Business context and reporting period
Farmers & Merchants Bancorp, Inc. (NASDAQ: FMAO) filed this Form 10-K for the fiscal year ended December 31, 2022. The company is an Ohio bank holding company operating primarily in Northwest Ohio and Northeast Indiana, with one reportable segment. Its principal subsidiary provides commercial, agricultural, residential mortgage and consumer banking services.
On October 1, 2022, the company acquired Peoples Federal Savings and Loan Bank for approximately $23.2 million in cash and stock. The acquired business contributed $101.8 million of loans and $111.9 million of deposits at acquisition. Results include Peoples only from the acquisition date.
Key financial results
| Metric | 2022 | 2021 | Change or context |
|---|---|---|---|
| Total interest income | $101.1 million | $76.8 million | Up $24.3 million |
| Net interest income | $86.8 million | $69.5 million | Up $17.3 million |
| Net interest margin | 3.32% | 3.31% | Up 1 basis point |
| Net interest spread | 3.13% | 3.18% | Down 5 basis points |
| Provision for loan losses | $4.6 million | $3.4 million | Higher provision amid loan growth and charge-offs |
| Noninterest income | $15.5 million | $17.6 million | Down 11.8%, mainly lower loan-sale gains |
| Noninterest expense | $57.2 million | $54.2 million | Up 5.7%; includes acquisition and staffing costs |
| Net income | $32.5 million | $23.5 million | Up 38.4%; record earnings |
| Diluted earnings per share | $2.46 | $2.01 | Up from prior year |
| Operating cash flow | $40.7 million | $34.7 million | Cash and equivalents declined $96.4 million during 2022 |
| Total assets | $3.015 billion | $2.638 billion | Up $377.1 million |
| Loans, net | $2.336 billion | $1.841 billion | Up $494.9 million |
| Total deposits | $2.469 billion | $2.193 billion | Up $275.4 million |
| Stockholders’ equity | $298.1 million | $297.2 million | Nearly flat; accumulated other comprehensive loss widened |
Material changes and financial condition
- Growth and acquisition: Loan growth, including acquired balances, drove higher interest income and earnings. Average loans increased $551.6 million year over year. Peoples acquisition-related costs in 2022 were approximately $2.4 million.
- Rates and funding: The Federal Reserve raised rates seven times in 2022, totaling 425 basis points. Higher loan yields and loan volumes lifted interest income, while deposit competition and rate increases raised funding costs. Total interest expense increased to $14.4 million from $7.3 million.
- Credit quality: Nonaccrual loans fell to $4.7 million from $8.1 million; net charge-offs were $529,000. The allowance for loan losses was $20.3 million and total allowance for credit losses was $21.6 million. Loans graded as watch-list or potential problem loans totaled $60.0 million, up from $55.4 million.
- Market-value losses: Available-for-sale securities had a $48.5 million gross unrealized loss at year-end. Other comprehensive loss for 2022 was $35.0 million after tax, and accumulated other comprehensive loss reached $38.2 million, compared with $3.2 million a year earlier. Management said the losses reflected interest-rate movements and that it had the intent and ability to hold the securities; no securities were sold in 2022.
- Debt and liquidity: Year-end FHLB advances were $127.5 million, versus $24.1 million in 2021; federal funds purchased and repurchase agreements totaled $54.2 million. Cash and cash equivalents were $84.4 million, down from $180.8 million. Management reported access to $73.0 million of unsecured correspondent borrowings, $130.4 million through an FHLB cash-management facility and $249.6 million of unpledged securities. The year-end loan-to-deposit ratio was 94.1%.
- Capital and shareholder returns: The Bank remained well capitalized. At year-end, its total risk-based capital ratio was 12.07%, common equity Tier 1 ratio was 11.15%, and leverage ratio was 9.03%. Dividends declared were $0.8125 per share, totaling $10.6 million, 14.4% above 2021. A new authorization allows repurchases of up to 650,000 shares during 2023.
Outlook, risks and unusual items
Management said it was positioned to continue strong earnings performance in 2023 and cited a three-to-five-year strategic plan, including planned branch expansion. The filing provides no quantified earnings, revenue or margin guidance. Management also described commercial customer concerns about inflation, rising rates, workforce availability and supply-chain delays, while reporting generally good credit quality and a sound agricultural portfolio.
Key risks include credit exposure to commercial real estate, commercial and agricultural borrowers; regional economic and agricultural conditions; deposit competition and liquidity needs; interest-rate changes; and cybersecurity, fraud and third-party vendor risks. The company also flagged regulatory and competitive pressures. No material pending legal proceedings were reported.
The company adopted the CECL credit-loss standard on January 1, 2023. Before adoption, management estimated a one-time cumulative adjustment to loan and unfunded-commitment reserves of $3 million to $7 million; the final impact is not stated in the provided filing text. The independent auditor issued an unqualified opinion on the financial statements and identified the allowance for loan losses as a critical audit matter. Management concluded disclosure controls and internal control over financial reporting were effective; the company was not required to obtain an auditor opinion on internal controls.
Important facts for investors to verify
- Review subsequent results for realized deposit repricing, deposit mix, funding costs and the effect of rate changes on net interest margin.
- Verify the actual CECL adoption adjustment and its effect on reserves, earnings and capital.
- Monitor the $60.0 million watch list, commercial real estate concentration, agricultural credit performance and allowance coverage as loan balances grow.
- Assess liquidity and funding trends, including uninsured deposits of $511.3 million, rising borrowings and the high year-end loan-to-deposit ratio.
- Track whether available-for-sale securities losses recover or lead to sales, and how the accumulated other comprehensive loss affects reported equity and capital measures.
- Confirm the earnings contribution, integration costs and expected benefits of the Peoples acquisition, as well as execution of planned branch expansion and the 2023 share-repurchase authorization.