FARMERS & MERCHANTS BANCORP INC quarterly report, Q3 FY2023

Vollständiges Dokument

Farmers & Merchants Bancorp, Inc. — Q3 2023 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results cover the company and subsidiaries, including its community bank. Unless otherwise noted, dollar amounts below are in millions. The filing states results for the nine-month period are not necessarily indicative of full-year results.

Financial performance and position

  • Q3 earnings: Net income was $4.8 million versus $9.0 million a year earlier; diluted EPS was $0.35 versus $0.68. Net interest income before credit-loss provision was $19.7 million, down from $22.6 million. Total interest income rose to $36.4 million from $25.8 million, but interest expense rose more sharply, to $16.7 million from $3.3 million.
  • Q3 margins: Net interest margin was 2.59%, compared with 3.49%; net interest spread was 1.97%, compared with 3.32%. The average cost of funds increased to 2.82% from 0.68%.
  • Nine-month results: Net income was $17.2 million versus $25.3 million, and diluted EPS was $1.26 versus $1.94. Net interest income before provision was $61.5 million versus $64.2 million. Interest income grew $29.9 million year over year, but interest expense increased $32.6 million. Nine-month net interest margin was 2.77%, down from 3.37%.
  • Credit costs: Q3 loan provision was $0.46 million versus $1.64 million; the company also recorded a $0.08 million release of provision for off-balance-sheet exposures. Nine-month loan provision was $1.42 million versus $3.85 million. The comparisons are affected by adoption of CECL in 2023; 2022 used the incurred-loss method.
  • Balance sheet at September 30: Total assets were $3.235 billion, up 7.3% from December 31, 2022. Net loans were $2.504 billion, up $168.3 million; deposits were $2.575 billion, up $106.4 million, or 4.3%. Total stockholders’ equity was $303.2 million.
  • Funding and liquidity: Cash and cash equivalents were $153.2 million, up $68.8 million from year-end. FHLB advances increased to $266.3 million from $127.5 million; repurchase-agreement funding was $30.5 million, versus $54.2 million, and other borrowings were zero. Nine-month operating cash flow was $11.6 million versus $22.0 million; investing cash use was $146.1 million, partly funded by $203.3 million of financing cash flow. The Bank reported $118 million of unsecured correspondent borrowing capacity and $71.9 million of BTFP capacity, neither of which was drawn under BTFP at quarter-end.
  • Capital: The Bank reported an 8.80% Tier 1 leverage ratio, 10.87% Tier 1 risk-based capital ratio, 11.85% total risk-based capital ratio, and 3.85% capital conservation buffer. Management described the company and Bank as well capitalized.

Material changes versus comparable periods

  • Higher market rates and competition for deposits sharply increased funding costs, compressing margins and reducing earnings despite higher earning-asset yields and loan growth. Q3 net interest income declined $2.9 million; nine-month net interest income declined about $2.8 million.
  • Loans grew substantially, particularly commercial real estate. Total loans net of deferred fees and costs were $2.530 billion, up 18.1% from September 2022. The October 2022 Peoples Federal acquisition contributed to year-over-year growth, so reported comparisons are not solely organic.
  • Nonaccrual loans rose to $22.4 million from $5.5 million at September 2022 and $4.7 million at December 2022. Management attributed the increase mainly to two agricultural borrower relationships and said the Bank was well collateralized and did not foresee a loss. Loans more than 30 days past due were 0.35% at quarter-end, the lowest reported level of 2023.
  • Noninterest expense rose $3.6 million in Q3 and $10.6 million year to date, reflecting staffing, new locations, strategic investment, higher FDIC assessments, advertising, and technology costs. Full-time equivalent employees increased to 465 from 431 at year-end 2022.
  • Accumulated other comprehensive loss was $39.5 million at September 30, 2023, versus $38.2 million at year-end. Available-for-sale securities had $49.989 million of gross unrealized losses; management attributed these to interest rates rather than credit deterioration and reported no related credit-loss allowance.

Outlook, commentary, risks, and unusual items

  • Outlook: No specific earnings or revenue guidance was provided. Management expects deposit growth in coming quarters, while acknowledging strong deposit competition and continued near-term pressure on margins. It expects the agricultural portfolio to remain stable in 2023 and describes overall credit quality as good. Management cites long-term benefits from balance-sheet repositioning and investments in people, branches, infrastructure, and technology.
  • Rate sensitivity: Management says a 1%–2% rising-rate scenario could expand margin over the next 12 months, but higher funding costs have reduced the flat-rate scenario margin. Much of the newer commercial real estate portfolio has initial fixed-rate periods, limiting near-term repricing. Actual outcomes depend on rates, deposit behavior, and balance-sheet mix.
  • Liquidity and securities: Management increased liquidity monitoring and pledged $60.5 million of securities to the Federal Reserve’s Bank Term Funding Program. Securities are available-for-sale and carry substantial unrealized losses; a forced sale to meet liquidity needs could affect capital and earnings. Reported uninsured deposits were 18.84% using FDIC coverage alone, and 9.11% after considering additional public-deposit protection.
  • Credit and economic risks: The portfolio includes significant commercial real estate and agricultural lending. Management cites sensitivity to rates, inflation, economic conditions, commodity prices, weather, construction delays, vacancies, and borrower repayment capacity. Nonaccrual growth in agricultural relationships warrants monitoring.
  • Unusual items and accounting: CECL adoption on January 1, 2023 reduced retained earnings by $3.4 million after tax. The company recorded an $0.891 million loss on a first-quarter securities sale, which management estimated would be recouped in 0.67 years through improved yield. Q3 loan interest income included a $0.594 million recovery on acquired relationships previously charged off; the company also reversed approximately $0.492 million of interest income on another relationship, including $0.324 million recognized in prior periods. A revised valuation analysis added $0.712 million of agricultural loan servicing rights in Q2 as a change in estimate.
  • Other matters: Management is evaluating proposed IRS rules concerning certain captive insurance arrangements. The Bank is subject to evolving regulatory requirements, including small-business lending data collection rules; the filing notes an injunction affecting implementation. The filing reports no legal proceedings and no material changes to other risk factors except those discussed in the report.

Important facts for investors to verify

  1. Whether deposit costs continue to rise faster than yields on loans and securities, and the effect on net interest margin and earnings.
  2. Deposit composition, uninsured-deposit exposure, available borrowing capacity, and the extent to which liquidity depends on collateralized funding or securities.
  3. Developments in the two agricultural borrower relationships, nonaccrual balances, delinquencies, and the adequacy of credit-loss reserves.
  4. Whether loan growth and the Peoples acquisition translate into sustainable profitability after funding costs, integration, staffing, and expansion expenses.
  5. The size and duration of unrealized securities losses, and the potential effects of any securities sales or changing interest rates on capital and liquidity.
  6. Progress and costs associated with new branches and strategic investments, and any updates on regulatory or captive-insurance matters.