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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 September 30, 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.
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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
--- ---
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 October 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-
September 30, 2003, December 31, 2002 and September 30, 2002 1
Condensed Consolidated Statements of Net Income-
Three Months and Nine Months Ended September 30, 2003 and September 30, 2002 2
Condensed Consolidated Statements of Cash Flows-
Nine Months Ended September 30, 2003 and September 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 an Vote of Security Holders 6
Item 5. Other Information 7
Item 6. Exhibits and Reports on form 8K 7
Signatures 7
Exhibits 31.1 & 31.2 Certifications Under Section 302
Exhibit 32 Additional Exhibit - Certifications Under Section 906
ITEM 1 FINANCIAL STATEMENTS
FARMERS & MERCHANTS BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands of dollars)
Sept 30, 2003 December 31, 2002 Sept 30, 2002
ASSETS:
Cash and due from banks $ 15,531 $ 18,508 $ 18,783
Interest bearing deposits with banks 608 279 624
Federal funds sold 0 - -
Investment Securities:
U.S. Treasury 2,823 4,215 4,463
U.S. Government 113,212 117,021 102,489
State & political obligations 53,297 55,860 52,982
All others 1,973 1,697 3,523
Loans and leases (Net of reserve for loan losses of
$9,313, $6,400 and $6,133 respectively) 489,928 497,515 487,702
Bank premises and equipment-net 15,906 15,034 13,611
Accrued interest and other assets 18,526 16,357 12,444
TOTAL ASSETS $ 711,804 $ 726,486 $ 696,621
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 42,623 $ 43,808 $ 41,680
Time and savings 528,553 532,565 533,264
Federal funds purchased and securities
sold under agreement to repurchase 29,531 38,200 24,098
Other borrowed money 27,139 28,696 14,694
Accrued interest and other liabilities 10,290 5,479 6,283
Total Liabilities 638,136 648,748 620,019
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 58,831 61,345 59,896
Accumulated other comprehensive income 2,160 3,716 4,029
Total Shareholders' Equity 73,668 77,738 76,602
LIABILITIES AND SHAREHOLDERS' EQUITY $ 711,804 $ 726,486 $ 696,621
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 Nine Months Ended
Sept 30, 2003 Sept 30, 2002 Sept 30, 2003 Sept 30, 2002
INTEREST INCOME:
Loans and leases $ 8,518 $ 8,907 $ 26,028 $ 26,551
Investment Securities:
U.S. Treasury securities 28 47 112 168
Securities of U.S. Government agencies 1,048 1,265 3,289 3,971
Obligations of states and political subdivisions 531 565 1,674 1,710
Other 45 85 119 274
Federal funds 7 8 24 48
Deposits in banks 5 4 22 22
Total Interest Income 10,182 10,881 31,268 32,744
INTEREST EXPENSE:
Deposits 3,046 4,349 10,161 13,560
Borrowed funds 315 339 1,136 1,027
Total Interest Expense 3,361 4,688 11,297 14,587
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 6,821 6,193 19,971 18,157
PROVISION FOR LOAN LOSSES 675 537 5,373 1,585
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,146 5,656 14,598 16,572
OTHER INCOME:
Service charges 543 546 1,604 1,482
Other 1,044 569 2,905 2,038
Net securities gains (losses) 2 - 524 64
1,589 1,115 5,033 3,584
OTHER EXPENSES:
Salaries and wages 1,664 1,934 5,110 5,834
Pension and other employee benefits 462 503 1,443 1,426
Occupancy expense (net) 137 166 488 359
Other operating expenses 1,781 1,628 5,339 5,264
4,044 4,231 12,380 12,883
INCOME BEFORE FEDERAL INCOME TAX 3,691 2,540 7,251 7,273
FEDERAL INCOME TAXES 1,100 760 1,691 1,973
NET INCOME 2,591 1,780 5,560 5,300
OTHER COMPREHENSIVE INCOME (NET OF TAX):
Unrealized gains (losses) on securities (1,529) 1,110 (1,556) 2,448
COMPREHENSIVE INCOME $ 1,062 $ 2,890 $ 4,004 $ 7,748
NET INCOME PER SHARE (Based upon
weighted average number of shares outstanding of 1,300,000 $ 1.99 $ 1.37 $ 4.28 $ 4.08
DIVIDENDS DECLARED $ 5.40 $ 0.40 $ 6.20 $ 1.15
See Notes to Condensed Consolidated Unaudited Financial Statements.
2
FARMERS & MERCHANTS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of dollars)
Nine Months Ended
Sept 30, 2003 Sept 30, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,560 $ 5,300
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and amortization 1,093 1,095
Premium amortization 439 451
Discount amortization (56) (61)
Provision for loan losses 5,373 1,585
Provision for deferred income taxes (653) (49)
(Gain) loss on sale of fixed assets 34 (53)
(Gain) loss on sale of investment securities (524) (64)
Changes in Operating Assets and Liabilities: -
Accrued interest receivable and other assets (1,516) (295)
Accrued interest payable and other liabilities 4,811 3,113
Net Cash Provided by Operating Activities 14,561 11,022
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,999) (2,321)
Proceeds from sale of fixed assets - -
Proceeds from maturities of investment securities: 13,160 45,998
Proceeds from sale of investment securities: 53,661 7,135
Purchase of investment securities- (67,262) (41,506)
Net increase in loans and leases 2,214 (21,044)
Net Change in Cash by Investing Activities (226) (11,738)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits (5,197) 8,787
Net change in short-term borrowings (8,669) (2,441)
Increase in long-term borrowings - -
Payments on long-term borrowings (1,557) (2,716)
Payments of dividends (1,560) (1,495)
Net Cash Provided by Financing Activities (16,983) 2,135
Net change in cash and cash equivalents (2,648) 1,419
Cash and cash equivalents - Beginning of year 18,787 17,988
CASH AND CASH EQUIVALENTS - END OF THE YEAR $ 16,139 $ 19,407
RECONCILIATION OF CASH AND CASH EQUIVALENTS:
Cash and cash due from banks $ 15,531 $ 18,783
Interest bearing deposits 608 624
Federal funds sold - -
$ 16,139 $ 19,407
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 nine months ended September 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
Refinancing of real estate loans remained brisk throughout the first two
months of the period. September marked the slowing of the secondary
mortgage revenue stream. The pipeline for secondary mortgages has shrunk
considerably and the bank expects to resume to normal activity levels in
origination during the last quarter.
Deposit balances decreased approximately $11 million during the period in
both demand and time and savings categories. Certificate of Deposit
run-off was expected with the significant change in rates on the
automatic renewals. This was offset by investment run-off and decreased
loan volume. The net interest margin continued to improve as the
liability cost was higher than the asset yield lost.
The loan loss reserve was increased during the quarter due to credit
rating adjustments made on some associated personal loans of a
reclassified commercial credit and the bank also adjusted the historical
loss factor to encompass five years of data instead of six used
previously. These two actions resulted in $.5 million being added to the
reserve during the quarter. The bank also replaced funds taken from
reserve due to charge-offs as the increase in loan provision expense for
the quarter was $675,000. The bank feels the necessary provisions have
been made and are confident the reserve is adequate.
The capital position of the bank remained strong as shown in the capital
ratios listed below. Along with its regular dividend, the bank declared a
one-time additional dividend of $5 per share based on its strong excess
capital position. The bank also recognized that it was an opportune time
for our shareholders to receive the dividend based on the favorable
personal tax changes concerning dividends.
4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
The bank is positioned to have strong earnings through the remainder of
the year. The banks financial ratios have continued to improve each month
since the first quarter and this is expected to continue throughout the
fourth quarter of 2003.
The following is a summary of five capital ratios as they are calculated
from the September 30, 2003 financial statements:
Primary Ratio 11.51%
Total Capital Ratio 15.27%
Risk Based Capital Tier 1 14.39%
Risk Based Capital Tier 2 21.50%
Stockholders' Equity/Total Assets 10.35%
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 608 509
Investment Securities 9,039 25,387 86,948 49,652 171,305
Loans 116,690 80,198 88,412 207,373 492,673
Total Rate
Sensitive Assets 126,337 105,585 175,360 257,025 664,487
Deposits 118,906 257,894 187,375 7,001 571,176
Fed Funds Purchased
& agreements to repurchase 29,531 29,531
Other Borrowings 5,156 17,912 4,071 27,139
Total Rate
Sensitive Liabilities 148,437 263,050 205,287 11,072 627,846
Gap -22,100 -157,465 -29,927 245,953 36,641
ITEM 4 CONTROLS AND PROCEDURES
As of September 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 September 30, 2003. There have been no significant
changes in the Company's internal controls subsequent to September 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
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 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
No reports on Form 8-K were filed by the registrant during the quarter
ended September 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: November 13, 2003 By: /s/ Joe E. Crossgrove
Joe E. Crossgrove
President and CEO
Date: November 13, 2003 By: /s/ Barbara J. Britenriker
Barbara J. Britenriker
Senior Vice-President and CFO
7
10-K 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 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002