Farmers & Merchants Bancorp, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; unaudited quarterly data is summarized below. The company is an Ohio bank holding company operating through The Farmers & Merchants State Bank and a captive insurer, serving Northwest Ohio and Northeast Indiana.
Financial results and position
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Interest income | $46.4 million | $41.2 million | Up 12.6% |
| Net interest income | $39.9 million | $36.1 million | Up 10.3%; net interest margin rose to 3.83% from 3.65% |
| Noninterest income | $10.9 million | $10.7 million | Up modestly; 2018 included a $9,000 net securities loss |
| Noninterest expense | $32.2 million | $28.7 million | Up 12.2%, led by compensation, benefits, and acquisition-related costs |
| Provision for loan losses | $324,000 | $222,000 | Low relative to loan balances; net charge-offs were $417,000 |
| Net income | $14.9 million | $12.7 million | Up 17.5%; EPS was $1.61 versus $1.38 |
| Effective tax rate | 17.75% | 28.95% | Lower rate reflected the 2017 tax law change and other tax factors |
- Fourth quarter: Net income was $3.19 million, or $0.34 per share, versus $3.44 million, or $0.37 per share, in Q4 2017. Net interest income increased to $10.19 million from $9.51 million, while noninterest expense and provision were higher.
- Balance sheet at year-end: Assets were $1.116 billion, loans net of allowance were $839.6 million, deposits were $928.8 million, and shareholders’ equity was $143.3 million. Loans net grew 2.9% and deposits grew 1.0% year over year.
- Cash flow: Operating activities provided $12.1 million, compared with $19.3 million in 2017. Investing activities provided $66,000 after loan growth and securities activity; financing activities used $8.3 million, including debt repayments and dividends. Cash and cash equivalents ended at $38.4 million.
- Capital and liquidity: The Bank was reported well capitalized, with a 13.45% total risk-based capital ratio, 12.67% Common Equity Tier 1 ratio, and 10.54% leverage ratio. Consolidated stockholders’ equity was 12.84% of assets. Year-end cash, available-for-sale securities, and borrowing capacity supported liquidity; management reported $69 million of unsecured correspondent-bank lines and access to FHLB advances subject to collateral.
- Debt and funding: No FHLB advances remained at year-end, versus $5.0 million in 2017. Federal funds purchased and repurchase agreements totaled $32.2 million. The company’s reported loans-to-deposits ratio was 90.4%; management separately reported the Bank’s year-end ratio as 91.2%.
Material changes and notable developments
- Loan growth, higher loan yields, and Federal Reserve rate increases drove higher interest income and helped lift margin. Average loans rose $48.5 million; loan interest income increased $5.1 million.
- Funding costs rose as deposit competition intensified: total interest expense increased to $6.6 million from $5.1 million, with management attributing most of the increase to rates. Management noted deposit-cost pressure was especially pronounced in the second half of 2018.
- Loan balances increased $23.4 million, while the available-for-sale securities portfolio declined to $168.4 million from $196.4 million, partly reflecting funds redirected to lending. The portfolio carried $4.1 million of gross unrealized losses at year-end; management attributed these primarily to interest-rate movements and reported no securities with other-than-temporary impairment.
- Asset quality indicators improved: nonaccrual loans fell to $542,000 from $1.0 million; watch-list loans declined to $7.9 million from $21.2 million. The allowance for loan losses was $6.8 million, or 0.80% of reported outstanding loans.
- The 2018 annual dividend increased 12% to $0.56 per share. A board authorization announced in January 2019 permitted repurchases of up to 500,000 shares during 2019.
Outlook, risks, and unusual items
- Management expected continued profitability improvement in 2019, supported by loan repricing and growth, but cautioned that deposit-cost pressure could persist and the yield curve could invert. It did not provide formal earnings or revenue guidance.
- On January 1, 2019, the company acquired Limberlost Bancshares, parent of Bank of Geneva, for approximately $78.9 million: $70.4 million in stock and $8.5 million in cash. The acquired institution had six Indiana offices, $259.3 million of loans, and $206.6 million of deposits; purchase accounting remained preliminary. Management expected the acquisition to be accretive in 2019. The company incurred $742,000 of acquisition expenses in 2018 and expected additional costs in 2019.
- Key exposures include commercial real estate and agricultural lending, local economic conditions, borrower credit quality, interest-rate and deposit competition, and securities valuation. The filing also highlights competition, regulatory change, cybersecurity and third-party vendor risks, and the need to retain qualified staff.
- CECL was scheduled to take effect for the company in 2020. Management was evaluating implementation and expected a one-time cumulative adjustment to the allowance at adoption; the amount was not disclosed.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls. No material pending legal proceedings were reported.
Important facts for investors to verify
- Whether loan and deposit pricing trends sustain the 3.83% margin as competition raises funding costs, and how the yield curve affects results.
- The quality and concentration of commercial real estate, agricultural, and other loans; ongoing charge-offs; and the adequacy of the allowance, including the eventual CECL impact.
- Final purchase-price allocation, integration expenses, acquired loan marks, and realized contribution from the Limberlost acquisition.
- Liquidity and funding mix, including reliance on customer deposits, repurchase agreements, and available borrowing capacity.
- Capital available after dividends and the 2019 share-repurchase authorization, together with the sustainability of dividend growth.