FARMERS & MERCHANTS BANCORP INC (FMAO) stock intrinsic value fair value estimate & owner earnings analysis

Farmers & Merchants Bancorp is the holding company for The Farmers & Merchants State Bank, a community bank that has served northwest Ohio, northeast Indiana and southeast Michigan since 1897. At June 30, 2026 it had about $3.5 billion of assets, $2.9 billion of deposits and $385 million of shareholders' equity, including $86 million of goodwill. Loans are a little over $2.6 billion and include farm and farmland loans, commercial real estate, home loans and commercial lending. Growth has come from steady lending plus three bank acquisitions: Limberlost Bancshares (Bank of Geneva, Indiana) on January 1, 2019, Perpetual Federal Savings Bank in the fourth quarter of 2021 and Peoples Federal Savings in the fourth quarter of 2022; the share count rose from about 9.2 million in 2018 to about 13.6 million at the end of 2022. How we measured earnings. Deposits and borrowings are a bank's raw material, so we value the profit left after interest and credit-loss costs (net income per share; there is no preferred stock) and subtract no debt. The $35 million of subordinated notes and the deposits are funding costs already deducted in that profit. We also built earnings from cash flow. That build landed within about 5% of net income in 2024 and 2025 but differed by 16% to 29% in 2021 through 2023, in part because of swings in loans held for sale (in 2022 loan-sale proceeds exceeded originations by $8.2 million) and a $10.9 million capital-spending year in 2023, so we rely on net income. Earnings record. Earnings per share were $2.01 in 2021, $2.46 in 2022, $1.67 in 2023, $1.90 in 2024 and $2.43 in 2025. The 32% drop in 2023 came as interest expense jumped from $14 million to $58 million. In 2025 net interest income rose 21.4% ($18.4 million) on lower funding costs and repriced loans, with loans roughly flat. First-half 2026 earnings were $1.55 per share against $1.07 a year earlier, and the last four quarters were $0.64, $0.71, $0.69 and $0.86. The bank has earned a profit in every year from 2015 through 2025. Earnings level. The median of 2022 through 2025 is $2.17. We start in 2022 because the Perpetual and Peoples Federal acquisitions were in place by then, and those four years span both the funding-cost squeeze and the recovery; 2021 is left out because it describes the bank before those deals. Because each of the last four quarters earned at least $0.64, we lift the base earnings level to $2.56, four times the weakest of those quarters. We do not use the $2.90 total of the last four quarters or the single $0.86 quarter. Growth check: earnings per share grew 28% in 2025 ($1.90 to $2.43); the base case assumes year one is 5% above 2025 ($2.56), below that pace, and credits no further margin gains. Credit and rate risk. Credit has been clean: net charge-offs were 0.03%, 0.01% and 0.02% of loans in 2025, 2024 and 2023, and the allowance is 1.02% of loans. But farm lending is a real exposure. Nonaccrual loans rose $8.1 million in 2025 to $11.3 million (0.42% of loans), including one agricultural relationship of $6.3 million, the rise in past-due and nonaccrual loans was largest in agriculture and farmland, and special mention and substandard loans rose significantly for the year. Allowance coverage of nonaccruals is about 2.5 times. The bank also says it has much more floating-rate lending than a year earlier, and the Federal Reserve cut rates three times in 2025, so loan yields can fall faster if rates keep falling. The cases. Each case is the earnings left for shareholders after setting aside the capital needed to fund balance-sheet growth, valued at 6% a year over ten years. After year ten we credit no growth and assume everything earned is paid out, because what we can evidence is a franchise that has been profitable every year in the record, not further growth. In every case the bank owes no separate debt beyond its deposits and subordinated notes, which are already in the earnings. Base case, about $44.90 per share. Earnings start at $2.56 and grow 2.5% a year for ten years, in line with assets growing about 2.3% a year from $3.28 billion at the end of 2023 to $3.43 billion at the end of 2025. Funding that growth takes about $0.70 a year of earnings, rising to about $0.87, leaving $1.86 rising to $2.33 for owners; from year eleven about $3.20 a year is distributed with no growth. Not credited: further acquisitions (they came in 2019, 2021 and 2022, not at a steady yearly pace), the new Michigan offices, share repurchases and any margin gain. Bear case, about $24.80 per share. Earnings stay at the squeezed 2023-2024 average of $1.79 for ten years with no growth, and a credit cycle sized on the 2008-2012 record arrives in years three to seven. Federal Reserve data show all U.S. commercial banks losing roughly 1.4%, 2.6%, 2.7%, 1.6% and 1.1% of loans in 2008 through 2012. Because the bank's own losses have run far below the national rate, we apply half of those rates (0.7%, 1.3%, 1.3%, 0.8% and 0.55%) to about $2.7 billion of loans, less its normal 0.03%. After 21% tax that costs about $1.06, $2.00, $2.02, $1.22 and $0.82 per share in those five years, leaving earnings of $0.73, a loss of $0.21, a loss of $0.23, then $0.57 and $0.97, with nothing distributed in the loss years, before earnings return to $1.79. The cumulative cost of about $7.10 per share is well within book value of about $27.90 per share, so no capital raise is assumed. This case is worth more than tangible book value (about $21.65 per share before smaller intangibles) because even in the squeeze the bank earned $1.67 per share in 2023, and the $2.9 billion deposit base keeps earning after the cycle. Bull case, about $53.90 per share. The last twelve months' earnings of $2.90 hold and the balance sheet grows 4% a year, the pace of 2015 to 2018 when assets went from $989 million to $1.116 billion, before the Limberlost deal. Funding that growth takes $1.12 a year rising to $1.59. Not credited: the 650,000-share repurchase authorization announced in January 2026 (only $99 thousand of stock was bought in the first half), further acquisitions and wider margins. What would make this wrong. If the 2025-2026 margin gains disappear and earnings sit at $1.79 with no growth, the shares would be worth about $29.80. If the farm downturn deepens beyond the 2025 problem loans or rates keep falling against a more floating-rate loan book, we are closer to the bear case. If the $0.86 quarter proves the new norm rather than a single good quarter, the bull case is nearer. Earlier values published for this company (about $19, $31 and $41) were built on a different basis and are not comparable. Margin-of-safety price, $22. We are fairly sure of an earnings level near $2.56: four straight quarters at or above $0.64 and first-half 2026 profit of $21.4 million. We are less sure it lasts, because the 2025 gains came from pricing and repricing rather than volume. The worst plausible outcome is a farm-credit downturn on top of narrower margins; the bank would come through it with equity at 10.8% of assets at the end of 2025, an allowance of 1.02% of loans and only $35 million of subordinated notes outside deposits, but earnings could be near zero for two years. An overpriced acquisition, which the cases do not model, is another risk given three deals in four years. If we are wrong about margins, the shares are worth about $29.80; if the credit cycle arrives, about $24.80. The price assumes a three-to-five-year holding period; the bank declared dividends of $0.90 per share for 2025, about 4% of $22. At $22 the shares trade near tangible book value and earn 11.6% on the cautious $2.56. If margins gave back to $1.79 and the shares eventually traded at what those earnings are worth, a $22 price would still imply returns in the high teens a year over three years, and the bear path about 10% a year, while the base case implies well above 20%. At $26 the margin give-back outcome falls to about 11% a year, which is why the margin-of-safety price is no higher than $22.