Farmers & Merchants Bancorp, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are primarily with 2019. The company is an Ohio bank holding company whose community bank serves Northwest Ohio and Northeast Indiana. Results are consolidated and reported as one segment.
Financial performance and condition
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Net interest income | $59.8 million | $53.5 million | Up 11.6% |
| Provision for loan losses | $7.0 million | $1.1 million | Substantial increase, primarily reflecting COVID-19 uncertainty and loan growth |
| Net income | $20.1 million | $18.4 million | Up 9.2%; record earnings, per management |
| Diluted EPS | $1.80 | $1.66 | Up 8.4% |
| Net interest margin | 3.62% | 3.80% | Down 18 basis points |
| Return on average assets / equity | 1.14% / 8.38% | 1.23% / 8.26% | ROAA declined; ROAE edged higher |
| Total assets | $1.91 billion | $1.61 billion | Up $302.2 million |
| Net loans / deposits | $1.29 billion / $1.60 billion | $1.21 billion / $1.29 billion | Loans rose 6.4%; deposits rose 23.9% |
| Stockholders’ equity | $249.2 million | $230.3 million | Equity-to-assets was 13.05%, versus 14.33% |
Total noninterest income rose to $16.8 million from $11.8 million, led by mortgage loan-sale gains and customer service fees. Noninterest expense increased 7.0% to $44.4 million, mainly from salaries, employee benefits, and expanded operations. Unusual or notable 2020 income included a $430,000 gain on a bank-owned life insurance settlement and a $270,000 securities gain. PPP loans generated $2.8 million of interest and fee income; forgiveness accelerated $1.2 million of PPP fee income in 2020.
Operating cash flow was $27.4 million. Cash and cash equivalents increased $124.4 million to $175.7 million, supported chiefly by deposit growth; investing activities used $177.7 million, while financing activities provided $274.8 million. Year-end deposits were the principal funding source. Repurchase-agreement borrowings were $30.2 million and FHLB advances were $17.9 million, down from a combined $72.9 million in 2019. Available liquidity included $148.1 million of unsecured correspondent borrowing capacity, $206.7 million of unpledged securities, and $7.4 million of additional FHLB capacity.
The Bank reported 11.63% Common Equity Tier 1, 12.64% total risk-based capital, and a 9.08% leverage ratio at year-end and remained “well capitalized.” These are Bank regulatory ratios; the company also reported consolidated capital-to-assets of 13.05%. The annual dividend increased to $0.66 per share from $0.61. The board authorized repurchases of up to 500,000 shares during 2021.
Material changes and business developments
- Lower Federal Reserve rates reduced asset yields; deposit repricing helped reduce interest expense, but did not fully offset lower earning-asset returns. Average net interest margin contracted to 3.62%.
- Average loans increased $184.4 million. Year-end assets also grew substantially, particularly cash and securities, alongside loans and deposits.
- The allowance for loan and lease losses rose to $13.7 million from $7.2 million; total allowance for credit losses, including unfunded commitments, was $14.3 million. Nonaccrual loans increased to $9.4 million from $3.4 million, while watch-list loans declined to $56.3 million from $60.2 million.
- In November, the investment-services business purchased ACFR’s assets and client relationships for $825,000 in stock; ACFR had approximately $83 million in assets under management. Management anticipated about $500,000 of additional noninterest income in 2021.
- The company announced a proposed $20 million cash acquisition of Ossian Financial Services, with approximately $122 million of assets as of September 2020, subject to the agreement’s terms and closing. The filing does not provide a completed closing.
- The company opened loan production offices in Muncie, Oxford, and West Bloomfield, and planned a Fort Wayne full-service office for early 2021. It also planned to consolidate four branches in 2021.
Outlook, risks, and contingencies
Management said it would continue its expansion strategy, pursue acquisition opportunities, improve efficiency, and invest in digital services. It expected to maintain quarterly dividends consistent with past practice, but payment remains subject to board discretion, earnings, and regulatory restrictions. The Bank began processing applications for a new PPP round in 2021. No specific earnings, revenue, or margin guidance was provided.
COVID-19 created uncertainty around borrower repayment, collateral values, loan-loss provisions, and future net interest income. By year-end, five COVID-related payment modifications remained, totaling $3.6 million; management said none involved a full payment deferment. The Bank reported 99 mortgage forbearance agreements totaling just over $9.1 million, with most loans having returned to current status or transitioned to other repayment arrangements. Management noted that further provisions could be required in 2021.
Key risks include the concentration of real estate, commercial, and agricultural lending in the company’s markets; deterioration in local economic or farm conditions; interest-rate and deposit-funding pressure; competition; cyber and vendor risks; and regulatory requirements. The allowance estimate is highly judgmental and was identified as a critical audit matter. CECL adoption was deferred for the company to fiscal years beginning after December 15, 2022; management was still evaluating its effect. The independent auditor issued an unqualified opinion on the financial statements.
The filing reports no material pending legal proceedings. It also contains a disclosure-controls and internal-control discussion that refers to effectiveness as of December 31, 2019, despite covering the 2020 annual report; investors should verify the applicable assessment date and related audit attestation.
Important facts for investors to verify
- Whether subsequent credit performance, delinquencies, nonaccrual balances, and charge-offs support the sharp increase in the loan-loss allowance, particularly for real estate, commercial, and agricultural borrowers.
- How much of the $36.2 million year-end PPP balance was later forgiven or repaid, and the timing of remaining fee recognition.
- Whether the Ossian acquisition closed as proposed, its final purchase price and integration costs, and whether the four planned branch consolidations and Fort Wayne opening proceeded.
- Whether deposit growth and repricing can sustain funding costs and margins in the low-rate environment; the filing’s interest-rate sensitivity analysis projects lower income in falling-rate scenarios.
- The company’s capacity to maintain dividends and execute the 2021 share-repurchase authorization while funding acquisitions and preserving regulatory capital.
- The correct year for the filing’s internal-control effectiveness assessment, given the stated December 31, 2019 date in the 2020 report.