Business context and reporting period
Farmers & Merchants Bancorp, Inc. is an Ohio-based financial holding company whose primary subsidiary is a community bank serving northwest Ohio and northeast Indiana. It reports one business segment. This unaudited Form 10-Q covers the three months ended March 31, 2016; income and cash-flow comparisons are with Q1 2015, and balance-sheet comparisons are principally with December 31, 2015. Unless indicated otherwise, financial amounts below are in millions of dollars.
Total assets reached a company record of $1.009 billion. The Bank opened a new office in the Fort Wayne, Indiana area on April 7, 2016, after quarter-end.
Financial performance and condition
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $9.004 | $8.184 in Q1 2015 |
| Net interest income | $8.008 | $7.326 in Q1 2015 |
| Provision for loan losses | $0.277 | $0.114 in Q1 2015 |
| Noninterest income / expense | $2.670 / $6.986 | $2.557 / $6.565 in Q1 2015 |
| Income before taxes / net income | $3.415 / $2.481 | $3.204 / $2.351 in Q1 2015 |
| Basic and diluted EPS | $0.54 | $0.51 in Q1 2015 |
| Net interest margin | 3.54% | 3.45% in Q1 2015 |
| Total assets | $1,009.1 | $989.1 at December 31, 2015 |
| Net loans | $701.4 | $679.8 at December 31, 2015 |
| Total deposits | $798.1 | $771.3 at December 31, 2015 |
| Stockholders’ equity | $122.7 | $120.1 at December 31, 2015 |
- Net income increased 5.5% year over year; EPS increased 5.9%. Management attributed higher net interest income principally to loan growth. Net interest income after provision rose 7.2%, while noninterest income rose 4.4% and noninterest expense rose 6.4%.
- Loans before the allowance and deferred fees were $707.7 million, up 15.1% from $614.7 million a year earlier. Commercial real estate was the largest category at $344.7 million; its balance rose 27.1% year over year. Commercial real estate and commercial and industrial lending are significant portfolio exposures.
- Cash and cash equivalents were $25.9 million, up from $22.0 million at year-end. Q1 operating cash flow was $2.3 million, investing cash flow was negative $14.6 million, and financing cash flow was positive $16.2 million. Deposit growth funded loan growth alongside securities runoff and sales.
- Funding included $69.4 million of federal funds purchased and repurchase agreements and $10.0 million of FHLB advances. Management cited $104.2 million of unsecured correspondent-bank borrowing capacity and additional potential liquidity from deposits, securities runoff or sales, and borrowing.
- Reported regulatory capital ratios were 11.72% Tier 1 leverage, 13.89% Tier 1 risk-based, and 14.66% total risk-based. Management said the Company and Bank were well-capitalized and above the 2019 capital conservation buffer requirement.
Material changes, outlook, and risks
- Compared with Q1 2015, loan interest income increased $0.912 million, while securities interest income declined. Asset yield rose to 3.97% from 3.85%; cost of funds rose to 0.58% from 0.53%. Management reported a 3.39% net interest spread, up from 3.32%.
- The allowance for loan losses rose to $6.285 million from $6.057 million at year-end; the total allowance for credit losses, including unfunded commitments and letters of credit, was $6.505 million. Q1 net charge-offs were $49,000. Nonaccrual loans were $2.003 million, and there were no loans 90 days past due and still accruing. Management reported past-due loans at 0.29% of total loans.
- One new troubled debt restructuring was recorded in Q1, a $138,000 consumer real estate loan modified to interest-only payments. Total TDRs were approximately $1.1 million. Foreclosed residential property held was $456,000, with $568,000 of consumer mortgage loans in foreclosure proceedings.
- Management described agricultural borrowers as facing lower commodity prices, higher input costs, and wet fields, with declining working capital a concern to monitor. It also cited intense competition for larger, well-performing borrowers and construction-lending constraints from regulation.
- Management intends to continue loan growth and improve net interest margin, and expects to provide for loan growth through the credit-loss reserve. It said the new office may weigh modestly on results in the short term. The filing provides no numeric earnings or revenue guidance; management cautioned that Q1 results are not necessarily indicative of full-year results.
- Interest-rate sensitivity analysis showed modeled net interest margin tightening under both rising and falling rate scenarios over the next 12 months. Management noted that longer initial fixed-rate periods on many commercial real estate loans limit near-term repricing benefits, and that depositors generally favor shorter-term deposits.
- Other notable items: available-for-sale securities had a $2.2 million net unrealized gain position, contributing to higher accumulated other comprehensive income. The Company repurchased 7,000 shares during the quarter at an average $27.75 per share. Management reported effective disclosure controls, no material change in internal control over financial reporting, no legal proceedings, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether strong loan growth continues and how it affects net interest income, margins, and the level of provision expense.
- Credit quality trends—particularly commercial real estate concentrations, agricultural borrower conditions, delinquencies, nonaccruals, TDRs, and allowance adequacy.
- Deposit growth, funding costs, use of short-term borrowings, and management’s stated liquidity capacity as the balance sheet expands.
- Actual sensitivity of earnings and margin to rate changes, given modeled repricing limits and the duration of loans and funding.
- The near-term costs and contribution of the Fort Wayne-area office, and the effect of regulatory requirements on planned construction lending.