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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 March 31, 3003
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.)
307-11 North Defiance Street, Archbold, Ohio 43502
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(Address of principal executive offices) (Zip Code)
(419) 446-2501
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Registrant's telephone number, including area code
- --------------------------------------------------------------------------------
(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 by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No __X__
Indicate the number of shares of each of the issuers classes of common
stock, as of the latest practicable date:
Common Stock, No Par Value 1,300,000
- ----------------------------- -------------------------------
Class Outstanding as of April 1, 2003
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
FARMERS & MERCHANTS BANCORP, INC.
INDEX
Form 10-Q Items Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets-
March 31, 2003, December 31, 2002 and March 31, 2002 1
Condensed Consolidated Statements of Net Income-
Three Months Ended March 31, 2003 and March 31, 2002 2
Condensed Consolidated Statements of Cash Flows-
Three Months Ended March 31, 2003 and March 31, 2002 3
Notes to Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 4
Item 3. Market Risk 5
Item 4. Controls and Procedures 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 6
Item 2. Changes in Securities and Use of Proceeds 6
Item 3. Defaults Upon Senior Securities 6
Item 4. Submission of Matters to an Vote of Security Holders 6
Item 5. Other Information 7
Item 6. Exhibits and Reports on form 8K 7
Signatures 7
Certifications Under Section 302 8 -9
Exhibit 99. Additional Exhibit - Certifications Under Section 906 10
ITEM 1 FINANCIAL STATEMENTS
FARMERS & MERCHANTS BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands of dollars)
March 31, 2003 December 31, 2002 March 31, 2002
ASSETS:
Cash and due from banks $ 22,537 $ 18,508 $ 13,435
Interest bearing deposits with banks 516 279 571
Federal funds sold 1,780 - 2,375
Investment Securities:
U.S. Treasury 4,356 4,215 5,391
U.S. Government 102,866 117,021 110,813
State & political obligations 55,828 55,860 51,366
All others - 1,697 3,578
Loans and leases (Net of reserve for loan losses of
$7,856, $6,400 and $5,900, respectively) 492,988 497,515 464,898
Bank premises and equipment-net 15,975 15,034 12,400
Accrued interest and other assets 17,126 16,357 14,154
TOTAL ASSETS $713,972 $726,486 $678,981
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 42,600 $ 43,808 $ 37,508
Time and savings 538,395 532,565 529,100
Federal funds purchased and securities
sold under agreement to repurchase 23,682 38,200 19,737
Other borrowed money 28,315 28,696 17,071
Accrued interest and other liabilities 4,147 5,479 3,892
Total Liabilities 637,139 648,748 607,308
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 60,681 61,345 57,541
Accumulated other comprehensive income 3,475 3,716 1,455
Total Shareholders' Equity 76,833 77,738 71,673
LIABILITIES AND SHAREHOLDERS' EQUITY $713,972 $726,486 $678,981
See Notes to Condensed Consolidated Unaudited Financial Statements.
Note: The December 31, 2002 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
March 31, 2003 March 31, 2002
INTEREST INCOME:
Loans and leases $ 8,630 $ 9,086
Investment Securities:
U.S. Treasury securities 44 72
Securities of U.S. Government agencies 1,166 1,351
Obligations of states and political subdivisions 578 569
Other 37 104
Federal funds 4 13
Deposits in banks 3 5
Total Interest Income 10,462 11,200
INTEREST EXPENSE:
Deposits 3,645 4,667
Borrowed funds 418 349
Total Interest Expense 4,063 5,016
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 6,399 6,184
PROVISION FOR LOAN LOSSES 3,938 656
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,461 5,528
OTHER INCOME:
Service charges 514 437
Other 740 863
Net securities gains (losses) 42 50
1,296 1,350
OTHER EXPENSES:
Salaries and wages 1,825 1,908
Pension and other employee benefits 462 456
Occupancy expense (net) 209 108
Other operating expenses 1,737 1,833
4,233 4,305
INCOME BEFORE FEDERAL INCOME TAX (476) 2,573
FEDERAL INCOME TAXES (347) 670
NET INCOME (129) 1,903
OTHER COMPREHENSIVE INCOME (NET OF TAX):
Unrealized gains (losses) on securities (241) (126)
COMPREHENSIVE INCOME $ (370) $ 1,777
NET INCOME PER SHARE (Based upon
weighted average number of shares outstanding of 1,300,000 $ (0.10) $ 1.46
DIVIDENDS DECLARED $ 0.40 $ 0.35
See Notes to Condensed Consolidated Unaudited Financial Statements.
2
FARMERS & MERCHANTS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of dollars)
Three Months Ended
March 31, 2003 March 31, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (129) $ 1,903
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and amortization 361 365
Premium amortization (258) 33
Discount amortization 54 (3)
Provision for loan losses 3,938 656
Provision for deferred income taxes (110) -
(Gain) loss on sale of fixed assets 2 (4)
(Gain) loss on sale of investment securities (42) (50)
Changes in Operating Assets and Liabilities: -
Accrued interest receivable and other assets (659) (2,054)
Accrued interest payable and other liabilities (1,332) 722
Net Cash Provided by Operating Activities 1,825 1,568
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (4,339) (429)
Proceeds from sale of fixed assets 3,035 -
Proceeds from maturities of investment securities: 18,443 12,557
Proceeds from sale of investment securities: (2,580) 2,205
Purchase of investment securities- - (13,485)
Net increase in loans and leases 589 2,689
Net Cash Used by Investing Activities 15,148 3,537
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 4,622 451
Net change in short-term borrowings (14,518) (6,802)
Increase in long-term borrowings - -
Payments on long-term borrowings (381) (339)
Payments of dividends (650) (455)
Net Cash Provided by Financing Activities (10,927) (7,145)
Net change in cash and cash equivalents 6,046 (2,040)
Cash and cash equivalents - Beginning of year 18,787 18,421
CASH AND CASH EQUIVALENTS - END OF THE YEAR $ 24,833 $ 16,381
RECONCILIATION OF CASH AND CASH EQUIVALENTS:
Cash and cash due from banks $ 22,537 $ 13,435
Interest bearing deposits 516 571
Federal funds sold 1,780 2,375
$ 24,833 $ 16,381
See Notes to Condensed Consolidated Unaudited Financial Statements.
3
FARMERS & MERCHANTS BANCORP, INC.
Notes to Condensed Consolidated Unaudited Financial Statements
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10Q and Rule 10-01 of
Regulation S-X; accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 2003 are
not necessarily indicative of the results that are expected for the year ended
December 31, 2003. 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, 2002.
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 three months ended March 31,2003 has come primarily from two
sources. Approximately $19 million of the securities portfolio has matured
without reinvestment to replace a reduction in deposits and balances in
repurchase agreements. In addition, some variable rate real estate mortgages,
that were part of the institution's loan portfolio have been refinanced into
fixed rate loans that were in turn sold on the secondary market.
During the quarter loan balances decreased by $1.5 million. This was due
primarily to the refinancing activities that were previously discussed in the
liquidity risk discussion. Loan demand remains steady.
The subsidiary bank shows a loss for the first quarter of $218.6 thousand. The
two main reasons for the loss were charge offs and additional loan loss reserve
allocations. Charge offs were led by the charge off of a large commercial
credit. The additional reserve allocation was due to collateral valuations being
downgraded. The problem loans were not new to management, and actions are being
taken to work out or recover losses to bring our performance back to where it
needs to be prior to year end.
A new operations center was opened in the first quarter. One time expenses for
the quarter, namely repairs-bank building is extremely high due to the cost of
UNISYS moving the proof equipment to the Operations Center and replacement of
the ATM network signs to the Star Logo. Approximately half of the cost of the
signs will be refunded in a future period. Depreciation expense includes the
completed cost of the center.
4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
The first quarter is not representative of the bank's earnings potential. It is
not anticipated that the loss adjustments will be repeated anytime soon. The
bank has seen an improvement in net interest margin and based on the yield and
maturity schedules, the margin should continue to improve through the second and
third quarters as a result of maturing time deposits that currently have a
higher average yield than current reinvestment rates. The bank has also
continued to be extremely busy in the residential real estate market with
refinancing activities. This should continue to bolster income through at least
the second quarter.
Management is working diligently to reanalyse the loan loss reserve to ensure it
is adequate. This will take time but should be completed in the next few months.
The bank remains well capitalized with strong earnings potential. Assuming no
major changes in overall economic conditions, subsequent quarters should show
improvement for the reasons stated previously.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
The following is a summary of five capital ratios as they are calculated from
the March 31, 2003 financial statements:
Primary Ratio 11.73%
Total Capital Ratio 14.27%
Risk Based Capital Tier 1 15.00%
Risk Based Capital Tier 2 20.10%
Stockholders' Equity/Total Assets 10.76%
ITEM 3 MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates and
equity prices. The primary market risk to which the Company is subject is
interest rate risk. The majority of the Company's interest rate risk arises,
from the instruments, positions and transactions entered into for the purposes
other than trading such as loans, available for sale securities, interest
bearing deposits, short term borrowings and long term borrowings. Interest rate
risk occurs when interest bearing assets and liabilities reprice at different
times as market interest rates change. For example, 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.
5
ITEM 3 MARKET RISK (Continued)
0-90 days 90-365 days 1-5 Years Over 5 Years Total
Interest Bearing Deposits 516 624
Investment Securities 8,048 15,741 100,106 39,562 163,457
Loans 122,328 114,681 87,665 170,338 495,012
Total Rate
Sensitive Assets 130,892 130,422 187,771 209,900 659,093
Deposits 150,719 247,814 182,462 0 580,995
Fed Funds Purchased
& agreements to repurchase 23,682 24,098
Other Borrowings 10,070 9,472 8,773 28,315
Total Rate
Sensitive Liabilities 174,401 257,884 191,934 8,773 633,408
Gap -43,509 -127,462 -4,163 201,127 25,685
ITEM 4 CONTROLS AND PROCEDURES
As of March 31, 2003, an evaluation was performed under the supervision and with
the participation of the Company's management including the CEO and CFO, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's management, including
the CEO and CFO, concluded that the Company's disclosure controls and procedures
were effective as of March 31, 2003. There have been no significant changes in
the Company's internal controls subsequent to March 31, 2003.
PART II
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
6
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the registrant during the quarter
ended March 31, 2003.
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, there unto duly authorized.
Farmers & Merchants Bancorp, Inc.,
Date: May 1, 2003 By: /s/ Joe E. Crossgrove
Joe E. Crossgrove
President and CFO
Date: May 1, 2003 By: /s/ Barbara J. Britenriker
Barbara J. Britenriker
Senior Vice-President and CFO
7
CERTIFICATIONS
I, Joe E. Crossgrove, President and CEO, certify that:
1 I have reviewed this quarterly report on Form 10-Q of Farmers &
Merchants Bancorp, Inc.;
2 Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3 Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4 The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrants' disclosure
controls and procedures as of a date within 90 days prior to the
filing of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5 The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6 The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 13, 2003
-----------------------------
/s/ Joe E. Crossgrove
-----------------------------
President and CEO
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8
CERTIFICATIONS
I, Barbara J. Britenriker, Senior Vice-President and CFO, certify that:
1 I have reviewed this quarterly report on Form 10-Q of Farmers &
Merchants Bancorp, Inc.;
2 Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3 Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4 The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrants' disclosure
controls and procedures as of a date within 90 days prior to the
filing of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5 The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have significant role in the registrant's
internal controls; and
6 The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 13, 2003
-----------------------------
/s/ Barbara J. Britenriker
-----------------------------
Senior Vice-President and CFO
-----------------------------
9
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-99 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002