Three Months Ended Six Months Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
INTEREST INCOME:
Loans and leases $ 7,757 $ 8,880 $ 15,492 $ 17,510
Investment Securities:
U.S. Treasury securities 4 40 31 84
Securities of U.S. Government agencies 1,043 1,076 2,020 2,241
Obligations of states and political subdivisions 504 565 1,014 1,143
Other 35 37 72 74
Federal funds 15 14 32 17
Deposits in banks 7 15 10 17
-------- -------- -------- --------
Total Interest Income 9,365 10,627 18,671 21,086
INTEREST EXPENSE:
Deposits 2,454 3,470 4,919 7,115
Borrowed funds 304 403 607 822
Total Interest Expense 2,758 3,873 5,526 7,937
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 6,607 6,754 13,145 13,149
PROVISION FOR LOAN LOSSES 375 760 791 4,698
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,232 5,994 12,354 8,451
OTHER INCOME:
Service charges 539 547 1,064 1,061
Other 688 1,120 1,300 1,861
Net securities gains 1 480 127 522
-------- -------- -------- --------
1,228 2,147 2,491 3,444
OTHER EXPENSES:
Salaries and wages 1,836 1,621 3,796 3,446
Pension and other employee benefits 549 519 1,047 981
Occupancy expense (net) 185 142 358 351
Other operating expenses 1,969 1,821 3,898 3,558
4,539 4,103 9,099 8,336
-------- -------- -------- --------
INCOME BEFORE FEDERAL INCOME TAX 2,921 4,038 5,746 3,559
FEDERAL INCOME TAXES 879 939 1,700 591
-------- -------- -------- --------
NET INCOME 2,042 3,099 4,046 2,968
======== ======== ======== ========
OTHER COMPREHENSIVE INCOME (NET OF TAX):
Unrealized gains (losses) on securities (2,857) 214 (2,405) (27)
COMPREHENSIVE INCOME (EXPENSE) $ (815) $ 3,313 $ 1,641 $ 2,941
NET INCOME PER SHARE (Based upon
weighted average number of shares
outstanding of 1,300,000) $ 1.57 $ 2.38 $ 3.11 $ 2.28
DIVIDENDS DECLARED $ 0.45 $ 0.40 $ 0.90 $ 0.80
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, 2004 June 30, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,046 $ 2,968
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and amortization 688 724
Premium amortization 725 426
Discount amortization (61) (54)
Provision for loan losses 791 4,698
Provision (Benefit) for deferred income taxes 1,239 (882)
Loss on sale of fixed assets 73 32
Gain on sale of investment securities (127) (522)
Changes in Operating Assets and Liabilities:
Accrued interest receivable and other assets 2,551 629
Accrued interest payable and other liabilities (2,598) (663)
-------- --------
Net Cash Provided by Operating Activities 7,327 7,356
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (635) (1,810)
Proceeds from sale of fixed assets 0 0
Proceeds from maturities of investment securities: 28,798 13,160
Proceeds from sale of investment securities: 10,500 26,954
Purchase of investment securities (50,301) (37,338)
Net increase (decrease) in loans and leases (3,624) 813
-------- --------
Net Cash Provided (Used) by Investing Activities (15,262) 1,779
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 8,961 5,678
Net change in short-term borrowings (1,621) (7,861)
Increase in long-term borrowings 0 0
Payments on long-term borrowings (489) (767)
Payments of dividends (1,300) (1,040)
Net Cash Provided (Used) by Financing Activities 5,551 (3,990)
-------- --------
Net change in cash and cash equivalents (2,384) 5,145
Cash and cash equivalents - Beginning of year 19,535 18,787
-------- --------
CASH AND CASH EQUIVALENTS - END OF THE YEAR $ 17,151 $ 23,932
======== ========
RECONCILIATION OF CASH AND CASH EQUIVALENTS:
Cash and cash due from banks $ 15,914 $ 23,423
Interest bearing deposits 1,237 509
-------- --------
$ 17,151 $ 23,932
======== ========
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 six months ended June 30, 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
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.
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 continues to remain strong as the investment
portfolio continues to build. Deposit growth was moderate
during the first six months and has grown slightly as compared
to June 30, 2003. The second quarter of 2004 shows an increase
in loans of approximately $2.8 million compared to December
31, 2003, but remains behind the loans balances of June 30,
2003 by $8.8 million. This decrease in loans coupled with the
increase in deposits has funded the investment growth.
Overall, company asset growth has been slow.
Loan demand has remained sluggish throughout the first half of
2004 with improvement projected as the economy continues to
strengthen. 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. Past dues
(over 30 days) in the total loan portfolio have hit historical
lows for the company. This is a postive indicator for future
loan losses to remain low during 2004.
4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS (Continued)
Deposits increased compared to both year-end and a year ago
totaling $9 and $2 million, respectively. During 2003 a great
deal of depositers invested short term in the hopes of rising
rates. Fifty percent of the certificate of deposit portfolio
matured during the first half. The goal was to extend the
duration of the portfolio while maintaining the balances. The
bank has been successful with promotions to encourage
depositors to invest longer. The bank has seen the most growth
in time deposits during 2004 and 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 $4.6 million from June
2003 and by $10 million from December of 2003. As loan growth
develops, the investment portfolio will be used to fund the
growth if deposit growth is slower. Additional funds are
available in short-term borrowings as they have decreased $4
and $.7 million compared to June and December 2003,
respectively.
The income statement shows yields on all portfolios have
decreased compared to 2003, but the overall net interest
income is lower by only $4,000 for the six months ended June
2004 from 2003 income. 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.
The largest determinant for the improved profitability in 2004
is the lower loan loss provision. Approximately $4.7 million
was the provision for June 2003 compared to $.8 million as of
June 2004. The reduction in provision offset the loss of other
noninterest income that had been derived from real estate
refinancing during 2003.
The company continues to be well-capitalized as the capital
ratios below show:
Primary Ratio 11.54%
Tier I Leverage Ratio 10.62%
Risk Based Capital Tier 1 14.69%
Total Risk Based Capital 15.95%
Stockholders' Equity/Total Assets 10.58%
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 rate shock as shown in the table
following.
5
ITEM 3 MARKET RISK (Continued)
Interest Rate Shock on Net Interest Interest Rate Shock on Net Interest
Margin Income
Net Interest % Change to Rate Rate Cumulative % Change to
Margin (Ratio) Flat Rate Direction Changes by Total ($000) Flat Rate
- -------------- ----------- --------- ---------- ------------ -----------
4.23% -3.005% Rising 3.000% 16,323 -3.585%
4.24% -2.755% Rising 2.000% 16,425 -2.982%
4.25% -2.419% Rising 1.000% 16,537 -2.321%
4.36% 0.000% Flat 0.000% 16,930 0.000%
4.36% -2.600% Falling -1.000% 16,906 -0.138%
4.12% -5.532% Falling -2.000% 15,976 -5.633%
3.75% -13.929% Falling -3.000% 14,645 -13.496%
As the table shows, should rates increase as predicted, the
bank's exposure to interest rate risk is minimal. 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. With the Federal
Reserve upward movement that occurred at the end of June, this
scenario seems most unlikely.
ITEM 4 CONTROLS AND PROCEDURES
As of June 30 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 June 30, 2004. There have been no significant changes in
the Company's internal controls subsequent to June 30, 2004.
The bank has hired David Kowalski as Senior Internal Auditor.
His educational background includes a MBA in Finance and he is
a CPA. He heads up the auditing department and also has
experience in the banking industry.
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
The Annual Meeting of Shareholders of Farmers & Merchants
Bancorp, Inc. was held on April 3, 2004. The following
directors were elected to a new term of office:
6
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
(Continued)
Eugene D. Bernath Dean E. Miller
Dexter L. Benecke Anthony J. Rupp
Jerry L Boyers David P. Rupp Jr.
Joe E. Crossgrove James C. Saneholtz
Steven A. Everhart Kevin J. Sauder
Robert G. Frey Merle J. Short
Jack C. Johnson Steven J. Wyse
Matters scheduled for consideration at this meeting were:
1. To elect fourteen (14) directors of the Corporation; and
2. To transact such other business as may have properly
come before the meeting or any adjournment thereof.
The results of the voting for the election of directors are as
follows:
Director For Withhold Authority
-------- --- ------------------
Eugene D. Bernath 897,884 1
Dexter L. Benecke 897,885 0
Jerry L Boyers 897,882 3
Joe E. Crossgrove 897,883 2
Steven A. Everhart 897,884 1
Robert G. Frey 897,884 1
Jack C. Johnson 897,882 3
Dean E. Miller 897,884 1
Anthony J. Rupp 897,881 4
David P. Rupp Jr. 897,881 4
James C. Saneholtz 897,870 15
Kevin J. Sauder 897,879 6
Merle J. Short 897,885 0
Steven J. Wyse 897,875 10
ITEM 5 OTHER INFORMATION
Paul Siebenmorgen has joined the bank as Senior Executive Vice
President and Chief Lending Officer. Mr. Siebenmorgen brings
many years of banking experience and strengthens the executive
management team.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
3.1 Articles of Incorporation of the Registrant
(incorporated by reference to Registrant's Quarterly
Report on Form 10-Q filed with the Commission on May 10,
2004)
3.2 Code of Regulations of the Registrant (incorpoated 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
7
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (Continued)
32.1 Section 1350 Certification - CEO
32.2 Section 1350 Certification - CFO
No reports on Form 8-K were filed by the registrant during the
quarter ended June 30, 2004.
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, theeunto duly authorized.
Farmers & Merchants Bancorp, Inc.,
Date: August 2, 2004 By: /s/ Joe E. Crossgrove
Joe E. Crossgrove
President and CEO
Date: August 2, 2004 By: /s/ Barbara J. Britenriker
Barbara J. Britenriker
Senior Vice-President and CFO
8
10-Q EXHIBIT INDEX
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
Exhibit 31.1
CERTIFICATIONS
I, Joe E. Crossgrove, President and CEO of Farmers & Merchants Bancorp, Inc.,
certify that:
1 I have reviewed this quarterly report on Form 10-Q of Farmers &
Merchants Bancorp, Inc.;
2 Based on my knowledge, this 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 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 report;
4 The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-(e)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, 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 report is being prepared;
b. [This paragraph intentionally left blank.]
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period convered by this
report based on such evaluation; and
d. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect the registrant's internal control over financial
reporting; and
5 The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
the equivalent functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b. Any fraud, whether or not material, that involves management
or other employees who have significant role in the
registrant's internal control over financial reporting.
Date: August 2, 2004 /s/ Joe E. Crossgrove
--------------------------------
Joe E. Crossgove
President and Chief Executive Officer
9
Exhibit 31.2
CERTIFICATIONS
I, Barbara J. Britenriker, Senior Vice-President and CFO of Farmers & Merchants
Bancorp, Inc., certify that:
1 I have reviewed this quarterly report on Form 10-Q of Farmers &
Merchants Bancorp, Inc.;
2 Based on my knowledge, this 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 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 report;
4 The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-(e)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, 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 report is being prepared;
b. [This paragraph intentionally left blank.]
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period convered by this
report based on such evaluation; and
d. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect the registrant's internal control over financial
reporting; and
5 The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
the equivalent functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b. Any fraud, whether or not material, that involves management
or other employees who have significant role in the
registrant's internal control over financial reporting.
Date: August 2, 2004 /s/ Barbara J. Britenriker
--------------------------
Barbara J Britenriker
Senior Vice President and
Chief Financial Officer
10
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Quarterly Report of Farmers & Merchants Bancorp, Inc. on
Form 10-Q for the period ending June 30, 2004, as filed with the Securities and
Exchange Commission ("the report"), I, Joe E. Crossgrove, President and Chief
Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1 The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2 The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of Farmers & Merchants Bancorp, Inc. as of the dates and for the
periods expressed in the Report.
Date: August 2, 2004 /s/ Joe E. Crossgrove
-----------------------------------
Joe E. Crossgrove, President and
Chief Executive Officer
11
Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Quarterly Report of Farmers & Merchants Bancorp, Inc. on
Form 10-Q for the period ending June 30, 2004, as filed with the Securities and
Exchange Commission ("the report"), I, Barbara J. Britenriker, Senior
Vice-President and Chief Financial Officer, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
1 The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2 The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of Farmers & Merchants Bancorp, Inc. as of the dates and for the
periods expressed in the Report.
Date: August 2, 2004 /s/ Barbara J. Britenriker
------------------------------------------
Barbara J. Britenriker, Senior Vice President and
Chief Financial Officer
12
