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, 2007
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
Commision File Number 0-14492
FARMERS & MERCHANTS BANCORP, INC.
(Exact name of registrant as specified in its charter)
OHIO 34-1469491
(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
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 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 check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (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 5,136,545
-------------------------- --------------------------------
Class Outstanding as of April 19, 2007
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, 2007, December 31, 2006 1
Condensed Consolidated Statements of Net Income-
Three Months Ended March 31, 2007 and March 31, 2006 2
Condensed Consolidated Statements of Cash Flows-
Three Months Ended March 31, 2007 and March 31, 2006 3
Notes to Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 4-6
Item 3. Qualitative and Quantitative Disclosures About Market Risk 7
Item 4. Controls and Procedures 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 1A. Risk Factors 8
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 8
Item 3. Defaults Upon Senior Securities 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 5. Other Information 8
Item 6. Exhibits 8
Signatures 9
Exhibit 31. Certifications Under Section 302 10-11
Exhibit 32. Certifications Under Section 906 12
ITEM 1 FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands of dollars)
Mar 31, 2007 Dec 31, 2006
------------ ------------
ASSETS:
Cash and due from banks $ 14,969 $ 23,583
Interest bearing deposits with banks 318 311
Federal funds sold 7,998 13,353
Investment Securities:
U.S. Treasury 388 388
U.S. Government 119,012 122,231
State & political obligations 42,740 45,495
All others 4,064 4,063
Loans and leases (Net of reserve for loan losses
of $5,476 & $5,594 respectively) 508,280 498,580
Bank premises and equipment-net 14,602 14,189
Accrued interest and other assets 19,164 14,903
-------- --------
TOTAL ASSETS $731,535 $737,096
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES:
Deposits:
Noninterest bearing $ 49,428 $ 60,211
Interest bearing 528,188 525,198
Federal funds purchased and securities sold
under agreement to repurchase 36,512 34,818
Other borrowed money 23,051 23,233
Accrued interest and other liabilities 5,474 5,904
-------- --------
Total Liabilities 642,653 649,364
SHAREHOLDERS' EQUITY:
Common stock, no par value - authorized
6,500,000 shares; issued 5,136,555 shares 12,677 12,677
Treasury Stock - 53,625 shares, Unearned stock
awards 9,720 shares and for Dec. 31, 2006
- Unearned stock 9,720 shares (1,455) (1,060)
Undivided profits 78,343 77,089
Accumulated other comprehensive income
(expense) (683) (974)
-------- --------
Total Shareholders' Equity 88,882 87,732
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY $731,535 $737,096
======== ========
See Notes to Condensed Consolidated Unaudited Financial Statements.
Note: The December 31, 2006 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, except per share data)
Three Months Ended
---------------------------
Mar 31, 2007 Mar 31, 2006
------------ ------------
INTEREST INCOME:
Loans and leases $ 9,499 $ 8,088
Investment Securities:
U.S. Treasury securities 4 18
Securities of U.S. Government agencies 1,324 1,250
Obligations of states and political
subdivisions 422 581
Other 63 58
Federal funds 51 69
Deposits in banks 26 3
---------- ----------
Total Interest Income 11,389 10,067
INTEREST EXPENSE:
Deposits 4,396 3,569
Borrowed funds 779 591
---------- ----------
Total Interest Expense 5,175 4,160
---------- ----------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN
LOSSES 6,214 5,907
PROVISION FOR LOAN LOSSES (19) (50)
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 6,233 5,957
OTHER INCOME:
Service charges 760 794
Other 615 610
Net securities gains (losses) -- 20
---------- ----------
1,375 1,424
OTHER EXPENSES:
Salaries and wages 2,090 2,000
Pension and other employee benefits 817 629
Occupancy expense (net) 149 135
Other operating expenses 1,661 1,852
---------- ----------
4,717 4,616
---------- ----------
INCOME BEFORE FEDERAL INCOME TAX 2,891 2,765
FEDERAL INCOME TAXES 815 747
---------- ----------
NET INCOME 2,076 2,018
========== ==========
OTHER COMPREHENSIVE INCOME (NET OF TAX):
Unrealized gains (losses) on securities 291 (150)
---------- ----------
COMPREHENSIVE INCOME (EXPENSE) $ 2,367 $ 1,868
NET INCOME PER SHARE $ 0.40 $ 0.39
Based upon average weighted shares
outstanding of: 5,149,967 5,195,920
DIVIDENDS DECLARED $ 0.16 $ 0.125
No disclosure of diluted earnings per share is required as shares are
antidiluted as of quarter end.
See Notes to Condensed Consolidated Unaudited Financial Statements.
2
FARMERS & MERCHANTS BANCORP, INC.
CONDENSED CONSOLIDATED STATMENTS OF CASH FLOWS
(Unaudited)
(in thousands of dollars)
Three Months Ended
---------------------------
Mar 31, 2007 Mar 31, 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,076 $ 2,018
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and amortization 297 276
Premium amortization 92 228
Discount amortization (64) (81)
Provision for loan losses (19) (50)
Provision (Benefit) for deferred income
taxes (1) 77
(Gain) Loss on sale of fixed assets 1 (32)
(Gain) Loss on sale of investment
securities -- (20)
Changes in Operating Assets and
Liabilities:
Accrued interest receivable and
other assets (1,410) 1,452
Accrued interest payable and other
liabilities (479) (413)
-------- --------
Net Cash Provided by Operating Activities 493 3,455
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (711) (27)
Net (increase) decrease in Federal Funds Sold 5,355 (1,682)
Proceeds from sale of fixed assets --
Proceeds from maturities of investment
securities: 22,836 14,106
Proceeds from sale of investment securities: -- 4,777
Purchase of investment securities (16,449) (5,114)
Purchase of Bank Owned Life Insurance (3,000)
Net (increase) decrease in loans and leases (9,681) (14,077)
-------- --------
Net Cash Provided (Used) by Investing
Activities (1,650) (2,017)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (7,793) (12,814)
Net change in short-term borrowings 1,694 4,278
Increase in long-term borrowings -- --
Payments on long-term borrowings (182) (194)
Purchase of Treasury stock (395) (33)
Payments of dividends (774) (844)
-------- --------
Net Cash Provided (Used) by Financing
Activities (7,450) (9,607)
-------- --------
Net change in cash and cash equivalents (8,607) (8,169)
Cash and cash equivalents - Beginning of year 23,894 22,589
-------- --------
CASH AND CASH EQUIVALENTS - END OF THE YEAR $ 15,287 $ 14,420
======== ========
RECONCILIATION OF CASH AND CASH EQUIVALENTS:
Cash and cash due from banks $ 14,969 $ 14,123
Interest bearing deposits 318 297
-------- --------
$ 15,287 $ 14,420
======== ========
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, 2007 are not necessarily indicative of the
results that are expected for the year ended December 31, 2007. 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, 2006.
The Company's Board of Directors declared a 4 for 1 stock split effective
May 12, 2006. Therefore, all references in the financial statements and
other disclosures related to the number of shares and per share amounts of
the Company's stock have been retroactively restated to reflect the
increased number of shares outstanding.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
Statements contained in this portion of the Company's report may be
forward-looking statements, as that term is defined in the Private
Securities Litigation Reform Act of 1995. Forward-looking statements may be
identified by the use of words such as "intend," "believe," "expect,"
"anticipate," "should," "planned," "estimated," and "potential." Such
forward-looking statements are based on current expectations, but may
differ materially from those currently anticipated due to a number of
factors, which include, but are not limited to, factors discussed in
documents filed by the Company with the Securities and Exchange Commission
from time to time. Other factors which could have a material adverse effect
on the operations of the company and its subsidiaries which include, but
are not limited to, changes in interest rates, general economic conditions,
legislative and regulatory changes, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board, the quality and composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand
for financial services in the Bank's market area, changes in relevant
accounting principles and guidelines and other factors over which
management has no control. The forward-looking statements are made as of
the date of this report, and the Company assumes no obligation to update
the forward-looking statements or to update the reasons why actual results
differ from those projected in the forward-looking statements.
CRITICAL ACCOUNTING POLICY AND ESTIMATES
The Company's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of
America, and the Company follows general practices within the industries in
which it operates. At times the application of these principles requires
Management to make assumptions estimates and judgments that affect the
amounts reported in the financial statements. These assumptions, estimates
and judgments are based on information available as of the date of the
financial statements. As this information changes, the financial statements
could reflect different assumptions, estimates and judgments. Certain
policies inherently have a greater reliance on assumptions, estimates and
judgments and as such have a greater possibility of producing results that
could be materially different than originally reported. Examples of
critical assumptions, estimates and judgments are when assets and
liabilities are required to be recorded at fair value, when a decline in
the value of an asset not required to be recorded at fair value warrants an
impairment write-down or valuation reserve to be established, or when an
asset or liability must be recorded contingent upon a future event.
Based on the valuation techniques used and the sensitivity of financial
statement amounts to assumptions, estimates, and judgments underlying those
amounts, management has identified the determination of the Allowance for
Loan and Lease Losses (ALLL) and the valuation
4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
of its Mortgage Servicing Rights as the accounting areas that requires the
most subjective or complex judgments, and as such have the highest
possibility of being subject to revision as as new information becomes
available.
The ALLL represents management's estimate of credit losses inherent in the
Bank's loan portfolio at the report date. The estimate is composite of a
variety of factors including past experience, collateral value and the
general economy. ALLL includes a specific portion, a formula driven
portion, and a general nonspecific portion.
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, CAPITAL RESOURCES AND MATERIAL CHANGES IN FINANCIAL CONDITION
Loan growth during the quarter totaled just over $9.5 million. The largest
growth of over $5.5 million occurred in the commercial real estate
portfolio. This was coupled with $2.5 million increase in commercial loans
and a $400 thousand increase in the home equity portfolio. The overall
growth was funded from the asset side of the balance sheet. A decrease in
cash and federal funds sold of almost $14 million. Also decreasing was the
rest of the loan portfolio and the investment portfolio contained runoff of
approximately $6 million which wasn't reinvested in the first quarter.
Other assets increased by $4.26 million mainly due to an additional BOLI
(Bank Owned Life Insurance) purchase of $3 million in January 2007. This
BOLI purchase was completed for asset yield improvement to fund the ever
increasing employee medical costs of the Bank. The Bank also completed the
purchase of land for its next branch location in Perrysburg, Ohio. Overall,
the Company's assets decreased $5.56 million to end the quarter at $731.54
million. Liquidity remained strong with loans to assets hovering around
seventy percent, up just slightly from December 31, 2006's sixty eight
percent. The Bank is currently at the low end of the target range for this
ratio.
Loans past due 30 days or more as a percentage of total loans as of
December 31, 2006 were .31% compared to March 31, 2007's .53%. The largest
increase in the comparison was located in the 1-4 family real estate
portfolio. The real estate and overall percentages, however, still remain
below the target percentage. Asset quality remains strong with net
charge-off activity for the quarter below $100,000.
Total deposit footings decreased just under $8 million as of quarter end
compared to year end. Growth occurred in time deposits of over $5 million
while the footings decreased in checking and savings accounts by a combined
total of $13 million. The Bank continues to offer higher rates for
short-term CD's with an incentive rate for continuing or establishing a
relationship (checking) account with the Bank. To encourage core deposit
growth, the Bank is also running a "refer a friend" deposit promotion. The
number of accounts being opened continues to improve with the decrease in
footings being linked to commercial and public fund accounts. The Bank has
also begun offering Health Savings Accounts (HSA) and while building the
portfolio will take time, it is encouraged by the success achieved within
the first quarter bringing in $198 thousand on deposit.
The Company purchased 17,445 shares of Treasury stock during March for an
outlay of nearly $400 thousand for the transactions. These transactions are
a continuation of the buyback agreement authorized in the fourth quarter of
2006 and may continue throughout 2007.
5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
MATERIAL CHANGES IN RESULTS OF OPERATIONS
The income statement shows improvement in net interest income as comparing
quarter end March 2007 to March 2006. As the Federal Reserve has left rates
unchanged since June 2006, improvement has been seen in the net interest
margin. Interest income and interest expense are both higher given the
higher rate environment compared to a year ago and a higher asset size of
the Company. Borrowed funds interest expense is higher due to the Bank
being in a net Federal Funds Purchase position for much of the quarter.
This is also confirmed with the lower interest income reported in Federal
Funds. More discussion on the net interest margin is included with the
interest rate shock on net interest margin report under Market Risk.
Overall net interest income improved by 5.2% over 2006 with the asset size
growing by less than 3.5%.
The non interest components of the statement of income show a slight
decrease of $49 thousand in income and a slight increase of $101 thousand
in expense. As stated previously, asset quality remained strong and the
provision for loan losses posted a slight income position of $19 thousand
compared to $50 thousand in 2006. Expenses related to personnel were
responsible for the increase in non interest expense with the largest
increase in the employee benefits as medical claims increased during 2007.
Other operating expense actually decreased as compared to March 2006 by
over $190 thousand. A $45 thousand decrease is attributible to lower audit
and exam fees due to being an accelerated filer and adjusting audit
procedures to better incorporate SOX control issues with general audit. The
Bank has renewed contracts and/or vendors with more favorable terms such as
the savings attributive to ATM processing of $30 thousand and discontinuing
some consulting fees saving almost $61 thousand as compared to first
quarter last year. Cost savings continues to be a focus for the Company.
Increased use of imaging technology is being implemented during 2007 with
efficiency and improved customer service the planned outcomes.
Overall net income improved by 3% as compared to quarter end 2006 and net
income per share improved to $.40 as of March 31, 2007 compared to March
31, 2006's $.39 per share. Comprehensive income shows the unrealized gain
(loss) position on securities continuing to improve due to the maturing and
reinvesting activities over the last year.
The company continues to be well-capitalized as the capital ratios below
show:
Primary Ratio 12.96%
Tier I Leverage Ratio 12.20%
Risk Based Capital Tier 1 16.07%
Total Risk Based Capital 17.08%
Stockholders' Equity/Total Assets 12.15%
6
ITEM 3 QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT 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 purposes, other than trading, such as lending, investing and securing
sources of funds. 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 rate shock as shown in the table following.
Interest Rate Shock Interest Rate Shock
on Net Interest Margin on Net Interest Income
---------------------------------------- ---------------------------------------
Net Interest % Change to Rate Rate Cumulative % Change to
Margin (Ratio) Flat Rate Direction Changes by Total ($000) Flat Rate
-------------- ----------- --------- ---------- ------------ -----------
2.94% -15.463% Rising 3.000% 5,531 -15.741%
3.12% -10.245% Rising 2.000% 5,879 -10.436%
3.30% -5.091% Rising 1.000% 6,224 -5.189%
3.48% 0.000% Flat 0.000% 6,564 0.000%
3.65% 5.005% Falling -1.000% 6,900 5.107%
3.85% 10.607% Falling -2.000% 7,262 10.629%
3.90% 12.070% Falling -3.000% 7,347 11.924%
The net interest margin represents the forecasted twelve month margin. The
predicted margin is lower than the Bank's current net interest margin. This
is due mainly to the shortened duration of the certificate of deposit
portfolio and correlates into the scenario of higher rates representing a
loss of margin as compared to the repricing of those CDs in a falling rate
environment. The uncertainty of the direction of any rate movements and the
flat and inverted yield curve have facilitated the Bank taking the position
it has. The range of the fluctuation of the percentage change is 10% higher
than a year ago with last year's ranging from 2 to 6%. The positive effect
of a falling rate environment at all rate shock levels is also an
improvement from a year ago.
The Bank will continue to focus on controlling the cost of funds through
deposit promotions aimed at gaining more relationships per customer.
Improving the overall asset yield is the other side of the equation that
needs to be addressed. Fierce competition continues to pressure the yield
and the Bank has focused on using a combination of rate and fees to attract
new business. The addition of another banking location will help the
expansion of the market though its completion will be late 2007.
7
ITEM 4 CONTROLS AND PROCEDURES
As of March 31, 2007, 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, 2007.
There have been no significant changes in the Company's internal controls
that occurred for the quarter ended March 31, 2007.
PART II
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 1A RISK FACTORS
There have been no material changes in the risk factors disclosed by
Registrant in its Report on Form 10-K for the fiscal year ended December
31, 2006.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Total Number of Shares (d) Maximum Number of Shares
(a) Total Number (b) Average Price Purchased as Part of Publicly that may yet be purchased under
Period of Shares Purchased Paid per Share Announced Plan or Progams the Plans or Programs
--------- ------------------- ----------------- ----------------------------- -------------------------------
1/1/2007
to 228,000
1/31/2007
2/1/2007
to 228,000
2/28/2007
3/1/2007
to 17,445 $22.67 17,445 210,555
3/31/2007
------ ------ ------ -------
Total 17,445 $22.67 17,445(1) 210,555
====== ====== ====== =======
(1) The Company purchased these shares in the market pursuant to a stock
repurchase program publicly announced on October 20, 2006. On that date,
the Board of Directors authorized the repurchase of 250,000 common shares
between October 20, 2006 and December 31, 2007.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5 OTHER INFORMATION
ITEM 6 EXHIBITS
3.1 Amended Articles of Incorporation of the Registrant (incorporated by
reference to Registrant's Quarterly Report on Form 10-Q filed with the
Commission on August 1, 2006)
3.2 Code of Regulations of the Registrant (incorporated by reference to
Registrant's Quarterly Report on Form 10-Q filed with the Commission
on May 10, 2004)
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
8
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 25, 2007 By: /s/ Paul S. Siebenmorgen
------------------------------------
Paul S. Siebenmorgen
President and CEO
Date: April 25, 2007 By: /s/ Barbara J. Britenriker
------------------------------------
Barbara J. Britenriker
Exec. Vice-President and CFO
9