-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NN/4kUGdXBWkYuUCuj5T/oVMOSqXz5o6F+EACFiGszt32TC3Ca5L8c+Fh8EsBZiL f+LMQmdBnKd2sV7+d1Oauw== 0000929624-00-000696.txt : 20000516 0000929624-00-000696.hdr.sgml : 20000516 ACCESSION NUMBER: 0000929624-00-000696 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARMERS & MERCHANTS BANCORP CENTRAL INDEX KEY: 0001085913 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 943327828 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26099 FILM NUMBER: 632101 BUSINESS ADDRESS: STREET 1: 121 WEST PINE ST CITY: LODI STATE: CA ZIP: 95240-2184 BUSINESS PHONE: 2093672411 MAIL ADDRESS: STREET 1: C/O PILLSBURY MADISON & SUTRO LLP STREET 2: P O BOX 7880 CITY: SAN FRANCISCO STATE: CA ZIP: 94120 10-Q 1 FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ For Quarter Ended March 31, 2000 Commission File Number:_________ FARMERS & MERCHANTS BANCORP (Exact name of registrant as specified in its charter) Delaware 94-3327828 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 121 W. Pine Street, Lodi, California 95240 (Address of principal Executive offices) (Zip Code) Registrant's telephone number, including area code (209) 334-1101 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Number of shares of common stock of the registrant: Par value $0.01, authorized 2,000,000 shares; issued and outstanding 659,883 as of May 3, 2000. This Form 10-Q contains 24 pages. FARMERS & MERCHANTS BANCORP FORM 10-Q TABLE OF CONTENTS ___________
PART I. - FINANCIAL INFORMATION Page --------------------- ---- Item 1 - Financial Statements Consolidated Balance Sheets as of March 31, 2000 December 31, 1999 and March 31, 1999. 3 Consolidated Statements of Income for the Three Months Ended March 31, 2000 and 1999. 4 Statement of Changes in Shareholders' Equity for the Three months ended March 31, 2000. 5 Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2000 and 1999. 6 Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2000 and 1999. 7 Notes to Consolidated Financial Statements 8 Item 2 - Management's Discussion and Analysis 9 PART II. - OTHER INFORMATION 22 ----------------- SIGNATURES 23 - ----------
2 PART I. - FINANCIAL INFORMATION Item 1 - Financial Statements FARMERS & MERCHANTS BANCORP
Consolidated Balance Sheets - ---------------------------------------------------------------------------------------------------------------- (in thousands) March 31, December 31, March 31, 2000 1999 1999 Assets (Unaudited) (Unaudited) - ---------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents: Cash and Due From $ 25,275 $ 30,384 $ 23,671 Federal Funds Sold 2,570 11,600 19,400 - ---------------------------------------------------------------------------------------------------------------- Total Cash and Cash Equivalents 27,845 41,984 43,071 Investment Securities: Available-for Sale 294,597 297,580 312,804 Held-to-Maturity 47,821 49,275 57,616 - ---------------------------------------------------------------------------------------------------------------- Total Investment Securities 342,418 346,855 370,420 - ---------------------------------------------------------------------------------------------------------------- Loans 423,743 413,757 327,179 Less: Unearned Income (365) (348) (315) Less: Allowance for Loan Losses (10,265) (9,787) (8,586) - ---------------------------------------------------------------------------------------------------------------- Loans, Net 413,113 403,622 318,278 - ---------------------------------------------------------------------------------------------------------------- Land, Buildings & Equipment 12,743 12,707 11,633 Interest Receivable and Other Assets 13,483 14,713 12,658 - ---------------------------------------------------------------------------------------------------------------- Total Assets $ 809,602 $ 819,881 $ 756,060 ================================================================================================================ Liabilities & Shareholders' Equity Deposits: Demand $ 147,442 $ 163,658 $ 135,414 Interest Bearing Transaction 77,220 86,503 59,363 Savings 176,336 179,294 191,618 Time Deposits Over $100,000 101,242 74,259 90,483 Time Deposits Under $100,000 176,128 181,429 150,309 - ---------------------------------------------------------------------------------------------------------------- Total Deposits 678,368 685,143 627,187 - ---------------------------------------------------------------------------------------------------------------- Fed Funds Purchased/Borrowings 41,056 41,064 41,086 Other Liabilities 7,532 13,473 6,394 - ---------------------------------------------------------------------------------------------------------------- Total Liabilities 726,956 739,680 674,667 - ---------------------------------------------------------------------------------------------------------------- Shareholders' Equity Common Stock 7 7 7 Additional Paid In Capital 47,765 47,993 43,576 Retained Earnings 38,754 36,040 37,303 Accumulated Other Comprehensive Income (Loss) (3,880) (3,839) 507 - ---------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 82,646 80,201 81,393 - ---------------------------------------------------------------------------------------------------------------- Total Liabilities & Shareholders' Equity $ 809,602 $ 819,881 $ 756,060 ================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 3 FARMERS & MERCHANTS BANCORP
Consolidated Statements of Income (Unaudited) - ------------------------------------------------------------------------------------------------------------------ (in thousands except for per share data) Three Months Ended March 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------ Interest Income: Interest & Fees on Loans $ 9,679 $ 7,420 Federal Funds Sold 48 237 Securities: Investments Available-for-Sale: Taxable 4,470 4,190 Non-taxable 223 234 Investments Held-to-Maturity: Taxable 123 153 Non-taxable 519 633 - ------------------------------------------------------------------------------------------------------------------ Total Interest Income 15,062 12,867 - ------------------------------------------------------------------------------------------------------------------ Interest Expense: Interest Bearing Transaction 188 170 Savings 1,074 1,007 Time Deposits Over $100,000 1,019 748 Time Deposits Under $100,000 2,310 2,051 Interest on Borrowed Funds 629 573 - ------------------------------------------------------------------------------------------------------------------ Total Interest Expense 5,220 4,549 - ------------------------------------------------------------------------------------------------------------------ Net Interest Income 9,842 8,319 Provision for Loan Losses 500 300 - ------------------------------------------------------------------------------------------------------------------ Net Interest Income After Provision for Loan Losses 9,342 8,019 - ------------------------------------------------------------------------------------------------------------------ Non-Interest Income Service Charges on Deposit Accounts 845 760 Net Gain (Loss) on Sale of Investment Securities (180) 90 Other 1,064 697 - ------------------------------------------------------------------------------------------------------------------ Total Non-Interest Income 1,729 1,547 - ------------------------------------------------------------------------------------------------------------------ Non-Interest Expense Salaries & Employee Benefits 3,841 3,586 Occupancy 850 913 Other Operating 2,044 1,541 - ------------------------------------------------------------------------------------------------------------------ Total Non-Interest Expense 6,735 6,040 - ------------------------------------------------------------------------------------------------------------------ Net Income Before Taxes 4,336 3,526 Provision for Taxes 1,622 1,213 - ------------------------------------------------------------------------------------------------------------------ Net Income $ 2,714 $ 2,313 ================================================================================================================== Earning Per Share $ 3.92 $ 3.32 ==================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 4 FARMERS & MERCHANTS BANCORP
Consolidated Statements of Changes in Shareholders' Equity (Unaudited) - -------------------------------------------------------------------------------------------------------------------------- (In thousands except share data) Accumulated Common Additional Other Total Shares Common Paid-In Retained Comprehensive Shareholders' Outstanding Stock Capital Earnings Income (Loss) Equity - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 660,989 $ 7 $ 47,993 $ 36,040 $ (3,839) $ 80,201 ========================================================================================================================== Net Income - - 2,714 - 2,714 Redemption of Stock (1,106) - (228) - - (228) Changes in Net Unrealized Gain (Loss) on Securities Available for Sale - - - (41) (41) - -------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 2000 659,883 $ 7 $ 47,765 $ 38,754 $ (3,880) $ 82,646 ==========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 5 FARMERS & MERCHANTS BANCORP Consolidated Statements of Comprehensive Income (Loss) - (Unaudited)
- -------------------------------------------------------------------------------------------------------------------- (in thousands) For Three Months Ended March 31, 2000 1999 - -------------------------------------------------------------------------------------------------------------------- Net Income $ 2,714 $ 2,313 Other Comprehensive Income - Unrealized Gain (Loss) on Securities, Net of Reclassification Adjustment and Taxes (41) (325) - -------------------------------------------------------------------------------------------------------------------- Total Other Comprehensive Income (Loss) (41) (325) - -------------------------------------------------------------------------------------------------------------------- Comprehensive Income $ 2,673 $ 1,988 ====================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 6 FARMERS & MERCHANTS BANCORP
Consolidated Statement of Cash Flows (Unaudited) For Three Months Ending - -------------------------------------------------------------------------------------------------------------- (in thousands) Mar. 31 Mar. 31 2000 1999 - -------------------------------------------------------------------------------------------------------------- Operating Activities: Net Income $ 2,714 $ 2,313 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Loan Losses 500 300 Depreciation and Amortization 445 434 Provision for Deferred Income Taxes (115) (135) Accretion of Investment Security Discounts (109) 256 Net (Gain) Loss on Sale of Investment Securities 180 (90) Net Change in Operating Assets & Liabilities: Decrease in Trading Account Assets - - (Increase) Decrease in Interest Receivable and Other Assets 1,374 2,032 (Decrease) in Interest Payable and Other Liabilities (5,940) (2,520) - -------------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Operating Activities (951) 2,590 Investing Activities: Trading Securities: Purchased - (15,490) Sold or Matured - 15,478 Securities Available-for-Sale: Purchased (17,659) (48,826) Sold or Matured 20,482 47,598 Securities Held-to-Maturity: Purchased (48) (209) Matured 1,522 2,765 Net Loans Originated or Acquired (10,056) 2,000 Principal Collected on Loans Charged Off 64 11 Net Additions to Premises and Equipment (481) (352) - -------------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Investing Activities (6,176) 2,975 Financing Activities: Net Decrease in Demand, Interest-Bearing Transaction, and Savings Accounts (28,457) (12,260) Increase in Time Deposits 21,681 12,061 Federal Funds Purchased - (2,007) Federal Home Loan Bank Borrowings: Advances - - Paydowns (8) - Cash Dividends - - Stock Redemption (228) - - -------------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Financing Activities (7,012) (2,206) Increase (Decrease) in Cash and Cash Equivalents (14,139) 3,359 Cash and Cash Equivalents at Beginning of Period 41,984 39,712 - -------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 27,845 $ 43,071 ==============================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Financial Statements The foregoing financial statements are unaudited, however, in the opinion of Management, all adjustments (comprised only of normal recurring accruals) necessary for a fair presentation of the financial statements have been included. Results for the period ended March 31, 2000, are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole. A summary of the Corporations significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements in the Corporation's Annual Report on Form 10-K for 1999. 2. Reclassifications Certain reclassifications have been made in the 1999 financial information to conform to the presentation used in 2000. 3. Earnings per Share The actual number of shares outstanding at March 31, 2000, were 692,379. Basic earnings per share is calculated on the basis of the weighted average number of shares outstanding during the period which were 692,835 and 695,791 for the three months ending March 31, 2000 and 1999, respectively. Prior period per share amounts have been restated for the 5% stock dividend declared during 1999 and 2000. 4. Holding Company Formation The accompanying financial statements include the accounts of Farmers & Merchants Bancorp and the Bancorp's wholly owned subsidiary, Farmers & Merchants Bank. Farmers & Merchants Bancorp was organized effective April 30, 1999. Significant intercompany transactions have been eliminated in consolidation. 8 ITEM 2. Management's Discussion and Analysis Forward-Looking Statements This report contains various forward-looking statements, usually containing the words "estimate," "project," "expect," "objective," "goal," or similar expressions and includes assumptions concerning the Company's operations, future results, and prospects. These forward-looking statements are based upon current expectations and are subject to risk and uncertainties. In connection with the "safe-harbor" provisions of the private Securities Litigation Reform Act of 1995, the company provides the following cautionary statement identifying important factors which could cause the actual results of events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Such factors include the following: (i) the effect of changing regional and national economic conditions; (ii) significant changes in interest rates and prepayment speeds; (iii) credit risks of commercial, real estate, consumer, and other lending activities; (iv) changes in federal and state Banking regulations; (v) the year 2000, and; (vi) other external developments which could materially impact the Company's operational and financial performance. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made. Introduction The following discussion and analysis is intended to provide a better understanding of the Company's performance during the first three months of 2000 and the material changes in financial condition, operating income and expense of the Company and its subsidiaries as shown in the accompanying financial statements. This section should be read in conjunction with the consolidated financial statements and the notes thereto, along with other financial information included in this report. Overview For the three months ended March 31, 2000, Farmers & Merchants Bancorp reported net income of $2,714,000, earnings per share of $3.92, return on average assets of 1.35% and return on average shareholders' equity of 12.66%. For the three months ending March 31, 1999, net income totaled $2,313,000, earnings per share was $3.32, return on average assets was 1.25% and the return on average shareholders' equity totaled 12.01%. The Company's improved financial performance in 2000 was due to a combination of increased revenue generated from its core business, which include improved growth rates in both loans outstanding and deposit balances along with effective capital management strategies. 9 The following is a summary of the financial accomplishments achieved during the three-month period ending March 31, 2000 compared to March 31, 1999. . Net income for the period totaled $2.7 million, up 17.4% from last year. . Net interest income increased 18.3% to $9.8 million from $8.3 million. . The provision for loan losses increased to $500 thousand from $300 thousand. . Non-interest income increased 11.7% to $1.7 million during the first three months of 2000, up from the $1.5 million reported for the first three months of 1999. . Non-interest expense increased 11.5% and totaled $6.7 million during the first three months of 2000. . Total assets increased 7.1% to $809.6 million. . Total loans increased 29.5% to $423.7 million, up $96.6 million from March 31, 1999. . Total deposits increased 8.2% to $678.4 million. . Total investment securities decreased to $342.4 million from $370.4 million at March 31, 2000. . Total Shareholders' Equity increased $1.2 million to $82.6 million. Net Interest Income Net interest income is the amount by which the interest and fees on loans and interest earned on earning assets exceeds the interest paid on interest bearing sources of funds. For the purpose of analysis, the interest earned on tax-exempt investments and municipal loans is adjusted to an amount comparable to interest subject to normal income taxes. This adjustment is referred to as "taxable equivalent" and is noted wherever applicable. Interest income and expense are affected by changes in the volume and mix of average interest earning assets and average interest bearing liabilities, as well as fluctuations in interest rates. Therefore, increases or decreases in net interest income are analyzed as changes in volume, changes in rate and changes in the mix of assets and liabilities. Net interest income grew 18.3% to $9.8 million during the first three months of 2000, compared to $8.3 million at March 31, 1999. On a fully taxable equivalent basis, net interest income increased 16.7% and totaled $10.2 million at March 31, 2000, compared to $8.8 million for the first three months of 1999. Net interest income on a taxable equivalent basis, expressed as a percentage of average total earning assets, is referred to as the net interest margin, which represents the average net effective yield on earning assets. For the three months ended March 10 31, 2000, the net interest margin was 5.25% compared to 5.03% for the same period in 1999. The increase in net interest margin was primarily related to the increase in loan balances, which helped offset competitive loan pricing. Loans, the Company's highest earning asset, increased $96.6 million as of March 31, 2000 compared to March 31, 1999. On an average balance basis, loans have increased by $99.6 million. The yield on the loan portfolio declined 12 basis points to 9.19% for the three months ending March 31, 2000 compared to 9.31% for the three months ending March 31, 1999. This decline in yield, due to competitive pressures, was offset by the growth in balances, which had a positive effect on interest revenue in the amount of $2.2 million for the first three months of 2000. The investment portfolio is the other main component of the Company's earning assets. The Company's investment policy is conservative. The Company primarily invests in mortgage-backed securities, U.S. Treasuries, U.S. Government Agencies, and high-grade municipals. Since the risk factor for these types of investments is significantly lower than that of loans, the yield earned on investments is substantially less than that of loans. Average investment securities decreased $8.1 million during the first three months of 2000. In spite of the decrease in the average balance of investment securities, interest income increased 1.2% as a portion of the portfolio was repositioned late in 1999. The average yield, on a taxable equivalent basis, in the investment portfolio was 6.45% in 2000 compared to 6.30% in 1999. Net interest income on the Average Balance Sheet is shown on a taxable equivalent basis, which is higher than net interest income on the Consolidated Statements of Income because of adjustments that relate to income on certain securities that are exempt from federal income taxes. Interest expense increased as a result of an increase in average interest-bearing deposits, which grew 10.7%. Interest expense on interest-bearing deposits grew 15.5% due to both rate increases on time deposits and increases in interest-bearing deposits of $51.3 million. The average interest cost on deposits was 3.47% at March 31, 2000 and 3.36% at March 31, 1999. The Company's earning assets and rate sensitive liabilities are subject to repricing at different times, which exposes the Company to income fluctuations when interest rates change. In order to minimize income fluctuations, the Company attempts to match asset and liability maturities. However, some maturity mismatch is inherent in the asset and liability mix. Provision and Allowance for Loan Losses As a financial institution that assumes lending and credit risks as a principal element of its business, the Company anticipates that credit losses will be experienced in the normal course of business. The provision for loan losses creates a reserve to absorb potential future losses. The allowance for loan losses is maintained at a level considered by management to be adequate to provide for risks inherent in the loan portfolio. In determining the adequacy of the allowance for loan losses, management takes into consideration examinations of Company supervisory authorities, results of internal credit reviews, financial condition of borrowers, loan concentrations, prior loan loss experience, and general economic conditions. The allowance is 11 based on estimates and ultimate future losses may vary from the current estimates. Management reviews these estimates periodically and, when adjustments are necessary, they are reported in the period in which they become known. The Company's written lending policies, along with applicable laws and regulations governing the extension of credit, require risk analysis as well as ongoing portfolio and credit management through loan product diversification, lending limits, ongoing credit reviews and approval policies prior to funding of any loan. The Company manages and controls credit risk through diversification, dollar limits on loans to one borrower by primarily restricting loans made to its principal market area. Loans that are performing but have shown some signs of weakness are subjected to more stringent reporting. Fixed-rate real estate loans are comprised primarily of loans with maturities of less than five years. Long-term residential loans are originated by the Company and sold on the secondary market. The provision as of March 31, 2000 equaled $500 thousand, an increase of $200 thousand from March 31, 1999. The increase in the provision was the result of growth in the loan portfolio and management's evaluation of the credit quality of the loan portfolio, the prevailing economic climate, and its effect on borrowers' ability to repay loans in accordance with the terms of the notes and current loan losses. After reviewing all factors, management concluded that an increase in the provision for loan losses was appropriate. As of March 31, 2000, the allowance for loan losses was $10.3 million, which represents 2.4% of the total loan balances. For the period ended March 31, 1999, the allowance was $8.6 million and 2.6% of total loans. The table below illustrates the change in the allowance for the first three months of 2000 and 1999. Allowance for Loan Losses (in thousands) - ------------------------- Balance, December 31, 1999 9,787 Provision Charged to Expense 500 Recoveries of Loans Previously Charged Off 64 Loans Charged Off (86) ======================================================================= Balance, March 31, 2000 $ 10,265 ======================================================================= Balance, December 31, 1998 8,589 Provision Charged to Expense 300 Recoveries of Loans Previously Charged Off 11 Loans Charged Off (314) ======================================================================= Balance, March 31, 1999 $ 8,586 ======================================================================= Non-Interest Income Non-interest income increased 11.7% for the three months ending March 31, 2000, compared to the same period of 1999. This change was due to increases in service charges on deposit 12 accounts, gains on sale of other real estate owned and growth in our fee income from alternative financial investments available to our customers. Non-Interest Expense Salaries and Employee Benefits increased $255 thousand or 7.1% from the prior year due to merit increases and additional staffing requirements related to loan production. Offsetting this increase was a decrease in occupancy expense of $63 thousand or 6.9%. Other operating expense increased 32.6% or $503 thousand from March 31, 1999. This was due to the increase in outside professional fees and marketing efforts and other costs relating to the opening of a centralized operations center. It is anticipated that the future growth rate in other operating expense will be comparable to the growth in net income. The net effect was an increase in non-interest expense of 11.5% compared to the prior year. Income Taxes The provision for income taxes increased 33.7% to $1.6 million for the first three months of 2000 as a result of improved earnings. For the three months ended March 31, 1999, the provision totaled $1.2 million. Balance Sheet Analysis Investment Securities The Financial Accounting Standards Board statement, Accounting for Certain Investments in Debt and Equity Securities, requires the Company to classify its investments as held-to-maturity, trading or available-for-sale. Securities are classified as held-to-maturity and accounted for at amortized cost when the Company has the positive intent and ability to hold the securities to maturity. Trading securities are securities acquired for short-term appreciation and are carried at fair value, with unrealized gains and losses recorded in non-interest income. As of March 31, there were no securities in the trading portfolio. Securities the Company does not intend to hold to maturity are classified as available-for-sale. This portion of the investment portfolio provides the Company with liquidity that may be required to meet the needs of Company borrowers and satisfy depositor's withdrawals. The investment portfolio provides the Company with an income alternative to loans. As of March 31, 2000 the investment portfolio represented 42.3% of the Company's total assets. Total investment securities decreased $28.0 million from a year ago and now total $342.4 million. Not included in the investment portfolio are overnight investments in Federal Funds Sold. For the three months ended March 31, 2000, average Federal Funds Sold was $3.3 million compared to $19.6 million in 1999. Loans The Company's loan portfolio at March 31, 2000 increased $96.6 million from March 31, 1999. The increase is the result of an aggressive calling program implemented during 1999 and an improved economic climate in the Company's market area. Additionally, on an average balance basis loans have increased $99.6 million or 30.8%. No significant change in this trend is 13 expected through the second quarter of 2000. The table following sets forth the distribution of the loan portfolio by type as of the dates indicated.
Loan Portfolio As Of: - --------------------- (in thousands) March 31, 2000 Dec. 31, 1999 March 31, 1999 - ------------------------------------------------------------------------------------------------------------------ Real Estate Construction $ 40,116 $ 39,186 $ 31,016 Real Estate - Other 231,500 222,354 178,613 Commercial 128,421 129,969 99,619 Consumer 23,706 22,248 17,931 - ------------------------------------------------------------------------------------------------------------------ Gross Loans 423,743 413,757 327,179 Less: Unearned Income 365 348 315 Allowance for Loan Losses 10,265 9,787 8,586 - ------------------------------------------------------------------------------------------------------------------ Net Loans $ 413,113 $ 403,622 $ 318,278 ==================================================================================================================
Non-Performing Assets The Company's policy is to place loans on non-accrual status when, for any reason, principal or interest is past due for ninety days or more unless it is both well secured and in the process of collection. Any interest accrued, but unpaid, is reversed against current income. Thereafter, interest is recognized as income only as it is collected in cash. As a result of events beyond the Company's control, problem loans can and do occur. As of March 31, 2000, non-performing loans were $1.9 million compared to $5.6 million at March 31, 1999. Reducing problem loans continues to be a significant Company objective. The Company reported $200 thousand in foreclosed loans as other real estate at March 31, 2000, compared to the $599 thousand as of March 31, 1999. Accrued interest reversed from income on loans placed on a non-accrual status totaled $101 thousand for the three months ended March 31, 2000.
Non-Performing Assets - --------------------- (dollar amounts in thousands) March 31, 2000 Dec. 31, 1999 March 31, 1999 - ---------------------------------------------------------------------------------------------------------------- Nonperforming Loans $1,895 $2,511 $5,554 OREO 200 204 599 ================================================================================================================ Total $2,095 $2,715 $6,153 ================================================================================================================ Non-Performing Assets as a % of: - -------------------------------- Total Loans 0.5% 0.6% 1.9% Allowance for Loan Loss 20.4% 27.7% 71.7%
Deposits At March 31, 2000, deposits totaled $678.4 million. This represents an increase of 8.2% or $51.2 million from March 31, 1999. The majority of the increase was focused in time deposits under $100,000, which increased $25.8 million or 17.2%. The increase in time deposits are the 14 result of calling efforts by Bank employees and deposit promotions offered during the period. It is not anticipated that this trend will change significantly through the second quarter of 2000. The most volatile deposits in any financial institution are certificates of deposit over $100,000. The Company has not found its certificates of deposit over $100,000 to be as volatile as some other financial institutions as it does not solicit these types of deposits from brokers nor does it offer interest rate premiums. It has been the Company's experience that large depositors have placed their funds with the Company due to its strong reputation for safety and soundness. Capital Much attention has been directed at the capital adequacy of the financial institution industry. The Company relies on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to insure depositor protection. Shareholders' Equity totaled $82.6 million at March 31, 2000 and $81.4 million at March 31, 1999, which represents an increase of $1.3 million or 1.5%. The Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation have adopted risk-based capital guidelines. The guidelines are designed to make capital requirements more sensitive to differences in risk related assets among Banking organizations, to take into account off-balance sheet exposures and to aid in making the definition of Bank capital uniform. Company assets and off-balance sheet items are categorized by risk. The results of these regulations are that assets with a higher degree of risk require a larger amount of capital; assets, such as cash, with a low degree of risk have little or no capital requirements. Under the guidelines the Company is currently required to maintain regulatory risk based capital equal to at least 8.0%. As of March 31, 2000 the Company meets all capital adequacy requirements to which it is subject. The following table illustrates the relationship between regulatory capital requirements and the Company and Bank's capital position.
To Be Well Capitalized Under Regulatory Capital Prompt Corrective (in thousands) Actual Requirements Action Provisions March 31, 2000 Amount Ratio Amount Ratio Amount Ratio - ----------------------------------------------------------------------------------------------------------------- Total Bank Capital to Risk Weighted Assets $92,418 16.95% $43,600 8.0% $54,501 10.0% Total Consolidated Capital to Risk Weighted Assets $93,384 17.13% $43,617 8.0% $54,521 10.0% Tier I Bank Capital to Risk Weighted Assets $85,563 15.69% $21,800 4.0% $32,701 6.0% Tier I Consolidated Capital to Risk Weighted Assets $86,526 15.87% $21,809 4.0% $32,713 6.0% Tier I Bank Capital to Average Assets $85,563 10.69% $32,017 4.0% $40,022 5.0%
Risk Management The Company has adopted a Risk Management Plan to ensure the proper control and management of all risk factors inherent in the operation of the Company and the Bank. Specifically, credit risk, interest rate risk, liquidity risk, compliance risk, strategic risk, reputation risk and price risk can all affect the market risk of the Company. These specific risk factors are 15 not mutually exclusive. It is recognized that any product or service offered by the Company may expose the Company and Bank to one or more of these risk factors. Credit Risk Credit risk is the risk to earnings or capital arising from an obligor's failure to meet the terms of any contract or otherwise fail to perform as agreed. Credit risk is found in all activities where success depends on counterparty, issuer, or borrower performance. Central to the Company's credit risk management is a proven loan risk rating system. Limitations on industry concentration, aggregate customer borrowings and geographic boundaries also reduce loan credit risk. Credit risk in the investment portfolio is minimized through clearly defined limits in the Bank's policy statements. Senior Management, Directors' Committees, and the Board of Directors are provided with timely and accurate information to appropriately identify, measure, control and monitor the credit risk of the Company and the Bank. The allowance for loan losses is based on estimates of probable losses inherent in the loan portfolio. The amount actually incurred with respect to these losses can vary significantly from the estimated amounts. The Company's methodology includes several features which are intended to reduce the difference between estimated and actual losses. Implicit in lending activities is the risk that losses will and do occur and that the amount of such losses will vary over time. Consequently, the Company maintains an allowance for loan losses by charging a provision for loan losses to earnings. Loans determined to be losses are charged against the allowance for loan losses. The Company's allowance for loan losses is maintained at a level considered by management to be adequate to provide for estimated losses inherent in the existing portfolio along with unused commitments to provide financing including commitments under commercial and standby letters of credit. The Company's methodology for assessing the appropriateness of the reserve consists of several key elements, which include the formula allowance, specific allowances for identified problem loans and portfolio segments and the unallocated allowance. Specific allowances are established in cases where management has identified conditions or circumstances related to credit that management believes indicate the possibility that a loss may be incurred in excess of the amount determined by the application of the formula reserve. Management performs a detailed analysis of these loans, including, but not limited to appraisals of the collateral, conditions of the marketplace for liquidating the collateral and assessment of the guarantors. Management then determines the loss potential and allocates a portion of the reserve for losses as a specific allowance for each of these credits. Management believes that the allowance for loan losses at March 31, 2000 was adequate to provide for both recognized and potential losses and estimated inherent losses in the portfolio. No assurances can be given that future events may not result in increases in delinquencies, non-performing loans or net loan chargeoffs that would increase the provision for loan losses and thereby adversely affect the results of operations. 16 Asset / Liability Management - Interest Rate Risk The mismatch between maturities of interest sensitive assets and liabilities results in uncertainty in the Company's earnings and economic value and is referred to as interest rate risk. Farmers & Merchants Bancorp's primary objective in managing interest rate risk is to minimize the potential for significant loss as a result of changes in interest rates. The Company measures interest rate risk in terms of potential impact on both its economic value and earnings. The methods for governing the amount of interest rate risk include: analysis of asset and liability mismatches (GAP analysis), the utilization of a simulation model and limits on maturities of investment, loan and deposit products to relatively short periods which reduces the market volatility of those instruments. The gap analysis measures, at specific time intervals, the divergence between earning assets and interest bearing liabilities for which repricing opportunities will occur. A positive difference, or gap, indicates that earning assets will reprice faster than interest-bearing liabilities. This will generally produce a greater net interest margin during periods of rising interest rates and a lower net interest margin during periods of declining interest rates. Conversely, a negative gap will generally produce a lower net interest margin during periods of rising interest rates and a greater net interest margin during periods of decreasing interest rates. The interest rates paid on deposit accounts do not always move in unison with the rates charged on loans. In addition, the magnitude of changes in the rates charged on loans is not always proportionate to the magnitude of changes in the rate paid for deposits. Consequently, changes in interest rates do not necessarily result in an increase or decrease in the net interest margin solely as a result of the differences between repricing opportunities of earning assets or interest bearing liabilities. The Company also utilizes the results of a dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. The sensitivity of the Company's net interest income is measured over a rolling one-year horizon. The simulation model estimates the impact of changing interest rates on interest income from all interest earning assets and the interest expense paid on all interest bearing liabilities reflected on the Company's balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given both a 200 basis point upward and downward shift in interest rates. A parallel and pro rata shift in rates over a 12-month period is assumed. Results that exceed policy limits, if any, are analyzed for risk tolerance and reported to the Board with appropriate recommendations. The Bank's market risk has not significantly changed since December 31, 1999. The estimated sensitivity does not necessarily represent a Company forecast and the results may not be indicative of actual changes to the Company's net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, pricing strategies on loans and deposits, replacement of asset and liability cashflows, and other assumptions. While the 17 assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change. Liquidity Liquidity risk is the risk to earnings or capital resulting from the Bank's inability to meet its obligations when they come due without incurring unacceptable losses. It includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect the Bank's ability to liquidate assets or acquire funds quickly and with minimum loss of value. The Company endeavors to maintain a cash flow adequate to fund operations, handle fluctuations in deposit levels, respond to the credit needs of borrowers and to take advantage of investment opportunities as they arise. The principal sources of liquidity include interest and principal payments on loans and investments, proceeds from the maturity or sale of investments, and growth in deposits. In general, liquidity risk is managed daily by controlling the level of Fed Funds and the use of funds provided by the cash flow from the investment portfolio. The Company maintains overnight investments in Fed Funds as a reserve for temporary liquidity needs. During the first quarter of 2000, Federal Funds averaged $3.3 million. In addition, the Company maintains Federal Fund credit lines of $136 million with major correspondent banks subject to the customary terms and conditions for such arrangements. At March 31, 2000, the Company had available liquid assets, which included cash and unpledged investment securities of approximately $322.4 million, which represents 39.8% of total assets. Year 2000 Update - ---------------- The Company is pleased to report that its efforts to prepare for the year 2000 were completely successful. The following is a summary of the more relevant facts: . There were no system interruptions as a result of the date change. . There are no further costs anticipated related to the year 2000. . The costs to become compliant approximate the $1,571,000 previously reported. . During the fourth quarter of 1999 and first quarter of 2000, there was no significant change in the Company's revenue or spending patterns. . The Company has not postponed any material project or capital improvements due to the year 2000. . The Company is not aware of any customer or third party vendor that will not be able to perform in accordance with existing contracts or service agreements. 18 Average Balance Sheets The tables on the following pages reflect the Company's average balance sheets and volume and rate analysis for the three-month periods ending March 31, 2000 and 1999. The average yields on earning assets and average rates paid on interest-bearing liabilities have been computed on an annualized basis for purposes of comparability with full year data. Average balance amounts for assets and liabilities are the computed average of daily balances. 19 Farmers & Merchants Bancorp Year-to-Date Average Balances and Interest Rates (Interest and Rates on a Taxable Equivalent Basis) (in thousands)
Three Months Ended March 31, 2000 Assets Balance Interest Rate - ----------------------------------------------------------------------------------------------------------- Federal Funds Sold $ 3,315 $ 46 5.57% Investment Securities Available-for-Sale U.S. Treasuries 14,976 204 5.46% U.S. Agencies 7,230 104 5.77% Municipals 24,336 393 6.48% Mortgage Backed Securities 255,946 4,057 6.36% Other 4,720 77 6.54% - ----------------------------------------------------------------------------------------------------------- Total Investment Securities Available-for-Sale 307,208 4,835 6.31% - ----------------------------------------------------------------------------------------------------------- Investment Securities Held-to-Maturity U.S. Treasuries 0 0 0.00% U.S. Agencies 2,018 30 5.96% Municipals 46,202 842 7.31% Mortgage Backed Securities 0 0 0.00% Other 856 19 8.90% - ----------------------------------------------------------------------------------------------------------- Total Investment Securities Held-to-Maturity 49,076 891 7.28% - ----------------------------------------------------------------------------------------------------------- Loans Real Estate 270,212 6,112 9.07% Commercial 129,362 3,030 9.39% Installment 19,547 444 9.11% Credit Card 3,227 89 11.06% Municipal 270 4 5.94% - ----------------------------------------------------------------------------------------------------------- Total Loans 422,618 9,679 9.19% - ----------------------------------------------------------------------------------------------------------- Total Earning Assets 782,217 $ 15,451 7.92% ================ Unrealized Gain/(Loss) on Securities Available-for-Sale (8,651) Reserve for Loan Losses (10,060) Cash and Due From Banks 26,048 All Other Assets 30,180 - ----------------------------------------------------------------------------------------- Total Assets $ 819,734 ========================================================================================= Liabilities & Shareholders' Equity Interest Bearing Deposits Transaction $ 66,394 $ 188 1.14% Savings 192,567 1,074 2.24% Time Deposits Over $100,000 82,248 1,019 4.97% Time Deposits Under $100,000 189,427 2,310 4.89% - ----------------------------------------------------------------------------------------------------------- Total Interest Bearing Deposits 530,636 4,591 3.47% Other Borrowed Funds 46,496 629 5.43% - ----------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities 577,132 $ 5,220 3.63% ================ Demand Deposits 152,281 All Other Liabilities 8,179 - ----------------------------------------------------------------------------------------- Total Liabilities 737,592 Shareholders' Equity 82,142 - ----------------------------------------------------------------------------------------- Total Liabilities & Shareholders' Equity $ 819,734 ========================================================================================= Net Interest Margin 5.25% ===========================================================================================================
Notes: Yields on municipal securities have been calculated on a fully taxable equivalent basis using the applicable Federal and State income tax rates for the period. Loan Fees are included in interest income for loans. Unearned discount is included for rate calculation purposes. Nonaccrual loans and lease financing receivables have been included in the average balances. Yields on securities available-for-sale are based on historical cost. 20 Farmers & Merchants Bancorp Year-to-Date Average Balances and Interest Rates (Interest and Rates on a Taxable Equivalent Basis) (in thousands)
Three Months Ended March 31, 1999 Assets Balance Interest Rate - ------------------------------------------------------------------------------------- Federal Funds Sold $ 19,599 $ 237 4.90% Investment Securities Available-for-Sale U.S. Treasuries 19,191 262 5.54% U.S. Agencies 11,589 177 6.19% Municipals 23,799 379 6.45% Mortgage Backed Securities 246,648 3,688 6.06% Other 4,916 61 5.03% - ------------------------------------------------------------------------------------- Total Investment Securities Available-for-Sale 306,143 4,567 6.05% - ------------------------------------------------------------------------------------- Investment Securities Held-to-Maturity U.S. Treasuries 2,005 30 6.07% U.S. Agencies 1,991 12 2.44% Municipals 53,220 1,027 7.83% Mortgage Backed Securities 0 0 0.00% Other 1,063 25 9.54% - ------------------------------------------------------------------------------------- Total Investment Securities Held-to-Maturity 58,279 1,094 7.61% - ------------------------------------------------------------------------------------- Loans: Real Estate 205,233 4,698 9.28% Commercial 100,488 2,293 9.25% Installment 14,364 343 9.68% Credit Card 2,798 83 12.03% Municipal 178 3 6.84% - ------------------------------------------------------------------------------------- Total Loans 323,061 7,420 9.31% - ------------------------------------------------------------------------------------- Total Earning Assets 707,082 $13,318 7.64% =============== Unrealized Gain/(Loss) on Securities Available-for-Sale 469 Reserve for Loan Losses (8,756) Cash and Due From Banks 22,363 All Other Assets 25,338 - ------------------------------------------------------------------- Total Assets $746,496 =================================================================== Liabilities & Shareholders' Equity Interest Bearing Deposits: Transaction $ 59,721 $ 170 1.15% Savings 183,326 1,007 2.23% Time Deposits Over $100,000 63,695 748 4.76% Time Deposits Under $100,000 172,575 2,051 4.82% - ------------------------------------------------------------------------------------- Total Interest Bearing Deposits 479,317 3,976 3.36% Other Borrowed Funds 42,795 573 5.43% - ------------------------------------------------------------------------------------- Total Interest Bearing Liabilities 522,112 $ 4,549 3.53% =============== Demand Deposits 137,807 All Other Liabilities 5,870 - ------------------------------------------------------------------- Total Liabilities 665,789 Shareholders' Equity 80,707 - ------------------------------------------------------------------- Total Liabilities & Shareholders' Equity $746,496 =================================================================== Net Interest Margin 5.03% =====================================================================================
Notes: Yields on municipal securities have been calculated on a fully taxable equivalent basis using the applicable Federal and State income tax rates for the period. Loan Fees are included in interest income for loans. Unearned discount is included for rate calculation purposes. Nonaccrual loans and lease financing receivables have been included in the average balances. Yields on securities available-for-sale are based on historical cost. 21 Farmers & Merchants Bancorp Volume and Rate Analysis of Net Interest Revenue (Rates on a Taxable Equivalent Basis) (in thousands)
2000 versus 1999 Amount of Increase (Decrease) Due to Change in: Average Average Net Interest Earning Assets Balance Rate Change - ------------------------------------------------------------------------------------------------------------------- Federal Funds Sold $ (388) $ 197 $ (191) Investment Securities Available for Sale U.S. Treasuries (54) (4) (58) U.S. Agencies (62) (11) (73) Municipals 13 2 14 Mortgage Backed Securities 162 208 369 Other (16) 31 16 - ------------------------------------------------------------------------------------------------------------------- Total Investment Securities Available for Sale 42 226 268 - ------------------------------------------------------------------------------------------------------------------- Investment Securities Held to Maturity U.S. Treasuries (15) (16) (30) U.S. Agencies 1 18 18 Municipals (123) (62) (185) Mortgage Backed Securities 0 0 0 Other (5) (2) (6) - ------------------------------------------------------------------------------------------------------------------- Total Investment Securities Held to Maturity (142) (61) (203) - ------------------------------------------------------------------------------------------------------------------- Loans: Real Estate 2,127 (712) 1,414 Commercial 700 37 737 Installment 228 (127) 101 Credit Card 40 (34) 6 Other 3 (3) 1 - ------------------------------------------------------------------------------------------------------------------- Total Loans 3,098 (839) 2,259 - ------------------------------------------------------------------------------------------------------------------- Total Earning Assets 2,611 (477) 2,133 - ------------------------------------------------------------------------------------------------------------------- Interest Bearing Liabilities Interest Bearing Deposits: Transaction 35 (17) 18 Savings 62 5 67 Time Deposits Over $100,000 236 36 271 Time Deposits Under $100,000 225 34 259 - ------------------------------------------------------------------------------------------------------------------- Total Interest Bearing Deposits 558 58 615 Other Borrowed Funds 59 (3) 56 - ------------------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities 617 55 671 - ------------------------------------------------------------------------------------------------------------------- Total Change $1,994 $ (532) $ 1,462 ===================================================================================================================
Notes: Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total "net change." The above figures have been rounded to the nearest whole number. 22 PART II. OTHER INFORMATION - --------------------------- ITEM 1. Legal Proceedings - ------------------------- None ITEM 2. Changes in Securities - ----------------------------- None ITEM 3. Defaults Upon Senior Securities - --------------------------------------- Not applicable ITEM 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- None ITEM 5. Other Information - ------------------------- None ITEM 6. Exhibits and Reports on Form 8-K - ---------------------------------------- (a) Exhibit Exhibit 27 - Financial Data Schedule 23 SIGNATURES ---------- Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FARMERS & MERCHANTS BANCORP Date: May 12, 2000 ____________________________ Kent A. Steinwert President and Chief Executive Officer (Principal Executive Officer) Date: May 12, 2000 ____________________________ John R. Olson Executive Vice President and Chief Financial Officer (Principal Accounting Officer) 24 EX-27.1 2 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 25,275 0 2,570 0 294,597 47,821 47,795 423,743 10,265 809,602 678,368 0 7,532 41,056 0 0 7 82,639 809,602 9,679 5,335 48 15,062 4,591 5,220 9,842 500 (180) 6,735 4,336 2,714 0 0 2,714 3.92 0 7.92 1,892 3 0 0 9,787 86 64 10,265 10,265 0 2,903
-----END PRIVACY-ENHANCED MESSAGE-----