Edgar Filing: FARMERS & MERCHANTS BANCORP INC

fmao-10q_20180630.htm

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10‑Q

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period June 30, 2018

☐ 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 001-38084

FARMERS & MERCHANTS BANCORP, INC.

(Exact name of registrant as specified in its charter)

OHIO

34-1469491

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

307 North Defiance Street, Archbold, Ohio	43502
(Address of principal executive offices)	(Zip Code)

(419) 446-2501

Registrant’s telephone number, including area code

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

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	9,263,910
Class	Outstanding as of July 20, 2018

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10Q

FARMERS & MERCHANTS BANCORP, INC.

INDEX

Form 10-Q Items		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets- June 30, 2018 and December 31, 2017	3

	Condensed Consolidated Statements of Income & Comprehensive Income - Three and Six Months Ended June 30, 2018 and June 30, 2017	4-5

	Condensed Consolidated Statements of Cash Flows- Six Months Ended June 30, 2018 and June 30, 2017	6

	Notes to Condensed Consolidated Financial Statements	7-36

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	37-52

Item 3.	Qualitative and Quantitative Disclosures About Market Risk	53

Item 4.	Controls and Procedures	54

PART II.	OTHER INFORMATION	54

Item 1.	Legal Proceedings	54

Item 1A.	Risk Factors	54

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3.	Defaults Upon Senior Securities	54

Item 4.	Mine Safety Disclosures	54

Item 5.	Other Information	54

Item 6.	Exhibits	55

Signatures		56

101.INS	XBRL Instance Document (1)
101.SCH	XBRL Taxonomy Extension Scheme Document (1)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB	XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (1)

(1)

Pursuant to Rule 406T of Regulation S-T, the interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

ITEM 1 FINANCIAL STATEMENTS

FARMERS & MERCHANTS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	(in thousands of dollars)
	June 30, 2018			December 31, 2017
	(Unaudited)
Assets
Cash and due from banks	$	31,838		$	33,480
Federal funds sold		726			987
Total cash and cash equivalents		32,564			34,467
Interest-bearing time deposits		4,019			4,018
Securities - available-for-sale		187,036			196,398
Other securities, at cost		3,717			3,717
Loans held for sale		913			1,221
Loans, net		824,226			816,156
Premises and equipment		21,957			21,726
Goodwill		4,074			4,074
Mortgage servicing rights		2,356			2,299
Other real estate owned		649			674
Bank owned life insurance		14,692			14,523
Other assets		9,129			7,736
Total Assets	$	1,105,332		$	1,107,009
Liabilities and Stockholders' Equity
Liabilities
Deposits
Noninterest-bearing	$	200,067		$	199,114
Interest-bearing
NOW accounts		311,185			298,711
Savings		238,167			233,949
Time		181,347			187,566
Total deposits		930,766			919,340
Federal funds purchased and securities sold under agreements to repurchase		23,898			39,495
Federal Home Loan Bank (FHLB) advances		5,000			5,000
Dividend payable		1,284			1,193
Accrued expenses and other liabilities		6,808			7,844
Total liabilities		967,756			972,872
Commitments and Contingencies
Stockholders' Equity
Common stock - No par value 20,000,000 shares authorized; issued and outstanding 10,400,000 shares 6/30/18 and 12/31/17⁽¹⁾		11,842			11,546
Treasury stock - 1,134,620 shares 6/30/18, 1,134,120 shares 12/31/17 ⁽¹⁾		(12,186	)		(12,160	)
Retained earnings		142,330			136,577
Accumulated other comprehensive loss		(4,410	)		(1,826	)
Total stockholders' equity		137,576			134,137
Total Liabilities and Stockholders' Equity	$	1,105,332		$	1,107,009

(1)	Share data has been adjusted to reflect a 2-for-1 stock split on September 20, 2017

See Notes to Condensed Consolidated Unaudited Financial Statements.

Note: The December 31, 2017, Condensed Consolidated Balance Sheet has been derived from the audited Consolidated Balance Sheet as of that date.

FARMERS & MERCHANTS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	(in thousands of dollars, except per share data)					(in thousands of dollars, except per share data)
	Three Months Ended					Six Months Ended
	June 30, 2018			June 30, 2017		June 30, 2018		June 30, 2017
Interest Income
Loans, including fees	$	10,521		$	9,120	$	20,623	$	17,820
Debt securities:
U.S. Treasury and government agencies		612			623		1,235		1,265
Municipalities		289			300		570		615
Dividends		53			44		108		86
Federal funds sold and other		62			37		137		59
Total interest income		11,537			10,124		22,673		19,845
Interest Expense
Deposits		1,389			1,098		2,708		2,128
Federal funds purchased and securities sold under agreements to repurchase		118			118		242		231
Borrowed funds		20			37		40		73
Total interest expense		1,527			1,253		2,990		2,432
Net Interest Income - Before Provision for Loan Losses		10,010			8,871		19,683		17,413
Provision for Loan Losses		132			25		172		98
Net Interest Income After Provision
For Loan Losses		9,878			8,846		19,511		17,315
Noninterest Income
Customer service fees		1,465			1,330		2,931		2,811
Other service charges and fees		1,040			1,209		2,052		2,080
Net gain on sale of loans		301			218		433		419
Net gain on sale of available-for-sale securities		-			16		-		47
Total noninterest income		2,806			2,773		5,416		5,357
Noninterest Expense
Salaries and wages		3,225			3,137		6,535		6,138
Employee benefits		848			783		1,984		1,705
Net occupancy expense		441			374		828		787
Furniture and equipment		565			491		1,072		963
Data processing		305			308		636		619
Franchise taxes		228			225		467		450
ATM expense		333			292		645		597
Advertising		247			192		433		367
Net (gain) loss on sale of other assets owned		(1	)		14		16		14
FDIC assessment		81			82		168		165
Mortgage servicing rights amortization		95			97		180		181
Other general and administrative		1,271			1,103		2,314		2,183
Total noninterest expense		7,638			7,098		15,278		14,169
Income Before Income Taxes		5,046			4,521		9,649		8,503
Income Taxes		932			1,298		1,768		2,441
Net Income	$	4,114		$	3,223	$	7,881	$	6,062
Net Income Per Share ⁽¹⁾	$	0.44		$	0.35	$	0.85	$	0.66
Dividends Declared ⁽¹⁾	$	0.14		$	0.12	$	0.27	$	0.24

(1)	Share data has been adjusted to reflect a 2-for-1 stock split on September 20, 2017

See Notes to Condensed Consolidated Unaudited Financial Statements

FARMERS & MERCHANTS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	(in thousands of dollars)						(in thousands of dollars)
	Three Months Ended						Six Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Net Income	$	4,114		$	3,223		$	7,881		$	6,062
Other Comprehensive Income (Loss) (Net of Tax):
Net unrealized gain (loss) on available-for-sale securities		(344	)		2,044			(2,815	)		2,456
Reclassification adjustment for gain on sale of available-for-sale securities		-			(16	)		-			(47	)
Net unrealized gain (loss) on available-for-sale securities		(344	)		2,028			(2,815	)		2,409
Tax expense (benefit)		(72	)		690			(591	)		819
Other comprehensive income (loss)		(272	)		1,338			(2,224	)		1,590
Comprehensive Income	$	3,842		$	4,561		$	5,657		$	7,652

See Notes to Condensed Consolidated Unaudited Financial Statements

FARMERS & MERCHANTS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	(in thousands of dollars)
	Six Months Ended
	June 30, 2018			June 30, 2017
Cash Flows from Operating Activities
Net income	$	7,881		$	6,062
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		922			970
Amortization on available-for-sale securities, net		500			578
Amortization of servicing rights		180			181
Amortization of core deposit intangible		84			161
Compensation expense related to stock awards		314			224
Deferred income taxes		(592	)		1,278
Provision for loan loss		172			98
Gain on sale of loans held for sale		(433	)		(419	)
Originations of loans held for sale		(27,216	)		(30,242	)
Proceeds from sale of loans held for sale		27,618			31,658
Loss on sale of other assets owned		16			14
Gain on sales of securities available-for-sale		-			(47	)
Change in other assets and other liabilities, net		(914	)		(2,189	)
Net cash provided by (used in) operating activities		8,532			8,327
Cash Flows from Investing Activities
Activity in available-for-sale securities:
Maturities, prepayments and calls		8,712			14,647
Sales		-			13,562
Purchases		(2,695	)		(3,387	)
Change in interest-bearing time deposits		1			(626	)
Proceeds from sale of other assets owned		9			130
Additions to premises and equipment		(1,262	)		(469	)
Loan originations and principal collections, net		(8,644	)		(34,184	)
Net cash used in investing activities		(3,879	)		(10,327	)
Cash Flows from Financing Activities
Net change in deposits		11,426			35,272
Net change in federal funds purchased and securities sold under agreements to repurchase		(15,597	)		(30,229	)
Cash dividends paid on common stock		(2,385	)		(2,106	)
Net cash provided by (used in) financing activities		(6,556	)		2,937
Net Increase (Decrease) in Cash and Cash Equivalents		(1,903	)		937
Cash and cash equivalents - Beginning of year		34,467			28,322
Cash and cash equivalents - End of period	$	32,564		$	29,259
Supplemental Information
Cash paid during the year for:
Interest	$	2,993		$	2,436
Income taxes	$	1,307		$	2,302
Noncash investing activities:
Transfer of loans to other real estate owned	$	-		$	-

See Notes to Condensed Consolidated Unaudited Financial Statements.

ITEM 1 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. Share data has been adjusted to reflect a 2-for-1 stock split on September 20, 2017. Operating results for the six months ended June 30, 2018 are not necessarily indicative of the results that are expected for the year ended December 31, 2018. The condensed consolidated balance sheet of the Company as of December 31, 2017, has been derived from the audited consolidated balance sheet of the Company as of that date. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

NOTE 2 ASSET PURCHASES

The Company purchased an office on December 13, 2013 in Custar, Ohio. Core deposit intangible assets of $1.17 million were recognized and are being amortized over its remaining economic useful life of the deposits of 7 years on a straight line basis.

The amortization expense for the year ended December 31, 2017 was $245 thousand, which included the remaining $78 thousand from the purchase of the Hicksville office on July 9, 2010. Of the $167 thousand to be expensed in 2018, $84 thousand has been expensed for the six months ended June 30, 2018.

	(In Thousands)
	Custar
2018	$	167
2019		167
2020		161
	$	495

NOTE 3 SECURITIES

The amortized cost and fair value of securities, with gross unrealized gains and losses at June 30, 2018 and December 31, 2017, follows:

	(In Thousands)
	June 30, 2018
	Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		Losses			Value
Available-for-Sale:
U.S. Treasury	$	21,168	$	-	$	(377	)	$	20,791
U.S. Government agencies		79,169		-		(2,859	)		76,310
Mortgage-backed securities		36,416		21		(1,601	)		34,836
State and local governments		55,865		313		(1,079	)		55,099
Total available-for-sale securities	$	192,618	$	334	$	(5,916	)	$	187,036

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 3 SECURITIES (Continued)

	(In Thousands)
	December 31, 2017
	Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		Losses			Value
Available-for-Sale:
U.S. Treasury	$	21,219	$	-	$	(241	)	$	20,978
U.S. Government agencies		82,198		-		(1,732	)		80,466
Mortgage-backed securities		40,236		64		(790	)		39,510
State and local governments		55,512		437		(505	)		55,444
Total available-for-sale securities	$	199,165	$	501	$	(3,268	)	$	196,398

Investment securities will at times depreciate to an unrealized loss position. The Company utilizes the following criteria to assess whether impairment is other than temporary. No one item by itself will necessarily signal that a security should be recognized as an other than temporary impairment.

The fair value of the security has significantly declined from book value.

A downgrade has occurred that lowered the credit rating to below investment grade (below Baa3 by Moody and BBB – by Standard and Poors.)

Dividends have been reduced or eliminated or scheduled interest payments have not been made.

The underwater security has longer than 10 years to maturity and the loss position had existed for more than 3 years.

Management does not possess both the intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

If the impairment is judged to be other than temporary, the cost basis of the individual security shall be written down to fair value, thereby establishing a new cost basis. The new cost basis shall not be changed for subsequent recoveries in fair value. The amount of the write down shall be included in current earnings as a realized loss. The recovery in fair value, if any, shall be recognized in earnings when the security is sold. The table below is presented by category of security and length of time in a continuous loss position. The Company currently does not hold any securities with other than temporary impairment.

Information pertaining to securities with gross unrealized losses at June 30, 2018 and December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

	(In Thousands)
	June 30, 2018
	Less Than Twelve Months					Twelve Months & Over
	Gross Unrealized			Fair		Gross Unrealized			Fair
	Losses			Value		Losses			Value
U.S. Treasury	$	(104	)	$	6,864	$	(273	)	$	13,927
U.S. Government agencies		(469	)		14,664		(2,390	)		61,646
Mortgage-backed securities		(94	)		5,640		(1,507	)		27,975
State and local governments		(472	)		30,386		(607	)		12,002
Total available-for-sale securities	$	(1,139	)	$	57,554	$	(4,777	)	$	115,550

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 3 SECURITIES (Continued)

	(In Thousands)
	December 31, 2017
	Less Than Twelve Months					Twelve Months & Over
	Gross Unrealized			Fair		Gross Unrealized			Fair
	Losses			Value		Losses			Value
U.S. Treasury	$	(36	)	$	6,924	$	(205	)	$	14,054
U.S. Government agencies		(314	)		27,328		(1,418	)		53,139
Mortgage-backed securities		(70	)		7,149		(720	)		28,080
State and local governments		(205	)		24,999		(300	)		11,567
Total available-for-sale securities	$	(625	)	$	66,400	$	(2,643	)	$	106,840

Unrealized losses on securities have not been recognized into income because the issuers’ bonds are of high credit quality, values have only been impacted by rate changes, and the Company has the intent and ability to hold the securities for the foreseeable future. Additionally, the decline in value is primarily due to changes in interest rates since the securities were purchased. The fair value is expected to recover as the bonds approach the maturity date.

Below are the gross realized gains and losses for the three and six months ended June 30, 2018 and June 30, 2017.

	Three Months					Six Months
	(In Thousands)					(In Thousands)
	2018		2017			2018		2017
Gross realized gains	$	-	$	27		$	-	$	58
Gross realized losses		-		(11	)		-		(11