Okay, hello everybody, and thank you for joining us today. Welcome to Sidoti September Small Cap Conference. My name is Brandon McCarthy. I'm an analyst here at Sidoti, and I'm very pleased to welcome Farmers & Merchants Bancorp, the ticker is FMAO. Presenting with us from the company will be President and CEO Lars Eller, as well as CFO Barb Britenriker. And before I hand it over, a quick reminder that the Q&A tab is located right at the bottom of your screen. Feel free to type in any questions throughout the presentation, and we can save time for Q&A at the end. With that said, I'll hand it over to Lars.
Thank you very much, Brandon. Yeah, great to meet everybody. Spend a little bit of time with us. It looks like we've got quite a few people out there, so we're looking forward to this. Barb and I will kind of hammer it as we go through it here, back and forth, going through the slides. That normally, I think, works pretty well. And again, we'll leave some time at the end for some questions that you might have directly. So we'd love to be out there. So Barb, let's kick it off, maybe kick it over to a couple of slides in. All right, so a little bit about the bank. So we're about $3.4 billion in assets. We're Ohio-based, but we operate in Ohio, Indiana, and Michigan. Been pretty successful over the last, I'd say, a good 10-year period.
You could see there the asset growth is at a CAGR of almost 16%, and the net income's at about a little over 7%. If you can go to the next one, Barb, this kind of can show a map for us, for you, just to see where we are. So you see these are the three states right here where you see that star. That's where the head office of the bank is in a small town called Archbold, Ohio. We try to live and work down I-75. That's in Ohio. I-69, that's in Indiana, and then I-80, which goes all between those three states, and I think that's where most of the businesses occur in those places, and that's where we like to work. We're an ag and commercial bank.
Still, I would say 70% of our income comes from the commercial side of the bank, but we do appreciate ag, and we've built out a decent retail business over the last few years as well. Going to go to the next slide, Barb. So just to give you an idea around market share, you know, we're in 38 locations. There's 38 branches that we have across all of the markets that are out there. Plus, we have a couple of loan production offices. Those are areas where we have lenders that generate commercial and ag loans in those markets. In 22 of the 38 locations, we're a number one or number two market share. Over the last four years, we've really grown deposits in Ohio at a 46% clip and in Indiana at a 28% clip.
Why that's important is that allows us to fund the loans that we're going, gives us those low-cost funds that we can fund the commercial and ag loans that we're doing. This is just a longer-term view, you know, over the last 10 years, how the bank has performed. It's at a little bit over an 11% CAGR, you could see right there. So I think a really nice trend. If you look at the next slide, one of the other things that we're really known well and where our shareholder base appreciates it is our dividend. We're normally around a 3% dividend or so, something like that. But what we feel impressive is we've raised it 30 consecutive years. I think there's only seven other institutions on the NASDAQ that have a longer track record than we do. So our shareholders have really enjoyed that. Keep going, Barb.
This is, again, just a little bit on the financial highlights. I don't think we need to talk about that anymore. Again, we've really grown the bank. We have grown it, tripled in size about, you know, over the last seven years. And I think we've done it the right way. We've grown a billion through organically and a billion through acquisitions. Those have been really success stories for us, and it's gone really, really well. Next one, Ben. We normally operate on a three-year strategic plan. What we try and do is, this one's coming up, ending here in December. And so this is more of a scorecard on how we've done on the existing one. So just kind of go through a little bit of each one of these. Leveraging the investments that we've been in optimizing our platform, we believe in de novo offices.
They've worked really well for us to get into new markets. You can see right here, in this period of time, we opened a new one up in Fort Wayne, one in Birmingham, Michigan, one in Toledo, Ohio, and one down in Oxford, Ohio. And those four branches, you know, I think a lot of people see customers going less and less into branches. We've found that it's still an important piece of every community. And for us, it also shows the community that we've made a commitment with bricks and mortar. You can see there in these four offices, we've grown over $80 million in deposits in those offices. So it's been really a wonderful opportunity for us.
The other piece that I'll just mention here briefly is the way we've gotten into some new markets, if we haven't done an acquisition, is we've opened up a loan production office. And what that is, is we take a, we find a seasoned commercial or ag or both banker in a market and try to build an office around them, and then they get it to grow to roughly $50 million. And then that gives us, there's a much girth there to operate a full-service office. And that's how, for instance, we got into Oxford, Ohio, that you see right here. That was also how we got into Michigan. Good example, it's been a real success story in Michigan, is four years ago, we put a loan production office in one of the suburbs, Birmingham of Detroit.
We were able to grow it $200 million in loans over a two-year period, so it's justified putting in an office, and we did, and then we grew it another $400 million, so it's over $600 million in loans, and we just opened up a second office in Troy, which is another suburb of Detroit, just in August, so it's been wildly successful for us, and it's been a great way to get into new markets. We continue to do talent development. You know, if you triple in size, you have much more skills and different skills that you need as the bank has gotten bigger, so we've done a nice job, I think, of growing some folks from within, but we've also brought in the expertise from the outside. I have a slide on our senior team in a few minutes. We've also done, of course, creative acquisitions.
We've done four of those. We've also done an asset purchase of an investment business that helped us really grow our investment business at the bank. We focus on market share and customer acquisition. I think you saw through those market share slide, that works out really well for us. We've been able to really grow the bank that way, and it's worked out well. Community banks, I don't know if you know this, we really rely on the core of three big providers. Either you're a Fiserv bank, you're an FIS bank, or you're a...
Jack Henry.
Yeah, Jack Henry & Associates. They limit what you can do on the digital side. So you really have to wait till they have that digital opportunity that you can use. We call ourselves fast followers. As soon as our provider can do it, we provide that service. It pretty much allows us to keep up with the, you know, the Fifth Thirds and the Bank of Americas that are out there. The last piece is we've really tried to diversify our revenue sources. We're very reliant on interest income. We spent some time these last three years building out our treasury management business products. Those are all the products that support a commercial bank, a commercial account that's out there. We've renegotiated our card contract to drive some different and bigger income to us. We've also really built out our swap business.
It's also allowed us to fix our portfolio as well. And we also have really built out our F&M Investments business. We use Raymond James as our provider and offer those products, but we have those FAs all are part of our world. And we're roughly about a little over, a little under $400 million so far in AUM. So I think that's building nicely, and that's a nice non-interest business for us. This just shows you the five prongs of that strategy that we put together that's finishing up right now. Next one, Barb. So we talked a little bit about digital. So those are just a little bit of the results around digital. I think we can move forward from there. So this is our senior team.
You can see right here, again, it's a good example of a few people that have really grown within the bank and gone to great job. You know, we've gotten some great jobs here at the bank and great careers at the bank. We'll start with Barb on the top there. Been with us 41 years. If you look right below her, Kevin Becker, he's our Chief Credit Officer. Been with us, been out of school for 10 years. He's really been a superstar for us. He's probably the youngest chief credit officer, I would say, in any of our markets in Ohio and Indiana, but he's a true superstar. He really understands the business. At the bottom there, Doug Shaw, been with us also about 10 years, straight out of school. He's one of our regional presidents.
He took over a market for us where we did two acquisitions in Southern Ohio, and he's done an incredible job of melding those two cultures together and also bringing in the F&M culture at the same time. If you look on the left-hand side, second from the bottom, Taryn Marino, been with us about 10 years, does a great job, runs all of our retail business, those 38 branches, so significant role for her and has grown up in the company, and then also a couple up from her is Amy Cover. She's been with us for about 15 years, again, straight out of school, runs all of marketing for the company, done and has had an incredible career. As I said, we've also had to add some key people that have the skill to help us as we've grown.
If you look at Tim Carsey there, just below me on the left-hand side, comes from PNC, has over 31 years in running back office businesses for banks. So tremendous hire right there. Shalini Singhal, she comes from another community bank here in Ohio, but over 20 years in that Chief Information Officer business, basically the IT business. You know, that's, of course, been grown tremendously for us as we've grown the bank. Cybersecurity is a big deal, and she has her arms around that and has helped us grow the bank there. On the bottom left, there you see Peter Schork. I used to be the CEO of his community bank up in Michigan. He sold his bank and joined us as our Regional President. So we have a very experienced individual there running Michigan and the top part of Northwest Ohio.
So we have some, again, a really nice mix, I think, of experienced people that have come from the outside and people that we've grown from within that have really developed in the company. This is just a slide that shows the different leadership development programs that we have across the bank, again, just to show how important it is to us and how it is to make sure we have people growing in the company and joining the senior team. This is our board of directors. We do have an age limit on our board of directors at the age of 72. So we've had a number of folks that have aged off over the last seven years or so. And I think we've done a nice job replacing them with people that have diversified our geography of experience and also business experience.
So a few people I'll point out. If you look at Andrew Briggs, second from the top there, he came from a bank that we bought in Indiana. So he's the only banker on the board besides myself. So Briggs really good experience there. And he's in Indiana, which has been a nice. It's probably 40% of the bank. So it's been great to have him come aboard. If you look a little bit farther down, Frank Simon, and then at the bottom, Ahmed Alomari. They're both new Michigan directors. So again, as we've grown tremendously right there, it's great to have some folks from Michigan. Frank runs a law firm up there. And then Ahmed has a cybersecurity firm, which, as you know, is critical right now with banks and making sure you have that set up properly.
If you look on the right-hand side, Lori Johnston, and a little bit farther, Kevin Fry. They're both CPAs that have joined the board. Kevin now has joined his family business and come back to run that. And then Lori ran a large medical network here in Ohio and then has recently joined a much bigger one that bought her out. It's gone out there. So she's on our board as well. And the last one I'll point out is on the bottom right, Ian Boyce. He runs a wealth management firm, and they have offices in Fort Wayne, Indiana, as well as Milwaukee, Wisconsin. So it's great to have someone with that type of experience on our board as well. So I think we feel very diversified for the bank, and there's some great experience there to help advise the senior team and advise the bank as we go forward. Couple, maybe Barb, you can talk about here, a couple key stats. Maybe if you want to go there again, sorry.
Sure. I'll let Lars take a breath.
Yes.
So very proud of our deposit growth, which is very important to us because of our strong loan engine. This just shows you the record. We are very focused on getting those core deposit accounts, specifically the checking accounts that also help us not only in funding, but also in improving our non-interest income, as Lars has mentioned earlier with the credit card, the debit card renewal that we did. But that anything that additional besides just the funding and being able to bring non-interest income is a huge plus. We are very happy when you look at the $1.5-2.7 billion over that time period. Oops, sorry. Happy clicking. The other thing I will just quickly talk about, Lars mentioned the dividend. One other thing that you might find interesting, our shareholder mix. We are only about 25% institutional.
The majority of our shareholders either came to us through our acquisitions as stock was traded, but we have a very strong long-standing retail base that goes with that. You can just see these are just some common metrics that we look at that we're very well capitalized. We're very comfortable where we're at. When we talk about the deposits, if you look at that, approximate 11.9% in our uninsured ratio was a number that everybody was looking at a couple of years ago with the bank failures that we had, and we're very strong in that area.
All right. So the banks, in terms of our lending portfolio, we're over 51% in commercial real estate. But what we, if you dig in a little bit and you look at that middle pie, we're very diversified within it. You know, we have everything from, you know, food service and office over to hotels and senior living. So very well diversified through the business and also the geography. You know, Detroit's a very different market from Toledo. That's a different market from Fort Wayne. That's a different market from Dayton. So there, I think we have good diversity across the portfolio right there. The next slide is really around our fixed and variable loan mix.
There we go.
There we go. So one of the things we were challenged with when we had that 550 basis points increase a couple of years ago come up, we got held with our pants down, had a little bit too much fix in our portfolio. So we've worked very hard over the last two and a half years to fix that mix. And we've got pretty close to 50/50 right now. And one of the things that we always talk about right now is how do we become rate agnostic? And we think we're pretty close to it right now with that type of ratio. So no matter what happens with interest rates, we know we can be profitable for our customers and for our shareholders. One of the, I think the secret sauces here at the bank is the quality of our assets.
If you look there at the bottom, you know, a 0% net charge-offs and then a 30- to 90-day past due of 14 basis points, it's extremely low for a bank our size and a bank that has grown as quickly as we have. We have a tremendous asset quality team that ensures and stress tests our portfolio continuously, as well as the new credits that we bring on. So we're very proud of this. And where I think it comes in is as there are struggles in the economy and we start to see some recessions or closer recessions and businesses start to fail and some banks start to take some write-offs, we are going to take on less write-offs than every other bank. We have an asset quality which shows and has shown over the years.
If we go back to 2007, 2008, pretty much every bank in the country took TARP. We were one of only a few that did not need to take TARP, and we didn't take TARP that was out there at that time because we didn't need to. Again, we have a significant asset quality group that I think differentiates us from many other community banks across the country. Community support is critical as a community bank. You know, we have budgeted well over $500,000 for charitable donations to support the communities that we're in. We have two significant golf tournaments. We have one in Ohio, one in Indiana. We'll raise between $50,000 and $60,000 there, and we'll designate every year anywhere between two and four charities that we'll give that to. And that type of money is normally a full year's budget for those folks.
So it really helps take care of them. We're also very conscious in the markets that we're in. It's very rural with a lot of farm country. So we take care of the grain elevators that are around us. Every fall during harvest, we'll bring lunches to those 50 grain elevators and help support them when they're working those, you know, 24/7 to get their harvest in. And then ag, I think, is the other secret sauce that we have that differentiates us. We have a significant ag business that really diversifies our business. When the economy isn't strong, when there's recessions, ag does very, very well. We've been in this business for the life of the company, 127 years, and have learned what to be in or why not to be in. We've gotten out of the livestock business.
You know, we've learned that if your collateral can move and walk, it can walk away. And so we don't do anything there. We also stayed away from or learned to stay away from the equipment part of the business. That's where the spreads are very, very thin because there's a lot of competition around rate. So we leave that to the credit unions. If you look there, we really involve the secondary market. We sell around, you know, 60 or 70% of our loans in the secondary market. So that reduces risk. And also on the crop insurance side, roughly 95% of our customers have crop protection insurance, which really helps them get through any tough years that might be there. We've also found over the last 10 years, ag delinquency has been really low. It's around 30 basis points. So that's been very good.
And also the loan-to-values are very low on our book of business. You know, these are experienced farmers who have been around a long time and really understand their businesses and have very well-diversified ag businesses. So we feel very proud of this business. It's around 25% of the book at the bank and really generates a nice income stream for us, not only on the interest side of it, but the non-interest side through the secondary market. All right. Just a couple more. This is just the acquisitions that we've done over the last 10 years or so that's happened. You can see the impacts that have happened there. And then the very last slide is just where we stand on our priorities. Basically for, you know, enhanced, we've really focused on profitability.
As Barb has said to you, you know, with what's happened with interest rates, we really took quite a hit on our net interest margin, our ROA. You know, a year ago, our NIM was probably around 263, and most recently, we're up as high as 313 right now in our NIM, and that continues to climb, and we think that trajectory will continue, so we've really focused on profitability and making sure we're getting that return on investment that we have. Because of that, we've also controlled the growth. We haven't grown, I think, as much as we have in the past, just to make sure we're getting that earnings stream back to where we need it to be and that trajectory where we need it to be, where we're consistently at a 125 ROA.
We got our efficiency ratio in the 50s, and we got a, you know, a NIM that's 325 or better. Continually innovate. You know, again, we're a little bit limited by our core provider and Fiserv, but we really tried to have the next best thing. One of the neat things, we started to work with a fintech called MANTL. It's really transformed our account opening software. Whether you're opening up an account in branch, you're doing it online, or you're doing it over the phone, it's one system. Takes around four minutes to open up a brand new account from start to finish.
So very efficient, very slick. I think it allows us to really keep that deposit generation machine going that we need to fund the loans. We're looking at some new products. We've also optimized our lineup. We've gone from 22 checking accounts to four. That's made a big difference for us, really cut some costs for us. And on the efficiency side, again, we're trying to get to an efficiency ratio with a five. We've worked it way down in these last two years. I think we were pushing back up to 72% years ago, right, Barb, I think?
Yes.
And then we're around 63, a little over 63 now in the latest quarter. So I feel good about that. Starting to make sure we can use our data properly. I think that's one of the areas where we can really leverage as well. So we have a whole data governance group that will help us become more efficient. So those are kind of the four major priorities. And what we'll do is we'll stop there. We still got a few minutes here and wanted to leave seven or eight minutes here for questions.
Fantastic. Thank you, Lars. Thank you, Barb, for the overview. We can now open the floor for Q&A. Why don't we start with deposit growth? I think I saw in the presentation there roughly 16% CAGR over the past five years. Do you attribute most of that deposit growth to your M&A activity, or has that been more, you know, expanding your footprint and more organic growth?
It's been 50/50, Brandon. Really good question. I think we've done a nice job. One of the biggest things, though, that impacted that was the pandemic. We really took off in our own organic growth at that time in terms of deposits and got, I think, a little bit lackadaisical and thought it was always going to be that way. So I think working with that fintech Mantle and kind of rededicating ourselves to deposits these last two and a half years, we've got back to that trajectory that we had before, but we definitely took a little bit of foot off the pedal during the pandemic.
That makes sense. And looking ahead, you know, what do you expect for future growth? And do you think that you'll be more active on the M&A front? And as a follow-up there, what do you typically look for in potential M&A prospects?
Yeah. So it's been part of our strategic plan for six years. You know, the current one that's ending right now is part of it, but it was a tough couple last years, I think, financially for the entire industry. And then I think there are also some targets that maybe wanted to sell and decide to wait to see until they could, you know, fix their balance sheets. So we'll continue to look at it going forward. We have 15 banks that we really like that are either fill-ins for us or new markets. We really like, if you think of ourselves, how we like to look at it is we like the whole southern part of Michigan.
We like that whole eastern side of Indiana and that whole western side of Ohio from the top all the way down to Indianapolis and then all the way down to Cincinnati. So we feel those are the focus areas for us. And we have some folks that we hope, some banks that we hopefully will give us a call. Banks are definitely sold. They're not bought. So we have relationships there, and hopefully when they decide to sell, they'll call Barb and I.
Yeah. So when we talk about that mix, we are currently getting ready to do our next project of what we call the next 10. As Lars had spoke, organic and acquisition has been important for us for that mix. What the next 10 does, it looks at if we don't have an acquisition, where are the next 10 locations that provide the best opportunity for us. What community should we be looking at? And interesting enough, last time when we did this, some of them that were on our next 10, we actually got those next 10 in the acquisitions that we completed. So it was really nice. It's a confirmation when we're looking at those acquisitions too, if they're already on our next 10 that we're organically going to do if we don't get an acquisition.
That's great. Appreciate that detail. And wanted to ask a question on the macroeconomic environment, potential for a lower interest rate environment, you know, on the horizon here. And then obviously you have the agriculture exposure on your loan book. How can investors kind of think about how the macro impacts your business and going forward?
So I'll do the NIM if you want to do the ag, Lars. So when we look at the NIM, as Lars had talked before about our position with floating and variable, we are slightly improved over the next 100 basis points dropped. That NIM will actually continue to expand. Once we get past that, then our floors kind of kick in on our loans, and we really don't have a lot of room to lower the deposit, the funding sources anymore. So the next 100 down is an advantage to us, and we would expect some expansion of the NIM.
So the ag book, we're coming off probably three of the best years in the history of farming, at least here in the markets that we're in right now. You know, these farmers would say, you know, if you couldn't be successful in those three years, you should be out of farming. So they've had some really, really good years to prepare for now. So now it's been a tough year in terms of the prices are down, and then we've had a couple of difficult yield years, just these last, probably this last year that's coming up. And one of the other headwinds that's coming down the pike on the macroeconomic side is tariffs. And why that's important in at least our ag industry, most of our ag industry is corn, soybeans, and wheat. Roughly 50% of the soybeans produced in the U.S. gets sold to China.
You can imagine with that tariff that's on there, that's pretty much shut that piece down. So farmers are resilient. You know, the industry is resilient. They'll find other takers for that. You know, they're going to focus on South America is what we're hearing right now with Argentina and Brazil. And it looks like a lot of that production is going to go to those slots. They'll just move from China. But we won't know for sure until we get through this harvest and this winter on how that went. But again, our farmers are very resilient. All of them have been doing this for definitely lifetimes. You know, it's not like even 20 or 30 years. A lot of these have passed on the years from farmer to farmer, from dad to grandpa to kid, you know, something like that.
So they really have a lot of resilience and have been there a lot of times and very diversified in how they get their income for their farm. So we're not concerned. And I think that, again, we'll figure out a way. And the other thing too is, you know, I think President Trump has said many times he's going to take care of the farmers in the country. And so we also feel that's going to be out there too, just in case there is more of a bigger challenge than we might have thought there was.
Absolutely. That makes sense. And when you look at your loan book, how can investors think about the net interest margin breakdown, or I guess the net interest margin characteristics of the commercial side versus the, I guess, maybe the gain on sale margin on the ag side? Because I know you mentioned you don't hold those ag loans on your books very long. How can investors kind of think about the margin profile of your business?
So the 90% that we do sell, we still do keep that 10% on. So that one slide did have what that we do have ag balances actually on our books. But then we also get the servicing rights off of those. We continue to provide that servicing. In a one-to-four family, your servicing is usually 25 basis points. With the ag, it's usually 50. So that makes that portfolio more profitable also. We have been really successful, and I'll let Lars talk on the commercial side of still maintaining, getting nice yields for quality loans.
Yeah. So we've really been fortunate in how we're approaching. We have a pretty sophisticated pricing model that we apply across the board. And with the focus on earnings, just tried to be a little bit more selective. Even though we've still grown the book, we've been more selective. And we've really been able to get yields, you know, we'll get rates between 7.5 and 8.5. And if you look at, you know, our cost of funds getting down as low right now, probably around the 280s where they are right now, that's a really nice spread, much higher than the overall portfolio.
So that's why you see significant improvement each quarter as we're getting into this because we're still, again, getting pretty good yields from these customers. So we feel really good where we are and where it's going forward. So it's a great time to be here and working here. And we're seeing a trajectory that everybody really, really likes. I think it's going to take us to that next level. We'll be consistently in that NIM of 325+ and definitely that 125 ROA. And that's what we're looking at.
Absolutely. And maybe one last question here. You know, what are investors really misunderstanding with the story or, you know, what's unique about F&M Bank from a competitive advantage standpoint?
Yeah. So I think there's three things. The commercial side of the bank, we've been very successful in bigger markets, you know, Fort Wayne and Detroit, where there's a series of super regional and national banks and really small banks. So there's a real niche for us in there for our commercial lending crew. We've really seen this kind of $5-$15 million of lending. It's a real niche for us. We've been very successful and continue to be. So that's a really strong area for us. I think our asset quality profile is extremely strong. It's in the top five percentile of our peer groups, and even across all of banking, again, the top, you know, five percentile in terms of how we manage the asset quality.
If you look at the growth that we had, if you factor that into, I don't know if there's anybody better in terms of how we manage our asset quality. The last piece, I think a wonderful complementary business, especially in the markets we are in Eastern Indiana and Western Ohio, is ag. You know, we have a very strong ag business with extremely experienced lenders in that business. Some of the acquisitions that we've had have been in markets where a lot of the banks have gotten out of ag. So we've really won a ton of new business that way. So it's a, I think, a niche business for us that we're very successful at, and we're very successful at profitably growing it. I think that's a niche that people aren't aware of either.
Great. That's fantastic. Well, Lars and Barb, we really appreciate your time and the overview. We'll conclude the presentation there.
Thank you.
Thanks, everybody.
Thanks, everybody, for joining us.