FARMERS & MERCHANTS BANCORP INC
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| þ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2009
or
| o | 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.
| OHIO | 34-1469491 | |
| (State or other jurisdiction of | (IRS Employer | |
| incorporation or organization) | Identification No.) |
| 307 North Defiance Street | ||
| Archbold, Ohio | 43502 | |
| (Address of principal | (Zip Code) | |
| Executive offices) |
Registrant’s telephone number, including area code (419) 446-2501
Securities registered pursuant to Section 12(b) of the Act:
| Name of each exchange on | ||
| Title of each class | which registered | |
| None | None |
Securities registered pursuant to Section 12(g) of the Act:
Common shares without par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes
o
No
þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.
Yes
o
No
þ
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
þ
No
o
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
o
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
Yes
þ
No
o
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.
(Check one):
| Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o
No
þ
As of June 30, 2009, the aggregate market value of the registrant’s common stock held by
non-affiliates of the registrant was $96,949,092.00
As of February 24, 2010, the Registrant had 5,200,000 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K — Portions of the definitive Proxy Statement for the 2009 Annual Meeting of
Shareholders of Farmers & Merchants Bancorp, Inc.
FARMERS & MERCHANTS BANCORP, INC.
TABLE OF CONTENTS
TABLE OF CONTENTS
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| EX-32.2 | ||||||||
Statements contained in this portion of the Company’s annual 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 such words 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
could differ from those projected in the forward-looking statements.
Table of Contents
General
Farmers & Merchants Bancorp, Inc. (Company) is a bank holding company incorporated under the laws
of Ohio in 1985. Our primary subsidiary, The Farmers & Merchants State Bank (Bank) is a community
bank operating in Northwest Ohio since 1897. Our only other subsidiary, Farmers & Merchants Life
Insurance Company, a reinsurance company for life, accident and health insurance for the Bank’s
consumer credits, was formed in 1992. Farmers & Merchants Life Insurance Company was dissolved
during 2007. We report our financial condition and net income on a consolidated basis and we
report only one segment.
Our executive offices are located at 307 North Defiance Street, Archbold, Ohio 43502, and our
telephone number is (419) 446-2501.
For a discussion of the general development of the Company’s business throughout 2009, please see
the portion of Management’s Discussion and Analysis of Financial Condition and Results of
Operations captioned “2009 in Review”.
Nature Of Activities
The Farmers & Merchants State Bank engages in general commercial banking and savings business. Our
activities include commercial, agricultural and residential mortgage, consumer, and credit card
lending activities. Because our Bank’s offices are located in Northwest Ohio and Northeast
Indiana, a substantial amount of our loan portfolio is comprised of loans made to customers in the
farming industry for such things as farm land, farm equipment, livestock and general operation
loans for seed, fertilizer, feed, etc. Other types of lending activities include loans for home
improvements, and loans for such items as autos, trucks, recreational vehicles, motorcycles, etc.
We also provide checking account services, as well as savings and time deposit services such as
certificates of deposits. In addition, ATM’s (automated teller machines) are also provided at our
Ohio offices in Archbold, Wauseon, Stryker, West Unity, Bryan, Delta, Napoleon, Montpelier,
Swanton, Defiance, and Perrysburg, along with ones at our Auburn and Angola, Indiana offices. Two
ATM’s are located at Sauder Woodworking Co., Inc., a major employer in Archbold. Additional
locations in Ohio are at Northwest State Community College, Archbold; Community Hospitals of
Williams County, Bryan; Fairlawn Haven Wyse Commons, Archbold; R&H Restaurant, Fayette; Delta
Eagles, Bryan Eagles; Sauder Village, Archbold; Fulton County Health Center, Wauseon; downtown
Defiance; and a mobile trailer ATM. In Indiana, four additional ATM’s are located at St. Joe; at
Kaiser’s Supermarket and Therma-Tru in Butler; and at DeKalb Memorial Hospital in Auburn.
Farmers & Merchants Life Insurance Company was established to provide services to our customers
through the issuance of life and disability insurance policies. Our Bank’s lending officers were
the selling agents of the policies to customers. The activities of Farmers & Merchants Life
Insurance Co. were not significant to the consolidated company. The Company dissolved the Farmers
& Merchants Life Insurance Company subsidiary as the Bank discontinued offering the credit life,
accident and health insurance to its customers. The Bank continues to offer credit insurance
related products to our residential real estate customers; however, it is through an unrelated
third party vendor.
F&M Investment Services, the brokerage department of the Bank, opened for business in April, 1999.
Securities are offered through Raymond James Financial Services, Inc.
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Table of Contents
The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956.
Our subsidiary bank is in turn regulated and examined by the Ohio Division of Financial
Institutions, and the Federal Deposit Insurance Corporation. The activities of our bank subsidiary
are also subject to other federal and state laws and regulations.
The bank is participating in the expanded FDIC limits through all of 2013 and utilizing the
additional insurance coverage provided in the Temporary Liquidity Guarantee Program through June
2010. The FDIC increased the insurance level for deposits from $100,000 to $250,000 on interest
bearing accounts and unlimited FDIC insurance on non-interest bearing accounts. We believe the
cost for this coverage is offset by the benefit to our depositors.
The Bank’s primary market includes communities located in the Ohio counties of Defiance, Fulton,
Henry, Williams, and Wood. The commercial banking business in this market is highly competitive,
with approximately 17 other depository institutions currently doing business in the Bank’s primary
market. In our banking activities, we compete directly with other commercial banks, credit unions,
farm credit services, and savings and loan institutions in each of our operating localities. In a
number of our locations, we compete against entities which are much larger than us. The primary
factors in competing for loans and deposits are the rates charged as well as location and quality
of the services provided. On December 31, 2007, the Bank acquired the Knisely Bank of Indiana,
expanding its market with the addition of offices in Butler and Auburn, Indiana, both located in
DeKalb County. An additional office was opened in the summer of 2008 in Angola, Indiana, located in
Steuben County.
At December 31, 2009, we had 251 full time equivalent employees. The employees are not represented
by a collective bargaining unit. We provide our employees with a comprehensive benefit program,
some of which are contributory. We consider our employee relations to be excellent.
Supervision and Regulation
General
The Company is a corporation organized under the laws of the State of Ohio. The business in which
the Company and its subsidiary are engaged is subject to extensive supervision, regulation and
examination by various bank regulatory authorities. The supervision, regulation and examination to
which the Company and its subsidiary are subject are intended primarily for the protection of
depositors and the deposit insurance funds that insure the deposits of banks, rather than for the
protection of shareholders.
Several of the more significant regulatory provisions applicable to banks and bank holding
companies to which the Company and its subsidiary are subject are discussed below, along with
certain regulatory matters concerning the Company and its subsidiary. To the extent that the
following information describes statutory or regulatory provisions, it is qualified in its entirety
by reference to the particular statutory provisions. Any change in applicable law or regulation
may have a material effect on the business and prospects of the Company and its subsidiary.
Regulatory Agencies
The Company is a registered bank holding company and is subject to inspection, examination and
supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”)
pursuant to the Bank Holding Company Act of 1956, as amended.
The Bank is an Ohio chartered commercial bank. It is subject to regulation and examination by both
the Ohio Division of Financial Institutions (ODFI) and the Federal Deposit Insurance Corporation
(FDIC).
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Table of Contents
Holding Company Activities
As a bank holding company incorporated and doing business within the State of Ohio, the Company is
subject to regulation and supervision under the Bank Holding Act of 1956, as amended (the “Act”).
The Company is required to file with the Federal Reserve Board on a quarterly basis information
pursuant to the Act. The Federal Reserve Board may conduct examinations or inspections of the
Company and its subsidiary.
The Company is required to obtain prior approval from the Federal Reserve Board for the acquisition
of more than five percent of the voting shares or substantially all of the assets of any bank or
bank holding company. In addition, the Company is generally prohibited by the Act from acquiring
direct or indirect ownership or control of more than five percent of the voting shares of any
company which is not a bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or furnishing services to its
subsidiaries. The Company may, however, subject to the prior approval of the Federal Reserve
Board, engage in, or acquire shares of companies engaged in activities which are deemed by the
Federal Reserve Board by order or by regulation to be so closely related to banking or managing and
controlling a bank as to be a proper activity.
On November 12, 1999, the Gramm-Leach-Bliley Act (the “GLB Act”) was enacted into law. The GLB Act
made sweeping changes with respect to the permissible financial services which various types of
financial institutions may now provide. The Glass-Steagall Act, which had generally prevented
banks from affiliation with securities and insurance firms, was repealed. Pursuant to the GLB Act,
bank holding companies may elect to become a “financial holding company,” provided that all of the
depository institution subsidiaries of the bank holding company are “well capitalized” and “well
managed” under applicable regulatory standards.
Under the GLB Act, a bank holding company that has elected to become a financial holding company
may affiliate with securities firms and insurance companies and engage in other activities that are
financial in nature. Activities that are “financial in nature” include securities underwriting,
dealing and market-making, sponsoring mutual funds and investment companies, insurance underwriting
and agency, merchant banking, and activities that the Federal Reserve Board has determined to be
closely related to banking. No Federal Reserve Board approval is required for the Company to
acquire a company, other than a bank holding company, bank or savings association, engaged in
activities that are financial in nature or incidental to activities that are financial in nature,
as determined by the Federal Reserve Board. Prior Federal Reserve Board approval is required
before the Company may acquire the beneficial ownership or control of more than 5% of the voting
shares, or substantially all of the assets, of a bank holding company, bank or savings association.
If any subsidiary bank of the Company ceases to be “well capitalized” or “well managed” under
applicable regulatory standards, the Federal Reserve Board may, among other actions, order the
Company to divest the subsidiary bank. Alternatively, the Company may elect to conform its
activities to those permissible for a bank holding company that is not also a financial holding
company. If any subsidiary bank of the Company receives a rating under the Community Reinvestment
Act of 1977 of less than satisfactory, the Company will be prohibited from engaging in new
activities or acquiring companies other than bank holding companies, banks or savings associations.
The Company has not elected to become a financial holding company and has no current intention of
making such an election.
Affiliate Transactions
Various governmental requirements, including Sections 23A and 23B of the Federal Reserve Act, limit
borrowings by holding companies and non-bank subsidiaries from affiliated insured depository
institutions, and also limit various other transactions between holding companies and their
non-bank subsidiaries, on the one hand, and their affiliated insured depository institutions on the
other. Section 23A of the Federal Reserve Act also generally requires that an insured depository
institution’s loan to its non-bank affiliates be secured, and Section 23B of the Federal Reserve
Act generally requires that an insured depository institution’s transactions with its non-bank
affiliates be on arms-length terms.
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Table of Contents
Interstate Banking and Branching
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act (“Riegle-Neal”), subject to
certain concentration limits and other requirements, adequately capitalized bank holding companies
such as the Company are permitted to acquire banks and bank holding companies located in any state.
Any bank that is a subsidiary of a bank holding company is permitted to receive deposits, renew
time deposits, close loans, service loans and receive loan payments as an agent for any other bank
subsidiary of that bank holding company. Banks are permitted to acquire branch offices outside
their home states by merging with out-of-state banks, purchasing branches in other states and
establishing de novo branch offices in other states. The ability of banks to acquire branch
offices is contingent, however, on the host state having adopted legislation “opting in” to those
provisions of Riegle-Neal. In addition, the ability of a bank to merge with a bank located in
another state is contingent on the host state not having adopted legislation “opting out” of that
provision of Riegle-Neal. The Company could from time to time use Riegle-Neal to acquire banks in
additional states.
Control Acquisitions
The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a
bank holding company, unless the Federal Reserve Board has been notified and has not objected to
the transaction. Under the rebuttable presumption established by the Federal Reserve Board, the
acquisition of 10% or more of a class of voting stock of a bank holding company with a class of
securities registered under Section 12 of the Exchange Act, such as the Company, would, under the
circumstances set forth in the presumption, constitute acquisition of control of the bank holding
company. In addition, a company is required to obtain the approval of the Federal Reserve Board
under the Bank Holding Company Act before acquiring 25% (5% in the case of an acquirer that is a
bank holding company) or more of any class of outstanding voting stock of a bank holding company,
or otherwise obtaining control or a “controlling influence” over that bank holding company.
Liability for Banking Subsidiaries
Under the current Federal Reserve Board policy, a bank holding company is expected to act as a
source of financial and managerial strength to each of its subsidiary banks and to maintain
resources adequate to support each subsidiary bank. This support may be required at times when
the bank holding company may not have the resources to provide it. In the event of a bank holding
company’s bankruptcy, any commitment by the bank holding company to a U.S. federal bank regulatory
agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and
entitled to priority of payment. Any depository institution insured by the FDIC can be held
liable for any loss incurred, or reasonably expected to be incurred, by the FDIC in connection
with (1) the “default” of a commonly controlled FDIC-insured depository institution; or (2) any
assistance provided by the FDIC to both a commonly controlled FDIC-insured depository institution
“in danger of default.” The Company’s subsidiary bank is an FDIC-insured depository institution.
If a default occurred with respect to the Bank, any capital loans to the Bank from its parent
holding company would be subordinate in right of payment to payment of the Bank’s depositors and
certain of its other obligations.
Regulatory Capital Requirements
The Company is required by the various regulatory authorities to maintain certain capital levels.
Bank holding companies are required to maintain minimum levels of capital in accordance with
Federal Reserve capital adequacy guidelines. If capital falls below minimum guideline levels, a
bank holding company, among other things, may be denied approval to acquire or establish additional
banks or non-bank businesses. The required capital levels and the Company’s capital position at
December 31, 2009 are summarized in the table included in Note 14 to the consolidated financial
statements.
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Table of Contents
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), and the regulations
promulgated under FDICIA, among other things, established five capital categories for insured
depository institutions-well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized-and requires U.S. federal bank regulatory agencies
to implement systems for “prompt corrective action” for insured depository institutions that do not
meet minimum capital requirements based on these categories. Unless a bank is well capitalized, it
is subject to restrictions on its ability to offer brokered deposits and on certain other aspects
of its operations. An undercapitalized bank must develop a capital restoration plan and its parent
bank holding company must guarantee the bank’s compliance with the plan up to the lesser of 5% of
the banks or thrift’s assets at the time it became undercapitalized and the amount needed to comply
with the plan. As of December 31, 2009, the Company’s banking subsidiary was well capitalized
pursuant to these prompt corrective action guidelines.
Dividend Restrictions
The ability of the Company to obtain funds for the payment of dividends and for other cash
requirements will be largely dependent on the amount of dividends which may be declared by its
banking subsidiary. Various U.S. federal statutory provisions limit the amount of dividends the
Company’s banking subsidiaries can pay to the Company without regulatory approval. Dividend
payments by the Bank are limited to its retained earnings during the current year and its prior two
years. See Note 15 to the consolidated financial statements for the actual amount.
Deposit Insurance Assessments
The deposits of the Company’s banking subsidiary are insured up to regulatory limits by the FDIC,
and, accordingly, are subject to deposit insurance assessments based on the Federal Deposit
Insurance Reform Act of 2005, as adopted and took effect on April 21, 2006.
The Emergency Economic Stabilization Act of 2008 provided a temporary increase in deposit insurance
coverage from $100,000 to $250,000 per depositor. This legislation was effective immediately upon
the President’s signature on October 3, 2008. The basic deposit insurance limit was set to return
to $100,000 on January 1, 2010, however, at this time, the date has been extended to December 31,
2013.
Depositor Preference Statute
In the “liquidation or other resolution” of an institution by any receiver, U.S. federal
legislation provides that deposits and certain claims for administrative expenses and employee
compensation against the insured depository institution would be afforded a priority over general
unsecured claims against that institution, including federal funds and letters of credit.
Government Monetary Policy
The earnings of the Company are affected primarily by general economic conditions and to a lesser
extent by the fiscal and monetary policies of the federal government and its agencies, particularly
the Federal Reserve. Its policies influence, to some degree, the volume of bank loans and
deposits, and interest rates charged and paid thereon, and thus have an effect on the earnings of
the Company’s subsidiary Bank.
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Table of Contents
Capital Purchase Program
In response to the financial crisis affecting the banking system and financial markets, the
Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law on October 3, 2008
creating the Troubled Assets Relief Program (“TARP”). As part of TARP, the U.S. Treasury
established the Capital Purchase Program to provide up to $700 billion of funding to eligible
financial institutions through the purchase of capital stock and other financial institutions for
the purpose of stabilizing and providing liquidity to the United States financial markets. The
Company did not participate in the TARP Capital Purchase Program. In connection with the EESA,
there have been numerous actions by the Federal Reserve Board, the United States Congress, the U.S.
Treasury, the FDIC, the SEC and others to further the economic and banking industry stabilization
efforts under the EESA. It remains unclear at this time what further legislative and regulatory
measures will be implemented under the EESA that affect the Company.
Additional Regulation
The Bank is also subject to federal regulation as to such matters as required reserves, limitation
as to the nature and amount of its loans and investments, regulatory approval of any merger or
consolidation, issuance or retirement of their own securities, limitations upon the payment of
dividends and other aspects of banking operations. In addition, the activities and operations of
the Bank are subject to a number of additional detailed, complex and sometimes overlapping laws and
regulations. These include state usury and consumer credit laws, state laws relating to
fiduciaries, the Federal Truth-in-Lending Act and Regulation Z, the Federal Equal Credit
Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Electronic Funds Transfer Act
and Regulation E, the Truth in Savings Act and Regulation DD, the Bank Secrecy Act, the Community
Reinvestment Act, HUD’s RESPA regulations, anti-discrimination laws and legislation, and antitrust
laws.
Future Legislation
Changes to the laws and regulations, both at the federal and state levels, can affect the operating
environment of the Company and its subsidiary in substantial and unpredictable ways. The Company
cannot accurately predict whether those changes in laws and regulations will occur, and, if those
changes occur, the ultimate effect they would have upon the financial condition or results of
operations of the Company or its subsidiary.
Available Information:
The Company maintains an Internet web site at the following internet address: www.fm-bank.com. The
Company files reports with the Securities and Exchange Commission (SEC). Copies of all filings
made with the SEC may be read and copied at the SEC’s Public Reference Room, 450 Fifth Street,
Washington, DC, 20549. You may obtain information about the SEC’s Public Reference Room by calling
(800/SEC-0330). Because the Company makes its filing with the SEC electronically, you may access
such reports at the SEC’s website, www.sec.gov. The Company makes available, free of charge
through its internet address, copies of its annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and any amendments to these reports as soon as reasonable
practicable after such materials have been filed with or furnished to the SEC. Copies of these
documents may also be obtained, either in electronic or paper form, by contacting Barbara J.
Britenriker, Chief Financial Officer of the Company at (419) 446-2501.
Please see the Consolidated Financial Statements provided under Part II, Item 8 of this Form 10-K
for information regarding the Company’s revenues from external customers, profits, and total assets
for and as of, respectively, the fiscal year ended December 31, 2009.
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Significant Competition from an Array of Financial Service Providers
Our ability to achieve strong financial performance and a satisfactory return on investment to
shareholders will depend in part on our ability to expand our available financial services. In
addition to the challenge of attracting and retaining customers for traditional banking services,
our competitors now include securities dealers, brokers, mortgage bankers, investment advisors and
finance and insurance companies who seek to offer one-stop financial services to their customers
that may include services that banks have not been able or allowed to offer to their customers in
the past. The increasingly competitive environment is a result primarily of changes in regulation,
changes in technology and product delivery systems and the accelerating pace of consolidation among
financial services providers. If we fail to adequately address each of the competitive pressures
in the banking industry, our financial condition and results of operations could be adversely
affected.
Credit Risk
The risk of nonpayment of loans is inherent in commercial banking. Such nonpayment could have an
adverse effect on the Company’s earnings and our overall financial condition as well as the value
of our common stock. Management attempts to reduce the Bank’s credit exposure by carefully
monitoring the concentration of its loans within specific industries and through loan application
and approval procedures. However, there can be no assurance that such monitoring and procedures
will reduce such lending risks. Credit losses can cause insolvency and failure of a financial
institution and, in such event, its shareholders could lose their entire investment. For more
information on the exposure of the Company and the Bank to credit risk, see the section under Part
II, Item 7 of this Form 10-K captioned “Loan Portfolio.”
Susceptibility to Changes in Regulation
Any changes to state and federal banking laws and regulations may negatively impact our ability to
expand services and to increase the value of our business. We are subject to extensive state and
federal regulation, supervision, and legislation that govern almost all aspects of our operations.
These laws may change from time to time and are primarily intended for the protection of consumers,
depositors and the deposit insurance funds. In addition, the Company’s earnings are affected by
the monetary policies of the Board of Governors of the Federal Reserve. These policies, which
include regulating the national supply of bank reserves and bank credit, can have a major effect
upon the source and cost of funds and the rates of return earned on loans and investments. The
Federal Reserve influences the size and distribution of bank reserves through its open market
operations and changes in cash reserve requirements against member bank deposits. The
Gramm-Leach-Bliley Act regarding financial modernization that became effective in November, 1999
removed many of the barriers to the integration of the banking, securities and insurance industries
and is likely to increase the competitive pressures upon the Bank. We cannot predict what effect
such Act and any presently contemplated or future changes in the laws or regulations or their
interpretations would have on us, but such changes could be materially adverse to our financial
performance. For more information on this subject, see the section under Part I, Item 1 of this
Form 10-K captioned “Supervision and Regulation.”
Interest Rate Risk
Changes in interest rates affect our operating performance and financial condition in diverse
ways. Our profitability depends in substantial part on our “net interest spread,” which is the
difference between the rates we receive on loans and investments and the rates we pay for deposits
and other sources of funds. Our net interest spread will depend on many factors that are partly or
entirely outside our control, including competition, federal
economic, monetary and fiscal policies, and economic conditions generally. Historically, net
interest spreads for other financial institutions have widened and narrowed in response to these
and
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other factors, which are often collectively referred to as “interest rate risk.” Over the last
few years, the Bank, along with most other financial institutions, has experienced a “margin
squeeze” as drastic interest rate fluctuations have made it difficult to maintain a more favorable
net interest spread. During 2009, the Bank was able to improve its margin and spread slightly as
the rate environment remained low and flat. Maturities of higher rate deposits aided the decrease
in cost of funds.
The Bank manages interest rate risk within an overall asset/liability framework. 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.
In the event that our asset/liabilities management strategies are unsuccessful, our profitability
may be adversely affected. For more information regarding the Company’s exposure to interest rate
risk, see Part II, Item 7A of this Form 10-K.
Attraction and Retention of Key Personnel
Our success depends upon the continued service of our senior management team and upon our ability
to attract and retain qualified financial services personnel. Competition for qualified employees
is intense. In our experience, it can take a significant period of time to identify and hire
personnel with the combination of skills and attributes required in carrying out our strategy. If
we lose the services of our key personnel, or are unable to attract additional qualified personnel,
our business, financial condition, results of operations and cash flows could be materially
adversely affected.
A key component of employee retention is providing a fair compensation base combined with the
opportunity for additional compensation for above average performance. In this regard, the Company
and the Bank use two incentive programs. The Company uses a stock award program to recognize and
incent officers of the Bank. Under the long-term incentive compensation plan, restricted stock
awards may be granted to officers. The amount of shares to be granted each year is determined by
the Board Compensation Committee and may vary each year in its amount of shares and the number of
recipients. The Compensation Committee determines the number of shares to be awarded overall and
to the Chief Executive Officer (“CEO”). The CEO then makes recommendations to the committee as to
the recipients of the remaining shares. The full Board of Directors approves the action of the
Committee. Since the plan’s inception in 2005, all granted stock awards have utilized a three year
cliff vesting feature. This is viewed as a retention aid as the awards may be forfeited should an
officer leave employment during the vested period.
A second incentive program of the Bank is based on cash compensation of which almost all employees
participate (excluding commission based employees and other employees paid for specific higher paid
positions, such as peak time.) A discussion of executive officer pay is incorporated within the
proxy and as such, this discussion will pertain to all other employees. Non-officer employees are
paid a cash incentive based on the projected overall performance of the Bank in terms of Return of
Average Assets (“ROA”). The Compensation Committee determines the target performance levels on
which the percentage of pay will be based. The Committee takes into account the five and ten year
trend of ROA along with budget forecasted for the next year and the Bank’s past year performance.
The Committee also considers the predicted banking environment under which the Bank will be
operating. Non-officers receive incentive pay in December of the same year based on the
year-to-date base compensation through the last pay received in November.
Officers, other than executive, receive incentive pay based on additional criterion. The officers
are rewarded based on overall ROA of the Bank along with individual pre-established goals.
Officers, therefore, have incentive pay at risk for individual performance. The individualized
goals are recommended by each officer’s supervisor and are approved by an incentive committee of
the Bank. The goals are designed to improve the performance of the Bank while also limiting the
risk of a short-term performance focus. For example, a lending officer may be given two goals of
which one is to grow loans within specific targets and another is tied to a specific level of past
dues and charge-offs. The second goal limits the ability to be rewarded for growth at all costs
along with the specific target levels within the growth goal itself. Officers in a support
10
Table of Contents
department may be given goals which create efficiencies, ensure compliance with procedures, or
generate new fee or product opportunities. An average of four goals were given to each officer in
2009. Officers are paid cash incentives based on the year end ROA of the Bank and receive it
within the first quarter of the following year. Should the ROA be forecasted to be positive but
below the base target set by the Board, the officers are paid an incentive under the same basis and
timing as non-officers disclosed above.
The percentages of base pay on which the incentive is calculated graduates higher as does the
responsibility level of the employee and their ability to impact the financial performance of the
Bank. These percentages are recommended by management to the Compensation Committee and Board for
approval. The cash incentive plan along with its targets and goals are subject to modification at
the Compensation Committee and Board’s discretion throughout each year.
Dividend Payout Restrictions
We currently pay a quarterly dividend on our common shares. However, there is no assurance that we
will be able to pay dividends in the future. Dividends are subject to determination and
declaration by our board of directors, which takes into account many factors. The declaration of
dividends by us on our common stock is subject to the discretion of our board and to applicable
state and federal regulatory limitations. The Company’s ability to pay dividends on its common
stock depends on its receipt of dividends from the Bank. The Bank is subject to restrictions and
limitations in the amount and timing of the dividends it may pay to the Company.
Anti-Takeover Provisions
Provisions of our Articles of Incorporation and Ohio law could have the effect of discouraging
takeover attempts which certain stockholders might deem to be in their interest. These
anti-takeover provisions may make us a less attractive target for a takeover bid or merger,
potentially depriving shareholders of an opportunity to sell their shares of common stock at a
premium over prevailing market prices as a result of a takeover bid or merger.
Operational Risks
We are subject to certain operational risks, including, but not limited to, data processing system
failures and errors, customer or employee fraud and catastrophic failures resulting from terrorist
acts or natural disasters. We maintain a system of internal controls to mitigate against such
occurrences and maintain insurance coverage for such risks that are insurable, but should such an
event occur that is not prevented or detected by our internal controls, uninsured or in excess of
applicable insurance limits, it could have a significant adverse impact on our business, financial
condition or results of operations.
Limited Trading Market
Our common stock is not listed on any exchange or The NASDAQ Stock Market. Our stock is currently
quoted in the over-the-counter markets.
None.
11
Table of Contents
Our principal office is located in Archbold, Ohio.
The Bank operates from the facilities at 307 North Defiance Street. In addition, the Bank owns the
property from 200 to 208 Ditto Street, Archbold, Ohio, which it uses for Bank parking and a
community mini-park area. The Bank owns real estate at two locations, 207 Ditto Street and 209
Ditto Street in Archbold, Ohio upon which the bank built a commercial building to be used for
storage, and a parking lot for company vehicles and employee parking. The Bank also owns real
estate across from the main facilities to provide for parking.
The Bank occupies an Operations Center at 622 Clydes Way in Archbold, Ohio to accommodate our
growth over the years. The bank owns a parking lot in downtown Montpelier which had been provided
for customer use. The bank owns a property at 204 Washington Street, St Joe, Indiana at which an
ATM is located.
The Bank owns all of its office locations, with the exception of Angola, Indiana. The Angola
office location is leased. Current locations of retail banking services are:
| Office | Location | |
|
Archbold, Ohio
|
1313 S Defiance Street | |
|
|
||
|
Wauseon, Ohio
|
1130 N Shoop Avenue | |
|
|
||
|
|
119 N Fulton Street | |
|
|
||
|
Stryker, Ohio
|
300 S Defiance Street | |
|
|
||
|
West Unity, Ohio
|
200 W Jackson Street | |
|
|
||
|
Bryan, Ohio
|
929 E High Street | |
|
|
||
|
|
1000 S Main Street | |
|
|
||
|
Delta, Ohio
|
101 Main Street | |
|
|
||
|
Montpelier, Ohio
|
1150 E Main Street | |
|
|
||
|
Napoleon, Ohio
|
2255 Scott Street | |
|
|
||
|
Swanton, Ohio
|
7 Turtle Creek Circle | |
|
|
||
|
Defiance, Ohio
|
1175 Hotel Drive | |
|
|
||
|
Perrysburg, Ohio
|
7001 Lighthouse Way | |
|
|
||
|
Butler, Indiana
|
200 S Broadway | |
|
|
||
|
Auburn, Indiana
|
403 Erie Pass | |
|
|
||
|
Angola, Indiana
|
2310 N Wayne Street |
All but one of of the above locations have drive-up service facilities and an ATM.
There are no material pending legal proceedings, other than ordinary routine proceedings incidental
to the business of the Bank or the Company, to which we are a party or of which any of our
properties are the subject.
12
Table of Contents
Our common stock is not listed on the NASDAQ stock market or any other stock exchange. While there
is no established public trading market for our common stock, our shares are currently
dually-quoted by various market makers on the Pink Sheets and the Over the Counter Bulletin Board,
which are both over-the-counter quotation services for participant broker-dealers.
There are market makers that set a price for our stock; however, private sales continue to occur.
The high and low sale prices were from sales of which we have been made aware by researching daily
on Bloomberg.com. The high and low sale prices known to our management are as follows:
| Stock Prices | ||||||||||||
| 2009 - quarter | Quarter | Low | High | |||||||||
|
|
1st | $ | 17.60 | $ | 20.00 | |||||||
|
|
2nd | 17.55 | 20.50 | |||||||||
|
|
3rd | 19.25 | 20.99 | |||||||||
|
|
4th | 15.20 | 19.00 | |||||||||
| 2008 - quarter | Quarter | Low | High | |||||||||
|
|
1st | $ | 18.00 | $ | 20.25 | |||||||
|
|
2nd | 19.05 | 22.80 | |||||||||
|
|
3rd | 20.05 | 22.25 | |||||||||
|
|
4th | 19.00 | 21.35 | |||||||||
The Company utilizes Registrar and Transfer Company as its transfer agent.
As of January 27, 2010 there were 2,052 record holders of our common stock.
Below is a line-graph presentation comparing the cumulative total shareholder returns for the
Corporation, an index for NASDAQ Stock Market (U.S. Companies) comprised of all domestic common
shares traded on the NASDAQ National Market System and the NASDAQ Bank Index for the five-year
period ended December 31, 2009. The chart compares the value of $100 invested in the Corporation
and each of the indices and assumes investment on December 31, 2004 with all dividends reinvested.
The Board of Directors recognizes that the market price of stock is influenced by many factors,
only one of which is performance. The stock price performance shown on the graph is not
necessarily indicative of future performance.
13
Table of Contents
Year 2004 as the Base
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||
|
FMAO
|
$ | 100.00 | $ | 80.00 | $ | 81.65 | $ | 76.40 | $ | 77.90 | $ | 67.60 | ||||||||||||
|
NASDAQ-COMPOSITE
|
$ | 100.00 | $ | 102.09 | $ | 112.64 | $ | 124.61 | $ | 75.02 | $ | 108.82 | ||||||||||||
|
NASDAQ-BANK INDEX
|
$ | 100.00 | $ | 98.02 | $ | 111.40 | $ | 89.54 | $ | 70.55 | $ | 58.97 | ||||||||||||
Dividends are declared and paid quarterly. Per share dividends declared for the years ended 2009
and 2008 are as follows:
| 1 st Quarter | 2 nd Quarter | 3 rd Quarter | 4 th Quarter | Total | ||||||||||||||||
|
2009
|
$ | .18 | $ | .18 | $ | .18 | $ | .18 | $ | .72 | ||||||||||
|
2008
|
$ | .16 | $ | .16 | $ | .18 | $ | .18 | $ | .68 | ||||||||||
The ability of the Company to pay dividends is limited by the dividend that the Company receives
from the Bank. The Bank may pay as dividends to the Company its retained earnings during the
current year and its prior two years. Currently, such limitation on the payment of dividends from
the Bank to the Company does not materially restrict the Company’s ability to pay dividends to its
shareholders.
Dividends declared during 2009 were $0.72 per share totaling $3.41 million, 5.88 percent higher
than 2008 declared dividends of $0.68 per share. During 2009, the Company purchased 28,907 shares
and awarded 10,000 restricted shares to 49 employees under its long term incentive plan. 350
shares were forfeited during 2009. At year end 2009, the Company held 437,551 shares in Treasury
stock and 27,775 in unearned stock awards. The Company purchased 171,889 shares throughout 2008.
10,000 shares were awarded to 51 employees in 2008. 245 restricted shares were forfeited during
2008. At December 31, 2008, the Company held 418,294 shares in Treasury stock and 23,575
in unearned stock awards. The Company continues to have a strong capital base and to maintain
regulatory capital ratios that are significantly above the defined regulatory capital ratios. On
December 18, 2009, the Company announced the authorization by its Board of Directors for the
Company’s repurchase, either on the open market, or in privately negotiated transactions, of up to
200,000 shares of its outstanding common stock commencing January 1, 2010 and ending December 31,
2010.
14
Table of Contents
ISSUER PURCHASES OF EQUITY SECURITIES
| Total Number of | ||||||||||||||||
| Shares Purchased as | Remaining Share | |||||||||||||||
| Total Number of | Average Price Paid | Part of Publicly | Repurchase | |||||||||||||
| Period | Shares Purchased | per Share | Announced Programs | Authorization | ||||||||||||
|
10/1/2009 to
10/31/2009
|
— | — | — | 196,093 | ||||||||||||
|
11/1/2009 to
11/30/2009
|
— | — | — | 196,093 | ||||||||||||
|
12/1/2009 to
12/31/2009
|
— | — | — | 196,093 | ||||||||||||
|
Total
|
— | — | — | 196,093 | ||||||||||||
| (1) | On January 16, 2009, the Company announced the authorization by its Board of Directors for the Company’s repurchase, either on the open market, or in privately negotiated transactions, of up to 225,000 shares of its outstanding common stock commencing on January 16, 2009 and ending December 31, 2009. |
Reclassification
Certain amounts in the 2008 and 2007 consolidated financial statements have been reclassified to
conform with the 2009 presentation.
15
Table of Contents
| ITEM 5. | SELECTED FINANCIAL DATA |
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
Summary of Consolidated Statement of Income — UNAUDITED
| (In Thousands, except share data) | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Summary of Income:
|
||||||||||||||||||||
|
Interest income
|
$ | 41,114 | $ | 43,824 | $ | 45,424 | $ | 42,269 | $ | 38,101 | ||||||||||
|
Interest expense
|
13,220 | 18,101 | 21,722 | 18,535 | 13,539 | |||||||||||||||
|
Net Interest Income
|
27,894 | 25,723 | 23,702 | 23,734 | 24,562 | |||||||||||||||
|
Provision for loan loss
|
3,558 | 1,787 | 871 | 525 | (425 | ) | ||||||||||||||
|
Net interest income after
provision for loan loss
|
24,336 | 23,936 | 22,831 | 23,209 | 24,987 | |||||||||||||||
|
Other income (expense), net
|
(15,256 | ) | (14,763 | ) | (12,269 | ) | (11,966 | ) | (13,209 | ) | ||||||||||
|
Net income before
income taxes
|
9,080 | 9,173 | 10,562 | 11,243 | 11,778 | |||||||||||||||
|
Income taxes
|
2,475 | 2,450 | 2,828 | 3,107 | 3,202 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net income
|
$ | 6,605 | $ | 6,723 | $ | 7,734 | $ | 8,136 | $ | 8,576 | ||||||||||
|
|
||||||||||||||||||||
|
Per Share of Common Stock:
|
||||||||||||||||||||
|
Earnings per common share
outstanding *
|
||||||||||||||||||||
|
Net income
|
$ | 1.39 | $ | 1.39 | $ | 1.52 | $ | 1.57 | $ | 1.65 | ||||||||||
|
|
||||||||||||||||||||
|
Dividends
|
$ | 0.720 | $ | 0.680 | $ | 0.640 | $ | 0.575 | $ | 0.500 | ||||||||||
|
|
||||||||||||||||||||
|
Weighted average number
of shares outstanding
|
4,741,392 | 4,846,310 | 5,097,636 | 5,186,329 | 5,198,728 | |||||||||||||||
|
|
||||||||||||||||||||
| * | Based on weighted average number of shares outstanding |
| (In Thousands) | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Total assets
|
$ | 853,860 | $ | 805,729 | $ | 803,974 | $ | 737,096 | $ | 720,945 | ||||||||||
|
Loans
|
563,911 | 562,336 | 523,474 | 498,580 | 458,704 | |||||||||||||||
|
Total Deposits
|
676,444 | 615,732 | 634,593 | 585,409 | 576,297 | |||||||||||||||
|
Stockholders’ equity
|
93,584 | 90,547 | 89,375 | 87,732 | 82,588 | |||||||||||||||
|
|
||||||||||||||||||||
|
Key Ratios
|
||||||||||||||||||||
|
Return on average equity
|
7.19 | % | 7.51 | % | 8.71 | % | 9.64 | % | 10.62 | % | ||||||||||
|
Return on average assets
|
0.80 | % | 0.84 | % | 1.06 | % | 1.14 | % | 1.22 | % | ||||||||||
|
Loans to deposits
|
83.36 | % | 91.33 | % | 82.49 | % | 85.17 | % | 79.65 | % | ||||||||||
|
Capital to assets
|
10.96 | % | 11.24 | % | 11.12 | % | 11.90 | % | 11.46 | % | ||||||||||
|
Dividend payout
|
51.66 | % | 48.77 | % | 42.00 | % | 36.63 | % | 30.31 | % | ||||||||||
16
Table of Contents
| ITEM 6. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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 financial services industry 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 and accompanying notes. 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.
All significant accounting policies followed by the Company are presented in Note 1 to the
consolidated financial statements. These policies, along with the disclosures presented in the
notes to the consolidated financial statements and in the management discussion and analysis of
financial condition and results of operations, provide information on how significant assets and
liabilities are valued and how those values are determined for the financial statements. 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 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 a 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. The collection and ultimate recovery of the book value of the collateral, in
most cases, is beyond our control.
The Company is also required to estimate the value of its Mortgage Servicing Rights. The Company
recognizes as separate assets rights to service fixed rate single-family mortgage loans that it
has sold without recourse but services for others for a fee. Mortgage servicing assets are
initially recorded at cost, based upon pricing multiples as determined by the purchaser, when the
loans are sold. Mortgage servicing assets are carried at the lower of the initial carrying value,
adjusted for amortization, or estimated fair value. Amortization is determined in proportion to
and over the period of estimated net servicing income using the level yield method. For purposes
of determining impairment, the mortgage servicing assets are stratified into like groups based on
loan type, term, new versus seasoned and interest rate. The valuation is completed by an
independent third party.
The expected and actual rates of mortgage loan prepayments are the most significant factors
driving the potential for the impairment of the value of mortgage servicing assets. Increases in
mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the
underlying loan is reduced.
For more information regarding the estimates and calculations used to establish the ALLL and the
value of Mortgage Servicing Rights, please see Note 1 to the consolidated financial statements
provided herewith.
17
Table of Contents
2009 in Review
2009 proved to be a tough year in which businesses had to operate. This was especially true in
banking as negative press continued throughout the year and all banks were painted with the same
brush. Increased FDIC assessments along with a special mid-year assessment impacted the bottom
line with over $1.2 million additional expense recorded for 2009 as compared to 2008. This
increased level of cost is forecasted to continue as the Bank has prepaid over $3.5 million for
the next three years. While funds were available for the prepayment, it still represents a cost
in terms of lost opportunity for earnings on the $3.5 million.
The Bank was not hit with the cost of failures in just our own industry, but rather from almost
all industries as charge-offs and watch list loans increased also. Much of our lenders’ time was
spent working delinquencies and the one bright spot of the low rate environment, refinancing
mortgages. Fortunately, many of our customers were able to refinance their mortgages to lower
rates and payments even though their house values had declined. The financial impact of both
these scenarios will be further discussed in the material changes in operations to follow.
The Bank launched a new product offering in March 2008: Reward Checking. The product is a free
checking account which pays a high rate of interest to customers who agree to three qualifications
each statement cycle. The three qualifications enable the Bank to deliver the high interest rate
as they create efficiencies or increase non-interest revenue to the Bank. As will be shown later,
the success of this product grew throughout 2009 and is the reason for the increase in interest
bearing liabilities. It has been extremely well received by customers and embraced by the Bank’s
employees. It has exceeded expectations at this point and continues to be the product of choice
for a new checking customer. At year end 2009, it had the highest balance at over $49 million
within the business and consumer checking portfolio. The Bank looks forward to further
development of the product line in 2010 with the introduction of KASASA™. KASASA is the first
national brand of the most innovative checking accounts available today. KASASA is a new word
that was created to capture consumers’ attention and awaken them to a new way of banking. These
accounts are designed to be the first and only accounts that actually take an interest in their
accountholders by paying them to use their account with what interests them most. More discussion
will be focused on this product with the tables to follow.
The Company is proud of its results for 2009. Increased regulatory demands and high unemployment
in the communities we serve impacted the level of profitability; however, the Company has remained
in the black throughout the year. Using the Bank Holding Company and Uniform Bank Performance
Report compiled by the Federal Reserve system as a reference, the Company was seven times more profitable than its
national peer and the Bank twice its peers as of end of third quarter 2009.
Material Changes in Results of Operations
The discussion now turns to more financial based results and trends as a result of 2009
operations. In comparing line items of the consolidated statement of income for years ended 2007
through 2009, it is easily seen where the Company has been spending its time and the impact of the
recession. Decreasing interest income and expense are obvious large factors on the profitability
of the Company for 2009; however, that discussion can be found in the net interest income section.
This discussion will focus on the significant non-interest items that impacted the operations of
the Company.
Looking at the positive items first; overall, non-interest income shows a trend of improvement. A
modest improvement of $94 thousand in 2008 over 2007 was followed by a more significant gain of
over $1.3 million in 2009 as compared to 2008. Accounting for over $1 million of the gain was the
revenue generated from mortgage loan activity through establishing mortgage servicing rights and
gain on the sale of loans into the secondary market. As mentioned earlier, our loan officers and
supporting departments were very busy in 2009 handling refinance activity for mortgages. It was a
much needed, but unexpected source of increased revenue.
18
Table of Contents
The second largest increase to non-interest income was derived from increased debit card usage.
As the Bank receives interchange revenue from each “swipe” of the card, usage increased thereby
increasing revenue over $126.5 thousand in 2009 over 2008. 2008’s increase was $218.5 thousand
over 2007. Both increases are attributed to the growth and popularity of the Bank’s Reward
checking product. One of the criteria for the payment of high interest on the account is
utilizing the debit card at least twelve times per statement cycle. The Bank’s Reward Checking
customers average 25 transactions per statement, surpassing the 9 transactions average of our Free
Checking customers. The additional revenue from debit card usage offsets the interest expense,
creating a win-win situation for the customers and the Bank. In 2010, this revenue stream will be
further enhanced with the addition of KASASA. All of the KASASA products will have a debit card
usage qualification; however, interest income will not be the customer win for all accounts.
Customers may choose to receive credit towards iTunes downloads or donate earnings to charity.
One additional non-interest income item to mention is overdraft and return check fee income. This
revenue source decreased 6.5%, or $176 thousand, during 2009 even though the number of checking
accounts increased 4.16% and the portfolio year end balance was $23.6 million higher in 2009 than
2008. Overdraft fees had been higher in 2008 than in 2007; however 2008’s income fee was lower
than in 2007. 2008 was higher due to the volume of checking accounts added from the Knisely
acquisition. The average overdraft fee paid per account was $6.77 less in 2008 than in 2007.
This revenue source is under intense regulatory review and proposed changes are predicted to
decrease this line item by as much as 30% in 2010.
Service charge income remained virtually unchanged from 2008 even with the increase in accounts.
Most of the new accounts added either don’t have service fee charges and/or the balances are high
enough to offset any charges. Both the OD and return check and service charge income from
checking accounts are included in the customer service fees line item on the income statement.
Lastly, the Bank was able to take advantage of the ability to book some gains on the sale of
securities. This opportunity presented itself in the first and last quarter of 2009. The Bank
did not sacrifice long term profitability for short term gains as the yields of the portfolio were
not negatively impacted by the sales. The discussion on causes for changes to yields follows in
the interest section. The Bank did recognize a loss of just over $50 thousand on an equity
security of a Banker’s Bank. The entity had been taken over by the FDIC with its assets and
deposits being bought by another financial institution.
Overall, non-interest expense increased 8.6% or $1.8 million in 2009 over 2008. This has proved
to be an increasing trend as 2008 was 13.9% over 2007, or $2.6 million higher. The causes behind
the increases; however, are different. The largest factor behind the 2009 increase was FDIC assessment, which
was broken out as its own line item on the statement of income due to its significance. Of the
$1.8 million increase in 2009 non-interest expense, $1.2 million is attributed to the cost of FDIC
insurance.
Also mentioned previously was the mortgage refinancing activity of 2009. A correlating expense to
that activity is the amortization of mortgage servicing rights. The income was discussed
previously; the amortization is the offset to the income recognized. This increase occurred in
both 2008 and 2009. Income is recorded when the mortgage loan is first sold with servicing
retained and is therefore recognized within one year. The amortization, however, is calculated
over the life of the loan and accelerated when paid off early. An increase in this expense can be
driven by two activities: an increase in the number of sold loans and/or by the acceleration of
the expense from payoff and refinance activity. The best picture of the bottom line impact is
achieved by netting the income with the expense each year. 2007 had net income from mortgage
servicing rights of $95 thousand, 2008 had net income of $77 thousand, and 2009 had net income of
$225 thousand. Of course, the value (or income) of the mortgage servicing right when sold also
impacts the net position. The reason for 2009’s larger net position is due to the increase in the
number of loans being serviced; thereby new rights are being established without having been
offset by accelerated expense. This is evidenced by the year end number of loans and balances
being up significantly. As of December 31 of each year, there were 3,571 loans serviced with
outstanding balances of $267.8 million for 2009, 3,190 loans with balances of $233.9 million for
2008, and 3,178 loans with balances of $235.2 million for 2007. Returning to the expense only
portion, expense for 2009 was $563 thousand higher than
19
Table of Contents
expense for 2008 and $676 thousand higher than 2007. As seen above, the increased expense was offset by a higher increase in income.
During the first part of 2009, some of the Bank’s lending officers were also very busy in auto
loan financing. This activity was spurred by government and auto manufacturer incentives along
with large banks exiting the market in the first half of the year. The consumer loan portfolio
grew by 26%, or almost $6 million. This increased activity offset the increased salary expense as
deferred costs from these loans are recorded as a deduction to the salary expense when the loans
are made. While salaries and wages decreased in 2009 as compared to 2008, it was this component
that made it possible. Base salary expense increased just over $400 thousand with the deferred
costs offsetting with a $50 thousand increase for 2009. In 2008, as compared to 2007, base salary
increased by $835 thousand, but was offset by a $98 thousand increase in deferred costs. The
increases in base salary have been driven by additional offices being opened and increase in
revenue generating positions, such as additional staff in the Bank’s financial planning division.
Employee benefits ended 2009 at $185 less than (or basically even) 2008’s and again it was for
different reasons than the fluctuation of $214 thousand between 2008 and 2007. Employees group
insurance costs were up $224 for 2009 over 2008 and 2008 costs were $51 thousand lower than 2007.
The Bank is partially self-insured and fluctuations to costs are therefore caused by fluctuations
in claims made by employees. In 2008, the Bank offered a Health Savings Account (HSA) option,
along with offering its traditional medical plans. 70% of employees chose the HSA high deductible
plan. Both options were available in 2009 and the decision was made to implement the HSA plan
only bank-wide for 2010. The increase in medical expense was offset by a decrease of $201.5
thousand in miscellaneous personnel expense and in the BOLI retirement expense for 2009 as
compared to 2008. Miscellaneous personnel expense includes such items as employee outings and the
use of employment and executive search agencies. Bank Owned Life Insurance (BOLI) retirement
expense represents the yearly cost to fund the liability of post retirement officers upon which
the Bank has an insurance policy of which the Bank is the beneficiary. The total of these two
expenses increased $216 thousand in 2008 as compared to 2007 and as stated previously was opposite
of the movement in 2009 as compared to 2008.
Occupancy expense increased $84 thousand over 2008 with the largest impact stemming from the costs
associated with holding Other Real Estate Owned (OREO). The balance in OREO increased from $426.7
thousand as of December 31, 2008 to $1.4 million as of December 31, 2009. The largest expense
increase in occupancy was real estate taxes, which was driven by the additional holding of OREO
and had increased $82.9 thousand. The larger increase of $465 thousand in occupancy expense in
2008 over 2007 was based on the increase in the number of offices and a decrease in the amount of building rent received
from the Bank’s brokerage division, FM Investments. The building rent received in 2009 was just
2% higher than in 2008, therefore it was not a factor in the increase for 2009.
As is often the case, an increase in technology costs is offset by efficiencies or cost savings
found elsewhere on the statements of income. During 2008, the increase in furniture and equipment
was caused by the increase in the number of offices and a new telephone system. The phone system
utilizes the Bank’s wide area data network, or VOIP (Voice Over Internet Protocol). The
depreciation cost of which is offset by a reduction in long distance and line usage. In 2009, the
increase in the furniture and equipment line item of $61 thousand over 2008 comes mainly from an
increase in the expense of maintenance contracts. The majority of software utilized by the Bank
includes an annual maintenance cost. This cost accounts for over 85% of the line item increase.
It is an area that is closely monitored; however, not easily contained. Generally, to have
additional revenue generated or expense decreased from new efficiencies, an additional expense
will be incurred in furniture and equipment.
A positive reduction in data processing expense of $98 thousand occurred in 2009. This decrease
is not attributable to just one vendor, but rather a negotiation with multiple vendors. This
reduction is hoped to begin a trend of declining costs as the Bank plans to switch service
providers in February 2010 at a cost savings. The pricing on many services, however, is based on
number of accounts and the Bank fully expects those to increase with the KASASA additions and an
improving economy.
20
Table of Contents
It was mentioned earlier that much of the lenders’ time was spent on mortgage refinancing and
collections. The collection expense is included in the general and administrative expense. The
collection expense increase of $92 thousand in 2008 as compared to 2007 has been followed by an
additional $251 thousand increase in 2009 over 2008. A more positive comparison is the reduction
by just under $74 thousand in 2009 of the expense associated with miscellaneous NSF
(non-sufficient funds) and return checks. 2008 had seen an increase of $137 thousand over 2007 in
this area where often the issue stems from fraudulent activity attempted on our customer accounts.
This is often a reflection of a tough economy and the Bank worked hard to educate our customers
and create an awareness to stop the losses. There are always a few that slip through the cracks
but it is a credit to the Bank’s front line personnel that a decrease to the expense took place.
The largest cost increase to the Bank in 2009 was the Provision for Loan Losses. A tough economic
environment existed for most businesses in our primary market area during 2007 through 2009. In
2009, the provision expense was $1.8 million higher than 2008 and $2.7 million over 2007. Gross
charge-offs were $3.3 million for 2009, as compared to 2008’s $2.6 million and 2007’s $1.6
million. Recoveries were $242, $348, and $732 thousand for 2009, 2008, and 2007, respectively.
Unfortunately, 2009 had the highest charge-off and lowest recovery amounts, making the net
charge-offs the highest at $3 million. 2008 had a net charge-off position of $2.2 million and 2007
had a position of less than $1 million. 2008 was impacted by mostly agricultural business and
2009 activity was mainly commercial driven. Further analysis by loan type is presented in the
discussion of the allowance for credit losses.
Overall, the Company is proud to have another solid, positive year of performance during tough
times. The Bank remains well capitalized and focused on how best to weather the economic climate.
Some positive signs are beginning to show in our markets; however, the heavy burden of regulation
is not easily overcome. FDIC assessments will be a way of life for the next three years. The
Company forecasts moderate expansion while seeking opportunities to improve earnings and lower
costs.
Net Interest Income
The net interest margin improved during 2009 as the Bank was able to adjust the majority of its
deposit liabilities by a larger percentage down than which the loans were pricing down. A
decrease occurred in both interest income and interest expense for the second straight year,
however, the $4.2 million decrease in deposit interest expense alone outpaced the $2.7 million
decrease in all interest income. Net interest income was $2.2 million higher than 2008 and 2008 was $2.0 million higher than 2007. As a
percentage, net interest income was 17.7% higher than 2007, while the average balance on earning
assets was only 5% higher for the same time period.
The following table presents net interest income, interest spread and net interest margin for the
three years 2007 through 2009, comparing average outstanding balances of earning assets and
interest bearing liabilities with the associated interest income and expense. The table also
shows their corresponding average rates of interest earned and paid. The tax-exempt asset yields
have been tax affected to reflect a marginal corporate tax rate of 34%. Average outstanding loan
balances include non-performing loans and mortgage loans held for sale. Average outstanding
security balances are computed based on carrying values including unrealized gains and losses on
available-for-sale securities.
As the charts indicate, the Company experienced significant increased growth on an average basis
for year 2008 compared to 2007 at 9.54%. 2009 had an increase of average assets of 3.13%.
Interest earning assets average balance increased during all periods. The biggest component of
the interest earning assets was loans. The decrease on yields is more pronounced on the other
earning assets. Specifically, the largest fluctuation is in short-term funds, Federal Funds Sold.
In 2007, the yield on Federal Funds was 4.67%, 2008 was 2.90%, and in 2009 it was 0.38%.
21
Table of Contents
While the loan portfolio size has remained fairly constant in 2009, the yield, or income,
generated has decreased for the second straight year. This is due to the low interest rate
environment, with the lending prime rate within 26 basis points of the Company’s net interest
spread. Spread is the difference between what the Company earns on its assets and pays on its
liabilities. It is on this spread that the Company must fund its operations and generate profit.
When the asset yield decreases, so must the cost of funds to maintain profitability. It becomes
increasingly challenging as the asset yield gets closer to the prime lending rate, or the
break-even point, of operations. To mitigate the low rate environment, the Bank placed rate
floors on most variable loans during 2009, which were typically 125 basis points over the current
prime rate. This protected the Bank during a flat rate environment. The challenge will come when
rates start to rise and the Bank will be affected by the index spreads also placed on the loans.
An increased prime rate will not directly correlate to an increased yield on loans.
Overall, the tax equivalent yield on interest earning assets decreased to 5.52% for 2009 compared
to 6.03% and 6.81% for 2008 and 2007 respectively. The percentage of interest earning assets to
total assets increased slightly in 2009 over 2008 and remained above 90% at a respectable 93.55%
for 2009.
As stated previously, the decreased yield on the assets was fortunately outpaced by the decreased
cost of funds. The average balances for interest bearing liabilities increased only $17.4 million
compared to 2008 and $83.5 million as compared to 2007. While the balance increased, the costs on
those funds were significantly lower. The average cost for 2009 was 2.00% compared to 2008’s
2.82% and 2007’s 3.77%. The balances in non-interest bearing liabilities also increased during
the last three years.
As with the yields on assets, the largest fluctuation in the cost of funds is in the shorter term
liabilities, savings deposits. The cost on savings decreased 66% while on time deposits the cost
decreased 38%. The Bank has focused on increasing its core deposit base to lessen the dependency
on higher cost time deposits. The Bank has also attempted to increase the duration of the time
deposits; however, customers have maintained a short-term, twelve month focus.
As stated previously, the charts show the improvement of the net interest margin from 2008 to
2009. A slight tightening occurred during 2008. Net interest spread increased 17 basis points
during 2008 and 30 basis points during 2009. Net interest margin dropped 2 basis points in 2008
compared to 2007 and a 19 basis point increase from 2008 to 2009. Competition played a major role
in the pressure applied on these margins along with the fluctuating rate environment and the slope
of the yield curve during 2007 through 2009. The ability to grow loans was directly impacted by
the ability to aggressively price the loans and finding borrowers wishing to borrow. The continued decrease in the prime lending rate and
deterioration of the economy made any improvement in interest income very difficult. The two
biggest factors in the decrease of interest expense in the liabilities were the volume of other
time deposits that re-priced to a significantly lower rate during 2008 and 2009 and the large drop
in the Federal Funds rate which directly impacted the Federal funds purchased and securities sold
under agreement to repurchase. The acquisition had a major impact on the average balances in 2008
as compared to 2007.
The yield on Tax-Exempt investments securities shown in the following charts were computed on a
tax equivalent basis. The yield on Loans has been tax adjusted for the portion of tax-exempt IDB
loans included in the total. Total Interest Earning Assets is therefore also reflecting a tax
equivalent yield in both line items, also with the Net Interest Spread and Margin. The
adjustments were based on a 34% tax rate.
22
Table of Contents
| 2009 | ||||||||||||
| (In Thousands) | ||||||||||||
| Average | Interest/ | |||||||||||
| Balance | Dividends | Yield/Rate | ||||||||||
|
ASSETS
|
||||||||||||
|
Interest Earning Assets:
|
||||||||||||
|
Loans (1)
|
$ | 558,869 | $ | 33,585 | 6.04 | % | ||||||
|
Taxable investment securities
|
146,872 | 5,798 | 3.95 | % | ||||||||
|
Tax exempt investment securities
|
46,736 | 1,686 | 5.47 | % | ||||||||
|
Interest bearing deposits
|
— | — | 0.00 | % | ||||||||
|
Federal funds sold
|
11,937 | 45 | 0.38 | % | ||||||||
|
|
||||||||||||
|
Total Interest Earning Assets
|
764,414 | $ | 41,114 | 5.52 | % | |||||||
|
|
||||||||||||
|
Non-Interest Earning Assets:
|
||||||||||||
|
Cash and cash equivalents
|
19,209 | |||||||||||
|
Other assets
|
39,007 | |||||||||||
|
|
||||||||||||
|
Total Assets
|
$ | 822,630 | ||||||||||
|
|
||||||||||||
|
|
||||||||||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||||||
|
Interest Bearing Liabilities:
|
||||||||||||
|
Savings deposits
|
$ | 257,345 | $ | 1,755 | 0.68 | % | ||||||
|
Other time deposits
|
317,619 | 9,252 | 2.91 | % | ||||||||
|
Other borrowed money
|
38,498 | 1,727 | 4.49 | % | ||||||||
|
Federal funds purchased and securities sold under agreement to repurchase
|
45,920 | 486 | 1.06 | % | ||||||||
|
|
||||||||||||
|
Total Interest Bearing Liabilities
|
659,382 | $ | 13,220 | 2.00 | % | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Non-Interest Bearing Liabilities:
|
||||||||||||
|
Non-interest bearing demand deposits
|
57,630 | |||||||||||
|
Other
|
13,778 | |||||||||||
|
|
||||||||||||
|
Total Liabilities
|
730,790 | |||||||||||
|
Shareholders’ Equity
|
91,840 | |||||||||||
|
|
||||||||||||
|
Total Liabilities and
Shareholders’ Equity
|
$ | 822,630 | ||||||||||
|
|
||||||||||||
|
Interest/Dividend income/yield
|
$ | 41,114 | 5.52 | % | ||||||||
|
Interest Expense / yield
|
13,220 | 2.00 | % | |||||||||
|
|
||||||||||||
|
Net Interest Spread
|
$ | 27,894 | 3.51 | % | ||||||||
|
|
||||||||||||
|
Net Interest Margin
|
3.79 | % | ||||||||||
|
|
||||||||||||
23
Table of Contents
| 2008 | ||||||||||||
| (In Thousands) | ||||||||||||
| Average | Interest/ | |||||||||||
| Balance | Dividends | Yield/Rate | ||||||||||
|
ASSETS
|
||||||||||||
|
Interest Earning Assets:
|
||||||||||||
|
Loans (1)
|
$ | 544,310 | $ | 34,994 | 6.46 | % | ||||||
|
Taxable investment securities
|
146,877 | 6,963 | 4.74 | % | ||||||||
|
Tax exempt investment securities
|
42,361 | 1,594 | 5.70 | % | ||||||||
|
Interest bearing deposits
|
— | — | 0.00 | % | ||||||||
|
Federal funds sold
|
9,423 | 273 | 2.90 | % | ||||||||
|
|
||||||||||||
|
Total Interest Earning Assets
|
742,971 | $ | 43,824 | 6.03 | % | |||||||
|
|
||||||||||||
|
Non-Interest Earning Assets:
|
||||||||||||
|
Cash and cash equivalents
|
19,399 | |||||||||||
|
Other assets
|
35,317 | |||||||||||
|
|
||||||||||||
|
Total Assets
|
$ | 797,687 | ||||||||||
|
|
||||||||||||
|
|
||||||||||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||||||
|
Interest Bearing Liabilities:
|
||||||||||||
|
Savings deposits
|
$ | 240,880 | $ | 2,760 | 1.15 | % | ||||||
|
Other time deposits
|
314,005 | 12,467 | 3.97 | % | ||||||||
|
Other borrowed money
|
38,110 | 1,747 | 4.58 | % | ||||||||
|
Federal funds purchased and securities
|
||||||||||||
|
sold under agreement to repurchase
|
49,014 | 1,127 | 2.30 | % | ||||||||
|
|
||||||||||||
|
Total Interest Bearing Liabilities
|
642,009 | $ | 18,101 | 2.82 | % | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Non-Interest Bearing Liabilities:
|
||||||||||||
|
Non-interest bearing demand deposits
|
53,208 | |||||||||||
|
Other
|
12,928 | |||||||||||
|
|
||||||||||||
|
Total Liabilities
|
708,145 | |||||||||||
|
|
||||||||||||
|
Shareholders’ Equity
|
89,542 | |||||||||||
|
|
||||||||||||
|
Total Liabilities and
|
||||||||||||
|
Shareholders’ Equity
|
$ | 797,687 | ||||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Interest/Dividend income/yield
|
$ | 43,824 | 6.03 | % | ||||||||
|
Interest Expense / yield
|
18,101 | 2.82 | % | |||||||||
|
|
||||||||||||
|
Net Interest Spread
|
$ | 25,723 | 3.21 | % | ||||||||
|
|
||||||||||||
|
Net Interest Margin
|
3.60 | % | ||||||||||
|
|
||||||||||||
24
Table of Contents
| 2007 | ||||||||||||
| (In Thousands) | ||||||||||||
| Average | Interest/ | |||||||||||
| Balance | Dividends | Yield/Rate | ||||||||||
|
ASSETS
|
||||||||||||
|
Interest Earning Assets:
|
||||||||||||
|
Loans (1)
|
$ | 502,815 | $ | 37,429 | 7.48 | % | ||||||
|
Taxable investment securities
|
132,047 | 6,181 | 4.68 | % | ||||||||
|
Tax exempt investment securities
|
40,433 | 1,533 | 5.74 | % | ||||||||
|
Interest bearing deposits
|
286 | 17 | 5.94 | % | ||||||||
|
Federal funds sold
|
5,658 | 264 | 4.67 | % | ||||||||
|
|
||||||||||||
|
Total Interest Earning Assets
|
681,239 | $ | 45,424 | 6.81 | % | |||||||
|
|
||||||||||||
|
Non-Interest Earning Assets:
|
||||||||||||
|
Cash and cash equivalents
|
17,318 | |||||||||||
|
Other assets
|
29,684 | |||||||||||
|
|
||||||||||||
|
Total Assets
|
$ | 728,241 | ||||||||||
|
|
||||||||||||
|
|
||||||||||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||||||
|
Interest Bearing Liabilities:
|
||||||||||||
|
Savings deposits
|
$ | 193,539 | $ | 3,978 | 2.06 | % | ||||||
|
Other time deposits
|
312,515 | 14,424 | 4.62 | % | ||||||||
|
Other borrowed money
|
28,233 | 1,317 | 4.66 | % | ||||||||
|
Federal funds purchased and securities
|
||||||||||||
|
sold under agreement to repurchase
|
41,549 | 2,003 | 4.82 | % | ||||||||
|
|
||||||||||||
|
Total Interest Bearing Liabilities
|
575,836 | $ | 21,722 | 3.77 | % | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Non-Interest Bearing Liabilities:
|
||||||||||||
|
Non-interest bearing demand deposits
|
44,553 | |||||||||||
|
Other
|
19,029 | |||||||||||
|
|
||||||||||||
|
Total Liabilities
|
639,418 | |||||||||||
|
|
||||||||||||
|
Shareholders’ Equity
|
88,823 | |||||||||||
|
|
||||||||||||
|
Total Liabilities and
Shareholders’ Equity
|
$ | 728,241 | ||||||||||
|
|
||||||||||||
|
Interest/Dividend income/yield
|
$ | 45,424 | 6.81 | % | ||||||||
|
Interest Expense / yield
|
21,722 | 3.77 | % | |||||||||
|
|
||||||||||||
|
Net Interest Spread
|
$ | 23,702 | 3.04 | % | ||||||||
|
|
||||||||||||
|
Net Interest Margin
|
3.62 | % | ||||||||||
|
|
||||||||||||
| (1) | For purposes of these computations, non-accruing loans are included in the daily average outstanding loan amounts. |
25
Table of Contents
The primary source of the Company’s traditional banking revenue is net interest income. Net
interest income is the difference between interest income on interest earning assets, such as
loans and securities, and interest expense on liabilities used to fund those assets, such as
interest bearing deposits and other borrowings. Net interest income is affected by changes in
both interest rates and the amount and composition of earning assets and liabilities. The change
in net interest income is most often measured as a result of two statistics – interest spread and
net interest margin. The difference between the yields on earning assets and the rates paid for
interest bearing liabilities supporting those funds represents the interest spread. Because
non-interest bearing sources of funds such as demand deposits and stockholders’ equity also
support earning assets, the net interest margin exceeds the interest spread.
The following tables show changes in interest income, interest expense and net interest resulting
from changes in volume and rate variances for major categories of earnings assets and interest
bearing liabilities.
| 2009 vs 2008 | ||||||||||||
| (In Thousands) | ||||||||||||
| Net | Due to Change in | |||||||||||
| Interest Earned On: | Change | Volume | Rate | |||||||||
|
Loans
|
$ | (1,409 | ) | $ | 941 | $ | (2,350 | ) | ||||
|
Taxable investment securities
|
(1,165 | ) | — | (1,165 | ) | |||||||
|
Tax-exempt investment securities
|
92 | 249 | (157 | ) | ||||||||
|
Interest bearing deposits
|
— | — | — | |||||||||
|
Federal funds sold
|
(228 | ) | 73 | (301 | ) | |||||||
|
|
||||||||||||
|
Total Interest Earning Assets
|
$ | (2,710 | ) | $ | 1,263 | $ | (3,973 | ) | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Interest Paid On:
|
||||||||||||
|
Savings deposits
|
$ | (1,005 | ) | $ | 189 | $ | (1,194 | ) | ||||
|
Other time deposits
|
(3,215 | ) | 143 | (3,358 | ) | |||||||
|
Other borrowed money
|
(20 | ) | 18 | (38 | ) | |||||||
|
Federal funds purchased and
securties sold under agreement to
repurchase
|
(641 | ) | (71 | ) | (570 | ) | ||||||
|
|
||||||||||||
|
Total Interest Bearing Liabilities
|
$ | (4,881 | ) | $ | 279 | $ | (5,160 | ) | ||||
|
|
||||||||||||
| 2008 vs 2007 | ||||||||||||
| (In Thousands) | ||||||||||||
| Net | Due to Change in | |||||||||||
| Interest Earned On: | Change | Volume | Rate | |||||||||
|
Loans
|
$ | (2,435 | ) | $ | 3,104 | $ | (5,539 | ) | ||||
|
Taxable investment securities
|
782 | 694 | 88 | |||||||||
|
Tax-exempt investment securities
|
61 | 111 | (50 | ) | ||||||||
|
Interest bearing deposits
|
(17 | ) | (17 | ) | — | |||||||
|
Federal funds sold
|
9 | 176 | (167 | ) | ||||||||
|
|
||||||||||||
|
Total Interest Earning Assets
|
$ | (1,600 | ) | $ | 4,068 | $ | (5,668 | ) | ||||
|
|
||||||||||||
|
Interest Paid On:
|
||||||||||||
|
Savings deposits
|
$ | (1,218 | ) | $ | 973 | $ | (2,191 | ) | ||||
|
Other time deposits
|
(1,957 | ) | 69 | (2,026 | ) | |||||||
|
Other borrowed money
|
430 | 460 | (30 | ) | ||||||||
|
Federal funds purchased and
securties sold under agreement to
repurchase
|
(876 | ) | 360 | (1,236 | ) | |||||||
|
|
||||||||||||
|
Total Interest Bearing Liabilities
|
$ | (3,621 | ) | $ | 1,862 | $ | (5,483 | ) | ||||
|
|
||||||||||||
26
Table of Contents
Interest rates began to drop at the end of third quarter 2007 and continued that course
throughout 2008. With the increase in average balances during 2008, the significant increase in
interest was to be expected due to change in volume. The difference in the two comparisons is the
amount of change due to interest rates remaining low through the two periods. What did remain the
same in the two comparisons is that the change in interest expense outpaced the change in interest
income. In the early part of 2007, the Bank employed a strategy to keep time deposit “specials”
to shorter terms (12 to 15 months). As rates continued to decline in 2008 and remain low
throughout 2009, this strategy accomplished its goal of significantly
lowering the cost of time deposits during 2008 and 2009. The strategy currently is to extend the
maturities of “specials” to over 24 months to prepare for rising rates. The other strategy
employed during 2008 and 2009 was to increase core deposits by offering innovative products
focused on customer needs: higher interest rates. In exchange for a high interest-bearing
checking account, customers were asked to utilize services that benefited both the Bank and
themselves. Smaller time deposit rate shoppers had an option to perhaps change their behavior of
banking or those deposits were allowed to run off. The new core deposit products were indeed
embraced by our customers and have helped to reach the deposit portfolio mix the Bank was after.
The improved net interest margin played a large role in offsetting the increased operating costs
of credit.
Allowance for Credit Losses
The Company segregates its Allowance for Loan and Lease Losses (ALLL) into two reserves: The ALLL
and the Allowance for Unfunded Loan Commitments and Letters of Credit (AULC). When combined,
these reserves constitute the total Allowance for Credit Losses (ACL).
The ACL increased during 2009 as compared to 2008 as net charge-offs and past due loans had
increased during 2009. The increase takes into account the high level of nonaccruals and watch
list loans and the extended time period it may involve for resolution. $3.3 million in loans were
charged off in 2009 compared to $2.6 million for 2008 and $1.6 million for 2007. The Company
increased the allowance for credit losses for 2007 as $301 thousand of the increase was the
allowance that came across from the acquisition. The allowance stands at $6.2 million for 2009
compared to $5.7 million for 2008 and $6.1 million for 2007. Provision expense was up $1.8
million for 2009 and $916 thousand for 2008, bringing the total expense to $3.6 million for 2009
compared to $1.8 million for 2008 and $871 thousand for 2007. The AULC remained almost equal to
2008, ending at $156 thousand for 2007, increased to $225 thousand for 2008, and ended 2009 at
$227 thousand. Historical factors along with current economic conditions are part of the
calculation to determine the adequacy of the allowance.
Non-interest Income
Non-interest income of $7.8 million is an increase of $982 thousand over 2008, while 2008 and 2007
were within $94 thousand of each other at $6.5 and $6.4 million, respectively. The largest
fluctuations in non-interest income were impacted with the residential mortgage loan activity and
sale of securities. Both of these were opportunities created from the low interest rate
environment and may not be repeated in 2010.
Non-interest Expense
The increase of $1.8 million in non-interest expense for 2009 as compared to 2008 was mainly the
increased FDIC assessment cost of $1.2 million and the $563 thousand of mortgage servicing rights
amortization. The FDIC is a result of funding the insurance reserve for the increased number of
failed banks the last two years and this cost will continue for the next few years to come. The
mortgage servicing rights amortization came from the same residential mortgage activity as did the
income; however, it was limited to the refinancing portion.
The difference in 2008 and 2007 was for entirely different reasons. Salaries and wages increased
in 2008 as compared to 2007. Full time equivalent numbers of employees for December 2008 compared
to September 2007 increased by seventeen with the addition of new offices. The incentive paid
based on performance for
27
Table of Contents
2008 was lower than 2007 as the overall performance of the Bank was
lower. Employee benefits were lower as the Bank’s cost for medical insurance decreased during
2008 with lower claims and 401(k) expense was lower due to performance. This impact was discussed
earlier.
Federal Income Taxes
Effective tax rates were 27.26%, 26.71%, and 26.78%, for 2009, 2008, and 2007, respectively. The
effect of tax-exempt interest from holding tax-exempt securities and Industrial Development Bonds
(IDBs) was $629, $654, and $650 thousand for 2009, 2008, and 2007, respectively.
Financial Condition
Average earning assets increased $21.4 million during 2009 over 2008 and were higher by $83.2
million as compared to 2007. The main cause of fluctuation was caused by the acquisition and
repositioning the balance sheet. Average interest bearing liabilities increased $17.4 million
over 2008 and $83.5 million from 2007. The increase in 2009 over 2008 was due to the success of
the Reward Checking product to attract funds into the savings deposit bucket. The increase in
2008 over 2007 was from the acquisition and to fund the increase in loans.
Securities
Security balances as of December 31 are summarized below:
| (In Thousands) | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
U.S. Treasury
|
$ | 5,219 | $ | — | $ | — | ||||||
|
U.S. Government agency
|
104,676 | 82,675 | 104,737 | |||||||||
|
Mortgage-backed securities
|
36,848 | 51,826 | 39,367 | |||||||||
|
State and local governments
|
60,538 | 43,160 | 41,467 | |||||||||
|
|
||||||||||||
|
|
$ | 207,281 | $ | 177,661 | $ | 185,571 | ||||||
|
|
||||||||||||
The following table sets forth (dollars in thousands) the maturities of investment securities
as of December 31, 2009 and the weighted average yields of such securities calculated on the
basis of cost and effective yields weighted for the scheduled maturity of each security.
Tax-equivalent adjustments, using a thirty-four percent rate have been made in yields on
obligations of state and political subdivisions. Stocks of domestic corporations have not been
included.
| Maturities | ||||||||||||||||
| (Amounts in Thousands) | ||||||||||||||||
| After One Year | ||||||||||||||||
| Within One Year | Within Five Years | |||||||||||||||
| Amount | Yield | Amount | Yield | |||||||||||||
|
U.S. Treasury
|
$ | — | 0.00 | % | $ | 5,219 | 1.26 | % | ||||||||
|
U.S. Government agency
|
31,037 | 2.90 | % | 63,947 | 3.05 | % | ||||||||||
|
Mortgage-backed securities
|
4,846 | 3.77 | % | 32,002 | 4.91 | % | ||||||||||
|
State and local governments
|
15,095 | 3.93 | % | 18,578 | 3.40 | % | ||||||||||
|
Taxable state and local governments
|
— | 0.00 | % | 2,089 | 3.50 | % | ||||||||||
28
Table of Contents
| Maturities | ||||||||||||||||
| (Amounts in Thousands) | ||||||||||||||||
| After Five Years | ||||||||||||||||
| Within Ten Years | After Ten Years | |||||||||||||||
| Amount | Yield | Amount | Yield | |||||||||||||
|
U.S. Treasury
|
$ | — | 0.00 | % | $ | — | 0.00 | % | ||||||||
|
U.S. Government agency
|
9,692 | 5.33 | % | — | 0.00 | % | ||||||||||
|
Mortgage-backed securities
|
— | 0.00 | % | — | 0.00 | % | ||||||||||
|
State and local governments
|
22,281 | 3.67 | % | 2,495 | 3.78 | % | ||||||||||
|
Taxable state and local governments
|
— | 0.00 | % | — | 0.00 | % | ||||||||||
As of December 31, 2009 the Bank did not hold a large block of any one investment security,
except for U.S. Government agencies. The Bank also holds stock in the Federal Home Loan Bank of
Cincinnati at a cost of $4.2 million. This is required in order to obtain Federal Home Loan Bank
Loans. The Bank also acquired stock in the Federal Home Loan Bank of Indianapolis at a cost of
$231.4 thousand and Banker’s Bancorp, Inc at a cost of $50.8 thousand through its acquisition of
Knisely Bank. There were no borrowings at the time of acquisition associated with Federal Home
Loan Bank of Indianapolis. The value of the stock in Banker’s Bancorp, Inc was written down to
zero at the end of 2009 as the institution was taken over by its regulators. The Bank also owns
stock of Farmer Mac with a carrying value of $27.4 thousand which is required to participate loans
in the program.
Loan Portfolio
The Bank’s various loan portfolios are subject to varying levels of credit risk. Management
mitigates these risks through portfolio diversification and through standardization of lending
policies and procedures.
The following table shows the Bank’s loan portfolio by category of loan as of December
31
st
of each year, including loans held for sale:
| (In Thousands) | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Loans:
|
||||||||||||||||||||
|
Commercial Real Estate
|
$ | 214,849 | $ | 226,761 | $ | 181,340 | $ | 162,363 | $ | 113,283 | ||||||||||
|
Agricultural Real Estate
|
41,045 | 48,607 | 45,518 | 49,564 | 50,777 | |||||||||||||||
|
Consumer Real Estate
|
98,599 | 89,773 | 102,660 | 86,688 | 115,831 | |||||||||||||||
|
Commercial/industrial
|
120,543 | 112,526 | 104,188 | 101,788 | 81,893 | |||||||||||||||
|
Agricultural
|
59,813 | 56,322 | 58,809 | 69,301 | 61,502 | |||||||||||||||
|
Consumer
|
32,581 | 26,469 | 27,796 | 27,388 | 31,935 | |||||||||||||||
|
Industrial Development Bonds
|
2,552 | 7,572 | 9,289 | 7,335 | 9,237 | |||||||||||||||
|
Total Loans
|
$ | 569,982 | $ | 568,030 | $ | 529,600 | $ | 504,427 | $ | 464,458 | ||||||||||
29
Table of Contents
The following table shows the maturity of loans as of December 31, 2009:
| Maturities (In Thousands) | ||||||||||||||||
| After One | ||||||||||||||||
| Within | Year Within | After | ||||||||||||||
| One Year | Five Years | Five Years | Total | |||||||||||||
|
Commercial Real Estate
|
$ | 12,811 | $ | 157,856 | $ | 44,182 | $ | 214,849 | ||||||||
|
Agricultural Real Estate
|
1,410 | 14,450 | 25,185 | $ | 41,045 | |||||||||||
|
Consumer Real Estate
|
8,035 | 23,915 | 66,649 | $ | 98,599 | |||||||||||
|
Commercial and Industrial Loans
|
78,939 | 32,898 | 8,706 | $ | 120,543 | |||||||||||
|
Agricultural
|
43,253 | 13,861 | 2,699 | $ | 59,813 | |||||||||||
|
Consumer, Master Card and Overdrafts
|
5,882 | 19,741 | 6,958 | $ | 32,581 | |||||||||||
|
Industrial Development Bonds
|
862 | 639 | 1,051 | $ | 2,552 | |||||||||||
The following table presents the total of loans due after one year which has 1) predetermined
interest rates and 2) floating or adjustable interest rates:
| (In Thousands) | ||||||||
| Fixed | Variable | |||||||
| Rate | Rate | |||||||
|
Commercial Real Estate
|
$ | 26,398 | $ | 175,640 | ||||
|
Agricultural Real Estate
|
4,337 | 35,298 | ||||||
|
Consumer Real Estate
|
20,069 | 70,495 | ||||||
|
Commercial and Industrial
|
15,924 | 25,680 | ||||||
|
Agricultural
|
9,508 | 7,052 | ||||||
|
Consumer, Overdrafts and other loans
|
26,696 | 3 | ||||||
|
Industrial Development Bonds
|
1,690 | — | ||||||
The following table summarizes the Company’s non-accrual and past due loans as of December 31
for each of the last five years:
| (In Thousands) | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Non-accrual loans
|
$ | 14,054 | $ | 13,575 | $ | 4,918 | $ | 4,254 | $ | 4,663 | ||||||||||
|
Accruing loans past due 90 days or more
|
69 | 2,524 | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 14,123 | $ | 16,099 | $ | 4,918 | $ | 4,254 | $ | 4,663 | ||||||||||
|
|
||||||||||||||||||||
Although loans may be classified as non-performing, some pay on a regular basis, many continue
to pay interest irregularly or at less than original contractual rates. Interest income that
would have been recorded under the original terms of these loans was $2.0 million for 2009, $1.4
for 2008, and $313 thousand for 2007. Any collections of interest on non-accrual loans are
included in interest income when collected unless it is on an impaired loan with a specific
allocation. A collection of interest on an impaired loan with a specific allocation is applied to
the loan balance to decrease the allocation needed. Total interest collections amounted to $290
thousand for 2009, $332 thousand for 2008, and $161 thousand for 2007. $6 thousand of interest
collected in 2009 was applied to reduce the specific allocations, $20 thousand of interest
collected in 2008 was applied to reduce the specific allocations, and $40 thousand of the interest
collected in 2007 was applied to reduce the specific allocations for 2007.
Loans are placed on non-accrual status in the event that the loan is in past due status for more
than 90 days or payment in full of principal and interest is not expected. The $14.1 million of
non-accrual loans as of
30
Table of Contents
December 31, 2009 are secured. The loss of interest of $2 million on
these non-accruals has significantly impacted the yield on loans.
As of December 31, 2009 the Bank has $25.6 million of loans which it considers to be potential
problem loans in that the borrowers are experiencing financial difficulties. These loans are
subject to constant management attention and are reviewed at least monthly.
The amount of the potential problem loans was considered in management’s review of the loan loss
reserve required at December 31, 2009.
In extending credit to families, businesses and governments, banks accept a measure of risk
against which an allowance for possible loan loss is established by way of expense charges to
earnings. This expense, used to enlarge a bank’s allowance for loan losses, is determined by
management based on a detailed monthly review of the risk factors affecting the loan portfolio,
including general economic conditions, changes in the portfolio mix, past due loan-loss experience
and the financial condition of the bank’s borrowers.
As of December 31, 2009, the Bank had loans outstanding to individuals and firms engaged in the
various fields of agriculture in the amount of $59.8 million with an additional $41 million in
agricultural real estate loans. The ratio of this segment of loans to the total loan portfolio is
not considered unusual for a bank engaged in and servicing rural communities.
ALLL is evaluated based on an assessment of the losses inherent in the loan portfolio. This
assessment results in an allowance consisting of two components, allocated and unallocated.
Management considers several different risk assessments in determining ALLL. The allocated
component of ALLL reflects expected losses resulting from an analysis of individual loans,
developed through specific credit allocations for individual loans and historical loss experience
for each loan category. For those loans where the internal credit rating is at or below a
predetermined classification and management can reasonably estimate the loss that will be
sustained based upon collateral, the borrowers operating activity and economic conditions in which
the borrower operates, a specific allocation is made. For those borrowers that are not currently
behind in their payment, but for which management believes based on economic conditions and
operating activities of the borrower, the possibility exists for future collection problems, a
reserve is established. The amount of reserve allocated to each loan portfolio is based on past
loss experiences and the different levels of risk within each loan portfolio. The historical loan
loss portion is determined using a historical loss analysis by loan category.
The unallocated portion of the reserve for loan losses is determined based on management’s
assessment of general economic conditions as well as specific economic factors in the Bank’s
marketing area. This assessment inherently involves a higher degree of uncertainty. It
represents estimated inherent but undetected losses within the portfolio that are probable due to
uncertainties in economic conditions, delays in obtaining information, including unfavorable
information about a borrower’s financial condition and other
current risk factors that may not have yet manifested themselves in the Bank’s historical loss
factors used to determine the allocated component of the allowance.
Actual charge-off of loan balances is based upon periodic evaluations of the loan portfolio by
management. These evaluations consider several factors, including, but not limited to, general
economic conditions, financial condition of the borrower, and collateral.
As presented below, charge-offs increased to $3.3 million for 2009, and the provision was $3.6
million. An additional $301 thousand is showing in the provision line for 2007 which represents
ALLL that was carried over from the acquisition. The Commercial and Industrial portfolio was the
only segment in a net recovery for 2008 and 2007, however it had the largest net charge-off
position in 2009. The negative provision of 2005 was necessary to decrease the allowance because
of the overall decrease of the loan portfolio and the improved asset quality position. The
decrease in the total allowance for credit losses for 2006 was due to the continued improvement in
the asset quality position and reassessment of the risk existent in the
31
Table of Contents
unfunded loan commitments. The improvement in the ratio of net charge offs to average loans
outstanding is evidence of the improved asset quality during that period.
The increase in net charge-offs and past due loans along with the loan growth were the reasons for
the increase in the ALLL for 2007. The decrease in the ALLL for 2008 was due to the large level
of charge-offs taken. With the charge-offs going higher in 2009, it became prudent to increase
the ALLL for 2009. The increase provides for the high level of non-accrual and watch list loans
and recognizes the extended time period with which it has taken to achieve resolution and/or
collection of these loans.
The following table presents a reconciliation of the allowance for credit losses:
| (In Thousands) | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Loans
|
$ | 569,982 | $ | 568,030 | $ | 529,600 | $ | 504,427 | $ | 464,488 | ||||||||||
|
|
||||||||||||||||||||
|
Daily average of outstanding loans
|
$ | 559,261 | $ | 544,859 | $ | 503,296 | $ | 484,663 | $ | 469,326 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Allowance for Loan Losses-Jan. 1
|
$ | 5,496 | $ | 5,922 | $ | 5,594 | $ | 5,388 | $ | 6,814 | ||||||||||
|
Loans Charged off:
|
||||||||||||||||||||
|
Commercial Real Estate
|
— | — | 376 | 214 | 82 | |||||||||||||||
|
Agricultural Real Estate
|
— | — | — | — | — | |||||||||||||||
|
Consumer Real Estate
|
452 | 194 | 252 | 167 | 347 | |||||||||||||||
|
Commercial and Industrial
|
2,235 | 71 | 538 | 282 | 933 | |||||||||||||||
|
Agricultural
|
230 | 1,912 | 42 | — | 12 | |||||||||||||||
|
Consumer & Other Loans
|
371 | 384 | 368 | 322 | 722 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
3,288 | 2,561 | 1,576 | 985 | 2,096 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Loan Recoveries:
|
||||||||||||||||||||
|
Commercial Real Estate
|
— | — | 25 | 2 | — | |||||||||||||||
|
Agricultural Real Estate
|
— | — | — | 214 | 20 | |||||||||||||||
|
Consumer Real Estate
|
11 | 87 | 5 | 24 | 52 | |||||||||||||||
|
Commercial and Industrial
|
72 | 78 | 359 | — | 580 | |||||||||||||||
|
Agricultural
|
6 | 4 | 103 | 74 | 31 | |||||||||||||||
|
Consumer & Other Loans
|
153 | 179 | 240 | 352 | 412 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
242 | 348 | 732 | 666 | 1,095 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net Charge Offs
|
3,047 | 2,213 | 844 | 319 | 1,001 | |||||||||||||||
|
|
||||||||||||||||||||
|
Provision for loan loss
|
3,558 | 1,787 | 871 | 525 | (425 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
Acquisition allowance for loan loss
|
— | — | 301 | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Allowance for Loan & Lease Losses — Dec
|
$ | 6,008 | $ | 5,496 | $ | 5,922 | $ | 5,594 | $ | 5,388 | ||||||||||
|
Allowance for Unfunded Loan Commitments
& Letters of Credit Dec 31
|
$ | 227 | $ | 226 | $ | 156 | $ | 168 | $ | 841 | ||||||||||
|
|
||||||||||||||||||||
|
Total Allowance for Credit Losses — Dec 31
|
$ | 6,235 | $ | 5,722 | $ | 6,078 | $ | 5,762 | $ | 6,229 | ||||||||||
|
|
||||||||||||||||||||
|
Ratio of net charge-offs to average
|
||||||||||||||||||||
|
Loans outstanding
|
0.54 | % | 0.41 | % | 0.17 | % | 0.07 | % | 0.21 | % | ||||||||||
|
|
||||||||||||||||||||
32
Table of Contents
Allocation of ALLL per Loan Category in terms of dollars and percentage of loans in each
category to total loans is as follows:
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | Amount | Amount | ||||||||||||||||||||||||||||||||||||
| (000’s) | % | (000’s) | % | (000’s) | % | (000’s) | % | (000’s) | % | |||||||||||||||||||||||||||||||
|
Balance at End of Period Applicable To:
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial Real Estate
|
$ | 1,810 | 37.69 | % | $ | 1,810 | 39.92 | % | $ | 1,358 | 34.24 | % | $ | 1,221 | 32.19 | % | $ | 756 | 24.39 | % | ||||||||||||||||||||
|
Agricultural Real Estate
|
120 | 7.20 | % | 130 | 8.56 | % | 117 | 8.60 | % | 162 | 9.82 | % | 88 | 10.93 | % | |||||||||||||||||||||||||
|
Consumer Real Estate
|
439 | 17.30 | % | 386 | 15.80 | % | 381 | 19.39 | % | 288 | 17.19 | % | 719 | 24.95 | % | |||||||||||||||||||||||||
|
Commercial & Industrial
|
2,494 | 21.14 | % | 2,278 | 19.81 | % | 1,859 | 19.67 | % | 2,721 | 20.18 | % | 2,246 | 17.63 | % | |||||||||||||||||||||||||
|
Agricultural
|
647 | 10.49 | % | 413 | 9.92 | % | 1,676 | 11.10 | % | 250 | 13.74 | % | 275 | 13.24 | % | |||||||||||||||||||||||||
|
Consumer, Overdrafts and other loans
|
498 | 5.72 | % | 479 | 5.99 | % | 531 | 7.00 | % | 634 | 6.88 | % | 526 | 8.86 | % | |||||||||||||||||||||||||
|
Unallocated
|
— | — | — | 318 | 778 | |||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Allowance for Loan & Lease Losses
|
$ | 6,008 | 100.00 | % | $ | 5,496 | 100.00 | % | $ | 5,922 | 100.00 | % | $ | 5,594 | 100.00 | % | $ | 5,388 | 100.00 | % | ||||||||||||||||||||
|
Off Balance Sheet Commitments
|
$ | 227 | $ | 226 | $ | 156 | $ | 168 | $ | 841 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total Allowance for Credit Losses
|
$ | 6,235 | $ | 5,722 | $ | 6,078 | $ | 5,762 | $ | 6,229 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
Deposits
The amount of outstanding time certificates of deposits and other time deposits in amounts of
$100,000 or more by maturity as of December 31, 2009 are as follows:
| (In Thousands) | ||||||||||||||||
| Over Three | Over Six | |||||||||||||||
| Months | Months Less | Over | ||||||||||||||
| Under | Less than | Than One | One | |||||||||||||
| Three Months | Six Months | Year | Year | |||||||||||||
|
Time Deposits
|
$ | 28,631 | $ | 22,205 | $ | 31,901 | $ | 31,922 | ||||||||
The following table presents the average amount of and average rate paid on each deposit
category:
| (In Thousands) | ||||||||||||||||
| Non-Interest | Interest | Savings | Time | |||||||||||||
| DDAs | DDAs | Accounts | Accounts | |||||||||||||
| December 31, 2009: | ||||||||||||||||
|
Average balance
|
$ | 55,793 | $ | 145,259 | $ | 112,086 | $ | 317,619 | ||||||||
|
Average rate
|
0.00 | % | 1.02 | % | 0.24 | % | 2.91 | % | ||||||||
|
|
||||||||||||||||
| December 31, 2008: | ||||||||||||||||
|
Average balance
|
$ | 52,152 | $ | 130,887 | $ | 109,993 | $ | 314,005 | ||||||||
|
Average rate
|
0.00 | % | 1.46 | % | 0.77 | % | 3.97 | % | ||||||||
|
|
||||||||||||||||
| December 31, 2007: | ||||||||||||||||
|
Average balance
|
$ | 44,331 | $ | 84,674 | $ | 108,864 | $ | 312,515 | ||||||||
|
Average rate
|
0.00 | % | 2.30 | % | 1.87 | % | 4.58% | |||||||||
|
|
||||||||||||||||
33
Table of Contents
Liquidity
Maintaining sufficient funds to meet depositor and borrower needs on a daily basis continues to be
among our management’s top priorities. This is accomplished not only by the immediately liquid
resources of cash, due from banks and federal funds sold, but also by the Bank’s available for sale
securities portfolio. The average aggregate balance of these assets was $216 million for 2009,
compared to $220 million for 2008, and $196 million for 2007. This represented 26.3 percent, 28.0
percent, and 26.9 percent of total average assets, respectively. Of the almost $208 million of
debt securities in the company’s portfolio as of December 31, 2009, $51 million or 24.6 percent of
the portfolio is expected to mature in 2010. Taking into consideration possible calls of the debt
securities, the amount climbs to $104.2 million or 50.3 percent of the portfolio becomes a source
of funds. The availability of the funds may be reduced by the need to utilize securities for
pledging purposes on public deposits. This liquidity provides the opportunity to fund loan growth
without having to over aggressively price deposits.
Historically, the primary source of liquidity has been core deposits that include non-interest
bearing and interest bearing demand deposits, savings, money market accounts and time deposits of
individuals. Core deposits increased as of year end balances in 2009, in all categories. Overall
deposits increased an average of $29.3 million during 2009 compared to 2008’s increase over 2007 of
$53.4 million in average deposits. These represent changes of 4.8 percent and 9.5 percent in
average total deposits, respectively. The Bank also utilized Federal Funds purchased at times
during 2009. The average balance for 2009 was $5 thousand.
Again, historically, the primary use of new funds is placing the funds back into the community
through loans for the acquisition of new homes, consumer products and for business development.
The use of new funds for loans is measured by the loan to deposit ratio. The Company’s average
loan to deposit ratio for 2009 was 85.95 percent, 2008 was 87.81percent, and 2007 was 88.82
percent. The lower ratio in 2009 was due to the success of the deposit gathering function and the
residential mortgage loans being sold in the secondary market. The lower ratio in 2008 is due to
the lower loan to deposit ratio of the acquisition and utilizing excess funds to grow loans. 2007
represented the increased loan growth outpacing deposit growth. The Company’s goal is for this
ratio to be higher with loan growth the driver; however, this was difficult to achieve in 2009 with
borrowers taking a conservative approach to increasing their liabilities.
Short-term debt such as federal funds purchased and securities sold under agreement to repurchase
also provides the Company with liquidity. Short-term debt for both federal funds purchased and
securities sold under agreement to repurchase amounted to $43.3 million at the end of 2009 compared
to $48.2 million at the end of 2008 and to $41.3 million at the end of 2007. Though no federal
funds were purchased at year end, the Bank does have arrangements with correspondent Banks that can
be utilized when necessary. Following is a table showing the daily securities sold under agreement
to repurchase activity for 2009, 2008, and 2007. These accounts are used to provide a sweep
product to the Bank’s commercial customers. The decrease in balances during 2009 was due to
business’ discontinuing the sweep as the cost of fees were higher than the interest benefit on
lower balance accounts. These funds may return in the future when short-term rates increase.
| Daily Securities Sold Under Agreement to Repurchase | ||||||||||||||||||||
| Maximum Amount | Approximate Average | |||||||||||||||||||
| Amount Oustanding | Borrowings Outstanding | in Period | Approximate Weighted | |||||||||||||||||
| at End of Period | Weighted Average Rate | Month End | Outstanding | Average Interest Rate | ||||||||||||||||
| (000’S) | End of Period | (000’s) | (000’s) | For the Period | ||||||||||||||||
|
2009
|
$ | 33,457 | 0.42 | % | $ | 40,530 | $ | 37,696 | 0.48 | % | ||||||||||
|
2008
|
$ | 40,014 | 0.50 | % | $ | 47,644 | $ | 40,113 | 1.96 | % | ||||||||||
|
2007
|
$ | 35,059 | 3.72 | % | $ | 39,205 | $ | 31,513 | 4.64 | % | ||||||||||
34
Table of Contents
Other borrowings are also a source of funds. Other borrowings consist of loans from the
Federal Home Loan Bank of Cincinnati. These funds are then used to provide fixed rate mortgage
loans secured by homes in our community. Borrowings from this source decreased by $11.4 million to
$34.2 million at December 31, 2009. This compares to increased borrowings during 2008 of $13.8
million to $45.6 million at December 31, 2008 and increased borrowings during 2007 of $8.6 million
to $31.8 million to end at December 31, 2007. The increased borrowings in 2008 and 2007 were used
to fund loan growth and were a cheaper source of funds than certificate of deposits. The decreased
borrowings were payoffs of matured notes in 2009. Sufficient funds were available to fund growth
so new advances were not needed in 2009.
Asset/Liability Management
The primary functions of asset/liability management are to assure adequate liquidity and maintain
an appropriate balance between interest earning assets and interest bearing liabilities. It
involves the management of the balance sheet mix, maturities, re-pricing characteristics and
pricing components to provide an adequate and stable net interest margin with an acceptable level
of risk. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and
to enhance consistent growth of net interest income through periods of changing interest rates.
Changes in net income, other than those related to volume arise when interest rates on assets
re-price in a time frame or interest rate environment that is different from that of the re-pricing
period for liabilities. Changes in net interest income also arise from changes in the mix of
interest-earning assets and interest-bearing liabilities.
Historically, the Bank has maintained liquidity through cash flows generated in the normal course
of business, loan repayments, maturing earning assets, the acquisition of new deposits, and
borrowings. The Bank’s asset and liability management program is designed to maximize net interest
income over the long term while taking into consideration both credit and interest rate risk.
Interest rate sensitivity varies with different types of interest-earning assets and
interest-bearing liabilities. Overnight federal funds on which rates change daily and loans that
are tied to the market rate differ considerably from long-term investment securities and fixed rate
loans. Similarly, time deposits over $100,000 and money market certificates are much more interest
rate sensitive than passbook savings accounts. The Bank utilizes shock analysis to examine the
amount of exposure an instant rate change of 100, 200, and 300 basis points in both increasing and
decreasing directions would have on the financials. Acceptable ranges of earnings and equity at
risk are established and decisions are made to maintain those levels based on the shock results.
Impact of Inflation And Changing Prices
The consolidated financial statements and notes thereto presented herein have been prepared in
accordance with generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without considering the
changes in the relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company’s operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are monetary in nature. As a
result, interest rates have a greater impact on the Company’s performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and service.
Contractual Obligations
Contractual Obligations of the Company totaled $405.3 million as of December 31, 2009. Time
deposits represent contractual agreements for certificates of deposits held by its customers. Long
term debt represents the borrowings with the Federal Home Loan Bank and is further defined in Note
4 and 9 of the Consolidated Financial Statements.
35
Table of Contents
| Payment Due by Period (In Thousands) | ||||||||||||||||||||
| Less than | 1-3 | 3-5 | More than | |||||||||||||||||
| Contractual Obligations | Total | 1 year | Years | Years | 5 years | |||||||||||||||
|
Securities sold under agreement to repurchase
|
$ | 43,257 | $ | 43,257 | ||||||||||||||||
|
Time Deposits
|
326,957 | 221,435 | 89,100 | 14,977 | 1,445 | |||||||||||||||
|
Dividends Payable
|
853 | 853 | ||||||||||||||||||
|
Long Term Debt
|
34,199 | 13,325 | 18,274 | 2,600 | ||||||||||||||||
|
Total
|
$ | 405,266 | $ | 278,870 | $ | 107,374 | $ | 17,577 | $ | 1,445 | ||||||||||
Capital Resources
Stockholders’ equity was $93.6 million as of December 31, 2009 compared to $90.5 million at
December 31, 2008. Dividends declared during 2009 were $0.72 per share totaling $3.41 million,
5.88 percent higher than 2008’s declared dividends of $0.68 per share. During 2009, the Company
purchased 28,907 shares and awarded 10,000 restricted shares to 49 employees under its long term
incentive plan. 350 shares were forfeited during 2009. At year end 2009, the Company held
437,551 shares in Treasury stock and 27,775 in unearned stock awards. The Company purchased
171,889 shares throughout 2008. 10,000 shares were awarded to 51 employees in 2008. 245
restricted shares were forfeited during 2008. At December 31, 2008, the Company held 418,294
shares in Treasury stock and 23,575 in unearned stock awards. The Company continues to have a
strong capital base and to maintain regulatory capital ratios that are significantly above the
defined regulatory capital ratios. On December 18, 2009, the Company announced the authorization
by its Board of Directors for the Company’s repurchase, either on the open market, or in privately
negotiated transactions, of up to 200,000 shares of its outstanding common stock commencing
January 01, 2010 and ending December 31, 2010.
At December 31, 2009, The Farmers & Merchants State Bank and Farmers & Merchants Bancorp, Inc had
total risk-based capital ratios of 14.10% and 14.14%, respectively. Core capital to risk-based
asset ratios of 10.85% and 13.19% are well in excess of regulatory guidelines. The Bank’s leverage
ratio of 8.5% is also substantially in excess of regulatory guidelines as is the Company’s at
10.3%.
The Company’s subsidiaries are restricted by regulations from making dividend distributions in
excess of certain prescribed amounts.
| ITEM 6A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risk
Market risk is the exposure to loss resulting from changes in interest rates and equity prices.
The primary market risk to which we are subject is interest rate risk. The majority of our
interest rate risk arises from the instruments, positions and transactions entered into for
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. 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. In the event that our asset/liabilities
36
Table of Contents
management strategies are unsuccessful, our profitability may be adversely affected. The
Company employs a sensitivity analysis utilizing interest rate shocks to help in this analysis.
The shocks presented below assume an immediate change of rate in the percentages and directions
shown:
| Interest Rate Shock on | Interest Rate Shock on | |||||||||||||||||||
| Net Interest Margin | Net Interest Income | |||||||||||||||||||
| Net Interest | % Change | Rate | Rate | Cumulative | % Change | |||||||||||||||
| Margin (Ratio) | to Flat Rate | Direction | changes by | Total ($000) | to Flat Rate | |||||||||||||||
|
2.77%
|
-10.98 | % | Rising | 3.00 | % | 23,220 | -10.43 | % | ||||||||||||
|
|
||||||||||||||||||||
|
2.88%
|
-7.27 | % | Rising | 2.00 | % | 24,127 | -6.93 | % | ||||||||||||
|
|
||||||||||||||||||||
|
2.99%
|
-3.61 | % | Rising | 1.00 | % | 25,028 | -3.46 | % | ||||||||||||
|
|
||||||||||||||||||||
|
3.11%
|
0.00 | % | Flat | 0 | 25,924 | 0.00 | % | |||||||||||||
|
|
||||||||||||||||||||
|
3.20%
|
3.12 | % | Falling | -1.00 | % | 26,874 | 3.66 | % | ||||||||||||
|
|
||||||||||||||||||||
|
3.27%
|
5.42 | % | Falling | -2.00 | % | 27,487 | 6.03 | % | ||||||||||||
|
|
||||||||||||||||||||
|
3.32%
|
7.02 | % | Falling | -3.00 | % | 27,977 | 7.92 | % | ||||||||||||
The shock chart currently shows a tightening in net interest margin over the next twelve months
in a rising rate environment. It shows expansion of net interest margin should rates fall. Both
directional changes are well within risk exposure guidelines. The effect of the rate shocks may be
mitigated to the extent that not all lines of business are directly tied to an external index.
37
Table of Contents
Index To Consolidated Financial Statements
| 39 | ||||
|
|
||||
| 41 | ||||
|
|
||||
| 42 | ||||
|
|
||||
| 43 | ||||
|
|
||||
| 44 | ||||
|
|
||||
| 45 |
38
Table of Contents
|
Plante & Moran, PLLC
SUITE 600 65 E. State St. Columbus, OH 43215 Tel: 614.849.3000 Fax: 614.221.3535 plantemoran.com |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Farmers & Merchants Bancorp, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Farmers & Merchants Bancorp, Inc.
and Subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of
income, stockholders’ equity, and cash flows for each of the years in the three-year period ended
December 31, 2009. We also have audited the Company’s internal control over financial reporting as
of December 31, 2009, based on criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management
is responsible for these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying financial statements. Our responsibility is to express an
opinion on these financial statements and an opinion on the company’s internal control over
financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis
for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
39
Table of Contents
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Farmers & Merchants Bancorp, Inc. and Subsidiaries as of
December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, Farmers & Merchants
Bancorp, Inc. and Subsidiaries maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on criteria established in Internal Control
— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
| /s/ Plante & Moran, PLLC | ||||
| Plante & Moran, PLLC | ||||
February 24, 2010
Columbus, Ohio
Columbus, Ohio
40
Table of Contents
Farmers & Merchants Bancorp, Inc and Subsidiaries
|
|
||||||||
| December 31, 2009 and 2008 | ||||||||
| (000’s Omitted, Except Per Share Data) | ||||||||
| 2009 | 2008 | |||||||
|
Assets
|
||||||||
|
Assets
|
||||||||
|
Cash and due from banks (Note 1)
|
$ | 28,691 | $ | 19,148 | ||||
|
Federal Funds Sold
|
4,957 | 1,739 | ||||||
|
|
||||||||
|
Total cash and cash equivalents
|
33,648 | 20,887 | ||||||
|
Securities — available for sale (Note 3)
|
207,281 | 177,661 | ||||||
|
Other Securities, at cost (Note 3)
|
4,448 | 4,498 | ||||||
|
Loans, net (Note 4)
|
563,911 | 562,336 | ||||||
|
Premises and equipment (Note 5)
|
16,053 | 16,806 | ||||||
|
Goodwill (Note 2)
|
4,074 | 4,074 | ||||||
|
Other assets (Note 2 & 6)
|
24,445 | 19,467 | ||||||
|
|
||||||||
|
Total Assets
|
$ | 853,860 | $ | 805,729 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Deposits
|
||||||||
|
Noninterest-bearing
|
$ | 65,302 | $ | 62,582 | ||||
|
Interest-bearing
|
||||||||
|
NOW accounts
|
160,432 | 136,760 | ||||||
|
Savings
|
123,753 | 122,482 | ||||||
|
Time (Note 7)
|
326,957 | 293,908 | ||||||
|
|
||||||||
|
Total deposits
|
676,444 | 615,732 | ||||||
|
|
||||||||
|
Securities sold under agreement to repurchase (Note 8)
|
43,257 | 48,214 | ||||||
|
FHLB Advances (Note 9)
|
34,199 | 45,635 | ||||||
|
Dividend payable
|
853 | 857 | ||||||
|
Accrued expenses and other liabilities (Note 10)
|
5,523 | 4,744 | ||||||
|
|
||||||||
|
Total liabilities
|
760,276 | 715,182 | ||||||
|
|
||||||||
|
|
||||||||
|
Stockholders’ Equity (Note 14 and 15)
|
||||||||
|
Common stock — No par value - 6,500,000 shares authorized; 5,200,000 shares issued & outstanding
|
12,677 | 12,677 | ||||||
|
Treasury Stock - 437,551 Shares 2009, 418,294 Shares 2008
|
(9,082 | ) | (8,727 | ) | ||||
|
Unearned Stock Awards - 27,775 Shares 2009, 23,575 Shares 2008
|
(573 | ) | (503 | ) | ||||
|
Retained earnings
|
88,048 | 84,864 | ||||||
|
Accumulated other comprehensive income
|
2,514 | 2,236 | ||||||
|
|
||||||||
|
Total stockholders’ equity
|
93,584 | 90,547 | ||||||
|
|
||||||||
|
Total Liabilities and Stockholders’ Equity
|
$ | 853,860 | $ | 805,729 | ||||
|
|
||||||||
See Notes to Consolidated Financial Statements
41
Table of Contents
Farmers & Merchants Bancorp, Inc and Subsidiaries
|
|
||||||||||||
| Years Ended December 31, 2009, 2008 and 2007 | ||||||||||||
| (000’s Omitted, Except Per Share Data) | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Interest Income
|
||||||||||||
|
Loans, including fees
|
$ | 33,585 | $ | 34,994 | $ | 37,429 | ||||||
|
Debt securities:
|
||||||||||||
|
U.S. Treasury and government agency
|
5,496 | 6,634 | 5,813 | |||||||||
|
Municipalities
|
1,788 | 1,697 | 1,635 | |||||||||
|
Dividends
|
200 | 226 | 266 | |||||||||
|
Federal funds sold
|
19 | 273 | 264 | |||||||||
|
Other
|
26 | — | 17 | |||||||||
|
|
||||||||||||
|
Total interest income
|
41,114 | 43,824 | 45,424 | |||||||||
|
Interest Expense
|
||||||||||||
|
Deposits
|
11,007 | 15,227 | 18,402 | |||||||||
|
Federal funds purchased and securities sold under agreements to repurchase
|
486 | 1,127 | 2,003 | |||||||||
|
Borrowed funds
|
1,727 | 1,747 | 1,317 | |||||||||
|
|
||||||||||||
|
Total interest expense
|
13,220 | 18,101 | 21,722 | |||||||||
|
|
||||||||||||
|
Net Interest Income
- Before provision for loan losses
|
27,894 | 25,723 | 23,702 | |||||||||
|
Provision for Loan Losses
(Note 4)
|
3,558 | 1,787 | 871 | |||||||||
|
|
||||||||||||
|
Net Interest Income After Provision
|
||||||||||||
|
For Loan Losses
|
24,336 | 23,936 | 22,831 | |||||||||
|
Noninterest Income
|
||||||||||||
|
Customer service fees
|
3,276 | 3,436 | 3,201 | |||||||||
|
Other service charges and fees
|
2,541 | 2,322 | 2,569 | |||||||||
|
Net gain on sale of loans
|
1,776 | 708 | 617 | |||||||||
|
Net gain on sale of securities
|
230 | 15 | — | |||||||||
|
|
||||||||||||
|
Total noninterest income
|
7,823 | 6,481 | 6,387 | |||||||||
|
Noninterest Expenses
|
||||||||||||
|
Salaries and Wages
|
8,601 | 8,715 | 8,084 | |||||||||
|
Employee benefits (Note 11)
|
3,018 | 3,018 | 2,804 | |||||||||
|
Occupancy expense
|
1,113 | 1,029 | 564 | |||||||||
|
Furniture and equipment
|
1,504 | 1,443 | 1,321 | |||||||||
|
Data processing
|
1,136 | 1,234 | 1,019 | |||||||||
|
Franchise taxes
|
914 | 863 | 873 | |||||||||
|
FDIC Assessment
|
1,306 | 151 | 67 | |||||||||
|
Mortgage servicing rights amortization (Note 6)
|
933 | 370 | 257 | |||||||||
|
Other general and administrative
|
4,554 | 4,421 | 3,667 | |||||||||
|
|
||||||||||||
|
Total other operating expenses
|
23,079 | 21,244 | 18,656 | |||||||||
|
|
||||||||||||
|
Income Before Income Taxes
|
9,080 | 9,173 | 10,562 | |||||||||
|
Income Taxes (Note 10)
|
2,475 | 2,450 | 2,828 | |||||||||
|
|
||||||||||||
|
Net Income
|
$ | 6,605 | $ | 6,723 | $ | 7,734 | ||||||
|
|
||||||||||||
|
Earnings Per Share — Basic and Diluted
|
$ | 1.39 | $ | 1.39 | $ | 1.52 | ||||||
|
|
||||||||||||
|
Weighted Average Shares Outstanding
|
4,741,392 | 4,846,310 | 5,097,636 | |||||||||
|
|
||||||||||||
See Notes to Consolidated Financial Statements
42
Table of Contents
Farmers & Merchants Bancorp, Inc. and Subsidiaries
| Consolidated Statement of Changes in Shareholders Equity | ||||||||||||||||||||||||||||
| For the Years Ended December 31, 2009, 2008, and 2007 | ||||||||||||||||||||||||||||
| (000’s Omitted, Except per Share Data) | ||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Shares of | Unearned | Other | Total | |||||||||||||||||||||||||
| Common | Common | Treasury | Stock | Retained | Comprehensive | Stockholders’ | ||||||||||||||||||||||
| Stock | Stock | Stock | Awards | Earnings | Income (Loss) | Equity | ||||||||||||||||||||||
|
Balance
- January 01, 2007
|
5,163,820 | 12,677 | (816 | ) | (244 | ) | 77,089 | (974 | ) | 87,732 | ||||||||||||||||||
|
Comprehensive income (Note 1):
|
||||||||||||||||||||||||||||
|
Net income
|
7,734 | 7,734 | ||||||||||||||||||||||||||
|
Change in net unrealized gain on securities available for
sale, net of reclassification adjustment and tax effects
|
1,854 | 1,854 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total comprehensive income
|
9,588 | |||||||||||||||||||||||||||
|
Purchase of Treasury Stock
|
(228,000 | ) | (4,710 | ) | (4,710 | ) | ||||||||||||||||||||||
|
Shares issued for vested stock awards
|
13 | 13 | ||||||||||||||||||||||||||
|
Grant of Restricted Stock Awards-8760 shares
|
||||||||||||||||||||||||||||
|
(Net of Forfeiture — 740)
|
8,020 | 160 | (160 | ) | — | |||||||||||||||||||||||
|
Cash dividends declared — $0.64 per share
|
(3,248 | ) | (3,248 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance
- December 31, 2007
|
4,943,840 | 12,677 | (5,366 | ) | (391 | ) | 81,575 | 880 | 89,375 | |||||||||||||||||||
|
Cumulative effect of adoption of EITF 06-4 for post
retirement liability
|
(152 | ) | (152 | ) | ||||||||||||||||||||||||
|
Comprehensive income (Note 1):
|
||||||||||||||||||||||||||||
|
Net income
|
6,723 | 6,723 | ||||||||||||||||||||||||||
|
Change in net unrealized gain on securities
sale, net of reclassification adjustment and tax
|
1,356 | 1,356 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total comprehensive income
|
8,079 | |||||||||||||||||||||||||||
|
Purchase of Treasury Stock
|
(171,889 | ) | (3,576 | ) | (3,576 | ) | ||||||||||||||||||||||
|
Shares issued for vested stock awards
|
98 | 98 | ||||||||||||||||||||||||||
|
Grant of Restricted Stock Awards-10,000 shares
|
||||||||||||||||||||||||||||
|
(Net of Forfeiture — 245)
|
9,755 | 215 | (210 | ) | 5 | |||||||||||||||||||||||
|
Cash dividends declared - $0.68 per share
|
(3,282 | ) | (3,282 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance
- December 31, 2008
|
4,781,706 | $ | 12,677 | $ | (8,727 | ) | $ | (503 | ) | $ | 84,864 | $ | 2,236 | $ | 90,547 | |||||||||||||
|
Comprehensive income (Note 1):
|
||||||||||||||||||||||||||||
|
Net income
|
6,605 | 6,605 | ||||||||||||||||||||||||||
|
Change in net unrealized gain on securities
sale, net of reclassification adjustment and tax
|
278 | 278 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total comprehensive income
|
6,883 | |||||||||||||||||||||||||||
|
Purchase of Treasury Stock
|
(28,907 | ) | (555 | ) | (555 | ) | ||||||||||||||||||||||
|
Shares issued for vested stock awards
|
— | |||||||||||||||||||||||||||
|
Grant of Restricted Stock Awards-10,000 shares
|
123 | (8 | ) | 115 | ||||||||||||||||||||||||
|
(Net of Forfeiture — 350)
|
9,650 | 200 | (193 | ) | 7 | |||||||||||||||||||||||
|
Cash dividends declared - $0.72 per share
|
(3,413 | ) | (3,413 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance
- December 31, 2009
|
4,762,449 | $ | 12,677 | $ | (9,082 | ) | $ | (573 | ) | $ | 88,048 | $ | 2,514 | $ | 93,584 | |||||||||||||
|
|
||||||||||||||||||||||||||||
See notes to Consolidated Financial Statements
43
Table of Contents
Farmers & Merchants Bancorp, Inc and Subsidiaries
|
Years Ended December 31, 2009, 2008 and 2007 (000’s Omitted) |
||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Cash Flows from Operating Activities
|
||||||||||||
|
Net income
|
$ | 6,605 | $ | 6,723 | $ | 7,734 | ||||||
|
Adjustments to reconcile net income to net cash from operating activities:
|
||||||||||||
|
Depreciation
|
1,171 | 1,132 | 1,059 | |||||||||
|
Amortization of servicing rights
|
933 | 370 | 257 | |||||||||
|
Amortization of Core Deposit Intangible
|
157 | 157 | — | |||||||||
|
Provision for loan loss
|
3,558 | 1,787 | 871 | |||||||||
|
Accretion and amortization of securities
|
809 | 300 | 131 | |||||||||
|
Deferred income taxes (benefit)
|
142 | (39 | ) | (170 | ) | |||||||
|
(Gain) loss on sale of other assets
|
75 | 194 | 4 | |||||||||
|
Realized (gain) loss on sales of securities, net
|
(230 | ) | (15 | ) | — | |||||||
|
Change in other assets and other liabilities, net
|
(6,026 | ) | (1,943 | ) | (1,343 | ) | ||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
7,194 | 8,666 | 8,543 | |||||||||
|
Cash Flows from Investing Activities
|
||||||||||||
|
Activity in securities:
|
||||||||||||
|
Sales
|
16,333 | 25 | 215 | |||||||||
|
Maturities, prepayments and calls
|
78,292 | 75,084 | 80,876 | |||||||||
|
Purchases
|
(124,354 | ) | (65,580 | ) | (95,804 | ) | ||||||
|
Loan and lease originations and principal collections, net
|
(5,133 | ) | (41,266 | ) | 6,620 | |||||||
|
Proceeds from sales of assets
|
494 | 1,102 | — | |||||||||
|
Additions to premises and equipment
|
(412 | ) | (1,081 | ) | (2,675 | ) | ||||||
|
Purchase of Bank Owned Life Insurance
|
— | — | (3,000 | ) | ||||||||
|
Net cash paid for acquisition
|
— | — | (2,400 | ) | ||||||||
|
|
||||||||||||
|
Net cash used in investing activities
|
(34,780 | ) | (31,716 | ) | (16,168 | ) | ||||||
|
Cash Flows from Financing Activities
|
||||||||||||
|
Net increase (decrease) in deposits
|
60,712 | (18,861 | ) | 12,108 | ||||||||
|
Net change in federal funds purchased and securities
|
||||||||||||
|
sold under agreements to repurchase
|
(4,957 | ) | 6,885 | 6,511 | ||||||||
|
Proceeds from issuance of long-term debt
|
— | 19,600 | 15,000 | |||||||||
|
Repayment of long-term debt
|
(11,436 | ) | (5,781 | ) | (6,417 | ) | ||||||
|
Purchase of Treasury Stock
|
(555 | ) | (3,576 | ) | (4,710 | ) | ||||||
|
Cash dividends paid on common stock
|
(3,417 | ) | (3,217 | ) | (3,227 | ) | ||||||
|
|
||||||||||||
|
Net cash provided (used) by financing activities
|
40,347 | (4,950 | ) | 19,265 | ||||||||
|
|
||||||||||||
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
12,761 | (28,000 | ) | 11,640 | ||||||||
|
|
||||||||||||
|
Cash and Cash Equivalents
- Beginning of Year
|
20,887 | 48,887 | 37,247 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash and Cash Equivalents
- End of Year
|
$ | 33,648 | $ | 20,887 | $ | 48,887 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Supplemental Information
|
||||||||||||
|
Cash paid during the year for:
|
||||||||||||
|
Interest
|
$ | 13,275 | $ | 18,756 | $ | 21,721 | ||||||
|
|
||||||||||||
|
Income taxes
|
$ | 2,725 | $ | 2,445 | $ | 3,120 | ||||||
|
|
||||||||||||
See Notes to Consolidated Financial Statements
44
Table of Contents
Farmers & Merchants Bancorp, Inc and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
December 31, 2009, 2008, and 2007
| Nature of Operations | |||
| The Farmers & Merchants Bancorp, Inc. (the Company) through its bank subsidiary, The Farmers & Merchants State Bank (the Bank) provides a variety of financial services to individuals and small businesses through its offices in Northwest Ohio and Northeast Indiana. | |||
| Consolidation Policy | |||
| The consolidated financial statements include the accounts of Farmers & Merchants Bancorp, Inc. and its wholly-owned subsidiaries, The Farmers & Merchants State Bank (the Bank), a commercial banking institution, and the Farmers & Merchants Life Insurance Company, a reinsurance company for life, accident and health insurance for the Bank’s consumer credits. The Farmers & Merchants Life Insurance Company was dissolved during 2007 with the Bank no longer offering the insurance product to its non-residential real estate consumers. The Bank continues to offer credit insurance related products to our residential real estate customers; however, it is through an unrelated third party vendor. All significant inter-company balances and transactions have been eliminated. | |||
| Use of Estimates | |||
| The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of mortgage servicing rights. Actual results could differ from those estimates. | |||
| The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral. | |||
| The Bank’s loans are generally secured by specific items of collateral including real property, consumer assets, and business assets. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on local economic conditions in the agricultural industry. | |||
| While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated. | |||
| Cash and Cash Equivalents | |||
| For purposes of the consolidated statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. This includes cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one day periods. |
45
Table of Contents
Farmers & Merchants Bancorp, Inc and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
December 31, 2009, 2008, and 2007
Note 1 — Summary of Significant Accounting Policies (Continued)
| Restrictions on Cash and Amounts Due from Banks | |||
| The Bank is required to maintain average balances on hand with the Federal Reserve Bank. The aggregate reserve was $4.0 million for December 31, 2009 and it was $3.0 million for December 31, 2008. | |||
| The Company and its subsidiaries maintain cash balances with high quality credit institutions. At times such balances may be in excess of the federally insured limits. | |||
| Securities | |||
| Debt securities are classified as available-for-sale. Securities available-for-sale are carried at fair value with unrealized gains and losses reported in other comprehensive income. Realized gains and losses on securities available for sale are included in other income (expense) and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Gains and losses on sales of securities are determined on the specific-identification method. | |||
| Declines in the fair value of securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The related write-downs are included in earnings as realized losses. | |||
| Other Securities | |||
| Other Securities consists of Federal Home Loan Bank of Cincinnati and Indianapolis stock, Bankers Bank stock, and Farmer Mac stock. These stocks are carried at cost and are held to enable the Bank to conduct business with the entities. The Federal Home Loan Banks sell and purchase their stock at par; therefore cost approximates market value. The Federal Home Loan Bank of Cincinnati stock is held as collateral security for all indebtedness of the Bank to the Federal Home Loan Bank. | |||
| Loans | |||
|
Loans that management has the intent and ability to hold for the foreseeable future or
until maturity or pay-off are reported at the amount of unpaid principal, reduced by
unearned discounts and deferred loan fees and costs, as well as, by the allowance for
loan losses. Interest income is accrued on a daily basis based on the principal
outstanding.
Generally, a loan is classified as nonaccrual and the accrual of interest income is generally discontinued when a loan becomes ninety days past due as to principal or interest and these loans are placed on a “cash basis” for purposes of income recognition. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal and accrued interest, and the loan is in the process of collection. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest receivable is charged against income. |
|||
| Loan origination and commitment fees and certain direct loan origination costs are deferred and amortized as a net adjustment to the related loan’s yield. The Bank is generally amortizing these costs over the contractual life of such loans. |
46
Table of Contents
Farmers & Merchants Bancorp, Inc and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
December 31, 2009, 2008, and 2007
Note 1 — Summary of Significant Accounting Policies (Continued)
| Allowance for Loan Losses | |||
| The allowance for loan losses is established through a provision for loan losses charged to income. Loans deemed to be uncollectable and changes in the allowance relating to loans are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. | |||
| The allowance for loan losses is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans in light of historical experiences, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are subject to revision as more information becomes available. | |||
| The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. The unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. | |||
|
A loan is considered impaired when, based on current information and events, it is
probable that the Bank will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement. Factors
considered by management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including
length of the delay, the reasons for the delay, the borrower’s prior payment record,
and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and agricultural loans by
either the present value of expected future cash flows discounted at the loan’s
effective interest rate, the loan’s obtainable market price, or the fair value of the
collateral if the loan is collateral dependent.
Large groups of homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer loans for impairment disclosures. |
|||
| Loans Held for Sale | |||
| Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized in a valuation allowance by charges to income. |
47
Table of Contents
Farmers & Merchants Bancorp, Inc and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
December 31, 2009, 2008, and 2007
Note 1 — Summary of Significant Accounting Policies (Continued)
| Servicing Assets | |||
| Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into noninterest expense in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. Fees received for servicing loans owned by investors are based on a percentage of the outstanding monthly principal balance of such loans and are included in operating income as loan payments are received. Costs of servicing loans are charged to expense as incurred. | |||
| Goodwill and other Intangible Assets | |||
| Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified. | |||
| Other intangible assets consist of core deposit intangible assets arising from business acquisitions. They are initially measured at fair value and then are amortized on a straight line method over their estimated useful lives. | |||
| Off Balance Sheet Instruments | |||
| In the ordinary course of business, the Bank has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded. | |||
| Bank Premises and Equipment | |||
| Land is carried at cost. Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is based on the estimated useful lives of the various properties and is computed using straight line and accelerated methods. Costs for maintenance and repairs are charged to operations as incurred. Gains and losses on dispositions are included in current operations. | |||
| Federal Income Tax | |||
| Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the various temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. | |||
| Earnings Per Share | |||
| Basic earnings per share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Basic and dilutive earnings per share are the same as the restricted stock grants are primarily anti-dilutive. |
48
Table of Contents
Farmers & Merchants Bancorp, Inc and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
December 31, 2009, 2008, and 2007
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and
losses be included in net income. Certain changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, are reported as a separate
component of the equity section of the balance sheet. Such items, along with net income,
are components of comprehensive income.
The components of other comprehensive income and related tax effects are as follows:
| (In Thousands) | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Net Unrealized gain on
available-for-sale securities
|
$ | 701 | $ | 2,055 | $ | 2,810 | ||||||
|
Reclassification adjustment for gain on sale of
available-for-sale securities
|
$ | (281 | ) | $ | — | $ | — | |||||
|
Net unrealized gains
|
$ | 420 | $ | 2,055 | $ | 2,810 | ||||||
|
Tax Effect
|
$ | 142 | $ | 699 | $ | 956 | ||||||
|
Other comprehensive income
|
$ | 278 | $ | 1,356 | $ | 1,854 | ||||||
Other securities, not classified as available for sale, had a realized loss of $51
thousand for 2009 and a $15 thousand gain in 2008. Those amounts are not included in the
above table.
Post Retirement Liability
In September 2006, the accounting for deferred compensation and postretirement benefit
aspects of endorsement split-dollar life insurance arrangements was changed. Effective in
2008, liability and related compensation costs are recognized for endorsement
split-dollar life insurance policies that provide a benefit to an employee extending to
postretirement periods. This accounting pronouncement was applied as a change in
accounting principle through a cumulative-effect adjustment to retained earnings as of
January 01, 2008 approximating $152,000.
Reclassification
Certain amounts in the 2008 and 2007 consolidated financial statements have been
reclassified to conform with the 2009 presentation.
On December 31, 2007, the Bank acquired 100% of the outstanding shares of Knisely
Bank. Knisely Bank was merged with and into the Bank, and the Knisely Bank offices now
operate as branches of the
Bank. The merger enabled the Company to increase its market share in a community
contiguous to its existing markets.
The aggregate acquisition cost of Knisely Bank was $10.4 million, which was all paid in
cash. Direct acquisition costs approximated $222 thousand. The acquisition cost in
excess of the net assets and identifiable intangible assets acquired, has been recorded
as goodwill of $4 million. Goodwill that is deductible for tax purposes is approximately
$3.85 million.
49
Table of Contents
Farmers & Merchants Bancorp, Inc and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
December 31, 2009, 2008, and 2007
In connection with the acquisition, the Company recognized core deposit intangible
assets of $1.1 million, which are being amortized on a straight line basis over the
estimated remaining economic useful life of the deposits of 7 years. There was no
amortization of the core deposit intangibles for the year ended December 31, 2007, but
$157,000 was amortized in 2008 and 2009. Amortization of the core deposit intangibles
remaining is scheduled to be as follows:
| (In Thousands) | ||||
|
2010
|
157 | |||
|
2011
|
157 | |||
|
2012
|
157 | |||
|
2013
|
157 | |||
|
2014
|
158 | |||
|
|
||||
|
|
$ | 786 | ||
|
|
||||
The amortized cost and fair value of securities, with gross unrealized gains and
losses, follows:
| (In Thousands) | ||||||||||||||||
| 2009 | ||||||||||||||||
| Gross | Gross | Estimated | ||||||||||||||
| Amortized | Unrealized | Unrealized | Market | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
|
Available-for-Sale:
|
||||||||||||||||
|
U.S. Treasury
|
$ | 5,244 | $ | — | $ | (25 | ) | $ | 5,219 | |||||||
|
U.S. Government agency
|
103,311 | 1,501 | (136 | ) | 104,676 | |||||||||||
|
Mortgage-backed securities
|
35,209 | 1,639 | — | 36,848 | ||||||||||||
|
State and local governments
|
59,708 | 1,009 | (179 | ) | 60,538 | |||||||||||
|
|
||||||||||||||||
|
|
$ | 203,472 | $ | 4,149 | $ | (340 | ) | $ | 207,281 | |||||||
|
|
||||||||||||||||
| (In Thousands) | ||||||||||||||||
| 2008 | ||||||||||||||||
| Gross | Gross | Estimated | ||||||||||||||
| Amortized | Unrealized | Unrealized | Market | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
|
Available-for-Sale:
|
||||||||||||||||
|
U.S. Treasury
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
U.S. Government agency
|
80,477 | 2,198 | — | 82,675 | ||||||||||||
|
Mortgage-backed securities
|
50,831 | 1,052 | 57 | 51,826 | ||||||||||||
|
State and local governments
|
42,964 | 561 | 365 | 43,160 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 174,272 | $ | 3,811 | $ | 422 | $ | 177,661 | ||||||||
|
|
||||||||||||||||
50
Table of Contents
Farmers & Merchants Bancorp, Inc and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
December 31, 2009, 2008, and 2007
Note 3 — Securities (Continued)
Information pertaining to securities with gross unrealized losses at December 31,
2009 and 2008, aggregated by investment category and length of time that
individual securities have been in a continuous loss position follows:
| 2009 | ||||||||||||||||
| (In Thousands) | (In Thousands) | |||||||||||||||
| Less Than Twelve Months | Twelve Months & Over | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Unrealized | Fair | Unrealized | Fair | |||||||||||||
| Losses | Value | Losses | Value | |||||||||||||
|
U.S. Treasury
|
$ | 25 | $ | 5,219 | $ | — | $ | — | ||||||||
|
U.S. Government agency
|
136 | 14,355 | — | — | ||||||||||||
|
Mortgage-backed securities
|
— | — | — | — | ||||||||||||
|
State and local governments
|
179 | 15,754 | — | — | ||||||||||||
| 2008 | ||||||||||||||||
| (In Thousands) | (In Thousands) | |||||||||||||||
| Less Than Twelve Months | Twelve Months & Over | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Unrealized | Fair | Unrealized | Fair | |||||||||||||
| Losses | Value | Losses | Value | |||||||||||||
|
U.S. Treasury
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
U.S. Government agency
|
— | — | — | — | ||||||||||||
|
Mortgage-backed securities
|
46 | 4,390 | 11 | 1,822 | ||||||||||||
|
State and local governments
|
326 | 11,899 | 39 | 482 | ||||||||||||
Unrealized losses on securities have not been recognized into income because the
issuers’ bonds are of high credit quality, the Bank has the intent and ability to hold
the securities for the foreseeable future, and the decline in fair value is primarily due
to increased market interest rates. The fair value is expected to recover as the bonds
approach the maturity date.
The gross realized gains and losses for the years ended December 31, are presented below:
| (In Thousands) | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Gross realized gains
|
$ | 281 | $ | 15 | $ | — | ||||||
|
Gross realized losses
|
(51 | ) | — | — | ||||||||
|
|
||||||||||||
|
|
$ | — | $ | — | ||||||||
|
Net Realized Gains
|
$ | 230 | $ | 15 | $ | — | ||||||
|
|
||||||||||||
|
Tax expense related to net realized gains
|
$ | 78 | $ | 5 | $ | — | ||||||
|
|
||||||||||||
51
Table of Contents
Farmers & Merchants Bancorp, Inc and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
December 31, 2009, 2008, and 2007
The amortized cost and fair value of debt securities at December 31, 2009, by
contractual maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
| (In Thousands) | ||||||||
| Amortized | ||||||||
| Cost | Fair Value | |||||||
|
One year or less
|
$ | 13,335 | $ | 13,631 | ||||
|
After one year through five years
|
80,554 | 81,402 | ||||||
|
After five years through ten years
|
56,302 | 57,221 | ||||||
|
After ten years
|
18,072 | 18,179 | ||||||
|
|
||||||||
|
Subtotal
|
$ | 168,263 | $ | 170,433 | ||||
|
Mortgage Backed Securities
|
35,209 | 36,848 | ||||||
|
|
||||||||
|
Total
|
$ | 203,472 | $ | 207,281 | ||||
|
|
||||||||
Investments with a carrying value and fair value of $167.3 million at December 31,
2009 and $155.9 million at December 31, 2008 were pledged to secure public deposits and
securities sold under repurchase agreements.
Other securities include Federal Home Loan Bank of Cincinnati and Indianapolis stock,
Bankers Bank stock, and Farmer Mac stock. Bankers Bank was written down to a carrying
value of zero in December 2009 at a loss of $51 thousand.
Loans at December 31 are summarized below:
| (In Thousands) | ||||||||
| Loans: | 2009 | 2008 | ||||||
|
Commercial Real Estate
|
$ | 214,849 | $ | 226,761 | ||||
|
Agricultural Real Estate
|
41,045 | 48,607 | ||||||
|
Consumer Real Estate
|
98,599 | 89,773 | ||||||
|
Commercial and industrial
|
120,543 | 112,526 | ||||||
|
Agricultural
|
59,813 | 56,322 | ||||||
|
Consumer, Overdrafts and other loans
|
32,581 | 26,469 | ||||||
|
Industrial Development Bonds
|
2,552 | 7,572 | ||||||
|
|
||||||||
|
|
569,982 | 568,030 | ||||||
|
Less: Deferred loan fees and costs
|
(63 | ) | (198 | ) | ||||
|
|
||||||||
|
|
569,919 | 567,832 | ||||||
|
Less: Allowance for loan losses
|
(6,008 | ) | (5,496 | ) | ||||
|
|
||||||||
|
Loans — Net
|
$ | 563,911 | $ | 562,336 | ||||
|
|
||||||||
52
Table of Contents
Farmers & Merchants Bancorp, Inc and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
December 31, 2009, 2008, and 2007
Note 4 — Loans (Continued)
The following is a maturity schedule by major category of loans:
| (In Thousands) | ||||||||||||
| Principal Payments Due Within | ||||||||||||
| Two to | After | |||||||||||
| One Year | Five Years | Five Years | ||||||||||
|
Commercial Real Estate
|
$ | 12,811 | $ | 157,856 | $ | 44,182 | ||||||
|
Agricultural Real Estate
|
1,410 | 14,450 | 25,185 | |||||||||
|
Consumer Real Estate
|
8,035 | 23,915 | 66,649 | |||||||||
|
Commercial and industrial loans
|
78,939 | 32,898 | 8,706 | |||||||||
|
Agricultural
|
43,253 | 13,861 | 2,699 | |||||||||
|
Consumer, Master Card and Overdrafts
|
5,882 | 19,741 | 6,958 | |||||||||
|
Industrial Development Bonds
|
862 | 639 | 1,051 | |||||||||
The distribution of fixed rate loans and variable rate loans by major loan category
is as follows as of December 31, 2009:
| (In Thousands) | ||||||||
| Fixed | Variable | |||||||
| Rate | Rate | |||||||
|
Commercial Real Estate
|
$ | 31,218 | $ | 183,631 | ||||
|
Agricultural Real Estate
|
4,902 | 36,143 | ||||||
|
Consumer Real Estate
|
23,153 | 75,446 | ||||||
|
Commercial and industrial loans
|
26,412 | 94,131 | ||||||
|
Agricultural
|
14,538 | 45,275 | ||||||
|
Consumer, Master Card and Overdrafts
|
27,677 | 4,904 | ||||||
|
Industrial Development Bonds
|
2,552 | — | ||||||
As of December 31, 2009, one to four family residential mortgage loans amounting to
$73.1 million and $72.1 million, respectively, have been pledged as security for loans
the Bank has received from the Federal Home Loan Bank.
The following is an analysis of the allowance for credit losses:
| (In Thousands) | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Allowance for Loan Losses
|
||||||||||||
|
Balance at beginning of year
|
$ | 5,496 | $ | 5,922 | $ | 5,594 | ||||||
|
Provision for loan loss
|
3,558 | 1,787 | 871 | |||||||||
|
Loans charged off
|
(3,288 | ) | (2,561 | ) | (1,576 | ) | ||||||
|
Recoveries
|
242 | 348 | 732 | |||||||||
|
Acquisition allowance for loan loss
|
— | — | 301 | |||||||||
|
|
||||||||||||
|
Allowance for Loan & Leases Losses
|
$ | 6,008 | $ | 5,496 | $ | 5,922 | ||||||
|
|
||||||||||||
|
Allowance for Unfunded Loan Commitments &
Letters of Credit
|
$ | 227 | $ | 226 | $ | 156 | ||||||
|
|
||||||||||||
|
Total Allowance for Credit Losses
|
$ | 6,235 | $ | 5,722 | $ | 6,078 | ||||||
|
|
||||||||||||
53
Table of Contents
Farmers & Merchants Bancorp, Inc and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
December 31, 2009, 2008, and 2007
The Company segregates its Allowance for Loan and Lease Losses (ALLL) into two
reserves: The ALLL and the Allowance for Unfunded Loan Commitments and Letters of Credit
(AULC). When combined, these reserves constitute the total Allowance for Credit Losses
(ACL).
The AULC is reported within other liabilities on the balance sheet while the ALLL is
netted within the loans, net asset line. The ACL presented above represents the full
amount of reserves available to absorb possible credit losses.
The following is a summary of information pertaining to impaired loans:
| (In Thousands) | ||||||||
| 2009 | 2008 | |||||||
|
Impaired loans without a valuation allowance
|
$ | 10,804 | $ | 9,582 | ||||
|
Impaired loans with a valuation
allowance
|
1,385 | 2,095 | ||||||
|
|
||||||||
|
Total impaired loans
|
$ | 12,189 | $ | 11,677 | ||||
|
|
||||||||
|
Valuation allowance related to
impaired loans
|
$ | 353 | $ | 466 | ||||
|
Total non-accrual loans
|
$ | 14,054 | $ | 13,575 | ||||
|
Total loans past-due ninety days or more and still accruing
|
$ | 69 | $ | 2,524 | ||||
| (In Thousands) | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Average investment in
impaired loans
|
$ | 13,643 | $ | 10,767 | $ | 6,975 | ||||||
|
|
||||||||||||
|
Interest income recognized
on impaired loans
|
$ | 290 | $ | 341 | $ | 592 | ||||||
|
|
||||||||||||
|
Interest income recognized on
a cash basis on impaired loans
|
$ | 290 | $ | 332 | $ | 161 | ||||||
|
|
||||||||||||
No additional funds are committed to be advanced in connection with impaired loans.
The major categories of banking premises and equipment and accumulated depreciation at
December 31 are summarized below:
| (In Thousands) | ||||||||
| 2009 | 2008 | |||||||
|
Land
|
$ | 3,510 | $ | 3,510 | ||||
|
Buildings (useful life 15-39 years)
|
17,200 | 17,133 | ||||||
|
Furnishings (useful life 3-15 years)
|
9,435 | 10,226 | ||||||
|
|
||||||||
|
|
30,145 | 30,869 | ||||||
|
Less: Accumulated depreciation
|
(14,092 | ) | (14,063 | ) | ||||
|
|
||||||||
|
Premises and Equipment (Net)
|
$ | 16,053 | $ | 16,806 | ||||
|
|
||||||||
54
Table of Contents
Farmers & Merchants Bancorp, Inc and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
December 31, 2009, 2008, and 2007
Loans serviced for others are not included in the accompanying consolidated balance
sheets. The unpaid principal balances of loans serviced for others were $267 and $251
million at December 31, 2009 and 2008, respectively.
The balance of capitalized servicing rights included in other assets at December 31, 2009
and 2008, was $2.2 and $2.0 million, respectively. The capitalized addition of servicing
rights is included in net gain on sale of loans on the consolidated statement of income.
The capitalized additions are as shown in the table following.
The fair market value of the capitalized servicing rights as of December 31, 2009 and
2008 was $3.0 million and $2.7 million, respectively. The valuations were completed by
stratifying the loans into like groups based on loan type, term and new versus seasoned.
Impairment was measured by estimating the fair value of each stratum, taking into
consideration an estimated level of prepayment based upon current market conditions. An
average constant prepayment rate of 11.3 and 7.7 were utilized for 2009 and 2008,
respectively. All stratums showed positive values compared to carrying value using a
discount yield of 7.75% for 2009 and 8.0% for 2008.
The following summarizes mortgage servicing rights capitalized and amortized during each
year:
| (In Thousands) | ||||||||
| 2009 | 2008 | |||||||
|
Beginning Year
|
$ | 1,970 | $ | 1,893 | ||||
|
Capitalized Additions
|
1,158 | 447 | ||||||
|
Amortization
|
(933 | ) | (370 | ) | ||||
|
Valuation Allowance
|
— | — | ||||||
|
|
||||||||
|
End of Year
|
$ | 2,195 | $ | 1,970 | ||||
|
|
||||||||
Time deposits at December 31 consist of the following:
| (In Thousands) | ||||||||
| 2009 | 2008 | |||||||
|
Time deposits under $100,000
|
$ | 212,298 | $ | 216,824 | ||||
|
Time deposits of $100,000 or more
|
114,659 | 77,084 | ||||||
|
|
||||||||
|
|
$ | 326,957 | $ | 293,908 | ||||
|
|
||||||||
At December 31, 2009 the scheduled maturities for time deposits are as follows:
| (In Thousands) | ||||
|
2010
|
221,435 | |||
|
2011
|
65,217 | |||
|
2012
|
23,883 | |||
|
2013
|
10,204 | |||
|
2014
|
4,773 | |||
|
thereafter
|
1,445 | |||
|
|
||||
|
|
$ | 326,957 | ||
|
|
||||
55
Table of Contents
Farmers & Merchants Bancorp, Inc and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
December 31, 2009, 2008, and 2007
The Bank’s policy requires qualifying securities to be used as collateral for the
underlying repurchase agreements. As of December 31, 2009 and 2008 securities with a book
value of $55.9 million and $58.5 million, respectively, were underlying the repurchase
agreements and were under the Bank’s control.
| Daily Securities Sold Under Agreement to Repurchase | ||||||||||||||||||||
| Maximum Amount | Approximate Average | Approximate | ||||||||||||||||||
| Amount Outstanding | Weighted Average | Borrowings | Outstanding in | Weighted Average | ||||||||||||||||
| at End of Period | Rate | Outstanding Month | Period | Interest Rate for | ||||||||||||||||
| (000’s) | End of Period | End (000’s) | (000’s) | the Period | ||||||||||||||||
|
2009
|
$ | 33,457 | 0.42 | % | $ | 40,530 | $ | 37,696 | 0.48 | % | ||||||||||
|
2008
|
$ | 40,014 | 0.50 | % | $ | 47,644 | $ | 40,113 | 1.96 | % | ||||||||||
|
2007
|
$ | 35,059 | 3.72 | % | $ | 39,205 | $ | 31,513 | 4.64 | % | ||||||||||
Long term debt consists of various loans from the Federal Home Loan Bank. Repayment
structures vary, ranging from monthly installments, annual payments or upon maturity.
Interest payments are due monthly with interest rates on the loans varying from 2.70% to
7.05%. Total borrowings were $34.1 million and $45.6 million for 2009 and 2008,
respectively. Notes are secured by a blanket lien on the one to four family residential
mortgage loan portfolios (Note 4).
The following is a schedule by years of future minimum principal payments:
| (In Thousands) | ||||
|
2010
|
13,325 | |||
|
2011
|
13,212 | |||
|
2012
|
5,062 | |||
|
2013
|
2,600 | |||
|
|
||||
|
|
$ | 34,199 | ||
|
|
||||
The components of income tax expense for the years ended December 31 are as follows:
| (In Thousands) | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 2,333 | $ | 2,489 | $ | 2,998 | ||||||
|
Deferred:
|
||||||||||||
|
Federal
|
142 | (39 | ) | (170 | ) | |||||||
|
|
||||||||||||
|
|
$ | 2,475 | $ | 2,450 | $ | 2,828 | ||||||
|
|
||||||||||||
56
Table of Contents
Farmers & Merchants Bancorp, Inc and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
December 31, 2009, 2008, and 2007
The following is a reconciliation of the statutory federal income tax rate to the
effective tax rate:
| (In Thousands) | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Income tax at statutory rates
|
$ | 3,087 | $ | 3,119 | $ | 3,591 | ||||||
|
Increase(decrease) resulting from:
|
||||||||||||
|
Tax exempt interest
|
(629 | ) | (654 | ) | (650 | ) | ||||||
|
Change in prior estimates and other
|
17 | (15 | ) | (113 | ) | |||||||
|
|
||||||||||||
|
|
$ | 2,475 | $ | 2,450 | $ | 2,828 | ||||||
|
|
||||||||||||
Deferred tax assets and liabilities at December 31 are comprised of the
following:
| (In Thousands) | ||||||||
| 2009 | 2008 | |||||||
|
Deferred Tax Assets:
|
||||||||
|
Allowance for loan losses
|
$ | 2,042 | $ | 1,869 | ||||
|
Other
|
650 | 751 | ||||||
|
Total deferred tax assets
|
2,692 | 2,620 | ||||||
|
Deferred Tax Liabilities:
|
||||||||
|
Accreted discounts on bonds
|
56 | 55 | ||||||
|
FHLB stock dividends
|
862 | 862 | ||||||
|
Mortgage servicing rights
|
740 | 667 | ||||||
|
Other
|
700 | 560 | ||||||
|
Net unrealized gain on available-for-sale securities
|
1,295 | 1,153 | ||||||
|
|
||||||||
|
Total deferred tax liabilities
|
3,653 | 3,297 | ||||||
|
|
||||||||
|
Net Deferred Tax Liability
|
$ | (961 | ) | $ | (677 | ) | ||
|
|
||||||||
The Bank has established a 401(k) profit sharing plan, which allows eligible
employees to save at a minimum one percent of eligible compensation on a pre-tax basis,
subject to certain Internal Revenue Service limitations. The Bank will match 50% of
employee 401(k) contributions up to four percent of total eligible compensation. In
addition, the Bank may make a discretionary contribution from time to time. A participant
is 100% vested in the participant’s deferral contributions and employer matching
contributions. A six-year vesting schedule applies to employer discretionary
contributions. Contributions to the 401(k) profit sharing plan for both the employer
matching contribution and the discretionary contribution were $570, $524, and $575
thousand for 2009, 2008 and 2007, respectively.
The Company has a Long-Term Stock Incentive Plan under which 10,000 shares of restricted
stock were issued to 49 and 51 employees during 2009 and 2008, respectively. 8,760 shares
were issued to 46 employees during 2007. Under the plan, the shares vest 100% in three
years. Due to employee termination, there were 350 and 245 shares forfeited during 2009
and 2008, respectively, 740 shares forfeited during 2007. During 2009, 5,450 shares
awarded in 2006 were vested 100%. 36 employees were still employed and received the
stock. During 2007, 600 shares had vesting accelerated and were paid to a retiring
officer. Compensation expense applicable to the restricted stock totaled $190, $155, and
$104 thousand for the year ending December 31, 2009, 2008 and 2007, respectively.
57
Table of Contents
Farmers & Merchants Bancorp, Inc and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
December 31, 2009, 2008, and 2007
In the ordinary course of business, the Bank has granted loans to senior officers and
directors and their affiliated companies amounting to $9.5 and $11.3 million at December
31, 2009 and 2008, respectively. Loans made during 2009 were $67 thousand and repayments
were $1.8 million. The difference in related borrowings amounted to $7.6 million, net
reduction. Deposits of directors, executive officers and companies in which they have a
direct or indirect ownership as of December 31, 2009 and 2008 amounted to $2.4 million
and $4.8 million, respectively.
There was one director added to the Board during 2009. In 2008, one director retired from
the Board and one was appointed. An executive officer was hired also during the year of
2008.
Credit Related Financial Instruments
The Bank is a party to credit related financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing need of its customer. These
financial instruments include commitments to extend credit, Standby Letters of Credit,
and Commercial Letters of Credit. Such commitments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the consolidated
balance sheets.
The Bank’s exposure to credit loss is represented by the contractual amount of these
commitments. The Bank follows the same credit policies in making commitments as it does
for on-balance-sheet instruments. The allowance for credit losses as it relates to
unfunded loan commitments (AULC) is included under other liabilities. The AULC as of
December 31, 2009 and 2008 was $227 thousand and $226 thousand, respectively. At December
31, 2009 and 2008, the following financial instruments were outstanding whose contract
amounts represent credit risk:
| (In Thousands) | ||||||||
| 2009 | 2008 | |||||||
|
Commitments to extend credit
|
$ | 151,696 | $ | 156,575 | ||||
|
Credit card arrangements
|
16,569 | 15,840 | ||||||
|
Standby letters of credit
|
18,085 | 20,418 | ||||||
Commitments to extend credit, credit card arrangements and Standby Letters of Credit
all include exposure to some credit loss in the event of nonperformance of the customer.
The Bank’s credit policies and procedures for credit commitments and financial guarantees
are the same as those for extensions of credit that are recorded in the financial
statements. Due to the fact that these instruments have fixed maturity dates, and
because many of them expire without being drawn upon, they generally do not present any
significant liquidity risk to the Bank.
Collateral Requirements
To reduce credit risk related to the use of credit-related financial instruments, the
Bank might deem it necessary to obtain collateral. The amount and nature of the
collateral obtained is based on the Bank’s credit evaluation of the customer. Collateral
held varies but may include cash, securities, accounts receivable, inventory, property,
plant, and real estate.
Legal Contingencies
Various legal claims also arise from time to time in the normal course of business,
which, in the opinion of management, will have no material effect on the Company’s
consolidated financial statements.
58
Table of Contents
| Farmers & Merchants Bancorp, Inc and Subsidiaries | ||
|
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007 |
The Company (on a consolidated basis) and the Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct material
effect on the Company’s and Bank’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of their
assets, liabilities and certain off balance-sheet items as calculated under regulatory
accounting practices.
The capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. Prompt corrective
action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the
Bank to maintain minimum amounts and ratios of: total risk-based capital and Tier I
capital to risk-weighted assets (as defined in the regulations), and Tier I capital to
adjusted total assets (as defined). Management believes, as of December 31, 2009, that
the Bank meets all the capital adequacy requirements to which it is subject.
As of December 31, 2009 the most recent notification from the FDIC indicated the Bank was
categorized as well capitalized under the regulatory framework for prompt corrective
action. To remain categorized as well capitalized, the Bank will have to maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed in
the table to follow. There are no conditions or events since the most recent
notification that management believes have changed the Bank’s prompt corrective action
category.
The Company and the Bank’s actual and required capital amounts and ratios as of December
31, 2009 and 2008 are as follows:
| To Be Well Capitalized | ||||||||||||||||||||||||
| Under the Prompt | ||||||||||||||||||||||||
| For Capital | Corrective Action | |||||||||||||||||||||||
| Actual | Adequacy | Purposes | Provisions | |||||||||||||||||||||
| (000’s) | (000’s) | (000’s) | ||||||||||||||||||||||
| As of December 31, 2009 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
|
Total Risk-Based Capital
(to Risk Weighted Assets)
Consolidated
|
$ | 92,447 | 14.14 | % | $ | 52,294 | 8.00 | % | N/A | N/A | ||||||||||||||
|
Farmers & Merchants State Bank
|
92,184 | 14.10 | % | 52,305 | 8.00 | % | $ | 65,382 | 10.00 | % | ||||||||||||||
|
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated
|
86,212 | 13.19 | % | 26,147 | 4.00 | % | N/A | N/A | ||||||||||||||||
|
Farmers & Merchants State Bank
|
70,949 | 10.85 | % | 26,153 | 4.00 | % | 39,229 | 6.00 | % | |||||||||||||||
|
Tier 1 Capital
(to Adjusted Total Assets)
Consolidated
|
86,212 | 10.33 | % | 33,393 | 4.00 | % | N/A | N/A | ||||||||||||||||
|
Farmers & Merchants State Bank
|
70,949 | 8.47 | % | 33,487 | 4.00 | % | 41,858 | 5.00 | % | |||||||||||||||
59
Table of Contents
| Farmers & Merchants Bancorp, Inc and Subsidiaries | ||
|
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007 |
| To Be Well Capitalized | ||||||||||||||||||||||||
| Under the Prompt | ||||||||||||||||||||||||
| For Capital | Corrective Action | |||||||||||||||||||||||
| Actual | Adequacy | Purposes | Provisions | |||||||||||||||||||||
| (000’s) | (000’s) | (000’s) | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| As of December 31, 2008 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
|
Total Risk-Based Capital
(to Risk Weighted Assets)
Consolidated
|
$ | 89,017 | 13.95 | % | $ | 51,036 | 8.00 | % | N/A | N/A | ||||||||||||||
|
Farmers & Merchants State Bank
|
88,941 | 13.94 | % | 51,048 | 8.00 | % | $ | 63,810 | 10.00 | % | ||||||||||||||
|
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated
|
83,294 | 13.06 | % | 25,518 | 4.00 | % | N/A | N/A | ||||||||||||||||
|
Farmers & Merchants State Bank
|
68,218 | 10.69 | % | 25,524 | 4.00 | % | 38,286 | 6.00 | % | |||||||||||||||
|
Tier 1 Capital
(to Adjusted Total Assets)
Consolidated
|
83,294 | 10.50 | % | 31,716 | 4.00 | % | N/A | N/A | ||||||||||||||||
|
Farmers & Merchants State Bank
|
68,218 | 8.59 | % | 31,766 | 4.00 | % | 39,708 | 5.00 | % | |||||||||||||||
The Bank is restricted as to the amount of dividends that can be paid. Dividends
declared by the Bank that exceed the net income for the current year plus retained income
for the preceding two years must be approved by federal and state regulatory agencies.
Under this formula dividends of $3.6 million may be paid without prior regulatory
approval. Regardless of formal regulatory restrictions, the Bank may not pay dividends
that would result in its capital levels being reduced below the minimum requirements
shown above. Under current Federal Reserve regulations, the Bank is limited as to the
amount and type of loans it may make to the Company and its non-bank subsidiary. These
loans are subject to qualifying collateral requirements on which the amount of the loan
may be based.
Fair values of financial instruments are management’s estimate of the values at which
the instruments could be exchanged in a transaction between willing parties. These
estimates are subjective and may vary significantly from amounts that would be realized
in actual transactions. In addition, other significant assets are not considered
financial assets including deferred tax assets, premises, equipment and intangibles.
Further, the tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on the fair value estimates and have not been
considered in any of the estimates.
The following assumptions and methods were used in estimating the fair value for
financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash, cash equivalents and federal
funds sold approximate their fair values. Also included in this line item are the
carrying amounts of interest-bearing deposits maturing within ninety days which
approximate their fair values. Fair values of other interest-bearing deposits are
estimated using discounted cash flow analyses based on current rates for similar types of
deposits.
60
Table of Contents
| Farmers & Merchants Bancorp, Inc and Subsidiaries | ||
|
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007 |
Note 16 — Fair Value of Financial Instruments (Continued)
Securities and Other Securities
Fair values for securities, excluding Federal Home Loan Bank stock and Federal Reserve
Bank stock, are based on quoted market prices, where available. If quoted market prices
are not available, fair values are based on quoted market prices of comparable
instruments. The carrying value of Federal Home Loan Bank and Federal Reserve Bank stock
approximates fair value based on the redemption provisions of the Federal Home Loan Bank
and the Federal Reserve Bank.
Loans
Most commercial and real estate mortgage loans are made on a variable rate basis. For
those variable-rate loans that re-price frequently, and with no significant change in
credit risk, fair values are based on carrying values. The fair values of the fixed rate
and all other loans are estimated using discounted cash flow analysis, using interest
rates currently being offered for loans with similar terms to borrowers with similar
credit quality.
Deposits
The fair values disclosed for deposits with no defined maturities are equal to their
carrying amounts, which represent the amount payable on demand. The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposit approximate
their fair value at the reporting date. Fair value for fixed-rate certificates of
deposit are estimated using a discounted cash flow analysis that applies interest rates
currently being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
Borrowings
Short-term borrowings are carried at cost that approximates fair value. Other long-term
debt was generally valued using a discounted cash flow analysis with a discounted rate
based on current incremental borrowing rates for similar types of arrangements, or if not
available, based on an approach similar to that used for loans and deposits.
Accrued Interest Receivable and Payable
The carrying amounts of accrued interest approximate their fair values.
Dividends Payable
The carrying amounts of dividends payable approximate their fair values and are generally
paid within forty days of declaration.
Off Balance Sheet Financial Instruments
Fair values for off-balance-sheet, credit related financial instruments are based on fees
currently charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties’ credit standing.
The estimated fair values, and related carrying or notional amounts, for on and
off-balance sheet financial instruments as of December 31, 2009 and 2008, are reflected
below.
61
Table of Contents
| Farmers & Merchants Bancorp, Inc and Subsidiaries | ||
|
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007 |
Note 16 — Fair Value of Financial Instruments (Continued)
| (In Thousands) | ||||||||||||||||
| 2009 | 2008 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
|
Financial Assets:
|
||||||||||||||||
|
Cash and Cash Equivalents
|
$ | 33,648 | $ | 33,648 | $ | 20,887 | $ | 20,887 | ||||||||
|
Securities — available for sale
|
207,281 | 207,281 | 177,661 | 177,661 | ||||||||||||
|
Other Securities
|
4,448 | 4,448 | 4,498 | 4,498 | ||||||||||||
|
Loans, net
|
563,911 | 563,532 | 562,336 | 562,049 | ||||||||||||
|
Interest receivable
|
3,693 | 3,693 | 4,048 | 4,048 | ||||||||||||
|
Financial Liabilities:
|
||||||||||||||||
|
Deposits
|
$ | 676,444 | $ | 672,963 | $ | 615,732 | $ | 614,495 | ||||||||
|
Short-term debt
|
||||||||||||||||
|
Repurchase agreement sold
|
43,257 | 43,257 | 48,214 | 48,214 | ||||||||||||
|
Long term debt
|
34,199 | 34,947 | 45,635 | 44,940 | ||||||||||||
|
Interest payable
|
852 | 852 | 907 | 907 | ||||||||||||
|
Dividends payable
|
853 | 853 | 857 | 857 | ||||||||||||
|
Off-Balance Sheet Financial Instruments
Commitments to
extend credit
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Standby letters of credit
|
— | — | — | — | ||||||||||||
Fair Value Measurements
The following table presents information about the Company’s assets and liabilities
measured at fair value on a recurring basis at December 31, 2009 and 2008, and the
valuation techniques used by the Company to determine those fair values.
In general, fair values determined by Level 1inputs use quoted prices in active markets
for identical assets or liabilities in active markets, and other inputs such as interest
rates and yield curves that are observable at commonly quoted intervals.
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.
62
Table of Contents
| Farmers & Merchants Bancorp, Inc and Subsidiaries | ||
|
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007 |
Note 16 — Fair Value of Financial Instruments (Continued)
Disclosures concerning assets and liabilities measured at fair value are as follows:
Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2009
and December 31, 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) | December 31, 2009 | |||||||||||||
|
2009
|
||||||||||||||||
|
Assets-(Securities Available for Sale)
|
$ | 0 | $ | 207,281 | $ | 0 | $ | 207,281 | ||||||||
|
|
||||||||||||||||
|
Liabilities
|
$ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
2008
|
||||||||||||||||
|
Assets-(Securities Available for Sale)
|
$ | 0 | $ | 177,661 | $ | 0 | $ | 177,661 | ||||||||
|
|
||||||||||||||||
|
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 or
have similar characteristics of those in the municipal markets, 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 December 31, 2009 and 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 projections.
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).
At December 31, 2009 and 2008, impaired loans categorized as Level 3 were $12.2 and $11.7
million, respectively. The change in fair value of impaired loans of $353 and $466
thousand for 2009 and 2008, respectively, is accounted for in the allowance for loan
losses (see Note 4).
Other real estate is reported at either the fair value of the real estate, minus the
estimated costs to sell the asset, or the cost of the asset. The determination of the
fair value of the real estate relies primarily on appraisals from third parties. If the
fair value of the real estate, minus the estimated costs to sell the asset, is less than
the asset’s cost, the deficiency is recognized as a valuation allowance against the asset
through a charge to expense. The valuation allowance is therefore increased or
decreased, through charges or credits to expense, for changes in the asset’s fair value
or estimated selling costs.
63
Table of Contents
| Farmers & Merchants Bancorp, Inc and Subsidiaries | ||
|
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007 |
| The Company also has other assets, which under certain conditions, are subject to measurement at fair value. These assets include loans held for sale, bank owned life insurance, and mortgage servicing rights. The Company estimated the fair values of these assets utilizing Level 3 inputs, including, the discounted present value of expected future cash flows. At December 31, 2009, the Company estimates that there is no impairment of these assets and therefore, no impairment charge to other expense was required to adjust these assets to their estimated fair values. |
Balance Sheet
| (In Thousands) | ||||||||
| 2009 | 2008 | |||||||
|
Assets
|
||||||||
|
Cash
|
$ | 471 | $ | 315 | ||||
|
Related party receivables:
|
||||||||
|
Dividends & Accounts receivable from subsidiaries
|
1,060 | 963 | ||||||
|
Note receivable from Bank subsidiary
|
15,000 | 15,000 | ||||||
|
Investment in subsidiaries
|
78,322 | 75,471 | ||||||
|
|
||||||||
|
Total Assets
|
$ | 94,853 | $ | 91,749 | ||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Accrued expenses
|
$ | 416 | $ | 345 | ||||
|
Dividends payable
|
853 | 857 | ||||||
|
|
||||||||
|
Total Liabilities
|
1,269 | 1,202 | ||||||
|
|
||||||||
|
Stockholders’ Equity
|
||||||||
|
Total Stockholders’ Equity
|
$ | 93,584 | $ | 90,547 | ||||
|
|
||||||||
|
Total Liabilities and Stockholders’ Equity
|
$ | 94,853 | $ | 91,749 | ||||
|
|
||||||||
Statement of Income
| (In Thousands) | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Income
|
||||||||||||
|
Dividends from subsidiaries
|
$ | 3,940 | $ | 6,708 | $ | 6,238 | ||||||
|
Interest
|
713 | 717 | 712 | |||||||||
|
|
||||||||||||
|
Total Income
|
4,653 | 7,425 | 6,950 | |||||||||
|
|
||||||||||||
|
Operating Expenses
|
460 | 364 | 383 | |||||||||
|
|
||||||||||||
|
Income Before Income Taxes and Equity in Undistributed Earnings (Distributions in excess of earnings) and Subsidiaries
|
4,193 | 7,061 | 6,567 | |||||||||
|
Income Taxes
|
161 | 167 | 105 | |||||||||
|
|
||||||||||||
|
|
4,032 | 6,894 | 6,462 | |||||||||
|
Equity in undistributed earnings (Distributions in excess of earnings) of subsidiaries
|
2,573 | (171 | ) | 1,272 | ||||||||
|
|
||||||||||||
|
Net Income
|
$ | 6,605 | $ | 6,723 | $ | 7,734 | ||||||
|
|
||||||||||||
64
Table of Contents
Farmers & Merchants Bancorp, Inc and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
December 31, 2009, 2008, and 2007
Statements of Cashflows
| (In Thousands) | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Cash Flows from Operating Activities
|
||||||||||||
|
Net income
|
$ | 6,605 | $ | 6,723 | $ | 7,734 | ||||||
|
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
|
||||||||||||
|
Equity in undistributed net income (Distributions
in excess earnings) of subsidiaries
|
(2,573 | ) | 171 | (1,272 | ) | |||||||
|
Changes in Assets and Liabilities:
|
||||||||||||
|
Account receivable
|
— | — | 35 | |||||||||
|
Dividends receivable
|
(97 | ) | (162 | ) | (26 | ) | ||||||
|
Other Liabilities
|
193 | (228 | ) | 428 | ||||||||
|
|
||||||||||||
|
Net Cash Provided by
|
||||||||||||
|
Operating Activities
|
4,128 | 6,504 | 6,899 | |||||||||
|
Cash Flows from Investing Activities
|
||||||||||||
|
Return of Capital from Investment in Subsidiary
|
— | — | 725 | |||||||||
|
Cash Flows from Financing Activities
|
||||||||||||
|
Payment of dividends
|
(3,417 | ) | (3,217 | ) | (3,227 | ) | ||||||
|
Purchase of Treasury Stock
|
(555 | ) | (3,575 | ) | (4,710 | ) | ||||||
|
|
||||||||||||
|
Net Change in Cash and
Cash Equivalents
|
156 | (288 | ) | (313 | ) | |||||||
|
Cash and Cash Equivalents
|
||||||||||||
|
Beginning of year
|
315 | 603 | 916 | |||||||||
|
|
||||||||||||
|
Cash and Cash Equivalents
|
||||||||||||
|
End of year
|
$ | 471 | $ | 315 | $ | 603 | ||||||
|
|
||||||||||||
65
Table of Contents
Farmers & Merchants Bancorp, Inc and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
December 31, 2009, 2008, and 2007
(000s omitted except per share data)
| Quarterly Financial Data - UNAUDITED | ||||||||||||||||
| Quarter Ended in 2009 | ||||||||||||||||
| Mar 31 | June 30 | Sep 30 | Dec 31 | |||||||||||||
|
Summary of Income:
|
||||||||||||||||
|
Interest income
|
$ | 10,376 | $ | 10,459 | $ | 10,081 | $ | 10,198 | ||||||||
|
Interest expense
|
3,474 | 3,427 | 3,220 | 3,099 | ||||||||||||
|
|
||||||||||||||||
|
Net Interest Income
|
6,902 | 7,032 | 6,861 | 7,099 | ||||||||||||
|
Provision for loan loss
|
659 | 1,079 | 1,432 | 388 | ||||||||||||
|
|
||||||||||||||||
|
Net interest income after provision for loan loss
|
6,243 | 5,953 | 5,429 | 6,711 | ||||||||||||
|
Other income (expense)
|
(3,880 | ) | (4,016 | ) | (3,739 | ) | (3,621 | ) | ||||||||
|
|
||||||||||||||||
|
Net income before income taxes
|
2,363 | 1,937 | 1,690 | 3,090 | ||||||||||||
|
Income taxes
|
633 | 536 | 414 | 892 | ||||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 1,730 | $ | 1,401 | $ | 1,276 | $ | 2,198 | ||||||||
|
|
||||||||||||||||
|
Earnings per Common Share
|
$ | 0.36 | $ | 0.30 | $ | 0.27 | $ | 0.46 | ||||||||
|
|
||||||||||||||||
|
Average common shares outstanding
|
4,756,389 | 4,742,910 | 4,731,841 | 4,734,674 | ||||||||||||
|
|
||||||||||||||||
| Quarter Ended in 2008 | ||||||||||||||||
| Mar 31 | June 30 | Sep 30 | Dec 31 | |||||||||||||
|
Summary of Income:
|
||||||||||||||||
|
Interest income
|
$ | 11,211 | $ | 11,134 | $ | 10,816 | $ | 10,663 | ||||||||
|
Interest expense
|
5,254 | 4,659 | 4,431 | 3,757 | ||||||||||||
|
|
||||||||||||||||
|
Net Interest Income
|
5,957 | 6,475 | 6,385 | 6,906 | ||||||||||||
|
Provision for loan loss
|
269 | 180 | 33 | 1,305 | ||||||||||||
|
|
||||||||||||||||
|
Net interest income after provision for loan loss
|
5,688 | 6,295 | 6,352 | 5,601 | ||||||||||||
|
Other income (expense)
|
(3,539 | ) | (3,474 | ) | (3,910 | ) | (3,840 | ) | ||||||||
|
|
||||||||||||||||
|
Net income before income taxes
|
2,149 | 2,821 | 2,442 | 1,761 | ||||||||||||
|
Income taxes
|
581 | 782 | 659 | 428 | ||||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 1,568 | $ | 2,039 | $ | 1,783 | $ | 1,333 | ||||||||
|
|
||||||||||||||||
|
Earnings per common share
|
$ | 0.32 | $ | 0.42 | $ | 0.37 | $ | 0.28 | ||||||||
|
|
||||||||||||||||
|
Average common shares outstanding
|
4,917,707 | 4,867,824 | 4,822,467 | 4,778,681 | ||||||||||||
|
|
||||||||||||||||
No disagreements exist on accounting and financial disclosures or related matter.
66
Table of Contents
Management Report Regarding Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the
participation of the Company’s management, including the Company’s Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of
the Company’s disclosure controls and procedures as of December 31, 2009, pursuant to
Exchange Act 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and procedures were
effective as of December 31, 2009, in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be included
in the Company’s periodic SEC filings.
67
Table of Contents
MANAGEMENT REPORT REGARDING INTERNAL CONTROL AND
COMPLIANCE WITH DESIGNATED LAWS AND REGULATIONS
COMPLIANCE WITH DESIGNATED LAWS AND REGULATIONS
Management of Farmers & Merchants Bancorp, Inc. and Subsidiaries is responsible for preparing
the Bank’s annual financial statements. Management is also responsible for establishing and
maintaining internal control over financial reporting presented in conformity with both generally
accepted accounting principles and regulatory reporting in conformity with the Federal Financial
Institutions Examination Council Instructions for Consolidated Reports of Condition and Income
(call report instructions). The Bank’s internal control contains monitoring mechanisms, and actions
are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any internal control, including the
possibility of human error and the circumvention or overriding of controls. Accordingly, even
effective internal control can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the effectiveness of internal
control may vary over time.
It is also management’s responsibility to ensure satisfactory compliance with all designated laws
and regulations and in particular, those laws and regulations concerning loans to insiders. The
federal laws concerning loans to insiders are codified at 12 USC 375a and 375b, and the federal
regulations are set forth at 12 CFR 23.5, 31, and 215.
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the
supervision and with the participation of our management, including our Principal Executive Officer
and Principal Financial Officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal Control — Integrated Framework, our management
concluded that our internal control over financial reporting was effective as of December 31, 2009.
The registered public accounting firm that audited the financial statements included in this
annual report has issued an attestation report on the Company’s internal control over financial
reporting which can be found under Item 8 of this form 10-K.
There was no change in the company’s internal control over financial reporting that occurred during
the Company’s fiscal quarter ended December 31, 2009 that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial reporting.
None.
68
Table of Contents
BOARD OF DIRECTORS
The information called for herein is presented below:
| Principal Occupation or | Year First | |||||||||
| Name | Age | Employment for Past Five Years | Became Director | |||||||
|
Dexter L. Benecke
|
67 | President, Freedom Ridge, Inc. | 1999 | |||||||
|
|
||||||||||
|
Steven A. Everhart
|
55 | Secretary/Treasurer, MBC Holdings, Inc. | 2003 | |||||||
|
|
||||||||||
|
Robert G. Frey
|
69 | President, E.H. Frey & Sons, Inc. | 1987 | |||||||
|
|
||||||||||
|
Jack C. Johnson
|
57 | President, Hawk’s Clothing, Inc. | 1991 | |||||||
|
|
||||||||||
|
Marcia S. Latta
1
|
48 | Vice President, BGSU Foundation | 2009 | |||||||
|
|
||||||||||
|
Steven J. Planson
|
50 | Self-Employed Farmer | 2008 | |||||||
|
|
||||||||||
|
Anthony J. Rupp
|
60 | President, Rupp Furniture Co. | 2000 | |||||||
|
|
||||||||||
|
David P. Rupp, Jr.
2
|
68 | Attorney | 2001 | |||||||
|
|
||||||||||
|
James C. Saneholtz
|
63 | President, Saneholtz-McKarns, Inc. | 1995 | |||||||
|
|
||||||||||
|
Kevin J. Sauder
|
49 | President/CEO, Sauder Woodworking Co. | 2004 | |||||||
|
|
||||||||||
|
Merle J. Short
|
69 | Chairman, ProMow, Inc. | 1987 | |||||||
|
|
||||||||||
|
Paul S. Siebenmorgen
|
60 | President/CEO of the Corporation and The Farmers & Merchants State Bank | 2005 | |||||||
|
|
||||||||||
|
Steven J. Wyse
|
65 | Private Investor | 1991 | |||||||
Directors are elected annually at the annual meeting of shareholders
| 1 | Ms. Latta was appointed to the Board of Directors of the Company and The Farmers & Merchants State Bank on January 16, 2009. | |
| 2 | David P. Rupp, Jr. is an attorney with membership in the law firm of Plassman, Rupp, Short & Hagans of Archbold, Ohio. The law firm has been retained by the Corporation, and its subsidiaries, during the past twenty years and is to be retained currently. |
69
Table of Contents
EXECUTIVE OFFICERS
| Principal Occupation & Offices Held with | ||||||
| Name | Age | Corporation & Bank for Past Five Years | ||||
|
David P. Rupp, Jr.
|
68 | Chairman | ||||
|
|
||||||
|
Paul S. Siebenmorgen
|
60 | President & Chief Executive Officer | ||||
|
|
||||||
|
Barbara J. Britenriker
|
48 |
Executive Vice President
Chief Financial Officer |
||||
|
|
||||||
|
Todd A. Graham
|
59 |
Executive Vice President
Chief Lending Officer |
||||
|
|
||||||
|
Edward A. Leininger
|
53 |
Executive Vice President
Chief Operating Officer |
||||
|
|
||||||
|
Rex D. Rice
|
51 |
Executive Vice President
Senior Commercial Banking Director |
||||
Any remaining information required by Item 401 of Regulation S-K is presented in the proxy
statement to be furnished in connection with the solicitation of proxies on behalf of the Board
of Directors of the Registrant for use at its Annual Meeting to be held on April 15, 2010, and
is incorporated herein by reference. The information called for under Item 405 of Regulation
S-K regarding compliance with Section 16(a) and called for under Item 407(d)(5) regarding the
existence of a Financial Expert on the Audit Committee of the Company’s Board of Directors is
presented in the proxy statement to be furnished in connection with the solicitation of proxies
on behalf of the Board of Directors of the Registrant for use at its Annual Meeting to be held
on April 15, 2010, and is incorporated herein by reference.
The Board of Directors of the Company adopted a Code of Business Conduct and Ethics (the
“Code”) at its meeting on February 13, 2004. While the Sarbanes-Oxley Act of 2002 mandates the
adoption of a code of ethics for the most senior executive officers of all public companies,
the Code adopted by the Corporation’s Board of Directors is broader in the activities covered
and applies to all officers, directors and employees of the Corporation and the Bank, including
the chief executive officer, chief financial officer, principal accounting officer and other
senior officers performing accounting, auditing, financial management or similar functions.
The administration of the Code has been delegated to the Audit Committee of the Board of
Directors, a Committee comprised entirely of “independent directors.” The Code addresses
topics such as compliance with laws and regulations, honest and ethical conduct, conflicts of
interest, confidentiality and protection of Corporation assets, fair dealing and accurate and
timely periodic reports, and also provides for enforcement mechanisms. The Board and management
of the Corporation intends to continue to monitor not only the developing legal requirements in
this area, but also the best practices of comparable companies, to assure that the Corporation
maintains sound corporate governance practices in the future.
A copy of the Corporation’s Code is available on the website of the Bank (www.fm-bank.com). In
addition, a copy of the Code is available to any shareholder free of charge upon request.
Shareholders desiring a copy of the Code should address written requests to Mr. Paul S.
Siebenmorgen, President, Chief Executive Officer and Treasurer of Farmers & Merchants Bancorp,
Inc., 307North Defiance Street, Archbold, Ohio 43502, and are asked to mark Code of Business
Conduct and Ethics on the outside of the envelope containing the request.
|
|
| The information called for herein is presented in the proxy statement to be furnished in connection with the solicitation of proxies on behalf of the Board of Directors of the Registrant for use at its Annual Meeting to be held on April 15, 2010, and is incorporated herein by reference. |
70
Table of Contents
|
|
| The information called for by Item 403 of Regulation S-K is presented in the proxy statement to be furnished in connection with the solicitation of proxies on behalf of the Board of Directors of the Registrant for use at its Annual Meeting to be held Thursday, April 15, 2010 and is incorporated herein by reference. | ||
| On April 23, 2005 the Company’s shareholders approved the Farmers & Merchants Bancorp, Inc. 2005 Long-Term Stock Incentive Plan. The plan authorizes the issuance of up to 800,000 of the Company’s common shares in the form of stock options, restricted stock, performance shares, and unrestricted stock to employees of the Company and its subsidiaries. During 2005, 4,000 shares of restricted stock were issued under the plan to 38 employees of the Bank. Due to employee termination, there were 80 shares forfeited during 2005. During 2006, the Company purchased 42,000 shares and awarded 6,100 restricted shares to 41 employees. 200 shares were forfeited during 2006. 8,760 shares of restricted stock were issued to 46 employees during 2007. Due to employee termination, 740 shares were forfeited during 2007. 600 shares had vesting accelerated and were paid to a retiring officer. 228,000 shares were purchased in 2007. In 2008, 171,889 shares were purchased with 10,000 shares being awarded to 51 employees. 245 shares were forfeited in 2008. 2009 had purchases of 28,907 shares with awards of 10,000 shares to 49 employees. 350 shares were forfeited during the year. At year end, the Company held 437,551 shares in Treasury stock and 27,775 in unearned stock awards. |
| Equity Compensation Plan Information | ||||||||||||
| Number of securities | ||||||||||||
| remaining available for | ||||||||||||
| Number of securities to be | Weighted-average exercise | future issuance under equity | ||||||||||
| issued upon exercise of | price of outstanding | compensation plans | ||||||||||
| outstanding options, | options, warrants and | (excluding securities | ||||||||||
| warrants and rights | rights | reflected in column (a)) | ||||||||||
| ( a ) | ( b ) | ( c ) | ||||||||||
|
Equity compensation
plans approved by
security holders
|
0 | $ | 0.00 | 762,755 | ||||||||
|
Equity compensation
plans not approved
by security holders
|
0 | $ | 0.00 | 0 | ||||||||
|
Total
|
0 | $ | 0.00 | 762,755 | ||||||||
|
|
| The information called for herein is presented in the proxy statement to be furnished in connection with the solicitation of proxies on behalf of the Board of Directors of the Registrant for use at its Annual Meeting to be held on April 15, 2010, and is incorporated herein by reference. |
|
|
| The information called for by this Item is presented in the proxy statement to be furnished in connection with the solicitation of proxies on behalf of the Board of Directors of the Registrant for use at its Annual Meeting to be held on April 15, 2010, and is incorporated herein by reference. |
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Table of Contents
| a. The Following documents are filed as part of this report. |
| (1) | Financial Statements (included in this 10-K under Item 8) Report of Independent Accountants Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Changes in Shareholders’ Equity Consolidated Statements of Cash Flows Note to Consolidated Financial Statements | ||
| (2) | Financial Statement Schedules Five Year Summary of Operations |
| b. Exhibits Required by Item 601 of Regulation S-K |
| (3) | a. Articles of Incorporation are incorporated by reference to the Company’s Quarterly Report on Form 10-Q that was filed with the Commission on May 10, 2004. b. Certificate of Amendment to the Company’s Articles of Incorporation is incorporated by reference to the Company’s Current Report on Form 8-K that was filed with the Commission on April 26, 2006. | ||
| (3.1) | Code of Regulations are incorporated by reference to the Company’s Quarterly Report on Form 10-Q that was filed with the Commission on May 10, 2004. | ||
| (10.1) | Change in Control Agreement executed by and between the Company and Paul S. Siebenmorgen on November 27, 2007 (incorporated by reference to the Current Report on Form 8-K filed with the Commission on November 30, 2007). | ||
| (10.2) | Change in Control Agreement executed by and between the Company and Barbara J. Britenriker on November 27, 2007 (incorporated by reference to the Current Report on Form 8-K filed with the Commission on November 30, 2007). | ||
| (10.3) | Change in Control Agreement executed by and between the Company and Edward A. Leininger on November 27, 2007 (incorporated by reference to the Current Report on Form 8-K filed with the Commission on November 30, 2007). | ||
| (10.4) | Change in Control Agreement executed by and between the Company and Rex D. Rice on November 27, 2007 (incorporated by reference to the Current Report on Form 8-K filed with the Commission on November 30, 2007). | ||
| (10.5) | 2005 Long-Term Stock Incentive Plan (incorporated by reference to the Quarterly Report on Form 10-Q filed with the Commission on October 27, 2005). | ||
| (10.6) | Form on Restricted Stock Agreement (incorporated by reference to the Quarterly Report on Form 10-Q filed with the Commission on October 27, 2005). |
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Table of Contents
| (21) | Subsidiaries of Farmers & Merchants Bancorp, Inc. | ||
| (31.1) | Certification of the Chief Executive Officer Required under Rule 13(a)-14(a)/15d-14(a) | ||
| (31.2) | Certification of the Chief Financial Officer Required under Rule 13(a)-14(a)/15d-14(a) | ||
| (32.1) | Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| (32.2) | Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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Table of Contents
FARMERS & MERCHANTS BANCORP, INC
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, hereunto duly authorized
| Date: February 24, 2010 | By: | /s/ Paul S. Siebenmorgen | ||
| Paul S. Siebenmorgen | ||||
| Chief Executive Officer Director | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
/s/ Paul S. Siebenmorgen
|
Date: February 24, 2010 | /s/ Barbara J. Britenriker | Date: February 24, 2010 | |||
|
|
||||||
|
Paul S Siebenmorgen
|
Barbara J. Britenriker | |||||
|
Chief Executive Officer
(Principal Executive Officer) |
Chief Financial Officer
(Principal Financial Officer/Principal Accounting Officer) |
|||||
|
|
||||||
|
/s/ Dexter L. Benecke
|
Date: February 24, 2010 | /s/ Steven A. Everhart | Date: February 24, 2010 | |||
|
|
||||||
|
Dexter L. Benecke, Director
|
Steven A. Everhart, Director | |||||
|
|
||||||
|
/s/ Robert G. Frey
|
Date: February 24, 2010 | /s/ Jack C. Johnson | Date: February 24, 2010 | |||
|
|
||||||
|
Robert G. Frey, Director
|
Jack C. Johnson, Director | |||||
|
|
||||||
|
/s/ Marcia S. Latta
|
Date: February 24, 2010 | /s/ Steven J. Planson | Date: February 24, 2010 | |||
|
|
||||||
|
Marcia S. Latta, Director
|
Steven J. Planson, Director | |||||
|
|
||||||
|
/s/ Anthony J. Rupp
|
Date: February 24, 2010 | /s/ David P. Rupp, Jr | Date: February 24, 2010 | |||
|
|
||||||
|
Anthony J. Rupp, Director
|
David P. Rupp, Jr., Director | |||||
|
|
||||||
|
/s/ James C. Saneholtz
|
Date: February 24, 2010 | /s/ Kevin J. Sauder | Date: February 24, 2010 | |||
|
|
||||||
|
James C. Saneholtz, Director
|
Kevin J. Sauder, Director | |||||
|
|
||||||
|
/s/ Merle J. Short
|
Date: February 24, 2010 | /s/ Steven J. Wyse | Date: February 24, 2010 | |||
|
|
||||||
|
Merle J. Short, Director
|
Steven J. Wyse, Director | |||||
73
TABLE OF CONTENTS
Part 1Item 1. Business:Item 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsPart IIItem 4. Market For Registrant S Common Equity and Related Stockholder MattersItem 5. Selected Financial DataItem 6. Managements Discussion and Analysis Of Financial Condition and Results Of OperationsItem 6A. Quantitative and Qualitative Disclosures About Market RiskItem 7. Financial StatementsNote 1 Summary Of Significant Accounting PoliciesNote 1 Summary Of Significant Accounting Policies (continued)Note 2 Business CombinationNote 2 Business Combination (continued)Note 3 SecuritiesNote 3 Securities (continued)Note 4 LoansNote 4 Loans (continued)Note 5 Premises and EquipmentNote 6 ServicingNote 7 DepositsNote 8 Securities Sold Under Agreement To RepurchaseNote 9 Federal Home Loan Bank AdvancesNote 10 Federal Income TaxesNote 10 Federal Income Taxes (continued)Note 11 Employee Benefit PlanNote 12 Related Party TransactionsNote 13 Off Balance Sheet ActivitiesNote 14 Minimum Regulatory Capital RequirementsNote 14 Minimum Regulatory Capital Requirements (continued)Note 15 Restrictions Of Dividends & Inter-company BorrowingsNote 16 Fair Value Of Financial InstrumentsNote 16 Fair Value Of Financial Instruments (continued)Note 17 Condensed Financial Statements Of Parent CompanyNote 17 Condensed Financial Statements Of Parent Company (continued)Note 18 Quarterly Financial DataItem 8. Change in and Disagreements with Accounting and Financial DisclosureItem 8A. Controls and ProceduresItem 8B. Other InformationPart IIIItem 9. Directors and Executive Officers Of The RegistrantItem 10. Executive CompensationItem 11. Security Ownership Of Certain Beneficial Owners and ManagementItem 12. Certain Relationships and Related TransactionsItem 13. Principal Accountant Fees and ServicesPart IVItem 14. Exhibits and Financial Statements SchedulesItem 14. Exhibits and Financial Statements Schedules (continued)