Farmers & Merchants Bancorp(FMAO) - 2025 Q2 - Quarterly Results

2025 Second Quarter and Year-to-Date Financial Results Overview This section provides a high-level overview of the company's financial performance for the second quarter and year-to-date 2025, highlighting key achievements and strategic direction 2025 Second Quarter Financial and Operating Highlights Farmers & Merchants Bancorp, Inc. reported one of its most profitable quarters in history, driven by significant net income growth, expanded net interest margin, and increases in total loans, assets, and deposits, alongside improved efficiency and strong asset quality - Net income increased by 35.7% year-over-year to $7.7 million, with basic and diluted earnings per share at $0.56[5] - Net interest margin expanded for the fourth consecutive quarter, increasing by 51 basis points year-over-year to 3.22%[5] - Total loans increased by $67.2 million, growing 2.6% year-over-year to $2.63 billion[5] - Total assets increased by $23.1 million, growing 0.7% year-over-year to $3.35 billion[5] - Total deposits increased by $69.2 million, growing 2.6% year-over-year to $2.71 billion[5] - Efficiency ratio improved from 69.03% to 64.93%[5] - Asset quality remained historically strong, with non-performing loans at only $3.7 million and an average loan net charge-off rate of 0.00%[5] - Tier 1 leverage ratio stood at 8.50%[5] CEO Commentary and Strategic Outlook CEO Lars B. Eller highlighted strong core profitability, sustained net interest margin growth, and successful execution of multi-year strategic plans as drivers for record second-quarter performance, noting significant total revenue growth exceeding noninterest expenses and improving the efficiency ratio - Strategic initiatives include enhancing product offerings, streamlining account opening processes, and a continued focus on attracting and developing experienced talent[4] - Total revenue (net interest income plus noninterest income) for Q2 2025 increased by 18.2% year-over-year, up from 16.7% in Q1 2025, significantly outpacing noninterest expense growth[4] - Net Interest Margin (NIM) increased by 51 basis points year-over-year and 19 basis points from Q1 2025, benefiting from higher asset yields due to existing loan repricing and new loan originations at more favorable rates, alongside improved funding costs from customer relationship growth and a more stable interest rate environment[4] - Deposit growth strategies reflect success in expanding relationship-based banking across Ohio, Indiana, and Michigan markets, supported by product enhancements and investments in new tools and capabilities for marketing efforts[8] - Loan demand remains strong, with the company managing growth through disciplined pricing and focusing on maintaining robust asset quality, evidenced by 17 consecutive quarters of average loan net charge-off rates below 0.03%[8] - The outlook anticipates continued loan growth, stable asset quality, and further net interest margin expansion in the second half of 2025 to support enhanced profitability, projecting 2025 to be another strong year for F&M[13] Consolidated Statements of Income & Comprehensive Income This section presents the company's consolidated income and comprehensive income statements, detailing revenue, expenses, and net income for the second quarter and year-to-date periods Three Months Ended June 30, 2025 In Q2 2025, the company experienced significant growth in net income and net interest income, primarily driven by increased interest income from loans and securities, while effectively managing interest expenses; noninterest income remained stable, and noninterest expenses increased, particularly in data processing and consulting fees Income Statement (Three Months Ended June 30, 2025 vs. Three Months Ended June 30, 2024) | Metric | Q2 2025 (in thousands) | Q2 2024 (in thousands) | Change (%) | | :-------------------------------- | :--------------------- | :--------------------- | :--------- | | Total Interest Income | $43,492 | $41,166 | 5.65% | | Total Interest Expense | $17,781 | $19,791 | -10.26% | | Net Interest Income - Before Provision for Credit Losses | $25,711 | $21,375 | 20.28% | | Provision for Credit Losses - Loans | $661 | $605 | 9.26% | | Net Interest Income After Provision for Credit Losses | $25,023 | $20,788 | 20.37% | | Total Noninterest Income | $3,935 | $3,716 | 5.89% | | Total Noninterest Expense | $19,260 | $17,345 | 11.04% | | Income Before Income Taxes | $9,698 | $7,159 | 35.46% | | Income Taxes | $1,988 | $1,477 | 34.60% | | Net Income | $7,710 | $5,682 | 35.69% | | Basic Earnings Per Share | $0.56 | $0.42 | 33.33% | | Diluted Earnings Per Share | $0.56 | $0.42 | 33.33% | | Dividends Declared Per Share | $0.22125 | $0.22 | 0.57% | Six Months Ended June 30, 2025 The company demonstrated strong financial growth in the first half of 2025, with a substantial year-over-year increase in net income, primarily driven by a significant rise in net interest income and growth in noninterest income Income Statement (Six Months Ended June 30, 2025 vs. Six Months Ended June 30, 2024) | Metric | H1 2025 (in thousands) | H1 2024 (in thousands) | Change (%) | | :-------------------------------- | :--------------------- | :--------------------- | :--------- | | Total Interest Income | $84,494 | $79,820 | 5.86% | | Total Interest Expense | $34,874 | $38,327 | -9.01% | | Net Interest Income - Before Provision for Credit Losses | $49,620 | $41,493 | 19.58% | | Provision for Credit Losses - Loans | $1,472 | $316 | 365.82% | | Net Interest Income After Provision for Credit Losses | $48,381 | $41,461 | 16.69% | | Total Noninterest Income | $8,097 | $7,662 | 5.68% | | Total Noninterest Expense | $38,020 | $35,186 | 8.06% | | Income Before Income Taxes | $18,458 | $13,937 | 32.44% | | Income Taxes | $3,796 | $2,896 | 31.01% | | Net Income | $14,662 | $11,041 | 32.79% | | Basic Earnings Per Share | $1.07 | $0.81 | 32.10% | | Diluted Earnings Per Share | $1.07 | $0.81 | 32.10% | | Dividends Declared Per Share | $0.44250 | $0.44 | 0.57% | Condensed Consolidated Balance Sheets As of June 30, 2025, the company's total assets and total deposits both increased year-over-year, while total liabilities saw a slight decrease, and stockholders' equity grew healthily, reflecting an improved financial position Balance Sheet (As of June 30, 2025 vs. June 30, 2024) | Metric | June 30, 2025 (in thousands) | June 30, 2024 (in thousands) | Change (%) | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------- | | Total Assets | $3,345,763 | $3,322,633 | 0.70% | | Total Loans, net of allowance for credit losses | $2,599,917 | $2,534,468 | 2.58% | | Total Deposits | $2,710,329 | $2,641,090 | 2.62% | | Total Liabilities | $2,994,971 | $2,999,969 | -0.17% | | Total Stockholders' Equity | $350,792 | $322,664 | 8.72% | Detailed Financial Data and Ratios This section provides an in-depth analysis of the company's financial performance through key ratios, deposit trends, loan portfolio composition, asset quality metrics, and stockholders' equity details Key Performance Ratios Compared to the prior year, the company demonstrated enhanced profitability and efficiency in Q2 and H1 2025, with improved returns on average assets and equity, expanded net interest margin, and a reduced efficiency ratio Key Ratios (Q2 2025 vs. Q2 2024) | Metric | Q2 2025 | Q2 2024 | Change (bps) | | :-------------------------- | :------ | :------ | :----------- | | Return on average assets | 0.92% | 0.69% | 23 | | Return on average equity | 8.88% | 7.13% | 175 | | Yield on earning assets | 5.45% | 5.22% | 23 | | Cost of interest bearing liabilities | 2.83% | 3.18% | -35 | | Net interest spread | 2.62% | 2.04% | 58 | | Net interest margin | 3.22% | 2.71% | 51 | | Efficiency ratio | 64.93% | 69.03% | -410 | | Dividend payout ratio | 38.91% | 52.35% | -1344 | Key Ratios (H1 2025 vs. H1 2024) | Metric | H1 2025 | H1 2024 | Change (bps) | | :-------------------------- | :------ | :------ | :----------- | | Return on average assets | 0.88% | 0.67% | 21 | | Return on average equity | 8.55% | 6.94% | 161 | | Yield on earning assets | 5.32% | 5.11% | 21 | | Cost of interest bearing liabilities | 2.84% | 3.12% | -28 | | Net interest spread | 2.48% | 1.99% | 49 | | Net interest margin | 3.13% | 2.66% | 47 | | Efficiency ratio | 65.84% | 71.50% | -566 | | Dividend payout ratio | 40.90% | 53.89% | -1299 | Deposits As of June 30, 2025, total deposits increased by 2.6% year-over-year to $2.71 billion, reflecting the success of relationship-based banking, while the cost of interest-bearing liabilities significantly decreased during the same period - Total deposits as of June 30, 2025, were $2.71 billion, a 2.6% increase from $2.64 billion as of June 30, 2024[7] - The cost of interest-bearing liabilities for the quarter ended June 30, 2025, was 2.83%, down from 3.18% in the prior year's corresponding period[7] Loan Portfolio and Asset Quality The loan portfolio achieved robust growth, primarily driven by commercial real estate, commercial and industrial, and agricultural loans, while asset quality remained strong with low non-performing loans and net charge-off rates, despite a year-over-year decrease in allowance for credit losses coverage of non-performing loans - Total loans, net, increased by 2.6% ($67.2 million) to $2.63 billion as of June 30, 2025, compared to $2.56 billion as of June 30, 2024[9] - Non-performing loans were $3.7 million (0.14% of total loans) as of June 30, 2025, compared to $2.5 million (0.10% of total loans) as of June 30, 2024[10] - The average loan net charge-off rate for Q2 2025 was 0.00%, marking 17 consecutive quarters below 0.03%[5][8][27] Loan Portfolio Composition The company's loan portfolio is diversified, with commercial real estate being the largest and growing category, alongside other significant segments including consumer real estate, commercial and industrial, and agricultural loans Loan Portfolio Composition (As of June 30, 2025 vs. June 30, 2024) | Loan Category | June 30, 2025 (in thousands) | June 30, 2024 (in thousands) | Change (%) | | :-------------------------- | :--------------------------- | :--------------------------- | :--------- | | Commercial real estate | $1,345,953 | $1,303,598 | 3.25% | | Agricultural real estate | $221,004 | $222,558 | -0.70% | | Consumer real estate | $523,781 | $525,902 | -0.40% | | Commercial and industrial | $293,826 | $268,426 | 9.46% | | Agricultural | $157,870 | $142,909 | 10.47% | | Consumer | $59,348 | $70,918 | -16.32% | | Other | $24,653 | $26,449 | -6.79% | | Total loans, net | $2,626,894 | $2,559,738 | 2.62% | Commercial Real Estate (CRE) Portfolio Breakdown The Commercial Real Estate (CRE) portfolio constitutes 51.2% of the total loan portfolio, with industrial, retail, and multi-family properties representing the largest sub-segments, indicating diversified exposure within the CRE sector CRE Portfolio Composition (As of June 30, 2025) | CRE Category | Dollar Balance (in thousands) | Percent of CRE Portfolio | Percent of Total Loan Portfolio | | :-------------- | :---------------------------- | :----------------------- | :------------------------------ | | Industrial | $281,599 | 20.9% | 10.7% | | Retail | $213,309 | 15.8% | 8.1% | | Multi-family | $213,029 | 15.8% | 8.1% | | Hotels | $172,026 | 12.8% | 6.5% | | Office | $139,844 | 10.4% | 5.3% | | Gas Stations | $77,527 | 5.8% | 3.0% | | Food Service | $52,205 | 3.9% | 2.0% | | Senior Living | $31,088 | 2.3% | 1.2% | | Development | $28,565 | 2.1% | 1.1% | | Auto Dealers | $26,744 | 2.0% | 1.0% | | Other | $110,017 | 8.2% | 4.2% | | Total CRE | $1,345,953 | 100.0% | 51.2% | Asset Quality Metrics The company maintained strong asset quality with low non-performing loans and net charge-off rates; although non-performing loans slightly increased year-over-year, the allowance for credit losses remained adequate, despite a decrease in its coverage of non-performing loans Asset Quality Data (As of June 30, 2025 vs. June 30, 2024) | Metric | June 30, 2025 (in thousands) | June 30, 2024 (in thousands) | Change (%) | | :------------------------------------ | :--------------------------- | :--------------------------- | :--------- | | Nonaccrual loans | $3,745 | $2,487 | 50.58% | | Nonperforming loans | $3,745 | $2,487 | 50.58% | | Total allowance for credit losses | $28,285 | $27,198 | 3.99% | | Total allowance for credit losses/total loans | 1.08% | 1.06% | 0.02% | | Nonperforming loans/total loans | 0.14% | 0.10% | 0.04% | | Allowance for credit losses/nonperforming loans | 720.35% | 1016.08% | -295.73% | - Net charge-offs for Q2 2025 were $36 thousand, compared to $15 thousand in Q2 2024[27] - Net charge-offs for H1 2025 were $321 thousand, compared to $70 thousand in H1 2024[27] Stockholders' Equity and Dividends Both stockholders' equity and tangible stockholders' equity significantly increased year-over-year, reflecting enhanced financial strength, and the company continued its long-standing tradition of increasing annual cash dividends, despite a decrease in the dividend payout ratio Stockholders' Equity (As of June 30, 2025 vs. June 30, 2024) | Metric | June 30, 2025 | June 30, 2024 | Change (%) | | :-------------------------- | :------------ | :------------ | :--------- | | Total Stockholders' Equity | $350.8 million | $322.7 million | 8.7% | | Per Share | $25.56 | $23.59 | 8.35% | | Tangible Stockholders' Equity | $259.6 million | $229.6 million | 13.07% | | Tangible Stockholders' Equity Per Share | $18.91 | $16.79 | 12.63% | | Tier 1 Leverage Ratio | 8.50% | 8.02% | 0.48% | - For the six months ended June 30, 2025, the company declared cash dividends of $0.44250 per share, representing a 0.6% increase from the prior year's corresponding period[15] - The company has increased its annual cash dividend for 30 consecutive years[15] - The dividend payout ratio for the six months ended June 30, 2025, was 40.90%, compared to 53.89% in the prior year's corresponding period[15] Net Interest Income and Yield/Rate Analysis This section analyzes the company's net interest income, average balance sheets, and related yields and rates for both the three-month and six-month periods, highlighting factors influencing profitability Average Balance Sheets and Related Yields and Rates (Three Months) In Q2 2025, the company significantly expanded its net interest income and net interest margin, primarily driven by higher yields on earning assets, particularly loans, and a reduction in the cost of interest-bearing liabilities Average Balance Sheets and Yields/Rates (Q2 2025 vs. Q2 2024) | Metric | Q2 2025 | Q2 2024 | Change (bps) | | :------------------------------------ | :-------- | :-------- | :----------- | | Average Interest Earning Assets (in thousands) | $3,193,222 | $3,156,445 | 1.16% | | Yield on Total Interest Earning Assets | 5.45% | 5.22% | 23 | | Average Interest Bearing Liabilities (in thousands) | $2,515,968 | $2,489,104 | 1.08% | | Cost on Total Interest Bearing Liabilities | 2.83% | 3.18% | -35 | | Net Interest Income (in thousands) | $25,711 | $21,375 | 20.28% | | Net Interest Spread | 2.62% | 2.04% | 58 | | Net Interest Margin | 3.22% | 2.71% | 51 | - Loan yield for Q2 2025 was 6.04%, up from 5.73% in Q2 2024[29] - The cost of NOW accounts and savings deposits for Q2 2025 was 2.37%, down from 2.73% in Q2 2024[29] Average Balance Sheets and Related Yields and Rates (Six Months) For the first half of 2025, the company demonstrated significant improvements in net interest income and net interest margin, primarily due to increased yields on earning assets, particularly loans, and a decrease in the overall cost of interest-bearing liabilities Average Balance Sheets and Yields/Rates (H1 2025 vs. H1 2024) | Metric | H1 2025 | H1 2024 | Change (bps) | | :------------------------------------ | :-------- | :-------- | :----------- | | Average Interest Earning Assets (in thousands) | $3,177,266 | $3,125,221 | 1.66% | | Yield on Total Interest Earning Assets | 5.32% | 5.11% | 21 | | Average Interest Bearing Liabilities (in thousands) | $2,451,150 | $2,454,282 | -0.13% | | Cost on Total Interest Bearing Liabilities | 2.84% | 3.12% | -28 | | Net Interest Income (in thousands) | $49,620 | $41,493 | 19.58% | | Net Interest Spread | 2.48% | 1.99% | 49 | | Net Interest Margin | 3.13% | 2.66% | 47 | - Loan yield for H1 2025 was 5.90%, up from 5.60% in H1 2024[30] - The cost of NOW accounts and savings deposits for H1 2025 was 2.37%, down from 2.67% in H1 2024[30] Company Information and Disclosures This section provides essential background information about Farmers & Merchants State Bank and includes a crucial safe harbor statement regarding forward-looking statements and associated risks About Farmers & Merchants State Bank Established in 1897, Farmers & Merchants State Bank operates as an independent community bank offering commercial, retail, and other financial services across multiple counties in Ohio, Northeast Indiana, and Oakland County, Michigan, supported by several loan production offices - Established in 1897[16] - Provides commercial banking, retail banking, and other financial services[16] - Serves areas including Ohio (Butler, Champaign, Fulton, Defiance, Hancock, Henry, Lucas, Shelby, Williams, and Wood counties), Northeast Indiana (Adams, Allen, DeKalb, Jay, Steuben, and Wells counties), and Oakland County, Michigan[16] - Operates loan production offices in Troy, Michigan; Muncie, Indiana; and Perrysburg and Bryan, Ohio[16] Safe Harbor Statement The safe harbor statement clarifies that this report contains forward-looking statements subject to various risks and uncertainties, including general banking conditions, competitive factors, future interest rate levels, legislative and regulatory decisions, capital market conditions, and the impact of the COVID-19 pandemic - The statement contains forward-looking statements not based on historical facts[17] - Risk factors include general and local banking conditions, competitive market factors, future interest rate levels, legislative and regulatory decisions, capital market conditions, and the impact of the COVID-19 pandemic on credit quality and business operations[17] - F&M assumes no obligation to update this information[17] - For more details, readers are directed to F&M's filings with the U.S. Securities and Exchange Commission (www.sec.gov) or F&M's website (www.fm.bank), including the latest Annual Report on Form 10-K and Quarterly Reports on Form 10-Q[17]