Farmers & Merchants Bancorp, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also provides unaudited quarterly results, including the three months ended December 31, 2015. The company is an Ohio bank holding company operating primarily in Northwest Ohio and Northeast Indiana through Farmers & Merchants State Bank, alongside a captive insurance subsidiary.
Financial performance and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Interest income | $33.650 million | $33.453 million |
| Net interest income | $30.063 million | $29.737 million |
| Net interest margin | 3.49% | 3.63% |
| Provision for loan losses | $625,000 | $1.191 million |
| Noninterest income | $10.788 million | $10.184 million |
| Noninterest expense | $26.067 million | $25.213 million |
| Net income | $10.340 million | $9.646 million |
| Diluted earnings per share | $2.24 | $2.08 |
| Net cash from operating activities | $14.809 million | $19.163 million |
- Management described 2015 as record earnings; net income rose 7.2%. Return on average assets was 1.08% (1.02% in 2014), and return on average equity was 8.80% (8.72%).
- At year-end, total assets were $989.1 million, net loans $679.8 million, deposits $771.3 million, and shareholders’ equity $120.1 million. Loans grew $63.8 million; deposits increased $8.8 million year over year.
- Net cash used in investing activities was $54.0 million, principally reflecting net loan growth and securities activity. Financing activities provided $36.9 million, including increased short-term funding and $10 million of new FHLB advances. Cash and cash equivalents ended at $22.0 million.
- The year-end loan-to-deposit ratio was 88.1%, versus 80.8% in 2014. Liquidity was described as adequate but lower than in prior years as securities were used to fund lending. Available contingent funding included $58 million of unsecured correspondent-bank lines and FHLB capacity subject to collateral.
- Capital remained strong: company total risk-based capital was 14.95%, common equity Tier 1 was 14.18%, and leverage was 11.91%. The Bank was classified as well capitalized.
Material changes and quarterly comparison
- Loan growth, lower funding costs, increased service-related income, and a lower loan-loss provision supported higher annual earnings. Securities were sold or allowed to mature to help fund loan growth.
- Asset yields declined and net interest margin narrowed 14 basis points to 3.49%, despite higher loan balances. Average cost of funds was 0.54%, down slightly from 0.55%.
- Commercial real estate loans increased to $322.8 million from $270.2 million. Available-for-sale securities fell to $235.1 million from $248.5 million.
- Credit indicators were generally favorable, with net charge-offs of $473,000 versus $480,000 and 30-plus-day delinquency of 0.32% versus 0.37%. Nonaccrual loans rose to $2.041 million from $1.705 million, while management-identified potential problem loans fell to $7.0 million from $13.5 million.
- Fourth-quarter net income was $2.772 million, compared with $2.661 million in fourth-quarter 2014; quarterly EPS was $0.60 versus $0.57. Fourth-quarter net interest income was $7.810 million versus $7.612 million.
Outlook, risks, and notable items
- No numerical earnings or growth guidance is provided. Management expected local economies to continue improving, while noting agricultural customers faced lower commodity prices and the business would need to address a rising-rate environment.
- A new Fort Wayne-area office was under construction and expected to open in 2016. Management anticipated start-up costs would make it a slight earnings drag during 2016, with potential in later years.
- Key risks include concentrations in real estate, commercial lending, and agriculture; borrower exposure to property values, farm commodity prices and weather; interest-rate and net-interest-margin changes; competitive pressure; regulatory compliance costs; and cybersecurity and operational disruption.
- The company reported no material pending legal proceedings. Management identified the allowance for loan losses, mortgage servicing rights, and other real estate owned valuations as particularly judgmental accounting areas.
- The company paid $0.87 per share in 2015 dividends, totaling about $3.99 million, and authorized repurchases of up to 200,000 shares for 2016. The filing attributes part of the lower effective tax rate to the captive insurance subsidiary established in 2014.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal control were effective at year-end.
Important facts for investors to verify
- Whether rapid loan growth—especially commercial real estate growth—and the rising loan-to-deposit ratio remain supportable without weakening underwriting or liquidity.
- Whether credit quality and the allowance remain adequate, given higher nonaccrual loans and the judgment involved in collateral valuations and loss estimates.
- How margin and funding costs respond to further rate changes, including the company’s increased short-term funding and new FHLB borrowing.
- The sustainability of earnings contributions from service fees, securities gains, and the captive-related tax benefit, and the expected costs and performance of the new office.
- Whether dividends and announced share repurchases remain consistent with regulatory capital, liquidity needs, and the Bank’s dividend capacity.