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Serving Ohio, Indiana and Michigan - Farmers & Merchants Bancorp, Inc. is a Community Bank at its Core

Lars Eller

President and CEO

Farmers & Merchants Bancorp, Inc.

(Nasdaq: FMAO)


Lars Eller


Interview conducted by:

Lynn Fosse, Senior Editor

CEOCFO Magazine

Published – February 1, 2021

CEOCFO: Mr. Eller, would you give us the overall vision behind Farmers & Merchants Bancorp, Inc?  What is your focus today?

Mr. Eller: Overall, the bank is a community bank at its core. We mainly cover three states; Ohio, Indiana and Michigan. We appeal to the small to medium sized towns in Northwest Ohio, Northeast Indiana, and Southern Michigan and feel we have a real niche there. We can help those customers, whether it be for commercial, retail, investments or even AG banking. F&M specializes in each of these lines of business. We have worked really hard to create a three-year strategic plan, with the goal of reaching $3 billion in assets by the end of 2022. The $3 billion is an important number for us because we realize the importance of taking care of our communities and to do that, we need to remain independent. We put together five strategic objectives to get there.

One is customer acquisition and retention - growing your customer base while also hanging on to our existing customers. We have found that a good portion of our customers still have some product or service with another financial institution. We are going to really focus on bringing them to their community bank, F&M.

There is attracting, developing and retaining our talent. Right now, we are between $1.8 and $1.9 billion. When I joined, we were about $1.2 billion. With our growth goals, we must have the most qualified people with the necessary skills to run a larger bank. We have done a really good job of being able to promote some key folks from within our organization. We have also been able to attract strong talent from outside the bank, therefore building on our expertise.

The third strategic pillar is growth by acquisition. We just recently announced our merger with Ossian State Bank in North East Indiana. We have an active list of banks within a certain mile radius and asset size for consideration. We try and keep in touch with those institutions as much as we possibly can. Banks are not bought, they are sold, so when those CEOs, shareholders and Boards decide that they want to consider selling, we want to be who they call.

The fourth thing that we do is really focus on our operating excellence. In banking, the key ratio is the efficiency ratio and that is what it costs to make a dollar for your shareholders. The magic number for us is anything that starts with a five, call it fifty-five cents, fifty-eight cents; anything like that to make a dollar means you are really operating at high level. Therefore, we are working hard to drive key revenue streams and managing our expenses tightly to improve our efficiencies.

The last piece of our strategic plan is developing a compelling digital strategy. As a community bank, it is very expensive to get the information technology (IT) infrastructure that is needed to stay competitive with the super regionals and the larger banks. We rely on vendors to help us with that and to continuously improve the technologies that we use. We have a “fast follower” strategy. We are never going to be the originators of, for instance, mobile banking or online banking or ACH or any of these types of services. However, we are going to be a fast follower. As soon as it is out there, we are going to have that technology. With COVID, many of our technology initiatives have moved up the list very quickly in 2020. For example, we have fully implemented the ability to electronically open an account, from A to Z, online or on mobile, which we did not have before. In addition, we had very few remote workers before COVID. Now we have forty percent of our team working remotely, and they have all the technology to be able to do so effectively. Those are just a couple of simple examples where we have really moved on our digital strategy.

Those are the five things that we are focused on right now to help us achieve our desired growth.

CEOCFO: How do you achieve the efficiencies? What do you look at? Would you give us an example of perhaps what you might have tweaked to get that started with the “five” number you want in some areas?

Mr. Eller: I will give you an example. Our debit card is a MasterCard debit card. We originally had a user contract rather than a master contract and that type of user contract does not allow you to take benefit of some of the larger networks out there. Therefore, just by extending our contract from a two-year contract to a five-year contract and working directly with MasterCard, we were able to get ourselves an additional $1.2 million dollars of revenue over a five-year period. This is just one example of what we were able to do to renegotiate and change a contract slightly to drive much more non-interest income into the bank. This really helps that efficiency number, because the efficiency number is the income divided by the expense. You either need to increase the income or decrease the expense to move that ratio.       

CEOCFO: If you could do both you are really doing well!

Mr. Eller: Yes! If you do both then you are really rocking!

CEOCFO: What is still not available to a community bank in technology that might be available to one of the super banks? What are you finding that perhaps you would like, but do not yet have?

Mr. Eller: That is one of the scale items that we set up while we try to get to $3 billion. I think that at $3 billion we can have anything that a super-regional or even a national bank can offer. It might not be quite as slick, but it is the exact service and the average customer is not going to see any difference.

Any service that a Citibank can offer, or a Bank of America, or a PNC - we can offer everything they have. The difference with community banks is that we need vendors to be able to bring these products to our customers. Whereas larger banks do it all in-house and they have full departments dedicated to the development of these services.  

CEOCFO: How do you vet technology? How do you look at the technology, both from the big picture and from the smaller things?

Mr. Eller: We use different user groups to help us. We have some advisory boards as well. This is likely more unique to community banks, because those boards are made up of either customers or community leaders. People providing wonderful feedback mechanisms.

I will give you a simple example of where we changed the technology on our mobile banking app, because of feedback we had gathered. We found out we were having a small glitch with our bill pay through the mobile application. We were able to fix that and improve the extensiveness of paying bills through the app, all because of feedback we received from some key advisors.  

The other thing I will add is that we have asked all our people to be involved in the communities where we operate. Whether that be in their chamber, their Rotary or their Lions Club. Of course, all the other folks that are in those groups are from that town or from that area. Many of them will use your products and services and they will give you feedback. It is a great opportunity to help serve the community, but also to get good feedback on what technology or service you might not have or if there is a gap.

CEOCFO: What is the key to a successful integration? Obviously, you have done acquisitions and you would like to do more. How do you do it as smoothly as possible? What is important, both from the back end and from the customer perspective as well?

Mr. Eller: I feel that much of it is the culture and the people. You want to make sure, as you are working through your negotiations, that the cultures of both banks are similar. For example, in the acquisition that we did previously, we sat down with senior management and learned they had a fair coming up in their particular county. They were telling us how they were busy with this fair and that they had a fire engine they needed to get to the fair. I said, “Really! We have a fire engine too!” I went and looked and said, “We have the exact same fire engine that we both use in county fairs.” Then he said, “This is a match made in heaven,” because we had the exact same thing!

With this more recent one, it is a bit of a different example, but it shows you how the cultures are similar. One of the challenges, right now, across all of banking is the hotel industry. It has really taken a beating with COVID and the economic decline. However, for the right borrowers and the right institutions and the right deal, you will do the deal. We did some due diligence on their hotel portfolio and their two largest hotel deals are two customers that we already deal with, that we do hotels with too. That is how we know right out of the gate that our credit cultures are going to be the same. This leads to much better integration down the road when we are looking at a similar customer base that we want to extend credit. We already think the same way.

Now, the back office is always a challenge, especially if you are a little bit larger or a little bit smaller. Normally, a smaller bank does not have some of the technology or relies on more manual processes to get things done. Often, they have one person that does ten jobs, instead of one person that does two jobs. Therefore, the biggest challenge is how you map the smaller process to the larger process. We are very aware of that. We have spent a lot of time reviewing processes to make sure that everyone is on the same page and highlighting where the bottle necks are going to show up, right from the beginning.

The last thing, which is probably the hardest and most delicate, is to have the employee conversations addressing what someone’s role is going to be after the two banks merge. We choose to have those conversations very early on and make those decisions early. You run a risk, as a bank, that the role is not what someone is looking for and they choose to leave. However, we feel, in the long run, that it is better to let everyone know their status is going forward, rather than keep them on pins and needles until the deal finally closes.        

CEOCFO: How are you working so that you can keep that community bank feel as you continue to grow, as that is also a challenge?

Mr. Eller: I think it is how you structure your bank. As you get bigger, local decision making and local leadership is how you are able to hang on to the community feel. Many of the larger banks or super regionals end up centralizing many of their businesses to gain economies of scale and that is where you lose that community bank aspect. The example with the last two acquisitions was that we were able to take on one of their key leaders, their former president, and he became our local president in that area. The same person was still in charge. He has the decision-making power to be able to make decisions on loans and make decisions on any type of customer issue that might come up. You can preserve the community feel that way.

We also like to invest in the communities we operate whether they were original F&M towns or we acquired them through a merger. There is an art center in one of our towns that is really important to the area. We inherited the commitment from a previous merger. Not only do we continue to make the financial commitment, we have increased it and our folks now volunteer.  When our communities are successful, we are successful. By staying community vested, we’re able to help where needed which also helps us keep that community bank feel.

CEOCFO: How are you able to help your customers through, certainly COVID times, but in general? There are many ups and downs over the years in banking. How can you help your customers ride them out or maybe even make inroads and profits during that time? What have you developed over the years?

Mr. Eller: Everyone is different, so that makes it really difficult. What one person needs is different from another. We try to give people alternatives and options and different ways to do their banking. I think if we provide different ways, it may not be the preferred way due to COVID, but at least they have another way to handle their banking. Therefore, you can either do it on the phone or you can come into the office, or you can come up to a drive-up window. You can use an ATM. We have something called ITMs, which are ATMs, but if you select an option on the screen there is actually a person on the other side of that screen. They can walk you through every part of the transaction, from A to Z, just like you were in front of them at the teller line. Of course, we also do ACH, and we offer treasury management services.

Any way that a customer could or wants to do a transaction, there are normally two or three different ways to do it and we try to take care of that. The biggest difficulty now is when customers are used to dealing with us face to face, but due to COVID and their own personal situation, we cannot deal face to face. This makes it really difficult. The only thing we have done is become pretty darn good at video calls! There are many different options. There is Zoom, Microsoft Teams, WebEx, etc. We have become pretty good at it. At least you can put a name with the face and see the person in front of you while you’re talking. I think that has been a decent bridge. It does not replace the real face to face, but it certainly helps.  

CEOCFO: What have you learned in the past five or ten years that you did not realize earlier on, that has made a difference; product, services, people, spaces?

Mr. Eller: I am probably biased, running a community bank, but twenty years ago I really thought that it was going to be really hard to continue to have branches for people to do their banking. I really thought that technology was going to take off and you really were not going to need those face-to-face meetings with customers. What I found over the years is that we will always need it! There probably will not be as many branches or as many people working face to face, but there is still that requirement.

Whenever the customer feels the financial transaction is big, they normally want to look the person in the eye. The challenge is that it is different for everybody. To someone going to deposit their first paycheck in their lives, it is a big transaction. For another person, if we are going to do a $5 million loan to help startup their business, that is a huge transaction. There is everything in between. Therefore, what they feel is that big transaction, they want to look the person in the eye. I think that will always be preserved, and I think that will always be part of our industry. I would have never thought that when I started thirty-five years ago or even twenty years ago.    

CEOCFO: Would you tell us a little bit about AG banking?

Mr. Eller: I think it is a niche and you need to spend time in it to really understand it. I always look at our bank as a barbell. Where we are in the mid-west is that, at one end of our market we have Fort Wayne which is a decent sized town of three hundred thousand people. Then you drive for an hour and a half through a lot of flat farmland. At the other end of it is Toledo, which is another decent sized town of three hundred thousand or so. A little bit north of that is Detroit, which is a much larger city. However again, in between, there is a great deal of farmland and there are opportunities out there.

What we have done over the years is really developed a way to lend to farmers that helps them and helps us. What we have found is that equipment lending is a very low margin, really challenging business, so we leave that business to the credit unions. We will finance crops and real estate, and that is our niche. We will normally sell the credit forty to sixty percent of the time. Over time, there might be an issue with it. However, by selling the credit you get to see income now. You do not have to worry about the credit risk later. We balance our portfolio in that way.

What we have found over the years, is that the AG industry is the exact opposite of the traditional economy. This means you are always balancing on the needs of your loan portfolio. That is because unlike a traditional market, with the recession we are in right now, AG preforms very, very well. Before that, when the regular economy was doing great, AG was a little bit of a struggle. It was a struggle in the market. They always balance each other out. I think that really helps us for the long term because you always have a piece of your business that is going well.

The other piece that we do well is we have seven dedicated agricultural lenders and that is all they do. Most of our competitors use commercial lenders and they do agricultural lending off the corner of their desk. Our team of AG bankers averages over thirty years in the business and each one has their own active farm. Therefore, they know exactly what every customer is going through. No one can pull any wool over anyone’s eyes and I think that really, really helps us. The last piece is we have been really fortunate with our government programs. There is insurance that you can buy for farmers that helps them take care of their crops, so that between ninety and ninety nine percent of the time they are covered, whether it is a good crop or a bad crop.       

CEOCFO: What, if anything, might someone miss when they are looking at Farmers & Merchants Bank for their banking or from the investment perspective?

Mr. Eller: From the customer side, I can confidently say that we have any product or service that any other bank has out there. I would say that our folks that are providing it are going to be better than the regular banker that you are using. For example, right now a good sweet spot for us is small business, business lending, commercial lending, between two and five million dollars, that size deal. We have lenders in those specialties that have been lending for thirty years. They know how to help those customers. They know what their pain points are. They know when it has been good and when it has been bad and can help them. If you look at any of the mid-sized banks out there or a super bank, such as a Bank of America or a Citi or a PNC, it is likely to be a call center person helping with that loan or a branch manager that is just fresh out of school. I will put up my thirty-year lender against any call center or any bank manager, any time of the day. Therefore, I think this makes a difference.

From the investor side, it would be a similar type of approach. If you are investing your money in a bank, you are looking for someone that is taking care of the roots of the country and is making sure that these communities are thriving. I would look to a community bank rather than a large bank, because they have a much better feel for what is going on with jobs and other pressures in those communities. If you look at the Paycheck Protection Program that we just went through, we lent just short of $90 million dollars to customers in the markets where we operate. It impacted almost twelve thousand five hundred jobs. We feel really good about being on the pulse of what we can do to help our communities. I think that as an investor, this is what you are looking for.

The other thing too, is our credit history. From the last recession in 2008/2009, maybe a little bit into 2010, there were a bunch of banks that really, really struggled and had a tough time. If you look at us for that time, we had some of the lowest delinquency rates and past dues than we have ever had, although our counties had some of the highest unemployment in the country. Our customers take care of their money. As a bank, we are extremely prudent in how we lend to these customers compared to many other banks around the country. I would say, we are not conservative, I would say we are prudent. We are wise lenders, and I think that makes a difference. We spend a lot of time really understanding our mission. We feel that our mission is to nurture lasting relationships, and by design there is nothing in there around profits. It is about relationships. I think that with community banks, how you make a difference is by focusing on relationships with your customers, with your communities, with your shareholders and, most importantly, with your employees.

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“I think that with community banks, how you make a difference is by focusing on relationships with your customers, with your communities, with your shareholders and, most importantly, with your employees.” Lars Eller