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 September 30, 3003 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 October 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- September 30, 2003, December 31, 2002 and September 30, 2002 1 Condensed Consolidated Statements of Net Income- Three Months and Nine Months Ended September 30, 2003 and September 30, 2002 2 Condensed Consolidated Statements of Cash Flows- Nine Months Ended September 30, 2003 and September 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 an Vote of Security Holders 6 Item 5. Other Information 7 Item 6. Exhibits and Reports on form 8K 7 Signatures 7 Exhibits 31.1 & 31.2 Certifications Under Section 302 Exhibit 32 Additional Exhibit - Certifications Under Section 906
ITEM 1 FINANCIAL STATEMENTS FARMERS & MERCHANTS BANCORP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands of dollars) Sept 30, 2003 December 31, 2002 Sept 30, 2002 ASSETS: Cash and due from banks $ 15,531 $ 18,508 $ 18,783 Interest bearing deposits with banks 608 279 624 Federal funds sold 0 - - Investment Securities: U.S. Treasury 2,823 4,215 4,463 U.S. Government 113,212 117,021 102,489 State & political obligations 53,297 55,860 52,982 All others 1,973 1,697 3,523 Loans and leases (Net of reserve for loan losses of $9,313, $6,400 and $6,133 respectively) 489,928 497,515 487,702 Bank premises and equipment-net 15,906 15,034 13,611 Accrued interest and other assets 18,526 16,357 12,444 TOTAL ASSETS $ 711,804 $ 726,486 $ 696,621 LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Deposits: Demand $ 42,623 $ 43,808 $ 41,680 Time and savings 528,553 532,565 533,264 Federal funds purchased and securities sold under agreement to repurchase 29,531 38,200 24,098 Other borrowed money 27,139 28,696 14,694 Accrued interest and other liabilities 10,290 5,479 6,283 Total Liabilities 638,136 648,748 620,019 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 58,831 61,345 59,896 Accumulated other comprehensive income 2,160 3,716 4,029 Total Shareholders' Equity 73,668 77,738 76,602 LIABILITIES AND SHAREHOLDERS' EQUITY $ 711,804 $ 726,486 $ 696,621 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 Nine Months Ended Sept 30, 2003 Sept 30, 2002 Sept 30, 2003 Sept 30, 2002 INTEREST INCOME: Loans and leases $ 8,518 $ 8,907 $ 26,028 $ 26,551 Investment Securities: U.S. Treasury securities 28 47 112 168 Securities of U.S. Government agencies 1,048 1,265 3,289 3,971 Obligations of states and political subdivisions 531 565 1,674 1,710 Other 45 85 119 274 Federal funds 7 8 24 48 Deposits in banks 5 4 22 22 Total Interest Income 10,182 10,881 31,268 32,744 INTEREST EXPENSE: Deposits 3,046 4,349 10,161 13,560 Borrowed funds 315 339 1,136 1,027 Total Interest Expense 3,361 4,688 11,297 14,587 NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 6,821 6,193 19,971 18,157 PROVISION FOR LOAN LOSSES 675 537 5,373 1,585 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,146 5,656 14,598 16,572 OTHER INCOME: Service charges 543 546 1,604 1,482 Other 1,044 569 2,905 2,038 Net securities gains (losses) 2 - 524 64 1,589 1,115 5,033 3,584 OTHER EXPENSES: Salaries and wages 1,664 1,934 5,110 5,834 Pension and other employee benefits 462 503 1,443 1,426 Occupancy expense (net) 137 166 488 359 Other operating expenses 1,781 1,628 5,339 5,264 4,044 4,231 12,380 12,883 INCOME BEFORE FEDERAL INCOME TAX 3,691 2,540 7,251 7,273 FEDERAL INCOME TAXES 1,100 760 1,691 1,973 NET INCOME 2,591 1,780 5,560 5,300 OTHER COMPREHENSIVE INCOME (NET OF TAX): Unrealized gains (losses) on securities (1,529) 1,110 (1,556) 2,448 COMPREHENSIVE INCOME $ 1,062 $ 2,890 $ 4,004 $ 7,748 NET INCOME PER SHARE (Based upon weighted average number of shares outstanding of 1,300,000 $ 1.99 $ 1.37 $ 4.28 $ 4.08 DIVIDENDS DECLARED $ 5.40 $ 0.40 $ 6.20 $ 1.15 See Notes to Condensed Consolidated Unaudited Financial Statements. 2
FARMERS & MERCHANTS BANCORP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands of dollars) Nine Months Ended Sept 30, 2003 Sept 30, 2002 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,560 $ 5,300 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and amortization 1,093 1,095 Premium amortization 439 451 Discount amortization (56) (61) Provision for loan losses 5,373 1,585 Provision for deferred income taxes (653) (49) (Gain) loss on sale of fixed assets 34 (53) (Gain) loss on sale of investment securities (524) (64) Changes in Operating Assets and Liabilities: - Accrued interest receivable and other assets (1,516) (295) Accrued interest payable and other liabilities 4,811 3,113 Net Cash Provided by Operating Activities 14,561 11,022 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (1,999) (2,321) Proceeds from sale of fixed assets - - Proceeds from maturities of investment securities: 13,160 45,998 Proceeds from sale of investment securities: 53,661 7,135 Purchase of investment securities- (67,262) (41,506) Net increase in loans and leases 2,214 (21,044) Net Change in Cash by Investing Activities (226) (11,738) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits (5,197) 8,787 Net change in short-term borrowings (8,669) (2,441) Increase in long-term borrowings - - Payments on long-term borrowings (1,557) (2,716) Payments of dividends (1,560) (1,495) Net Cash Provided by Financing Activities (16,983) 2,135 Net change in cash and cash equivalents (2,648) 1,419 Cash and cash equivalents - Beginning of year 18,787 17,988 CASH AND CASH EQUIVALENTS - END OF THE YEAR $ 16,139 $ 19,407 RECONCILIATION OF CASH AND CASH EQUIVALENTS: Cash and cash due from banks $ 15,531 $ 18,783 Interest bearing deposits 608 624 Federal funds sold - - $ 16,139 $ 19,407 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 nine months ended September 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 Refinancing of real estate loans remained brisk throughout the first two months of the period. September marked the slowing of the secondary mortgage revenue stream. The pipeline for secondary mortgages has shrunk considerably and the bank expects to resume to normal activity levels in origination during the last quarter. Deposit balances decreased approximately $11 million during the period in both demand and time and savings categories. Certificate of Deposit run-off was expected with the significant change in rates on the automatic renewals. This was offset by investment run-off and decreased loan volume. The net interest margin continued to improve as the liability cost was higher than the asset yield lost. The loan loss reserve was increased during the quarter due to credit rating adjustments made on some associated personal loans of a reclassified commercial credit and the bank also adjusted the historical loss factor to encompass five years of data instead of six used previously. These two actions resulted in $.5 million being added to the reserve during the quarter. The bank also replaced funds taken from reserve due to charge-offs as the increase in loan provision expense for the quarter was $675,000. The bank feels the necessary provisions have been made and are confident the reserve is adequate. The capital position of the bank remained strong as shown in the capital ratios listed below. Along with its regular dividend, the bank declared a one-time additional dividend of $5 per share based on its strong excess capital position. The bank also recognized that it was an opportune time for our shareholders to receive the dividend based on the favorable personal tax changes concerning dividends. 4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (Continued) The bank is positioned to have strong earnings through the remainder of the year. The banks financial ratios have continued to improve each month since the first quarter and this is expected to continue throughout the fourth quarter of 2003. The following is a summary of five capital ratios as they are calculated from the September 30, 2003 financial statements: Primary Ratio 11.51% Total Capital Ratio 15.27% Risk Based Capital Tier 1 14.39% Risk Based Capital Tier 2 21.50% Stockholders' Equity/Total Assets 10.35% 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 608 509 Investment Securities 9,039 25,387 86,948 49,652 171,305 Loans 116,690 80,198 88,412 207,373 492,673 Total Rate Sensitive Assets 126,337 105,585 175,360 257,025 664,487 Deposits 118,906 257,894 187,375 7,001 571,176 Fed Funds Purchased & agreements to repurchase 29,531 29,531 Other Borrowings 5,156 17,912 4,071 27,139 Total Rate Sensitive Liabilities 148,437 263,050 205,287 11,072 627,846 Gap -22,100 -157,465 -29,927 245,953 36,641 ITEM 4 CONTROLS AND PROCEDURES As of September 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 September 30, 2003. There have been no significant changes in the Company's internal controls subsequent to September 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 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 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 No reports on Form 8-K were filed by the registrant during the quarter ended September 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: November 13, 2003 By: /s/ Joe E. Crossgrove Joe E. Crossgrove President and CEO Date: November 13, 2003 By: /s/ Barbara J. Britenriker Barbara J. Britenriker Senior Vice-President and CFO 7
10-K 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 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: November 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: November 13, 2003 ------------------------------- /s/ Barbara J. Britenriker ------------------------------- Senior Vice-President and CFO ------------------------------- 9
EXHIBIT 32 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 September 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: November 13, 2003 /s/ Joe E. Crossgrove ---------------------- ---------------------------------- Joe E. Crossgrove, President and Chief Executive Officer 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, 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: November 13, 2003 /s/ Barbara J. Britenriker ---------------------- -------------------------------- Barbara J. Britenriker, Senior Vice-President Chief Financial Officer 10