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

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents unaudited condensed consolidated financial statements and comprehensive notes detailing the company's financial position and performance Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (June 30, 2025 vs. December 31, 2024) | Item | June 30, 2025 (In Thousands) | December 31, 2024 (In Thousands) | Change (In Thousands) | % Change | | :-------------------------------- | :----------------------------- | :------------------------------- | :-------------------- | :------- | | Total Assets | $3,345,763 | $3,364,723 | $(18,960) | -0.56% | | Total Liabilities | $2,994,971 | $3,029,512 | $(34,541) | -1.14% | | Total Stockholders' Equity | $350,792 | $335,211 | $15,581 | 4.65% | | Cash and cash equivalents | $88,231 | $176,351 | $(88,120) | -49.97% | | Loans, net | $2,599,917 | $2,536,043 | $63,874 | 2.52% | | Total deposits | $2,710,329 | $2,686,765 | $23,564 | 0.88% | Condensed Consolidated Statements of Income Condensed Consolidated Statements of Income (Three Months Ended June 30) | Item | June 30, 2025 (In Thousands) | June 30, 2024 (In Thousands) | Change (In Thousands) | % Change | | :------------------------------------------ | :----------------------------- | :----------------------------- | :-------------------- | :------- | | Total interest income | $43,492 | $41,166 | $2,326 | 5.65% | | Total interest expense | $17,781 | $19,791 | $(2,010) | -10.16% | | Net Interest Income - Before Provision for Credit Losses | $25,711 | $21,375 | $4,336 | 20.28% | | Provision for Credit Losses - Loans | $661 | $605 | $56 | 9.26% | | Net Interest Income - After Provision for Credit Losses | $25,023 | $20,788 | $4,235 | 20.37% | | Total noninterest income | $3,935 | $3,716 | $219 | 5.90% | | Total noninterest expense | $19,260 | $17,345 | $1,915 | 11.04% | | Net Income | $7,710 | $5,682 | $2,028 | 35.69% | | Basic Earnings Per Share | $0.56 | $0.42 | $0.14 | 33.33% | Condensed Consolidated Statements of Income (Six Months Ended June 30) | Item | June 30, 2025 (In Thousands) | June 30, 2024 (In Thousands) | Change (In Thousands) | % Change | | :------------------------------------------ | :----------------------------- | :----------------------------- | :-------------------- | :------- | | Total interest income | $84,494 | $79,820 | $4,674 | 5.86% | | Total interest expense | $34,874 | $38,327 | $(3,453) | -9.01% | | Net Interest Income - Before Provision for Credit Losses | $49,620 | $41,493 | $8,127 | 19.59% | | Provision for Credit Losses - Loans | $1,472 | $316 | $1,156 | 365.82% | | Net Interest Income - After Provision for Credit Losses | $48,381 | $41,461 | $6,920 | 16.70% | | Total noninterest income | $8,097 | $7,662 | $435 | 5.68% | | Total noninterest expense | $38,020 | $35,186 | $2,834 | 8.05% | | Net Income | $14,662 | $11,041 | $3,621 | 32.79% | | Basic Earnings Per Share | $1.07 | $0.81 | $0.26 | 32.10% | Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income (Three Months Ended June 30) | Item | June 30, 2025 (In Thousands) | June 30, 2024 (In Thousands) | Change (In Thousands) | % Change | | :-------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------- | | Net Income | $7,710 | $5,682 | $2,028 | 35.69% | | Other comprehensive income (net of tax) | $908 | $2,000 | $(1,092) | -54.60% | | Comprehensive Income | $8,618 | $7,682 | $936 | 12.18% | Condensed Consolidated Statements of Comprehensive Income (Six Months Ended June 30) | Item | June 30, 2025 (In Thousands) | June 30, 2024 (In Thousands) | Change (In Thousands) | % Change | | :-------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------- | | Net Income | $14,662 | $11,041 | $3,621 | 32.79% | | Other comprehensive income (net of tax) | $6,014 | $423 | $5,591 | 1321.75% | | Comprehensive Income | $20,676 | $11,464 | $9,212 | 80.36% | Condensed Consolidated Statements of Changes to Stockholders' Equity Changes in Stockholders' Equity (Six Months Ended June 30, 2025) | Item | January 1, 2025 (In Thousands) | June 30, 2025 (In Thousands) | Change (In Thousands) | | :-------------------------------- | :----------------------------- | :--------------------------- | :-------------------- | | Common Stock | $135,565 | $135,805 | $240 | | Treasury Stock | $(10,985) | $(10,674) | $311 | | Retained Earnings | $235,854 | $244,870 | $9,016 | | Accumulated Other Comprehensive Loss | $(25,223) | $(19,209) | $6,014 | | Total Stockholders' Equity | $335,211 | $350,792 | $15,581 | - Net income contributed $14,662 thousand to retained earnings for the six months ended June 30, 2025, while cash dividends declared reduced it by $5,997 thousand. Other comprehensive income increased by $6,014 thousand[15] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (Six Months Ended June 30) | Cash Flow Activity | June 30, 2025 (In Thousands) | June 30, 2024 (In Thousands) | Change (In Thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | | Net cash provided by operating activities | $12,113 | $11,201 | $912 | | Net cash (used in) provided by investing activities | $(60,508) | $12,946 | $(73,454) | | Net cash (used in) provided by financing activities | $(39,725) | $26,720 | $(66,445) | | Net (Decrease) Increase in Cash and Cash Equivalents | $(88,120) | $50,867 | $(138,987) | | Cash and Cash Equivalents - End of period | $88,231 | $193,068 | $(104,837) | - Investing activities shifted from providing cash in 2024 to using cash in 2025, primarily due to a net increase in loan originations and principal collections, and purchases of available-for-sale securities[18] - Financing activities also shifted from providing cash in 2024 to using cash in 2025, mainly driven by significant repayments of FHLB advances[18] Notes to Condensed Consolidated Financial Statements NOTE 1 BASIS OF PRESENTATION AND OTHER - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions, and do not include all information required for complete financial statements[20] - The Company's principal revenue source is interest income from loans and investment securities, supplemented by noninterest income from various banking and financial services[21] NOTE 2 BUSINESS COMBINATION AND ASSET PURCHASE - On October 1, 2022, the Company acquired Peoples-Sidney Financial Corporation for approximately $23.2 million, consisting of $9.8 million in cash and $13.4 million in stock, aiming to increase its deposit base and reduce transaction costs through economies of scale[22] - The acquisition of Peoples-Sidney Financial Corporation resulted in the allocation of $6.0 million to core deposit intangible, amortized over seven years, and $5.9 million to goodwill[23] Annual Amortization of Core Deposit Intangible Assets (In Thousands) | Year | Geneva | Ossian | Perpetual | Peoples | Total | | :--- | :----- | :----- | :-------- | :------ | :---- | | 2025 | $560 | $140 | $95 | $861 | $1,656 | | 2026 | - | $140 | $95 | $861 | $1,096 | | 2027 | - | $140 | $95 | $861 | $1,096 | | 2028 | - | $47 | $73 | $861 | $981 | | 2029 | - | - | - | $646 | $646 | | Total | $560 | $467 | $358 | $4,090 | $5,475 | NOTE 3 SECURITIES Available-for-Sale Securities (June 30, 2025 vs. December 31, 2024, In Thousands) | Item | June 30, 2025 Fair Value | December 31, 2024 Fair Value | Change | | :-------------------------- | :------------------------- | :--------------------------- | :----- | | U.S. Treasury | $95,390 | $105,999 | $(10,609) | | U.S. Government agencies | $137,666 | $135,166 | $2,500 | | Mortgage-backed securities | $136,953 | $120,631 | $16,322 | | State and local governments | $61,093 | $64,760 | $(3,667) | | Total available-for-sale securities | $431,102 | $426,556 | $4,546 | - The Company did not record an allowance for credit losses on its available-for-sale securities, as unrealized losses were attributed to interest rate changes, not credit quality, and management intends and has the ability to hold these securities until recovery[39][41] Debt Securities by Contractual Maturity (June 30, 2025, In Thousands) | Maturity | Amortized Cost | Fair Value | | :-------------------------- | :------------- | :--------- | | One year or less | $63,149 | $62,185 | | After one year through five years | $224,876 | $212,978 | | After five years through ten years | $19,822 | $18,986 | | After ten years | - | - | | Mortgage-backed securities | $147,570 | $136,953 | | Total | $455,417 | $431,102 | NOTE 4 LOANS Loan Balances and Composition Loan Balances by Segment (June 30, 2025 vs. December 31, 2024, In Thousands) | Loan Segment | June 30, 2025 | December 31, 2024 | Change | | :-------------------------- | :------------ | :---------------- | :----- | | Consumer Real Estate | $523,781 | $520,114 | $3,667 | | Agricultural Real Estate | $221,004 | $216,401 | $4,603 | | Agricultural | $157,870 | $152,080 | $5,790 | | Commercial Real Estate | $1,345,953 | $1,310,811 | $35,142 | | Commercial and Industrial | $293,826 | $275,152 | $18,674 | | Consumer | $59,348 | $63,009 | $(3,661) | | Other | $24,653 | $24,978 | $(325) | | Total Loans | $2,626,435 | $2,562,545 | $63,890 | - Commercial Real Estate and Commercial and Industrial loans saw the largest increases, while Consumer loans experienced a decrease[47] Fixed vs. Variable Rate Loans (June 30, 2025, In Thousands) | Loan Segment | Fixed Rate | Variable Rate | | :-------------------------- | :--------- | :------------ | | Consumer Real Estate | $281,802 | $241,979 | | Agricultural Real Estate | $111,837 | $109,167 | | Agricultural | $47,253 | $110,617 | | Commercial Real Estate | $873,725 | $472,228 | | Commercial and Industrial | $122,192 | $171,634 | | Consumer | $59,319 | $29 | | Other | $15,098 | $9,555 | Loan Risk Characteristics and Underwriting Past Due Loans by Portfolio Segment (June 30, 2025, In Thousands) | Loan Segment | 30-59 Days Past Due | 60-89 Days Past Due | Greater Than 90 Days Past Due | Total Past Due | | :-------------------------- | :------------------ | :------------------ | :---------------------------- | :------------- | | Consumer Real Estate | $2,487 | $449 | $656 | $3,592 | | Agricultural Real Estate | $251 | $6 | $125 | $382 | | Agricultural | $60 | - | $50 | $110 | | Commercial Real Estate | - | - | $141 | $141 | | Commercial and Industrial | $50 | $144 | - | $194 | | Consumer | $109 | $18 | $31 | $158 | | Other | - | - | - | - | | Total | $2,957 | $617 | $1,003 | $4,577 | Nonaccrual Loans by Portfolio Segment (June 30, 2025 vs. December 31, 2024, In Thousands) | Loan Segment | June 30, 2025 Nonaccrual | December 31, 2024 Nonaccrual | | :-------------------------- | :------------------------- | :--------------------------- | | Consumer Real Estate | $3,049 | $2,369 | | Agricultural Real Estate | $461 | $130 | | Agricultural | $60 | $90 | | Commercial Real Estate | $141 | $360 | | Commercial & Industrial | - | $57 | | Consumer | $34 | $118 | | Total | $3,745 | $3,124 | - The Bank uses a nine-tier risk rating system for loans, ranging from 'Excellent' (1) to 'Loss' (8), with 'Satisfactory' (3) and 'Satisfactory / Monitored' (4) representing average or slightly above average risk[57][59] Allowance for Credit Losses (ACL) Activity Allowance for Credit Losses (ACL) Activity (Six Months Ended June 30, 2025, In Thousands) | Item | Consumer Real Estate | Agricultural Real Estate | Agricultural | Commercial Real Estate | Commercial and Industrial | Consumer | Other | Total | | :-------------------------------- | :------------------- | :----------------------- | :----------- | :--------------------- | :------------------------ | :------- | :---- | :------ | | Beginning balance (Jan 1, 2025) | $3,543 | $895 | $285 | $16,560 | $2,969 | $1,012 | $562 | $25,826 | | Provision for (recovery of) credit losses-loans | $108 | $(157) | $39 | $775 | $420 | $272 | $15 | $1,472 | | Charge-offs | - | - | - | - | $(25) | $(442) | - | $(467) | | Recoveries | $2 | - | $10 | $19 | $12 | $103 | - | $146 | | Ending Balance (June 30, 2025) | $3,653 | $738 | $334 | $17,354 | $3,376 | $945 | $577 | $26,977 | Allowance for Unfunded Loan Commitments and Letters of Credit (AULC) Activity (Six Months Ended June 30, 2025, In Thousands) | Item | Unfunded Loan Commitment & Letters of Credit | | :------------------------------------------------ | :------------------------------------------- | | Beginning balance (Jan 1, 2025) | $1,541 | | Recovery of credit losses-off balance sheet credit exposures | $(233) | | Ending Balance (June 30, 2025) | $1,308 | - The ACL increased by $1,151 thousand for the six months ended June 30, 2025, primarily due to a provision for credit losses of $1,472 thousand, partially offset by net charge-offs[79] NOTE 5 SERVICING - The unpaid principal balances of 1-4 family real estate loans serviced for others were $362.8 million at June 30, 2025, and agricultural real estate loans serviced for others were $146.8 million[84] Mortgage Servicing Rights Activity (Six Months Ended June 30, 2025, In Thousands) | Item | June 30, 2025 | | :-------------------------- | :------------ | | Beginning Balance | $5,753 | | Capitalized Additions | $515 | | Amortization | $(371) | | Ending Balance | $5,897 | | Valuation Allowance | $(87) | | Servicing Rights net | $5,810 | - A valuation allowance of $87 thousand was established at June 30, 2025, due to certain strata of 1-4 family real estate and agricultural real estate loans having carrying values slightly below fair value[86][88] NOTE 6 EARNINGS PER SHARE - Basic and diluted earnings per share are calculated using the two-class method, allocating earnings to common stock and participating securities (unvested restricted stock)[89] Earnings Per Share (Six Months Ended June 30) | Item | June 30, 2025 | June 30, 2024 | | :------------------------------------------------ | :------------ | :------------ | | Net income | $14,662 | $11,041 | | Less: distributed earnings allocated to participating securities | $(77) | $(72) | | Less: undistributed earnings allocated to participating securities | $(103) | $(57) | | Net earnings available to common shareholders | $14,482 | $10,912 | | Weighted average common shares outstanding | 13,544,662 | 13,515,966 | | Basic and diluted earnings per share | $1.07 | $0.81 | - Director stock awards are immediately vested and do not affect diluted earnings per share[91] NOTE 7 DERIVATIVE FINANCIAL INSTRUMENTS - The Bank uses interest rate swap agreements with a combined notional value of $100 million to manage interest rate risk, designated as accounting hedges[95][96] Interest Rate Swap Derivatives (June 30, 2025 vs. December 31, 2024, In Thousands) | Item | June 30, 2025 Notional Value | June 30, 2025 Fair Value | December 31, 2024 Notional Value | December 31, 2024 Fair Value | | :-------------------------------- | :----------------------------- | :----------------------- | :------------------------------- | :--------------------------- | | Interest rate swaps associated with loans | $100,000 | $(1,826) | $100,000 | $(976) | Effects of Interest Rate Swaps on Consolidated Statements of Income (Six Months Ended June 30) | Line Item | June 30, 2025 (In Thousands) | June 30, 2024 (In Thousands) | | :-------------------------- | :----------------------------- | :----------------------------- | | Loans, including fees | $(45) | $5 | | Other interest income | $50 | $427 | | Total interest income | $5 | $432 | NOTE 8 QUALIFIED AFFORDABLE HOUSING PROJECT INVESTMENTS - The Company invests in qualified affordable housing projects, accounting for them using the proportional amortization method, which amortizes the initial cost to income tax expense in proportion to tax credits received[104] Qualified Affordable Housing Project Investments (June 30, 2025 vs. December 31, 2024, In Thousands) | Item | June 30, 2025 | December 31, 2024 | | :------------------------------------------ | :------------ | :---------------- | | Low-income-housing tax credit investments | $4,000 | $4,000 | | Unfunded commitments | $(446) | $(880) | | Net funded low-income-housing tax credit investments | $3,554 | $3,120 | Related Expenses and Tax Credits Recognized (Six Months Ended June 30) | Item | June 30, 2025 (In Thousands) | June 30, 2024 (In Thousands) | | :-------------------------- | :----------------------------- | :----------------------------- | | Amortization expense | $224 | $220 | | Tax credits recognized | $223 | $218 | NOTE 9 FAIR VALUE OF FINANCIAL INSTRUMENTS - Fair values are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[110][111][114] Assets Measured at Fair Value on a Recurring Basis (June 30, 2025, In Thousands) | Item | Level 1 | Level 2 | Level 3 | | :-------------------------- | :------ | :------ | :------ | | U.S. Treasury | $95,390 | - | - | | U.S. Government agencies | $20,078 | $117,588 | - | | Mortgage-backed securities | - | $136,953 | - | | State and local governments | - | $59,639 | $1,454 | | Total Securities Available-for-Sale | $115,468 | $314,180 | $1,454 | | Interest rate swap liabilities | - | $(1,826) | - | Assets Measured at Fair Value on a Nonrecurring Basis (June 30, 2025, In Thousands) | Item | Level 1 | Level 2 | Level 3 | | :-------------------------- | :------ | :------ | :------ | | Collateral dependent loans | - | - | $3,597 | | Loan servicing rights | - | - | $323 | NOTE 10 FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - The Company had no federal funds purchased at June 30, 2025, or December 31, 2024[127] Securities Sold Under Agreements to Repurchase (June 30, 2025, In Thousands) | Maturity | Overnight & Continuous | Up to 30 days | 30-90 days | Greater Than 90 days | Total | | :-------------------------- | :--------------------- | :------------ | :--------- | :------------------- | :---- | | US Treasury & agency securities | - | - | $344 | $27,218 | $27,562 | NOTE 11 SUBORDINATED NOTES - On July 30, 2021, the Company completed a private placement of $35 million aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due July 30, 2031[129] - These Notes qualify as Tier 2 capital for regulatory purposes, with proportionate reductions beginning July 31, 2026[129] Subordinated Notes (June 30, 2025 vs. December 31, 2024, In Thousands) | Item | June 30, 2025 Principal | June 30, 2025 Unamortized Costs | December 31, 2024 Principal | December 31, 2024 Unamortized Costs | | :-------------------------- | :---------------------- | :------------------------------ | :-------------------------- | :-------------------------------- | | Subordinated Notes | $35,000 | $(125) | $35,000 | $(182) | NOTE 12 - SEGMENT REPORTING - The Company operates as one reportable operating segment: commercial banking, providing a broad array of financial products and services across Ohio, Indiana, and Michigan[132] - Performance is evaluated on a Company-wide basis using net income, return on average total assets, return on average equity, earnings per common share, net interest margin, operating efficiency, and nonaccrual loans to total loans[134] NOTE 13 RECENT ACCOUNTING PRONOUNCEMENTS - ASU 2023-06 (Disclosure Improvements) requires new disclosures for cash flows from derivatives, unused lines of credit, unfunded commitments, and weighted-average interest rates on short-term borrowings, with early adoption prohibited[136][137] - ASU 2023-09 (Income Taxes) mandates public business entities to disclose specific categories in rate reconciliation and additional information for significant reconciling items, effective for annual periods after December 15, 2024[139] - ASU 2024-03 (Expense Disaggregation) requires disclosure of employee compensation, depreciation, and intangible asset amortization within relevant expense captions, effective for annual periods after December 15, 2026[140] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, condition, and liquidity, covering net interest income, loan/deposit changes, noninterest items, regulatory updates, and critical accounting estimates OVERVIEW - Net interest income for the first six months of 2025 increased by $8.1 million year-over-year, driven by a 47 basis point improvement in net interest margin[142] - The decrease in the cost of funds was primarily due to lower repricing of higher-cost certificates of deposits (CDs) and a reduction in interest expense from NOW and savings accounts, benefiting from Federal Reserve rate cuts in late 2024[143] - Overall net income for Q2 2025 was $7.7 million, up $2.0 million (35.7%) from Q2 2024, and $758 thousand higher than Q1 2025, indicating a path towards a more profitable 2025[152] NATURE OF ACTIVITIES - Farmers & Merchants Bancorp, Inc. is a financial holding company operating The Farmers & Merchants State Bank, which serves Northwest Ohio, Northeast Indiana, and Southeast Michigan through 37 full-service banking offices and four Loan Production Offices[153][154] - The Bank engages in commercial, agricultural, residential mortgage, and consumer lending, with a significant portion of its loan portfolio in the agricultural industry[155] - The Bank offers a range of services including checking, savings, time deposits, ATMs/ITMs, online and mobile banking, and investment services through FM Investment Services[156][160] RECENT REGULATORY DEVELOPMENTS - The CFPB's Section 1071 rule on small business lending data collection has faced legal challenges, resulting in a nationwide injunction extending compliance dates indefinitely for community banks[167][168][169][170] - The Community Reinvestment Act (CRA) final rule, effective April 1, 2024, is also subject to a temporary injunction and ongoing litigation, with joint agencies announcing intent to rescind the 2023 rule and reinstate the prior framework[171] - New federal legislation, the GENIUS Act (July 2025), establishes a comprehensive regulatory framework for payment stablecoins, imposing requirements like asset reserve standards and enhanced reporting, which the Company is evaluating for compliance and strategic implications[173] CRITICAL ACCOUNTING ESTIMATES - The Allowance for Credit Losses (ACL) is identified as the most subjective and complex accounting area, requiring significant management judgment and potentially subject to revision[178] - The ACL methodology estimates expected credit losses over the life of the loan, incorporating historical loss rates, economic projections (e.g., National Unemployment), and qualitative factors such as staff ability, collateral values, and economic conditions[183][184][185][186] - Loans are placed on nonaccrual status if 90 days delinquent or full payment is not expected, with interest income recognized on a cash-basis or cost-recovery method until return to accrual status[180][181] MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES - Loan balances increased by $63.9 million (2.5%) since December 31, 2024, with significant growth in non-real estate commercial loans (9.4%), commercial real estate loans (3.3%), and agricultural loans (10.5%) year-over-year[192][196] - Total deposits increased by $23.6 million (0.9%) since year-end 2024, while cash and cash equivalents decreased by $88.1 million, primarily used to fund loan growth and repay FHLB advances[194][207] - Shareholders' equity increased by $15.6 million (4.65%) since year-end 2024, driven by earnings exceeding dividends and a $6.0 million decrease in accumulated other comprehensive loss[208] MATERIAL CHANGES IN RESULTS OF OPERATIONS Comparison of Results of Interest Earnings and Expenses for three month periods ended June 30, 2025 and 2024 - Total interest income increased by $2.3 million (5.7%) for Q2 2025 compared to Q2 2024, primarily due to higher loan interest income ($2.9 million increase) and increased available-for-sale securities income ($1.0 million increase)[211][212][213] - Total interest expense decreased by $2.0 million (10.2%) for Q2 2025 compared to Q2 2024, driven by a $1.7 million reduction in interest-bearing deposit expense and $331 thousand decrease in borrowed funds expense[216][217] Net Interest Spread and Margin (Quarter Ended June 30) | Metric | June 30, 2025 | June 30, 2024 | | :------------------- | :------------ | :------------ | | Interest/Dividend income/yield | 5.45% | 5.22% | | Interest Expense/cost | 2.83% | 3.18% | | Net Interest Spread | 2.62% | 2.04% | | Net Interest Margin | 3.22% | 2.71% | Comparison of Noninterest Results of Operations for three month periods ended June 30, 2025 and 2024 - Total provision for credit losses increased by $56 thousand for Q2 2025 compared to Q2 2024, with net charge-offs increasing by $21 thousand, primarily in the consumer portfolio segment[227] - Noninterest income increased by $219 thousand (5.9%) for Q2 2025, driven by higher customer service fees ($141 thousand) and other service fees ($121 thousand), partially offset by reductions in interchange income[237] - Noninterest expenses were $1.9 million (11.0%) higher for Q2 2025, mainly due to increased employee benefits ($153 thousand), consulting fees ($296 thousand), and a combined $973 thousand increase in data processing and ATM expenses[241][242] Comparison of Results of Interest Earnings and Expenses for six month periods ended June 30, 2025 and 2024 - Total interest income increased by $4.7 million (5.9%) for the six months ended June 30, 2025, compared to the same period in 2024, with loan interest income up $4.8 million[247][249] - Total interest expense decreased by $3.5 million (9.0%) for the six months ended June 30, 2025, primarily due to a $3.0 million reduction in interest-bearing deposit expense and $470 thousand decrease in borrowed funds expense[252][253] Net Interest Spread and Margin (Six Months Ended June 30) | Metric | June 30, 2025 | June 30, 2024 | | :------------------- | :------------ | :------------ | | Interest/Dividend income/yield | 5.32% | 5.11% | | Interest Expense/cost | 2.84% | 3.12% | | Net Interest Spread | 2.48% | 1.99% | | Net Interest Margin | 3.13% | 2.66% | Comparison of Noninterest Results of Operations for six month periods ended June 30, 2025 and 2024 - Provision expense increased by $1.2 million for the six months ended June 30, 2025, compared to 2024, driven by higher net charge-offs ($251 thousand increase) and a $1.3 million increase in nonaccrual loans[259] - Noninterest income increased by $435 thousand (5.7%) for the six months ended June 30, 2025, mainly from other service fees ($188 thousand increase) and servicing rights income ($304 thousand increase)[267] - Noninterest expenses increased by $2.8 million (8.1%) for the six months ended June 30, 2025, primarily due to higher employee benefits ($324 thousand increase), consulting fees ($855 thousand increase), and a combined $1.0 million increase in data processing and ATM expenses[270][271] Item 3. Qualitative and Quantitative Disclosures About Market Risk This section details the Company's market risk, primarily interest rate risk, and management strategies, including sensitivity analysis of net interest margin and income to hypothetical interest rate shocks - The primary market risk is interest rate risk, managed through an asset/liability framework to control sensitivity of net interest spreads and net income to interest rate changes[278][279] Interest Rate Shock on Net Interest Margin and Net Interest Income (June 30, 2025) | Interest Rate Shock | Net Interest Margin (Ratio) | % Change to Flat Rate (NIM) | Cumulative Total ($000) (NII) | % Change to Flat Rate (NII) | | :------------------ | :-------------------------- | :-------------------------- | :---------------------------- | :-------------------------- | | Rising 3.00% | 3.39% | -5.82% | $100,252 | -8.82% | | Rising 2.00% | 3.46% | -3.63% | $103,532 | -5.83% | | Rising 1.00% | 3.63% | 0.97% | $109,591 | -0.32% | | Flat 0.00% | 3.59% | 0.00% | $109,946 | 0.00% | | Falling -1.00% | 3.50% | -2.74% | $108,187 | -1.60% | | Falling -2.00% | 3.30% | -8.30% | $103,487 | -5.88% | | Falling -3.00% | 3.14% | -12.69% | $100,364 | -8.72% | - The Bank's static balance sheet shifted from slightly asset-sensitive in March to mostly neutral in June, influenced by floating-rate liabilities and market rate inversions[280] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting during the most recent fiscal quarter - The Company's disclosure controls and procedures were evaluated and deemed effective as of June 30, 2025[282] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[282] PART II. OTHER INFORMATION Item 1. Legal Proceedings No material legal proceedings are reported for the Company - No legal proceedings are reported[283] Item 1A. Risk Factors This section updates the Company's risk factors, including inflation, quantitative modeling, trade policy, and emerging financial technologies, impacting profitability and operations - Inflation risk may negatively impact profitability by increasing fixed costs, funding costs, and talent acquisition/retention expenses, potentially decreasing customer purchasing power and increasing loan default rates[284] - Quantitative modeling risk arises from reliance on models for financial estimates and risk management, which may be deficient due to assumptions, historical analyses, errors, or misuse, potentially leading to adverse business decisions[285][286] - Trade policy risk, particularly from tariffs, could negatively impact commercial borrowers in agriculture, food processing, and manufacturing, leading to increased credit risk, higher loan delinquencies, and decreased loan demand in the Midwest market[287][288] - Emerging financial technologies (digital assets, stablecoins, DLT) pose risks by potentially reducing demand for traditional banking services and creating new competitive pressures, which could erode the Company's relevance and financial condition[291][293] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company did not repurchase treasury stock during Q2 2025 under its publicly announced program, which authorized the repurchase of 650,000 common shares Treasury Stock Repurchase Activity (Quarter Ended June 30, 2025) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan or Programs | Maximum Number of Shares that may yet be purchased under the Plans or Programs | | :-------------------- | :----------------------------- | :--------------------------- | :-------------------------------------------------------------------------- | :-------------------------------------------------------------------------- | | 4/1/2025 to 4/30/2025 | — | — | — | 650,000 | | 5/1/2025 to 5/31/2025 | — | — | — | 650,000 | | 6/1/2025 to 6/30/2025 | — | — | — | 650,000 | | Total | — | — | — | 650,000 | - The Board of Directors authorized the repurchase of 650,000 common shares between January 28, 2025, and December 31, 2025[297] Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the reporting period - No defaults upon senior securities are reported[297] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Mine Safety Disclosures are not applicable[297] Item 5. Other Information No director or officer adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the most recent fiscal quarter - No director or officer adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements during the quarter[298] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, incentive plans, certifications, and XBRL data - Exhibits include Amended Articles of Incorporation, Amended and Restated Code of Regulations, Description of Common Stock, 2025 Long-Term Incentive Plan, Rule 13-a-14(a) Certifications (CEO, CFO), Section 1350 Certifications (CEO, CFO), and Inline XBRL documents[301] Signatures The report is duly signed by Farmers & Merchants Bancorp, Inc.'s President and CEO, Lars B. Eller, and EVP and CFO, Barbara J. Britenriker, as of August 4, 2025 - The report is signed by Lars B. Eller, President and CEO, and Barbara J. Britenriker, Executive Vice-President and CFO, on August 4, 2025[303]