Farmers & Merchants Bancorp, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; balance-sheet comparisons are to December 31, 2010. Financial statement amounts below are in millions of dollars unless otherwise stated. The company and its subsidiary operate a commercial bank serving northwest Ohio and northeast Indiana, with substantial agricultural lending.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Interest income | $8.855 | $10.025 | $27.354 | $30.218 |
| Net interest income before provision | $6.864 | $7.348 | $21.033 | $21.812 |
| Provision for loan losses | $0.093 | $1.200 | $1.522 | $4.875 |
| Noninterest income | $1.566 | $2.382 | $4.580 | $6.123 |
| Noninterest expense | $5.537 | $5.512 | $16.671 | $16.716 |
| Net income | $2.081 | $2.197 | $5.629 | $4.796 |
| Basic earnings per share | $0.44 | $0.47 | $1.20 | $1.02 |
- Q3 net income declined about 5% year over year; nine-month net income increased about 17%. Nine-month dividends declared were $0.57 per share, versus $0.54 a year earlier.
- Management reported a nine-month earning-asset yield of 4.42%, down from 5.04%, and a cost of interest-bearing funds of 1.15%, down from 1.59%. The filing’s interest-rate sensitivity table is a forecast, not a measure of realized margin; it shows forecast net interest income 6.4% below the flat-rate case under a 3-percentage-point rate increase.
- Cash flow: Nine-month operating cash flow was $12.451 million, investing activities used $3.405 million, and financing activities used $14.021 million. Cash and cash equivalents decreased $4.975 million to $38.404 million.
- Balance sheet: Total assets were $907.722 million, compared with $906.363 million at year-end 2010. Net loans were $500.326 million, down $21.557 million; available-for-sale securities were $316.372 million, up $29.055 million.
- Funding and liquidity: Deposits totaled $719.585 million, down $4.928 million. FHLB advances were $21.710 million and repurchase-agreement borrowings were $53.207 million. Management described liquidity as strong and cited $45 million of unsecured correspondent-bank borrowing access and more than $116.6 million of unpledged securities.
- Capital: Reported ratios were 10.67% primary, 10.15% Tier I leverage, 15.07% Tier I risk-based, and 15.94% total risk-based capital. Shareholders’ equity was $103.752 million.
Material changes and credit quality
- Lower loan balances and yields contributed to weaker interest income and net interest income. The nine-month decline in interest income was $2.864 million; management attributed most of it to loans and lower interest rates.
- Lower loan-loss provisions supported year-to-date earnings: the provision was $3.353 million lower than in the first nine months of 2010. Net charge-offs were $2.090 million, versus $3.878 million a year earlier; the allowance for loan losses ended at $5.138 million, compared with $5.706 million at year-end.
- Delinquent loans rose to 1.73% of total loans at September 30, after reaching 0.76% at the end of March. Management attributed the increase mainly to a large agricultural credit placed in collection; it said the loan was fully collateralized and expected principal, fees, and interest to be collected in 2011. Nonaccrual loans were $6.684 million, versus $5.844 million at year-end.
- Impaired loans increased to $7.082 million from $4.369 million at year-end. Approximately $3.2 million of restructured loans were current and accruing; one commercial real estate restructured loan with a recorded investment of $207,000 subsequently defaulted.
- Noninterest income was affected by $1.009 million of losses and write-downs on other assets, principally other real estate. Other real estate owned was $3.855 million at quarter-end. By contrast, the company recorded $504,000 of securities-sale gains year to date, below the $956,000 recorded in 2010.
- Accumulated other comprehensive income increased to $6.946 million from $0.538 million at year-end, largely reflecting unrealized securities gains. Management reported no securities with other-than-temporary impairment.
Outlook, commentary, and risks
- No quantified earnings or financial guidance was provided. Management expected collection of the large agricultural credit during the fourth quarter and sought loan growth to improve asset yields and profitability.
- Management noted persistent low short-term interest rates, soft loan demand, and high liquidity. It expected deposit costs to remain under pressure from customer preference for shorter maturities and cautioned that rising rates could challenge margins.
- Other risks and uncertainties include the fragile local economic recovery, unemployment, agricultural exposure to commodity prices and weather, loan and collateral values, competition, deposit flows, and changing regulatory requirements. Management specifically cited Regulation E and Dodd-Frank compliance costs, potential overdraft and interchange-fee revenue pressure, and debit-card fraud.
- The company reported no material change in previously disclosed risk factors and no legal proceedings. Management concluded disclosure controls were effective and reported no significant quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the large agricultural credit was collected as expected, and how subsequent delinquencies, nonaccruals, and impaired loans developed.
- Whether the allowance for loan losses remains adequate given charge-offs, portfolio trends, and the concentration in agricultural and commercial lending.
- How other real estate valuations and sale losses affect earnings, and whether the reported unrealized securities gains persist or reverse.
- Whether loan demand and asset yields improve enough to offset margin pressure, and how deposit pricing and regulatory changes affect revenue and costs.
- Whether reported liquidity sources and capital ratios remain sufficient under adverse credit and interest-rate conditions.