Farmers & Merchants Bancorp, Inc. — Q1 2020 Form 10-Q
Business context and reporting period
Ohio-based community bank holding company, operating primarily in Northwest Ohio and Northeast Indiana. This unaudited filing covers the three months ended March 31, 2020; income-statement comparisons are against Q1 2019, and balance-sheet comparisons are against December 31, 2019. The company reported one business segment.
Financial and operating metrics
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $1.655 billion | $1.607 billion at December 31, 2019 |
| Loans, net | $1.239 billion | $1.212 billion at December 31, 2019; $1.090 billion at March 31, 2019 |
| Deposits | $1.349 billion | $1.288 billion at December 31, 2019 |
| Total interest income | $17.464 million | $15.862 million in Q1 2019 |
| Net interest income, before provision | $14.053 million | $12.777 million in Q1 2019 |
| Provision for loan losses | $1.430 million | $30,000 in Q1 2019 |
| Noninterest income / expense | $3.122 million / $10.695 million | $2.695 million / $11.511 million in Q1 2019 |
| Net income / diluted EPS | $4.105 million / $0.37 | $3.224 million / $0.29 in Q1 2019 |
| Net interest margin / spread | 3.75% / 3.44% | 3.87% / 3.54% in Q1 2019 |
| Cash and cash equivalents | $90.837 million | $51.296 million at December 31, 2019 |
| Total stockholders’ equity | $236.457 million | $230.258 million at December 31, 2019 |
Operating cash flow was $4.651 million, down from $7.805 million in Q1 2019. Financing activities provided $40.695 million, primarily reflecting a $60.276 million net increase in deposits, partly offset by lower repurchase-agreement funding and dividends paid. The declared quarterly dividend was $0.16 per share, versus $0.15 a year earlier.
Interest-bearing funding costs averaged 1.22%, versus 1.26% in Q1 2019; the yield on interest-earning assets was 4.66%, versus 4.80%. Management reported that lower asset yields compressed net interest margin. The allowance for loan losses was $8.533 million and the allowance for unfunded commitments was $0.470 million, for total credit-loss allowances of $9.003 million.
At March 31, nonaccrual loans were $3.344 million; no loans were more than 90 days past due and still accruing. Total impaired loans were $6.188 million. The Bank’s reported capital ratios included a 10.14% Tier 1 leverage ratio, 11.97% Tier 1 risk-based capital ratio, and 12.66% total risk-based capital ratio.
Material changes versus comparable periods
- Net income increased $881,000, or about 27%, year over year; EPS rose from $0.29 to $0.37. Net interest income increased $1.276 million, while the loan-loss provision rose by $1.400 million.
- Loans grew $27.3 million from year-end and 13.6% year over year, according to management. Deposits increased $60.4 million from year-end and 13.6% year over year. Growth was concentrated in commercial real estate and commercial and industrial lending.
- Q1 noninterest expense fell $816,000 year over year, principally because Q1 2019 included acquisition-related costs, including $1.3 million of data-processing charges and other Limberlost-related expenses. Q1 2020 noninterest income benefited from mortgage loan sales and $270,000 of securities-sale gains.
- Available-for-sale securities declined $18.2 million from year-end to $204.1 million, while accumulated other comprehensive income increased to $4.833 million, reflecting unrealized securities gains.
- Past-due loans increased $2.3 million year over year, though nonaccrual loans remained low in absolute terms. The allowance for loan losses increased from $7.228 million at year-end to $8.533 million.
Outlook, management commentary, and risks
- Management said COVID-19’s duration and economic effects were highly uncertain and that its impact on full-year results could not be reliably predicted. The Q1 provision increase reflected COVID-related uncertainty and loan growth; management said further provisions could be taken as warranted.
- Management warned that customer assistance—including payment deferrals, forbearance, skipped payments, and waived fees—would likely materially affect Q2 performance. As of April 15, 78 mortgage customers had entered forbearance agreements totaling just over $7.65 million; these are post-quarter figures.
- As of the filing, the Bank had presented PPP applications for approximately 496 small businesses, representing about $69 million in requested funding; management said the process remained fluid and a final amount was not available.
- Management expected to continue its quarterly dividend consistent with past practice, subject to conditions. It described the company as well capitalized and reported that holding-company liquidity could support the dividend without relying on Bank dividends. No formal earnings or margin guidance was provided.
- COVID-related risk includes borrower distress, rising delinquencies and credit losses, lower collateral values, weaker margins from low interest rates, and potential pressure on liquidity, earnings, and dividends. The loan portfolio is concentrated in commercial real estate and includes agricultural lending; management identified hospitality, restaurants, retail, and other affected sectors for monitoring.
- Liquidity sources cited include $90.8 million of cash and equivalents, $123.4 million of unsecured correspondent-bank borrowing capacity, and potential additional FHLB borrowing of up to $97 million subject to adequate collateral. Management stated the Bank had $1.1 million additionally available from the FHLB based on current pledged collateral.
- The company elected CARES Act relief from TDR accounting for qualifying COVID-related modifications. It also stated that, as a smaller reporting company, it would not adopt CECL in 2020 and could defer adoption until 2023; timing of any early adoption remained under evaluation.
- The company reported no legal proceedings and no material changes to previously disclosed risks other than the added COVID-19 risk factors. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the unusually low Q1 provision remains adequate as pandemic-related payment relief expires and borrower performance becomes clearer.
- Actual PPP loan originations, forgiveness, fees, and effects on reported loan growth and earnings.
- Subsequent-quarter trends in deferrals, forbearances, delinquencies, nonaccrual loans, charge-offs, and criticized or classified loans.
- Whether deposit growth and available borrowing capacity are sustained, and how funding costs and net interest margin respond to low rates.
- Whether the expected dividend policy remains supportable if credit costs or earnings deteriorate.