Farmers & Merchants Bancorp, Inc. — FY 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual report, not a standalone fourth-quarter filing. The company is an Ohio-based bank holding company operating primarily through Farmers & Merchants State Bank in Northwest Ohio, Northeast Indiana, and Southern Michigan.
Financial results and condition
| Metric | FY 2023 / year-end | Prior comparable period |
|---|---|---|
| Net interest income | $81.4 million | $86.8 million in 2022; down $5.4 million |
| Net income | $22.8 million; $1.67 diluted EPS | $32.5 million; $2.46 diluted EPS in 2022 |
| Net interest margin | 2.72% | 3.32% in 2022 |
| Return on average assets / equity | 0.71% / 7.46% | 1.17% / 11.30% in 2022 |
| Total assets | $3.283 billion | $3.015 billion at year-end 2022 |
| Loans, net | $2.556 billion | $2.336 billion at year-end 2022 |
| Total deposits | $2.607 billion | $2.469 billion at year-end 2022 |
| Stockholders’ equity | $316.5 million | $298.1 million at year-end 2022 |
| Cash and cash equivalents | $142.2 million | $84.4 million at year-end 2022 |
| Cash flows from operations | $22.1 million | $40.7 million in 2022 |
Interest income rose $38.7 million year over year, but interest expense increased $44.0 million, primarily as deposit and borrowing costs repriced upward. Total interest expense was $58.4 million versus $14.4 million in 2022. Average cost of funds rose to 2.53% from 0.74%. Noninterest income was $16.0 million, up 3.2%; noninterest expense increased 17.6% to $67.3 million. Provision for credit losses was $1.7 million, down from $4.6 million.
Loans grew 9.5% and deposits 5.6% during 2023; the year-end loan-to-deposit ratio was 97.93%, versus 94.62% in 2022. Borrowings included $265.8 million of Federal Home Loan Bank advances, $28.2 million of repurchase agreements, and $35.0 million principal of subordinated notes. The Bank reported substantial additional contingent funding capacity, including correspondent-bank lines, FHLB capacity, and unpledged securities.
Material changes and notable items
- Profitability weakened: net income fell about 30%, reflecting margin compression and higher operating expenses, partly offset by lower credit-loss provision expense.
- Loan growth outpaced deposit growth, increasing liquidity pressure. The Bank raised approximately $100 million through deposit promotions and increased FHLB advances. Cash balances rose $57.8 million.
- Credit indicators deteriorated from the prior year: nonaccrual loans rose to $22.4 million from $4.7 million; watch-list loans increased to $104.9 million from $60.0 million. The allowance for credit losses was $25.0 million, or 0.97% of loans, versus 0.86% in 2022. Net charge-offs remained low at $551,000.
- The company adopted CECL in 2023, increasing the loan-loss allowance by $3.6 million and the unfunded-commitment allowance by $0.9 million; retained earnings decreased $3.4 million net of tax at adoption.
- Available-for-sale securities had $36.9 million of gross unrealized losses at year-end, which management attributed to interest rates rather than credit quality. Accumulated other comprehensive loss improved to $29.0 million from $38.2 million. A first-quarter securities exchange generated an $891,000 loss.
- The Bank entered three interest-rate swaps covering $100 million of fixed-rate real-estate loans, with the aim of converting their rate exposure to variable. The filing describes the Bank as liability-sensitive and warns that long-term, lower-rate assets weigh on interest income.
- New agricultural mortgage-servicing rights contributed $2.3 million of service-charge income. Net gain on loan sales declined to $699,000 from $1.4 million in 2022 as higher rates reduced mortgage originations.
Outlook, risks, and contingencies
Management provided no quantified earnings or margin guidance. It expects to continue its quarterly dividend practice, subject to board decisions, bank-level dividend restrictions, and conditions. The 2023 dividend was $0.85 per share, up 4.6%. Management’s stated priorities for 2024 include core-deposit gathering, liquidity management, controlling funding costs, and integrating recent investments in technology, staffing, and new branches. Management said loan demand had softened entering 2024.
Key risks include further deposit competition and funding-cost increases; interest-rate movements and repricing mismatches; real-estate, commercial, and agricultural credit exposure; the increase in criticized/watch-list and nonaccrual loans; and potential losses from economic, commodity, weather, cyber, operational, and regulatory events. Approximately 78% of year-end assets were loans, with commercial real estate the largest loan category.
The company dissolved its captive insurance subsidiary in December 2023 amid proposed IRS rules that could have affected its tax treatment; management said it may form a new captive later. No material pending legal proceedings were reported. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective disclosure controls and internal controls.
Important facts for investors to verify
- Whether deposit growth can keep pace with loan growth and reduce reliance on higher-cost time deposits and borrowings.
- Trends in net interest margin, deposit pricing, and the performance of the $100 million loan-hedge program.
- Whether higher nonaccrual and watch-list balances lead to increased charge-offs, provisions, or allowance needs.
- The maturity and repricing profile of the $663.0 million time-deposit portfolio, including $476.3 million scheduled to mature in 2024.
- The effect of securities’ unrealized losses and any future funding needs on liquidity and capital.
- That the 2023 results include CECL adoption effects and other notable items, and that prior-year credit-loss provisions used the incurred-loss method, limiting direct comparability.