Farmers & Merchants Bancorp, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are against December 31, 2022 unless noted. Unaudited consolidated results cover the company’s community banking operations. Dollar amounts below are in millions unless stated otherwise.
Business context and key financial metrics
The company operates through Farmers & Merchants State Bank, with 33 full-service offices in northwest Ohio and northeast Indiana, plus loan production offices in Ohio, Indiana, and Michigan. The bank lends to commercial, agricultural, residential real estate, and consumer borrowers. Peoples Federal Savings and Loan, acquired in October 2022, is included in current-period results but not in the same prior-year reported period.
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior date |
|---|---|---|
| Interest income | $31.8 | $21.9 in Q1 2022 |
| Net interest income, before credit-loss provision | $21.7 | $19.8 in Q1 2022 |
| Provision for credit losses | $0.9 total: $0.8 loans and $0.1 off-balance-sheet exposures | $0.6 loans in Q1 2022; prior period used the incurred-loss method |
| Noninterest income | $4.2, including an $0.9 securities-sale loss | $4.3 in Q1 2022 |
| Noninterest expense | $16.9 | $13.5 in Q1 2022 |
| Net income / diluted EPS | $6.5 / $0.47 | $8.1 / $0.62 in Q1 2022 |
| Net interest margin / spread | 3.01% / 2.56% | 3.14% / 3.02% in Q1 2022 |
| Return on assets / return on equity | 0.91% / 8.53% | 1.30% / 10.12% in Q1 2022 |
| Total assets | $3,070.1 | $3,015.4 at December 31, 2022 |
| Loans, net of allowance | $2,422.0 | $2,336.1 at December 31, 2022 |
| Deposits | $2,513.2 | $2,468.9 at December 31, 2022 |
| Cash and cash equivalents | $64.3 | $84.4 at December 31, 2022 |
Q1 operating cash flow was $3.1 million; investing cash flow was negative $68.2 million and financing cash flow was positive $45.1 million. Cash and cash equivalents decreased $20.1 million during the quarter. Interest paid was $9.3 million.
At March 31, borrowings included $164.3 million of FHLB advances, $30.5 million in repurchase agreements, and $34.6 million of subordinated notes, net of issuance costs. Total stockholders’ equity was $305.8 million. The company reported bank capital ratios of 9.01% Tier 1 leverage, 11.05% Tier 1 risk-based capital, and 12.06% total risk-based capital. Management stated the company and bank remained well capitalized.
Material changes versus comparable periods
- Net income fell 20.2% year over year, and diluted EPS declined from $0.62 to $0.47. Although interest income rose $9.9 million, interest expense increased $8.0 million, reflecting higher deposit and borrowing costs.
- Average earning assets increased, largely from loan growth and acquisitions. Management reported year-over-year loan growth of 24.7% excluding PPP balances, including 19.4% organic growth excluding acquisitions and PPP.
- Higher interest rates and deposit competition compressed the net interest margin by 13 basis points year over year. The cost of interest-bearing liabilities rose to 1.85% from 0.45%.
- Noninterest expense increased $3.4 million. Salaries and benefits rose, and management cited a $0.5 million one-time credit-card platform conversion expense, including customer awards. FDIC assessment, data processing, and other operating costs also increased.
- Noninterest income was affected by lower mortgage production and loan-sale gains, down approximately $0.6 million year over year. A $0.9 million net realized loss was recorded on sales of $22.0 million of available-for-sale securities.
- Available-for-sale securities had $39.6 million of gross unrealized losses at quarter-end, versus $48.5 million at year-end 2022. Accumulated other comprehensive loss improved to $31.2 million from $38.2 million. Management attributed unrealized losses to interest-rate changes, stated it intended and was able to hold the securities, and reported no securities credit-loss allowance.
- Deposits increased $44.3 million from year-end, while FHLB advances rose $36.8 million. The loan-to-deposit ratio was approximately 96%, according to management.
Credit quality, accounting changes, outlook, and risks
- Nonaccrual loans were $7.7 million, or 0.32% of loans, compared with $8.6 million, or 0.44%, at March 31, 2022. Past-due loans were $13.0 million at March 31, 2023, up from $6.0 million at year-end 2022; management also noted past dues increased $11.1 million year over year. No loans more than 90 days past due were reported as still accruing.
- The loan allowance for credit losses was $24.6 million, 1.01% of loans; the allowance for unfunded commitments was $2.2 million. Commercial real estate made up $16.1 million, or 65.3%, of the loan allowance. Commercial real estate loans were $1.2 billion, about half of the reported loan portfolio.
- The company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $3.6 million and the unfunded-commitment allowance by $0.9 million, with a $3.4 million after-tax reduction to retained earnings. Q1 provision comparisons with 2022 are not fully comparable because prior-year results used the incurred-loss method.
- Management said commercial loan demand remained active, but higher rates had slowed demand in some sectors and mortgage refinancing had fallen significantly. Agricultural conditions and the near-term outlook were described as favorable, with risks including workforce constraints, supply-chain delays, energy prices, and commodity and weather exposure.
- Management expects its loan-growth and balance-sheet strategy to support future net interest income as new loans generate earnings, while acknowledging that deposit competition and higher funding costs could further pressure margins. The filing provides no formal numerical earnings or margin guidance.
- Management said liquidity needs could be met through deposits, security maturities, and borrowings. It reported $88 million of unsecured correspondent borrowing capacity and $130.4 million of FHLB cash-management advance access. Available-for-sale securities and other funding options remain subject to market conditions and collateral availability.
- The filing identifies interest-rate, liquidity, deposit-flow, credit, economic, and regulatory risks. It specifically notes industry disruption following the failures of Silicon Valley Bank and Signature Bank, which could affect confidence, funding costs, liquidity, capital requirements, and the market price of the company’s stock. The company’s interest-rate model showed projected net interest income sensitivity of positive 2.53% under a 200-basis-point rise and negative 10.26% under a 200-basis-point decline; these are model estimates, not guidance.
- Management is evaluating proposed IRS rules concerning certain captive insurance arrangements; the filing does not provide a clear estimate of any potential financial impact. No material legal proceedings were reported, and management concluded disclosure controls were effective.
Important facts for investors to verify
- How much of reported loan growth and earnings reflects the Peoples acquisition versus organic growth, and how reported results compare with the filing’s pro forma figures.
- Whether deposit growth can continue at acceptable cost, and how funding costs, liquidity, and the approximately 96% loan-to-deposit ratio develop.
- Trends in delinquencies, nonaccrual loans, credit-loss provisions, and commercial real estate concentrations, especially as higher rates and economic conditions affect borrowers.
- The sustainability of net interest margin and management’s interest-rate sensitivity assumptions, including deposit repricing behavior and loan reset timing.
- The effect of securities sales, remaining unrealized losses, and future liquidity needs on earnings and capital.
- Whether agricultural servicing-rights valuations, CECL estimates, or proposed captive-insurance regulations lead to material future adjustments.