Farmers & Merchants Bancorp, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone quarterly filing; fourth-quarter figures below are unaudited. Unless otherwise noted, financial amounts are in millions of dollars.
Business context
Ohio-based bank holding company operating primarily through The Farmers & Merchants State Bank in Northwest Ohio and Northeast Indiana, with a captive insurance subsidiary. The community bank focuses on commercial, agricultural, residential mortgage and consumer lending; agriculture and real estate are meaningful portfolio exposures.
Financial results and condition
| Metric | 2017 | 2016 |
|---|---|---|
| Interest income | $41.25 | $37.73 |
| Net interest income | $36.12 | $33.50 |
| Net interest margin | 3.65% | 3.55% |
| Noninterest income | $10.74 | $11.37 |
| Net income | $12.72 | $11.66 |
| Diluted earnings per share | $1.38 | $1.27 |
| Total assets | $1,107.0 | $1,055.9 |
| Loans, net | $816.2 | $751.3 |
| Deposits | $919.3 | $842.2 |
| Stockholders’ equity | $134.1 | $125.6 |
- Net income rose 9.1%; net interest income increased 7.8%. The net interest spread was 3.48%, versus 3.39% in 2016. Return on average assets was 1.18% and return on average equity was 9.75%.
- Loan growth was $64.8 million; deposits increased $77.1 million year over year. The year-end loan-to-deposit ratio was 89.6% (the selected-data table reports 88.78%, apparently a different calculation or basis).
- Provision for loan losses declined to $0.22 million from $1.12 million. Net charge-offs were $0.14 million; nonaccrual loans fell to $1.00 million from $1.38 million. Allowance for loan losses was $6.87 million, or 0.83% of loans.
- Operating cash flow was $19.3 million; investing cash use was $49.8 million and financing cash provided was $36.7 million. Cash and cash equivalents ended at $34.5 million, up $6.1 million.
- Year-end funding included $39.5 million of federal funds purchased and repurchase agreements and $5.0 million of FHLB advances. The Bank reported $69 million of unsecured correspondent borrowing capacity and $94.6 million of unpledged securities; additional FHLB capacity depended on collateral.
- Consolidated regulatory capital ratios were 14.73% Tier 1 risk-based, 15.52% total risk-based and 12.02% leverage. The Bank was categorized as well capitalized.
Material changes versus 2016
- Higher loan balances and Federal Reserve rate increases lifted interest income; management said loan repricing above floors began to benefit results in 2017. Deposit and other funding costs also rose, with total interest expense up $0.90 million.
- Noninterest income decreased $0.63 million, mainly because securities-sale gains fell to $0.05 million from $0.59 million. Salaries and benefits and other operating costs contributed to a $1.30 million increase in noninterest expense.
- The available-for-sale securities portfolio declined to $196.4 million from $218.5 million and remained in an unrealized loss position. Other comprehensive income was positive $0.15 million in 2017, following a $2.18 million loss in 2016.
- Time deposits fell to $187.6 million from $198.8 million, while noninterest-bearing deposits and NOW accounts increased. Short-term federal funds and repurchase-agreement balances fell to $39.5 million from $70.3 million.
- Quarterly unaudited fourth-quarter net income was $3.44 million, versus $3.19 million in fourth-quarter 2016; EPS was $0.37 versus $0.35, on a stock-split-adjusted basis.
Outlook, risks and notable items
- Management described local economies as strengthening, with agriculture at breakeven or slightly profitable amid low commodity prices and weather effects. It expects newer offices to contribute to earnings in 2018 and plans continued market expansion, including a Findlay, Ohio office scheduled to open in early 2018. No quantified earnings or revenue guidance was provided.
- Management expects higher rates to support loan yields but cautioned that deposit costs may rise faster. Its rate-shock analysis indicated modest margin and income pressure under 100- and 200-basis-point increases, with results dependent on balance-sheet mix and repricing.
- Key risks include commercial real estate concentration, agricultural borrower exposure to commodity prices and weather, credit quality, interest-rate and liquidity risk, competition, regulatory change, cybersecurity and operational disruption. Commercial real estate loans were $410.5 million, about half of total loans. Potential problem/watch-list loans were approximately $20.8 million.
- The Tax Cuts and Jobs Act was enacted in December 2017, lowering the federal corporate rate to 21%; remeasurement of deferred taxes produced an approximately $8,000 benefit. The reported 2017 effective tax rate was 28.95%.
- The Board authorized repurchases of up to 400,000 shares during 2018. The company also completed a two-for-one stock split in September 2017; per-share data in the filing is split-adjusted.
- Auditors gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. No material pending legal proceedings were reported.
Most important facts for investors to verify
- Whether loan growth and margin improvement persist as funding costs respond to further rate changes.
- Credit trends and reserve adequacy, particularly within commercial real estate, agriculture and the $20.8 million watch-list/potential-problem portfolio.
- Liquidity and funding assumptions, including the availability and collateral requirements of borrowing lines and the shift from repurchase agreements to insured cash sweep deposits.
- The potential effect of the securities portfolio’s unrealized losses and future securities sales used to fund loan growth.
- Execution, expense and returns from branch expansion, including the Findlay opening, alongside the 2018 share-repurchase authorization and dividend capacity.
- How the 21% federal tax rate and forthcoming accounting standards, particularly expected-credit-loss requirements, affect future reported results and capital.