SECURTIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2005
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ________ to ________
Commision File Number 0-14492
FARMERS & MERCHANTS BANCORP, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-1469491
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
307-11 North Defiance Street, Archbold, Ohio 43502
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(Address of principal executive offices) (Zip Code)
(419) 446-2501
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Registrant's telephone number, including area code
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or Section 15(d) of the securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to such file reports), and (2) has
been subject to such filing requirements for the past 90 days Yes [X]
No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes [X] No [ ]
Indicate the number of shares of each of the issuers classes of common
stock, as of the latest practicable date:
Common Stock, No Par Value 1,300,000
- -------------------------- --------------------------------
Class Outstanding as of March 31, 2005
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
FARMERS & MERCHANTS BANCORP, INC.
INDEX
Form 10-Q Items Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets-
March 31, 2005, December 31, 2004 and March 31, 2004 1
Condensed Consolidated Statements of Net Income-
Three Months Ended March 31, 2005 and March 31, 2004 2
Condensed Consolidated Statements of Cash Flows-
Three Months Ended March 31, 2005 and March 31, 2004 3
Notes to Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 4-5
Item 3. Market Risk 5-6
Item 4. Controls and Procedures 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 6
Item 2. Changes in Securities and Use of Proceeds 6
Item 3. Defaults Upon Senior Securities 6
Item 4. Submission of Matters to an Vote of Security Holders 7
Item 5. Other Information 7
Item 6. Exhibits 7
Signatures 8
Certifications Under Section 302
Exhibit 32. Additional Exhibit - Certifications Under Section 906
ITEM 1 FINANCIAL STATEMENTS
FARMERS & MERCHANTS BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands of dollars)
March 31, December March 31,
2005 31, 2004 2004
ASSETS:
Cash and due from banks $ 14,843 $ 15,026 $ 13,444
Interest bearing deposits with banks 2,758 9,230 2,931
Federal funds sold - - 2,150
Investment Securities:
U.S. Treasury 4,988 4,852 610
U.S. Government 117,559 113,580 123,860
State & political obligations 55,842 54,647 51,850
All others 3,695 3,655 -
Loans and leases (Net of reserve for loan losses of
$6,716, $7,300, and $6,400 respectively) 468,886 472,186 485,014
Bank premises and equipment-net 15,426 15,520 15,782
Accrued interest and other assets 15,057 13,817 19,008
--------- --------- ---------
TOTAL ASSETS $ 699,054 $ 702,513 $ 714,649
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest bearing $ 51,533 $ 47,958 $ 43,214
Interest bearing 519,404 526,247 544,630
Federal funds purchased and securities
sold under agreement to repurchase 22,604 22,852 22,369
Other borrowed money 21,753 21,964 24,120
Accrued interest and other liabilities 4,942 4,647 3,587
--------- --------- ---------
Total Liabilities 620,236 623,668 637,920
SHAREHOLDERS' EQUITY:
Common stock, no par value - authorized 1,500,000
shares; issued 1,300,000 shares 12,677 12,677 12,677
Undivided profits 67,404 65,956 61,617
Accumulated other comprehensive income (1,263) 212 2,435
--------- --------- ---------
Total Shareholders' Equity 78,818 78,845 76,729
--------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY $ 699,054 $ 702,513 $ 714,649
========= ========= =========
See Notes to Condensed Consolidated Unaudited Financial Statements.
Note: The December 31, 2004 Balance Sheet has been derived from the audited
financial statements of that date.
1
FARMERS & MERCHANTS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands of dollars)
<Table>
<Caption>
Three Months Ended
March 31, 2005 March 31, 2004
INTEREST INCOME:
Loans and leases $ 7,724 $ 7,735
Investment Securities:
U.S. Treasury securities 35 26
Securities of U.S. Government agencies 932 977
Obligations of states and political subdivisions 504 511
Other 40 37
Federal funds 1 17
Deposits in banks 49 4
------- -------
Total Interest Income 9,285 9,307
INTEREST EXPENSE:
Deposits 2,682 2,465
Borrowed funds 336 303
------- -------
Total Interest Expense 3,018 2,768
------- -------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 6,267 6,539
PROVISION FOR LOAN LOSSES 96 416
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,171 6,123
OTHER INCOME:
Service charges 687 525
Other 592 612
Net securities gains 0 127
------- -------
1,279 1,264
OTHER EXPENSES:
Salaries and wages 2,047 1,960
Pension and other employee benefits 537 498
Occupancy expense (net) 163 173
Other operating expenses 1,958 1,929
------- -------
4,705 4,560
------- -------
INCOME BEFORE FEDERAL INCOME TAX 2,745 2,827
FEDERAL INCOME TAXES 712 821
------- -------
NET INCOME $ 2,033 $ 2,006
======= =======
OTHER COMPREHENSIVE INCOME (NET OF TAX):
Unrealized gains (losses) on securities $(1,475) $ 452
COMPREHENSIVE INCOME (EXPENSE) $ 558 $ 2,458
NET INCOME PER SHARE (Based upon weighted average
number of shares outstanding 1,300,000) $ 1.56 1.54
DIVIDENDS DECLARED $ 0.45 $ 0.45
See Notes to Condensed Consolidated Unaudited Financial Statements.
2
FARMERS & MERCHANTS BANCORP, INC.
CONDENSED CONSOLIDATED STATMENTS OF CASH FLOWS
(Unaudited)
(in thousands of dollars)
<Table>
<Caption>
Three Months Ended
March 31, 2005 March 31, 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,033 $ 2,006
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 302 344
Premium amortization 314 358
Discount amortization (25) (32)
Provision for loan losses 96 416
Provision (Benefit) for deferred income taxes 760 (232)
Loss on sale of fixed assets 4 35
Gain on sale of investment securities 0 (127)
Changes in Operating Assets and Liabilities:
Accrued interest receivable and other assets (699) 487
Accrued interest payable and other liabilities (295) (501)
-------- --------
Net Cash Provided (Used) by Operating Activities 2,490 2,754
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (212) (287)
Proceeds from sale of fixed assets 0 0
Proceeds from maturities of investment securities: 4,870 11,550
Proceeds from sale of investment securities: 0 11,401
Purchase of investment securities (12,565) (28,196)
Net (increase) decrease in loans and leases 3,204 (5,091)
-------- --------
Net Cash Provided (Used) by Investing Activities (4,703) (10,623)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (3,268) 12,778
Net change in short-term borrowings (248) (4,950)
Increase in long-term borrowings 0 0
Payments on long-term borrowings (211) (254)
Payments of dividends (715) (715)
-------- --------
Net Cash Provided (Used) by Financing Activities (4,442) 6,859
-------- --------
Net change in cash and cash equivalents (6,655) (1,010)
Cash and cash equivalents - Beginning of year 24,256 19,535
-------- --------
CASH AND CASH EQUIVALENTS - END OF THE YEAR $ 17,601 $ 18,525
======== ========
RECONCILIATION OF CASH AND CASH EQUIVALENTS:
Cash and cash due from banks $ 14,843 $ 13,444
Interest bearing deposits 2,758 2,931
Federal funds sold 0 2,150
-------- --------
$ 17,601 $ 18,525
======== ========
See Notes to Condensed Consolidated Unaudited Financial Statements.
3
FARMERS & MERCHANTS BANCORP, INC.
Notes to Condensed Consolidated Unaudited Financial Statements
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions for Form 10Q and Rule 10-01 of Regulation S-X;
accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 2005 are not
necessarily indicative of the results that are expected for the year
ended December 31, 2005. For further information, refer to the
consolidated financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the year ended December
31, 2004.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Statements contained in this portion of the Company's report may be
forward-looking statements, as that term is defined in the Private
Securities Litigation Reform Act of 1995. Forward-looking statements
may be identified by the use of words such as "intend," "believe,"
"expect," "anticipate," "should," "planned," "estimated," and
"potential." Such forward-looking statements are based on current
expectations, but may differ materially from those currently
anticipated due to a number of factors, which include, but are not
limited to, factors discussed in documents filed by the Company with
the Securities and Exchange Commission from time to time. Other
factors which could have a material adverse effect on the operations
of the company and its subsidiaries which include, but are not
limited to, changes in interest rates, general economic conditions,
legislative and regulatory changes, monetary and fiscal policies of
the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality and composition of the loan or
investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Bank's market
area, changes in relevant accounting principles and guidelines and
other factors over which management has no control. The
forward-looking statements are made as of the date of this report,
and the Company assumes no obligation to update the forward-looking
statements or to update the reasons why actual results differ from
those projected in the forward-looking statements.
Farmers & Merchants Bancorp, Inc. was incorporated on February 25,
1985, under the laws of the State of Ohio. Farmers & Merchants
Bancorp, Inc., and its subsidiaries The Farmers & Merchants State
Bank and Farmers & Merchants Life Insurance Company are engaged in
commercial banking and life and disability insurance, respectively.
The executive offices of Farmers & Merchants Bancorp, Inc. are
located at 307-11 North Defiance Street, Archbold, Ohio 43502.
LIQUIDITY, CAPITAL RESOURCES AND MATERIAL CHANGES IN FINANCIAL
CONDITION
Liquidity continues to remain strong with the investment portfolio
growing by $5.4 million for the quarter. $3.3 million was a shift
from loans decreasing during the quarter. Loan growth occurred in
the real estate and industrial development bond markets. The
increases were outweighed by the decreases in the consumer and
commercial portfolios. The bank focused on improving asset quality
throughout 2004 and advertising was directed toward the real estate
market. In combination, loans showed a decrease of $16.1 million
compared to March 2004. Deposits also decreased by almost $3.3
million during the first three months and by $16.9 million during
the last twelve months. As the numbers indicate the decreases on
each side of the balance sheet were closely matched. Overall,
company assets have declined in comparision to three months and one
year ago.
The economy has remained slow in the first part of 2005. Loan demand
is projected to increase when the
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
ITEM 2 local economy strenghtens. The agricultural community experienced
another good year in 2004 and planting has begun in earnest for
2005. Two strong years in 2003 and 2004 has strengthened the asset
quality of the agricultural portfolio. Increased fuel and fertilizer
costs will remain a concern for the agricultural community in 2005.
Agricultural and agricultural real estate portfolios comprise almost
22.5% of the bank's loan portfolio.
Commercial activity has been the slowest with competition being
extremely high. This places pressure on the interest income yields
to keep pace with the increases in the cost of funds. A slight
tightening of the margin has occurred during 2004 and first quarter
2005. This is discussed more in Item 3 Market Risk.
The bank has not been aggressively pricing its deposits. The
decrease in deposits has come from run off of the CD portfolio,
particularly in public funds. The bank maintains rates to be in the
middle of the market rather than the high end. This strategy is used
to match what is occurring on the asset side of the balance sheet.
The bank could quickly adjust its stategy if and when loan demand
increases.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
The income statement shows yields on all portfolios have increased
compared to 2004. Overall net interest income is lower by $272
thousand for the three months ended March 2005 from 2004 income.
Maintaining the margin is an important part of the ongoing
profitability of the company. The margin had a 3 basis point
decrease when comparing year to date 2005 to 2004.
Net income for the year is up $27 thousand over 2004. The largest
determinant for the improved profitability in 2005 is the lower loan
loss provision, $96 thousand compared to $416 thousand,
respectively. Past dues continue to be at low levels for the bank
and improved asset quality continues to remain a focus. Unrealized
gain on securites has experienced an almost $2 million swing to a
loss position with the rising rate environment. The bank does not
plan on selling any of those investments to realize the loss. Net
income per share ends slightly higher for the quarter at $1.56
compared to $1.54 for March ended 2004.
The company is focusing on growth for 2005. With the improved asset
quality, increased support staff and SOX 404 compliance completed,
the direction of the company is to expand its operations.
The company continues to be well-capitalized as the capital ratios
below show:
Primary Ratio 12.33%
Tier I Leverage Ratio 11.43%
Risk Based Capital Tier 1 15.93%
Total Risk Based Capital 17.18%
Stockholders' Equity/Total Assets 11.27%
ITEM 3 MARKET RISK
Market risk is the exposure to loss resulting from changes in
interest rates and equity prices. The primary market risk to which
the Company is subject is interest rate risk. The majority of the
Company's interest rate risk arises, from the instruments, positions
and transactions entered into for the purposes, other than trading,
such as loans, available for sale securities, interest bearing
deposits, short term borrowings and long term borrowings. Interest
rate risk occurs when interest bearing assets and liabilities
reprice at different times as market interest rates change. For
example,
5
ITEM 3 MARKET RISK (Continued)
if fixed rate assets are funded with variable rate debt, the spread
between asset and liability rates will decline or turn negative if
rates increase.
Interest rate risk is managed within an overall asset/liability
framework for the Company. The principal objectives of
asset/liability management are to manage sensitivity of net interest
spreads and net income to potential changes in interest rates.
Funding positions are kept within predetermined limits designed to
ensure that risk-taking is not excessive and that liquidity is
properly managed. The Company employs a sensitivity analysis in the
form of a net interest rate shock as shown in the table following.
Interest Rate Shock on Net Interest Rate Shock on
Interest Margin Net Interest Income
Net Interest %Change to Rate Rate Cumulative %Change to
Margin (Ratio) Flat Rate Direction Changes by Total ($000) Flat Rate
- -------------- ---------- --------- ---------- ------------ ---------
3.97% 1.422% Rising 3.000% 6,543 -0.021%
3.94% 0.695% Rising 2.000% 6,526 -0.280%
3.92% -0.046% Rising 1.000% 6,509 -0.552%
3.92% 0.000% Flat 0.000% 6,545 0.000%
3.97% 1.372% Falling -1.000% 6,672 1.944%
3.84% -2.019% Falling -2.000% 6,472 -1.109%
3.63% -7.266% Falling -3.000% 6,145 -6.110%
As the table shows, should rates increase as predicted, the bank's
exposure to interest rate risk is minimal. To the extent that the
bank has the ability not to instantly reprice the liability side of
the balance sheet, the risk would decrease even more. With the rate
change increases that have occurred during the last quarter, the
bank did experience a decrease in net interest income as predicted
with the December table and reflected in the positive numbers shown
for a 100 basis point falling rate shock. Very little movement of
interest bearing asset or liability balances has occurred during the
last quarter that would effect the maturity or pricing of those
instruments. The falling rate scenario shows the highest risk on a
300 basis point drop. With the Federal Reserve upward movement that
has occurred so far this year, this scenario seems most unlikely.
ITEM 4 CONTROLS AND PROCEDURES
As of March 31 2005, an evaluation was performed under the
supervision and with the participation of the Company's management
including the CEO and CFO, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including the CEO and
CFO, concluded that the Company's disclosure controls and procedures
were effective as of March 31, 2005. There have been no significant
changes in the Company's internal controls that occurred for the
quarter ended March 31, 2005.
PART II
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
6
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5 OTHER INFORMATION
Richard Lis has joined the company as Chief Lending Officer. He
replaces Daniel Schutt who left the company to assume the presidency
at another financial institution. Mr. Lis brings many years of
banking experience, especially in the credit adminstration area. He
was worked at community banks and also larger institutions.
ITEM 6 EXHIBITS
3.1 Articles of Incorporation of the Registrant (incorporated by
reference to Registrant's Quarterly Report on Form 10-Q filed
with the Commission on May 10, 2004)
3.2 Code of Regulations of the Registrant (incorpoated by
reference to Registrant's Quarterly Report on Form 10-Q filed
with the Commission on May 10, 2004)
10.1 Change in Control Agreement executed by and between the
Company and Paul S. Siebenmorgen on February 18, 2005,
incorporated by reference to Exhibit 10.1 of the Company's
Form 8-K filed with the Commission on February 22, 2005.
10.2 Change in Control Agreement executed by and between the
Company and Barbara J. Britenriker on February 18, 2005,
incorporated by reference to Exhibit 10.2 of the Company's
Form 8-K filed with the Commission on February 22, 2005.
10.3 Change in Control Agreement executed by and between the
Company and Edward A. Leininger on February 18, 2005,
incorporated by reference to Exhibit 10.3 of the Company's
Form 8-K filed with the Commission on February 22, 2005.
10.4 Change in Control Agreement executed by and between the
Company and Rex D. Rice on February 18, 2005, incorporated by
reference to Exhibit 10.4 of the Company's Form 8-K filed with
the Commission on February 22, 2005.
10.5 Employment Agreement by and between the Company and Paul S.
Siebenmorgen, dated May 7, 2004, incorporated by reference to
exhibit 10.5 of the Company's Form 8-K filed with the
Commission on February 22, 2005.
31.1 Rule 13-a-14(a) Certification -CEO
31.2 Rule 13-a-14(a) Certification -CFO
32.1 Section 1350 Certification - CEO
32.2 Section 1350 Certification - CFO
7
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, theeunto duly authorized.
Farmers & Merchants Bancorp, Inc.,
Date: April 27, 2005 By: /s/ Paul S. Siebenmorgen
Paul S. Siebenmorgen
President and CEO
Date: April 27, 2005 By: /s/ Barbara J. Britenriker
Barbara J. Britenriker
Exec. Vice-President and CFO
8
EXHIBIT INDEX
EX.NO DESCRIPTION
- ----- ----------------------------------
31.1 Rule 13-a-14(a) Certification - CEO
31.2 Rule 13-a-14(a) Certification - CFO
32.1 Section 1350 Certification - CEO
32.2 Section 1350 Certification - CFO