Farmers & Merchants Bancorp, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021 unless otherwise noted. Dollar amounts are in millions except per-share data. The unaudited consolidated results cover the bank holding company and subsidiaries, including acquisitions completed in 2021.
Financial performance and position
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $21.9 | $16.8 in Q1 2021 |
| Net interest income, before provision | $19.8 | $15.0 in Q1 2021 |
| Provision for loan losses | $0.6 | $1.7 in Q1 2021 |
| Noninterest income | $4.3 | $5.0 in Q1 2021 |
| Noninterest expense | $13.5 | $12.4 in Q1 2021 |
| Net income | $8.1 | $4.9 in Q1 2021 |
| Basic and diluted EPS | $0.62 | $0.44 in Q1 2021 |
| Net interest margin | 3.14% | 3.33% in Q1 2021 |
| Total assets | $2,686.1 | $2,638.3 at December 31, 2021 |
| Net loans | $1,945.4 | $1,841.2 at December 31, 2021 |
| Total deposits | $2,253.6 | $2,193.5 at December 31, 2021 |
| Cash and cash equivalents | $139.5 | $180.8 at December 31, 2021 |
| Stockholders’ equity | $286.5 | $297.2 at December 31, 2021 |
Net income rose 65.0% and EPS rose 40.9% year over year. Net interest income increased $4.7 million, chiefly reflecting balance-sheet and loan growth; lower loan-loss provision also supported earnings. The net interest margin nevertheless declined 19 basis points year over year. Management reported a 3.02% net interest spread, versus 3.18% a year earlier.
Operating cash flow was $7.9 million, compared with $6.4 million in Q1 2021. Investing activities used $108.5 million, principally reflecting $104.5 million of net loan originations and collections; financing activities provided $59.3 million, including a $60.8 million increase in deposits. Cash and equivalents decreased $41.3 million during the quarter.
Interest-bearing and other borrowings at quarter-end included $31.7 million of repurchase agreements, $22.7 million of FHLB advances, $40.0 million of other borrowings and $34.5 million of subordinated notes, net of issuance costs. The company reported bank capital ratios of 8.80% Tier 1 leverage, 11.56% Tier 1 risk-based and 12.47% total risk-based capital.
Material changes and management commentary
- Total assets increased 1.8% from year-end; year-over-year growth was 34.8%, with acquisitions and loan growth contributing. Net loans increased $104.3 million from year-end. Management reported 22.0% year-over-year organic loan growth, excluding acquired balances and PPP loans.
- Noninterest income fell $0.6 million year over year, mainly because gains on mortgage and agricultural loan sales declined and there were no available-for-sale securities gains, versus $0.3 million in Q1 2021. Noninterest expense rose $1.1 million, including higher salary and wage expense.
- Management described credit quality as solid, with past-due loans over 30 days at 0.10% of loans. Nonaccrual loans were $8.6 million; the allowance for loan losses was $16.8 million, or 0.85% of loans. Total allowance for credit losses, including unfunded commitments, was $17.8 million.
- The available-for-sale securities portfolio had a $25.0 million net unrealized loss at quarter-end, compared with $4.0 million at year-end; accumulated other comprehensive loss was $19.7 million. Management attributed the valuation decline primarily to interest-rate changes and reported no securities with other-than-temporary impairment.
- Dividend declared was $0.19 per share, versus $0.17 in Q1 2021. No shares were repurchased in the quarter under the program authorizing up to 600,000 shares through December 31, 2022.
Outlook, risks and unusual items
- Management said it intends to continue expanding and aims to reach $3 billion in assets by year-end 2022. It cited loan demand and a strong pipeline, while noting that deposit competition could pressure margins. The filing does not provide earnings or revenue guidance.
- Management noted workforce availability, supply-chain delays, energy and input-cost pressures, inflation and rising rates as issues affecting customers. It expects mortgage refinancing and related production to slow as rates rise, though housing demand remains strong and home-equity lending is a growth focus.
- Management’s interest-rate sensitivity analysis forecast higher net interest margin and net interest income in rising-rate scenarios and compression in falling-rate scenarios. Results depend on actual balance-sheet mix, deposit repricing and loan repricing; many commercial real-estate loans have initial fixed periods of three to five years.
- On April 13, 2022, the Bank received approval for a $40 million special dividend to the holding company, paid April 20, to repay short-term borrowings related to the Perpetual acquisition; the line of credit remains available for future liquidity needs.
- The company expects to adopt CECL on January 1, 2023 and was still refining methodology and reviewing parallel reports. Management identified the allowance for credit losses and mortgage servicing rights valuation as areas involving significant estimates. The filing also cites COVID-19, economic conditions, interest rates, credit quality, deposit flows and regulation as risks.
- The 2021 Ossian and Perpetual acquisitions affect comparability. Pro forma results assuming both acquisitions were in place for the comparable prior period show Q1 2021 net income of $7.1 million and EPS of $0.54, versus reported $4.9 million and $0.44.
Key facts for investors to verify
- Whether organic loan growth and deposit growth continue, and how loan growth is funded as cash balances decline.
- Whether net interest margin stabilizes or is pressured by deposit competition, rate changes and repricing timing.
- Credit trends in commercial real estate, agricultural, consumer and mortgage portfolios, including nonaccrual loans, past dues and allowance adequacy.
- How the $40 million special dividend and repayment of acquisition-related borrowings affect holding-company liquidity and funding capacity.
- Mortgage and other fee-income trends, expense growth, and the financial contribution and integration benefits of recent acquisitions.
- CECL implementation assumptions and any resulting changes to credit-loss estimates when adopted in 2023.