Farmers & Merchants Bancorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited consolidated results; financial statement amounts below are in USD millions unless otherwise noted. The company is a community banking holding company operating primarily in northwest Ohio and northeast Indiana.
Financial performance and position
- Third-quarter earnings: Net income was $8.95 million, up 51% from $5.92 million a year earlier; diluted EPS was $0.68 versus $0.53. Net interest income before provision rose to $22.58 million from $18.45 million. Provision for loan losses was $1.64 million, versus $0.66 million.
- Nine-month earnings: Net income was $25.33 million, up 60% from $15.81 million; diluted EPS was $1.94 versus $1.41. Net interest income before provision increased to $64.23 million from $49.46 million. Provision expense was $3.85 million, up from $3.00 million.
- Revenue mix and costs: Noninterest income was $3.73 million for Q3, down from $4.07 million, primarily reflecting lower mortgage loan-sale gains. Nine-month noninterest income fell to $11.40 million from $13.09 million. Noninterest expense was $13.47 million in Q3, down from $14.32 million; nine-month expense was $40.20 million, up from $39.74 million.
- Margins: Q3 net interest margin was 3.49%, compared with 3.53% a year earlier; the nine-month margin was 3.37%, compared with 3.36%. Management attributed rising funding costs to higher rates and deposit competition.
- Balance sheet and lending: Total assets were $2,783.8 million, up 5.5% from year-end 2021. Net loans were $2,122.6 million, up $281.4 million since year-end; reported loan growth was 44.1% year over year excluding PPP balances, with 21.3% organic growth excluding PPP and acquisitions. Commercial real estate was the largest loan category.
- Deposits, liquidity and borrowings: Deposits were $2,283.0 million, up $89.6 million from year-end. Cash and cash equivalents declined to $70.7 million from $180.8 million. Federal Home Loan Bank advances were $102.1 million, versus $24.1 million at year-end; repurchase agreements and federal funds purchased totaled $55.8 million, and other borrowings were $10.0 million. Management reported a loan-to-deposit ratio of approximately 93% and additional borrowing capacity, including $29 million available from the FHLB based on currently pledged collateral.
- Capital and equity: Stockholders’ equity was $280.6 million, down from $297.2 million at year-end, principally reflecting a $34.6 million increase in accumulated other comprehensive loss. At September 30, the Bank’s Tier 1 leverage ratio was 9.16%, Tier 1 risk-based capital was 11.25%, total risk-based capital was 12.24%, and capital conservation buffer was 4.24%. The company reported that it and the Bank exceeded applicable capital requirements.
- Cash flow: For the nine months, operating activities provided $22.0 million, investing activities used $290.4 million—largely reflecting $283.8 million of net loan originations and collections—and financing activities provided $158.3 million. Cash and cash equivalents decreased $110.2 million.
Changes versus comparable periods
- Higher loan balances drove interest income and net interest income growth, while increased deposit and borrowing costs partly offset the benefit. Q3 interest expense rose to $3.26 million from $1.67 million; nine-month expense rose to $7.43 million from $4.95 million.
- Loan balances grew substantially, reflecting organic production and the prior acquisitions of Ossian State Bank and Perpetual Federal Savings Bank. Commercial real estate loans increased $334.8 million year over year, according to management.
- Mortgage origination and loan-sale gains declined as higher rates slowed refinancing. Nine-month loan-sale gains were $1.19 million, compared with $2.82 million; 2021 also included $0.29 million of gains on securities sales.
- Credit indicators included $5.47 million of nonaccrual loans, down from $8.08 million at year-end 2021. Loans past due were $5.31 million, compared with $1.46 million at year-end. The allowance for loan losses was $19.99 million, or 0.93% of loans, and total allowance for credit losses, including unfunded commitments, was $21.11 million.
- Available-for-sale securities had $47.8 million of gross unrealized losses at quarter-end, versus $7.1 million at year-end 2021. Accumulated other comprehensive loss was $37.7 million. Management attributed the unrealized losses to interest-rate changes, stated that it had no securities with other-than-temporary impairment, and said it intended and was able to hold the securities.
Outlook, commentary and risks
- Management described loan demand as active and credit quality as good, while noting customer pressures from labor availability, supply-chain delays and energy costs. Agricultural conditions and commodity prices were described as favorable at the time, with attention shifting to 2023 input costs and commodity prices.
- Management expected loan growth to support net interest income in dollars, but cautioned that deposit competition and higher rates could pressure margins. Its interest-rate sensitivity analysis projected higher net interest income in rising-rate scenarios and declines in falling-rate scenarios; actual results may differ from modeled assumptions.
- The merger with Peoples-Sidney Financial Corporation closed October 1, 2022, after quarter-end, for an estimated transaction value of approximately $27 million based on the cited June share price. System conversion was planned for December 3–5, 2022. The filing does not provide post-close results.
- The company planned to adopt the current expected credit losses (CECL) standard and ASU 2022-02 on January 1, 2023. Management noted that its credit-loss methodology was still being refined.
- Risks highlighted include interest-rate and funding-cost changes, inflation and broader economic or geopolitical instability, loan and securities portfolio quality, deposit flows, competition, and ongoing effects of COVID-19. The filing states that operating results for the nine months are not necessarily indicative of full-year results. It gives no specific quantitative earnings guidance.
- The company reported $357,000 of acquisition-related costs during 2022. It also reported reversals of mortgage servicing rights valuation allowance during the first three quarters, including $188,000 in Q3, which affected reported servicing-related expense.
Most important facts for investors to verify
- Whether rapid loan growth—particularly in commercial real estate—continues without deterioration in delinquencies, nonaccruals or required credit-loss reserves.
- Whether deposit pricing and reliance on FHLB advances and other borrowings constrain net interest margin or liquidity as rates and competition change.
- The potential impact of the $47.8 million securities unrealized loss position, including any need to sell securities to fund growth or other needs.
- CECL adoption assumptions and resulting allowance changes beginning in 2023.
- Integration progress, costs and realized benefits from the Peoples-Sidney merger, which closed after the reporting date.
- The filing reports no legal proceedings and no material change in risk factors other than the added discussion of global economic, geopolitical and inflation risks.