Farmers & Merchants Bancorp, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016 unless otherwise noted. Financial statement amounts are in thousands of dollars except per-share data. Results are unaudited.
Business context and reporting period
The Ohio-based financial holding company operates a community bank serving Northwest Ohio and Northeast Indiana, with commercial, agricultural, residential mortgage, and consumer lending. The company reports one consolidated segment. Management emphasized loan growth, supported by expansion into newer markets, including Fort Wayne and Bowling Green.
Key financial metrics
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior date |
|---|---|---|
| Interest income | $9.721 million | $9.004 million in Q1 2016 |
| Net interest income | $8.542 million | $8.008 million in Q1 2016 |
| Provision for loan losses | $73,000 | $277,000 in Q1 2016 |
| Net income | $2.839 million | $2.481 million in Q1 2016 |
| Diluted earnings per share | $0.61 | $0.54 in Q1 2016 |
| Net interest margin | 3.51% | 3.54% in Q1 2016; 3.61% in Q4 2016 |
| Comprehensive income | $3.091 million | $3.690 million in Q1 2016 |
| Net cash from operating activities | $5.414 million | $2.307 million in Q1 2016 |
| Total assets | $1.068 billion | $1.056 billion at December 31, 2016 |
| Net loans | $764.356 million | $751.310 million at December 31, 2016 |
| Deposits | $894.691 million | $842.203 million at December 31, 2016 |
| Cash and cash equivalents | $39.894 million | $28.322 million at December 31, 2016 |
| Federal funds purchased and repurchase agreements | $27.961 million | $70.324 million at December 31, 2016 |
| FHLB advances | $10.000 million | $10.000 million at December 31, 2016 |
| Stockholders’ equity | $127.717 million | $125.577 million at December 31, 2016 |
Reported interest income less interest expense was $8.542 million. Management cited a 3.99% annualized yield on interest-earning assets, a 0.65% cost of interest-bearing liabilities, and a 3.34% net interest spread. Cash increased by $11.572 million during the quarter. Cash from operations and financing was partly offset by $2.914 million of net investing cash outflow.
Capital ratios at March 31 were 11.81% Tier 1 leverage, 14.88% Tier 1 risk-based capital, and 15.73% total risk-based capital. Management said both the company and bank were well above the 2019 capital conservation buffer requirement.
Material changes versus prior comparable period
- Net income increased 14.4% and diluted EPS rose from $0.54 to $0.61. Net interest income grew 6.7%, mainly from higher loan balances and loan yields; average loans were up $69.5 million year over year.
- Loans including loans held for sale increased 9.1% year over year to $772.3 million. Growth was concentrated in commercial real estate, commercial and industrial, and agricultural lending. Net loans rose $13.0 million from year-end.
- Interest expense increased $183,000 year over year, reflecting higher average interest-bearing deposits and funding costs. Net interest margin edged down year over year and was below Q4 2016.
- Noninterest income declined $86,000 year over year, including an $82,000 reduction in securities-sale gains. Noninterest expense increased $85,000, including higher payroll and benefits, partly offset by lower data-processing costs.
- Provision expense was $204,000 lower than Q1 2016. Net charge-offs were $7,000 versus $49,000 a year earlier. Nonaccrual loans were $1.430 million, down from $2.003 million at March 31, 2016; total past-due loans were $2.460 million.
- Available-for-sale securities declined $12.1 million from year-end, while pledged securities declined $41.6 million. The portfolio had a net unrealized loss of approximately $2.6 million; management reported no securities with other-than-temporary impairment.
- Reported deposits rose $52.5 million from year-end, while management said growth excluding movement associated with sweep products was $10.1 million. Management attributed changes in deposit categories partly to use of the Insured Cash Sweep product and runoff of short-term network time deposits.
Outlook, management commentary, risks and unusual items
- Management plans to continue loan growth in 2017, particularly in newer markets, and to fund growth through deposits. It expects the income benefit from new loans and balance-sheet repositioning to continue, but provided no numerical earnings or revenue guidance.
- Management described local commercial lending as firm and agricultural borrowers as generally well capitalized. It noted agriculture remains exposed to commodity prices and weather, while consumer lending slowed and residential mortgage lending increased.
- Liquidity improved, according to management, with higher cash balances and fewer pledged securities. The company reported $106.5 million of unsecured correspondent-bank borrowing capacity for short-term needs.
- Interest-rate risk is a key exposure. Management’s sensitivity analysis showed forecast net interest margin tightening under larger rate shocks, and noted that many newer commercial real estate loans have initial fixed-rate periods of three to five years. Outcomes depend on deposit repricing, loan mix, and actual balance-sheet composition.
- Key credit-estimate risks include the allowance for loan losses, mortgage servicing rights, and foreclosed real estate valuations. Management also cited regulatory compliance complexity. The company had no new troubled debt restructurings in Q1 2017; approximately $551,000 of impaired loans were classified as TDRs at quarter-end.
- The company adopted ASU 2016-09 on stock compensation on January 1, 2017, with no significant reported impact. It was assessing the impact of the expected-credit-loss standard, ASU 2016-13, effective for calendar-year entities in 2020.
- No legal proceedings were reported, and the filing stated there were no material changes to risk factors from the 2016 Form 10-K. No shares were repurchased during the quarter; a January 2017 authorization permits repurchases of up to 200,000 shares through year-end.
Important facts for investors to verify
- Track whether loan growth continues to translate into net interest income while funding costs and the net interest margin remain under pressure.
- Reconcile deposit growth by category and distinguish underlying customer growth from sweep-product movements and network time-deposit runoff.
- Monitor commercial real estate concentration, delinquency trends, nonaccrual loans, charge-offs, and the adequacy of the allowance as the portfolio expands.
- Assess liquidity and securities exposure, including pledged collateral, unrealized losses, and the company’s reliance on deposit and borrowing sources.
- Review the assumptions in interest-rate sensitivity analysis and the potential effect of repricing timing on loan yields and deposit costs.
- Confirm the balance-sheet and disclosure effects of upcoming accounting standards, particularly the expected-credit-loss methodology.