Three Months Ended
March 31, 2005 March 31, 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,033 $ 2,006
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 302 344
Premium amortization 314 358
Discount amortization (25) (32)
Provision for loan losses 96 416
Provision (Benefit) for deferred income taxes 760 (232)
Loss on sale of fixed assets 4 35
Gain on sale of investment securities 0 (127)
Changes in Operating Assets and Liabilities:
Accrued interest receivable and other assets (699) 487
Accrued interest payable and other liabilities (295) (501)
-------- --------
Net Cash Provided (Used) by Operating Activities 2,490 2,754
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (212) (287)
Proceeds from sale of fixed assets 0 0
Proceeds from maturities of investment securities: 4,870 11,550
Proceeds from sale of investment securities: 0 11,401
Purchase of investment securities (12,565) (28,196)
Net (increase) decrease in loans and leases 3,204 (5,091)
-------- --------
Net Cash Provided (Used) by Investing Activities (4,703) (10,623)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (3,268) 12,778
Net change in short-term borrowings (248) (4,950)
Increase in long-term borrowings 0 0
Payments on long-term borrowings (211) (254)
Payments of dividends (715) (715)
-------- --------
Net Cash Provided (Used) by Financing Activities (4,442) 6,859
-------- --------
Net change in cash and cash equivalents (6,655) (1,010)
Cash and cash equivalents - Beginning of year 24,256 19,535
-------- --------
CASH AND CASH EQUIVALENTS - END OF THE YEAR $ 17,601 $ 18,525
======== ========
RECONCILIATION OF CASH AND CASH EQUIVALENTS:
Cash and cash due from banks $ 14,843 $ 13,444
Interest bearing deposits 2,758 2,931
Federal funds sold 0 2,150
-------- --------
$ 17,601 $ 18,525
======== ========
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, 2005 are not
necessarily indicative of the results that are expected for the year
ended December 31, 2005. 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, 2004.
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, CAPITAL RESOURCES AND MATERIAL CHANGES IN FINANCIAL
CONDITION
Liquidity continues to remain strong with the investment portfolio
growing by $5.4 million for the quarter. $3.3 million was a shift
from loans decreasing during the quarter. Loan growth occurred in
the real estate and industrial development bond markets. The
increases were outweighed by the decreases in the consumer and
commercial portfolios. The bank focused on improving asset quality
throughout 2004 and advertising was directed toward the real estate
market. In combination, loans showed a decrease of $16.1 million
compared to March 2004. Deposits also decreased by almost $3.3
million during the first three months and by $16.9 million during
the last twelve months. As the numbers indicate the decreases on
each side of the balance sheet were closely matched. Overall,
company assets have declined in comparision to three months and one
year ago.
The economy has remained slow in the first part of 2005. Loan demand
is projected to increase when the
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
ITEM 2 local economy strenghtens. The agricultural community experienced
another good year in 2004 and planting has begun in earnest for
2005. Two strong years in 2003 and 2004 has strengthened the asset
quality of the agricultural portfolio. Increased fuel and fertilizer
costs will remain a concern for the agricultural community in 2005.
Agricultural and agricultural real estate portfolios comprise almost
22.5% of the bank's loan portfolio.
Commercial activity has been the slowest with competition being
extremely high. This places pressure on the interest income yields
to keep pace with the increases in the cost of funds. A slight
tightening of the margin has occurred during 2004 and first quarter
2005. This is discussed more in Item 3 Market Risk.
The bank has not been aggressively pricing its deposits. The
decrease in deposits has come from run off of the CD portfolio,
particularly in public funds. The bank maintains rates to be in the
middle of the market rather than the high end. This strategy is used
to match what is occurring on the asset side of the balance sheet.
The bank could quickly adjust its stategy if and when loan demand
increases.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
The income statement shows yields on all portfolios have increased
compared to 2004. Overall net interest income is lower by $272
thousand for the three months ended March 2005 from 2004 income.
Maintaining the margin is an important part of the ongoing
profitability of the company. The margin had a 3 basis point
decrease when comparing year to date 2005 to 2004.
Net income for the year is up $27 thousand over 2004. The largest
determinant for the improved profitability in 2005 is the lower loan
loss provision, $96 thousand compared to $416 thousand,
respectively. Past dues continue to be at low levels for the bank
and improved asset quality continues to remain a focus. Unrealized
gain on securites has experienced an almost $2 million swing to a
loss position with the rising rate environment. The bank does not
plan on selling any of those investments to realize the loss. Net
income per share ends slightly higher for the quarter at $1.56
compared to $1.54 for March ended 2004.
The company is focusing on growth for 2005. With the improved asset
quality, increased support staff and SOX 404 compliance completed,
the direction of the company is to expand its operations.
The company continues to be well-capitalized as the capital ratios
below show:
Primary Ratio 12.33%
Tier I Leverage Ratio 11.43%
Risk Based Capital Tier 1 15.93%
Total Risk Based Capital 17.18%
Stockholders' Equity/Total Assets 11.27%
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,
5
ITEM 3 MARKET RISK (Continued)
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 on Net Interest Rate Shock on
Interest Margin Net Interest Income
Net Interest %Change to Rate Rate Cumulative %Change to
Margin (Ratio) Flat Rate Direction Changes by Total ($000) Flat Rate
- -------------- ---------- --------- ---------- ------------ ---------
3.97% 1.422% Rising 3.000% 6,543 -0.021%
3.94% 0.695% Rising 2.000% 6,526 -0.280%
3.92% -0.046% Rising 1.000% 6,509 -0.552%
3.92% 0.000% Flat 0.000% 6,545 0.000%
3.97% 1.372% Falling -1.000% 6,672 1.944%
3.84% -2.019% Falling -2.000% 6,472 -1.109%
3.63% -7.266% Falling -3.000% 6,145 -6.110%
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. With the rate
change increases that have occurred during the last quarter, the
bank did experience a decrease in net interest income as predicted
with the December table and reflected in the positive numbers shown
for a 100 basis point falling rate shock. Very little movement of
interest bearing asset or liability balances has occurred during the
last quarter that would effect the maturity or pricing of those
instruments. The falling rate scenario shows the highest risk on a
300 basis point drop. With the Federal Reserve upward movement that
has occurred so far this year, this scenario seems most unlikely.
ITEM 4 CONTROLS AND PROCEDURES
As of March 31 2005, 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, 2005. There have been no significant
changes in the Company's internal controls that occurred for the
quarter ended March 31, 2005.
PART II
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
6
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5 OTHER INFORMATION
Richard Lis has joined the company as Chief Lending Officer. He
replaces Daniel Schutt who left the company to assume the presidency
at another financial institution. Mr. Lis brings many years of
banking experience, especially in the credit adminstration area. He
was worked at community banks and also larger institutions.
ITEM 6 EXHIBITS
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)
10.1 Change in Control Agreement executed by and between the
Company and Paul S. Siebenmorgen on February 18, 2005,
incorporated by reference to Exhibit 10.1 of the Company's
Form 8-K filed with the Commission on February 22, 2005.
10.2 Change in Control Agreement executed by and between the
Company and Barbara J. Britenriker on February 18, 2005,
incorporated by reference to Exhibit 10.2 of the Company's
Form 8-K filed with the Commission on February 22, 2005.
10.3 Change in Control Agreement executed by and between the
Company and Edward A. Leininger on February 18, 2005,
incorporated by reference to Exhibit 10.3 of the Company's
Form 8-K filed with the Commission on February 22, 2005.
10.4 Change in Control Agreement executed by and between the
Company and Rex D. Rice on February 18, 2005, incorporated by
reference to Exhibit 10.4 of the Company's Form 8-K filed with
the Commission on February 22, 2005.
10.5 Employment Agreement by and between the Company and Paul S.
Siebenmorgen, dated May 7, 2004, incorporated by reference to
exhibit 10.5 of the Company's Form 8-K filed with the
Commission on February 22, 2005.
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
7
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: April 27, 2005 By: /s/ Paul S. Siebenmorgen
Paul S. Siebenmorgen
President and CEO
Date: April 27, 2005 By: /s/ Barbara J. Britenriker
Barbara J. Britenriker
Exec. Vice-President and CFO
8
EXHIBIT INDEX
EX.NO DESCRIPTION
- ----- ----------------------------------
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
Exhibit 31.1
CERTIFICATIONS
I, Paul S. Siebenmorgen, 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)) and
internal control over financial reporting (as defined in the
Exchange Acts Rules 13a-15(f) and 15d-15(f) 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. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
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 covered 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 a significant role in the
registrant's internal control over financial reporting.
Date: April 27, 2005 /s/ Paul S. Siebenmorgen
--------------------------------------
Paul S. Siebenmorgen
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, Barbara J. Britenriker, Executive 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)) and
internal control over financial reporting (as defined in the
Exchange Acts Rules 13a-15(f) and 15d-15(f) 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. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
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 covered 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 a significant role in the
registrant's internal control over financial reporting.
Date: April 27, 2005 /s/ Barbara J. Britenriker
--------------------------
Barbara J Britenriker
Executive Vice President and
Chief Financial Officer
Exhibit 32.1
ADDITIONAL EXHIBIT CERTIFICATIONS - ITEM 601(b)
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 March 31, 2005, as filed with the Securities and
Exchange Commission ("the report"), I, Paul S. Siebenmorgen, 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: April 27, 2005 /s/ Paul S. Siebenmorgen
-----------------------------------
Paul S. Siebenmorgen, President and
Chief Executive Officer
Exhibit 32.2
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 September 30, 2004, as filed with the Securities
and Exchange Commission ("the report"), I, Barbara J. Britenriker, Exec.
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: April 27, 2005 /s/ Barbara J. Britenriker
------------------------------------------
Barbara J. Britenriker, Exec. Vice President
and Chief Financial Officer
