Farmers & Merchants Bancorp, Inc. — Q1 2021 Form 10-Q
Business context and period. This unaudited filing covers the three months ended March 31, 2021, compared with Q1 2020; balance-sheet comparisons are to December 31, 2020 unless noted. The Ohio-based bank holding company operates principally in northwest Ohio and northeast Indiana, with lending concentrated in commercial real estate, commercial and industrial, and agriculture. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and condition
| Metric | Q1 2021 / March 31, 2021 | Comparable period / change |
|---|---|---|
| Interest income | $16.8 | $17.5 in Q1 2020, down 4.0% |
| Net interest income | $15.0 | $14.1 in Q1 2020, up $1.0 |
| Net interest margin | 3.33% | 3.75% in Q1 2020 |
| Provision for loan losses | $1.7 | $1.4 in Q1 2020 |
| Noninterest income | $5.0 | $3.1 in Q1 2020, up 59.9% |
| Noninterest expense | $12.4 | $10.7 in Q1 2020 |
| Net income / diluted EPS | $4.9 / $0.44 | $4.1 / $0.37 in Q1 2020; net income up 19.6% |
| Dividend declared | $0.17 per share | $0.16 per share in Q1 2020 |
| Operating cash flow | $6.4 | $4.7 in Q1 2020 |
Net income growth was supported by lower funding costs and higher fee income, particularly gains on mortgage and agricultural loan sales and increased customer service and debit-card fees. Loan-sale gains were $1.0 million versus $0.2 million a year earlier. Interest expense fell 49.3% to $1.7 million, while the yield on earning assets declined to 3.71% from 4.66%. Management reported net interest spread of 3.18%, down from 3.44%.
Total assets were $1,993.3 million, up 4.4% from year-end 2020. Net loans were $1,327.3 million on the balance sheet; gross loans, net of deferred fees and costs, were $1,341.7 million, up $38.7 million from year-end and 7.5% year over year. Available-for-sale securities were $353.0 million, up $45.2 million from year-end. Total deposits rose $87.7 million, or 5.5%, to $1,683.9 million.
Cash and cash equivalents were $175.5 million, essentially unchanged from year-end. Investing activities used $92.1 million, principally reflecting $76.1 million of securities purchases and net loan growth; financing activities provided $85.5 million, largely from deposit growth. The company reported $30.1 million of repurchase-agreement funding and $17.8 million of FHLB advances. Management cited $148.1 million of unsecured correspondent-bank borrowing capacity and $6.2 million of additional FHLB capacity.
Stockholders’ equity was $246.8 million, down $2.3 million from year-end, mainly as accumulated other comprehensive income declined $5.6 million amid unrealized securities losses. The Bank reported an 8.21% Tier 1 leverage ratio, 11.12% Tier 1 risk-based capital, and 12.26% total risk-based capital; management described capital as well above requirements.
Material changes, outlook and risks
- Compared with Q1 2020, net income increased $0.8 million despite lower interest income and margin compression. Management attributed the margin decline to lower market rates and excess deposit liquidity being placed in lower-yielding securities and overnight funds.
- The allowance for loan and lease losses rose to $14.4 million from $13.7 million at year-end; total allowance for credit losses, including unfunded commitments, was $15.5 million. Q1 net charge-offs were $0.9 million, including $0.8 million of commercial and industrial charge-offs. Nonaccrual loans were $8.1 million, down from $9.4 million at year-end but up from $3.3 million a year earlier.
- COVID-19 effects remained uncertain. Five loans totaling $10.4 million had COVID-related interest-only modifications at quarter-end. Hospitality loans totaled $90.6 million, with none on COVID-related modifications; management said hotels, entertainment and food businesses were less than 10% of the overall loan portfolio. Management stated it was prepared to increase provisions if warranted.
- Management cited a strong commercial lending pipeline, expansion into newer markets, and plans to continue growth. It also expected mortgage refinancing activity to slow as rates and home prices rose and housing inventory remained low. No quantified full-year earnings or revenue guidance was provided.
- The company expected to close its announced acquisition of Ossian Financial Services for approximately $20 million in cash at midnight April 30, 2021, subject to possible adjustment. It recorded $0.18 million of related costs in Q1. The filing also describes the discontinuation of three offices on March 1, with another closure planned for Q2.
- Unusual or notable items included a $0.15 million Indiana income-tax credit adjustment, a $0.35 million one-time 2020 employer pension-match expense, and $0.18 million of Ossian acquisition costs. Management cited interest-rate changes, credit quality, deposit flows, competition, regulation and the pandemic as risks. It reported no material change in risk factors, no legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Whether loan growth, deposit inflows and the elevated securities portfolio can sustain earnings as net interest margin remains below the prior-year level.
- How credit performance develops, particularly nonaccruals, commercial charge-offs, the allowance, and borrowers affected by COVID-19; reconcile the higher year-over-year nonaccrual balance with its decline from year-end.
- Completion and final economics of the Ossian acquisition, including any closing adjustment and integration costs.
- Realized versus unrealized securities losses and their effects on accumulated other comprehensive income, equity and capital.
- Execution of the stated expansion and office-closure plans, and the impact of any further slowdown in mortgage originations and sales.
- Future adoption timing and allowance impact of the expected-credit-loss standard, which the company had not adopted and could defer until 2023.