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, 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 Accelerated Non-accelerated Smaller reporting
filer [ ] filer [X] filer [ ] 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 4,835,255
-------------------------- -------------------------------
Class Outstanding as of July 30, 2008
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
FARMERS & MERCHANTS BANCORP, INC.
INDEX
Page
-----
Form 10-Q Items
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets-
June 30, 2008 and December 31, 2007 1
Condensed Consolidated Statements of Net Income-
Three and Six Months Ended June 30, 2008 and June 30, 2007 2
Condensed Consolidated Statements of Cash Flows-
Six Months Ended June 30, 2008 and June 30, 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
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 1A. Risk Factors 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 10-11
Item 5. Other Information 11
Item 6. Exhibits 11
Signatures 12
Exhibit 31. Certifications Under Section 302 13-14
Exhibit 32. Certifications Under Section 906 15
ITEM 1 FINANCIAL STATEMENTS
FARMERS & MERCHANTS BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands of dollars)
June 30, 2008 Dec 31, 2007
------------- ------------
ASSETS:
Cash and due from banks $ 21,130 $ 21,753
Interest bearing deposits with banks 0 0
Federal funds sold 732 27,134
Investment Securities:
U.S. Treasury 0 0
U.S. Government 142,075 144,104
State & political obligations 45,934 41,467
All others 4,443 4,346
Loans and leases (Net of reserve for loan losses of
$5,763 and $5,921 respectively) 546,608 523,474
Bank premises and equipment-net 17,181 17,051
Accrued interest and other assets 21,594 20,638
Goodwill 4,074 4,007
-------- ---------
TOTAL ASSETS $803,771 $ 803,974
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest bearing $ 59,243 $ 75,670
Interest bearing 555,187 558,923
Federal funds purchased and securities
sold under agreement to repurchase 51,235 41,329
Other borrowed money 43,628 31,816
Accrued interest and other liabilities 6,100 6,861
-------- ---------
Total Liabilities 715,393 714,599
SHAREHOLDERS' EQUITY:
Common stock, no par value - authorized 6,500,000
shares; issued 5,200,000 shares 12,677 12,677
Treasury Stock - 346,750 shares 2008, 256,160 shares 2007 (7,249) (5,366)
Unearned Stock Awards 16,995 for 2008 and 17,240 for 2007 (386) (391)
Undivided profits 83,474 81,575
Accumulated other comprehensive income (expense) (138) 880
-------- ---------
Total Shareholders' Equity 88,378 89,375
-------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY $803,771 $ 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 Six Months Ended
----------------------------- -----------------------------
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
------------- ------------- ------------- -------------
INTEREST INCOME:
Loans and leases $ 8,875 $ 9,468 $ 17,769 $ 18,967
Investment Securities:
U.S. Treasury securities -- 4 -- 9
Securities of U.S. Government agencies 1,710 1,394 3,359 2,718
Obligations of states and political subdivisions 439 409 846 831
Other 58 65 112 128
Federal funds 52 26 259 77
Deposits in banks -- 3 -- 29
---------- ---------- ---------- ----------
Total Interest Income 11,134 11,369 22,345 22,759
INTEREST EXPENSE:
Deposits 4,003 4,626 8,496 9,022
Borrowed funds 656 744 1,417 1,524
---------- ---------- ---------- ----------
Total Interest Expense 4,659 5,370 9,913 10,546
---------- ---------- ---------- ----------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 6,475 5,999 12,432 12,213
PROVISION FOR LOAN LOSSES 180 154 449 135
NET INTEREST INCOME AFTER
---------- ---------- ---------- ----------
PROVISION FOR LOAN LOSSES 6,295 5,845 11,983 12,078
OTHER INCOME:
Service charges 859 795 1,679 1,556
Other 749 762 1,536 1,377
Net securities gains (losses) -- -- 15 --
---------- ---------- ---------- ----------
1,608 1,557 3,230 2,933
OTHER EXPENSES:
Salaries and wages 2,086 2,062 4,116 4,151
Pension and other employee benefits 819 742 1,673 1,559
Occupancy expense (net) 208 122 461 271
Other operating expenses 1,968 1,707 3,992 3,368
---------- ---------- ---------- ----------
5,081 4,633 10,242 9,349
---------- ---------- ---------- ----------
INCOME BEFORE FEDERAL INCOME TAX 2,822 2,769 4,971 5,662
FEDERAL INCOME TAXES 783 778 1,364 1,592
---------- ---------- ---------- ----------
NET INCOME 2,039 1,991 3,607 4,070
========== ========== ========== ==========
OTHER COMPREHENSIVE INCOME (NET OF TAX):
Unrealized gains (losses) on securities (2,917) (948) (1,018) (658)
---------- ---------- ---------- ----------
COMPREHENSIVE INCOME (EXPENSE) $ (878) $ 1,043 $ 2,589 $ 3,412
NET INCOME PER SHARE $ 0.42 $ 0.39 $ 0.74 $ 0.79
Based upon average weighted shares outstanding of: 4,867,824 5,117,901 4,892,765 5,133,846
DIVIDENDS DECLARED $ 0.16 $ 0.16 $ 0.32 $ 0.32
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)
Six Months Ended
-----------------------------
June 30, 2008 June 30, 2007
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,607 $ 4,070
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and amortization 586 594
Premium amortization 186 161
Discount amortization (54) (96)
Provision for loan losses 449 135
Provision (Benefit) for deferred income taxes (211)
(Gain) Loss on sale of fixed assets 15 (1)
(Gain) Loss on sale of investment securities (15) --
Changes in Operating Assets and Liabilities:
Accrued interest receivable and other assets (940) (1,664)
Accrued interest payable and other liabilities (240) (843)
-------- --------
Net Cash Provided by Operating Activities 3,383 2,356
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (734) (988)
Proceeds from sale of fixed assets 3 --
Proceeds from maturities of investment securities: 46,173 33,684
Proceeds from sale of investment securities: 25 --
Purchase of investment securities (50,391) (26,373)
Purchase of Bank Owned Life Insurance -- (3,000)
Net (increase) decrease in loans and leases (23,583) 167
-------- --------
Net Cash Provided (Used) by Investing Activities (28,507) 3,490
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (20,163) (32,641)
Net change in short-term borrowings 9,906 9,705
Increase in long-term borrowings 12,000 --
Payments on long-term borrowings (188) (365)
Purchase of Treasury stock (1,878) (1,302)
Payment of Stock Awards -- --
Payments of dividends (1,578) (1,596)
-------- --------
Net Cash Provided (Used) by Financing Activities (1,901) (26,199)
-------- --------
Net change in cash and cash equivalents (27,025) (20,353)
Cash and cash equivalents - Beginning of year 48,887 37,247
-------- --------
CASH AND CASH EQUIVALENTS - END OF THE YEAR $ 21,862 $ 16,894
======== ========
RECONCILIATION OF CASH AND CASH EQUIVALENTS:
Cash and cash due from banks $ 21,130 $ 15,309
Interest bearing deposits -- 303
Federal funds sold 732 1,282
-------- --------
$ 21,862 $ 16,894
======== ========
See Notes to Condensed Consolidated Unaudited Financial Statements.
3
FARMERS & MERCHANTS BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
for Form 10Q and Rule 10-01 of Regulation S-X; accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation have been
included. Operating results for the six months ended June 30, 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
INTRODUCTION
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. On December 31, 2007 the Bank closed on it's Knisely
Bank, Indiana acquisition adding two more full service locations. 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.
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.
FAIR VALUE MEASUREMENTS
The following tables present information about the Company's assets and
liabilities measured at fair value on a recurring basis at June 30, 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
June 30, 2008
($ in Thousands)
Quoted Prices in Active Significant Significant
Markets for Identical Observable Inputs Observable Inputs Balance at
Assets (Level 1) (Level 2) (Level 3) June 30, 2008
----------------------- ----------------- ----------------- -------------
Assets - Securities Available for Sale $142,075 $45,934 $0 $188,009
======== ======= === ========
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 June 30, 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 June 30, 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 June 30, 2008 to that of December 31,
2007, the largest change is the switch in the Federal Funds position. At
December 31, just over $27 million was being sold and in June 2008, $9.7
million was being purchased. The almost $40 million change in liquidity
funded $23.5 million in loan growth and replaced over $20 million of
deposits. The investment portfolio increased almost $2.5 million along
with other borrowed money of almost $10 million. The December 31, 2007
cash balance was unusually high due to an acquisition that closed on the
last business day of the year and was a cash purchase. The proceeds of
the purchase, around $10 million, remained in the selling holding
company's account maintained at the Bank. Proceeds were dispersed to
shareholders in 2008 which is partially responsible for the decrease in
non-interest bearing deposit balances in the first six months of 2008.
The other factor in lowering of the non-interest bearing deposit balances
is the Bank offering a new high interest bearing transaction account. The
balance in the new product was over $14 million as of June 30, 2008 with
funds being moved from free non-interest checking balances into the new
interest bearing checking balances. It has also attracted new money and
some funds have also moved from the certificate of deposit portfolio. The
expense of the high interest rate is offset by an increase in the
non-interest fee activity and decrease in non-interest expense. The new
product has been well received by existing customers and has attracted
new customers as well.
Liquidity and capital remain strong with capital decreasing due to the
market value change of securities and the continued repurchasing of
treasury stock. The Company repurchased 228,000 shares during 2007 and
continued with an additional 44,900 shares during the 1st quarter 2008
and 45,445 shares during the 2nd quarter. In terms of dollars spent, 2007
purchases cost just over $4.7 million and 2008 purchases cost over $1.877
million. The Company has authorization to purchase up to 250 thousand
shares during 2008.
The Company continues to be well-capitalized as the capital ratios below
show:
Primary Ratio 11.20%
Tier I Leverage Ratio 10.52%
Risk Based Capital Tier 1 13.76%
Total Risk Based Capital 14.74%
Stockholders' Equity/Total Assets 11.00%
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.
As stated previously, loans increased $23.5 million during the first half
2008. Past due loans over 30 days improved to end June 30, 2008 at 2.41%
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 and an additional $1.2 million during
the second quarter. The increases were based on just a few relationships
experiencing difficulty. Residential mortgage delinquency was under two
percent and consumer loan is less than one quarter of a percent. 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
Due to the impact of the first quarter activity on the year-to-date
numbers, some of the discussion to follow will reference the change
between first and second quarter 2008 as compared to 2007.
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. During the second quarter, an additional $88
thousand of interest income was reversed due to the increase in non
accrual balances. This was offset by smaller interest collections but
overall, the high non accrual balances remain a barrier to higher
profitability.
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 half 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 $182 thousand higher in 2008.
The same rationale applies to the interest income from the investment
portfolio which was $640 thousand higher in the first half 2008 than the
first half 2007.
Interest expense increased $119 thousand in 2008 when comparing the first
quarters. The cost of funds or yield, however, decreased. During the
second quarter, as higher rate certificate of deposits matured along with
the run off of deposits, the interest expense was significantly lower
compared to same quarter last year. A large percentage of the certificate
of deposit portfolio will continue to reprice during the third quarter of
2008 sustaining the improvement in the net interest margin. Interest on
borrowed funds was also lower as compared for the quarter and first half
2008 to 2007. As maturities occurred in 2007, the replacement and
addition of borrowings were at significantly lower interest costs.
Overall net interest income reversed the position of first quarter
performance where 2008 was running below 2007. Second quarter 2008 was
$437 thousand higher as compared to 2007. Year to date June 30th, net
interest income was $141 thousand higher in 2008 as compared to 2007. Net
interest income should continue to increase as the Bank continues to work
to reduce the amount of loans in nonaccrual, maintains a smaller cash
position, and lastly continues the decrease in the cost of funds as a
result of the repricing certificates of deposit.
Provision for loan loss was $314 thousand higher in 2008 than 2007. As
mentioned earlier, the increase in the non accrual loans along with loan
growth, warranted a higher provision to the loan loss reserve. The net
charge-off position was also slightly higher in 2008 by around $125
thousand compared to 2007.
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. The new
checking product is expected to increase non interest income through
increased debit card activity the second half of the year. As the
accounts have switched, the debit card activity has doubled for those
customers. The convenience to the customers and increased revenue to the
Bank will continue to be a positive for all involved. Overall, non
interest income for the three months ended June 30, 2008 was $51 thousand
higher than the same period 2007, bringing the year to date total $297
higher than 2007.
Due to state regulatory restrictions, stock was sold during the first
quarter to maintain a relationship with only one banker's bank which
resulted in the $15 thousand gain on investments.
7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
Non interest expense was $404 thousand higher for first quarter 2008 as
compared to same quarter 2007. The second quarter was $409 thousand
higher comparing 2008 to 2007. Even though the number of full time
equivalent employees increased to 259 for the first quarter, it decreased
to 256 the second quarter. The number of employees remains higher in 2008
than 2007, while the salary and wage expense has decreased $35 thousand.
Underlying the decrease is a lower accrual for incentive pay for 2008 as
compared to 2007. The lower incentive accrual is a direct correlation to
the lower Return on Assets for the year as compared to 2007; ROA being a
primary determinant of incentive compensation. Base salary expense has
increased due to the higher number of employees. The Bank has three new
locations compared to same time last year and one office was relocated.
The relocation occurred at the end of June 2008. 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 7.3%.
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. An additional location is to be
added in August and additional expense was occurred in preparation. The
new location will operate from a leased property.
Adding the offices and specifically the addition of accounts caused the
increase in the other operating expenses of $546 thousand for first half
of 2008 compared to 2007. The second quarter comparison of $222 thousand
more expense than same quarter last year was lower than the $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. Most of the
outstanding contracts of the Knisely Bank have been reviewed and either
modified or terminated. Only minor bills were presented for payment in
the second quarter. While the expense will remain higher, the on going
expense will continue to decrease as one time expenses to establish the
offices and carry back room support have been incurred.
Overall, net income was down just $463 thousand in comparing 2008 to 2007
first half performance. The performance of the three months ended June 30
were actually better than the same three months last year. The Company
expects for the performance to continue to improve the remaining quarters
of 2008. Additional new products and the focus on returning asset quality
to a higher level will accomplish this. The Company remains positioned
for continued improvement in the net interest margin in the next quarter
due to decreasing cost of funds. The Company continues to focus on
positioning the balance sheet for a neutral rate position going forward.
The Company does remain, however, a reflection of the local economy 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 a new market in the second half of the year along
with the new additions in 2007 will aid in the growth effort.
FORWARD LOOKING STATEMENTS
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.
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
-------------- ----------- --------- ---------- ------------ -----------
3.17% -16.498% Rising 3.000% 12,752 -16.893%
3.39% -10.931% Rising 2.000% 13,624 -11.210%
3.59% -5.432% Rising 1.000% 14,488 -5.579%
3.80% 0.000% Flat 0.000% 15,344 0.000%
4.00% 5.191% Falling -1.000% 16,140 5.186%
4.11% 8.051% Falling -2.000% 16,574 8.013%
4.13% 8.779% Falling -3.000% 16,720 8.965%
The net interest margin represents the forecasted twelve month margin. It
also shows what effect rate changes will have on both the margin and the
net interest income. The shock report has consistently shown an
improvement in a falling rate environment. The goal of the Company is to
lengthen some of the liabilities or sources of funds to decrease the
exposure to a raising rate environment. The Bank has offered higher rates
on certificates of deposits for longer periods so far during 2008 than it
did during the same period in 2007. Of course, customer desires also
drive the ability to capture longer term deposits. Currently, the
customer looks for terms twelve months and under while the Bank would
prefer 24 months and longer. It is often a meeting in the middle that
satisfies both.
The Bank continues to remain focused on gaining more relationships per
customer as a way to help control the cost of funds also. 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 promotion has been extremely successful since its release
in early March.
9
ITEM 4 CONTROLS AND PROCEDURES
As of June 30, 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 June
30, 2008. There have been no significant changes in the Company's
internal controls that occurred during the quarter ended June 30, 2008.
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 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
------ ------------------- ----------------- ----------------------------- -------------------------------
4/1/2008
to 205,100
4/30/2008
5/1/2008
to 25,741 $21.53 25,741 179,359
5/31/2008
6/1/2008
to 19,704 $22.80 19,704 159,655
6/30/2008
------ ------ ------ -------
Total 45,445 $22.08 45,445(1) 159,655
====== ====== ====== =======
(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
The Annual Meeting of Shareholders of Farmers & Merchants Bancorp, Inc.
was held on April 17, 2008. The following directors were elected to a new
term of office:
Dexter L. Benecke
Joe E. Crossgrove
Steven A. Everhart
Robert G. Frey
Jack C. Johnson
Dean E. Miller
Steven J. Planson
Anthony J. Rupp
David P. Rupp Jr.
James C. Saneholtz
Kevin J. Sauder
Merle J. Short
Paul S. Siebenmorgen
Steven J. Wyse
10
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS (Continued)
1. A proposal to elect fourteen (14) directors of the Corporation The
results of the voting on the proxy items are as follows:
Votes Cast Votes
For Withhold
---------- --------
Dexter L. Benecke 3,719,861 13,174
Joe E. Crossgrove 3,718,151 14,884
Steven A. Everhart 3,709,671 23,364
Robert G. Frey 3,703,510 29,524
Jack C. Johnson 3,699,749 33,286
Dean E. Miller 3,719,711 13,324
Steven J. Planson 3,718,461 14,574
Anthony J. Rupp 3,709,391 23,644
David P. Rupp Jr. 3,700,181 32,854
James C. Saneholtz 3,708,719 24,316
Kevin J. Sauder 3,689,321 43,714
Merle J. Short 3,719,811 13,224
Paul S. Siebenmorgen 3,704,497 28,538
Steven J. Wyse 3,705,369 27,666
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
11
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: July 30, 2008 By: /s/ Paul S. Siebenmorgen
Paul S. Siebenmorgen
President and CEO
Date: July 30, 2008 By: /s/ Barbara J. Britenriker
Barbara J. Britenriker
Exec. Vice-President and CFO
12