Farmers & Merchants Bancorp, Inc. — Q3 2021 Form 10-Q
Business context and period. This unaudited report covers the three and nine months ended September 30, 2021. The Ohio-based financial holding company operates a community bank serving northwest Ohio and northeast Indiana, with loan production offices in Ohio, Indiana and Michigan. Its principal revenue source is interest income from loans and securities.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income, before provision | $18.45 million | $15.02 million | $49.46 million | $43.65 million |
| Provision for loan losses | $0.66 million | $1.99 million | $3.00 million | $4.99 million |
| Noninterest income | $4.07 million | $4.72 million | $13.09 million | $11.16 million |
| Noninterest expense | $14.32 million | $12.06 million | $39.74 million | $33.09 million |
| Net income | $5.92 million | $4.41 million | $15.81 million | $13.32 million |
| Diluted EPS | $0.53 | $0.40 | $1.41 | $1.20 |
- Q3 net income rose about 34%; nine-month net income rose 18.7%. Nine-month net interest income increased 13.3%, while noninterest income increased 17.3%.
- Net interest margin was 3.53% in Q3 versus 3.51% a year earlier; year-to-date margin was 3.36% versus 3.61%. The nine-month asset yield fell to 3.70% from 4.30%, while funding cost fell to 0.47% from 0.95%.
- At September 30, assets were $2.219 billion, up 16.2% from year-end 2020. Net loans were $1.480 billion, up about $190.5 million; deposits were $1.866 billion, up 16.9%. Available-for-sale securities totaled $426.7 million.
- Cash and cash equivalents were $158.1 million, down $17.6 million from year-end. Nine-month cash flows were $27.3 million provided by operations, $226.6 million used in investing, and $181.7 million provided by financing.
- Debt included $34.4 million net subordinated notes, $17.9 million of FHLB advances and $29.6 million in repurchase-agreement funding. The $35 million subordinated notes were issued in July, carry a 3.25% fixed rate for five years before floating, and are intended to qualify as Tier 2 capital.
- The Bank reported capital ratios of 8.30% Tier 1 leverage, 11.25% Tier 1 risk-based capital and 12.31% total risk-based capital; management described the Company and Bank as well capitalized.
Material changes, outlook and risks
- Growth reflects both lending activity and the April 30 acquisition of Ossian Financial Services for about $20.0 million in cash. The acquisition added approximately $116.0 million of deposits and $52.4 million of loans at acquisition; $7.9 million of goodwill was recorded.
- Acquisition-related expenses were approximately $2.6 million for the first nine months, including Ossian and the pending Perpetual transaction. Branch-closure costs were also $406,000; management expected additional closure expense in Q4 and estimated savings above $760,000. These costs contributed to higher noninterest expense.
- PPP-related accelerated net fee income was approximately $2.4 million in Q3. PPP balances were below $10 million at quarter-end. Management noted continued slowing in mortgage refinancing, competitive lending conditions, labor and supply-chain challenges for commercial customers, and ongoing uncertainty from COVID-19.
- Credit indicators included $6.2 million of nonaccrual loans, down from $9.4 million at year-end 2020; loans more than 30 days past due totaled $1.6 million, or 0.11% of loans. Net charge-offs were $974,000 year to date, versus $331,000 in the prior-year period. The allowance for loan losses was $15.7 million; total credit-loss allowances, including unfunded commitments, were $16.7 million.
- Two loans remained under principal deferral at quarter-end. Management cited lingering pandemic-related risks, especially for restaurant and hospitality borrowers and consumer/1–4 family real estate, and said it would continue monitoring credit quality and adjusting reserves as needed.
- Perpetual Federal Savings, with reported March 2021 assets of $391 million, loans of $326 million and deposits of $305 million, closed on October 1, 2021, after the reporting date. The filing provides no formal earnings guidance. Management planned continued growth, expected benefits from balance-sheet expansion, and cautioned that deposit competition could pressure margins.
- Interest-rate modeling showed projected net interest income rising in rate-increase scenarios and falling in rate-decrease scenarios; management noted model assumptions and timing may differ from actual results. The company had not adopted CECL and could defer adoption until 2023 as a smaller reporting company. No material change in risk factors was reported; no legal proceedings were disclosed.
Important facts for investors to verify
- How much of earnings growth is recurring versus PPP fee acceleration, reduced provision expense and acquisition-related effects.
- Whether Ossian integration, Perpetual’s post-quarter acquisition and branch consolidations deliver the expected cost savings and growth without undue execution or credit risk.
- Loan quality, especially past-due trends, commercial real estate exposures, net charge-offs and reserve adequacy as pandemic support fades.
- Net interest margin sensitivity to changing rates and deposit pricing, including the assumptions underlying management’s interest-rate simulations.
- Capital, liquidity and funding after the Perpetual closing, and the impact of subordinated-note interest costs and future acquisition funding.