FARMERS & MERCHANTS BANCORP INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
---
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002
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.
---------------------------------
(Exact name of registrant as specified in its charter)

OHIO 34-1469491
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)

North Defiance Street, Archbold, Ohio 43502
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(Address of principal executive offices) (Zip Code)

(419) 446-2501
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Registrant's telephone number, including area code

- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---

Indicate the number of shares of each of the issuers classes of
common stock, as of the latest practicable date:

Common Stock, No Par Value 1,300,000
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Class Outstanding as of July 1, 2002

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q

FARMERS & MERCHANTS BANCORP, INC.
INDEX

Form 10-Q Items Page
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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets-
June 30, 2002, December 31, 2001 and June 30, 2001 1

Condensed Consolidated Statements of Income
Six Months Ended June 30, 2002 and June 30, 2001 2

Condensed Consolidated Statements of Cash Flows-
Six Months Ended June 30, 2002 and June 30, 2001 3

Notes to Condensed Financial Statements 4

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 5

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on form 8K 6

Signatures 7

FARMERS & MERCHANTS BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands of dollars)

June 30, 2002 December 31, 2001 June 30, 2001

ASSETS:
Cash and due from banks $ 16,295 $ 17,842 $ 21,337
Interest bearing deposits with banks 3,507 146 100
Federal funds sold 1,610 - 20,535
Investment Securities:
U.S. Treasury 4,430 5,038 7,784
U.S. Government 108,795 108,994 80,354
State & political obligations 52,100 50,819 35,173
All others 3,558 8,112 8,918
Loans and leases 476,077 468,243 460,490
Bank premises and equipment-net 12,649 12,332 11,530
Accrued interest and other assets 12,671 12,100 10,370
TOTAL ASSETS $ 691,692 $ 683,626 $ 656,591

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 40,573 $ 41,991 $ 36,052
Time and savings 535,145 524,166 509,652
Federal funds purchased and securities
sold under agreement to repurchase 19,827 26,539 19,585
Other borrowed money 16,726 17,410 18,339
Accrued interest and other liabilities 5,191 3,170 3,871
Total Liabilities 617,462 613,276 587,499

SHAREHOLDERS' EQUITY:
Common stock, no par value - authorized 1,500,000
shares; issued 1,300,000 shares 12,677 12,677 12,677
Undivided profits 58,634 56,092 54,588
Accumulated other comprehensive income 2,919 1,581 1,827
Total Shareholders' Equity 74,230 70,350 69,092

LIABILITIES AND SHAREHOLDERS' EQUITY $ 691,692 $ 683,626 $ 656,591

See Notes to Condensed Consolidated Unaudited Financial Statements.
Note: The December 31, 2001 Balance Sheet has been derived from the audited
financial statements of that date.

1

FARMERS & MERCHANTS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands of dollars)

Three Months Ended Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001

INTEREST INCOME:
Loans and leases $ 8,558 $ 10,652 $ 17,644 $ 21,474
Investment Securities:
U.S. Treasury securities 49 121 121 245
Securities of U.S. Government agencies 1,356 1,044 2,707 2,013
Obligations of states and political subdivisions 576 422 1,145 809
Other 84 178 189 398
Federal funds 27 203 41 363
Deposits in banks 12 66 17 95
Total Interest Income 10,662 12,686 21,864 25,397
INTEREST EXPENSE:
Deposits 4,543 5,958 9,210 11,996
Borrowed funds 340 583 689 1,430
Total Interest Expense 4,883 6,541 9,899 13,426
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 5,779 6,145 11,965 11,971
PROVISION FOR LOAN LOSSES 393 486 1,049 670
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,386 5,659 10,916 11,301
OTHER INCOME:
Service charges 499 471 936 909
Other 606 859 1,469 1,420
Net securities gains (losses) 13 153 63 204
1,118 1,483 2,468 2,533
OTHER EXPENSES:
Salaries and wages 1,992 1,768 3,900 3,552
Pension and other employee benefits 467 407 923 871
Occupancy expense (net) 86 252 194 237
Other operating expenses 1,803 1,733 3,636 3,408
4,348 4,160 8,653 8,068
INCOME BEFORE FEDERAL INCOME TAX 2,156 2,982 4,731 5,766
FEDERAL INCOME TAXES 543 851 1,213 1,683
NET INCOME 1,613 2,131 3,518 4,083
OTHER COMPREHENSIVE INCOME (NET OF TAX):
Unrealized gains (losses) on securities 1,464 184 1,338 932
COMPREHENSIVE INCOME $ 3,077 $ 2,315 $ 4,856 $ 5,015
NET INCOME PER SHARE (Based upon
weighted average nmber of shares outstanding of 1,300,000 $ 1.24 $ 1.64 $ 2.71 $ 3.14
DIVIDENDS DECLARED $ 0.40 $ 0.35 $ 0.75 $ 0.70

See Notes to Condensed Consolidated Unaudited Financial Statements.

2

FARMERS & MERCHANTS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of dollars)

Six Months Ended
June 30, 2002 June 30, 2001

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,518 $ 4,083
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and amortization 730 568
Premium amortization 409 142
Discount amortization (58) (80)
Provision for loan losses 1,049 670
Provision for deferred income taxes 10 (88)
(Gain) loss on sale of fixed assets (10) 11
(Gain) loss on sale of investment securities (63) (204)
Changes in Operating Assets and Liabilities:
Accrued interest receivable and other assets (581) (774)
Accrued interest payable and other liabilities 2,021 (149)
Net Cash Provided by Operating Activities 7,025 4,179
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,037) (1,755)
Proceeds from sale of fixed assets - -
Proceeds from maturities of investment securities: 35,822 19,451
Proceeds from sale of investment securities: 7,135 2,105
Purchase of investment securities- (37,893) (36,300)
Net increase in loans and leases (8,883) 19,485
Net Cash Used by Investing Activities (4,856) 2,986
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 9,561 29,241
Net change in short-term borrowings (6,712) 682
Increase in long-term borrowings - -
Payments on long-term borrowings (684) (12,447)
Payments of dividends (910) (910)
Net Cash Provided by Financing Activities 1,255 16,566
Net change in cash and cash equivalents 3,424 23,731
Cash and cash equivalents - Beginning of year 17,988 18,241
CASH AND CASH EQUIVALENTS - END OF THE YEAR $ 21,412 $ 41,972

RECONCILIATION OF CASH AND CASH EQUIVALENTS:
Cash and cash due from banks $ 16,295 $ 21,337
Interest bearing deposits 3,507 100
Federal funds sold 1,610 20,535
$ 21,412 $ 41,972

See Notes to Condensed Consolidated Unaudited Financial Statements.

3

FARMERS & MERCHANTS BANCORP, INC.

Notes to Condensed Consolidated Unaudited Financial Statements

NOTE 1 BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions for Form 10Q and Rule 10-01 of Regulation S-X;
accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments,
consisting of normal recurring accruals, considered necessary for a
fair presentation have been included. Operating results for the six
months ended June 30, 2002 are not necessarily indicative of the
results that are expected for the year ended December 31, 2002. For
further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 2001.

4

ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS

Farmers & Merchants Bancorp, Inc. was incorporated on February 25,
1985, under the laws of the State of Ohio. Farmers & Merchants
Bancorp, Inc., and its subsidiaries The Farmers & Merchants State
Bank and Farmers & Merchants Life Insurance Company are engaged in
commercial banking and life and disability insurance, respectively.
The executive offices of Farmers & Merchants Bancorp, Inc. are
located at 307-11 North Defiance Street, Archbold, Ohio 43502.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity for the six months ended June 30, 2002 comes primarily from
net income from operations of $3.5 million. This compares with net
income of $4.1 million for the same period in 2001. In addition,
funds were purchased from correspondents, and the Federal Home Loan
Bank when needed.

During the year loan balances were increased by 8.9 million. These
increases have occurred due to normal lending operations and the
conscious decision to retain a certain number of fixed rate mortgages
on the Bank's books to help bolster the net interest margin, without
substantially affecting the Bank's interest rate risk. Deposits have
maintained a steady growth to offset these loans and maintain a good
liquidity position.

The following is a summary of five capital ratios as they are
calculated from the June 30, 2002 financial statements:

Primary Ratio 11.52%
Total Capital Ratio 13.91%
Risk Based Capital Tier 1 15.85%
Risk Based Capital Tier 2 20.73%
Stockholders' Equity/Total Assets 10.73%

MARKET RISK

Market risk is the exposure to loss resulting from changes in
interest rates and equity prices. The primary market risk to which
the Company is subject is interest rate risk. The majority of the
Company's interest rate risk arises, from the instruments, positions
and transactions entered into for the purposes other than trading
such as loans, available for sale securities, interest bearing
deposits, short term borrowings and long term borrowings. Interest
rate risk occurs when interest bearing assets and liabilities reprice
at different times as market interest rates change. For example, if
fixed rate assets are funded with variable rate debt, the spread
between asset and liability rates will decline or turn negative if
rates increase.

Interest rate risk is managed within an overall asset/liability
framework for the Company. The principal objectives of
asset/liability management are to manage sensitivity of net interest
spreads and net income to potential changes in interest rates.
Funding positions are kept within predetermined limits designed to
ensure that risk-taking is not excessive and that liquidity is
properly managed. The Company employs a sensitivity analysis in the
form of a net interest income to help in the analysis.

0-90 days 90-365 days 1-5 Years Over 5 Years Total

Interest Bearing Dep 3,507 3,507
Investment Securities 8,108 15,930 104,746 40,099 168,883
Loans 116,286 176,504 85,581 100,157 478,528
Total Rate
Sensitive Assets 127,901 192,434 190,327 140,256 650,918

Deposits 127,052 213,654 235,012 0 575,718
Fed Funds Purchased
& agreements to repur 19,827 19,827
Other Borrowings 5,000 624 11,102 16,726
Total Rate
Sensitive Liabilities 146,879 218,654 235,636 11,102 612,271

Gap -18,978 -26,220 -45,309 129,154 38,647

5

PART II
EXHIBIT AND REPORTS ON FORM 8-K
ITEM 6
(A)
The following documents are filed as part of this report:

None

(B)
Reports on Form 8-K

No reports on Form 8-K were filed by the registrant during
the quarter ended June 30, 2002

6

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, theeunto duly authorized.

Farmers & Merchants Bancorp, Inc.,

Date: August 10, 2002 By: /s/ Joe E. Crossgrove
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Joe E. Crossgrove
President and Cashier

Date: August 10, 2002 By: /s/ Randal H. Schroeder
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Randal H. Schroeder
Vice-President
and Sr. Operations Officer

7

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION

99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.