UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 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
Commission File Number 0-14492
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FARMERS & MERCHANTS BANCORP, INC.
---------------------------------
OHIO 34-1469491
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
307-11 North Defiance Street
Archbold, Ohio 43502
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(Address of principal Executive offices) (Zip Code)
Registrant's telephone number, including area code (419)446-2501
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
- ------------------------ -------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common shares without par value
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(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [ X ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [ X ]
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 file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Ace.
(Check one):
Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ]
Indicated by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
As of June 30, 2005, the aggregate market value of the registrant's common stock
held by non-affiliates of the registrant was $134,616,460.00.
As of February 27, 2006, the Registrant had 1,299,980 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K - Portions of the definitive Proxy Statement for the 2005
Annual Meeting of Shareholders of Farmers & Merchants Bancorp, Inc.
FARMERS & MERCHANTS BANCORP, INC.
TABLE OF CONTENTS
Form 10-K Items PAGE
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Item 1. Business 3 - 8
Item 1A Risk Factors 7 - 8
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Financial Statements and Supplementary Data 26
Item 9. Disagreements on Accounting and Financial Disclosure 52
Item 9a. Controls and Procedures 52
Item 10. Directors and Executive Officers of the Registrant 56
Item 11. Management Remuneration and Transactions 57
Item 12. Security Ownership of Certain Beneficial Owners and Management 58
Item 13. Certain Relationships and Related Transactions 58
Item 14. Principal Accountant Fees and Services 58
Item 15. Exhibits, Financial Schedules and Reports on Form 8-K 58
Signatures and Certifications 60
Total Pages: 66
Statements contained in this portion of the Company's annual 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 such words 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 could differ from those projected in the
forward-looking statements.
PART 1.
ITEM 1. BUSINESS:
GENERAL
Farmers & Merchants Bancorp, Inc. (Company) is a bank holding company under the
laws of Ohio and was incorporated in 1985. Our primary subsidiary, The Farmers &
Merchants State Bank (Bank) is a community bank in Northwest Ohio, as it has
been since 1897. Our only other subsidiary, Farmers & Merchants Life Insurance
Company, a reinsurance company for life, accident and health insurance for the
Bank's consumer credits, was formed in 1992. We report our financial condition
and net income on a consolidated basis and we report only one segment.
Our executive offices are located at 307-11 North Defiance Street, Archbold,
Ohio 43502, and our telephone number is (419) 446-2501.
NATURE OF ACTIVITIES
The Farmers & Merchants State Bank engages in general commercial banking and
savings business. Our activities include commercial and residential mortgage,
consumer, and credit card lending activities. Because our Bank's branches are
located in Northwest Ohio, a substantial amount of our loan portfolio is
comprised of loans made to customers in the farming industry for such things as
farm land, farm equipment, livestock and general operation loans for seed,
fertilizer, feed, etc. Other types of lending activities include loans for home
improvements, student loans, and loans for such items as autos, trucks,
recreational vehicles, mobile homes, motorcycles, etc. We have previously
engaged in direct finance leasing and have invested in leveraged type leases,
although the activity in this area has since ceased.
We also provide checking account services, as well as, savings and other time
deposit services such as certificates of deposits. In addition, ATM's (automated
teller machines) are also provided in our offices in Archbold, Wauseon, Stryker,
West Unity, Bryan, Delta, Napoleon, Montpelier, Swanton, and Defiance. Two ATM's
are also located at Sauder Woodworking Co., Inc., a major employer in Archbold.
Additional locations are at Northwest State Community College, Archbold;
Williams County Hospital, Bryan; Fairlawn Haven Wyse Commons, Archbold; Repp
Oil, Fayette; Delta Eagles, Bryan Eagles; and Sauder Village Barn Restaurant,
Archbold.
Farmers & Merchants Life Insurance Company was established to provide services
to our customers through the issuance of life and disability insurance policies.
Our Bank's lending officers are the selling agents of the policies to customers.
The activities of Farmers & Merchants Life Insurance Co. are not significant to
the consolidated company.
F&M Investments, the brokerage department of the Bank, opened for business in
April, 1999. Securities are offered through Raymond James Financial Services,
Inc.
The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956. Our subsidiary bank is in turn regulated and examined by
the Ohio Division of Financial Institutions, the Federal Deposit Insurance
Corporation and the Federal Reserve System. The activities of our bank
subsidiary are also subject to other federal and state laws and regulations,
including usury and consumer credit laws, state laws relating to fiduciaries,
the Federal Truth-in-Lending Act and Regulation Z as promulgated thereunder by
the Board of Governors, the Truth in Savings Act, the Bank Bribery Act, the
Competitive Equality Banking Act of 1987, the Expedited Funds Availability Act,
the Community Reinvestment Act, the FDICIA (Federal Deposit Insurance
Corporation Insurance Act), FIRREA (Federal Institutions Reform, Recovery, and
Enforcement Act of 1989), the Bank Merger Act, and the Graham-Leach-Bliley Act
regarding financial modernization among others.
The commercial banking business in the geographical area in which the Bank
operates is highly competitive. In our banking activities, we compete directly
with other commercial banks and savings and loan institutions in each of our
operating localities. In a number of our locations, we compete against entities
which are much larger than us. The primary factors in competing for loans and
deposits are the rates charged as well as location and quality of the services
provided.
At December 31, 2005, we had 265 full time equivalent employees. The employees
are not represented by a collective bargaining unit. We provide our employees
with a comprehensive benefit program, some of which are contributory. We
consider our employee relations to be excellent.
3
SUPERVISION AND REGULATION
General
The Company is a corporation organized under the laws of the State of Ohio. The
business in which the Company and its subsidiary are engaged is subject to
extensive supervision, regulation and examination by various bank regulatory
authorities. The supervision, regulation and examination to which the Company
and its subsidiary are subject are intended primarily for the protection of
depositors and the deposit insurance funds that insure the deposits of banks,
rather than for the protection of shareholders.
Several of the more significant regulatory provisions applicable to banks and
bank holding companies to which the Company and its subsidiary are subject are
discussed below, along with certain regulatory matters concerning the Company
and its subsidiary. To the extent that the following information describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory provisions. Any change in applicable law or
regulation may have a material effect on the business and prospects of the
Company and its subsidiary.
Regulatory Agencies
The Company is a registered bank holding company and is subject to inspection,
examination and supervision by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") pursuant to the Bank Holding Company Act of
1956, as amended.
The Bank is an Ohio chartered commercial bank. It is subject to regulation and
examination by both the Ohio Division of Financial Institutions (the "ODFI") and
the FDIC.
Holding Company Activities
As a bank holding company incorporated and doing business within the State of
Ohio, the Company is subject to regulation and supervision under the Bank
Holding Act of 1956, as amended (the "Act"). The Company is required to file
with the Federal Reserve Board on a quarterly basis information pursuant to the
Act. The Federal Reserve Board may conduct examinations or inspections of the
Company and its subsidiaries.
The Company is required to obtain prior approval from the Federal Reserve Board
for the acquisition of more than five percent of the voting shares or
substantially all of the assets of any bank or bank holding company. In
addition, the Company is generally prohibited by the Act from acquiring direct
or indirect ownership or control of more than five percent of the voting shares
of any company which is not a bank or bank holding company and from engaging
directly or indirectly in activities other than those of banking, managing or
controlling banks or furnishing services to its subsidiaries. The Company may,
however, subject to the prior approval of the Federal Reserve Board, engage in,
or acquire shares of companies engaged in activities which are deemed by the
Federal Reserve Board by order or by regulation to be so closely related to
banking or managing and controlling a bank as to be a proper activity.
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was enacted
into law. The GLB Act made sweeping changes with respect to the permissible
financial services which various types of financial institutions may now
provide. The Glass-Steagall Act, which had generally prevented banks from
affiliation with securities and insurance firms, was repealed. Pursuant to the
GLB Act, bank holding companies may elect to become a "financial holding
company," provided that all of the depository institution subsidiaries of the
bank holding company are "well capitalized" and "well managed" under applicable
regulatory standards.
Under the GLB Act, a bank holding company that has elected to become a financial
holding company may affiliate with securities firms and insurance companies and
engage in other activities that are financial in nature. Activities that are
"financial in nature" include securities underwriting, dealing and
market-making, sponsoring mutual funds and investment companies, insurance
underwriting and agency, merchant banking, and activities that the Federal
Reserve Board has determined to be closely related to banking. No Federal
Reserve Board approval is required for the Company to acquire a company, other
than a bank holding company, bank or savings association, engaged in activities
that are financial in nature or incidental to activities that are financial in
nature, as determined by the Federal Reserve Board. Prior Federal Reserve Board
approval is required before the Company may acquire the beneficial ownership or
control of more than 5% of the voting shares, or substantially all of the
assets, of a bank holding company, bank or savings association. If any
subsidiary bank of the Company ceases to be "well capitalized" or "well managed"
under applicable regulatory
4
standards, the Federal Reserve Board may, among other actions, order the Company
to divest the subsidiary bank. Alternatively, the Company may elect to conform
its activities to those permissible for a bank holding company that is not also
a financial holding company. If any subsidiary bank of the Company receives a
rating under the Community Reinvestment Act of 1977 of less than satisfactory,
the Company will be prohibited from engaging in new activities or acquiring
companies other than bank holding companies, banks or savings associations. The
Company has not elected to become a financial holding company and has no current
intention of making such an election.
Affiliate Transactions
Various governmental requirements, including Sections 23A and 23B of the Federal
Reserve Act, limit borrowings by holding companies and non-bank subsidiaries
from affiliated insured depository institutions, and also limit various other
transactions between holding companies and their non-bank subsidiaries, on the
one hand, and their affiliated insured depository institutions on the other.
Section 23A of the Federal Reserve Act also generally requires that an insured
depository institution's loan to its non-bank affiliates be secured, and Section
23B of the Federal Reserve Act generally requires that an insured depository
institution's transactions with its non-bank affiliates be on arms-length terms.
Interstate Banking and Branching
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
("Riegle-Neal"), subject to certain concentration limits and other requirements,
bank holding companies such as the Company are permitted to acquire banks and
bank holding companies located in any state. Any bank that is a subsidiary of a
bank holding company is permitted to receive deposits, renew time deposits,
close loans, service loans and receive loan payments as an agent for any other
bank subsidiary of that bank holding company. Banks are permitted to acquire
branch offices outside their home states by merging with out-of-state banks,
purchasing branches in other states and establishing de novo branch offices in
other states. The ability of banks to acquire branch offices is contingent,
however, on the host state having adopted legislation "opting in" to those
provisions of Riegle-Neal. In addition, the ability of a bank to merge with a
bank located in another state is contingent on the host state not having adopted
legislation "opting out" of that provision of Riegle-Neal. The Company could
from time to time use Riegle-Neal to acquire banks in additional states.
Control Acquisitions
The Change in Bank Control Act prohibits a person or group of persons from
acquiring "control" of a bank holding company, unless the Federal Reserve Board
has been notified and has not objected to the transaction. Under the rebuttable
presumption established by the Federal Reserve Board, the acquisition of 10% or
more of a class of voting stock of a bank holding company with a class of
securities registered under Section 12 of the Exchange Act, such as the Company,
would, under the circumstances set forth in the presumption, constitute
acquisition of control of the bank holding company. In addition, a company is
required to obtain the approval of the Federal Reserve Board under the Bank
Holding Company Act before acquiring 25% (5% in the case of an acquiror that is
a bank holding company) or more of any class of outstanding voting stock of a
bank holding company, or otherwise obtaining control or a "controlling
influence" over that bank holding company.
Liability for Banking Subsidiaries
Under the current Federal Reserve Board policy, a bank holding company is
expected to act as a source of financial and managerial strength to each of its
subsidiary banks and to maintain resources adequate to support each subsidiary
bank. This support may be required at times when the bank holding company may
not have the resources to provide it. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a U.S. federal bank
regulatory agency to maintain the capital of a subsidiary bank would be assumed
by the bankruptcy trustee and entitled to priority of payment. Any depository
institution insured by the FDIC can be held liable for any loss incurred, or
reasonably expected to be incurred, by the FDIC in connection with (1) the
"default" of a commonly controlled FDIC-insured depository institution; or (2)
any assistance provided by the FDIC to both a commonly controlled FDIC-insured
depository institution "in danger of default." The Company's subsidiary bank is
an FDIC-insured depository institution. If a default occurred with respect to
the Bank, any capital loans to the Bank from its parent holding company would be
subordinate in right of payment to payment of the Bank's depositors and certain
of its other obligations.
Regulatory Capital Requirements
The Company is required by the various regulatory authorities to maintain
certain capital levels. Bank holding companies are required to maintain minimum
levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital falls
5
below minimum guideline levels, a bank holding company, among other things, may
be denied approval to acquire or establish additional banks or non-bank
businesses. The required capital levels and the Company's capital position at
December 31, 2004 are summarized in the table included in Note 14 to the
consolidated financial statements.
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
and the regulations promulgated under FDICIA, among other things, established
five capital categories for insured depository institutions-well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized-and requires U.S. federal bank regulatory agencies
to implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements based on these
categories. Unless a bank is well capitalized, it is subject to restrictions on
its ability to offer brokered deposits and on certain other aspects of its
operations. An undercapitalized bank must develop a capital restoration plan and
its parent bank holding company must guarantee the bank's compliance with the
plan up to the lesser of 5% of the banks or thrift's assets at the time it
became undercapitalized and the amount needed to comply with the plan. As of
December 31, 2005, the Company's banking subsidiary was well capitalized
pursuant to these prompt corrective action guidelines.
Dividend Restrictions
The ability of the Company to obtain funds for the payment of dividends and for
other cash requirements will be largely dependent on the amount of dividends
which may be declared by its banking subsidiary. Various U.S. federal statutory
provisions limit the amount of dividends the Company's banking subsidiaries can
pay to the Company without regulatory approval. Dividend payments by the Bank
are limited to its retained earnings during the current year and its prior two
years.
Deposit Insurance Assessments
The deposits of the Company's banking subsidiary are insured up to regulatory
limits by the FDIC, and, accordingly, are subject to deposit insurance
assessments to maintain the Bank Insurance Fund (the "BIF") and/or the Savings
Association Insurance Fund (the "SAIF") administered by the FDIC.
Depositor Preference Statute
In the "liquidation or other resolution" of an institution by any receiver, U.S.
federal legislation provides that deposits and certain claims for administrative
expenses and employee compensation against the insured depository institution
would be afforded a priority over general unsecured claims against that
institution, including federal funds and letters of credit.
Government Monetary Policy
The earnings of the Company are affected primarily by general economic
conditions, and to a lesser extent by the fiscal and monetary policies of the
federal government and its agencies, particularly the Federal Reserve. Its
policies influence, to some degree, the volume of bank loans and deposits, and
interest rates charged and paid thereon, and thus have an effect on the earnings
of the Company's subsidiary Bank.
Additional Regulation
The Bank is also subject to federal regulation as to such matters as required
reserves, limitation as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirement of
their own securities, limitations upon the payment of dividends and other
aspects of banking operations. In addition, the activities and operations of the
Bank are subject to a number of additional detailed, complex and sometimes
overlapping laws and regulations. These include state usury and consumer credit
laws, state laws relating to fiduciaries, the Federal Truth-in-Lending Act and
Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the
Fair Credit Reporting Act, the Truth in Savings Act, the Community Reinvestment
Act, anti-redlining legislation and antitrust laws.
Future Legislation
Changes to the laws and regulations, both at the federal and state levels, can
affect the operating environment of the Company and its subsidiary in
substantial and unpredictable ways. The Company cannot accurately predict
whether those changes in laws and
6
regulations will occur, and, if those changes occur, the ultimate effect they
would have upon the financial condition or results of operations of the Company
or its subsidiary.
Available Information:
The Company maintains an Internet web site at the following internet address:
http://www.fm-bank.com. The Company files reports with the Securities and
Exchange Commission (SEC). Copies of all filings made with the SEC may be read
and copied at the SEC's Public Reference Room, 450 Fifth Street, Washington, DC,
20549. You may obtain information about the SEC's Public Reference Room by
calling (800/SEC-0330). Because the Company makes its filing with the SEC
electronically, you may access such reports at the SEC's website, www.sec.gov.
The Company makes available, free of charge through its internet address, copies
of its annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to these reports as soon as reasonable
practicable after such materials have been filed with or furnished to the SEC.
Copies of these documents may also be obtained, either in electronic or paper
form, by contacting Barbara J. Britenriker, Chief Financial Officer of the
Company at (419) 446-2501.
ITEM 1A. RISK FACTORS
SIGNIFICANT COMPETITION FROM AN ARRAY OF FINANCIAL SERVICE PROVIDERS
Our ability to achieve strong financial performance and a satisfactory
return on investment to shareholders will depend in part on our ability to
expand our available financial services. In addition to the challenge of
attracting and retaining customers for traditional banking services, our
competitors now include securities dealers, brokers, mortgage bankers,
investment advisors and finance and insurance companies who seek to offer
one-stop financial services to their customers that may include services that
banks have not been able or allowed to offer to their customers in the past. The
increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems and the
accelerating pace of consolidation among financial services providers. If we
fail to adequately address each of the competitive pressures in the banking
industry, our financial condition and results of operations could be adversely
affected.
CREDIT RISK
The risk of nonpayment of loans is inherent in commercial banking. Such
nonpayment could have an adverse effect on the Company's earnings and our
overall financial condition as well as the value of our common stock. Management
attempts to reduce the Bank's credit exposure by carefully monitoring the
concentration of its loans within specific industries and through loan
application and approval procedures. However, there can be no assurance that
such monitoring and procedures will reduce such lending risks. Credit losses can
cause insolvency and failure of a financial institution and, in such event, its
shareholders could lose their entire investment. For a more information on the
exposure of the Company and the Bank to credit risk, see the section under Part
II, Item 7 of this Form 10-K captioned "Loan Portfolio."
SUSCEPTIBILITY TO CHANGES IN REGULATION
Any changes to state and federal banking laws and regulations may
negatively impact our ability to expand services and to increase the value of
our business. We are subject to extensive state and federal regulation,
supervision, and legislation that govern almost all aspects of our operations.
These laws may change from time to time and are primarily intended for the
protection of consumers, depositors and the deposit insurance funds. In
addition, the Company's earnings are affected by the monetary policies of the
Board of Governors of the Federal Reserve. These policies, which include
regulating the national supply of bank reserves and bank credit, can have a
major effect upon the source and cost of funds and the rates of return earned on
loans and investments. The Federal Reserve influences the size and distribution
of bank reserves through its open market operations and changes in cash reserve
requirements against member bank deposits. The Gramm-Leach-Bliley Act regarding
financial modernization that became effective in November, 1999 removed many of
the barriers to the integration of the banking, securities and insurance
industries and is likely to increase the competitive pressures upon the Bank. We
cannot predict what effect such Act and any presently contemplated or future
changes in the laws or regulations or their interpretations would have on us,
but such changes could be materially adverse to our financial performance. For a
more information on this subject, see the section under Part I, Item 1 of this
Form 10-K captioned "Supervision and Regulation."
7
INTEREST RATE RISK
Changes in interest rates affect our operating performance and financial
condition in diverse ways. Our profitability depends in substantial part on our
"net interest spread," which is the difference between the rates we receive on
loans and investments and the rates we pay for deposits and other sources of
funds. Our net interest spread will depend on many factors that are partly or
entirely outside our control, including competition, federal economic, monetary
and fiscal policies, and economic conditions generally. Historically, net
interest spreads for other financial institutions have widened and narrowed in
response to these and other factors, which are often collectively referred to as
"interest rate risk." Over the last few years, the Bank, along with most other
financial institutions, has experienced a "margin squeeze" as lower interest
rates have made it difficult to maintain a more favorable net interest spread.
The Bank manages interest rate risk within an overall asset/liability
framework. 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. In the event that our asset/liabilities management strategies are
unsuccessful, our profitability may be adversely affected. For more information
regarding the Company's exposure to interest rate risk, see Part II, Item 7A of
this Form 10-K.
ATTRACTION AND RETENTION OF KEY PERSONNEL
Our success depends upon the continued service of our senior management
team and upon our ability to attract and retain qualified financial services
personnel. Competition for qualified employees is intense. In our experience, it
can take a significant period of time to identify and hire personnel with the
combination of skills and attributes required in carrying out our strategy. If
we lose the services of our key personnel, or are unable to attract additional
qualified personnel, our business, financial condition, results of operations
and cash flows could be materially adversely affected.
DIVIDEND PAYOUT RESTRICTIONS
We currently pay a quarterly dividend on our common shares. However, there
is no assurance that we will be able to pay dividends in the future. Dividends
are subject to determination and declaration by our board of directors, which
takes into account many factors. The declaration of dividends by us on our
common stock is subject to the discretion of our board and to applicable state
and federal regulatory limitations. The Company's ability to pay dividends on
its common stock depends on its receipt of dividends from the Bank. The Bank is
subject to restrictions and limitations in the amount and timing of the
dividends it may pay to the Company.
ANTI-TAKEOVER PROVISIONS
Provisions of our Articles of Incorporation and Ohio law could have the
effect of discouraging takeover attempts which certain stockholders might deem
to be in their interest. These anti-takeover provisions may make us a less
attractive target for a takeover bid or merger, potentially depriving
shareholders of an opportunity to sell their shares of common stock at a premium
over prevailing market prices as a result of a takeover bid or merger.
OPERATIONAL RISKS
We are subject to certain operations risks, including, but not limited to,
data processing system failures and errors, customer or employee fraud and
catastrophic failures resulting from terrorist acts or natural disasters. We
maintain a system of internal controls to mitigate against such occurrences and
maintain insurance coverage for such risks that are insurable, but should such
an event occur that is not prevented or detected by our internal controls,
uninsured or in excess of applicable insurance limits, it could have a
significant adverse impact on our business, financial condition or results of
operations.
LIMITED TRADING MARKET
Our common stock is not listed on any exchange or The Nasdaq Stock Market.
While our stock is currently quoted on the Pink Sheets, it trades infrequently.
8
ITEM 2. PROPERTIES
Our principal office is located in Archbold, Ohio.
The Bank operates from the facilities at 307-11 North Defiance Street. In
addition, the Bank owns the property from 200 to 208 Ditto Street, Archbold,
Ohio, which it uses for Bank parking and a community mini-park area. The Bank
owns real estate at two locations, 207 Ditto Street and 209 Ditto Street in
Archbold, Ohio upon which the bank built a commercial building to be used for
storage, and a parking lot for company vehicles and employee parking. The Bank
also owns real estate across from the main facilities to provide for parking.
The Bank completed construction in February 2003 of an operations center at 622
Clydes Way in Archbold, Ohio to accommodate our growth.
The Bank owns all of its branch locations. Current locations of retail banking
services are:
Branch Location
- ---------------- ------------------------------
Archbold, Ohio 1313 South Defiance Street
Wauseon, Ohio 1130 North Shoop Avenue
119 North Fulton Street
Stryker, Ohio 300 South Defiance Street
West Unity, Ohio 200 West Jackson Street
Bryan, Ohio 924 W. High Street
1000 South Main Street
Delta, Ohio 101 Main Street
Montpelier, Ohio 225 West Main Street
1150 East Main Street
Napoleon, Ohio 2255 Scott Street
Swanton, Ohio 7 Turtle Creek Circle
Defiance, Ohio 1175 Hotel Drive
The majority of the above locations have drive-up service facilities.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine
proceedings incidental to the business of the Bank or the Company, to which we
are a party or of which any of our properties are the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted during the fourth quarter of the year covered by this
report to a vote of the security holders through solicitation of proxies or
otherwise.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is not quoted on the National Association of Securities Dealers
Automated Quotations System (NASDAQ) or any other market or exchange.
9
Our common stock is traded in the principal market area of Fulton, Williams, and
Henry Counties, Ohio. We had one market maker that set a price for our stock;
however, private sales continue to occur. The high and low sale price was from
sales of which we have been made aware by our Market Maker. The high and low
sale prices known to our management are as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ---------- -----------
2005 High $ 115.00 $ 115.00 $ 115.00 $ 100.00
Low $ 110.00 $ 110.00 $ 101.25 $ 81.25
2004 High $ 115.00 $ 115.00 $ 123.00 $ 115.00
Low $ 100.00 $ 100.00 $ 100.00 $ 100.00
The Bank acted as transfer agent for the Company's common stock until December
17, 2004. After December 17, 2004 the Company utilizes Register and Transfer as
its transfer agent. .
As of February 17, 2006, there were 2050 record holders of our common stock.
Dividends are declared and paid quarterly. Per share dividends declared for the
years ended 2005 and 2004 are as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
----------- ----------- ----------- ----------------------
2005 $.45 $.45 $.45 $.65 $ 2.00
2004 $.45 $.45 $.45 $.55 $ 1.90
The ability of the Company to pay dividends is limited by the dividend that the
Company receives from the Bank. The Bank may pay as dividends to the Company its
retained earnings during the current year and its prior two years. Currently,
such limitation on the payment of dividends from the Bank to the Company does
not materially restrict the Company's ability to pay dividends to its
shareholders.
The Company has a long-term stock incentive plan under which 1,000 shares of
restricted stock were issued to 38 employees of the Bank during 2005. Under the
plan, the shares vest 100% in three years. Due to employee termination, there
were 20 shares forfeited during 2005. Compensation expense applicable to the
restricted stock totaled $14 thousand for the year ended December 31, 2005.
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
10
SUMMARY OF CONSOLIDATED STATEMENT OF INCOME - UNAUDITED
(In Thousands)
-------------------------------------------------------------------
2005 2004 2003 2002 2001
-------------------------------------------------------------------
Summary of Income:
Interest income $ 38,716 $ 37,962 $ 41,107 $ 43,424 $ 48,945
Interest expense 13,539 11,222 14,283 18,979 25,448
----------- ----------- ----------- ----------- -----------
Net Interest Income 25,177 26,740 26,824 24,445 23,497
Provision for loan loss (425) 885 6,903 2,194 2,632
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan loss 25,602 25,855 19,921 22,251 20,865
Other income (expense), net (13,824) (14,052) (9,836) (11,864) (11,217)
----------- ----------- ----------- ----------- -----------
Net income before income taxes 11,778 11,803 10,085 10,387 9,648
Income taxes 3,202 3,573 2,459 2,989 2,892
----------- ----------- ----------- ----------- -----------
Net income $ 8,576 $ 8,230 $ 7,626 $ 7,398 $ 6,756
=========== =========== =========== =========== ===========
Per Share of Common Stock:
Earnings per common share outstanding (Based on weighted
average number of shares outstanding)
Net income $ 6.60 $ 6.33 $ 5.87 $ 5.69 $ 5.20
=========== =========== =========== =========== ===========
Dividends $ 2.00 $ 1.90 $ 6.75 $ 1.65 $ 1.60
=========== =========== =========== =========== ===========
Weighted average number of shares outstanding 1,299,682 1,300,000 1,300,000 1,300,000 1,300,000
=========== =========== =========== =========== ===========
SUMMARY OF CONSOLIDATED BALANCE SHEET - UNAUDITED
(In Thousands)
--------------------------------------------------------------------
2005 2004 2003 2002 2001
--------------------------------------------------------------------
Total assets $ 720,945 $ 702,513 $ 705,703 $ 726,486 $ 683,626
Loans 458,704 472,211 480,339 497,515 468,243
Total Deposits 576,297 574,205 575,066 576,373 566,157
Stockholders' equity 82,588 78,845 74,856 77,738 70,350
Key Ratios
Return on average equity 10.62% 10.72% 9.87% 9.93% 9.73%
Return on average assets 1.22% 1.16% 1.06% 1.06% 1.02%
Loan to deposits 79.65% 82.24% 83.53% 86.32% 82.71%
Capital to assets 11.46% 11.22% 10.61% 10.70% 10.29%
Dividend payout 30.31% 30.02% 115.07% 28.99% 30.79%
11
ITEM 7. MANAGEMENTS DICUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CRITICAL ACCOUNTING POLICY AND ESTIMATES
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, and
the Company follows general practices within the financial services industry in
which it operates. At times the application of these principles requires
Management to make assumptions, estimates and judgments that affect the amounts
reported in the financial statements and accompanying notes. These assumptions,
estimates and judgments are based on information available as of the date of the
financial statements. As this information changes, the financial statements
could reflect different assumptions, estimates and judgments. Certain policies
inherently have a greater reliance on assumptions, estimates and judgments and
as such have a greater possibility of producing results that could be materially
different than originally reported. Examples of critical assumptions, estimates
and judgments are when assets and liabilities are required to be recorded at
fair value, when a decline in the value of an asset not required to be recorded
at fair value warrants an impairment write-down or valuation reserve to be
established, or when an asset or liability must be recorded contingent upon a
future event.
All significant accounting policies followed by the Company are presented in
Note 1 to the consolidated financial statements. These policies, along with the
disclosures presented in the notes to the consolidated financial statements and
in the management discussion and analysis of financial condition and results of
operations, provide information on how significant assets and liabilities are
valued and how those values are determined for the financial statements. Based
on the valuation techniques used and the sensitivity of financial statement
amounts to assumptions, estimates and judgments underlying those amounts,
management has identified the determination of the Allowance for Loan and Lease
Losses (ALLL) and the valuation of its Mortgage Servicing Rights as the
accounting areas that requires the most subjective or complex judgments, and as
such could be the most subject to revision as new information becomes available.
The ALLL represents management's estimate of credit losses inherent in the
Bank's loan portfolio at the report date. The estimate is a composite of a
variety of factors including past experience, collateral value, and the general
economy. ALLL includes a specific portion, a formula driven portion, and a
general nonspecific portion. The collection and ultimate recovery of the book
value of the collateral, in most cases, is beyond our control.
The Company is also required to estimate the value of its Mortgage Servicing
Rights. The Company recognizes as separate assets rights to service fixed rate
single-family mortgage loans that it has sold without recourse but services for
others for a fee. Mortgage servicing assets are initially recorded at cost,
based upon pricing multiples as determined by the purchaser, when the loans are
sold. Mortgage servicing assets are carried at the lower of the initial carrying
value, adjusted for amortization, or estimated fair value. Amortization is
determined in proportion to and over the period of estimated net servicing
income using the level yield method. For purposes of determining impairment, the
mortgage servicing assets are stratified by interest rate.
The expected and actual rates of mortgage loan prepayments are the most
significant factors driving the potential for the impairment of the value of
mortgage servicing assets. Increases in mortgage loan prepayments reduce
estimated future net servicing cash flows because the life of the underlying
loan is reduced.
For more information regarding the estimates and calculations used to establish
the ALLL and the value of Mortgage Servicing Rights, please see Note 1 to the
consolidated financial statements provided herewith.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Record earnings were attained in 2005 for the second straight year. Improved
profitability was attributed to two main sources: increased non-interest income
and decrease of the loan loss provision. Non-interest income increased by over
$1 million during 2005 as compared to 2004. A new service, overdraft privilege,
introduced in February 2005 was the leading determinant. The increased revenue
of over $1 million from overdraft privilege offset the lost revenue in service
charges from offering free personal checking and a new free small
business-checking product during 2005.
Impacting the decrease of the loan loss allowance was the continued improvement
in the asset quality position and the decrease of the loan portfolio. Improved
asset quality was evident in the decrease in impaired loans from $11.4 million
at year-end 2004 to $8.5 million at year-end 2005. The valuation allowance
percentage related to impaired loans remained constant resulting in a decrease
of the allowance by $646 thousand during 2005. Non-accrual loans decreased by
approximately $1 million and past due loans 90 days or more and still accruing
interest decreased to zero at year end 2005 as compared to year end 2004's $393
thousand.
12
The loan portfolio decreased $13.3 million when comparing year-end 2005 to
year-end 2004. Movement of some significant troubled loans along with vigorous
competition for higher quality loans were factors that lead to the decline.
Higher interest rates slowed refinancing activity in consumer loan portfolios.
Coupled with the improved asset quality the provision became an income source.
As the allowance decreased from $7.5 million to $6.2 million for year-end 2004
and 2005, respectively, the provision turned into $425 thousand of income in
2005 versus an expense of $884 thousand in 2004. This represented a swing in
revenue attributable to the loan loss provision of $1.3 million.
The allowance for unfunded loan commitments and letters of credit increased by
$155 thousand as unfunded balances increased. An $8 million letter of credit was
negotiated within 2005 thereby increasing the unfunded commitments. Changes in
this allowance are recorded separately in other non-interest expense. When the
total allowance for credit losses is reviewed, it represented a $1.27 million
swing in revenue. The swing attributed to the improved asset quality position is
a positive step while the remainder attributed to negative loan growth would
have been better utilized in supporting positive loan growth. The challenge lies
in replacing this revenue during 2006 through growth in all loan categories and
fee income.
Overall, net income after taxes improved $346 thousand at year-end 2005 over
year- end 2004. Earnings per share increased 4.27% over the previous year ending
at $6.60.
NET INTEREST INCOME
Net interest income decreased by over $1.56 million for 2005 as compared to
2004. Constriction of the net interest margin was evident during 2005 as the
Federal Reserve continued raising rates and the yield curve continued to
flatten. Pressure from competition caused the increase of deposit rates and held
down loan rates, thereby shrinking the margin. As stated earlier, negative loan
growth also impacted the interest income in terms of overall dollar volume.
The following table presents net interest income, interest spread and net
interest margin for the three years 2003 through 2005, comparing average
outstanding balances of earning assets and interest bearing liabilities with the
associated interest income and expense. The table also shows their corresponding
average rates of interest earned and paid. The tax-exempt asset yields have been
tax affected to reflect a marginal corporate tax rate of 34%. Average
outstanding loan balances include non-performing loans and mortgage loans held
for sale. Average outstanding security balances are computed based on carrying
values including unrealized gains and losses on available-for-sale securities.
As the charts indicate, the Company experienced decreased growth on an average
basis for year 2005 compared to 2004 and 2003. The largest decrease in average
balances on interest earning assets compared to 2004 and 2003 was in loans. 2004
showed a slight increase in net interest margin over 2003 but 2005 averaged
lower than both previous years. The net interest margin and spread in 2004 are
the highest of the three years shown and 2005 is the lowest. The average yield
on earning assets increased for 2005. Unfortunately, the interest expense yield
increased proportionately higher, shrinking the margin. Customers moved money to
higher earning instruments as rates began to increase in the second half of
2004. Due to the decrease in loans, the Bank did not price deposits as
aggressively as competitors and the average balance decline reflects that
pricing strategy used in both 2004 and 2005. Interest expense rates, however,
still priced higher to maintain retention of loyal multiple relationship
customers.
13
2005
------------------------------------
(In Thousands)
------------------------------------
Average Interest/
Balance Dividends Yield/Rate
---------- --------- ----------
ASSETS
INTEREST EARNING ASSETS:
Loans (1) $ 468,934 $ 32,003 6.82%
Taxable investment securities 134,420 4,609 3.43%
Tax-exempt investment securities 51,022 1,839 5.46%
Interest bearing deposits 7,974 256 3.21%
Federal funds sold 204 9 4.41%
---------- ---------
TOTAL INTEREST EARNING ASSETS 662,554 $ 38,716 5.99%
========= ====
NON-INTEREST EARNING ASSETS:
Cash and cash equivalents 16,372
Other assets 22,954
----------
TOTAL ASSETS $ 701,880
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST BEARING LIABILITIES:
Savings deposits $ 195,748 $ 2,383 1.22%
Other time deposits 311,855 9,461 3.03%
Other borrowed money 24,995 896 3.58%
Federal funds purchased and securities
sold under agreement to repurchase 25,443 799 3.14%
---------- ---------
TOTAL INTEREST BEARING LIABILITIES 558,041 $ 13,539 2.43%
========= ====
NON-INTEREST BEARING LIABILITIES:
Non-interest bearing demand deposits 42,363
Other 20,686
----------
TOTAL LIABILITIES 621,090
SHAREHOLDERS' EQUITY 80,790
----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 701,880
==========
Interest/Dividend income/yield $ 38,716 5.99%
Interest Expense / yield 13,539 2.43%
--------- ----
Net Interest Spread $ 25,177 3.56%
========= ====
Net Interest Margin 3.80%
====
14
2004
------------------------------------
(In Thousands)
------------------------------------
Average Interest/
Balance Dividends Yield/Rate
---------- --------- ----------
ASSETS
INTEREST EARNING ASSETS:
Loans (1) $ 490,793 $ 31,767 6.47%
Taxable investment securities 127,432 4,393 3.45%
Tax-exempt investment securities 46,730 1,688 5.47%
Interest bearing deposits 5,141 80 1.56%
Federal funds sold 3,543 34 0.96%
---------- ---------
TOTAL INTEREST EARNING ASSETS 673,639 $ 37,962 5.76%
========= ====
NON-INTEREST EARNING ASSETS:
Cash and cash equivalents 14,945
Other assets 20,349
----------
TOTAL ASSETS $ 708,933
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST BEARING LIABILITIES:
Savings deposits $ 204,049 $ 1,268 0.62%
Other time deposits 323,527 8,712 2.69%
Other borrowed money 23,694 817 3.45%
Federal funds purchased and securities
sold under agreement to repurchase 24,218 425 1.75%
---------- ---------
TOTAL INTEREST BEARING LIABILITIES 575,488 $ 11,222 1.95%
========= ====
NON-INTEREST BEARING LIABILITIES:
Non-interest bearing demand deposits 42,205
Other 14,497
----------
TOTAL LIABILITIES 632,190
SHAREHOLDERS' EQUITY 76,743
----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 708,933
==========
Interest/Dividend income/yield $ 37,962 5.76%
Interest Expense / yield 11,222 1.95%
--------- ----
Net Interest Spread $ 26,740 3.81%
========= ====
Net Interest Margin 3.97%
====
15
2003
------------------------------------
(In Thousands)
------------------------------------
Average Interest/
Balance Dividends Yield/Rate
---------- --------- ----------
ASSETS
INTEREST EARNING ASSETS:
Loans (1) $ 500,517 $ 34,233 6.84%
Taxable investment securities 128,087 5,105 3.99%
Tax-exempt investment securities 44,981 1,710 5.76%
Interest bearing deposits 2,413 26 1.08%
Federal funds sold 3,163 33 1.04%
---------- ---------
TOTAL INTEREST EARNING ASSETS 679,161 $ 41,107 6.18%
========= ====
NON-INTEREST EARNING ASSETS:
Cash and cash equivalents 17,001
Other assets 21,717
----------
TOTAL ASSETS $ 717,879
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST BEARING LIABILITIES:
Savings deposits $ 209,044 $ 1,494 0.71%
Other time deposits 326,966 11,336 3.47%
Other borrowed money 28,095 1,077 3.83%
Federal funds purchased and securities
sold under agreement to repurchase 21,296 376 1.77%
---------- ---------
TOTAL INTEREST BEARING LIABILITIES 585,401 $ 14,283 2.44%
========= ====
NON-INTEREST BEARING LIABILITIES:
Non-interest bearing demand deposits 43,924
Other 11,258
----------
TOTAL LIABILITIES 640,583
SHAREHOLDERS' EQUITY 77,296
----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 717,879
==========
Interest/Dividend income/yield $ 41,107 6.18%
Interest Expense / yield 14,283 2.44%
--------- ----
Net Interest Spread $ 26,824 3.74%
========= ====
Net Interest Margin 3.95%
====
(1) For purposes of these computations, non-accruing loans are included in the
daily average outstanding loan amounts.
16
The primary source of the Company's traditional banking revenue is net interest
income. Net interest income is the difference between interest income on
interest earning assets, such as loans and securities, and interest expense on
liabilities used to fund those assets, such as interest bearing deposits and
other borrowings. Net interest income is affected by changes in both interest
rates and the amount and composition of earning assets and liabilities. The
change in net interest income is most often measured as a result of two
statistics - interest spread and net interest margin. The difference between the
yields on earning assets and the rates paid for interest bearing liabilities
supporting those funds represents the interest spread. Because non-interest
bearing sources of funds such as demand deposits and stockholders' equity also
support earning assets, the net interest margin exceeds the interest spread.
The following tables show changes in interest income, interest expense and net
interest resulting from changes in volume and rate variances for major
categories of earnings assets and interest bearing liabilities.
2005 vs 2004
(In Thousands)
---------------------------
Net Due to Change in
Change Volume Rate
------ -------- -------
INTEREST EARNED ON:
Loans $ 236 $ (1,415) $ 1,651
Taxable investment securities 216 241 (25)
Tax-exempt investment securities 151 235 (84)
Interest bearing deposits 176 44 132
Federal funds sold (25) (32) 7
------ -------- -------
TOTAL INTEREST EARNING ASSETS $ 754 $ (927) $ 1,681
====== ======== =======
INTEREST PAID ON:
Savings deposits $1,115 $ (51) $ 1,166
Other time deposits 749 (315) 1,064
Other borrowed money 79 45 34
Federal funds purchased and
securties sold under agreement to
repurchase 374 22 352
------ -------- -------
TOTAL INTEREST BEARING LIABILITIES $2,317 $ (299) $ 2,616
====== ======== =======
2004 vs 2003
(In Thousands)
-----------------------------
Net Due to Change in
Change Volume Rate
-------- ------- --------
INTEREST EARNED ON:
Loans $ (2,466) $ (665) $ (1,801)
Taxable investment securities (712) (26) (686)
Tax-exempt investment securities (22) 101 (123)
Interest bearing deposits 54 29 25
Federal funds sold 1 4 (3)
-------- ------- --------
TOTAL INTEREST EARNING ASSETS $ (3,145) $ (557) $ (2,588)
======== ======= ========
INTEREST PAID ON:
Savings deposits $ (226) $ (36) $ (190)
Other time deposits (2,624) (119) (2,505)
Other borrowed money (260) (169) (91)
Federal funds purchased and
securties sold under agreement to
repurchase 49 52 (3)
-------- ------- --------
TOTAL INTEREST BEARING LIABILITIES $ (3,061) $ (272) $ (2,789)
======== ======= ========
17
The Federal Reserve began raising the Federal Funds rate in June of 2004 and
continued along that path throughout 2005. The increased interest income from
loans for 2005 is due to the increased rate. Securities, however, had increased
revenue due to the increased portfolio size. All of the increases on the
liability side were due in part to the increased rate environment, specifically
on the deposits.
Interest income on loans decreased $2.5 million for 2004 as compared to 2003.
The decrease for 2004 was primarily due to a drop in interest rates. This drop
was offset by the significant decrease in interest expense on other time
deposits of $2.6 million for 2004. The interest rate on the matured long term
time deposits during the first half of 2004 was often 3% - 4% higher than what
the money was able to be reinvested at due to the lower interest rate
environment. As rates began to rise the second half of 2004 and shorter term
time deposits reinvested at higher rates, the savings on interest expense
declined or disappeared completely.
ALLOWANCE FOR CREDIT LOSSES
The company segregated its Allowance for Loan and Lease Losses (ALLL) into two
reserves at the period ending December 31, 2004: The ALLL and the Allowance for
Unfunded Loan Commitments and Letters of Credit (AULC). When combined, these
reserves constitute the total Allowance for Credit Losses (ACL). The portion of
2003 ACL attributable to AULC was $402 thousand.
The Company decreased the allowance for credit losses for 2005. The allowance
stands at $6.2 million for 2005 compared to $7.5 million for 2004. The Bank has
worked hard to improve loan quality while making credit available to all of
those who are in need and deemed an acceptable credit risk. This decrease was
due to the slow pickup of the economy and its effect on our ability to generate
quality loans. Charge-off activity of $1.8 million was extremely low for 2004
compared to $7.3 million for 2003. 2005 charge-off was only slightly higher than
2004 at $2.1 million. The allowance for credit loss activity resulted in expense
of $0.9 and $6.9 million for 2004 and 2003, respectively. For 2005, it actually
resulted in income of $425 thousand. One large credit impacted 2003 and the
Company is no longer carrying a balance on that credit. The Company expects to
see the lower levels of 2005 and 2004 charge-offs continue in future years as
the indicators of asset quality have shown improvement.
NON-INTEREST INCOME
Non-interest income of $5.8 million is an increase of $1 million over 2004 and a
decrease of $2.2 million from 2003. Non-interest income for 2003 of $8.0 million
is the highest of the three years shown. 2003 experienced a dramatic rise due to
an increase in fixed rate mortgage loan activity as a result of the favorable
interest rates for such loans. These types of loans are sold to investors while
the Bank retains the mortgage servicing rights on these loans. As a result,
mortgage servicing rights income was $1.1 million for 2003. Mortgage rates were
higher in 2004 and 2005 so the level of mortgage activity was slower. Sold
mortgage originations dropped to $48.8 million for 2004 from the $179.1 million
produced in 2003 and further dropped to $42.8 million for 2005. Along with the
mortgage servicing rights income, gains on the sale of those loans increased in
2003. The recognition of both income sources due to the mortgage activity was
$0.7 million in 2005 and $0.9 million in 2004 compared to $3.3 million.
An increase of over $1 million in non-interest income in 2005 compared to 2004
was generated from the new product Overdraft Privilege. Overdraft Privilege was
introduced in February 2005 along with free personal checking and a free small
business checking account. While maintenance fees collected on the traditional
products declined, Overdraft Privilege more than replaced it.
Overdraft Privilege enabled more automation to be utilized in the
overdraft/return check process and alleviated concern by most customers of
having their checks returned. It has been well received by customers and
decreased returns.
NON-INTEREST EXPENSE
Non-interest expense has increased during the last three years, growing from
$17.8 million in 2003 to $19.6 million in 2005. The largest increase occurred in
2004 as compared to 2003. Personnel costs were the major component behind the
increase. Additional staffing compiled with increased benefits costs added up to
an additional $1.0 million of expense. 2005 also saw an increase in salaries and
wages over 2004 of $441 thousand. Incentive pay for 2005 was higher than both
previous years as the overall performance of the Bank was higher. The full time
equivalent number of employees for 2005 compared to 2004 decreased by four.
FEDERAL INCOME TAXES
Effective tax rates were 27.19%, 30.27%, and 24.38% for 2005, 2004 and 2003,
respectively. The Company has increased its tax-exempt holdings each year with
2005's average investment balance in tax-exempt securities at $51 million
compared to $46.7 and
18
$45 million for 2004 and 2003, respectively. Overall growth in interest income
is needed to allow the tax exempt advantage to be maintained in 2006.
FINANCIAL CONDITION
Average earning assets decreased during 2004 and 2005. Average earnings assets
for 2005 were $663 million compared to $674 million for 2004 and $679 million
for 2003. This decrease in average earnings assets represents a less than 1.0
percent change for each year 2005 and 2004. The decrease in both years was
attributed to loans. Average interest bearing liabilities also decreased by $1.7
million in 2005, adding to the decrease of $9.9 million in 2004. The decrease
occurred to offset the decrease in loan growth and lessen the pressure on the
net interest margin. 2005 is lower than 2003 by $2.7 million.
SECURITIES
Security balances as of December 31 are summarized below:
(In Thousands)
-------------------------------------
2005 2004 2003
---------- ---------- -----------
U.S. Treasury and Government Agencies $ 112,199 $ 88,344 $ 103,470
Mortgage-backed securities 28,514 30,088 14,178
State and local governments 62,891 54,647 51,016
Corporate debt securities - - 1,981
Equity securities 47 48 47
---------- ---------- -----------
$ 203,651 $ 173,127 $ 170,692
========== ========== ===========
The following table sets forth (dollars in thousands) the maturities of
investment securities as of December 31, 2005 and the weighted average yields of
such securities calculated on the basis of cost and effective yields weighted
for the scheduled maturity of each security. Tax-equivalent adjustments, using a
thirty-four percent rate have been made in yields on obligations of state and
political subdivisions. Stocks of domestic corporations have not been included.
Maturities
---------------------------------------------
After One Year
Within One Year Within Five Years
----------------------- -------------------
Amount Yield Amount Yield
---------- ---------- ----------- -----
U.S. Treasury $ 2,181 2.96% $ 173 3.67%
U.S. Government agency 48,823 3.15% 61,023 3.59%
Mortgage-backed securities - - 26,773 3.93%
State and local governments 12,491 5.05% 22,182 5.49%
Taxable state and local governments 1,042 5.89% 4,104 4.45%
Maturities
---------------------------------------------
After Five Years
Within Ten Years After Ten Years
----------------------- -----------------
Amount Yield Amount Yield
---------- ---------- ----------- -----
U.S. Treasury $ - - $ - -
U.S. Government agency - - - -
Mortgage-backed securities 1,740 4.05% - -
State and local governments 20,846 5.49% 2,227 5.81
Taxable state and local governments - - - -
As of December 31, 2005 the Bank did not hold a large block of any one
investment security, except for U.S. Treasury and other U.S. Government
agencies. The Bank also holds stock in the Federal Home Loan Bank of Cincinnati
at a cost of $3.8 million. This is required in order to obtain Federal Home Loan
Bank Loans.
19
LOAN PORTFOLIO
The Bank's various loan portfolios are subject to varying levels of credit risk.
Management mitigates these risks through portfolio diversification and through
standardization of lending policies and procedures.
The following table shows the Bank's loan portfolio by category of loan
including loans held for sale:
(In Thousands)
----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Loans:
Commercial/industrial $ 90,227 $ 98,518 $102,101 $100,119 $ 96,992
Agricultural 62,023 55,219 63,082 66,136 53,717
Real estate mortgage 268,315 274,156 267,312 278,933 247,545
Consumer 34,686 41,276 47,984 51,156 55,845
Industrial Development Bonds 9,237 10,687 7,944 7,810 7,590
-------- -------- -------- -------- --------
Total Loans $464,488 $479,856 $488,423 $504,154 $461,689
======== ======== ======== ======== ========
The following table shows the maturity of loans as of December 31,2005:
Maturities (In Thousands)
-----------------------------------------------------
After One
Within Year Within After
One Year Five Years Five Years Total
---------- ----------- ----------- ---------
Commercial and industrial $ 28,695 $ 40,862 $ 20,670 $ 90,227
Agricultural 28,349 28,463 5,211 62,023
Real estate mortgage 10,043 12,793 245,479 268,315
Consumer 7,354 22,288 5,044 34,686
Industrial Development Bonds 1,316 6,652 1,269 9,237
The following table presents the total of loans due after one year which have
1) predetermined interest rates and 2) floating or adjustable interest rates:
(In Thousands)
----------------------
Fixed Variable
Rate Rate
-------- ---------
Commercial and industrial $ 38,029 $ 23,503
Agricultural 15,222 18,452
Real estate 19,093 239,179
Consumer, Credit Card and overdrafts 27,332 -
Industrial Development Bonds 7,921 -
The following table summarizes the Company's non-accrual and past due loans as
of December 31 for each of the last five years:
(In Thousands)
-----------------------------------------------
2005 2004 2003 2002 2001
------- ------- ------- ------- -------
Non-accrual loans $ 5,060 $ 6,059 $ 6,236 $ 5,792 $ 5,353
Accruing loans past due
90 days or more - 393 2,042 2,674 5,408
------- ------- ------- ------- -------
Total $ 5,060 $ 6,452 $ 8,278 $ 8,466 $10,761
======= ======= ======= ======= =======
20
Although loans may be classified as non-performing, some pay on a regular basis,
many continue to pay interest irregularly or at less than original contractual
rates. Interest income that would have been recorded under the original terms of
these loans was $530 thousand for 2003 and $561 thousand for 2004 and $246
thousand for 2005. Any collections of interest on non-accrual loans are included
in interest income when collected. This amounted to $473 for 2005, $279 for
2004, $346 thousand for 2003.
Loans are placed on non-accrual status in the event that the loan is in past due
status for more than 90 days or payment in full of principal and interest is not
expected.
The $4.7 million of non-accrual loans as of December 31, 2005 are secured.
As of December 31, 2005 the Bank has $15.7 million of loans which it considers
to be potential problem loans in that the borrowers are experiencing financial
difficulties. These loans are subject to constant management attention and are
reviewed more frequently than quarterly.
The amount of the potential problem loans was considered in management's review
of the loan loss reserve required at December 31, 2005.
In extending credit to families, businesses and governments, banks accept a
measure of risk against which an allowance for possible loan loss is established
by way of expense charges to earnings. This expense, used to enlarge a bank's
allowance for loan losses, is determined by management based on a detailed
monthly review of the risk factors affecting the loan portfolio, including
general economic conditions, changes in the portfolio mix, past due loan-loss
experience and the financial condition of the bank's borrowers.
As of December 31, 2005, the Bank had loans outstanding to individuals and firms
engaged in the various fields of agriculture in the amount of $62 million. The
ratio of this segment of loans to the total loan portfolio is not considered
unusual for a bank engaged in and servicing rural communities.
The allowance for loan losses is evaluated based on an assessment of the losses
inherent in the loan portfolio. This assessment results in an allowance
consisting of two components, allocated and unallocated.
Management considers several different risk assessments in determining the
allowance for loan losses. The allocated component of the allowance for loan
losses reflects expected losses resulting from an analysis of individual loans,
developed through specific credit allocations for individual loans and
historical loss experience for each loan category. For those loans where the
internal credit rating is at or below a predetermined classification and
management can reasonably estimate the loss that will be sustained based upon
collateral, the borrowers operating activity and economic conditions in which
the borrower operates, a specific allocation is made. For those borrowers that
are not currently behind in their payment, but for which management believes
based on economic conditions and operating activities of the borrower, the
possibility exists for future collection problems, a reserve is established. The
amount of reserve allocated to each loan portfolio is based on past loss
experiences and the different levels of risk within each loan portfolio. The
historical loan loss portion is determined using a historical loss analysis by
loan category.
The unallocated portion of the reserve for loan losses is determined based on
management's assessment of general economic conditions as well as specific
economic factors in the Bank's marketing area. This assessment inherently
involves a higher degree of uncertainty. It represents estimated inherent but
undetected losses within the portfolio that are probable due to uncertainties in
economic conditions, delays in obtaining information, including unfavorable
information about a borrower's financial condition and other current risk
factors that may not have yet manifested themselves in the Bank's historical
loss factors used to determine the allocated component of the allowance.
Actual charge-off of loan balances is based upon periodic evaluations of the
loan portfolio by management. These evaluations consider several factors,
including, but not limited to, general economic conditions, financial condition
of the borrower, and collateral.
As presented below, charge-offs increased to $2.1 million for 2005, and the
provision was a negative $425 thousand. A few large commercial credits included
in the $5.7 charged off in the commercial and agricultural segment in 2003
caused 2003 to have the largest charge offs of the years presented. The
commercial and agricultural segment was in a net recovery position for 2004. The
negative provision of 2005 was necessary to decrease the allowance because of
the overall decrease of the loan portfolio and the improved asset quality
position.
The following table presents a reconciliation of the allowance for credit
losses:
21
(In Thousands)
-------------------------------------------------------
2005 2004 2003 2002 2001
-------------------------------------------------------
Loans $464,488 $479,681 $ 488,247 $ 498,078 $ 461,689
======== ======== ========= ========= =========
Daily average of outstanding loans $469,326 $491,104 $ 500,517 $ 475,035 $ 472,181
======== ======== ========= ========= =========
Allowance for Loan Losses-Jan. 1 $1 6,814 $ 7,300 $ 6,400 $ 7,275 $ 7,160
Loans Charged off:
Commercial & Agricultural 945 491 5,706 2,987 1,826
Consumer 722 739 1,156 1,050 1,254
Real estate mortgages 429 549 424 215 54
-------- -------- --------- --------- ---------
2,096 1,779 7,286 4,252 3,134
-------- -------- --------- --------- ---------
Loan Recoveries:
Commercial & Agricultural 631 652 601 801 421
Consumer 412 405 546 366 191
Real estate mortgages 52 38 136 16 5
-------- -------- --------- --------- ---------
1,095 1,095 1,283 1,183 617
-------- -------- --------- --------- ---------
Net Charge Offs 1,001 684 6,003 3,069 2,517
-------- -------- --------- --------- ---------
Provision for loan loss (425) 884 6,903 2,194 2,632
-------- -------- --------- --------- ---------
Allowance for Loan & Lease Losses - Dec 31 $ 5,388 $ 6,814 $ 7,300 $ 6,400 $ 7,275
Allowance for Unfunded Loan Commitments
& Letters of Credit Dec 31 $ 841 $ 686 $ - $ - $ -
-------- -------- --------- --------- ---------
Total Allowance for Credit Losses - Dec 31 $ 6,229 $ 7,500 $ 7,300 $ 6,400 $ 7,275
======== ======== ========= ========= =========
Ratio of net charge-offs to average
Loans outstanding 0.21% 0.14% 1.20% 0.65% 0.53%
======== ======== ========= ========= =========
Allocation of the allowance for credit losses per Loan Category in terms of
dollars and percentage among the various loan categories is as follows:
2005 2004 2003 2002 2001
Amount Amount Amount Amount Amount
(000's) % (000's) % (000's) % (000's) % (000's) %
---------------- --------------- --------------- --------------- --------------
Balance at End of Period Applicable To:
Commercial/industrial $ 2,753 2.77% $ 3,917 3.98% $ 1,816 1.78% $ 3,170 1.91% $ 4,235 2.26%
Agricultural 390 0.63% 681 1.23% 674 1.07% - - - -
Real estate 910 0.34% 644 0.23% 531 0.20% 1,306 0.48% 1,101 0.44%
Consumer 557 1.61% 549 1.33% 451 0.94% 1,140 2.23% 1,526 2.73%
Unallocated 778 1,024 3,928 784 413
-------- ------- ------- ------- -------
Allowance for Loan & Lease Losses $ 5,388 1.16% $ 6,815 1.42% $ 7,400 1.52% $ 6,400 4.61% $ 7,275 1.60%
Off Balance Sheet Commitments $ 841 0.60% $ 686 0.56% $ - $ - $ - -
-------- ------- ------- ------- -------
Total Allowance for Credit Losses $ 6,229 $ 7,500 $ 7,500 $ 7,500 $ 7,500
======== ======= ======= ======= =======
DEPOSITS
The amount of outstanding time certificates of deposits and other time deposits
in amounts of $100,000 or more by maturity are as follows:
(In Thousands)
------------------------------------------------------------
Over Three Over One
Months Year Less Over
Under Less Than Than Three Three
Three Months One Year Years Years
------------------------------------------------------------
Time Deposits $ 30,034 $ 28,101 $ 10,981 $ 5,866
22
The following table presents the average amount of and average rate paid on each
deposit category:
(In Thousands)
-------------------------------------------------------------
Demand NOW Savings Time
Deposits Accounts Accounts Accounts
-------------------------------------------------------------
December 31, 2005:
Average balance $ 42,363 $ 83,107 $ 112,642 $ 311,855
Average rate 0.00% 1.31% 1.14% 3.03%
December 31, 2004:
Average balance $ 42,205 $ 88,666 $ 115,383 $ 323,527
Average rate 0.00% 0.67% 0.58% 2.69%
December 31, 2003:
Average balance $ 43,924 $ 101,132 $ 107,912 $ 326,966
Average rate 0.00% 0.77% 0.66% 3.47%
LIQUIDITY
Maintaining sufficient funds to meet depositor and borrower needs on a daily
basis continues to be among our management's top priorities. This is
accomplished not only by the immediately liquid resources of cash, due from
banks and federal funds sold, but also by the Bank's available for sale
securities portfolio. The average aggregate balance of these assets was $196
million during 2003, $198 million for 2004, compared to $207 million for 2005.
This represented 27 percent, 28 percent, and 29.67 percent of total average
assets, respectively. Of the almost $206 million of debt securities in the
company's portfolio as of December 31, 2005, $54.4 million or 26 percent of the
portfolio is expected to mature in 2005. Taking into consideration possible
calls of the debt securities, the amount climbs to $84.9 million or 41 percent
of the portfolio becomes a source of funds. This liquidity provides the
opportunity to fund loan growth without having to over aggressively price
deposits.
Historically, the primary source of liquidity has been core deposits that
include non-interest bearing demand deposits, NOW, money market accounts and
time deposits of individuals. Core deposits decreased in 2005, pushed by the
move of customers seeking higher rates. Overall deposits decreased an average of
$19.8 million over 2004 compared to 2004's decrease over 2003 of $10.2 million
in average deposits. These represent changes of (3.5) percent and (1.8) percent
in average total deposits, respectively. The biggest change shows in the most
expensive time accounts and represents rate shoppers moving funds out of the
Bank.
Again, historically, the primary use of new funds is placing the funds back into
the community through loans for the acquisition of new homes, consumer products
and for business development. The use of new funds for loans is measured by the
loan to deposit ratio. The Company's loan to deposit ratio for 2005 was 79.6
percent, 2004 was 82.23 percent, 2003 was 83.53 percent. The decrease in 2004
and 2005 is due to the lack of growth in both the credit and deposit portfolios.
The Company's goal is for this ratio to be higher with loan growth the driver.
Short-term debt such as federal funds purchased and securities sold under
agreement to repurchase also provides the Company with liquidity. Short-term
debt for both federal funds purchased and securities sold under agreement to
repurchase amounted to $21.2 million at the end of 2005 compared to $22.9
million at the end of 2004 and $27.3 million at December 31, 2003. Though no
federal funds were purchased at year end, the Bank does have arrangements with
correspondent Banks that can be utilized when necessary.
Other borrowings are also a source of funds. Other borrowings consist of loans
from the Federal Home Loan Bank of Cincinnati. These funds are then used to
provide fixed rate mortgage loans secured by homes in our community. Borrowings
from this source increased by $13 million to $35 million at December 31, 2005.
This compares to decreased borrowings during 2003 and 2004 of $4.3 to $24.4
million at December 31, 2003, and of $2.4 to $22 million at December 31, 2004.
The increased borrowings of 2005 were used to leverage the Company with the
proceeds purchasing tax exempt municipals that provided a set profit margin.
CONTRACTUAL OBLIGATIONS
Contractual Obligations of the Company totaled $368.8 million as of December
31,2005. Time deposits represent contractual agreements for certificates of
deposits held by its customers. Long term debt represents the borrowings with
the Federal Home Loan Bank and are further defined in Note 4 and 9 of the
Consolidated Financial Statements.
23
Payment Due by Period (In Thousands)
Less than 1-3 3-5 More than
Contractual Obligations Total 1 year Years Years 5 years
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
Securities sold under agreement to repurchase $ 21,158 $ 21,158 $ - $ - $ -
Time Deposits 311,846 192,000 99,205 19,654 987
Dividends Payable 844 844
Long Term Debt 34,952 11,720 7,127 6,105 10,000
----------- ----------- ----------- ----------- -----------
Total $ 368,800 $ 225,722 $ 106,332 $ 25,759 $ 10,987
=========== =========== =========== =========== ===========
CAPITAL RESOURCES
Shareholders' equity was $82.6 million as of December 31, 2005 compared to $78.8
million at December 31, 2004. Dividends declared during 2005 were $2.00 per
share totaling $2.6 million, slightly higher than 2004 declared dividends of
$1.90 per share. The Company purchased back 1,000 shares in the third quarter of
2005 to award to employees of the Bank under its long-term incentive plan. 20
shares were held in Treasury stock at year-end after having been forfeited by an
employee. The Company continues to have a strong capital base and to maintain
regulatory capital ratios that are significantly above the defined regulatory
capital ratios.
At December 31, 2005, The Farmers & Merchants State Bank and Farmers & Merchants
Bancorp, Inc had total risk-based capital ratios of 17.49% and 17.68%,
respectively. Core capital to risk-based asset ratios of 13.35% and 16.47% are
well in excess of regulatory guidelines. The Bank's leverage ratio of 9.5% is
also substantially in excess of regulatory guidelines as is the Company's at
11.9%.
The Company's subsidiaries are restricted by regulations from making dividend
distributions in excess of certain prescribed amounts.
ASSET/LIABILITY MANAGEMENT
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest earning assets
and interest bearing liabilities. It involves the management of the balance
sheet mix, maturities, repricing characteristics and pricing components to
provide an adequate and stable net interest margin with an acceptable level of
risk. Interest rate sensitivity management seeks to avoid fluctuating net
interest margins and to enhance consistent growth of net interest income through
periods of changing interest rates.
Changes in net income, other than those related to volume arise when interest
rates on assets reprice in a time frame or interest rate environment that is
different from that of the repricing period for liabilities. Changes in net
interest income also arise from changes in the mix of interest-earning assets
and interest-bearing liabilities.
Historically, the Bank has maintained liquidity through cash flows generated in
the normal course of business, loan repayments, maturing earning assets, the
acquisition of new deposits, and borrowings. The Bank's asset and liability
management program is designed to maximize net interest income over the long
term while taking into consideration both credit and interest rate risk.
Interest rate sensitivity varies with different types of interest-earning assets
and interest bearing liabilities. Overnight federal funds on which rates change
daily and loans that are tied to the market rate differ considerably from
long-term investment securities and fixed rate loans. Similarly, time deposits
over $100,000 and money market certificates are much more interest rate
sensitive than passbook savings accounts. The Bank utilizes shock analysis to
examine the amount of exposure an instant rate change of 100, 200, and 300 basis
points in both increasing and decreasing directions would have on the
financials. Acceptable ranges of earnings and equity at risk are established and
decisions are made to maintain those levels based on the shock results.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, nearly all the assets and
24
liabilities of the Company are monetary in nature. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 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, 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 utilizing interest
rate shocks to help in this analysis. The shocks presented on the next page
assume an immediate change of rate in the percentages and direction shown:
Interest Rate Shock on Interest Rate Shock on
Net Interest Margin Net Interest Income
- -------------------------------------- ----------------------------
Net Interest % Change Rate Rate Cumulative % Change
Margin (Ratio) to Flat Rate Direction changes by Total ($000) to Flat Rate
- -------------- ------------ --------- ---------- ------------ ------------
3.83% -5.18% Rising 3.00% 24,671 -9.51%
3.90% -3.52% Rising 2.00% 25,526 -6.38%
3.97% -1.89% Rising 1.00% 26,375 -3.26%
4.04% 0.00% Flat 0 27,264 0.00%
4.06% 0.49% Falling -1.00% 27,593 1.21%
4.00% -1.04% Falling -2.00% 27,272 0.03%
3.92% -3.11% Falling -3.00% 26,741 -1.92%
ASSET/LIABILITY MANAGEMENT
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest earning assets
and interest bearing liabilities. It involves the management of the balance
sheet mix, maturities, repricing characteristics and pricing components to
provide an adequate and stable net interest margin with an acceptable level of
risk. Interest rate sensitivity management seeks to avoid fluctuating net
interest margins and to enhance consistent growth of net interest income through
periods of changing interest rates.
Changes in net income, other than those related to volume arise when interest
rates on assets reprice in a time frame or interest rate environment that is
different from that of the repricing period for liabilities. Changes in net
interest income also arise from changes in the mix of interest-earning assets
and interest-bearing liabilities.
25
Historically, the Bank has maintained liquidity through cash flows generated in
the normal course of business, loan repayments, maturing earning assets, the
acquisition of new deposits, and borrowings. The Bank's asset and liability
management program is designed to maximize net interest income over the long
term while taking into consideration both credit and interest rate risk.
Interest rate sensitivity varies with different types of interest-earning assets
and interest bearing liabilities. Overnight federal funds on which rates change
daily and loans that are tied to the market rate differ considerably from
long-term investment securities and fixed rate loans. Similarly, time deposits
over $100,000 and money market certificates are much more interest rate
sensitive than passbook savings accounts. The Bank utilizes shock analysis to
examine the amount of exposure an instant rate change of 100, 200, and 300 basis
points in both increasing and decreasing directions would have on the
financials. Acceptable ranges of earnings and equity at risk are established and
decisions are made to maintain those levels based on the shock results.
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Independent Auditors' Report
Consolidated Balance Sheet at December 31, 2005 and 2004
Consolidated Statements of Income for the years ended December 31, 2005, 2004
and 2003
Consolidated Statements of Changes in Shareholders' Equity for the year ended
December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flow for the years ended December 31, 2005, 2004
and 2003
Notes to Consolidated Financial Statements
26
[PLANTE & MORAN LOGO] PLANTE & MORAN, PLLC
Suite 500
2601 Cambridge Court
Auburn Hills, MI 48326
Tel: 248.375.7100
Fax: 248.375.7101
plantemoran.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Archbold, Ohio
We have audited the accompanying consolidated balance sheet of Farmers &
Merchants Bancorp, Inc. and Subsidiaries as of December 31, 2005 and December
31, 2004 and the related consolidated statements of income, stockholders'
equity, and cash flows for each year in the three year period ended December 31,
2005. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Farmers &
Merchants Bancorp, Inc. and Subsidiaries as of December 31, 2005 and December
31, 2004 and the consolidated results of its operations and its cash flows for
each year in the three year period ended December 31, 2005, in conformity with
U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Farmers &
Merchants Bancorp, Inc. and Subsidiaries internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated February 17, 2006, expressed an
unqualified opinion thereon.
PLANTE & MORAN, PLLC
February 17, 2006
Auburn Hills, Michigan
27
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005 AND 2004
(000's OMITTED, EXCEPT PER SHARE DATA)
2005 2004
--------- ---------
ASSETS
ASSETS
Cash and due from banks (Note 2) $ 20,056 $ 15,026
Interest-bearing deposits in banks 2,533 9,230
--------- ---------
Total cash and cash equivalents 22,589 24,256
Securities - available for sale (Note 3) 203,651 173,127
Federal Home Loan Bank stock, at cost 3,791 3,607
Loans held for sale - 175
Loans, net (Note 4) 458,704 472,011
Premises and equipment (Note 5) 14,874 15,520
Other assets (Note 6 & 10) 17,336 13,817
--------- ---------
TOTAL ASSETS $ 720,945 $ 702,513
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 7)
Noninterest-bearing $ 64,791 $ 47,958
Interest-bearing
NOW accounts 84,835 92,178
Savings 114,825 121,168
Time (Note 7) 311,846 312,901
--------- ---------
Total deposits 576,297 574,205
Federal funds purchased - -
Securities sold under agreement to repurchase (Note 8) 21,158 22,852
Long-term debt (Note 9) 34,952 21,964
Dividend payable 844 715
Accrued expenses and other liabilities 5,106 3,932
--------- ---------
Total liabilities 638,357 623,668
--------- ---------
STOCKHOLDERS' EQUITY (NOTE 14 AND 15)
Common stock - No par value - 1,500,000
shares authorized; 1,300,000 shares issued & outstanding 12,677 12,677
Treasury Stock - 20 Shares (2) -
Unearned Stock Awards - 980 Shares (113) -
Retained earnings 71,933 65,956
Accumulated other comprehensive income (Loss) (1,907) 212
--------- ---------
Total stockholders' equity 82,588 78,845
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 720,945 $ 702,513
========= =========
28
\
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(000's OMITTED, EXCEPT PER SHARE DATA)
2005 2004 2003
----------- ----------- -----------
INTEREST INCOME
Loans, including fees $ 32,003 $ 31,767 $ 34,233
Debt securities:
U.S. Treasury and government agency 4,142 3,912 4,454
Municipalities 2,121 2,020 2,196
Corporate debt securities - 3 29
Dividends 185 146 136
Federal funds sold 9 34 33
Other 256 80 26
----------- ----------- -----------
Total interest income 38,716 37,962 41,107
INTEREST EXPENSE
Deposits 11,844 9,980 12,830
Federal funds purchased and securities sold
under agreements to repurchase 799 425 376
Borrowed funds 896 817 1,077
----------- ----------- -----------
Total interest expense 13,539 11,222 14,283
----------- ----------- -----------
NET INTEREST INCOME - Before provision for loan losses 25,177 26,740 26,824
PROVISION FOR LOAN LOSSES (Note 4) (425) 884 6,903
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 25,602 25,856 19,921
NONINTEREST INCOME
Customer service fees 3,618 2,140 2,028
Other service charges and fees 1,494 1,623 2,120
Net gain on sale of loans (Note 6) 704 925 3,309
Net gain on sale of available-for-sale securities 9 127 528
----------- ----------- -----------
Total noninterest income 5,825 4,815 7,985
NONINTEREST EXPENSES
Salaries and Wages 8,411 7,970 7,067
Employee benefits (Note 11) 2,275 2,252 2,181
Occupancy expense 656 649 592
Furniture and equipment 1,492 1,437 1,445
Data processing 1,013 1,101 996
Franchise taxes 817 712 922
Mortgage servicing rights amortization (Note 6) 293 332 723
Other general and administrative 4,692 4,415 3,895
----------- ----------- -----------
Total other operating expenses 19,649 18,868 17,821
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 11,778 11,803 10,085
INCOME TAXES (NOTE 10) 3,202 3,573 2,459
----------- ----------- -----------
NET INCOME $ 8,576 $ 8,230 $ 7,626
=========== =========== ===========
EARNINGS PER SHARE - BASIC $ 6.60 $ 6.33 $ 5.87
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 1,299,682 1,300,000 1,300,000
=========== =========== ===========
29
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(000's OMITTED, EXCEPT PER SHARE DATA)
Accumulated
Shares of Unearned Other Total
Common Common Treasury Stock Retained Comprehensive Stockholders'
Stock Stock Stock Awards Earnings Income (Loss) Equity
--------- ------- -------- -------- -------- ------------- -------------
BALANCE - January 1, 2003 1,300,000 $12,677 $ - $ - $ 61,345 $ 3,716 $ 77,738
Comprehensive income (Note 1):
Net income - $ - $ - $ - $ 7,626 $ - $ 7,626
Change in net unrealized gain on
securities available for sale,
net of reclassification adjustment
and tax effects - $ - $ - $ - $ - $ (1,733) $ (1,733)
-------------
Total comprehensive income $ 5,893
Cash dividends declared - $6.75 per share - $ - $ - $ - $ (8,775) $ - $ (8,775)
--------- ------- -------- -------- -------- ------------- -------------
BALANCE - December 31, 2003 1,300,000 $12,677 $ - $ - $ 60,196 $ 1,983 $ 74,856
Comprehensive income (Note 1):
Net income - $ - $ - $ - $ 8,230 $ - $ 8,230
Change in net unrealized gain on
securities available for sale, net
of reclassification adjustment
and tax effects - $ - $ - $ - $ - $ (1,771) $ (1,771)
-------------
Total comprehensive income $ 6,459
Cash dividends declared - $1.90 per share - $ - $ - $ - $ (2,470) $ - $ (2,470)
--------- ------- -------- -------- -------- ------------- -------------
BALANCE - December 31, 2004 1,300,000 $12,677 $ - $ - $ 65,956 $ 212 $ 78,845
--------- ------- -------- -------- -------- ------------- -------------
30
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(000's OMITTED, EXCEPT PER SHARE DATA)
Accumulated
Shares of Unearned Other Total
Common Common Treasury Stock Retained Comprehensive Stockholders'
Stock Stock Stock Awards Earnings Income (Loss) Equity
--------- ------- -------- -------- -------- ------------- -------------
Comprehensive income (Note 1):
Net income - $ - $ - $ - $ 8,576 $ - $ 8,576
Change in net unrealized gain on
securities available for sale, net
of reclassification adjustment
and tax effects - $ - $ - $ - $ - $ (2,119) $ (2,119)
-------------
Total comprehensive income $ 6,457
Purchase of Treasury Stock 1000 shares (1,000) $ (115) $ - $ (115)
Grant of Restricted Stock
Awards-1000 shares
(Net of Forfeiture - 20) 980 $ 113 $ (113) $ -
Cash dividends declared - $2.00 per share - $ - $ - $ - $ (2,599) $ - $ (2,599)
--------- ------- -------- -------- -------- ------------- -------------
BALANCE - December 31, 2005 1,299,980 $12,677 $ (2) $ (113) $ 71,933 $ (1,907) $ 82,588
========= ======= ======== ======== ======== ============= =============
31
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(000's OMITTED)
2005 2004 2003
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,576 $ 8,230 $ 7,626
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 1,167 1,142 1,216
Amortization of servicing rights 293 332 723
Provision for loan loss (425) 884 6,903
Accretion and amortization of securities 989 1,223 1,406
Deferred income taxes (benefit) 387 (14) (126)
(Gain) loss on sale of other assets (2) 2 12
Realized gain on sales of available-for-sale securities, net (9) (127) (528)
Net Change in:
Loans held for sale 175 1 5,900
Change in other assets and other liabilities, net (1,931) 3,019 (3,651)
-------- -------- --------
Net cash provided (used) by operating activities 9,220 14,692 19,481
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Sales - 10,740 16,036
Maturities, prepayments and calls 38,477 64,599 75,412
Purchases (73,376) (81,553) (86,849)
Loan and lease originations and principal collections, net 13,732 7,241 3,955
Proceeds from sales of assets 18 3 -
Additions to premises and equipment (539) (793) (2,068)
-------- -------- --------
Net cash provided (used) by investing activities (21,688) 237 6,486
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 2,092 (861) (1,307)
Net change in federal funds purchased and securities
sold under agreements to repurchase (1,694) (4,467) (10,881)
Proceeds from issuance of long-term debt 15,000 - 10,000
Repayment of long-term debt (2,012) (2,410) (14,322)
Purchase of Treasury Stock (115) - -
Cash dividends paid on common stock (2,470) (2,470) (8,709)
-------- -------- --------
Net cash provided (used) by financing activities 10,801 (10,208) (25,219)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,667) 4,721 748
CASH AND CASH EQUIVALENTS - Beginning of Year 24,256 19,535 18,787
-------- -------- --------
CASH AND CASH EQUIVALENTS - End of Year $ 22,589 $ 24,256 $ 19,535
======== ======== ========
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest $ 13,227 $ 11,283 $ 14,824
======== ======== ========
Income taxes $ 2,640 $ 2,840 $ 5,326
======== ======== ========
32
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Farmers & Merchants Bancorp, Inc. (the Company) through its bank
subsidiary, The Farmers & Merchants State Bank (the Bank) provide a
variety of financial services to individuals and small businesses through
its offices in Northwest Ohio.
CONSOLIDATION POLICY
The consolidated financial statements include the accounts of Farmers &
Merchants Bancorp, Inc. and its wholly-owned subsidiaries, The Farmers &
Merchants State Bank (the Bank), a commercial banking institution, and the
Farmers & Merchants Life Insurance Company, a reinsurance company for
life, accident and health insurance for the Bank's consumer credits. All
significant inter-company balances and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Material
estimates that are particularly susceptible to significant change in the
near term relate to the determination of the allowance for loan losses and
the valuation of mortgage servicing rights. Actual results could differ
from those estimates.
The determination of the adequacy of the allowance for loan losses is
based on estimates that are particularly susceptible to significant
changes in the economic environment and market conditions. In connection
with the determination of the estimated losses on loans, management
obtains independent appraisals for significant collateral.
The Bank's loans are generally secured by specific items of collateral
including real property, consumer assets, and business assets. Although
the Bank has a diversified loan portfolio, a substantial portion of its
debtors' ability to honor their contracts is dependent on local economic
conditions in the agricultural industry.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based
on changes in local economic conditions. In addition regulatory agencies,
as an integral part of their examination process, periodically review the
estimated losses on loans. Such agencies may require the Bank to recognize
additional losses based on their judgments about information available to
them at the time of their examination. Because of these factors, it is
reasonably possible that the estimated losses on loans may change
materially in the near term. However, the amount of the change that is
reasonably possible cannot be estimated.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents. This includes cash on hand,
amounts due from banks, and federal funds sold. Generally, federal funds
are purchased and sold for one day periods.
SECURITIES
Debt securities are classified as available-for-sale. Securities
available-for-sale are carried at fair value with unrealized gains and
losses reported in other comprehensive income. Realized gains and losses
on securities available for sale are included in other income (expense)
and, when applicable, are reported as a reclassification adjustment, net
of tax, in other comprehensive income. Gains and losses on sales of
securities are determined on the specific-identification method.
33
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Declines in the fair value of securities below their cost that are deemed
to be other than temporary are reflected in earnings as realized losses.
In estimating other-than-temporary impairment losses, management considers
(1) the length of time and the extent to which the fair value has been
less than cost, (2) the financial condition and near-term prospects of the
issuer, and (3) the intent and ability of the Company to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. The related write-downs are included
in earnings as realized losses.
FEDERAL HOME LOAN BANK STOCK
The Federal Home Loan Bank stock is recorded at cost since it is a
restricted stock. The Federal Home Loan Bank sells and purchases its stock
at par; therefore cost approximates market value. The stock is held as
collateral security for all indebtedness of the Bank to the Federal Home
Loan Bank.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at the amount
of unpaid principal, reduced by unearned discounts and deferred loan fees
and costs, as well as, by the allowance for loan losses. Interest income
is accrued on a daily basis based on the principal outstanding.
Generally, a loan is classified as nonaccrual and the accrual of interest
income is generally discontinued when a loan becomes ninety days past due
as to principal or interest and these loans are placed on a "cash basis"
for purposes of income recognition. Management may elect to continue the
accrual of interest when the estimated net realizable value of collateral
is sufficient to cover the principal and accrued interest, and the loan is
in the process of collection. When a loan is placed on nonaccrual status,
all previously accrued and unpaid interest receivable is charged against
income.
Loan origination and commitment fees and certain direct loan origination
costs are deferred and amortized as a net adjustment to the related loan's
yield. The Bank is generally amortizing these costs over the contractual
life of such loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses charged to income. Loans deemed to be uncollectable and changes in
the allowance relating to impaired loans are charged against the allowance
for loan losses, and subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based on management's periodic review of the
collectibility of the loans in light of historical experience, the nature
and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral,
and prevailing economic conditions. This evaluation is inherently
subjective, as it requires estimates that are susceptible to significant
revision as more information becomes available.
The allowance consists of specific, general and unallocated components.
The specific component relates to loans that are classified as either
doubtful, substandard or special mention. For such loans that are also
classified as impaired, an allowance is established when the discounted
cash flows (or collateral value or observable market price) of the
impaired loan is lower than the carrying value of that loan. The general
component covers non-classified loans and is based on historical loss
experience adjusted for qualitative factors. The unallocated component is
maintained to cover uncertainties that could affect management's estimate
of probable losses. The unallocated component of the allowance reflects
the margin of imprecision inherent in the underlying assumptions used in
the methodologies for estimating specific and general losses in the
portfolio.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment
34
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the
borrower, including length of the delay, the reasons for the delay, the
borrower's prior payment record, and the amount of the shortfall in
relation to the principal and interest owed. Impairment is measured on a
loan by loan basis for commercial loans by either the present value of
expected future cash flows discounted at the loan's effective interest
rate, the loan's obtainable market price, or the fair value of the
collateral if the loan is collateral dependent.
Large groups of homogeneous loans are collectively evaluated for
impairment. Accordingly, the Bank does not separately identify individual
consumer loans for impairment disclosures.
LOANS HELD FOR SALE
Loans originated and intended for sale in the secondary market are carried
at the lower of cost or estimated fair value in the aggregate. Net
unrealized losses, if any, are recognized in a valuation allowance by
charges to income.
SERVICING ASSETS
Servicing assets are recognized as separate assets when rights are
acquired through purchase or through sale of financial assets. Capitalized
servicing rights are reported in other assets and are amortized into
noninterest expense in proportion to, and over the period of, the
estimated future net servicing income of the underlying financial assets.
Servicing assets are evaluated for impairment based upon the fair value of
the rights as compared to amortized cost. Impairment is determined by
stratifying rights by predominant characteristics, such as interest rates
and terms. Fair value is determined using prices for similar assets with
similar characteristics, when available, or based upon discounted cash
flows using market based assumptions. Impairment is recognized through a
valuation allowance for an individual stratum, to the extent that fair
value is less than the capitalized amount for the stratum. Fees received
for servicing loans owned by investors are based on a percentage of the
outstanding monthly principal balance of such loans and are included in
operating income as loan payments are received. Costs of servicing loans
are charged to expense as incurred.
OFF BALANCE SHEET INSTRUMENTS
In the ordinary course of business, the Bank has entered into commitments
to extend credit, including commitments under credit card arrangements,
commercial letters of credit and standby letters of credit. Such financial
instruments are recorded when they are funded.
BANK PREMISES AND EQUIPMENT
Land is carried at cost. Bank premises and equipment are stated at cost
less accumulated depreciation. Depreciation is based on the estimated
useful lives of the various properties and is computed using straight line
and accelerated methods.
Costs for maintenance and repairs are charged to operations as incurred.
Gains and losses on dispositions are included in current operations.
FEDERAL INCOME TAX
Deferred income tax assets and liabilities are determined using the
liability (or balance sheet) method. Under this method, the net deferred
tax asset or liability is determined based on the tax effects of the
various temporary differences between the book and tax bases of the
various balance sheet assets and liabilities and gives current recognition
to changes in tax rates and laws.
35
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares
outstanding during the period. The Company has no dilutive shares, as
the restricted stock grants are anti-dilutive.
COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Certain changes
in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of
the equity section of the balance sheet. Such items, along with net
income, are components of comprehensive income.
The components of other comprehensive income and related tax effects
are as follows:
(In Thousands)
-------------------------------
2005 2004 2003
------- ------- -------
Net Unrealized gain (loss) on
available-for-sale securities $(3,202) $(2,556) $(2,100)
Tax Effect 1,089 869 714
------- ------- -------
Net-of-tax amount (2,113) (1,687) (1,386)
------- ------- -------
Reclassification adjustment for gain on sale of
available-for-sale securities $ (9) $ (127) $ (528)
Tax Effect 3 43 181
------- ------- -------
Net-of-tax amount (6) (84) (347)
------- ------- -------
Other comprehensive income $(2,119) $(1,771) $(1,733)
======= ======= =======
RECLASSIFICATION
Certain amounts in the 2004 and 2003 consolidated financial statements
have been reclassified to conform with the 2005 presentation.
NOTE 2 - RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS
The Bank is required to maintain average balances on hand with the
Federal Reserve Bank. The aggregate reserve remains the same at
December 31, 2005 as it was for December 31, 2004 at $4.6 million.
The Company and its subsidiaries maintain cash balances with high
quality credit institutions. At times such balances may be in excess
of the federally insured limits.
36
NOTE 3 - SECURITIES
The amortized cost and fair value of securities, with gross unrealized
gains and losses, follows:
(In Thousands)
--------------------------------------------------
2005
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
Available-for-Sale:
U.S. Treasury $ 2,380 $ - $ 26 $ 2,354
U.S. Government agency 111,503 4 1,662 109,845
Mortgage-backed securities 29,470 10 966 28,514
State and local governments 63,141 426 676 62,891
Equity securities 47 - - 47
--------- ---------- ---------- ---------
$ 206,541 $ 440 $ 3,330 $ 203,651
========= ========== ========== =========
(In Thousands)
--------------------------------------------------
2004
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
Available-for-Sale:
U.S. Treasury $ 4,856 $ 1 $ 5 $ 4,852
U.S. Government agency 84,095 155 758 83,492
Mortgage-backed securities 30,329 106 347 30,088
State and local governments 53,479 1,292 124 54,647
Equity securities 48 - - 48
--------- ---------- ---------- ---------
$ 172,807 $ 1,554 $ 1,234 $ 173,127
========= ========== ========== =========
Information pertaining to securities with gross unrealized losses at
December 31, 2005 and 2004, aggregated by investment category and
length of time that individual securities have been in a continuous
loss position follows:
2005
(In Thousands) (In Thousands)
Less Than Twelve Months Twelve Months & Over
----------------------- -----------------------
Gross Gross
Unrealized Unrealized
Losses Fair Value Losses Fair Value
---------- ---------- ---------- ----------
U. S. Treasury $ 2 $ 237 $ 24 $ 2,117
U. S. Government agency $ 286 $ 39,837 $ 1,376 $ 63,039
Mortgage-backed securities $ 123 $ 8,448 $ 843 $ 18,738
State and local governments $ 480 $ 30,354 $ 196 $ 6,404
37
NOTE 3 - SECURITIES (CONTINUED)
2004
(In Thousands) (In Thousands)
Less Than Twelve Months Twelve Months & Over
----------------------- -----------------------
Gross Gross
Unrealized Unrealized
Losses Fair Value Losses Fair Value
---------- ---------- ---------- ----------
U S Treasury $ 5 $ 2,870 $ - $ -
U S Government agency $ 563 $58,365 $ 195 $ 5,810
Mortgage-backed securities $ 209 $18,317 $ 138 $ 6,347
State and local governments $ 61 $ 9,483 $ 63 $ 2,258
Unrealized losses on securities have not been recognized into income
because the issuers' bonds are of high credit quality, the Bank has
the intent and ability to hold the securities for the foreseeable
future, and the decline in fair value is primarily due to increased
market interest rates. The fair value is expected to recover as the
bonds approach the maturity date.
The gross realized gains and losses for the years ended December 31,
are presented below:
(In Thousands)
--------------------------
2005 2004 2003
----- ----- -----
Gross realized gains $ 9 $ 133 $ 528
Gross realized losses - (6) -
----- ----- -----
Net Realized Gains $ 9 $ 127 $ 528
===== ===== =====
Tax expense related to net realized gains $ 3 $ 43 $ 180
===== ===== =====
The amortized cost and fair value of debt securities at December 31,
2005, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
(In Thousands)
------------------------
Amortized
Cost Fair Value
--------- ----------
One year or less $ 54,756 $ 54,444
After one year through five years 101,342 99,643
After five years through ten years 29,107 28,558
After ten years 21,289 20,959
-------- --------
206,494 203,604
Equity securities 47 47
-------- --------
Total $206,541 $203,651
======== ========
Investments with a carrying value and fair value of $140.3 million at
December 31, 2005 and $127 million at December 31, 2004 were pledged
to secure public deposits and securities sold under repurchase
agreements.
38
NOTE 4 - LOANS
Loans at December 31, are summarized below:
(In Thousands)
-------------------------
2005 2004
--------- ----------
Loans:
Real estate (Consumer, Cml & Ag) $ 268,315 $ 273,981
Commercial and industrial 90,227 98,518
Agricultural 62,023 55,219
Consumer, Overdrafts and other loans 34,686 41,276
Industrial Development Bonds 9,237 10,687
--------- ---------
464,488 479,681
Less: Deferred loan fees and costs (396) (856)
--------- ---------
464,092 478,825
Less: Allowance for loan losses (5,388) (6,814)
--------- ---------
Loans - Net $ 458,704 $ 472,011
========= =========
The following is a maturity schedule by major category of loans
including available for sale loans:
(In Thousands)
---------------------------------
Principal Payments Due Within
---------------------------------
Two to After
One Year Five Years Five Years
-------- ---------- ----------
Real estate loans (Consumer, Cml & Ag) $ 10,043 $ 12,793 $245,479
Commercial and industrial loans 28,695 40,862 20,670
Agricultural 28,349 28,463 5,211
Consumer, Master Card and Overdrafts 7,354 22,288 5,044
Industrial Development Bonds 1,316 6,652 1,269
The distribution of fixed rate loans and variable rate loans by major
loan category is as follows as of December 31, 2005:
(In Thousands)
-------------------------
Fixed Variable
Rate Rate
-------- ---------
Real estate loans (Consumer, Cml & Ag) $ 28,337 $ 239,978
Commercial and industrial loans 45,394 44,833
Agricultural 20,710 41,313
Consumer, Master Card and Overdrafts 32,718 1,968
Industrial Development Bonds 9,237 -
One to four family residential mortgage loans amounting to $80.8
million have been pledged as security for loans the Bank has received
from the Federal Home Loan Bank.
As of December 31, 2005 and 2004 there were $8.9 and $3.2 million,
respectively, of undisbursed loans in process.
39
NOTE 4 - LOANS (CONTINUED)
The following is an analysis of the allowance for loan loss:
(In Thousands)
-----------------------------
2005 2004 2003
------- ------- -------
Allowance for Loan Losses
Balance at beginning of year $ 6,814 $ 7,300 $ 6,400
Provision for loan loss (425) 884 6,903
Loans charged off (2,096) (1,779) (7,286)
Recoveries 1,095 1,095 1,283
Allowance for Unfunded Loan Commitments &
Letters of Credit $ - $ (686) $ -
------- ------- -------
Allowance for Loan & Leases Losses $ 5,388 $ 6,814 $ 7,300
======= ======= =======
Allowance for Unfunded Loan Commitments &
Letters of Credit $ 841 $ 686 $ --
------- ------- -------
Total Allowance for Credit Losses $ 6,229 $ 7,500 $ 7,300
======= ======= =======
The company segregated its Allowance for Loan and Lease Losses (ALLL)
into two reserves at the period ending December 31, 2004: The ALLL and
the Allowance for Unfunded Loan Commitments and Letters of Credit
(AULC). When combined, these reserves constitute the total Allowance
for Credit Losses (ACL). The portion of 2003 ACL attributable to AULC
was $402 thousand.
The AULC is reported within other liabilities on the balance sheet
while the ALLL is netted within the loans, net asset line. The ACL
presented above represents the full amount of reserves available to
absorb possible credit losses.
The following is a summary of information pertaining to impaired
loans:
(In Thousands)
-----------------
2005 2004
------- -------
Impaired loans without a
valuation allowance $ 1,273 $ 397
Impaired loans with a valuation
allowance 7,221 10,960
------- -------
Total impaired loans $ 8,494 $11,357
======= =======
Valuation allowance related to
impaired loans $ 1,978 $ 2,624
Total non-accrual loans $ 5,060 $ 6,059
Total loans past-due ninety days or more and still accruing $ - $ 393
(In Thousands)
-------------------------------
2005 2004 2003
------- ------- -------
Average investment in
impaired loans $ 9,926 $16,030 $19,040
======= ======= =======
Interest income recognized
on impaired loans $ 480 $ 572 $ 1,227
======= ======= =======
Interest income recognized on
a cash basis on impaired loans $ 473 $ 279 $ 346
======= ======= =======
No additional funds are committed to be advanced in connection with
impaired loans.
40
NOTE 5 - PREMISES AND EQUIPMENT
The major categories of banking premises and equipment and accumulated
depreciation at December 31 are summarized below:
(In Thousands)
-----------------------
2005 2004
-------- --------
Land $ 2,756 $ 2,756
Buildings (useful life 15-39 years) 15,080 15,052
Furnishings (useful life 3-15 years) 9,758 10,063
-------- --------
27,594 27,871
Less: Accumulated depreciation (12,720) (12,351)
-------- --------
Premises and Equipment (Net) $ 14,874 $ 15,520
======== ========
NOTE 6 - SERVICING
Loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of loans
serviced for others were $249 and $244 million at December 31, 2005
and 2004, respectively.
The balance of capitalized servicing rights included in other assets
at December 31, 2005 and 2004, was $1.7 and $1.5 million,
respectively. The capitalized addition of servicing rights is included
in net gain on sale of loans on the consolidated statement of income.
The capitalized additions are as shown in the table following.
The fair market value of the capitalized servicing rights as of
December 31, 2005 and 2004 was $1.9 and $2.1 million, respectively.
The valuation for 2005 was completed by stratifying the loans into
like groups based on loan type, term and new versus seasoned.
Impairment was measured by estimating the fair value of each stratum,
taking into consideration an estimated level of prepayment based upon
current market conditions. All stratums showed positive values
compared to carrying value using a discount yield of 8.5%. The
valuation for 2004 was calculated using a present value calculation on
the discounted cash flows of each individual capitalized servicing
right. The discount rate utilized was the average internal rate of
return of the portfolio, 5.8%. The stated fair value represents the
present value over an 84-month time frame.
The following summarizes mortgage servicing rights capitalized and
amortized during each year:
(In Thousands)
------------------------
2005 2004
------- -------
Beginning Year $ 1,500 $ 1,441
Capitalized Additions $ 483 $ 391
Amortization $ (293) $ (332)
Valuation Allowance $ - $ -
------- -------
End of Year $ 1,690 $ 1,500
======= =======
41
NOTE 7 - DEPOSITS
Time deposits at December 31 consist of the following:
(In Thousands)
------------------------
2005 2004
-------- --------
Time deposits under $100,000 $236,864 $220,905
Time deposits of $100,000 or more 74,982 91,996
-------- --------
$311,846 $312,901
======== ========
At December 31, 2005 the scheduled maturities for time deposits are as
follows:
(In Thousands)
-------------
2006 $ 192,000
2007 71,858
2008 27,347
2009 18,909
2010 745
thereafter 987
---------
$ 311,846
=========
NOTE 8 - SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
The Bank's policy requires qualifying securities to be used as
collateral for the underlying repurchase agreements. As of December
31, 2005 and 2004 securities with a book value of $38.8 million and
$31.6 million, respectively, were underlying the repurchase agreements
and were under the Bank's control.
NOTE 9 - LONG TERM DEBT
Long term debt consists of various loans from the Federal Home Loan
Bank. Repayment structures vary, ranging from monthly installments,
annual payments or upon maturity. Interest payments are due monthly
with interest rates on the loans varying from 2.24% to 7.05%. Total
borrowings were $35.0 and $22.0 million for 2005 and 2004,
respectively. Notes are secured by a blanket lien on 100% of the one
to four family residential mortgage loan portfolio (Note 4).
The following is a schedule by years of future minimum principal
payments:
(In Thousands)
-------------
2006 $ 11,720
2007 6,416
2008 711
2009 464
2010 5,641
thereafter 10,000
--------
$ 34,952
========
42
NOTE 10 - FEDERAL INCOME TAXES
The components of income tax expense for the years ended December 31
are as follows:
(In Thousands)
----------------------------------------
2005 2004 2003
------- ------- -------
Current:
Federal $ 2,815 $ 3,587 $ 2,585
Deferred:
Federal 387 (14) (126)
------- ------- -------
$ 3,202 $ 3,573 $ 2,459
======= ======= =======
The following is a reconciliation of the statutory federal income tax
rate to the effective tax rate:
(In Thousands)
----------------------------------------
2005 2004 2003
-------- ------- -------
Income tax at statutory rates $ 4,004 $ 4,013 $ 3,429
Increase(decrease) resulting from:
Tax exempt interest (784) (706) (571)
Change in prior estimates and other (18) 266 (399)
------- ------- -------
$ 3,202 $ 3,573 $ 2,459
======= ======= =======
Deferred tax assets and liabilities at December 31 are comprised of
the following:
(In Thousands)
-----------------
2005 2004
------ ------
Deferred Tax Assets:
Allowance for loan losses $1,832 $2,263
Net unrealized loss on available-
for-sale securities 984 -
Other 484 256
------ ------
Total deferred tax assets 3,300 2,519
Deferred Tax Liabilities:
Accreted discounts on bonds 74 29
FHLB stock dividends 721 659
Mortgage servicing rights 572 507
Other 505 494
Net unrealized gain on available-
for-sale securities - 107
------ ------
Total deferred tax liabilities 1,872 1,796
------ ------
Net Deferred Tax Asset (Liability) $1,428 $ 723
====== ======
43
NOTE 11 - EMPLOYEE BENEFIT PLAN
The Bank has established a 401(k) profit sharing plan, which allows
eligible employees to save at a minimum one percent of eligible
compensation on a pre-tax basis, subject to certain Internal Revenue
Service limitations. The Bank will match 50% of employee 401(k)
contributions up to four percent of total eligible compensation. In
addition, the Bank may make a discretionary contribution from time to
time. A participant is 100% vested in the participant's deferral
contributions and employer matching contributions. A six-year vesting
schedule applies to employer discretionary contributions.
Contributions to the 401(k) profit sharing plan for both the employer
matching contribution and the discretionary contribution were $608,
$546, and $505 thousand for 2005, 2004 and 2003, respectively.
The Company has a Long-Term Stock Incentive Plan under which 1,000
shares of restricted stock were issued to 38 employees during 2005.
Under the plan, the shares vest 100% in three years. Due to employee
termination, there were 20 shares forfeited during 2005. Compensation
expense applicable to the restricted stock totaled $14 thousand for
the year ended December 31, 2005.
NOTE 12 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to
senior officers and directors and their affiliated companies amounting
to $22.3 and $20.3 million at December 31, 2005 and 2004,
respectively. Loans made during 2005 were $168.4 million and
repayments were $165.1 million. During 2005, two directors retired
from the Board and two directors were added. Their difference in
related borrowings amounted to $1.3 million, net deletion. Deposits of
directors, executive officers and companies in which they have a
direct or indirect ownership as of December 31, 2005 and 2004 amounted
to $23.4 million and $17.3 million, respectively.
NOTE 13 - OFF BALANCE SHEET ACTIVITIES
CREDIT RELATED FINANCIAL INSTRUMENTS
The Bank is a party to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing need of its customer. These financial instruments include
commitments to extend credit, standby letters of credit and commercial
letters of credit. Such commitments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets.
The Bank's exposure to credit loss is represented by the contractual
amount of these commitments. The Bank follows the same credit policies
in making commitments as it does for on-balance-sheet instruments. At
year end 2004 the Bank segregated the Allowance for Loan Losses into
two components. The allowance as it relates to unfunded loan
commitments (AULC) is included under other liabilities. The AULC as of
December 31, 2005 and 2004 was $841 and 686 thousand, respectively. At
December 31, 2005 and 2004, the following financial instruments were
outstanding whose contract amounts represent credit risk:
(In Thousands)
-------------------------
2005 2004
--------- ---------
Commitments to extend credit $ 121,857 $ 108,731
Credit card arrangements 16,092 15,404
Standby letters of credit 12,039 1,950
Commitments to extend credit, credit card arrangements and standby
letters of credit all include exposure to some credit loss in the
event of nonperformance of the customer. The Bank's credit policies
and procedures for credit commitments and financial guarantees are the
same as those for extensions of credit that are
44
NOTE 13 - OFF BALANCE SHEET ACTIVITIES
recorded in the financial statements. Because these instruments have fixed
maturity dates, and because many of them expire without being drawn upon,
they generally do not present any significant liquidity risk to the Bank.
COLLATERAL REQUIREMENTS
To reduce credit risk related to the use of credit-related financial
instruments, the Bank might deem it necessary to obtain collateral. The
amount and nature of the collateral obtained is based on the Bank's credit
evaluation of the customer. Collateral held varies but may include cash,
securities, accounts receivable, inventory, property, plant, and equipment
and real estate.
LEGAL CONTINGENCIES
Various legal claims also arise from time to time in the normal course of
business, which, in the opinion of management, will have no material
effect on the Company's consolidated financial statements.
NOTE 14 - MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's and Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off
balance-sheet items as calculated under regulatory accounting practices.
The capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total
risk-based capital and Tier I capital to risk-weighted assets (as defined
in the regulations), and Tier I capital to adjusted total assets (as
defined). Management believes, as of December 31, 2005, that the Bank
meets all the capital adequacy requirements to which it is subject.
As of December 31, 2005 the most recent notification from the FDIC
indicated the Bank was categorized as well capitalized under the
regulatory framework for prompt corrective action. To remain categorized
as well capitalized, the Bank will have to maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed in
the table to follow. There are no conditions or events since the most
recent notification that management believes have changed the Bank's
prompt corrective action category.
The Company and the Bank's actual and required capital amounts and ratios
as of December 31, 2005 and 2004 are as follows:
45
NOTE 14 - MINIMUM REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
To Be Well Capitalized
Under the Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
------------------------------------------------------------------------------------------
(000's) (000's) (000's)
As of December 31, 2005 Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------
Total Risk-Based Capital
(to Risk Weighted Assets)
Consolidated $ 90,724 17.68% $ 41,042 8.00% N/A N/A
Farmers & Merchants State Bank 89,717 17.49% 41,044 8.00% 51,306 10.00%
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated 84,495 16.47% 20,521 4.00% N/A N/A
Farmers & Merchants State Bank 68,488 13.35% 20,522 4.00% 30,783 6.00%
Tier 1 Capital
(to Adjusted Total Assets)
Consolidated 84,495 11.87% 28,475 4.00% N/A N/A
Farmers & Merchants State Bank 68,488 9.53% 28,759 4.00% 35,949 5.00%
To Be Well Capitalized
Under the Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
----------------------------------------------------------------------------------------
(000's) (000's) (000's)
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------------------------
As of December 31, 2004
Total Risk-Based Capital
(to Risk Weighted Assets)
Consolidated $ 84,939 16.88% $ 40,264 8.00% N/A N/A
Farmers & Merchants State Bank 84,313 16.75% 40,271 8.00% 50,339 10.00%
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated 78,633 15.62% 20,132 4.00% N/A N/A
Farmers & Merchants State Bank 63,006 12.52% 20,136 4.00% 30,203 6.00%
Tier 1 Capital
(to Adjusted Total Assets)
Consolidated 78,633 11.17% 28,160 4.00% N/A N/A
Farmers & Merchants State Bank 63,006 8.90% 28,308 4.00% 35,385 5.00%
46
NOTE 15 - RESTRICTIONS OF DIVIDENDS & INTER-COMPANY BORROWINGS
The Bank is restricted as to the amount of dividends that can be paid.
Dividends declared by the Bank that exceed the net income for the current
year plus retained income for the preceding two years must be approved by
federal and state regulatory agencies. Under this formula dividends of
$5.2 million may be paid without prior regulatory approval. Regardless of
formal regulatory restrictions, the Bank may not pay dividends that would
result in its capital levels being reduced below the minimum requirements
shown above. Under current Federal Reserve regulations, the Bank is
limited as to the amount and type of loans it may make to the Company and
its non-bank subsidiary. These loans are subject to qualifying collateral
requirements on which the amount of the loan may be based.
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of financial instruments are management's estimate of the
values at which the instruments could be exchanged in a transaction
between willing parties. These estimates are subjective and may vary
significantly from amounts that would be realized in actual transactions.
In addition, other significant assets are not considered financial assets
including deferred tax assets, premises, equipment and intangibles.
Further, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on the fair
value estimates and have not been considered in any of the estimates.
The estimated fair values, and related carrying or notional amounts, for
on and off-balance sheet financial instruments as of December 31, 2005 and
2004 are reflected below.
(In Thousands)
-------------------------------------------------------
2005 2004
-------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------------------------
Financial Assets:
Cash and due from banks $ 20,056 $ 20,056 $ 15,026 $ 15,026
Interest-bearing deposits in banks 2,533 2,533 9,230 9,230
Securities - available for sale 203,651 203,651 173,127 173,127
Federal Home Loan Bank Stock 3,791 3,791 3,607 3,607
Loans, net 458,704 459,598 472,011 475,228
Interest receivable 5,036 5,036 4,686 4,686
Loans held for sale - - 175 175
Financial Liabilities:
Deposits $ 576,297 $ 575,554 $ 574,205 $ 573,616
Short-term debt
Federal funds purchased - - - -
Repurchase agreement sold 21,158 21,158 22,852 22,852
Long -term debt 34,952 34,551 21,964 20,374
Interest payable 1,191 1,191 879 879
Dividends payable 844 844 715 715
Off-Balance Sheet Financial Instruments
Commitments to extend credit $ - $ - $ - $ -
Standby letters of credit - - - -
The following assumptions and methods were used in estimating
the fair value for financial instruments:
47
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
CASH AND DUE FROM BANKS
The carrying amounts reported in the balance sheet for cash and due from
banks and federal funds sold approximate their fair values.
INTEREST BEARING DEPOSITS
The carrying amounts of interest-bearing deposits maturing within ninety
days approximate their fair values. Fair values of other interest-bearing
deposits are estimated using discounted cash flow analyses based on
current rates for similar types of deposits.
SECURITIES AND FEDERAL HOME LOAN BANK STOCK
Fair values for securities, excluding Federal Home Loan Bank stock, are
based on quoted market prices, where available. If quoted market prices
are not available, fair values are based on quoted market prices of
comparable instruments. The carrying value of Federal Home Loan Bank stock
approximates fair value based on the redemption provisions of the Federal
Home Loan Bank.
LOANS
Most commercial and real estate mortgage loans are made on a variable rate
basis. For those variable-rate loans that reprice frequently, and with no
significant change in credit risk, fair values are based on carrying
values. The fair values of the fixed rate and all other loans are
estimated using discounted cash flow analysis, using interest rates
currently being offered for loans with similar terms to borrowers with
similar credit quality.
LOANS HELD FOR SALE
Fair values for loans held for sale approximate the carrying values as
these loans are generally sold within forty-five days of being made.
DEPOSITS
The fair values disclosed for deposits with no defined maturities are
equal to their carrying amounts, which represent the amount payable on
demand. The carrying amounts for variable-rate, fixed-term money market
accounts and certificates of deposit approximate their fair value at the
reporting date. Fair value for fixed-rate certificates of deposit are
estimated using a discounted cash flow analysis that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
BORROWINGS
Short-term borrowings are carried at cost that approximates fair value.
Other long-term debt was generally valued using a discounted cash flows
analysis with a discounted rate based on current incremental borrowing
rates for similar types of arrangements, or if not available, based on an
approach similar to that used for loans and deposits.
ACCRUED INTEREST RECEIVABLE AND PAYABLE
The carrying amounts of accrued interest approximate their fair values.
DIVIDENDS PAYABLE
The carrying amounts of dividends payable approximate their fair values
and are generally paid within forty days of declaration.
48
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
Fair values for off-balance-sheet, credit related financial instruments
are based on fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
counterparties' credit standing.
NOTE 17 - CONDENSED FINANICAL STATEMENTS OF PARENT COMPANY
BALANCE SHEET (In Thousands)
-------------------------
2005 2004
-------------------------
ASSETS
Cash $ 325 $ 651
Related party receivables:
Dividends receivable from subsidiaries 1,100 300
Note receivable from Bank subsidiary 15,000 15,000
Investment in subsidiaries 67,164 63,799
-------- --------
TOTAL ASSETS $ 83,589 $ 79,750
======== =========
LIABILITIES
Accrued expenses $ 157 $ 190
Dividends payable 844 715
-------- --------
Total Liabilities 1,001 905
-------- --------
STOCKHOLDERS' EQUITY
Common stock - No par value - 1,500,000 shares
authorized; 1,300,000 shares issued 12,677 12,677
Treasury Stock - 20 shares (2) -
Unearned Stock Awards - 980 shares (113) -
Retained earnings 71,933 65,956
Accumulated other comprehensive income (Loss) (1,907) 212
-------- --------
Total Stockholders' Equity 82,588 78,845
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 83,589 $ 79,750
======== =========
49
NOTE 17 - CONDENSED FINANICAL STATEMENTS OF PARENT COMPANY (CONTINUED)
STATEMENT OF INCOME
(In Thousands)
----------------------------------------
2005 2004 2003
----------------------------------------
INCOME
Dividends from subsidiaires $ 2,855 $ 2,185 $ 13,273
Interest 713 713 604
-------- -------- --------
Total Income 3,568 2,898 13,877
OPERATING EXPENSES 344 170 125
-------- -------- --------
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED EARNINGS AND SUBSIDIARIES 3,224 2,728 13,752
INCOME TAXES 132 185 175
-------- -------- --------
3,092 2,543 13,577
Equity in undistributed earnings
of subsidiaries 5,484 5,687 (5,951)
-------- -------- --------
NET INCOME $ 8,576 $ 8,230 $ 7,626
======== ======== ========
STATEMENTS OF CASHFLOWS
(In Thousands)
---------------------------------------
2005 2004 2003
---------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,576 $ 8,230 $ 7,626
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Equity in undistributed net income
of subsidiaries (5,484) (5,687) 5,951
Changes in Operating Assets and
Liabilities:
Note receivable - - (5,000)
Dividends receivable (800) (300) 325
Other Liabilities (33) (25) 55
-------- -------- --------
Net Cash Provided by
Operating Activities 2,259 2,218 8,957
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of dividends (2,470) (2,470) (8,709)
Purchase of Treasury Stock (115) - -
-------- -------- --------
Net Change in Cash and
Cash Equivalents (326) (252) 248
CASH AND CASH EQUIVALENTS
Beginning of year 651 903 655
-------- -------- --------
CASH AND CASH EQUIVALENTS
End of year $ 325 $ 651 $ 903
======== ======== =======
50
(000s OMITTED EXCEPT PER SHARE DATA)
Quarterly Financial Data - UNAUDITED
Quarter Ended in 2005
-----------------------------------------------------
Mar 31 June 30 Sep 30 Dec 31
----------- ----------- ----------- -----------
Summary of Income:
Interest income $ 9,285 $ 9,207 $ 9,384 $ 10,135
Interest expense 3,018 3,159 3,442 3,920
----------- ----------- ----------- -----------
Net Interest Income 6,267 6,048 5,942 6,215
Provision for loan loss 96 (205) (352) 36
----------- ----------- ----------- -----------
Net interest income after
provision for loan loss 6,171 6,253 6,294 6,179
Other income (expense) (3,426) (3,243) (3,245) (3,205)
----------- ----------- ----------- -----------
Net income before income taxes 2,745 3,010 3,049 2,974
Income taxes 712 803 821 866
----------- ----------- ----------- -----------
Net income $ 2,033 $ 2,207 $ 2,228 $ 2,108
=========== =========== =========== ===========
Earnings per Common Share $ 1.56 $ 1.70 $ 1.72 $ 1.62
=========== =========== =========== ===========
Average common shares outstanding 1,300,000 1,300,000 1,299,739 1,299,000
=========== =========== =========== ===========
Quarter Ended in 2004
-----------------------------------------------------
Mar 31 June 30 Sep 30 Dec 31
----------- ----------- ----------- -----------
Summary of Income:
Interest income $ 9,307 $ 9,365 $ 9,249 $ 9,387
Interest expense 2,768 2,758 2,759 2,938
----------- ----------- ----------- -----------
Net Interest Income 6,539 6,607 6,490 6,449
Provision for loan loss 416 375 150 (56)
----------- ----------- ----------- -----------
Net interest income after
provision for loan loss 6,123 6,232 6,340 6,505
Other income (expense) (3,296) (3,312) (3,270) (3,519)
----------- ----------- ----------- -----------
Net income before income taxes 2,827 2,920 3,070 2,986
Income taxes 821 879 929 944
----------- ----------- ----------- -----------
Net income $ 2,006 $ 2,041 $ 2,141 $ 2,042
=========== =========== =========== ===========
Earnings per common share $ 1.54 $ 1.57 $ 1.65 $ 1.57
=========== =========== =========== ===========
Average common shares outstanding 1,300,000 1,300,000 1,300,000 1,300,000
=========== =========== =========== ===========
51
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTING AND FINANCIAL DISCLOSURE
No disagreements exist on accounting and financial disclosures or related
matters.
ITEM 9A. CONTROLS AND PROCEDURES
MANAGEMENTS DISCLOSURE OF INTERNAL CONTROLS & PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
December 31, 2005, pursuant to Exchange Act 13a-15. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of December 31,
2005, in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in the
Company's periodic SEC filings.
52
MANAGEMENT REPORT REGARDING INTERNAL CONTROL AND
COMPLIANCE WITH DESIGNATED LAWS AND REGULATIONS
Management of Farmers & Merchants Bancorp, Inc. and Subsidiaries is responsible
for preparing the Bank's annual financial statements. Management is also
responsible for establishing and maintaining internal control over financial
reporting presented in conformity with both generally accepted accounting
principles and regulatory reporting in conformity with the Federal Financial
Institutions Examination Council Instructions for Consolidated Reports of
Condition and Income (call report instructions). The Bank's internal control
contains monitoring mechanisms, and actions are taken to correct deficiencies
identified.
There are inherent limitations in the effectiveness of any internal control,
including the possibility of human error and the circumvention or overriding of
controls. Accordingly, even effective internal control can provide only
reasonable assurance with respect to financial statement preparation. Further,
because of changes in conditions, the effectiveness of internal control may vary
over time.
It is also management's responsibility to ensure satisfactory compliance with
all designated laws and regulations and in particular, those laws and
regulations concerning loans to insiders. The federal laws concerning loans to
insiders are codified at 12 USC 375a and 375b, and the federal regulations are
set forth at 12 CFR 23.5, 31, and 215.
Pursuant to Exchange Act Rule 13a-15, the company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Company's Principal Executive Officer and Principal Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of December 31, 2005. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective as of
December 31, 2005 in timely alerting them to material information relating to
the Company (including its consolidated subsidiaries) required to be included in
the Company's periodic SEC filings.
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f). Under the supervision and with the participation of our management,
including our Principal Executive Officer and Principal Financial Officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control -
Intergrated Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2005.
Plante & Moran, PLLC, the independent registered public accounting firm that
audited the financial statements contained herein, has issued an attestation
report on management's assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2005.
There was no change in the company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended December 31, 2005 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
February 3, 2006
Farmers & Merchants Bancorp, Inc. and Subsidiaries
/s/ Paul S. Siebenmorgen
- --------------------------------------------
Paul S. Siebenmorgen, President/CEO
/s/ Barbara J. Britenriker
- --------------------------------------------
Barbara J. Britenriker, Chief Financial Officer
53
[PLANTE MORAN LOGO] PLANTE & MORAN, PLLC
Suite 500
2601 Cambridge Court
Auburn Hills, MI 48326
Tel: 248,375,7100
Fax: 248,375,7101
plantemoran.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Archbold, Ohio
We have audited management's assessment included in the accompanying Report of
Management on Farmers & Merchants Bancorp, Inc. and Subsidiaries Internal
Control over Financial Reporting, that the Company maintained effective internal
control over financial reporting as of December 31, 2005, based on criteria
established in Internal Control-Integrated Framework issued by the committee of
Sponsoring Organizations of the Treadway Commission (COSO). Management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Because management's assessment
and our audit were conducted to also meet the reporting requirements of Section
112 of the Federal Deposit Insurance Corporations Improvement Act (FDICIA),
management's assessment and our audit of the Company's internal control over
financial reporting included controls over the preparation of financial
statements in accordance with the instructions to the Consolidated Financial
Statements for Bank Holding Companies (Form FR Y-9). A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Farmers & Merchants Bancorp, Inc.
and Subsidiaries maintained effective internal control over financial reporting
as of December 31, 2005, is fairly stated, in all material respects, based on
COSO criteria. Also in our opinion, Farmers & Merchants Bancorp, Inc. and
Subsidiaries maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2005 based oh the COSO criteria.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United State), the Consolidated Balance Sheets of
Farmers & Merchants Bancorp, Inc. and Subsidiaries as of December 31, 2005 and
2004
54
and the related consolidated statements of earnings, shareholders equity and
cash flow for each of the three years in the period ended December 31, 2005 and
our report dated February 17, 2006, expressed an unqualified opinion thereon.
[PLANTE & MORAN, PLLC]
February 17, 2006
Auburn Hills, Michigan
55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
The information called for herein is presented below:
YEAR FIRST
PRINCIPAL OCCUPATION OR BECAME
NAME AGE EMPLOYMENT FOR PAST FIVE YEARS DIRECTOR
- --------------------- --- ---------------------------------------- ----------
Dexter Benecke 63 President, Freedom Ridge, Inc 1999
Joe E. Crossgrove 69 Chairman of the Corporation and 1992
The Farmers & Merchants State Bank
Steven A. Everhart 51 Secretary/Treasurer, MBC Holdings, Inc 2003
Robert G. Frey 65 President, E.H. Frey & Sons, Inc. 1987
Jack C. Johnson 53 President, Hawk's Clothing, Inc. 1991
Dean E. Miller 62 President, MBC Holdings, Inc. 1986
Anthony J. Rupp 56 President, Rupp Furniture Co. 2000
David P. Rupp Jr. 64 Attorney 2001
James C. Saneholtz 59 President, Saneholtz-McKarns, Inc. 1995
Kevin J. Sauder 45 President, Chief Executive Officer 2004
Sauder Woodworking Company
Merle J. Short 65 President Promow, Inc. 1987
Paul S. Siebenmorgen 56 President and CEO fo the Corporation and 2005
the Farmers & Merhcants State Bank
Steven J. Wyse 61 Private Investor 1991
Dr. Betty K. Young 50 President, Northwest State Community 2005
College
56
EXECUTIVE OFFICERS
Principal Occupation & offices Held with
Name Age 69 Corporation & Bank for Past Five Years
- ----------------------- ------ -----------------------------------------
Joe E. Crossgrove 69 Chairman
Paul S. Siebenmorgan 56 President & Chief Executive Officer
Rex D. Rice 47 Executive Vice President
Senior Commercial Loan Officer
Edward A. Leininger 49 Executive Vice President
Chief Operating Officer
Barbara J. Britenriker 44 Executive Vice President
Chief Financial Officer
Richard J. Lis 64 Executive Vice President
Chief Lending Officer
The information called for under Rule 405 of Regulation S-K regarding compliance
with Section 16(a) is presented in the proxy statement to be furnished in
connection with the soliciation of proxies on behalf of the Board of Directors
of the Registrant for use at its Annual Meeting to be held on April 23, 2005,
and is incorporated herein by reference.
The Board of Directors of the Company adopted a Code of Business Conduct and
Ethics (the "Code") at its meeting on February 13, 2004. While the
Sarbanes-Oxley Act of 2002 mandates the adoption of a code of ethics for the
most senior executive officers of all public companies, the Code adopted by the
Corporation's Board of Directors is broader in the activities covered and
applies to all officers, directors and employees of the Corporation and the
Bank, including the chief executive officer, chief financial officer, principal
accounting officer and other senior officers performing accounting, auditing,
financial management or similar functions. The administration of the Code has
been delegated to the Audit Committee of the Board of Directors, a Committee
comprised entirely of "independent directors." The Code addresses topics such as
compliance with laws and regulations, honest and ethical conduct, conflicts of
interest, confidentiality and protection of Corporation assets, fair dealing and
accurate and timely periodic reports, and also provides for enforcement
mechanisms. The Board and management of the Corporation intends to continue to
monitor not only the developing legal requirements in this area, but also the
best practices of comparable companies, to assure that the Corporation maintains
sound corporate governance practices in the future. The Board of Directors has
determined that Steven A. Everhart, Chairman of the Audit Committee, is a
"financial expert" as defined under the regulations promulgated under the
Sarbanes Oxley Act discussed above.
A copy of the Corporation's Code is available on the website of the Bank
(www.fm-bank.com). In addition, a copy of the Code is available to any
shareholder free of charge upon request. Shareholders desiring a copy of the
Code should address written requests to Mr. Paul S. Siebenmorgen, President,
Chief Executive Officer and Treasurer of Farmers & Merchants Bancorp, Inc.,
307-11 North Defiance Street, Archbold, Ohio 43502, and are asked to mark Code
of Business Conduct and Ethics on the outside of the envelope containing the
request.
ITEM 11. EXECUTIVE COMPENSATION
The information called for herein is presented in the proxy statement to be
furnished in connection with the solicitation of proxies on behalf of the Board
of Directors of the Registrant for use at its Annual Meeting to be held on April
22, 2006, and is incorporated herein by reference.
57
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for herein is presented in the proxy statement to be
furnished in connection with the solicitation of proxies on behalf of the Board
of Directors of the Registrant for use at its Annual Meeting to be held
Saturday, April 22, 2006, and is incorporated herein by reference.
On April 23, 2005 the Company's shareholders approved the Farmers & Merchants
Bancorp, Inc. 2005 Long-Term Stock Incentive Plan. The plan authorizes the
issuance of up to 200,000 of the Company's common shares in the form of stock
options, restricted stock, performance shares, and unrestricted stock to
employees of the Company and its subsidiaries. During 2005, 1,000 shares of
restricted stock were issued under the plan to 38 employees of the Bank. These
grants will become completely vested in three years. Due to employee
termination, there were 20 shares forfeited during 2005.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
remaining available for
Number of securities future issuance under
to be issued upon Weighted-average equity compensation
exercise of outstanding exercise price of plans (excluding
options, warrants and outstanding options, securities reflected in
rights warrants and rights column (a))
(a) (b) (c)
- --------------------------------- ----------------------- -------------------- -----------------------
Equity compensation plans 0 $0.00 199,020
approved by security holders
Equity compensation plan 0 $0.00 0
not approved by security
holders
Total 0 $0.00 199,020
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for herein is presented in the proxy statement to be
furnished in connection with the solicitation of proxies on behalf of the Board
of Directors of the Registrant for use at its Annual Meeting to be held on April
22, 2006, and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for herein is presented in the proxy statement to be
furnished in connection with the solicitation of proxies on behalf of the Board
of Directors of the Registrant for use at its Annual Meeting to be held on April
22, 2006, and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) The Following documents are filed as part of this
report:
(1) Financial Statements (included in this 10-K
under item 8)
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in
Shareholders' Equity
Consolidated Statements of Cash Flows
Note to Consolidated Financial Statements
58
(2) Financial Statement Schedules
Five Year Summary of Operations
(3) Exhibits Required by Item 601 of Regulation S-K
(3.1) Articles of Incorporation are
incorporated by reference to the
Company's Quarterly Report on Form 10-Q
that was filed with the Commission on
May 10, 2004.
(3.2) Code of Regulations are incorporated by
reference to the Company's Quarterly
Report on Form 10-Q that was 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
the Current Report on 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 the Current Report on 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
the Current Report on 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 the
Current Report on 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 the Current Report
on Form 8-K filed with the Commission on
February 22, 2005).
(10.6) Change in Control Agreement executed by and
between the Company and Richard J Lis on
December 16, 2005 (incorporated by Reference to
the Current Report on Form 8-K file with the
Commission on December 16,2005).
(10.7) 2005 Long-Term Stock Incentive Plan
(incorporated by reference to the Quarterly
Report on Form 10-Q filed with the Commission on
October 27, 2005)
(10.8) Form of Restricted Stock Agreement (incorporated
by reference to the Quarterly Report on Form
10-Q filed with the Commission on October 27,
2005)
(21) Subsidiaries of Farmers & Merchants Bancorp, Inc.
(31.1) Certification of the Chief Executive Officer
Required under Rule 13(a)-14(a)/15d-14(a)
(31.2) Certification of the Chief Financial Officer
Required under Rule 13(a)- 14(a)/15d-14(a)
(32.1) Certification of the Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(32.2) Certification of the Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
59
FARMERS & MERCHANTS BANCORP, INC
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, herunto duly authorized
By: /s/ Paul S. Siebenmorgen Date: February 17, 2006
-------------------------
Paul S. Siebenmorgen
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Paul S Siebenmorgen Date: February 17, 2006 /s/ Barbara J. Britenriker Date: February 17, 2006
- ----------------------- ------------------------------
Paul S Siebenmorgen Barbara J. Britenriker
Chief Executive Officer Chief Financial Officer
(Principal Executive Officer) (Principal Financial Officer
/Principal Accounting Officer)
/s/ Joe E. Crossgrove Date: February 17, 2006 /s/ Jack C. Johnson Date: February 17, 2006
- ----------------------- ------------------------------
Joe E. Crossgrove Jack C. Johnson, Director
Director & Chairman
/s/ Anthony J. Rupp Date: February 17, 2006 /s/ Dean E. Miller Date: February 17, 2006
- ----------------------- ------------------------------
Anthony J. Rupp, Director Dean E. Miller, Director
/s/ David P. Rupp Jr. Date: February 17, 2006 /s/ Steven A. Everhart Date: February 17, 2006
- ----------------------- ------------------------------
David P. Rupp Jr, Director Steven A. Everhart, Director
/s/ James Saneholtz Date: February 17, 2006 /s/ Kevin J. Sauder Date: February 17, 2006
- ----------------------- ------------------------------
James Saneholtz, Director Kevin J. Sauder, Director
/s/ Merle J. Short Date: February 17, 2006 /s/ Robert G. Frey Date: February 17, 2006
- ----------------------- ------------------------------
Merle J. Short, Director Robert G. Frey, Director
/s/ Dexter Benecke Date: February 17, 2006 /s/ Steven J. Wyse Date: February 17, 2006
- ----------------------- ------------------------------
Dexter Benecke, Director Steven J. Wyse, Director
/s/ Dr. Betty Young Date: February 17, 2006
- -----------------------
Dr Betty Young, Director
60
Exhibit Index
Exhibit Description
- ------- -----------------------------------------------------------
(21) Subsidiaries of Farmers & Merchants Bancorp, Inc.
(31.1) Certification of the Chief Executive Officer Required under
Rule 13(a)-14(a)/15d-14(a)
(31.2) Certification of the Chief Financial Officer Required under
Rule 13(a)- 14(a)/15d-14(a)
(32.1) Certification of the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(32.2) Certification of the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
61