SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2008
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 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act..
Large accelerated filer [ ] Accelerated filer [X]
Non-accelerated filer [ ] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares of each of the issuers classes of common stock, as
of the latest practicable date:
Common Stock, No Par Value 4,881,700
Class Outstanding as of April 30, 2008
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
FARMERS & MERCHANTS BANCORP, INC.
INDEX
Form 10-Q Items Page
--------------- -----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets-
March 31, 2008 and December 31, 2007 1
Condensed Consolidated Statements of Net Income-
Three Months Ended March 31, 2008 and March 31, 2007 2
Condensed Consolidated Statements of Cash Flows-
Three Months Ended March 31, 2008 and March 31, 2007 3
Notes to Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 4-8
Item 3. Qualitative and Quantitative Disclosures About Market Risk 9
Item 4. Controls and Procedures 10
Item 4A. Other Information 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 1A. Risk Factors 10
Item 1B. Unresolved Staff Comments 10
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits 10
Signatures 11
Exhibit 31. Certifications Under Section 302 12-13
Exhibit 32. Certifications Under Section 906 14
ITEM 1 FINANCIAL STATEMENTS
FARMERS & MERCHANTS BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands of dollars)
Mar 31, 2008 Dec 31, 2007
------------ ------------
ASSETS:
Cash and due from banks $ 18,308 $ 21,753
Interest bearing deposits with banks 0 0
Federal funds sold 9,569 27,134
Investment Securities:
U.S. Treasury 0 0
U.S. Government 139,998 144,104
State & political obligations 46,014 41,467
All others 4,388 4,346
Loans and leases (Net of reserve for loan losses of
$5,868 and $5,921 respectively) 530,905 523,474
Bank premises and equipment-net 17,220 17,051
Accrued interest and other assets 21,531 20,638
Goodwill 4,073 4,007
-------- --------
TOTAL ASSETS $792,006 $803,974
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest bearing $ 63,692 $ 75,670
Interest bearing 558,825 558,923
Federal funds purchased and securities
sold under agreement to repurchase 39,699 41,329
Other borrowed money 31,723 31,816
Accrued interest and other liabilities 7,033 6,861
-------- --------
Total Liabilities 700,972 714,599
SHAREHOLDERS' EQUITY:
Common stock, no par value - authorized 6,500,000
shares; issued 5,200,000 shares 12,677 12,677
Treasury Stock - 301,060 shares 2008, 256,160 shares 2007 (6,631) (5,757)
Unearned Stock Awards 17,240 for 2008 and 17,240 for 2007
Undivided profits 82,209 81,575
Accumulated other comprehensive income (expense) 2,779 880
-------- --------
Total Shareholders' Equity 91,034 89,375
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY $792,006 $803,974
======== ========
See Notes to Condensed Consolidated Unaudited Financial Statements.
Note: The December 31, 2007 Balance Sheet has been derived from the audited
financial statements of that date.
1
FARMERS & MERCHANTS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands of dollars, except per share data)
Three Months Ended
-------------------------------
March 31, 2008 March 31, 2007
-------------- --------------
INTEREST INCOME:
Loans and leases $ 8,894 $ 9,499
Investment Securities:
U.S. Treasury securities -- 4
Securities of U.S. Government agencies 1,648 1,324
Obligations of states and political subdivisions 407 422
Other 54 63
Federal funds 208 51
Deposits in banks -- 26
---------- ----------
Total Interest Income 11,211 11,389
INTEREST EXPENSE:
Deposits 4,493 4,396
Borrowed funds 801 779
---------- ----------
Total Interest Expense 5,294 5,175
---------- ----------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 5,917 6,214
PROVISION FOR LOAN LOSSES 269 (19)
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,648 6,233
OTHER INCOME:
Service charges 820 760
Other 787 615
Net securities gains (losses) 15 --
---------- ----------
1,622 1,375
OTHER EXPENSES:
Salaries and wages 2,029 2,090
Pension and other employee benefits 854 817
Occupancy expense (net) 253 149
Other operating expenses 1,985 1,661
---------- ----------
5,121 4,717
---------- ----------
INCOME BEFORE FEDERAL INCOME TAX 2,149 2,891
FEDERAL INCOME TAXES 581 815
---------- ----------
NET INCOME 1,568 2,076
========== ==========
OTHER COMPREHENSIVE INCOME (NET OF TAX):
Unrealized gains (losses) on securities 1,899 291
---------- ----------
COMPREHENSIVE INCOME (EXPENSE) $ 3,467 $ 2,367
NET INCOME PER SHARE $ 0.32 $ 0.40
Based upon average weighted shares outstanding of: 4,917,707 5,149,967
DIVIDENDS DECLARED $ 0.16 $ 0.16
No disclosure of diluted earnings per share is required as shares are
antidiluted as of quarter end.
See Notes to Condensed Consolidated Unaudited Financial Statements.
2
FARMERS & MERCHANTS BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of dollars)
Three Months Ended
---------------------------------
March 31, 2008 March 31,2007
-------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,568 $ 2,076
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and amortization 293 297
Premium amortization 81 92
Discount amortization (31) (64)
Provision for loan losses 269 (19)
Provision (Benefit) for deferred income taxes 142 (1)
(Gain) Loss on sale of fixed assets (19) 1
(Gain) Loss on sale of investment securities (15) --
Changes in Operating Assets and Liabilities:
Accrued interest receivable and other assets (1,297) (1,410)
Accrued interest payable and other liabilities (751) (479)
-------- --------
Net Cash Provided by Operating Activities 240 493
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (443) (711)
Proceeds from sale of fixed assets -- --
Proceeds from maturities of investment securities: 26,978 22,836
Proceeds from sale of investment securities: 25 --
Purchase of investment securities (24,643) (16,449)
Purchase of Bank Owned Life Insurance -- (3,000)
Net (increase) decrease in loans and leases (7,699) (9,681)
-------- --------
Net Cash Provided (Used) by Investing Activities (5,782) (7,005)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (12,076) (7,793)
Net change in short-term borrowings (1,630) 1,694
Increase in long-term borrowings -- --
Payments on long-term borrowings (93) (182)
Purchase of Treasury stock (874) (395)
Payment of Stock Awards -- --
Payments of dividends (795) (774)
-------- --------
Net Cash Provided (Used) by Financing Activities (15,468) (7,450)
-------- --------
Net change in cash and cash equivalents (21,010) (13,962)
Cash and cash equivalents - Beginning of year 48,887 37,247
-------- --------
CASH AND CASH EQUIVALENTS - END OF THE YEAR $ 27,877 $ 23,285
======== ========
RECONCILIATION OF CASH AND CASH EQUIVALENTS:
Cash and cash due from banks $ 18,308 $ 14,969
Interest bearing deposits -- 318
Federal funds sold 9,569 7,998
-------- --------
$ 27,877 $ 23,285
======== ========
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, 2008 are not necessarily indicative of the
results that are expected for the year ended December 31, 2008. 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, 2007.
RECENT ACCOUNTING PRONOUNCEMENT
In September 2006, the FASB ratified the Emerging Issues Task Force's
(EITF) Issue 06-4, Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split- Dollar Life Insurance Arrangements,
which requires companies to recognize a liability and related compensation
costs for endorsement split-dollar life insurance policies that provide a
benefit to an employee extending to post retirement periods. The liability
should be recognized based on the substantive agreement with the employee.
This Issue was effective beginning January 1, 2008. The Issue was applied
as a change in accounting principle through a cumulative-effect adjustment
to retained earnings as of January 1, 2008 approximating $152,000.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
Statements contained in this portion of the Company's report may be
forward-looking statements, as that term is defined in the Private
Securities Litigation Reform Act of 1995. Forward-looking statements may be
identified by the use of words such as "intend," "believe," "expect,"
"anticipate," "should," "planned," "estimated," and "potential." Such
forward-looking statements are based on current expectations, but may
differ materially from those currently anticipated due to a number of
factors, which include, but are not limited to, factors discussed in
documents filed by the Company with the Securities and Exchange Commission
from time to time. Other factors which could have a material adverse effect
on the operations of the company and its subsidiaries which include, but
are not limited to, changes in interest rates, general economic conditions,
legislative and regulatory changes, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board, the quality and composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand
for financial services in the Bank's market area, changes in relevant
accounting principles and guidelines and other factors over which
management has no control. The forward-looking statements are made as of
the date of this report, and the Company assumes no obligation to update
the forward-looking statements or to update the reasons why actual results
differ from those projected in the forward-looking statements.
CRITICAL ACCOUNTING POLICY AND ESTIMATES
The Company's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of
America, and the Company follows general practices within the industries in
which it operates. At times the application of these principles requires
Management to make assumptions estimates and judgments that affect the
amounts reported in the financial statements. These assumptions, estimates
and judgments are based on information available as of the date of the
financial statements. As this information changes, the financial statements
could reflect different assumptions, estimates and judgments. Certain
policies inherently have a greater reliance on assumptions, estimates and
judgments and as such have a greater possibility of producing results that
could be materially different than originally reported. Examples of
critical assumptions, estimates and judgments are when assets and
liabilities are required to be recorded at fair value, when a decline in
the value of an asset not required to be recorded at fair value warrants an
impairment write-down or valuation reserve to be established, or when an
asset or liability must be recorded contingent upon a future event.
Based on the valuation techniques used and the sensitivity of financial
statement amounts to assumptions, estimates, and judgments underlying those
amounts, management has identified the determination of the Allowance for
Loan and Lease Losses (ALLL), the valuation
4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
of its Mortgage Servicing Rights and the valuation of its post retirement
benefit liability as the accounting areas that requires the most subjective
or complex judgments, and as such have the highest possibility of being
subject to revision as new information becomes available.
The ALLL represents management's estimate of credit losses inherent in the
Bank's loan portfolio at the report date. The estimate is composite of a
variety of factors including past experience, collateral value and the
general economy. ALLL includes a specific portion, a formula driven
portion, and a general nonspecific portion.
Farmers & Merchants Bancorp, Inc. was incorporated on February 25, 1985,
under the laws of the State of Ohio. Farmers & Merchants Bancorp, Inc., and
its subsidiary The Farmers & Merchants State Bank are engaged in commercial
banking. During 2007, the Company operated another subsidiary, Farmers and
Merchants Life Insurance which offered life and disability insurance to the
Bank's credit customers. The subsidiary was dissolved at the end of 2007.
The executive offices of Farmers & Merchants Bancorp, Inc are located at
307-11 North Defiance Street, Archbold, Ohio 43502.
FAIR VALUE MEASUREMENTS
The following tables present information about the Company's assets and
liabilities measured at fair value on a recurring basis at March 31, 2008,
and the valuation techniques used by the Company to determine those fair
values.
In general, fair values determined by Level 1 inputs use quoted prices in
active markets for identical assets or liabilities that the Company has the
ability to access.
Fair values determined by Level 2 inputs use other inputs that are
observable, either directly or indirectly. These Level 2 inputs include
quoted prices for similar assets and liabilities in active markets, and
other inputs such as interest rates and yield curves that are observable at
commonly quoted intervals.
Level 3 inputs are unobservable inputs, including inputs that are available
in situations where there is little, if any, market activity for the
related asset or liability.
In instances where inputs used to measure fair value fall into different
levels in the above fair value hierarchy, fair value measurements in their
entirety are categorized based on the lowest level input that is
significant to the valuation. The Company's assessment of the significance
of particular inputs to these fair value measurements requires judgment and
considers factors specific to each asset or liability.
Disclosures concerning assets and liabilities measured at fair value are as
follows:
Assets and Liabilities Measured at Fair Value on a Recurring Basis at March
31, 2008
($ in Thousands)
Quoted Prices
in Active
Markets for Significant Significant
Identical Observable Observable Balance at
Assets Inputs Inputs March 31,
(Level 1) (Level 2) (Level 3) 2008
------------- ----------- ----------- ----------
Assets - Securities Available for Sale $139,998 $46,014 $ 0 $186,012
======== ======= === ========
Liabilities $ 0 $ 0 $ 0 $ 0
======== ======= === ========
The Company did not have any assets or liabilities measured at fair value
that were categorized as Level 3 during the period. All of the Company's
available for sale securities, including any bonds issued by local
municipalities, have CUSIP numbers making them marketable and comparable as
Level 2.
The Company also has assets that, under certain conditions, are subject to
measurement at fair value on a non-recurring basis. At March 31, 2008, such
assets consist primarily of impaired loans. The Company has established the
fair values of these assets using Level 3 inputs, specifically discounted
cash flow
5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
projections. During the quarter ended March 31, 2008, the impairment
charges recorded to the income statement for impaired loans were not
significant.
Impaired loans accounted for under FAS 114 categorized as Level 3 assets
consist of non-homogeneous loans that are considered impaired . The Company
estimates the fair value of the loans based on the present value of
expected future cash flows using management's best estimate of key
assumptions. These assumptions include future payment ability, timing of
payment streams, and estimated realizable values of available collateral
(typically based on outside appraisals).
Other assets, including bank owned life insurance, are also subject to
periodic impairment assessments under other accounting principles generally
accepted in the United States of America. These assets are not considered
financial instruments. Effective February 12, 2008, the FASB issued a staff
position, FSP FAS 157-2, which delayed the applicability of FAS 157 to
non-financial instruments. Accordingly, these assets have been omitted from
the above disclosures.
LIQUIDITY, CAPITAL RESOURCES AND MATERIAL CHANGES IN FINANCIAL CONDITION
In comparing the balance sheet of March 31, 2008 to that of December 31,
2007, the largest change is the decrease in the cash position. The cash
position at December 31, 2007 was significantly higher by over $21 million
due to the closing of the Knisely Bank acquisition on December 31, 2007.
The Knisely Bank held an extremely liquid position with a lower loan to
deposit ratio and without an investment portfolio. This was compounded by
the necessity of the F&M Bank to fund the acquisition as it was a cash
purchase. The proceeds of the purchase remained in the holding company
account of Knisely - also held at the Bank.
Liquidity remains strong and capital continued to grow even with the
additional purchase of treasury stock. The Company repurchased 228,000
shares during 2007 and continued with an additional 44,900 shares during
the 1st quarter 2008. In terms of dollars spent, 2007 purchases cost just
over $4.7 million and 2008 purchases cost nearly $875 thousand. The Company
has authorization to purchase up to 250 thousand shares during 2008.
Capital increased during the quarter, helped by the increase in the market
value of the investment portfolio reflected in the almost $1.9 million
increase in comprehensive income.
Undivided profits increased with the net income from the Bank. The Bank's
capital was also impacted by the establishment of a post retirement benefit
liability as required by EITF 06-4 of its Bank Owned Life Insurance (BOLI).
The funding of just under $152 thousand was provided by decreasing retained
earnings. The transaction was completed in the first quarter and the
liability was established using the present value calculation of a third
party administrator.
Loans increased $7.4 million during the first quarter 2008. This loan
growth was funded from the excess liquidity position. Past dues loans over
30 days improved to end March 31, 2008 at 2.35% compared to December 31,
2007 past due percentage of 2.88%. While an improvement over December's
numbers, the percentage is higher than most of 2007. Driving the percentage
is the commercial and agricultural portfolios. Those same loans have
increased the non-accrual balances of the Bank. A loan is placed in
non-accrual automatically once it has reached 90 days past due. The balance
in non-accruals increased over $5 million during the first quarter. This
increase was based on just a few relationships experiencing difficulty. A
discussion of the additional impact to profitability caused by the non
accruals will follow in the results of operations.
Unlike many of the industry headlines, the Bank has not experienced losses
due to the subprime mortgage market. The Bank did not participate in
subprime lending and the local economies have dealt more with decreased
working hours and bonuses. Overall the credit quality remains strong and
the issues manageable.
6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Interest income and yield on the loan portfolio was down significantly in
the first quarter 2008 compared to first quarter 2007. Reversal of interest
income due to the loans whose status went to nonaccrual totaled over $370
thousand. Any interest that has been accrued but not yet collected is
reversed out of interest income when the loan goes into nonaccrual. At a
minimum, loans with monthly payments may have four months of accrued
interest reversed. Those whose payments are less frequent may have even
more months reversed. This reversal does not exclude collection of the
interest but rather it may only be taken into income when collected on a
cash basis once a loan is in nonaccrual status. As mentioned earlier, these
loans were mainly in the commercial and agricultural portfolios and none of
the reversed interest was consequently collected later in the month.
The Federal Fund rate cuts during 2007 and 2008 also impacted the yield of
the portfolio. Lines of credit, adjustable rate mortgages subject to
repricing, home equities and new loans all priced considerably lower in
first quarter 2008 versus 2007. This was the other large factor in the
lower interest income.
While the yield on the Federal Funds was impacted by the cuts, the sheer
volume of Federal Funds compared to first quarter 2007 out weighed the
yield. Interest earned on Federal Funds was $157 thousand higher in 2008.
The same rationale applies to the interest income from the investment
portfolio which was $300 thousand higher in the first quarter 2008 than the
first quarter 2007.
Interest expense increased $119 thousand in 2008 when comparing the first
quarters. The cost of funds or yield, however, decreased. Again, the volume
of the deposit portfolio aided by the acquisition and the deposit
generation of the Perrysburg office which opened in November 2007 accounted
for more interest expense than the lower interest expense generated from
the decreased yield.
Overall net interest income was almost $300 thousand lower for first
quarter 2008 as compared to first quarter 2007. The net interest margin
decreased also. Reasons for the decrease in the margin were the $5 million
of loans which went into nonaccrual, the higher cash position, and lastly
the effect of the acquisition in terms of integration of their rate
structures.
Provision for loan loss was $288 thousand higher in 2008 than 2007. As
mentioned earlier, the increase in the non accrual loans, the overall
increase in past dues the fourth quarter 2007 and first quarter 2008 and
the local economy warranted a provision to the loan loss.
Non interest income increased by $247 thousand for first quarter 2008
compared to 2007. The acquisition added core deposits upon which more
revenue was generated in service charges and also in other fees associated
with the accounts. Four Automated Teller Machines (ATM's) were added from
the acquisition. One remote ATM has heavier foreign volume, on which fees
are charged, than typical of the Bank's other ATMs.
Due to state regulatory restrictions, stock was sold during the quarter to
maintain a relationship with only one banker's bank which resulted in the
$15 thousand gain on investments.
Non interest expense was $404 thousand higher for first quarter 2008 as
compared to same quarter 2007. Even though the number of full time
equivalent employees increased to 259 as compared to 249 as of March 31,
2007, the salary and wage expense decreased $61 thousand. Underlying the
decrease is the lack of any accrual for incentive pay for 2008 while $235.4
thousand had been expensed in first quarter 2007. The lack of incentive
accrual is a direct correlation to the lower Return on Assets for the
period. Base salary expense did increase due to the increase in employees.
This is also reflected in the increased expense in pension and other
employee benefits. The Bank expects medical benefit costs to increase 11%
during 2008 over 2007. At this point, the increase in pension and other
employee benefits is 5%.
7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
Occupancy expense is higher with the addition of three offices in the
fourth quarter of 2007. The Bank's Perrysburg office opened in November and
the acquisition which added two offices was completed on December 31, 2007.
The acquired locations are expected to be accretive to earnings in 2008 and
the Bank projects the Perrysburg office to be profitable on a monthly basis
within 18 to 24 months.
Adding the offices and specifically the addition of accounts caused the
increase in the other operating expenses of $324 thousand in comparing
first quarter 2008 to 2007. The Bank's data processing expense is based
mainly on the number of accounts under management. Each application, such
as loan, checking, certificate of deposit, are costed individually along
with the household account database. Additional expense was also carried
the first part of 2008 until the software conversion of the Knisely Bank
was completed in January. Office supplies and equipment also needed to be
replaced for the conversion. While the expense will remain higher, the on
going expense will be lower than first quarter which had many one time
expenses to establish the offices and carry back room support until the
software conversion took place.
Overall, net income was down just over $500 thousand in comparing 2008 to
2007 first quarter performance. The Company fully expects performance to
improve the remainder of 2008. As stated previously, many of the reasons
for the poorer performance are one time issues and the increased operating
expense due to the acquisition were expected. Additional new products and
the focus on returning asset quality to a higher level will accomplish
this. The Company remains positioned for an additional rate cut and is
focused on positioning the balance sheet for a more neutral position going
forward. The Company does remain, however, a reflection of the local
economies in which it operates. To the degree that the local economies
continue to deal with slow downs, the Company will be hampered to achieve
its growth goals. The addition of new markets and new services to those
areas will aid in the growth.
The company continues to be well-capitalized as the capital ratios below
show:
Primary Ratio 11.12%
Tier I Leverage Ratio 10.48%
Risk Based Capital Tier 1 14.13%
Total Risk Based Capital 15.16%
Stockholders' Equity/Total Assets 11.49%
8
ITEM 3 QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates and equity prices. The primary market risk to which the Company is
subject is interest rate risk. The majority of the Company's interest rate
risk arises from the instruments, positions and transactions entered into
for purposes, other than trading, such as lending, investing and securing
sources of funds. Interest rate risk occurs when interest bearing assets
and liabilities reprice at different times as market interest rates change.
For example, if fixed rate assets are funded with variable rate debt, the
spread between asset and liability rates will decline or turn negative if
rates increase.
Interest rate risk is managed within an overall asset/liability framework
for the Company. The principal objectives of asset/liability management are
to manage sensitivity of net interest spreads and net income to potential
changes in interest rates. Funding positions are kept within predetermined
limits designed to ensure that risk-taking is not excessive and that
liquidity is properly managed. The Company employs a sensitivity analysis
in the form of a net interest rate shock as shown in the table following.
Interest Rate Shock on Net Interest Margin Interest Rate Shock on Net Interest Income
------------------------------------------ ------------------------------------------
Net Interest % Change to Rate Rate Cumulative % Change to
Margin (Ratio) Flat Rate Direction Changes by Total ($000) Flat Rate
-------------- ----------- --------- ---------- ------------ -----------
3.35% -15.028% Rising 3.000% 6,692 -15.247%
3.55% -9.961% Rising 2.000% 7,097 -10.113%
3.74% -4.952% Rising 1.000% 7,498 -5.030%
3.94% 0.000% Flat 0.000% 7,896 0.000%
4.08% 3.574% Falling -1.000% 8,182 3.631%
4.26% 8.278% Falling -2.000% 8,548 8.261%
4.24% 7.712% Falling -3.000% 8,510 7.779%
As the balance sheet mix changes, the predicted net interest margin
improves as compared to December 2007's interest rate shock table. The net
interest margin represents the forecasted twelve month margin. A portion of
the improvement in the predicted flat rate is due to the drop in rates that
occurred in the first quarter 2008. The shock report has consistently shown
an improvement in a falling rate environment. The report for March shows an
increase in the base or flat rate of 51 basis points over December's with
the Federal Funds rate having dropped 75 basis points in March alone. This
is consistent with the model predictions as December showed improvement to
take place in the net interest margin should rates fall.
It must be remembered that the shock report is based on a twelve month time
span. How the margin will be impacted for the remainder of 2008 is still
dependent on when pricing opportunities arise from maturities and repricing
schedules. The Bank continues to remain focused on gaining more
relationships per customer as a way to help control the cost of funds.
Promotions continue to focus on special incentives or rewards being based
on a multiple deposit account relationship with each customer. A new
program also promotes a high rate interest bearing checking account with
the increased interest expense offset by fees and savings in operating
efficiency. The higher rate to the customer is dependent on meeting three
simple requirements that generate the fees and create additional
efficiency. The promotion has been extremely successful since its release
in early March.
9
ITEM 4 CONTROLS AND PROCEDURES
As of March 31, 2008, 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, 2008.
There have been no significant changes in the Company's internal controls
that occurred for the quarter ended March 31, 2008.
ITEM 4A OTHER INFORMATION
None
PART II
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 1A RISK FACTORS
There have been no material changes in the risk factors disclosed by
Registrant in its Report on Form 10-K for the fiscal year ended December
31, 2007.
ITEM 1B UNRESOLVED STAFF COMMENTS
None
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Total Number of Shares (d) Maximum Number of Shares
(a) Total Number (b) Average Price Purchased as Part of Publicly that may yet be purchased under
Period of Shares Purchased Paid per Share Announced Plan or Programs the Plans or Programs
--------- ------------------- ----------------- ----------------------------- -------------------------------
1/1/2008
to 250,000
1/31/2008
2/1/2008
to 250,000
2/29/2008
3/1/2008
to 44,900 $19.47 44,900 205,100
3/31/2008
------ ------ ------ -------
Total 44,900 $19.47 44,900(1) 205,100
====== ====== ====== =======
(1) The Company purchased these shares in the market pursuant to a stock
repurchase program publicly announced on November 16, 2007. On that date,
the Board of Directors authorized the repurchase of 250,000 common shares
between January 1, 2008 and December 31, 2008.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5 OTHER INFORMATION
ITEM 6 EXHIBITS
3.1 Amended Articles of Incorporation of the Registrant (incorporated by
reference to Registrant's Quarterly Report on Form 10-Q filed with the
Commission on August 1, 2006)
3.2 Code of Regulations of the Registrant (incorporated by reference to
Registrant's Quarterly Report on Form 10-Q filed with the Commission
on May 10, 2004)
31.1 Rule 13-a-14(a) Certification -CEO
31.2 Rule 13-a-14(a) Certification -CFO
32.1 Section 1350 Certification - CEO
32.2 Section 1350 Certification - CFO
10
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Farmers & Merchants Bancorp, Inc.,
Date: April 30, 2008 By: /s/ Paul S. Siebenmorgen
------------------------------------
Paul S. Siebenmorgen
President and CEO
Date: April 30, 2008 By: /s/ Barbara J. Britenriker
------------------------------------
Barbara J. Britenriker
Exec. Vice-President and CFO
11