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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)
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of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2004
OR
Transition Report Pursuant to Section 13 or 15(d)
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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
- -------------------------------------------- --------------
(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 _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
- ------------------------------------- -----------------------------------
Class Outstanding as of April 23, 2004
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, 2004, December 31, 2003 and March 31, 2003 1
Condensed Consolidated Statements of Net Income-
Three Months Ended March 31, 2004 and March 31, 2003 2
Condensed Consolidated Statements of Cash Flows-
Three Months Ended March 31, 2004 and March 31, 2003 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
ITEM 1 FINANCIAL STATEMENTS
FARMERS & MERCHANTS BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands of dollars)
March 31, 2004 December 31, 2003 March 31, 2003
ASSETS:
Cash and due from banks $ 13,444 $ 18,873 $ 22,537
Interest bearing deposits with banks 2,931 662 516
Federal funds sold 2,150 -- 1,780
Investment Securities:
U.S. Treasury 610 6,637 4,356
U.S. Government 123,860 111,011 102,866
State & political obligations 51,850 51,016 55,828
All others -- 2,028 0
Loans and leases (Net of reserve for loan losses of
$7,500, $7,300 and $7,856, respectively) 485,014 480,339 492,988
Bank premises and equipment-net 15,782 15,874 15,975
Accrued interest and other assets 19,008 19,263 17,126
-------- -------- --------
TOTAL ASSETS $714,649 $705,703 $713,972
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 43,214 $ 50,710 $ 42,600
Time and savings 544,630 524,356 538,395
Federal funds purchased and securities
sold under agreement to repurchase 22,369 27,319 23,682
Other borrowed money 24,120 24,374 28,315
Accrued interest and other liabilities 3,587 4,088 4,147
Total Liabilities 637,920 630,847 637,139
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 61,617 60,196 60,681
Accumulated other comprehensive income 2,435 1,983 3,475
Total Shareholders' Equity 76,729 74,856 76,833
-------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY $714,649 $705,703 $713,972
======== ======== ========
See Notes to Condensed Consolidated Unaudited Financial Statements.
Note: The December 31, 2003 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, 2004 March 31, 2003
INTEREST INCOME:
Loans and leases $ 7,735 $ 8,630
Investment Securities:
U.S. Treasury securities 26 44
Securities of U.S. Government agencies 977 1,166
Obligations of states and political subdivisions 511 578
Other 37 37
Federal funds 17 4
Deposits in banks 4 3
Total Interest Income 9,307 10,462
INTEREST EXPENSE:
Deposits 2,465 3,645
Borrowed funds 303 418
Total Interest Expense 2,768 4,063
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 6,539 6,399
PROVISION FOR LOAN LOSSES 416 3,938
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,123 2,461
OTHER INCOME:
Service charges 525 514
Other 612 740
Net securities gains 127 42
1,264 1,296
OTHER EXPENSES:
Salaries and wages 1,960 1,825
Pension and other employee benefits 498 462
Occupancy expense (net) 173 209
Other operating expenses 1,929 1,737
4,560 4,233
INCOME BEFORE FEDERAL INCOME TAX 2,827 (476)
FEDERAL INCOME TAXES 821 (347)
NET INCOME 2,006 (129)
OTHER COMPREHENSIVE INCOME (NET OF TAX):
Unrealized gains (losses) on securities 452 (241)
-------- --------
COMPREHENSIVE INCOME $ 2,458 $ (370)
======== ========
NET INCOME PER SHARE (Based upon
weighted average number of shares outstanding of 1,300,000 $ 1.54 $ (0.10)
======== ========
DIVIDENDS DECLARED $ 0.45 $ 0.40
======== ========
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, 2004 March 31, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,006 $ (129)
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and amortization 344 361
Premium amortization 358 (258)
Discount amortization (32) 54
Provision for loan losses 416 3,938
Provision for deferred income taxes (232) (110)
(Gain) loss on sale of fixed assets 35 2
(Gain) loss on sale of investment securities (127) (42)
Changes in Operating Assets and Liabilities: -
Accrued interest receivable and other assets 487 (659)
Accrued interest payable and other liabilities (501) (1,332)
Net Cash Provided by Operating Activities 2,754 1,825
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (287) (4,339)
Proceeds from sale of fixed assets - -
Proceeds from maturities of investment securities: 11,550 3,035
Proceeds from sale of investment securities: 11,401 18,443
Purchase of investment securities- (28,196) (2,580)
Net increase in loans and leases (5,091) 589
Net Cash Used by Investing Activities (10,623) 15,148
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 12,778 4,622
Net change in short-term borrowings (4,950) (14,518)
Increase in long-term borrowings - -
Payments on long-term borrowings (254) (381)
Payments of dividends (715) (650)
Net Cash Provided by Financing Activities 6,859 (10,927)
Net change in cash and cash equivalents (1,010) 6,046
Cash and cash equivalents - Beginning of year 19,535 18,787
-------- --------
CASH AND CASH EQUIVALENTS - END OF THE YEAR $ 18,525 $ 24,833
======== ========
RECONCILIATION OF CASH AND CASH EQUIVALENTS:
Cash and cash due from banks $ 13,444 $ 22,537
Interest bearing deposits 2,931 516
Federal funds sold 2,150 1,780
-------- --------
$ 18,525 $ 24,833
======== ========
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, 2004
are not necessarily indicative of the results that are expected for the
year ended December 31, 2004. 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,
2003.
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 continues to increase as deposit growth out paces loan growth.
The first quarter of 2004 shows a slight increase of $4.6 million in
loans compared to December 2003 but a decrease of almost $8 million from
the same quarter last year. The decrease compared to last March is due
to refinancing variable rate real estate loans into fixed rate loans and
consequently, the sale of these loans into the secondary market. The
decrease in loans is also due to $6 million of loans having been
charged-off during 2003.
Loan demand has remained sluggish throughout the first quarter with
improvement projected as the economy continues to improve in 2004.
Financial results for the agricultural community, which comprises
approximately 13% of the overall portfolio, were strong during 2003
after two rough years. This has helped to strengthen the asset quality
of the portfolio.
Deposits increased to $587.8 million representing growth of $12.7 and
$6.8 million over last quarter and March 2003, respectively. Thirty
percent of the certificate of deposit portfolio matured during the first
quarter. An additional twenty percent matures in the second quarter. The
bank is working to extend the duration of the portfolio and has been
successful with promotions to encourage depositors to invest longer.
During 2003 a great deal of depositers invested short term in the hopes
of rising rates. The bank is striving to maintain its net interest
margin by controlling the liabilities repricing.
The additional liquidity was put to use in the investment portfolio.
Investments grew by over $13.2 million from March 2003 and by over $5.6
million from December of 2003. When loan growth develops, the investment
portfolio will be used if necessary to fund the growth. It may also be
utilized if and when deposit money returns to the stock market and
mutual funds.
4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
Yields on the loan portfolio have continued to decline to 6.28% for the
first quarter. The decline in the cost rates, however, have been more
drastic causing the overall net interest margin to improve slightly.
Maintaining the margin is an important part of the ongoing profitability
of the company. The discussion on market risk to follow will document
the exposure of margin and earnings to interest rate risk.
Overall profitability has improved from a loss for first quarter 2003,
and in line with the fourth quarter of 2003. The replacement of
non-interest income derived from the real estate activity of 2003
presents a challenge going forward. At the same time, the level of
charge-off activity of 2003 is not expected to repeat. Past dues (over
90 days) at year-end were .433% of total loans and have improved to
.042% for March 2004. Past dues for quarter ended March 2003 were .285%.
The company continues to be well-capitalized as the capital ratios below
show:
Primary Ratio 11.66%
Total Capital Ratio 15.00%
Risk Based Capital Tier 1 15.08%
Risk Based Capital Tier 2 21.29%
Stockholders' Equity/Total Assets 10.74%
ITEM 3 MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates and equity prices. The Company's primary market risk 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 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. 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. Asset/liability
management is done with the Company's main subsidiary, The Farmers &
Merchants State Bank. The bank employs a sensitivity analysis utilizing
interest rate shocks to assist in this analysis. The shocks presented
below assume an immediate change of rate in the percentages and
directions shown:
5
ITEM 3 MARKET RISK (Continued)
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
- --------------- ------------------ -------------------- ------------------- ------------------- ------------
4.058% -0.083% Rising 3.000% 7,102 -1.776%
4.051% -0.090% Rising 2.000% 7,089 -1.969%
4.049% -0.092% Rising 1.000% 7,083 -2.052%
4.141% 0.000% Flat 0.000% 7,231 0.000%
4.097% -0.044% Falling -1.000% 7,138 -1.289%
3.850% -0.291% Falling -2.000% 6,705 -7.273%
3.495% -0.647% Falling -3.000% 6,093 -15.733%
As the table shows, should rates increase, the bank's exposure to
interest rate risk is minimal and the risk lessen as the rates go
higher. To the extent that the bank has the ability not to instantly
reprice the liability side of the balance sheet, the risk would decrease
even more. The falling rate scenario shows the highest risk on a 300
basis point drop. This is due to the fact that the liability side of the
balance sheet will have already hit its low. Unless customers are
willing to pay the bank to keep their deposit, this is definitely the
worse case scenario. The asset side of the bank has also at this point
hit many of the floors so that additional declining rates would have
little effect.
ITEM 4 CONTROLS AND PROCEDURES
As of March 31, 2004, 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, 2004. There have been no significant changes in the Company's
internal controls subsequent to March 31, 2004.
PART II
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
3.1 Articles of Incorporation of the Registrant
3.2 Code of Regulations of the Registrant
4 Instruments Defining the Rights of Security Holders (See Exhibits
3.1 and 3.2)
31.1 Rule 13-a-14(a) Certification - CEO
31.2 Rule 13-a-14(a) Certification - CFO
32.1 Section 1350 Certification - CEO
32.2 Section 1350 Certification - CFO
Registrant filed a current report on form 8-K under Item 9 (Regulation
FD Disclosure) on January 20, 2004 that attached a letter from Joe E.
Crossgrove, President and CEO for the Company, to shareholders regarding
a dividend payment.
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: April 23, 2004 By: /s/ Joe E. Crossgrove
Joe E. Crossgrove
President and CEO
Date: April 23,2004 By: /s/ Barbara J. Britenriker
Barbara J. Britenriker
Senior Vice-President and CFO
10-Q EXHIBIT INDEX
EX- 3.1 Articles of Incorporation of the Registrant
EX- 3.2 Code of Regulations of the Registrant
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