Farmers & Merchants Bancorp, Inc. — Q3 2015 Form 10-Q
Business context and reporting period
Community banking and related financial services in northwest Ohio and northeast Indiana; the company reports one consolidated segment. This unaudited quarterly filing covers the three and nine months ended September 30, 2015. Financial figures below are in millions of dollars unless stated otherwise.
Financial performance and condition
| Metric | Q3 / September 30, 2015 | Comparable period / prior date |
|---|---|---|
| Interest income | Q3 $8.444; nine months $24.917 | Q3 2014 $8.471; nine months 2014 $24.934 |
| Net interest income | Q3 $7.509; nine months $22.253 | Q3 2014 $7.576; nine months 2014 $22.125 |
| Noninterest income | Q3 $2.827; nine months $8.083 | Q3 2014 $2.761; nine months 2014 $7.599 |
| Noninterest expense | Q3 $6.512; nine months $19.458 | Q3 2014 $6.579; nine months 2014 $18.828 |
| Net income | Q3 $2.620; nine months $7.568 | Q3 2014 $2.474; nine months 2014 $6.985 |
| EPS, basic and diluted | Q3 $0.57; nine months $1.64 | Q3 2014 $0.54; nine months 2014 $1.51 |
| Net interest margin | Q3 3.53%; nine months 3.52% | Q3 2014 3.58%; nine months 2014 3.53% |
| Cash and cash equivalents | $31.218 | $24.295 at Dec. 31, 2014 |
| Total assets | $957.522 | $941.213 at Dec. 31, 2014 |
| Net loans | $629.074 | $616.021 at Dec. 31, 2014 |
| Total deposits | $768.042 | $762.560 at Dec. 31, 2014 |
| Stockholders’ equity | $119.493 | $114.493 at Dec. 31, 2014 |
- Cash flow, nine months: Operating cash flow was $9.631 million versus $13.055 million in 2014; investing cash flow was negative $10.305 million versus positive $32.029 million; financing cash flow was positive $7.597 million versus negative $47.068 million. Cash increased $6.923 million.
- Funding and liquidity: Repurchase-agreement funding was $61.504 million at quarter-end; the company reported no federal funds purchased or FHLB advances. Management cited $104.2 million of unsecured correspondent borrowing capacity and over $48.5 million in unpledged securities. Core deposits grew $9.6 million year to date while time deposits declined $4.1 million.
- Capital: The filing reports a 12.65% primary ratio, 14.52% Common Equity Tier I and Tier I risk-based capital ratios, 12.04% Tier I leverage ratio, 15.34% total risk-based capital, and equity-to-assets of 12.48%.
Material changes versus comparable periods
- Nine-month net income rose $583,000. Higher noninterest income and a $614,000 reduction in loan-loss provision outweighed higher operating expenses. Q3 net income rose $146,000 year over year.
- Nine-month net interest income improved $128,000, although Q3 net interest income declined $67,000 year over year. Loan interest income increased, but lower securities income and higher Q3 funding costs offset much of the benefit. The nine-month net interest margin edged down one basis point; Q3 margin was down five basis points.
- Net loans increased $13.1 million from year-end and $26.6 million from September 2014. Commercial real estate loans rose $27.3 million year over year, while commercial and industrial loans declined. Securities declined $3.7 million from year-end as sales and runoff helped fund lending and liquidity needs.
- Noninterest expense increased $630,000 year to date, reflecting staffing and expansion costs, including the Sylvania office. The bank was constructing a Fort Wayne office, expected to open in the first quarter of 2016.
Outlook, risks and unusual items
- Management described loan growth as steady but difficult amid competition, and said its pipeline remained strong. It expects to use cash and lower-yielding securities to support lending and anticipated continued pressure on margins from the low-rate environment. Higher loan demand and deposit growth are important to its outlook; no numerical earnings guidance was provided.
- Credit indicators warrant attention: nonaccrual loans were $2.294 million versus $1.705 million at year-end 2014; impaired loans were $2.541 million versus $1.843 million. Past-due loans were $2.232 million, or 0.35% of loans, excluding nonaccrual loans. The allowance for loan losses was $6.165 million and total allowance for credit losses was $6.361 million. Management reported no loans past due over 90 days and still accruing.
- Troubled debt restructurings were approximately $1.2 million. Two loans were newly classified as TDRs during the first half; none were added in Q3, and no TDRs defaulted in the reported three- or nine-month periods. The filing also reports $452,000 of foreclosed residential property and $411,000 of residential mortgage loans in foreclosure proceedings.
- Management identified interest-rate exposure, credit quality, competition, economic conditions and regulatory change as risks. Its interest-rate analysis indicates potential margin pressure in several rate scenarios; results depend on balance-sheet composition and deposit repricing. TRID compliance was an ongoing priority following the rule’s October 3, 2015 effective date. Basel III capital rules began phasing in during 2015.
- Available-for-sale securities had $1.730 million of net unrealized gains; management reported no securities with other-than-temporary impairment. The company recorded $418,000 of net securities-sale gains year to date. No material change in previously disclosed risk factors and no legal proceedings were reported. Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether commercial real estate concentration and the rise in nonaccrual and impaired loans affect future credit losses or required provisions.
- Whether loan growth and core-deposit growth can sustain earnings as securities yields remain low and funding costs change.
- How much of reported earnings growth came from recurring banking activity versus lower provisions and securities-sale gains.
- Whether capital ratios, available liquidity and funding capacity remain adequate as lending expands and regulatory requirements evolve.
- Whether management’s rate-sensitivity assumptions and its margin outlook hold under actual interest-rate and deposit repricing conditions.