-----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, PseBD7pokRiTaQWTOARjfqMUEmbthH02XoOAF9e7nOhDGdxhAT9lJo1vplWCFYzS /0qNQ8slXJ9GqEHQOsBI3A== /in/edgar/work/0000929624-00-001535/0000929624-00-001535.txt : 20001109 0000929624-00-001535.hdr.sgml : 20001109 ACCESSION NUMBER: 0000929624-00-001535 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARMERS & MERCHANTS BANCORP CENTRAL INDEX KEY: 0001085913 STANDARD INDUSTRIAL CLASSIFICATION: [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: 755573 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 0001.txt FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 For Quarter Ended September 30, 2000 Commission File Number: 1.000-26099 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 687,514 as of November 6, 2000. FARMERS & MERCHANTS BANCORP FORM 10-Q TABLE OF CONTENTS ---------------------- PART I. - FINANCIAL INFORMATION Page --------------------- ---- Item 1 - Financial Statements Consolidated Balance Sheets as of September 30, 2000 December 31, 1999 and September 30, 1999. 3 Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2000 and 1999. 4 Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 2000 and 1999. 5 Statement of Changes in Shareholders' Equity for the Nine months ended September 30, 2000 and 1999. 6 Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 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) September 30, December 31, September 30, 2000 1999 1999 Assets (Unaudited) (Unaudited) - ---------------------------------------------------------------------------------------------------- Cash and Cash Equivalents: Cash and Due From $ 28,936 $ 30,384 $ 22,981 Federal Funds Sold 14,900 11,600 - - ---------------------------------------------------------------------------------------------------- Total Cash and Cash Equivalents 43,836 41,984 22,981 Investment Securities: Available-for Sale 282,423 297,580 292,251 Held-to-Maturity 44,303 49,275 51,213 - ---------------------------------------------------------------------------------------------------- Total Investment Securities 326,726 346,855 343,464 - ---------------------------------------------------------------------------------------------------- Loans 484,820 413,757 399,378 Less: Unearned Income (552) (348) (388) Less: Allowance for Loan Losses (11,071) (9,787) (9,700) - ---------------------------------------------------------------------------------------------------- Loans, Net 473,197 403,622 389,290 - ---------------------------------------------------------------------------------------------------- Land, Buildings & Equipment 12,137 12,707 11,988 Interest Receivable and Other Assets 15,487 14,713 15,059 - ---------------------------------------------------------------------------------------------------- Total Assets $871,383 $819,881 $782,782 ==================================================================================================== Liabilities & Shareholders' Equity Deposits: Demand $154,256 $163,658 $145,293 Interest Bearing Transaction 81,129 86,503 74,389 Savings 162,676 179,294 168,686 Time Deposits Over $100,000 142,705 74,259 103,475 Time Deposits Under $100,000 192,204 181,429 157,104 - ---------------------------------------------------------------------------------------------------- Total Deposits 732,970 685,143 648,947 - ---------------------------------------------------------------------------------------------------- Federal Home Loan Bank Advances / Fed Funds Purchased 41,041 41,064 44,471 Other Liabilities 9,772 13,473 7,884 - ---------------------------------------------------------------------------------------------------- Total Liabilities 783,783 739,680 701,302 - ---------------------------------------------------------------------------------------------------- Shareholders' Equity Common Stock 7 7 7 Additional Paid In Capital 53,587 47,993 48,105 Retained Earnings 36,189 36,040 36,002 Accumulated Other Comprehensive Income (Loss) (2,183) (3,839) (2,634) - ---------------------------------------------------------------------------------------------------- Total Shareholders' Equity 87,600 80,201 81,480 - ---------------------------------------------------------------------------------------------------- Total Liabilities & Shareholders' Equity $871,383 $819,881 $782,782 ====================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 3
FARMERS & MERCHANTS BANCORP Consolidated Statements of Income (Unaudited) - ---------------------------------------------------------------------------------------------------------------- (in thousands except per share data) Three Months Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 --------------------------------------------------- Interest Income: Interest & Fees on Loans $11,475 $ 9,312 $31,979 $25,134 Federal Funds Sold 515 34 617 522 Interest on Investment Securities Taxable 4,390 4,348 13,582 13,001 Non-taxable 717 787 2,212 2,496 - ---------------------------------------------------------------------------------------------------------------- Total Interest Income 17,097 14,481 48,390 41,153 - ---------------------------------------------------------------------------------------------------------------- Interest Expense: Interest Bearing Transaction 192 179 571 526 Savings 1,017 1,034 3,105 3,070 Time Deposits Over $100,000 1,540 1,746 3,750 3,261 Time Deposits Under $100,000 3,347 1,166 8,271 5,234 Interest on Borrowed Funds 825 627 2,344 1,774 - ---------------------------------------------------------------------------------------------------------------- Total Interest Expense 6,921 4,752 18,041 13,865 - ---------------------------------------------------------------------------------------------------------------- Net Interest Income 10,176 9,729 30,349 27,288 Provision for Loan Losses 400 500 1,400 1,400 - ---------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 9,776 9,229 28,949 25,888 - ---------------------------------------------------------------------------------------------------------------- Non-Interest Income Service Charges on Deposit Accounts 882 800 2,588 2,347 Net Gain (Loss) on Sale of Investment Securities (1) 7 (119) 149 Other 811 767 2,652 2,105 - ---------------------------------------------------------------------------------------------------------------- Total Non-Interest Income 1,692 1,574 5,121 4,601 - ---------------------------------------------------------------------------------------------------------------- Non-Interest Expense Salaries & Employee Benefits 4,100 3,825 12,262 11,247 Occupancy 435 436 1,291 1,244 Other Operating 2,377 2,823 7,136 7,218 - ---------------------------------------------------------------------------------------------------------------- Total Non-Interest Expense 6,912 7,084 20,689 19,709 - ---------------------------------------------------------------------------------------------------------------- Income Before Taxes 4,556 3,719 13,381 10,780 Provision for Income Taxes 1,728 1,316 5,035 3,751 - ---------------------------------------------------------------------------------------------------------------- Net Income $ 2,828 $ 2,403 $ 8,346 $ 7,029 ================================================================================================================ Earnings Per Share $ 4.11 $ 3.46 $ 12.09 $ 10.11 ================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 4
FARMERS & MERCHANTS BANCORP Consolidated Statements of Comprehensive Income (Unaudited) - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands) Three Months Ended Nine Months Ended Sept. 30, Sept. 30, Sept. 30, Sept.30, 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Net Income $2,828 $2,403 $ 8,346 $ 7,029 Other Comprehensive Income (Loss) - Unrealized Gain (Loss) on Securities: 1,603 (621) 1,656 (3,466) - ------------------------------------------------------------------------------------------------------------------------------------ Total Other Comprehensive Income (Loss) 1,603 (621) 1,656 (3,466) - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive Income $4,431 $1,782 $10,002 $ 3,563 ===================================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 5
FARMERS & MERCHANTS BANCORP Consolidated Statements of Changes in Shareholders' Equity (Unaudited) - -------------------------------------------------------------------------------------------------------------------------------- (in thousands except per share data) Accumulated Common Additional Other Total Shares Common Paid-In Retained Comprehensive Shareholders' Outstanding Stock Capital Earnings Income (Loss) Equity - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 632,185 $6 $43,576 $34,991 $ 832 $79,405 ================================================================================================================================ Net Income - - 7,029 - 7,029 Cash Dividends Declared on - Common Stock - - (1,125) - (1,125) 5% Stock Dividend 31,110 1 4,822 (4,823) - - Cash Paid in Lieu of Fractional Shares Related to Stock Dividend - - (70) - (70) Redemption of Stock (1,774) - (293) - - (293) Changes in Net Unrealized Gain (Loss) on Securities Available for Sale - - - (3,466) (3,466) - -------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1999 661,521 $7 $48,105 $36,002 $(2,634) $81,480 ================================================================================================================================ - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 660,989 $7 $47,993 $36,040 $(3,839) $80,201 ================================================================================================================================ Net Income - - 8,346 - 8,346 Cash Dividends Declared on - Common Stock - - (1,273) - (1,273) 5% Stock Dividend 32,496 - 6,824 (6,824) - - Cash Paid in Lieu of Fractional Shares Related to Stock Dividend - - (100) - (100) Redemption of Stock (5,877) - (1,230) - - (1,230) Changes in Net Unrealized Gain (Loss) on Securities Available for Sale - - - 1,656 1,656 - -------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 2000 687,608 $7 $53,587 $36,189 $(2,183) $87,600 ================================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 6
FARMERS & MERCHANTS BANCORP Consolidated Statement of Cash Flows (Unaudited) For Nine Months Ending - ------------------------------------------------------------------------------------- (in thousands) Sept. 30, Sept. 30, 2000 1999 - ------------------------------------------------------------------------------------- Operating Activities: Net Income $ 8,346 $ 7,029 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Loan Losses 1,400 1,400 Depreciation and Amortization 1,341 1,323 Provision for Deferred Income Taxes (345) (405) (Amortization) Accretion of Investment Security (307) 597 Discounts/Premiums Net (Gain) Loss on Sale of Investment Securities 119 (149) Net Change in Operating Assets & Liabilities: (Increase) Decrease in Interest Receivable and Other (1,587) 2,097 Assets Decrease in Interest Payable and Other Liabilities (3,701) (1,030) - ------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 5,266 10,862 Investing Activities: Trading Securities: Purchased - (15,490) Sold or Matured - 15,478 Securities Available-for-Sale: Purchased (41,514) (127,297) Sold or Matured 59,609 141,067 Securities Held-to-Maturity: Purchased (202) (1,978) Matured 5,238 10,876 Net Loans Originated or Acquired (71,142) (70,740) Principal Collected on Loans Charged Off 167 639 Net Additions to Premises and Equipment (771) (1,597) - ------------------------------------------------------------------------------------- Net Cash (Used) by Investing Activities (48,615) (49,042) Financing Activities: Net Decrease in Demand, Interest-Bearing Transaction, and Savings Accounts (31,394) (10,288) Increase in Time Deposits 79,221 31,848 Federal Funds Purchased - 1,400 Federal Home Loan Bank Borrowings: Advances - - Paydowns (23) (22) Cash Dividends (1,373) (1,196) Stock Redemption (1,230) (293) - ------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 45,201 21,449 Increase (Decrease) in Cash and Cash Equivalents 1,852 (16,731) Cash and Cash Equivalents at Beginning of Period 41,984 39,712 - ------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 43,836 $ 22,981 =====================================================================================
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 September 30, 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 September 30, 2000, were 687,632. Basic earnings per share is calculated on the basis of the weighted average number of shares outstanding during the period. Weighted average number of shares for the nine months ending September 30, 2000 and 1999 were 690,353 and 695,132 and for the three months ending September 30, 2000 and 1999, were 687,611 and 694,091, 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 and; (v) 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 nine 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 nine months ended September 30, 2000, Farmers & Merchants Bancorp reported net income of $8,346,000, earnings per share of $12.09, return on average assets of 1.33% and return on average shareholders' equity of 12.75%. For the nine months ending September 30, 1999, net income totaled $7,029,000, earnings per share was $10.11, return on average assets was 1.23% and the return on average shareholders' equity totaled 11.37%. 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 results for the nine-month period ending September 30, 2000 compared to September 30, 1999. . Net income for the period totaled $8.3 million, up 18.7% over last year. . Net interest income increased 11.2% to $30.3 million from $27.3 million. . The provision for loan losses remained at $1.4 million for both periods. . Non-interest income increased 11.3% to $5.1 million, from the $4.6 million reported for 1999. . Non-interest expense increased 5.0% and totaled $20.7 million during the first nine months of 2000. . Total assets increased 11.3% to $871.4 million. . Total loans increased 21.4% to $484.8 million, up $85.4 million. . Total deposits increased 12.9% to $732.9 million. . Total investment securities decreased to $326.7 million from $343.5 million at September 30, 1999. . Total Shareholders' Equity increased $6.1 million to $87.6 million. Net Interest Income Net interest income is the amount by which the interest and fees on loans and interest 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 11.2% to $30.3 million during the first nine months of 2000, compared to $27.3 million at September 30, 1999. On a fully taxable equivalent basis, net interest income increased 10.2% and totaled $31.5 million at September 30, 2000, compared to $28.6 million for the first nine 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 nine months ended 10 September 30, 2000, the net interest margin was 5.2% compared to 5.3% for the same period in 1999. The decrease in net interest margin was primarily related to a change in asset mix and the impact of their corresponding rates of interest. Securities declined by $12.6 million, loans increased by $98.3 million and interest-bearing deposits increased by $69.4 million. Loans, the Company's highest earning asset, increased $85.4 million as of September 30, 2000 compared to September 30, 1999. On an average balance basis, loans have increased by $98.3 million. The yield on the loan portfolio declined 9 basis points to 9.47% for the nine months ending September 30, 2000 compared to 9.56% for the nine months ending September 30, 1999. This decline in yield, due to competitive pressures, was offset by the growth in balances, which had a positive effect on interest revenue from loans in the amount of $6.8 million for the first nine 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 $12.0 million during the first nine months of 2000. In spite of the decrease in the average balance of investment securities, interest income increased 1.0% as a portion of the portfolio was repositioned late in 1999. The average yield, on a taxable equivalent basis, in the investment portfolio was 6.6% in 2000 compared to 6.3% 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 30.1% as a result of growth in interest-bearing deposit balances, additional borrowings, and an increase in interest rates paid for those source of funds. Overall, interest-bearing sources of funds increased $69.4 million or 13.1%. Of that increase, average borrowings increased $11.4 million and interest-bearing deposits increased 58.0 million. Interest expense increased disproportionately from the increase in deposit balances due to the rising rate environment and promotional rates paid on certain time deposit products. Overall, the average interest cost on deposits was 3.8% at September 30, 2000 and 3.3% at September 30, 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. 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 allowance for loan losses is established to absorb losses inherent in the portfolio. 11 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 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 and 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 appropriate allowance amount is based upon growth in the loan portfolio, 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 the current amount in the allowance for loan losses was adequate. As of September 30, 2000, the allowance for loan losses was $11.1 million, which represents 2.3% of the total loan balances. For the period ended September 30, 1999, the allowance was $9.7 million and 2.4% of total loans. The table below illustrates the change in the allowance for the first nine months of 2000 and 1999.
Allowance for Loan Losses (in thousands) - -------------------------- Balance, December 31, 1999 $ 9,787 Provision Charged to Expense 1,400 Recoveries of Loans Previously Charged Off 167 Loans Charged Off (283) - ---------------------------------------------------------------------------- Balance, September 30, 2000 $11,071 ============================================================================ Balance, December 31, 1998 $ 8,589 Provision Charged to Expense 1,400 Recoveries of Loans Previously Charged Off 639 Loans Charged Off (928) - ---------------------------------------------------------------------------- Balance, September 30, 1999 $ 9,700 ============================================================================
12 Non-Interest Income Non-interest income increased 11.3% for the nine months ending September 30, 2000, compared to the same period of 1999. This change was due to increases in service charges on deposit 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 $1.0 million or 9.0% 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 $146 thousand or 5.2%. Other operating expense increased 2.0% or $111 thousand from September 30, 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 and a new branch in the Modesto area. It is anticipated that the future growth rate in other operating expense will remain modest and comparable to the growth in assets. Income Taxes The provision for income taxes increased 34.2% to $5.0 million for the first nine months of 2000. For the nine months ended September 30, 1999, the provision totaled $3.8 million. Additionally, the Company's effective tax rate increased due to the reduction of investments in tax-exempt securities. 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 September 30, 2000, 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 September 30, 2000 the investment portfolio represented 37.5% of the Company's total assets. Total investment securities decreased $16.7 million from a year ago and now total $326.7 million. Not included in the investment portfolio are overnight investments in Federal Funds Sold. For the nine months ended September 30, 2000, average Federal Funds Sold was $13.3 million compared to $14.2 in 1999. 13 Loans The Company's loan portfolio at September 30, 2000 increased $85.4 million from September 30, 1999. The increase is the result of an aggressive calling program and a favorable economic climate in the Company's market area. Additionally, on an average balance basis loans have increased $98.3 million or 27.7%. No significant change in this trend is expected through the fourth 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) Sept. 30, 2000 Dec. 31, 1999 Sept. 30, 1999 - -------------------------------------------------------------------------------- Real Estate Construction $ 27,880 $ 39,186 $ 37,605 Real Estate - Other 254,499 222,354 216,595 Commercial 177,152 129,969 123,843 Consumer 25,289 22,248 21,335 - -------------------------------------------------------------------------------- Gross Loans 484,820 413,757 399,378 Less: Unearned Income 552 348 388 Allowance for Loan Losses 11,071 9,787 9,700 - -------------------------------------------------------------------------------- Net Loans $473,118 $403,622 $389,290 ================================================================================
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 September 30, 2000, non-performing loans were $2.7 million compared to $2.9 million at September 30, 1999. Managing problem loans continues to be a significant Company objective. The Company reported $299 thousand as other real estate at September 30, 2000, compared to the $420 thousand as of September 30, 1999. Accrued interest reversed from income on loans placed on a non-accrual status totaled $125 thousand for the nine months ended September 30, 2000 compared to $276 thousand for the nine months ended September 30, 1999.
Non-Performing Assets - --------------------- (dollar amounts in thousands) Sept. 30, 2000 Dec. 31, 1999 Sept. 30, 1999 - -------------------------------------------------------------------------------- Nonperforming Loans $2,734 $2,511 $2,948 OREO 299 204 420 - ------------------------------------------------------------------------------- Total $3,033 $2,715 $3,368 ================================================================================ Non-Performing Assets as a % of: - ------------------------------- Total Loans 0.6% 0.6% 0.8% Allowance for Loan Loss 27.4% 27.7% 34.7%
14 Deposits At September 30, 2000, deposits totaled $732.9 million. This represents an increase of 12.9% or $84.0 million from September 30, 1999. The majority of the increase was focused in time deposits over $100,000, which increased $39.2 million or 37.9%. This increase was the result of new and larger relationships with municipal depositors in the Bank's service area. It is not anticipated that this trend will change significantly through the fourth 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. 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 $87.6 million at September 30, 2000 and $81.5 million at September 30, 1999, which represents an increase of $6.1 million or 7.5%. 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 September 30, 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 September 30, 2000 Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------------------------------------------------------------------------------------- Total Bank Capital to Risk Weighted Assets $95,713 15.64% $48,952 8.0% $61,190 10.0% Total Consolidated Capital to Risk Weighted Assets $96,948 17.03% $45,533 8.0% N/A N/A Tier I Bank Capital to Risk Weighted Assets $88,022 14.38% $24,476 4.0% $36,714 6.0% Tier I Consolidated Capital to Risk Weighted Assets $89,785 15.77% $22,766 4.0% N/A N/A Tier I Bank Capital to Average Assets $88,022 10.05% $35,035 4.0% $43,794 5.0%
15 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 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 allowance 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 allowance for losses for each of these credits. 16 Management believes that the allowance for loan losses at September 30, 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. 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. At September 30, 2000, the Company's estimated net interest income sensitivity to changes in interest rates, as a percent of net interest income was an increase in net 17 interest income of 5.05% if rates increase by 200 basis points and a decrease in net interest income of 6.78% if rates decline 200 basis points. 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 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 third quarter of 2000, Federal Funds averaged $13.3 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 September 30, 2000, the Company had available liquid assets, which included cash and unpledged investment securities of approximately $159.4 million, which represents 18.3% of total assets. Average Balance Sheets The tables on the following pages reflect the Company's average balance sheets and volume and rate analysis for the nine-month periods ending September 30, 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. 18 Farmers & Merchants Bancorp Year-to-Date Average Balances and Interest Rates (Interest and Rates on a Taxable Equivalent Basis) (in thousands)
Nine Months Ended September 30, 2000 ------------------------------------- Assets Balance Interest Rate - -------------------------------------------------------------------------------------------------- Federal Funds Sold $ 13,252 $ 617 6.20% Investment Securities Available-for-Sale U.S. Treasuries 9,461 393 5.53% U.S. Agencies 7,139 312 5.82% Municipals 24,047 1,177 6.52% Mortgage Backed Securities 251,451 12,103 6.41% Other 5,226 324 8.26% - -------------------------------------------------------------------------------------------------- Total Investment Securities Available-for-Sale 297,324 14,309 6.41% - -------------------------------------------------------------------------------------------------- Investment Securities Held-to-Maturity U.S. Treasuries 0 0 0.00% U.S. Agencies 1,997 89 5.94% Municipals 44,270 2,500 7.52% Mortgage Backed Securities 0 0 0.00% Other 794 57 9.56% - -------------------------------------------------------------------------------------------------- Total Investment Securities Held-to-Maturity 47,061 2,646 7.49% - -------------------------------------------------------------------------------------------------- Loans Real Estate 276,379 19,189 9.25% Commercial 149,100 11,052 9.87% Installment 20,465 1,440 9.37% Credit Card 3,276 280 11.39% Municipal 403 18 5.95% - -------------------------------------------------------------------------------------------------- Total Loans 449,623 31,979 9.47% - -------------------------------------------------------------------------------------------------- Total Earning Assets 807,260 $49,551 8.18% ===================== Net Unrealized Gain/(Loss) on Securities (7,754) Available-for-Sale Allowance for Loan Losses (10,429) Cash and Due From Banks 25,718 All Other Assets 30,394 - ------------------------------------------------------------------------ Total Assets $845,189 ======================================================================== Liabilities & Shareholders' Equity Interest Bearing Deposits Transaction $ 65,144 $ 571 1.17% Savings 182,058 3,105 2.27% Time Deposits Over $100,000 91,643 3,750 5.45% Time Deposits Under $100,000 206,997 8,271 5.32% - -------------------------------------------------------------------------------------------------- Total Interest Bearing Deposits 545,842 15,697 3.83% Other Borrowed Funds 55,331 2,344 5.64% - -------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities 601,173 $18,041 4.00% ====================== Demand Deposits 152,457 All Other Liabilities 7,792 - ------------------------------------------------------------------------ Total Liabilities 761,422 Shareholders' Equity 83,767 - ------------------------------------------------------------------------ Total Liabilities & Shareholders' Equity $845,189 ======================================================================== Net Interest Margin 5.20% ==================================================================================================
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. 19 Farmers & Merchants Bancorp Year-to-Date Average Balances and Interest Rates (Interest and Rates on a Taxable Equivalent Basis) (in thousands)
Nine Months Ended September 30, 1999 --------------------------------------- Assets Balance Interest Rate - ------------------------------------------------------------------------------------------------ Federal Funds Sold $ 14,194 $ 522 4.92% Investment Securities Available-for-Sale U.S. Treasuries 21,566 856 5.31% U.S. Agencies 9,438 442 6.26% Municipals 24,287 1,159 6.38% Mortgage Backed Securities 242,291 11,034 6.09% Other 4,254 137 4.31% - ------------------------------------------------------------------------------------------------ Total Investment Securities Available-for-Sale 301,836 13,628 6.04% - ------------------------------------------------------------------------------------------------ Investment Securities Held-to-Maturity U.S. Treasuries 1,079 49 6.07% U.S. Agencies 1,992 64 4.30% Municipals 51,087 2,945 7.71% Mortgage Backed Securities 0 0 0.00% Other 1,014 109 14.37% - ------------------------------------------------------------------------------------------------ Total Investment Securities Held-to-Maturity 55,172 3,167 7.67% - ------------------------------------------------------------------------------------------------ Loans Real Estate 222,820 16,206 9.72% Commercial 110,081 7,567 9.19% Installment 15,318 1,089 9.51% Credit Card 2,879 259 12.03% Municipal 275 13 6.32% - ------------------------------------------------------------------------------------------------ Total Loans 351,373 25,134 9.56% - ------------------------------------------------------------------------------------------------ Total Earning Assets 722,575 $42,451 7.85% ====================== Net Unrealized Gain/(Loss) on Securities (841) Available-for-Sale Allowance for Loan Losses (8,887) Cash and Due From Banks 23,790 All Other Assets 26,346 - ---------------------------------------------------------------------- Total Assets $762,983 ====================================================================== Liabilities & Shareholders' Equity Interest Bearing Deposits Transaction $ 61,799 $ 526 1.14% Savings 183,366 3,070 2.24% Time Deposits Over $100,000 93,302 3,261 4.67% Time Deposits Under $100,000 149,348 5,234 4.69% - ------------------------------------------------------------------------------------------------ Total Interest Bearing Deposits 487,815 12,091 3.31% Other Borrowed Funds 43,954 1,774 5.40% - ------------------------------------------------------------------------------------------------ Total Interest Bearing Liabilities 531,769 $13,865 3.49% ====================== Demand Deposits 142,775 All Other Liabilities 6,032 - ---------------------------------------------------------------------- Total Liabilities 680,576 Shareholders' Equity 82,407 - ---------------------------------------------------------------------- Total Liabilities & Shareholders' Equity $762,983 ====================================================================== Net Interest Margin 5.29% ================================================================================================
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 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 $ (54) $ 149 $ 95 Investment Securities Available for Sale U.S. Treasuries (521) 59 (463) U.S. Agencies (101) (29) (130) Municipals (15) 33 18 Mortgage Backed Securities 445 624 1,069 Other 37 150 187 - --------------------------------------------------------------------------------------------------------------- Total Investment Securities Available for Sale (156) 837 681 - --------------------------------------------------------------------------------------------------------------- Investment Securities Held to Maturity U.S. Treasuries (25) (25) (49) U.S. Agencies 0 25 25 Municipals (377) (67) (445) Mortgage Backed Securities 0 0 0 Other (21) (32) (52) - --------------------------------------------------------------------------------------------------------------- Total Investment Securities Held to Maturity (422) (99) (521) - --------------------------------------------------------------------------------------------------------------- Loans: Real Estate 4,239 (1,256) 2,983 Commercial 2,880 605 3,485 Installment 376 (25) 351 Credit Card 42 (20) 21 Other 6 (1) 5 - --------------------------------------------------------------------------------------------------------------- Total Loans 7,543 (698) 6,845 - --------------------------------------------------------------------------------------------------------------- Total Earning Assets 6,911 189 7,100 - --------------------------------------------------------------------------------------------------------------- Interest Bearing Liabilities Interest Bearing Deposits: Transaction 30 15 45 Savings (28) 63 35 Time Deposits Over $100,000 (93) 582 489 Time Deposits Under $100,000 2,246 791 3,037 - --------------------------------------------------------------------------------------------------------------- Total Interest Bearing Deposits 2,155 1,451 3,606 Other Borrowed Funds 484 86 570 - --------------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities 2,639 1,537 4,176 - --------------------------------------------------------------------------------------------------------------- Total Change $4,271 $(1,347) $2,924 ===============================================================================================================
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. 21 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 - ----------------------------------------------------------- ITEM 5. Other Information - ------------------------- None ITEM 6(a). Exhibits - ------------------- 27 Financial Data Schedule ITEM 6(b). Reports on Form 8-K - ------------------------------ The Company filed form 8-K on October 20, 2000, with respect to a change in the registrant's certifying accountant. 22 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: November 7, 2000 /s/ Kent A. Steinwert --------------------------------- Kent A. Steinwert President and Chief Executive Officer (Principal Executive Officer) Date: November 7, 2000 /s/ John R. Olson --------------------------------- John R. Olson Executive Vice President and Chief Financial Officer (Principal Accounting Officer) 23 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 09/30/00 CONSOLIDATED BALANCE SHEETS AND THE 09/30/00 CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 28,936 0 14,900 0 282,423 44,303 44,670 484,268 11,071 871,383 732,970 0 9,772 41,041 0 0 7 87,593 871,383 31,979 15,794 617 48,390 15,697 18,041 30,349 1,400 (119) 20,689 13,381 13,381 0 0 8,346 12.09 0 8.18 2,720 14 0 0 9,787 283 167 11,071 11,071 0 902
-----END PRIVACY-ENHANCED MESSAGE-----