Farmers & Merchants Bancorp, Inc. reported financial results for the 2020 third quarter and year-to-date September 30, 2020.
2020 Third Quarter Financial Highlights Include (on a year-over-year basis unless noted):
“Momentum in our business remains strong and I am extremely proud of the high level of service and dedication our employees continue to provide our customers and communities,” stated Lars B. Eller, President and Chief Executive Officer. “We entered the COVID-19 crisis from a position of strength through our commitment to community-oriented and prudent banking values. F&M’s continued success throughout this challenging period is encouraging and we have been able to offset an increased level of provision for loan losses by reducing our cost of funds, driving strong noninterest income, and improving our efficiency ratio. As a result, third quarter net income increased 3.2%, and earnings per diluted share are up 5.3% over the prior year period.”
Mr. Eller continued: “Our loan portfolio continues to be resilient. Loans 30 days past due to total loans, excluding PPP loan balance, is comparable to pre-COVID levels and was 0.26% at September 30, 2020, compared to 0.18% at December 31, 2019. In addition, we ended the third quarter with only $8.5 million of interest only and full deferrals, compared to $156.6 million at the end of the second quarter. Given this favorable performance, we believe interest only and full deferrals, as well as second deferrals, will continue to decline throughout the remainder of 2020. However, given the uncertainty surrounding the COVID-19 crisis and the continued impacts the pandemic is having on the global economy, we are proactively monitoring our portfolio’s performance and our approach to risk remains prudent. As a result, we have increased our allowance for loan and lease losses by nearly 76.0% over the past 12 months, and our allowance for loan and lease losses to total loans, adjusted for our PPP balances, are now over 1.0%.”
Net income for the 2020 third quarter ended September 30, 2020, was $4.4 million, compared to $4.3 million for the same period last year. Net income per basic and diluted share for the 2020 third quarter was $0.40, compared to $0.38 for the same period last year. Net income for the 2020 nine-month period ended September 30, 2020, was $13.3 million, compared to $13.7 million for the same period last year. Net income per basic and diluted share for the 2020 nine months was $1.20, compared to $1.23 for the same period last year.
Mr. Eller continued, “Our provision for loan losses has increased from $410,000 for the nine months ended September 30, 2019 to $5.0 million for the nine months ended September 30, 2020. Helping offset this year-to-date increase, has been a slight increase in total interest income, a 23.5% improvement in total interest expense, and a 26.3% increase in noninterest income. In addition, noninterest expenses have increased only 4.9% year-to-date, primarily due to a one-time $0.5 million increase in salary and wages during the third quarter to support our employees’ annual incentive program. Despite higher operating expenses, our efficiency ratio for the nine months ended September 30, 2020 was 62.11%, compared to 65.86% for the same period last year and at the bank only level, excluding the parent or any affiliate, our efficiency ratio at September 30, 2020, was 59.89% compared to 62.45% for the same period last year.”
At September 30, 2020, total deposits were $1.519 billion, an increase of 18.8% from September 30, 2019, and an increase of 2.8% from June 30, 2020. The significant organic deposit growth being experienced is a result of continued strength in expanding relationships with new and existing customers, and the benefits of PPP activity. In addition, we continue to see growing customer preferences to more stable and secure saving instruments as deposits have increased since the COVID-19 crisis began.
Loan Portfolio and Asset Quality
Total loans, net at September 30, 2020, increased 17.7% or by $205.2 million to $1.364 billion, compared to $1.159 billion at September 30, 2019, and up 1.4% from $1.345 billion at June 30, 2020. The year-over-year improvement resulted primarily from the contribution of strong organic loan growth and $87.0 million of PPP loans originated during the 2020 second quarter.
Mr. Eller continued, “Despite the challenges created by the COVID-19 crisis, we continue to grow our loan portfolio with high quality customers, reflecting the personal financial services and value we provide our local communities and the recent contribution of our newly opened loan production offices in Muncie, IN and Oxford, OH.”
F&M continues to closely monitor its loan portfolio with a particular emphasis on higher risk sectors. The Bank initially had loans of $28 million in deferment and loans of $137 million making interest only payments. As of September 30, 2020, there is a total of $8.5 million outstanding between deferrals and interest only payments within the Company’s commercial and agriculture portfolios. The $8.5 million balance comprised $1.4 million with one full month of deferment, $641,000 with three full months of deferment, $5.5 million with three months interest only payments, and $900,000 with six months interest only. Second deferrals were negligible at September 30, 2020 and at this point in time, existing loans outstanding in deferral or interest only payments are expected to be current as of December 31, 2020.
The Company’s management team has evaluated its exposure to increased loan losses related to the COVID-19 pandemic and has identified the following industry segments most impacted by the pandemic as of September 30, 2020:
(Dollars in Thousands)
Real Estate *
|# of Customers||4||5|
|*Includes Owner Occupied|
|Report on Adjusted Loans as of September 30, 2020|
The other category in payment deferment at September 30, 2020, is a loan for a livestock production facility. The other category for interest modifications as of September 30, 2020, is for construction of an agricultural implement facility and a manufacturer.
F&M’s agriculture portfolio continues to perform well, as a result of the Company’s experienced lenders, diversified market exposure, and geographic focus within strong agricultural markets. At September 30, 2020, F&M’s $103.3 million agriculture portfolio consisted primarily of row crop and livestock production, with almost no dairy exposure. Agriculture customers are proven farmers with strong balance sheets and 95% of row crop producers utilize crop insurance to mitigate weather and production risks. Approximately, 25% of F&M’s agriculture portfolio at September 30, 2020, was within the livestock sector, and approximately 70% of this exposure is to customers that support production but do not have direct livestock ownership. In addition, approximately 80% of F&M’s livestock exposure is for loans with balances under $750,000 and of the borrowers with direct livestock ownership, approximately 50% are not dependent on the income from livestock to manage their debt payments. Overall, F&M believes agricultural performance will be similar to 2019.
Focusing on Operational Excellence and Executing Long-Term Strategic Plan
Mr. Eller stated: “Based on the lessons we have learned throughout the COVID-19 pandemic, we are making strategic investments across our organization that support the future needs of our operations as well as adapt to changing customer preferences. We are reviewing our office modification strategy. As a part of this, we are exploring the opportunity for offices in compelling markets with a high concentration of our core customer demographic. During the fourth quarter, we are expanding our physical presence into the state of Michigan with a new loan production office in West Bloomfield, MI. Our new full-service office in Fort Wayne, IN is also expected to open in fourth quarter.”
“We have recently split our back-end operations team into four separate locations to mitigate risk of operating one facility and promote social distancing within our facilities, in addition to supporting our employees’ efforts to work from home. We also remain focused on attracting and retaining employees to support our current and future growth, and during the third quarter we expanded our employee 401(k) offerings, and upgraded our HR system. Investments in our digital infrastructure continue and in the coming months we will go live with an upgrade to F&M’s website, improve our customer’s ability to automatically open accounts online, and open a new call center to support our growing digital strategies.”
Mr. Eller concluded: “Despite the unprecedented impacts of the COVID-19 pandemic, 2020 is shaping up to be a strong year demonstrating the resiliency of our employees, customers, and communities. We are all in this together and F&M remains focused on providing support for you and us, throughout the near-term challenges and future prosperity.”
Stockholders’ Equity and Dividends
Total stockholders’ equity increased 7.0% to $243.4 million at September 30, 2020, from $227.4 million at September 30, 2019. At September 30, 2020, the Company had a Tier 1 leverage ratio of 10.65%, compared to 11.60% at September 30, 2019.
Tangible stockholders’ equity increased to $187.2 million at September 30, 2020, compared to $174.6 million at September 30, 2019. The largest change to intangible stockholders’ equity was an increase in accumulated comprehensive income, which increased from $1.471 million as of September 30, 2019 to $5.860 million as of September 30, 2020. On a per share basis, tangible stockholders’ equity at September 30, 2020, was $16.78 per share, compared to $15.68 per share at September 30, 2019.
For the nine months ended September 30, 2020, the Company has declared cash dividends of $0.49 per share, which is an 8.9% increase over the 2019 nine month declared dividend payment. F&M is committed to returning capital to shareholders and has increased the annual cash dividend for 26 consecutive years. For the nine months ended September 30, 2020, the dividend payout ratio was 42.66% compared to 38.67% for the same period last year.
About Farmers & Merchants State Bank:
The Farmers & Merchants State Bank is a local independent community bank that has been serving Northwest Ohio and Northeast Indiana since 1897. The Farmers & Merchants State Bank provides commercial banking, retail banking and other financial services through its 30 offices. Our locations are in Fulton, Defiance, Hancock, Henry, Lucas, Williams, and Wood counties in Northwest Ohio. In Northeast Indiana, we have offices located in Adams, Allen, DeKalb, Jay, and Steuben counties.
Safe harbor statement
Farmers & Merchants Bancorp, Inc. (“F&M”) wishes to take advantage of the Safe Harbor provisions included in the Private Securities Litigation Reform Act of 1995. Statements by F&M, including management’s expectations and comments, may not be based on historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21B of the Securities Exchange Act of 1934, as amended. Actual results could vary materially depending on risks and uncertainties inherent in general and local banking conditions, competitive factors specific to markets in which F&M and its subsidiaries operate, future interest rate levels, legislative and regulatory decisions, capital market conditions, or the effects of the COVID-19 pandemic, and its impacts on our credit quality and business operations, as well as its impact on general economic and financial market conditions. F&M assumes no responsibility to update this information. For more details, please refer to F&M’s SEC filing, including its most recent Annual Report on Form 10-K and quarterly reports on Form 10-Q. Such filings can be viewed at the SEC’s website, www.sec.gov or through F&M’s website www.fm.bank.
|Company Contact:||Investor and Media Contact:|
|Lars B. Eller
President and Chief Executive Officer
Farmers & Merchants Bancorp, Inc.
|Andrew M. Berger
SM Berger & Company, Inc.