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 June 30, 2003 OR Transition Report Pursuant to Section 13 or 15(d) --- of the Securities Exchange Act of 1934 For the transition period from to -------- -------- Commission File Number 0-14492 ------------------------------ 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 Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ---- ---- Indicate the number of shares of each of the issuers classes of common stock, as of the latest practicable date: Common Stock, No Par Value 1,300,000 - ---------------------------------- --------------------------------- Class Outstanding as of July 1, 2003
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- June 30, 2003, December 31, 2002 and June 30, 2002 1 Condensed Consolidated Statements of Net Income- Six Months Ended June 30, 2003 and June 30, 2002 2 Condensed Consolidated Statements of Cash Flows- Six Months Ended June 30, 2003 and June 30, 2002 3 Notes to Condensed Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 4 Item 3. Market Risk 5 Item 4. Controls and Procedures 6 PART II. OTHER INFORMATION Item 1. Legal Proceedings 6 Item 2. Changes in Securities and Use of Proceeds 6 Item 3. Defaults Upon Senior Securities 6 Item 4. Submission of Matters to a Vote of Security Holders 6 Item 5. Other Information 7 Item 6. Exhibits and Reports on form 8K 7 Signatures 7 Certifications Under Section 302 8 -9 Certifications Under Section 906 10
ITEM 1 FINANCIAL STATEMENTS FARMERS & MERCHANTS BANCORP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands of dollars) June 30, 2003 December 31, 2002 June 30, 2002 ASSETS: Cash and due from banks $ 23,423 $ 18,508 $ 16,295 Interest bearing deposits with banks 509 279 3,507 Federal funds sold 0 - 1,610 Investment Securities: U.S. Treasury 3,852 4,215 4,430 U.S. Government 115,619 117,021 108,795 State & political obligations 54,649 55,860 52,100 All others 2,006 1,697 3,558 Loans and leases (Net of reserve for loan losses of $8,840, $6,400 and $6,133 respectively) 492,004 497,515 476,077 Bank premises and equipment-net 16,088 15,034 12,649 Accrued interest and other assets 16,610 16,357 12,671 TOTAL ASSETS $ 724,760 $ 726,486 $ 691,692 LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Deposits: Demand $ 45,977 $ 43,808 $ 40,573 Time and savings 536,074 532,565 535,145 Federal funds purchased and securities sold under agreement to repurchase 30,339 38,200 19,827 Other borrowed money 27,929 28,696 16,726 Accrued interest and other liabilities 4,816 5,479 5,191 Total Liabilities 645,135 648,748 617,462 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 63,259 61,345 58,634 Accumulated other comprehensive income 3,689 3,716 2,919 Total Shareholders' Equity 79,625 77,738 74,230 LIABILITIES AND SHAREHOLDERS' EQUITY $ 724,760 $ 726,486 $ 691,692 See Notes to Condensed Consolidated Unaudited Financial Statements. Note: The December 31, 2002 Balance Sheet has been derived from the audited financial statements of that date. 1
FARMERS & MERCHANTS BANCORP, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands of dollars) Three Months Ended Six Months Ended June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002 INTEREST INCOME: Loans and leases $ 8,880 $ 8,558 $ 17,510 $ 17,644 Investment Securities: U.S. Treasury securities 40 49 84 121 Securities of U.S. Government agencies 1,076 1,356 2,241 2,707 Obligations of states and political subdivisions 565 576 1,143 1,145 Other 37 84 74 189 Federal funds 14 27 17 41 Deposits in banks 15 12 17 17 Total Interest Income 10,627 10,662 21,086 21,864 INTEREST EXPENSE: Deposits 3,470 4,543 7,115 9,210 Borrowed funds 403 340 822 689 Total Interest Expense 3,873 4,883 7,937 9,899 NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 6,754 5,779 13,149 11,965 PROVISION FOR LOAN LOSSES 760 393 4,698 1,049 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,994 5,386 8,451 10,916 OTHER INCOME: Service charges 547 499 1,061 936 Other 1,120 606 1,861 1,469 Net securities gains (losses) 480 13 522 63 2,147 1,118 3,444 2,468 OTHER EXPENSES: Salaries and wages 1,621 1,992 3,446 3,900 Pension and other employee benefits 519 467 981 923 Occupancy expense (net) 142 86 351 194 Other operating expenses 1,821 1,803 3,558 3,636 4,103 4,348 8,336 8,653 INCOME BEFORE FEDERAL INCOME TAX 4,038 2,156 3,559 4,731 FEDERAL INCOME TAXES 939 543 591 1,213 NET INCOME 3,099 1,613 2,968 3,518 OTHER COMPREHENSIVE INCOME (NET OF TAX): Unrealized gains (losses) on securities 214 1,464 (27) 1,338 COMPREHENSIVE INCOME $ 3,313 $ 3,077 $ 2,941 $ 4,856 NET INCOME PER SHARE (Based upon weighted average number of shares outstanding of 1,300,000 $ 2.38 $ 1.24 $ 2.28 $ 2.71 DIVIDENDS DECLARED $ 0.40 $ 0.40 $ 0.80 $ 0.75 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, 2003 June 30, 2002 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,968 $ 3,518 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and amortization 724 730 Premium amortization 426 409 Discount amortization (54) (58) Provision for loan losses 4,698 1,049 Provision for deferred income taxes (882) 10 (Gain) loss on sale of fixed assets 32 (10) (Gain) loss on sale of investment securities (522) (63) Changes in Operating Assets and Liabilities: - Accrued interest receivable and other assets 629 (581) Accrued interest payable and other liabilities (663) 2,021 Net Cash Provided by Operating Activities 7,356 7,025 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (1,810) (1,037) Proceeds from sale of fixed assets - - Proceeds from maturities of investment securities: 13,160 35,822 Proceeds from sale of investment securities: 26,954 7,135 Purchase of investment securities- (37,338) (37,893) Net increase in loans and leases 813 (8,883) Net Cash Used by Investing Activities 1,779 (4,856) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 5,678 9,561 Net change in short-term borrowings (7,861) (6,712) Increase in long-term borrowings - - Payments on long-term borrowings (767) (684) Payments of dividends (1,040) (910) Net Cash Provided by Financing Activities (3,990) 1,255 Net change in cash and cash equivalents 5,145 3,424 Cash and cash equivalents - Beginning of year 18,787 17,988 CASH AND CASH EQUIVALENTS - END OF THE YEAR $ 23,932 $ 21,412 RECONCILIATION OF CASH AND CASH EQUIVALENTS: Cash and cash due from banks $ 23,423 $ 16,295 Interest bearing deposits 509 3,507 Federal funds sold - 1,610 $ 23,932 $ 21,412 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 June 30, 2003 are not necessarily indicative of the results that are expected for the year ended December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2002. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Farmers & Merchants Bancorp, Inc. was incorporated on February 25, 1985, under the laws of the State of Ohio. Farmers & Merchants Bancorp, Inc., and its subsidiaries The Farmers & Merchants State Bank and Farmers & Merchants Life Insurance Company are engaged in commercial banking and life and disability insurance, respectively. The executive offices of Farmers & Merchants Bancorp, Inc. are located at 307-11 North Defiance Street, Archbold, Ohio 43502. LIQUIDITY AND CAPITAL RESOURCES Liquidity for the first six months ended June 30, 2003 came from multiple sources. Refinancing of real estate loans remained brisk throughout the period. The impact to liquidity came in terms of gains on sale of these loans into the secondary market and also a decrease in the loan portfolio for those variable and fixed rate loans previously being held by the bank and sold to the secondary markets. Deposit balances also increased during the period and security activity was heavier than normal with calls and sales. During the period, the bank booked $.5 million in realized gains on securities. This was done to strengthen the income position to allow for further loan reserve provisions. The average maturity of the investment portfolio was extended slightly and yield sacrifice was kept to a minimum. During the second quarter of 2003, the bank continued to see its net interest margin strengthen due mainly to deposit repricing. The margin is expected to see continued improvement through August with the higher rate certificate of deposits that are maturing. As stated previously, the bank did make additional provisions to the loan reserve. With the aid of an external vendor, the bank is analyzing the loan loss reserve to confirm its adequacy. The review will be complete by the end of the third quarter. The capital position of the bank improved as shown in the capital ratios listed on the following page. The bank is positioned to have strong earnings through the remainder of the year. The banks financial ratios continued to improve each month since the first quarter and this is expected to continue throughout 2003. 4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (Continued) The first quarter is not representative of the bank's earnings potential. It is not anticipated that the loss adjustments will be repeated anytime soon. The bank has seen an improvement in net interest margin and based on the yield and maturity schedules, the margin should continue to improve through the second and third quarters as a result of maturing time deposits that currently have a higher average yield than current reinvestment rates. The bank has also continued to be extremely busy in the residential real estate market with refinancing activities. This should continue to bolster income through at least the second quarter. Management is working diligently to reanalyse the loan loss reserve to ensure it is adequate. This will take time but should be completed in the next few months. The bank remains well capitalized with strong earnings potential. Assuming no major changes in overall economic conditions, subsequent quarters should show improvement for the reasons stated previously. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (Continued) The following is a summary of five capital ratios as they are calculated from the June 30, 2003 financial statements: Primary Ratio 12.06% Total Capital Ratio 15.87% Risk Based Capital Tier 1 15.37% Risk Based Capital Tier 2 22.47% Stockholders' Equity/Total Assets 10.99% ITEM 3 MARKET RISK Market risk is the exposure to loss resulting from changes in interest rates and equity prices. The primary market risk to which the Company is subject is interest rate risk. The majority of the Company's interest rate risk arises, from the instruments, positions and transactions entered into for the purposes other than trading such as loans, available for sale securities, interest bearing deposits, short term borrowings and long term borrowings. Interest rate risk occurs when interest bearing assets and liabilities reprice at different times as market interest rates change. For example, if fixed rate assets are funded with variable rate debt, the spread between asset and liability rates will decline or turn negative if rates increase. Interest rate risk is managed within an overall asset/liability framework for the Company. The principal objectives of asset/liability management are to manage sensitivity of net interest spreads and net income to potential changes in interest rates. Funding positions are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is properly managed. The Company employs a sensitivity analysis in the form of a net interest income to help in the analysis. 5
ITEM 3 MARKET RISK (Continued) 0-90 days 90-365 days 1-5 Years Over 5 Years Total Interest Bearing Dep 509 509 Investment Securities 14,588 63,686 84,859 52,993 176,126 Loans 112,861 105,620 88,399 185,124 492,004 Total Rate Sensitive Assets 127,958 169,306 173,258 238,117 668,639 Deposits 166,458 238,769 114,377 62,447 582,051 Fed Funds Purchased & agreements to repur 30,339 30,339 Other Borrowings 5,194 18,315 4,420 27,929 Total Rate Sensitive Liabilities 196,797 243,963 132,692 66,867 640,319 Gap -68,839 -74,657 40,566 171,250 28,320 ITEM 4 CONTROLS AND PROCEDURES As of June 30, 2003, an evaluation was performed under the supervision and with the participation of the Company's management including the CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of June 30, 2003. There have been no significant changes in the Company's internal controls subsequent to June 30, 2003. PART II ITEM 1 LEGAL PROCEEDINGS None ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3 DEFAULTS UPON SENIOR SECURITIES None ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None 6
ITEM 5 OTHER INFORMATION None ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K No reports on Form 8-K were filed by the registrant during the quarter ended June 30, 2003. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Farmers & Merchants Bancorp, Inc., Date: August 1, 2003 By: /s/ Joe E. Crossgrove Joe E. Crossgrove President and CFO Date: August 1, 2003 By: /s/ Barbara J. Britenriker Barbara J. Britenriker Senior Vice-President and CFO 7
10-Q EXHIBIT INDEX EXHIBIT NO. DESCRIPTION EX-31.1 Certification of Chief Executive Officer pursuant to Section 302 EX-31.2 Certification of Chief Financial Officer pursuant to Section 302 EX-32.1 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, certify that: 1 I have reviewed this quarterly report on Form 10-Q of Farmers & Merchants Bancorp, Inc.; 2 Based on my knowledge, this quarterly 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 quarterly 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 quarterly report; 4 The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures 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 quarterly report is being prepared; b. evaluated the effectiveness of the registrants' disclosure controls and procedures as of a date within 90 days prior to the filing of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5 The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have significant role in the registrant's internal controls; and 6 The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 13, 2003 -------------------------- /s/ Joe E. Crossgrove -------------------------- President and CEO -------------------------- 8
EXHIBIT 31.2 CERTIFICATIONS I, Barbara J. Britenriker, Senior Vice-President and CFO, certify that: 1 I have reviewed this quarterly report on Form 10-Q of Farmers & Merchants Bancorp, Inc.; 2 Based on my knowledge, this quarterly 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 quarterly 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 quarterly report; 4 The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures 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 quarterly report is being prepared; b. evaluated the effectiveness of the registrants' disclosure controls and procedures as of a date within 90 days prior to the filing of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5 The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have significant role in the registrant's internal controls; and 6 The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 13, 2003 ------------------------------ /s/ Barbara J. Britenriker ------------------------------ Senior Vice-President and CFO ------------------------------ 9
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, 2003, 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 13, 2003 /s/ Joe E. Crossgrove ----------------------- -------------------------------- Joe E. Crossgrove, President and Chief Executive Officer 10
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 June 30, 2003, 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 13, 2003 /s/ Barbara J. Britenriker ----------------------- -------------------------------------- Barbara J. Britenriker, Senior Vice-President Chief Financial Officer 11