Farmers & Merchants Bancorp, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; unaudited consolidated results. Financial amounts below are in millions unless stated otherwise. The company is a regional community bank operating primarily in Ohio and Indiana. The October 2022 acquisition of Peoples-Sidney Financial Corporation affects year-over-year comparability.
Key financial results
- Q2 earnings: Net interest income before credit-loss provision was $20.1 million, down from $21.9 million a year earlier. Net income was $6.0 million versus $8.3 million; diluted EPS was $0.44 versus $0.63.
- First-half earnings: Net interest income before provision was $41.8 million versus $41.6 million. Net income declined to $12.5 million from $16.4 million; diluted EPS was $0.92 versus $1.25.
- Interest and margins: First-half interest income rose 42% to $65.2 million, but interest expense increased to $23.4 million from $4.2 million. First-half net interest margin fell to 2.87% from 3.30%; Q2 margin was 2.73% versus 3.47%. Management attributed pressure to higher deposit and borrowing costs.
- Noninterest items and expenses: First-half noninterest income was $8.4 million versus $7.7 million; noninterest expense rose to $33.8 million from $26.7 million. Reported first-half ROA was 0.81% versus 1.22%, and ROE was 8.21% versus 11.32%.
- Balance sheet at June 30: Total assets were $3.15 billion, up 4.4% from year-end 2022. Net loans were $2.49 billion, up $154.8 million; deposits were essentially unchanged at $2.47 billion. Stockholders’ equity was $304.7 million.
- Funding and liquidity: FHLB advances increased to $266.8 million from $127.5 million at year-end; federal funds purchased and repurchase agreements totaled $51.6 million. Cash and cash equivalents were $71.2 million. Uninsured deposits were $442.3 million, or 17.9% of deposits. The company reported $113 million of unsecured correspondent borrowing capacity, $150.1 million through an FHLB cash-management advance, and $74.1 million of BTFP capacity; it had not drawn on the BTFP.
- Cash flow, first half: Operating activities provided $6.8 million, investing activities used $141.5 million, and financing activities provided $121.5 million. Cash and cash equivalents decreased $13.2 million.
- Capital: Management described the company and bank as well capitalized. Reported bank ratios included a 9.01% Tier 1 leverage ratio, 10.81% Tier 1 risk-based capital ratio, and 11.88% total risk-based capital ratio.
Changes, outlook and risks
- Loans grew 23.6% year over year, excluding PPP balances, with commercial real estate the largest dollar-growth category. Management said demand softened as rates rose, while competition for deposits intensified; loan-to-deposit ratio was approximately 100.9%.
- Credit quality was characterized by management as strong. The allowance for credit losses on loans was $24.9 million, or 0.99% of loans; the separate allowance for unfunded commitments was $2.1 million. Loans past due 30 or more days increased $5.6 million year over year. The filing reports no loans over 90 days past due and still accruing.
- The company adopted CECL on January 1, 2023, reducing retained earnings by $3.4 million after tax. Because prior-year provision amounts used the incurred-loss method, credit-provision comparisons are not fully like-for-like.
- Unusual items included an $891,000 first-quarter loss from selling $21.6 million of securities; management said the securities were replaced with higher-yielding investments and estimated the loss would be recouped in 0.67 years. First-half results also included a $541,000 credit-card platform conversion expense and a $712,000 increase in agricultural loan servicing rights from a revised valuation estimate.
- Management is pursuing a three-year strategic plan aimed at positioning the bank to reach $4–$5 billion in assets. Three offices opened in Q2, with two more anticipated in Q3; staffing, expansion, technology and branding investments are contributing to higher expenses. No specific earnings or margin guidance was provided.
- Key stated risks include deposit outflows and higher funding costs, interest-rate and securities valuation exposure, loan demand and credit quality, inflation, potential recession, regulatory changes, climate-related disruption, and limitations or errors in quantitative models. The filing reports no legal proceedings and no material changes to other risk factors except those described.
Important facts for investors to verify
- Reconcile the filing’s differing descriptions of June 30, 2023 nonaccrual loans: the loan table reports $6.295 million, while MD&A later refers to $4.7 million.
- Track deposit pricing, deposit mix, uninsured deposits, borrowing reliance and the effects on net interest margin.
- Monitor commercial real estate concentrations, past-due loan trends, allowance adequacy and the impact of CECL assumptions.
- Assess the persistence of servicing-rights valuation gains and whether expansion and conversion costs continue to weigh on expenses.
- Review securities portfolio unrealized losses, liquidity capacity and capital ratios as rates and funding conditions change.