Edgar Filing: FARMERS & MERCHANTS BANCORP INC

fmao-10q_20180930.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 September 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 every Interactive Data File required to be submitted 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	☐	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	9,285,261
Class	Outstanding as of October 19, 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- September 30, 2018 and December 31, 2017	3

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

	Condensed Consolidated Statements of Cash Flows- Nine Months Ended September 30, 2018 and September 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)
	September 30, 2018			December 31, 2017
	(Unaudited)
Assets
Cash and due from banks	$	28,782		$	33,480
Federal funds sold		939			987
Total cash and cash equivalents		29,721			34,467
Interest-bearing time deposits		4,019			4,018
Securities - available-for-sale		183,075			196,398
Other securities, at cost		3,717			3,717
Loans held for sale		1,679			1,221
Loans, net		831,943			816,156
Premises and equipment		22,117			21,726
Goodwill		4,074			4,074
Mortgage servicing rights		2,373			2,299
Other real estate owned		717			674
Bank owned life insurance		14,799			14,523
Other assets		9,778			7,736
Total Assets	$	1,108,012		$	1,107,009
Liabilities and Stockholders' Equity
Liabilities
Deposits
Noninterest-bearing	$	197,088		$	199,114
Interest-bearing
NOW accounts		314,873			298,711
Savings		230,306			233,949
Time		186,592			187,566
Total deposits		928,859			919,340
Federal funds purchased and securities sold under agreements to repurchase		27,026			39,495
Federal Home Loan Bank (FHLB) advances		5,000			5,000
Dividend payable		1,287			1,193
Accrued expenses and other liabilities		6,493			7,844
Total liabilities		968,665			972,872
Commitments and Contingencies
Stockholders' Equity
Common stock - No par value 20,000,000 shares authorized; issued and outstanding 10,400,000 shares 9/30/18 and 12/31/17		10,589			11,546
Treasury stock - 1,114,739 shares 9/30/18, 1,134,120 shares 12/31/17		(12,409	)		(12,160	)
Retained earnings		146,072			136,577
Accumulated other comprehensive loss		(4,905	)		(1,826	)
Total stockholders' equity		139,347			134,137
Total Liabilities and Stockholders' Equity	$	1,108,012		$	1,107,009

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				Nine Months Ended
	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Interest Income
Loans, including fees	$	10,725	$	9,547	$	31,348	$	27,367
Debt securities:
U.S. Treasury and government agencies		613		605		1,848		1,870
Municipalities		275		290		845		905
Dividends		56		49		164		135
Federal funds sold and other		84		44		221		103
Total interest income		11,753		10,535		34,426		30,380
Interest Expense
Deposits		1,611		1,161		4,319		3,289
Federal funds purchased and securities sold under agreements to repurchase		134		135		376		366
Borrowed funds		20		37		60		110
Total interest expense		1,765		1,333		4,755		3,765
Net Interest Income - Before Provision for Loan Losses		9,988		9,202		29,671		26,615
Provision for Loan Losses		47		99		219		197
Net Interest Income After Provision
For Loan Losses		9,941		9,103		29,452		26,418
Noninterest Income
Customer service fees		1,392		1,320		4,323		4,131
Other service charges and fees		1,097		1,134		3,149		3,214
Net gain on sale of loans		184		181		617		600
Net gain on sale of available-for-sale securities		10		-		10		47
Total noninterest income		2,683		2,635		8,099		7,992
Noninterest Expense
Salaries and wages		3,391		3,236		9,926		9,374
Employee benefits		1,029		943		3,013		2,648
Net occupancy expense		478		434		1,306		1,221
Furniture and equipment		588		493		1,660		1,456
Data processing		364		300		1,000		919
Franchise taxes		243		226		710		676
ATM expense		327		256		972		853
Advertising		236		181		669		548
Net loss on sale of other assets owned		1		13		17		27
FDIC assessment		81		82		249		247
Mortgage servicing rights amortization		84		85		264		266
Other general and administrative		1,304		1,108		3,618		3,291
Total noninterest expense		8,126		7,357		23,404		21,526
Income Before Income Taxes		4,498		4,381		14,147		12,884
Income Taxes		623		1,159		2,391		3,600
Net Income	$	3,875	$	3,222	$	11,756	$	9,284
Basic and Diluted Earnings Per Share	$	0.42	$	0.35	$	1.27	$	1.01
Dividends Declared	$	0.14	$	0.13	$	0.41	$	0.37

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						Nine Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
Net Income	$	3,875		$	3,222		$	11,756		$	9,284
Other Comprehensive Income (Loss) (Net of Tax):
Net unrealized gain (loss) on available-for-sale securities		(617	)		(472	)		(3,432	)		1,984
Reclassification adjustment for gain on sale of available-for-sale securities		(10	)		-			(10	)		(47	)
Net unrealized gain (loss) on available-for-sale securities		(627	)		(472	)		(3,442	)		1,937
Tax expense (benefit)		(132	)		(160	)		(723	)		659
Other comprehensive income (loss)		(495	)		(312	)		(2,719	)		1,278
Comprehensive Income	$	3,380		$	2,910		$	9,037		$	10,562

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)
	Nine Months Ended
	September 30, 2018			September 30, 2017
Cash Flows from Operating Activities
Net income	$	11,756		$	9,284
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,411			1,426
Amortization on available-for-sale securities, net		743			843
Amortization of servicing rights		264			266
Amortization of core deposit intangible		126			203
Compensation expense related to stock awards		497			346
Deferred income taxes		(723	)		1,116
Provision for loan loss		219			197
Gain on sale of loans held for sale		(617	)		(600	)
Originations of loans held for sale		(40,814	)		(42,601	)
Proceeds from sale of loans held for sale		39,435			44,574
Loss on sale of other assets owned		17			27
Gain on sales of securities available-for-sale		(10	)		(47	)
Change in other assets and other liabilities, net		(2,531	)		(2,918	)
Net cash provided by operating activities		9,773			12,116
Cash Flows from Investing Activities
Activity in available-for-sale securities:
Maturities, prepayments and calls		11,754			16,682
Sales		6,781			13,562
Purchases		(9,416	)		(3,387	)
Change in interest-bearing time deposits		1			(626	)
Proceeds from sale of other assets owned		8			133
Additions to premises and equipment		(1,911	)		(1,459	)
Loan originations and principal collections, net		(14,627	)		(39,195	)
Net cash used in investing activities		(7,410	)		(14,290	)
Cash Flows from Financing Activities
Net change in deposits		9,519			61,163
Net change in federal funds purchased and securities sold under agreements to repurchase		(12,469	)		(34,774	)
Purchase of treasury stock		(490	)		(183	)
Cash dividends paid on common stock		(3,669	)		(3,250	)
Net cash provided by (used in) financing activities		(7,109	)		22,956
Net Increase (Decrease) in Cash and Cash Equivalents		(4,746	)		20,782
Cash and cash equivalents - Beginning of year		34,467			28,322
Cash and cash equivalents - End of period	$	29,721		$	49,104
Supplemental Information
Cash paid during the year for:
Interest	$	4,706		$	3,735
Income taxes	$	2,407		$	3,802
Noncash investing activities:
Transfer of loans to other real estate owned	$	68		$	-

See Notes to Condensed Consolidated Unaudited Financial Statements.

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 1 BASIS OF PRESENTATION AND OTHER

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 nine months ended September 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.

The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. The Company’s principal source of revenue is interest income from loans and investment securities. The Company also earns noninterest income from various banking and financial services offered primarily through Farmers & Merchants State Bank. Interest income is primarily recognized on an accrual basis according to nondiscretionary formulas written in contracts, such as loan agreements or investment security contracts. The Company also earns noninterest income from various banking and financial services provided to business and consumer clients such as deposit account, debit card, and mortgage banking services. Revenue is recorded for noninterest income based on the contractual terms for the service or transaction performed.

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, $126 thousand has been expensed for the nine months ended September 30, 2018.

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

NOTE 3 SECURITIES

Mortgage-backed securities, as shown in the following tables, are all government sponsored enterprises. The amortized cost and fair value of securities, with gross unrealized gains and losses at September 30, 2018 and December 31, 2017, follows:

	(In Thousands)
	September 30, 2018
	Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		Losses			Value
Available-for-Sale:
U.S. Treasury	$	21,141	$	-	$	(370	)	$	20,771
U.S. Government agencies		78,753		-		(2,986	)		75,767
Mortgage-backed securities		36,350		11		(1,761	)		34,600
State and local governments		53,040		199		(1,302	)		51,937
Total available-for-sale securities	$	189,284	$	210	$	(6,419	)	$	183,075

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 September 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)
	September 30, 2018
	Less Than Twelve Months					Twelve Months & Over
	Gross Unrealized			Fair		Gross Unrealized			Fair
	Losses			Value		Losses			Value
U.S. Treasury	$	(111	)	$	6,860	$	(259	)	$	13,910
U.S. Government agencies		(166	)		7,424		(2,820	)		68,344
Mortgage-backed securities		(132	)		7,220		(1,629	)		26,657
State and local governments		(350	)		23,413		(952	)		20,371
Total available-for-sale securities	$	(759	)	$	44,917	$	(5,660	)	$	129,282

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 nine months ended September 30, 2018 and September 30, 2017.

	Three Months				Nine Months
	(In Thousands)				(In Thousands)
	2018		2017		2018		2017
Gross realized gains	$	51	$	-	$	51	$	58
Gross realized losses