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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, 2003
OR
Transition Report Pursuant to Section 13 or 15(d)
--- of the Securities Exchange Act of 1934
For the transition period from to
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Commission File Number 0-14492
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FARMERS & MERCHANTS BANCORP, INC.
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(Exact name of registrant as specified in its charter)
OHIO 34-1469491
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
307-11 North Defiance Street, Archbold, Ohio 43502
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(Address of principal executive offices) (Zip Code)
(419) 446-2501
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Registrant's telephone number, including area code
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or Section
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to 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
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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, 2003
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, 2003, December 31, 2002 and June 30, 2002 1
Condensed Consolidated Statements of Net Income-
Six Months Ended June 30, 2003 and June 30, 2002 2
Condensed Consolidated Statements of Cash Flows-
Six Months Ended June 30, 2003 and June 30, 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 a 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
Certifications Under Section 906 10
ITEM 1 FINANCIAL STATEMENTS
FARMERS & MERCHANTS BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands of dollars)
June 30, 2003 December 31, 2002 June 30, 2002
ASSETS:
Cash and due from banks $ 23,423 $ 18,508 $ 16,295
Interest bearing deposits with banks 509 279 3,507
Federal funds sold 0 - 1,610
Investment Securities:
U.S. Treasury 3,852 4,215 4,430
U.S. Government 115,619 117,021 108,795
State & political obligations 54,649 55,860 52,100
All others 2,006 1,697 3,558
Loans and leases (Net of reserve for loan losses of
$8,840, $6,400 and $6,133 respectively) 492,004 497,515 476,077
Bank premises and equipment-net 16,088 15,034 12,649
Accrued interest and other assets 16,610 16,357 12,671
TOTAL ASSETS $ 724,760 $ 726,486 $ 691,692
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 45,977 $ 43,808 $ 40,573
Time and savings 536,074 532,565 535,145
Federal funds purchased and securities
sold under agreement to repurchase 30,339 38,200 19,827
Other borrowed money 27,929 28,696 16,726
Accrued interest and other liabilities 4,816 5,479 5,191
Total Liabilities 645,135 648,748 617,462
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 63,259 61,345 58,634
Accumulated other comprehensive income 3,689 3,716 2,919
Total Shareholders' Equity 79,625 77,738 74,230
LIABILITIES AND SHAREHOLDERS' EQUITY $ 724,760 $ 726,486 $ 691,692
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 Six Months Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
INTEREST INCOME:
Loans and leases $ 8,880 $ 8,558 $ 17,510 $ 17,644
Investment Securities:
U.S. Treasury securities 40 49 84 121
Securities of U.S. Government agencies 1,076 1,356 2,241 2,707
Obligations of states and political subdivisions 565 576 1,143 1,145
Other 37 84 74 189
Federal funds 14 27 17 41
Deposits in banks 15 12 17 17
Total Interest Income 10,627 10,662 21,086 21,864
INTEREST EXPENSE:
Deposits 3,470 4,543 7,115 9,210
Borrowed funds 403 340 822 689
Total Interest Expense 3,873 4,883 7,937 9,899
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 6,754 5,779 13,149 11,965
PROVISION FOR LOAN LOSSES 760 393 4,698 1,049
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,994 5,386 8,451 10,916
OTHER INCOME:
Service charges 547 499 1,061 936
Other 1,120 606 1,861 1,469
Net securities gains (losses) 480 13 522 63
2,147 1,118 3,444 2,468
OTHER EXPENSES:
Salaries and wages 1,621 1,992 3,446 3,900
Pension and other employee benefits 519 467 981 923
Occupancy expense (net) 142 86 351 194
Other operating expenses 1,821 1,803 3,558 3,636
4,103 4,348 8,336 8,653
INCOME BEFORE FEDERAL INCOME TAX 4,038 2,156 3,559 4,731
FEDERAL INCOME TAXES 939 543 591 1,213
NET INCOME 3,099 1,613 2,968 3,518
OTHER COMPREHENSIVE INCOME (NET OF TAX):
Unrealized gains (losses) on securities 214 1,464 (27) 1,338
COMPREHENSIVE INCOME $ 3,313 $ 3,077 $ 2,941 $ 4,856
NET INCOME PER SHARE (Based upon
weighted average number of shares outstanding of 1,300,000 $ 2.38 $ 1.24 $ 2.28 $ 2.71
DIVIDENDS DECLARED $ 0.40 $ 0.40 $ 0.80 $ 0.75
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, 2003 June 30, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,968 $ 3,518
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and amortization 724 730
Premium amortization 426 409
Discount amortization (54) (58)
Provision for loan losses 4,698 1,049
Provision for deferred income taxes (882) 10
(Gain) loss on sale of fixed assets 32 (10)
(Gain) loss on sale of investment securities (522) (63)
Changes in Operating Assets and Liabilities: -
Accrued interest receivable and other assets 629 (581)
Accrued interest payable and other liabilities (663) 2,021
Net Cash Provided by Operating Activities 7,356 7,025
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,810) (1,037)
Proceeds from sale of fixed assets - -
Proceeds from maturities of investment securities: 13,160 35,822
Proceeds from sale of investment securities: 26,954 7,135
Purchase of investment securities- (37,338) (37,893)
Net increase in loans and leases 813 (8,883)
Net Cash Used by Investing Activities 1,779 (4,856)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 5,678 9,561
Net change in short-term borrowings (7,861) (6,712)
Increase in long-term borrowings - -
Payments on long-term borrowings (767) (684)
Payments of dividends (1,040) (910)
Net Cash Provided by Financing Activities (3,990) 1,255
Net change in cash and cash equivalents 5,145 3,424
Cash and cash equivalents - Beginning of year 18,787 17,988
CASH AND CASH EQUIVALENTS - END OF THE YEAR $ 23,932 $ 21,412
RECONCILIATION OF CASH AND CASH EQUIVALENTS:
Cash and cash due from banks $ 23,423 $ 16,295
Interest bearing deposits 509 3,507
Federal funds sold - 1,610
$ 23,932 $ 21,412
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
June 30, 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 first six months ended June 30, 2003 came from
multiple sources. Refinancing of real estate loans remained brisk
throughout the period. The impact to liquidity came in terms of
gains on sale of these loans into the secondary market and also a
decrease in the loan portfolio for those variable and fixed rate
loans previously being held by the bank and sold to the secondary
markets. Deposit balances also increased during the period and
security activity was heavier than normal with calls and sales.
During the period, the bank booked $.5 million in realized gains
on securities. This was done to strengthen the income position to
allow for further loan reserve provisions. The average maturity of
the investment portfolio was extended slightly and yield sacrifice
was kept to a minimum. During the second quarter of 2003, the bank
continued to see its net interest margin strengthen due mainly to
deposit repricing. The margin is expected to see continued
improvement through August with the higher rate certificate of
deposits that are maturing.
As stated previously, the bank did make additional provisions to
the loan reserve. With the aid of an external vendor, the bank is
analyzing the loan loss reserve to confirm its adequacy. The
review will be complete by the end of the third quarter.
The capital position of the bank improved as shown in the capital
ratios listed on the following page. The bank is positioned to
have strong earnings through the remainder of the year. The banks
financial ratios continued to improve each month since the first
quarter and this is expected to continue throughout 2003.
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 June 30, 2003 financial statements:
Primary Ratio 12.06%
Total Capital Ratio 15.87%
Risk Based Capital Tier 1 15.37%
Risk Based Capital Tier 2 22.47%
Stockholders' Equity/Total Assets 10.99%
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 Dep 509 509
Investment Securities 14,588 63,686 84,859 52,993 176,126
Loans 112,861 105,620 88,399 185,124 492,004
Total Rate
Sensitive Assets 127,958 169,306 173,258 238,117 668,639
Deposits 166,458 238,769 114,377 62,447 582,051
Fed Funds Purchased
& agreements to repur 30,339 30,339
Other Borrowings 5,194 18,315 4,420 27,929
Total Rate
Sensitive Liabilities 196,797 243,963 132,692 66,867 640,319
Gap -68,839 -74,657 40,566 171,250 28,320
ITEM 4 CONTROLS AND PROCEDURES
As of June 30, 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 June 30, 2003. There have been no
significant changes in the Company's internal controls subsequent
to June 30, 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 June 30, 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, thereunto duly authorized.
Farmers & Merchants Bancorp, Inc.,
Date: August 1, 2003 By: /s/ Joe E. Crossgrove
Joe E. Crossgrove
President and CFO
Date: August 1, 2003 By: /s/ Barbara J. Britenriker
Barbara J. Britenriker
Senior Vice-President and CFO
7
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-31.1 Certification of Chief Executive Officer pursuant to Section 302
EX-31.2 Certification of Chief Financial Officer pursuant to Section 302
EX-32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002