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, 2006 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) <TABLE> <S> <C> OHIO 34-1469491 (State or other jurisdiction of (I.R.S Employer incorporation or organization) Identification No.) </TABLE> <TABLE> <S> <C> 307-11 North Defiance Street, Archbold, Ohio 43502 (Address of principal executive offices) (Zip Code) </TABLE> (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, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated Filer [ ] 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: <TABLE> <S> <C> Common Stock, No Par Value 1,299,624 Class Outstanding as of April 26, 2006 </TABLE>
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10Q FARMERS & MERCHANTS BANCORP, INC. INDEX <TABLE> <CAPTION> Form 10-Q Items Page - --------------- ----- <S> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets- March 31, 2006, December 31, 2005 1 Condensed Consolidated Statements of Net Income- Three Months Ended March 31, 2006 and March 31, 2005 2 Condensed Consolidated Statements of Cash Flows- Three Months Ended March 31, 2006 and March 31, 2005 3 Notes to Condensed Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 4-6 Item 3. Quantitative and Qualitative Disclosures About Market Risk 7 Item 4. Controls and Procedures 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings 8 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 8 Item 3. Defaults Upon Senior Securities 8 Item 4. Submission of Matters to a Vote of Security Holders 8 Item 5. Other Information 8 Item 6. Exhibits 8 Signatures 9 Certifications Under Section 302 10-11 Exhibit 32. Additional Exhibit - Certifications Under Section 906 12 </TABLE>
ITEM 1 FINANCIAL STATEMENTS FARMERS & MERCHANTS BANCORP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands of dollars) <TABLE> <CAPTION> Mar 31, 2006 Dec 31, 2005 ------------ ------------ <S> <C> <C> ASSETS: Cash and due from banks $ 14,123 $ 20,056 Interest bearing deposits with banks 297 2,533 Federal funds sold 1,682 0 Investment Securities: U.S. Treasury 2,359 2,355 U.S. Government 129,436 138,358 State & political obligations 57,634 62,891 All others 3,892 3,838 Loans and leases (Net of reserve for loan losses of $5,344 and $5,388 respectively) 472,831 458,704 Bank premises and equipment-net 14,657 14,874 Accrued interest and other assets 16,076 17,336 -------- -------- TOTAL ASSETS $712,987 $720,945 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Deposits: Noninterest bearing $ 49,202 $ 64,791 Interest bearing 514,281 511,506 Federal funds purchased and securities sold under agreement to repurchase 25,436 21,158 Other borrowed money 34,758 34,952 Accrued interest and other liabilities 5,537 5,950 -------- -------- Total Liabilities 629,214 638,357 SHAREHOLDERS' EQUITY: Common stock, no par value - authorized 1,500,000 shares; issued 1,300,000 shares 12,677 12,677 Treasury Stock - 376 shares, Unearned stock awards 980 shares (148) (115) Undivided profits 73,301 71,933 Accumulated other comprehensive income (expense) (2,057) (1,907) -------- -------- Total Shareholders' Equity 83,773 82,588 LIABILITIES AND SHAREHOLDERS' EQUITY $712,987 $720,945 ======== ======== </TABLE> See Notes to Condensed Consolidated Unaudited Financial Statements. Note: The December 31, 2005 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) <TABLE> <CAPTION> Three Months Ended ----------------------- Mar 31, Mar 31, 2006 2005 ---------- ---------- <S> <C> <C> INTEREST INCOME: Loans and leases $ 8,088 $ 7,724 Investment Securities: U.S. Treasury securities 18 35 Securities of U.S. Government agencies 1,250 932 Obligations of states and political subdivisions 581 504 Other 58 40 Federal funds 69 1 Deposits in banks 3 49 ---------- ---------- Total Interest Income 10,067 9,285 INTEREST EXPENSE: Deposits 3,569 2,682 Borrowed funds 591 336 ---------- ---------- Total Interest Expense 4,160 3,018 ---------- ---------- NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 5,907 6,267 PROVISION FOR LOAN LOSSES (50) 96 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,957 6,171 OTHER INCOME: Service charges 794 687 Other 610 592 Net securities gains 20 -- ---------- ---------- 1,424 1,279 OTHER EXPENSES: Salaries and wages 2,000 2,047 Pension and other employee benefits 629 537 Occupancy expense (net) 135 163 Other operating expenses 1,852 1,958 ---------- ---------- 4,616 4,705 ---------- ---------- INCOME BEFORE FEDERAL INCOME TAX 2,765 2,745 FEDERAL INCOME TAXES 747 712 ---------- ---------- NET INCOME 2,018 2,033 ========== ========== OTHER COMPREHENSIVE INCOME (NET OF TAX): Unrealized gains (losses) on securities (150) (1,475) COMPREHENSIVE INCOME (EXPENSE) $ 1,868 $ 558 NET INCOME PER SHARE $ 1.55 1.56 Based upon average weighted shares outstanding of: 1,298,980 1,300,000 DIVIDENDS DECLARED $ 0.50 $ 0.45 </TABLE> 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 STATMENTS OF CASH FLOWS (Unaudited) (in thousands of dollars) <TABLE> <CAPTION> Three Months Ended ------------------- Mar 31, Mar 31, 2006 2005 -------- -------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,018 $ 2,033 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and amortization 276 302 Premium amortization 228 314 Discount amortization (81) (25) Provision for loan losses (50) 96 Provision (Benefit) for deferred income taxes 77 760 Gain (Loss) on sale of fixed assets (32) 4 Gain on sale of investment securities (20) -- Changes in Operating Assets and Liabilities: Accrued interest receivable and other assets 1,452 (699) Accrued interest payable and other liabilities (413) (295) -------- -------- Net Cash Provided by Operating Activities 3,455 2,490 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (27) (212) Net (increase) decrease in Federal Funds Sold (1,682) Proceeds from sale of fixed assets -- Proceeds from maturities of investment securities: 14,106 4,870 Proceeds from sale of investment securities: 4,777 -- Purchase of investment securities (5,114) (12,565) Net (increase) decrease in loans and leases (14,077) 3,204 -------- -------- Net Cash Provided (Used) by Investing Activities (2,017) (4,703) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits (12,814) (3,268) Net change in short-term borrowings 4,278 (248) Increase in long-term borrowings -- -- Payments on long-term borrowings (194) (211) Purchase of Treasury Stock (33) -- Payments of dividends (844) (715) -------- -------- Net Cash Provided (Used) by Financing Activities (9,607) (4,442) -------- -------- Net change in cash and cash equivalents (8,169) (6,655) Cash and cash equivalents - Beginning of year 22,589 24,256 -------- -------- CASH AND CASH EQUIVALENTS - END OF THE YEAR $ 14,420 $ 17,601 ======== ======== RECONCILIATION OF CASH AND CASH EQUIVALENTS: Cash and cash due from banks $ 14,123 $ 14,843 Interest bearing deposits 297 2,758 -------- -------- $ 14,420 $ 17,601 ======== ======== </TABLE> 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, 2006 are not necessarily indicative of the results that are expected for the year ended December 31, 2006. 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, 2005. 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) and the valuation 4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (Continued) of its Mortgage Servicing Rights as the accounting areas that requires the most subjective or complex judgments, and as such could be the most 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 subsidiaries The Farmers & Merchants State Bank and Farmers & Merchants Life Insurance Company are engaged in commercial banking and life and disability insurance, respectively. The executive offices of Farmers & Merchants Bancorp, Inc. are located at 307-11 North Defiance Street, Archbold, Ohio 43502. LIQUIDITY, CAPITAL RESOURCES AND MATERIAL CHANGES IN FINANCIAL CONDITION The bank experienced an improvement in loan growth during the first quarter with loans increasing approximately $14.1 million. The loan increase was funded by utilizing cash of $6.5 million and decreasing the investment portfolio by $14 million. The loan to deposit ratio increased to 83.9% at quarter end from 82.1% as of December 31, 2005. Both sides of the percentage were impacted - one, the loan growth and the other, a decrease in deposits of almost $13 million during the first quarter. Loan growth was accomplished through an increase in purchased participations with other banks and a renewed focus on the bank's customer calling program. Loan quality remained strong, evidenced by the decreased need for additional loan provision due to improved past due ratios and decreased non-performing loans. The largest area of growth occurred in the commercial real estate portfolio, growing well over $26.5 million in the first quarter, to a quarter ending balance of $140 million. This represented new loans through the participations and a couple of the Bank's customers expanding their operations through construction of additional facilities. The next largest area of fluctuataion was in the consumer real estate which decreased by $11.8 million in the first quarter. Though the bank has increased the volume of home equity loans, the balances have not been utilized. Customers have looked to lock in rates, moving from variable to fixed rates loans in the secondary market. The remainder of the loan portfolio experienced only minor fluctuations. The decrease in deposits was expected as the bank had a large customer balance during the fourth quarter of 2005 that was known to be temporary. The largest decrease shows in the transaction accounts of $10 million. Certificates of deposit also decreased $5.5 million as the bank offered only promotional CD's. This strategy was used to lessen the increased cost of funds being driven by the Federal Reserve Federal Funds rate increases. The flat yield curve has also made deposit pricing difficult. The tightening of the net interest rate margin during the first quarter has caused the bank to look closely at its operating efficiency. With net interest income decreasing, as the cost of funds have increased higher than the yield on the earning assets, non-interest items are coming under scrutiny. The success of the addition of non-interest income in 2005 was accomplished by providing Overdraft Privilege. The Company continues to look for opportunities to provide services our customers want that aid in the profitability of the Company also. The bank has also focused its attention on the non-interest expense side of the income statement. 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (Continued) MATERIAL CHANGES IN RESULTS OF OPERATIONS Management has reviewed allocation of staff and has accomplished reduction through normal attrition. In March, the transaction accounts were restructured to add simplicity to the portfolio. Types of checking accounts have been decreased from fifteen to a basic four. This aids in customer understanding and improves the marketing of the accounts. A conversion on existing accounts takes place during April. The income statement shows the effects of the tightening of our interest margin and decrease in asset size. Net interest income is lower by $360 thousand for the three months ended March 2006 compared to March 2005. The tightening of the margin has mirrored the interest rate risk testing done throughout 2005 and 2006. The Company's net income after tax shows a slight decrease of $15 thousand from same period last year. A $50 thousand reversal in the loan loss provision for 2006 creates a $146 thousand swing to income as March 2005 had a $96 thousand expense. The Company does not foresee the reversals continuing in 2006 to the extent that it had in 2005 ($425 thousand for the full year). An increase in the allowance due to loan growth is expected to outpace any reduction in the allowance caused from asset quality improvement. The Company purchased 356 shares of stock during the first quarter, impacting the outstanding shares during the quarter. Additional purchases are planned to provide the Company share to use for the employee stock award plan. The Board of Directors had approved additional purchases up to 5,000 shares. The company continues to be well-capitalized as the capital ratios below show: <TABLE> <S> <C> Primary Ratio 12.84% Tier I Leverage Ratio 11.97% Risk Based Capital Tier 1 16.73% Total Risk Based Capital 17.94% Stockholders' Equity/Total Assets 11.75% </TABLE> 6
ITEM 3 QUANTITATIVE AND QUALITATIVE 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 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 rate shock as shown in the table following. Interest Rate Shock on Interest Rate Shock on Net Interest Margin Net Interest Income <TABLE> <CAPTION> Net Interest % Change to Rate Rate Cumulative % Change to Margin (Ratio) Flat Rate Direction Changes by Total ($000) Flat Rate - -------------- ----------- --------- ---------- ------------ ----------- <S> <C> <C> <C> <C> <C> 3.69% -6.059% Rising 3.000% 6,537 -5.868% 3.77% -4.044% Rising 2.000% 6,673 -3.913% 3.85% -2.058% Rising 1.000% 5,806 -1.986% 3.93% 0.000% Flat 0.000% 6,944 0.000% 3.95% 0.685% Falling -1.000% 6,978 0.481% 3.89% -0.868% Falling -2.000% 6,849 -1.374% 3.82% -2.653% Falling -3.000% 6,700 -3.522% </TABLE> With the Federal Reserve Federal Funds rate increases over the last year, the rates have risen high enough that the Bank shows an improvement in the shock report should rates fall 100 basis points. This is because more liabilities could actually adjust down 100 basis points than before. A 200 basis point negative swing however, is still more of a swing than the rate on many of the liabilities. There can be no adjustment below paying 0% on a deposit. The Company can afford to take some additional risk with minimal consequences as the chart shows. The concern lies in the flat rate continuing to decrease as compared to previous quarters. The previous shock reports have consistantly shown a tightening of the Company margin would occur as rates increased. With the current outlook for additional rate increases by the Federal Reserve, the Company will continue to loose net interest income. Net interest margin shows 3.93% as of end of quarter compared to showing 4.04% as of December 31, 2005 in the predicted flat rate environment. The net interest margin represents the forecasted twelve month margin. The predictions to the effect of an interest rate increase in the short term have occurred. The current margin has tightened throughout 2005 and 2006. The Company is incorporating a strategy to improve the profitability (net interest margin) through growth. 7
ITEM 4 CONTROLS AND PROCEDURES As of March 31, 2006, 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, 2006. There have been no significant changes in the Company's internal controls that occurred for the quarter ended March 31, 2006. PART II ITEM 1 LEGAL PROCEEDINGS None 1A RISK FACTORS None ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS <TABLE> <CAPTION> (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 Progams the Plans or Programs ------ ------------------- ----------------- ----------------------------- ------------------------------- <S> <C> <C> <C> <C> 03/01/06 to 356 $91.50 356 4,644 03/31/06 </TABLE> The Board of Directors approved the repurchase of 5,000 shares of its outstanding shares of common stock on December 19, 2005. The purchases can be conducted throughout 2006. 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 Articles of Incorporation of the Registrant (incorporated by reference to Registrant's Quarterly Report on Form 10-Q filed with the Commission on May 10, 2004) 3.2 Code of Regulations of the Registrant (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 8
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 26, 2006 By: /s/ Paul S. Siebenmorgen ------------------------------------ Paul S. Siebenmorgen President and CEO Date: April 26,2006 By: /s/ Barbara J. Britenriker ------------------------------------ Barbara J. Britenriker Exec. Vice-President and CFO 9
EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- <S> <C> 3.1 Articles of Incorporation of the Registrant (incorporated by reference to Registrant's Quarterly Report on Form 10-Q filed with the Commission on May 10, 2004) 3.2 Code of Regulations of the Registrant (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 </TABLE>