Farmers & Merchants Bancorp, Inc. — 2019 Form 10-K
Business context and reporting period
Reports the fiscal year ended December 31, 2019. Farmers & Merchants is an Ohio bank holding company operating primarily in northwest Ohio and northeast Indiana, with one reportable segment. Its business is community banking, including commercial, agricultural, real estate and consumer lending.
Results include Bank of Geneva following the January 1, 2019 acquisition of Limberlost Bancshares. The acquisition added six Indiana offices and materially affects comparisons with 2018, when those operations were not consolidated.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Interest income | $68.3 million | $46.4 million |
| Net interest income | $53.5 million | $39.9 million |
| Net interest margin | 3.80% | 3.83% |
| Noninterest income | $11.8 million | $10.9 million |
| Noninterest expense | $41.6 million | $32.2 million |
| Provision for loan losses | $1.1 million | $0.3 million |
| Net income | $18.4 million | $14.9 million |
| Basic and diluted EPS | $1.66 | $1.61 |
| Total assets | $1.607 billion | $1.116 billion |
| Loans, net | $1.212 billion | $839.6 million |
| Total deposits | $1.288 billion | $928.8 million |
| Stockholders’ equity | $230.3 million | $143.3 million |
| Cash and cash equivalents at year-end | $51.3 million | $38.4 million |
Net cash provided by operating activities was $23.9 million; investing activities used $149.3 million and financing activities provided $138.3 million. Cash and cash equivalents increased $12.9 million during 2019.
At year-end, the Bank reported a 94.06% loans-to-deposits ratio. Regulatory capital ratios included 11.71% Common Equity Tier 1, 12.30% total risk-based capital and 10.02% Tier 1 leverage; the Bank was categorized as well capitalized. Federal funds purchased and repurchase agreements totaled $48.1 million, and FHLB advances were $24.8 million.
Material changes versus the prior comparable period
- Net income rose 23.1%; net interest income increased $13.7 million, primarily from loan growth and higher loan yields. Average loans increased $297.6 million.
- Asset growth of approximately $491.2 million largely reflects the Geneva acquisition. Year-end loans rose about 44%, deposits about 39%, and assets about 44% versus 2018.
- Net interest margin edged down from 3.83% to 3.80%, as the cost of funds increased 56 basis points amid deposit competition and three Federal Reserve rate cuts in the second half of 2019.
- Noninterest expense increased 29.1%, including higher payroll and benefits from expansion and acquisition-related costs. The company recorded $1.28 million of acquisition costs in 2019.
- Credit indicators weakened in some measures: nonaccrual loans increased to $3.4 million from $0.5 million, and management’s watch-list/potential-problem loan balance rose to $60.2 million from $7.9 million. The company attributed much of the watch-list increase to acquired agricultural real estate loans. Net charge-offs were $0.7 million versus $0.4 million.
- Declared dividends increased to $0.61 per share from $0.56. Return on average assets was 1.23% versus 1.34%, and return on average equity was 8.26% versus 10.86%.
Outlook, management commentary, risks and unusual items
Management expected continued improvement through 2020 and planned further market expansion, including a Fort Wayne, Indiana office, while pursuing acquisitions, deposit growth, operating efficiency and a broader digital strategy. The filing provides no quantified earnings or revenue guidance. Management described the agricultural portfolio as stable after a wet spring and reduced planting; crop yields, government support and crop insurance helped offset farm stress, while some agribusiness customers faced tighter conditions.
- Acquisition and accounting items: Limberlost consideration was approximately $78.9 million, including $70.4 million in stock and $8.5 million in cash. The transaction generated $43.3 million of goodwill and $3.9 million of core deposit intangibles. A $1.985 million discount reversal on two acquired purchased credit-impaired loans increased 2019 loan interest income. Management reported pro forma EPS of $1.75 for 2019 excluding acquisition costs, versus reported EPS of $1.66.
- Credit and concentration risk: Lending is concentrated in real estate, commercial and agricultural borrowers in the company’s local markets. Agricultural repayment depends on weather, commodity prices and government policy; management also cited trade tariffs as a potential risk.
- Other principal risks: Interest-rate and funding-cost changes, competition, liquidity and deposit retention, regulatory requirements, cybersecurity and third-party vendor disruptions, and the uncertainty of loan-loss estimates. The company expected CECL adoption in 2023 and was evaluating its effect.
- Liquidity: Management described liquidity as adequate and reported access to $69 million of unsecured correspondent-bank borrowings, $116.3 million of unpledged securities, and additional FHLB capacity subject to collateral.
- Audit and legal matters: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor assessed controls as effective. No material pending legal proceedings were reported.
Important facts for investors to verify
- How much of 2019’s earnings and balance-sheet growth is sustainable organic growth versus the Geneva acquisition, purchase-accounting accretion and other acquisition effects.
- Whether the sharp increase in watch-list and nonaccrual loans leads to higher charge-offs or provisions, and how acquired agricultural credit quality develops.
- Whether loan yields and deposit costs support stable or improving net interest margin after 2019’s rate cuts and deposit repricing.
- The effect of acquisition goodwill and intangible amortization, integration costs, and the planned expansion on future expenses and returns.
- Whether capital, liquidity and dividend capacity remain adequate alongside the January 2020 authorization to repurchase up to 550,000 shares.