Farmers & Merchants Bancorp, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are primarily against December 31, 2023. Amounts are in U.S. dollars; financial-statement figures below are converted from thousands to millions where noted. The company is a community banking holding company operating in Ohio, Indiana, and Michigan.
Financial performance
| Metric | Q1 2024 | Comparable period / change |
|---|---|---|
| Interest income | $38.7 million | Up $6.9 million (21.5%) from Q1 2023 |
| Interest expense | $18.5 million | Up $8.4 million (83.2%) from Q1 2023 |
| Net interest income before credit-loss provision | $20.1 million | Down $1.6 million (7.2%) from Q1 2023 |
| Net income | $5.36 million; $0.39 per basic and diluted share | Compared with $6.47 million and $0.47 per share in Q1 2023, per the income statement |
| Net interest margin / spread | 2.60% / 1.94% | 3.01% / 2.56% in Q1 2023 |
| Average cost of funds / earning-asset yield | 3.06% / 5.00% | 1.85% / 4.41% in Q1 2023 |
| Noninterest income / expense | $3.95 million / $17.84 million | Income down $0.23 million; expense up $0.85 million year over year |
| Operating cash flow | $1.48 million provided | $3.08 million provided in Q1 2023 |
Financial position, liquidity, and credit
- Total assets were $3.288 billion, broadly unchanged from year-end 2023. Total deposits were $2.621 billion, up $13.9 million; noninterest-bearing deposits declined while interest-bearing checking and savings grew.
- Net loans were $2.517 billion, down $39.5 million from year-end. Loans, net of deferred fees and costs, were up 3.8% year over year. Management intentionally slowed originations and expects little to no loan growth for 2024.
- Cash and cash equivalents increased $45.6 million from year-end to $187.8 million, equal to 5.7% of assets and 7.2% of deposits. Management reported $103 million of unsecured overnight Federal Funds borrowing capacity and $118 million including holding-company availability; it also cited $44.2 million of currently available FHLB borrowing capacity.
- Borrowings included $256.6 million of FHLB advances, $28.2 million of repurchase agreements, and $34.7 million of subordinated notes, net of issuance costs. FHLB advances declined $9.1 million during the quarter. The company reported testing correspondent lines and using $16.6 million of brokered CDs; it planned another $10 million early in Q2.
- Uninsured deposits were reported as 11.8% of deposits ($308.8 million) after specified public-fund protections, or 21.1% ($552.3 million) based on FDIC coverage alone. The Bank Term Funding Program ended in March; the company said it had not borrowed under the program and planned to release approximately half of pledged securities and move the remainder to the Discount Window.
- Nonaccrual loans were $19.4 million, or 0.76% of loans, versus $22.4 million at year-end and $7.7 million a year earlier. A single borrower relationship drove much of the year-over-year agricultural real estate and agricultural increase; management said it was well collateralized. Past-due loans over 90 days were $16.4 million, principally agricultural and agricultural real estate.
- The allowance for credit losses on loans was $24.7 million; including the $1.9 million allowance for unfunded commitments, total reserves were $26.6 million. The loan allowance was 0.97% of loans and 127.28% of nonaccrual loans. Net charge-offs were approximately $55,000; the loan provision was a $289,000 credit, and the off-balance-sheet provision was a $266,000 credit.
- Available-for-sale securities were $347.5 million at fair value, with $38.8 million of gross unrealized losses attributed by management to interest rates rather than credit quality. Accumulated other comprehensive loss widened $1.6 million during the quarter to $30.6 million.
- Stockholders’ equity was $317.7 million. The Bank reported a Tier 1 leverage ratio of 8.75%, Tier 1 risk-based capital of 10.95%, total risk-based capital of 11.93%, and a 3.93% capital conservation buffer. The quarterly dividend declared was $0.22 per share, up from $0.21 a year earlier.
Material changes, outlook, and risks
- Higher asset yields and loan balances lifted interest income, but increased deposit and borrowing costs more than offset the gain; the cost of funds rose 121 basis points year over year. Management said margin improvement would be gradual and identified funding mix and deposit costs as priorities.
- Management cited one-time special compensation payments, accelerated restricted-stock awards, new-office staffing, and higher FDIC assessments among expense pressures. Lower prior-year credit-card conversion costs partly offset these increases. The company dissolved its captive insurer in December 2023; management expects the lost tax benefit to increase the tax burden in 2024.
- Management expects modest, if any, loan growth and intends to use repayments to fund selected originations, including in newer markets. It described agricultural customers’ recent financial condition as generally solid but warned that lower grain prices could reduce projected 2024 cash-grain income. Commercial loan demand softened, while management said commercial credit quality and collateral values remained solid.
- Management said two agricultural real estate sales were expected to further reduce nonaccrual balances in Q2, with a return toward historical levels by quarter-end. This is an expectation, not a guarantee.
- Interest-rate sensitivity analysis showed projected net interest income down 2.41% under a 300-basis-point rise and up 2.29% under a 100-basis-point rise, versus the flat-rate scenario; falling-rate scenarios were negative. Management highlighted deposit competition, repricing timing, and fixed-rate assets as sources of margin risk.
- Key risks include deposit outflows and funding access, uninsured deposits, unrealized securities losses if assets must be sold, interest-rate changes, inflation, agricultural conditions, commercial real estate concentration, credit losses, regulatory changes, and limitations in quantitative models. The filing identifies commercial real estate as 51.31% of gross loans.
- No formal earnings guidance was provided. Management stated that Q1 results are not necessarily indicative of full-year results. It reported no material legal proceedings and no material change in risk factors other than those described in the filing.
Important facts for investors to verify
- Net-income inconsistency: The income statement reports Q1 2023 net income of $6.466 million, making the year-over-year decline about 17.1%. The MD&A separately says $7.2 million and a 25.8% decline. Verify the intended comparison; the filing text is internally inconsistent.
- Track whether agricultural delinquencies and nonaccrual loans decline as management expects, and assess the collateral and concentration behind the larger exposures.
- Monitor deposit mix, funding costs, brokered-CD use, available borrowing capacity, and the effect of ending the Bank Term Funding Program.
- Assess whether net interest margin improves despite deposit competition and the repricing characteristics of loans, securities, and funding.
- Review the commercial real estate portfolio, including property type, geography, loan grades, and the performance of criticized loans; also monitor agricultural income and commodity-price exposure.
- Evaluate the consequences of the securities portfolio’s unrealized losses, changes in accumulated other comprehensive loss, and the company’s ability to maintain capital and dividends under adverse conditions.