-----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, FpXAJHNC9A2K4KhxejTROlIXLW/wZRncFl3KRrgRUS3g1v+0UY70SfAW8lC+b3YL ms1MUD7BaKcV2JdVYTHF3Q== 0000929624-01-000425.txt : 20010319 0000929624-01-000425.hdr.sgml : 20010319 ACCESSION NUMBER: 0000929624-01-000425 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010316 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-K SEC ACT: SEC FILE NUMBER: 000-26099 FILM NUMBER: 1570760 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-K 1 0001.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-K -------------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value 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 [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of March 12, 2001, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $168,428,925 based on the sales price of that day of $245.00. The number of shares of Common Stock outstanding as of March 12, 2001: 687,465 Documents Incorporated by Reference: Portions of the Annual Report to Shareholders for 2000 are incorporated by reference in Part II, Item 5 through 8, portions of the 8-K filed October 20, 2000, is incorporated by reference in Part II, Item 9 and portions of the definitive proxy statement for the 2001 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A are incorporated by reference in Part III, Items 10 through 13. FARMERS & MERCHANTS BANCORP FORM 10-K TABLE OF CONTENTS
PART I Page ---- Item 1. Business 4 - General Development of the Business 4 - Service Area - Employees - Competition - Government Policies - Supervision and Regulation - Statistical Disclosure Item 2. Properties 24 Item 3. Legal Proceedings 24 Item 4. Submission of Matters to a Vote of Security Holders 24 PART II Item 5. Market for the Registrant's Common Stock and Related Security Matters 24 Item 6. Selected Financial Data 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 Item 8. Financial Statements and Supplementary Data 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 25 PART III Item 10. Directors and Executive Officers of the Company 25 Item 11. Executive Compensation 25 Item 12. Security Ownership of Certain Beneficial Owners and Management 25 Item 13. Certain Relationships and Related Transactions 25
2 Item 14. Exhibits, Financial Statement Schedules and Reports on Forms 8-k 25 Signatures 26
3 Introduction This annual 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. PART I Item 1. Business General Development of the Business August 1, 1916 marked the first day of business for Farmers & Merchants Bank of Lodi. The Bank was incorporated under the laws of the State of California and was licensed by the California Department of Financial Institutions as a state- chartered bank. The Bank prospered and grew even through the Depression years. Farmers & Merchants' first venture out of Lodi occurred in response to the closure of the only bank serving the community of Galt, requiring area residents to drive miles away for the simplest banking transaction. To meet this need, the Galt office was opened in 1948. Shortly thereafter branches were opened in Linden, North Modesto and South Sacramento. On April 12, 1957, the Secretary of State granted authority to officially change the Bank's name to Farmers & Merchants Bank of Central California. The Bank continued expansion in the Lodi market area and also acquired three offices in Turlock and Hilmar in 1985. The service area was next expanded by opening a loan production office in the community of Elk Grove. This office was later converted to a full service branch. A third office was also opened in Modesto. In 1997, a loan production office was opened in the community of Walnut Grove. On April 30, 1999, Farmers & Merchants Bancorp (referred to herein on a consolidated basis as the "Company"), pursuant to a reorganization, acquired all of the voting stock of Farmers & Merchants Bank of Central California (the "Bank"). Farmers & Merchants Bank is the Company's principal asset. Farmers & Merchants Bancorp is a bank holding company incorporated in the State of Delaware on February 22, 1999, and registered under the Bank Holding Company Act of 1956, as amended. The Company's securities as of December 31, 2000, consist of 687,491 of common stock, $0.01 par value and no shares of Preferred stock issued. The Bank's two wholly owned subsidiaries are Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Both Companies were organized during 1986. Farmers & Merchants Investment Corporation is currently dormant and Farmers/Merchants Corp. acts as trustee on deeds of trust originated by the Bank. The Company's principal business is to serve as a holding company for the Bank and for other banking or banking related subsidiaries which the Company may establish or acquire. The Company has not engaged in any other activities to date. As a legal entity separate and distinct from its subsidiary, The Company's 4 principal source of funds is, and will continue to be, dividends paid by and other funds advanced from the Bank. Legal limitations are imposed on the amount of dividends that may be paid and loans that may be made by the Bank to the Company. See Dividends and Other Transfer of Funds on Page 6. The Bank's deposit accounts are insured under the Federal Deposit Insurance Act up to applicable limits. The Bank is a member of the Federal Reserve System 1999 also saw the opening of our Centralized Loan Center in Lodi. Growth will continue in 2001 with a move to new facilities for our Turlock Main Office and the addition of our Vintage Faire Office in Modesto. Service Area The Company services the northern Central Valley with 18 banking offices. The area includes Sacramento, San Joaquin, Stanislaus and Merced Counties with branches in Sacramento, Elk Grove, Galt, Lodi, Walnut Grove, Linden, Modesto, Turlock and Hilmar. Through its network of banking offices, the Company emphasizes personalized service along with a full range of banking services to businesses and individuals located in the service areas of its offices. Although the Company focuses on marketing of its services to small and medium sized businesses, a full range of retail banking services are made available to the local consumer market. The Company offers a wide range of deposit instruments. These include checking, savings, money market, time certificates of deposit, individual retirement accounts and online banking services for both business and personal accounts. The Company also serves as a federal tax depository for its business customers. The Company provides a full complement of lending products, including commercial, real estate construction, agribusiness, installment, credit card and real estate loans. Commercial products include lines of credit and other working capital financing and letters of credit. Financing products for individuals include automobile financing, lines of credit, residential real estate, home improvement and home equity lines of credit. The Company also offers a wide range of specialized services designed for the needs of its commercial accounts. These services include a credit card program for merchants, collection services, payroll services, on-line account access, and electronic funds transfers by way of domestic and international wire and automated clearinghouse. The Company makes available investment products to customers, including mutual funds and annuities. These investment products are offered through a third party with investment advisors Employees At December 31, 2000 the Company employed a total of 296 full time equivalent employees. The Company believes that its employee relations are excellent. Competition The Banking and financial services industry in California generally, and in the Company's market areas specifically, is highly competitive. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial service providers. The Company competes with other major commercial banks, diversified financial institutions, savings banks, credit unions, savings and loan associations, money market and other mutual funds, mortgage companies, and a variety of other nonbanking financial services and advisory companies. Federal legislation in recent years seems to favor competition between different types of financial service providers and to foster new entrants into the financial services market, and it is anticipated that this trend will continue. 5 Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader range of financial services than the Company. In order to compete with other financial service providers, the Company relies upon personal contact by its officers, directors, employees, and shareholders, along with various promotional activities and specialized services. In those instances where the Company is unable to accommodate a customer's needs, the Company may arrange for those services to be provided through its correspondents. Government Policies The Company and the Bank are influenced by prevailing economic conditions, monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Board of Governors of the Federal Reserve System. The actions and policy directives of the Federal Reserve Board determine, to a significant degree, the cost and the availability of funds obtained from money market sources for lending and investing. Federal Reserve Board policies and regulations also influence, directly and indirectly, the rates of interest paid by commercial banks on their time and savings deposits through its open market operations in U.S. Government securities and adjustments to the discount rates applicable to borrowings by depository institutions and others. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits and also affect the interest rates earned on interest-earning assets and paid on interest-bearing liabilities. The nature and impact of future changes in such policies on the Company of future changes in economic conditions and monetary and fiscal policies are not predictable. Supervision and Regulation General Bank holding companies and banks are extensively regulated under both federal and state law. The regulation is intended primarily for the protection of depositors and the deposit insurance fund and not for the benefit of shareholders of the Company. Set forth below is a summary description of the material laws and regulations, which relate to the operations of the Company and the Bank. This description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations. In recent years significant legislative proposals and reforms affecting the financial services industry have been discussed and evaluated by Congress, the state legislature and before the various Bank regulatory agencies. These proposals may increase or decrease the cost of doing business, limiting or expanding permissible activities, or enhance the competitive position of other financial service providers. The likelihood and timing of any such proposals or bills and the impact they might have on the Company and its subsidiaries cannot be predicted. The Company The Company is a registered bank holding company and is subject to regulation under the Bank Holding Company Act of 1956, as amended. Accordingly, the Company's operations, and its subsidiaries are subject to extensive regulation and examination by the Board of Governors of the Federal Reserve System (FRB). The Company is required to file with the FRB quarterly and annual reports and such additional information as the FRB may require pursuant to the Bank Holding Company Act. The FRB conducts periodic examinations of the Company and its subsidiaries. The Federal Reserve Board may require that the Company terminate an activity or terminate control of or liquidate or divest certain subsidiaries of affiliates when the Federal Reserve Board believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The Federal Reserve Board also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, the Company must file written notice and obtain approval from the Federal Reserve Board prior to purchasing or redeeming its equity securities. 6 Under the BHCA and regulations adopted by the Federal Reserve Board, a bank holding company and its nonbanking subsidiaries are prohibited from requiring certain tie-in arrangements in connection with an extension of credit, lease or sale of property or furnishing of services. For example, with certain exceptions, a bank may not condition an extension of credit on a promise by its customer to obtain other services provided by it, its holding company or other subsidiaries, or on a promise by its customer not to obtain other services from a competitor. In addition, federal law imposes certain restrictions on transitions between Farmers & Merchants Bancorp and its subsidiaries. Further, the Company is required by the Federal Reserve Board to maintain certain levels of capital. See "Capital." Directors, officers and principal shareholders of Farmers & Merchants Bancorp, and the companies with which they are associated, have had and will continue to have banking transactions with the Bank in the ordinary course of business. Any loans and commitments to lend included in such transactions are made in accordance with applicable law, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons of similar creditworthiness, and on terms not involving more than the normal risks of collection or presenting other unfavorable features. The Company is prohibited by the BHCA, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting share of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. However, the Company, subject to the prior approval of the Federal Reserve Board, may engage in any, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Removal of many of the activity limitations is currently under review by Congress, but whether any legislation liberalizing permitted bank holding company activities will be enacted is not known. Under Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Boards' policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board's regulations or both. The Company's securities are registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As such, the Company is subject to the information, proxy solicitation, insider trading and other requirements and restrictions of the Exchange Act. The Bank The Bank, as a California chartered bank, is subject to primary supervision, periodic examination and regulation by the California Department of Financial Institutions ("DFI") and the FRB. If, as a result of an examination of the Bank, the FRB should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank's operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, various remedies are available to the FRB. Such remedies include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to 7 assess civil monetary penalties, to remove officers and directors and ultimately to terminate the Bank's deposit insurance, which for a California chartered bank would result in a revocation of the Bank's charter. The DFI has many of the same remedial powers. Various requirements and restrictions under the laws of the State of California and the United States affect the operations of the Bank. State and federal statues and regulations relate to many aspects of the Bank's operations, including reserves against deposits, ownership of deposit accounts, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, and capital requirements. Further, the Bank is required to maintain certain levels of capital. See "Capital." Dividends and Other Transfer of Funds Dividends from the Bank constitute the principal source of income to the Company. The Company is a legal entity separate and distinct from the Bank. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Company. Under such restrictions, the amount available for payment of dividends to the Company by the Bank totaled $18.1 million at December 31, 2000. The FRB and the DFI also have authority to prohibit the Bank from engaging in activities that, in their opinion, constitute unsafe or unsound practices in conducting its business. It is possible, depending upon the financial condition of the Bank in question and other factors, that the FRB and the DFI could assert that the payment of dividends or other payments might, under some circumstances, be an unsafe or unsound practice. Further, the FRB and the FDIC have established guidelines with respect to the maintenance of appropriate levels of capital by banks or bank holding companies under their jurisdiction. Compliance with the standards set forth in such guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of federal law could limit the amount of dividends which the Bank or the Company may pay. An insured depository institution is prohibited from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized. The DFI may impose similar limitations on the Bank. See "Prompt Corrective Regulatory Action and Other Enforcement Mechanisms" and "Capital Standards" for a discussion of these additional restrictions on capital distributions. The Bank is subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, the Company or other affiliates, the purchase of, or investments in, stock or other securities thereof, the taking of such securities as collateral for loans, and the purchase of assets of the Company or other affiliates. Such restrictions prevent the Company and other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designate amounts. Further, such secured loans and investments by the Bank to or in the Company or to or in any other affiliates are limited, individually, to 10.0% of the Bank's capital and surplus (as defined by federal regulations), and such secured loans and investments are limited, in the aggregate, to 20.0% of the Bank's capital and surplus (as defined by federal regulations). California law also imposes certain restriction with respect to transactions involving the transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of federal law. See "Item 1. Business - Supervision and Regulation - Prompt Corrective Action and Other Enforcement Mechanisms. Capital The Federal Reserve Board and the FDIC have established risk-based minimum capital guidelines with respect to the maintenance of appropriate levels of capital by United States Banking organizations. These guidelines are intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are 8 multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as commercial loans. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk- adjusted assets of 4%. In addition to the risked-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be 3%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above minimum guidelines and ratios. As of December 31, 2000 and 1999 the Company and the Bank's risk-based capital ratios were as follows:
To Be Well Capitalized Under Regulatory Capital Prompt Corrective (in thousands) Actual Requirements Action Provisions December 31, 2000 Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------ Total Bank Capital to Risk Weighted Assets $96,150 15.22% $50,548 8.0% $63,185 10.0% Total Consolidated Capital to Risk Weighted Assets $97,419 15.41% $50,582 8.0% N/A N/A Tier I Bank Capital to Risk Weighted Assets $88,203 13.96% $25,274 4.0% $37,911 6.0% Tier I Consolidated Capital to Risk Weighted Assets $90,092 14.25% $25,291 4.0% N/A N/A Tier I Bank Capital to Average Assets $88,203 10.00% $35,268 4.0% $44,085 5.0% Tier I Consolidated Capital to Average Assets $90,092 10.21% $35,285 4.0% N/A N/A December 31, 1999 - ------------------------------------------------------------------------------------------------------------------ Total Bank Capital to Risk Weighted Assets $89,573 16.70% $42,915 8.0% $53,644 10.0% Total Consolidated Capital to Risk Weighted Assets $90,784 16.92% $42,922 8.0% N/A N/A Tier I Bank Capital to Risk Weighted Assets $82,829 15.44% $21,458 4.0% $32,187 6.0% Tier I Consolidated Capital to Risk Weighted Assets $84,040 15.66% $21,461 4.0% N/A N/A Tier I Bank Capital to Average Assets $82,829 10.37% $31,938 4.0% $39,923 5.0% Tier I Consolidated Capital to Average Assets $84,040 10.53% $31,938 4.0% N/A N/A
Prompt Corrective Action The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective Federal regulatory agencies to implement systems for "prompt corrective action" for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An "undercapitalized" Company must develop a capital restoration plan. At December 31, 2000 the Company exceeded all of the required ratios for classification as "well capitalized." An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or 9 practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. Banking agencies have also adopted regulations which mandate that regulators take into consideration (i) concentrations of credit risk; (ii) interest rate risk (when the interest rate sensitivity of an institution's assets does not match the sensitivity of its liabilities or its off-balance-sheet position); and (iii) risks from non-traditional activities, as well as an institution's ability to manage those risks, when determining the adequacy of an institution's capital. That evaluation will be made as a part of the institution's regular safety and soundness examination. In addition, the banking agencies have amended their regulatory capital incorporate a measure for market risk. In accordance with the amended guidelines, the Company and any Company with significant trading activity must incorporate a measure for market risk in their regulatory capital calculations. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the supervising agencies for unsafe or unsound practices in conducting their businesses for violations of law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions vary commensurate with the severity of the violation. Safety and Soundness Standards The federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to: (i) internal controls, information systems and internal audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation, fees and benefits. In addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and earnings standards. These guidelines provide six standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating. Under these standards, any insured depository institution should: (i) conduct periodic asset quality reviews to identify problem assets, (ii) estimate the inherent losses in problem assets and establish reserves that are sufficient to absorb estimated losses, (iii) compare problem asset totals to capital, (iv) take appropriate corrective action to resolve problem assets, (v) consider the size and potential risks of material asset concentrations, and (vi) provide periodic asset quality reports with adequate information for management and the board of directors to assess the level of asset risk. These guidelines also set forth standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves. Premiums for Deposit Insurance The Company's deposit accounts are insured by the Bank Insurance Fund ("BIF"), as administered by the FDIC, up to the maximum permitted by law. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operation, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or the institution's primary regulator. The FDIC charges an annual assessment for the insurance of deposits, which as of December 31, 2000, ranged from 0 to 27 basis points per $100 of insured deposits, based on the risk a particular institution poses to its deposit insurance fund. The risk classification is based on an institution's capital group and supervisory subgroup assignment. An institution's risk category is based upon whether the institution is well capitalized, adequately capitalized, or less than adequately capitalized. Each insured depository institution is also assigned to one of the following "supervisory subgroups." Subgroup A, B or C. Subgroup A institutions are financially sound institutions with few minor weaknesses; Subgroup B institutions are institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration; and Subgroup C institutions are 10 institutions for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness. Insured institutions are not allowed to disclose their risk assessment classification and no assurance can be given as to what the future level of premiums will be. The Community Reinvestment Act ("CRA") The Bank is subject to certain fair lending requirements and reporting obligations involving lending, investing and other CRA activities. CRA requires each Company to identify the communities served by the Company's offices and to identify the types of credit and investments the Company is prepared to extend within such communities including low and moderated income neighborhoods. It also requires the Company's regulators to assess the Company's performance in meeting the credit needs of its community and to take such assessment into consideration in reviewing application for mergers, acquisitions and other transactions, such as the Branch Acquisition. A bank may be subject to substantial penalties and corrective measures for a violation of certain fair lending laws. The federal banking agencies may take compliance with such laws and CRA in consideration when regulating and supervising other banking activities. A Bank's compliance with its CRA obligations is based on a performance based evaluation system which bases CRA ratings on an institution's lending service and investment performance. An unsatisfactory rating may be the basis for denying a merger application. The Company completed a CRA examination during 2000, and received a satisfactory rating in complying with its CRA obligations. Risk Factors that May Affect Future Results The following discusses certain factors that may affect the Company's financial results and operations and should be considered in evaluating the Company. Economic Conditions and Geographic Concentration. The Company's operations are located in Sacramento, San Joaquin, Stanislaus and Merced Counties, in the Central Valley of California. As a result of this geographic concentration, the Company's results depend largely upon economic conditions in these areas. A deterioration in economic conditions in the Company's market areas could have a material adverse impact on the quality of the Company's loan portfolio, the demand for its products and services and its financial condition and results of operations. Interest Rates. The Company's earnings are impacted by changing interest rates. Changes in interest rates impact the level of loans, deposits and investments, the credit profile of existing loans and the rates received on loans and securities and the rates paid on deposits and borrowings. The Company does not attempt to predict interest rates and positions the balance sheet in a manner to minimize the affects of changing interest rates. However, significant fluctuations in interest rates may have an adverse affect on the Company's financial condition and results of operations. Government Regulations and Monetary Policy. The banking industry is subject to extensive federal and state supervision and regulation. Significant new laws or changes in existing loans, or repeals of existing laws may cause the Company's results to differ materially. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions for the Company and a material change in these conditions could have a material adverse impact on the Company's financial condition and results of operations. Competition. The banking and financial services business in the Company's market areas is highly competitive. The increasingly competitive environment is a result of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial service 11 providers. The results of the Company may differ if circumstances affecting the nature or level of completion change. Credit Quality. A significant source of risk arises from the possibility that losses will be sustained because borrowers, guarantors and related parties adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for credit losses, that management believes are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying the Company's credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could have a material adverse effect on the Company's results. Statistical Disclosure The tables on the following pages set forth certain statistical information for Farmers & Merchants Bancorp on a consolidated basis. Averages are computed on a daily average basis. This information should be read in conjunction with "Management's Discussion and Analysis" in the Company's 2000 Annual Report to Shareholders, located in Exhibit 13, incorporated herein by reference and with the Company's Consolidated Financial Statements and the Notes thereto included in Company's 2000 Annual Report to Shareholders, located in Exhibit 13, incorporated herein by reference. 12 Year-to-Date Average Balances and Interest Rates (Interest and Rates on a Taxable Equivalent Basis) (in thousands)
Twelve Months Ended December 2000 Assets Balance Interest Rate - -------------------------------------------------------------------------------------------------- Federal Funds Sold $ 20,481 $ 1,300 6.35% Investment Securities Available for Sale U.S. Treasuries 8,350 461 5.52% U.S. Agencies 7,133 416 5.83% Municipals 23,802 1,531 6.43% Mortgage Backed Securities 248,708 15,977 6.42% Other 5,340 328 6.14% - -------------------------------------------------------------------------------------------------- Total Investment Securities Available for Sale 293,333 18,713 6.38% - -------------------------------------------------------------------------------------------------- Investment Securities Held to Maturity U.S. Treasuries 0 0 0.00% U.S. Agencies 1,997 119 5.96% Municipals 43,126 3,200 7.42% Mortgage Backed Securities 0 0 0.00% Other 770 75 9.74% - -------------------------------------------------------------------------------------------------- Total Investment Securities Held to Maturity 45,893 3,394 7.40% - -------------------------------------------------------------------------------------------------- Loans Real Estate 279,313 26,374 9.44% Commercial 153,678 15,318 9.97% Installment 20,592 2,021 9.81% Credit Card 3,340 425 12.72% Municipal 509 33 6.48% - -------------------------------------------------------------------------------------------------- Total Loans 457,432 44,171 9.66% - -------------------------------------------------------------------------------------------------- Total Earning Assets 817,139 $ 67,579 8.27% ================== Unrealized Gain/(Loss) on Securities Available for Sale (6,571) Allowance for Loan Losses (10,676) Cash and Due From Banks 26,303 All Other Assets 30,098 - ----------------------------------------------------------------------------- Total Assets $ 856,293 ============================================================================= Liabilities & Shareholders' Equity Interest Bearing Deposits Transaction $ 65,678 $ 778 1.18% Savings 181,476 4,127 2.27% Time Deposits Over $100,000 94,773 5,339 5.63% Time Deposits Under $100,000 212,014 11,601 5.47% - -------------------------------------------------------------------------------------------------- Total Interest Bearing Deposits 553,941 21,845 3.94% Other Borrowed Funds 52,017 2,912 5.60% - -------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities 605,958 $ 24,757 4.09% ================== Demand Deposits 156,941 All Other Liabilities 8,244 - ----------------------------------------------------------------------------- Total Liabilities 771,143 Shareholders' Equity 85,150 - ----------------------------------------------------------------------------- Total Liabilities & Shareholders' Equity $ 856,293 ============================================================================= Net Interest Margin 5.24% ==================================================================================================
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. 13 Year-to-Date Average Balances and Interest Rates (Interest and Rates on a Taxable Equivalent Basis) (in thousands)
Twelve Months Ended December 1999 Assets Balance Interest Rate - -------------------------------------------------------------------------------------------------- Federal Funds Sold $ 15,580 $ 793 5.09% Investment Securities Available for Sale U.S. Treasuries 21,145 1,116 5.28% U.S. Agencies 8,864 547 6.17% Municipals 24,014 1,543 6.42% Mortgage Backed Securities 242,092 14,828 6.12% Other 4,350 241 5.54% - -------------------------------------------------------------------------------------------------- Total Investment Securities Available for Sale 300,465 18,275 6.08% - -------------------------------------------------------------------------------------------------- Investment Securities Held to Maturity U.S. Treasuries 807 49 6.07% U.S. Agencies 1,993 93 4.67% Municipals 50,185 3,861 7.69% Mortgage Backed Securities 0 0 0.00% Other 975 110 11.28% - -------------------------------------------------------------------------------------------------- Total Investment Securities Held to Maturity 53,960 4,113 7.62% - -------------------------------------------------------------------------------------------------- Loans Real Estate 231,955 22,382 9.65% Commercial 111,233 10,276 9.24% Installment 16,319 1,519 9.31% Credit Card 2,917 395 13.54% Municipal 330 21 6.36% - -------------------------------------------------------------------------------------------------- Total Loans 362,754 34,593 9.54% - -------------------------------------------------------------------------------------------------- Total Earning Assets 732,759 $ 57,773 7.88% ================== Unrealized Gain/(Loss) on Securities Available for Sale (1,983) Allowance for Loan Losses (9,097) Cash and Due From Banks 25,240 All Other Assets 27,801 - ----------------------------------------------------------------------------- Total Assets $ 774,720 ============================================================================= Liabilities & Shareholders' Equity Interest Bearing Deposits Transaction $ 63,298 $ 715 1.13% Savings 184,547 4,140 2.24% Time Deposits Over $100,000 71,015 3,335 4.70% Time Deposits Under $100,000 176,337 8,310 4.71% - -------------------------------------------------------------------------------------------------- Total Interest Bearing Deposits 495,197 16,500 3.33% Other Borrowed Funds 43,585 2,362 5.42% - -------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities 538,782 $ 18,862 3.50% ================== Demand Deposits 146,529 All Other Liabilities 6,418 - ----------------------------------------------------------------------------- Total Liabilities 691,729 Shareholders' Equity 82,991 - ----------------------------------------------------------------------------- Total Liabilities & Shareholders' Equity $ 774,720 ============================================================================= Net Interest Margin 5.31% ==================================================================================================
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. 14 Year-to-Date Average Balances and Interest Rates (Interest and Rates on a Taxable Equivalent Basis) (in thousands)
Twelve Months Ended December 1998 Assets Balance Interest Rate - ---------------------------------------------------------------------------------------------------- Federal Funds Sold $ 17,665 $ 943 5.34% Investment Securities Available for Sale U.S. Treasuries 12,024 721 6.00% U.S. Agencies 28,767 1,949 6.78% Municipals 11,304 726 6.42% Mortgage Backed Securities 199,319 12,549 6.30% Other 3,708 241 6.50% - ---------------------------------------------------------------------------------------------------- Total Investment Securities Available for Sale 255,122 16,186 6.34% - ---------------------------------------------------------------------------------------------------- Investment Securities Held to Maturity U.S. Treasuries 2,015 120 5.96% U.S. Agencies 19,216 1,080 5.62% Municipals 60,600 4,793 7.91% Mortgage Backed Securities 0 0 0.00% Other 1,146 135 11.78% Total Investment Securities Held to Maturity 82,977 6,128 7.39% - ---------------------------------------------------------------------------------------------------- Loans Real Estate 186,840 18,896 10.11% Commercial 91,983 9,042 9.83% Installment 12,807 1,358 10.60% Credit Card 2,865 400 13.96% Municipal 127 11 8.66% - ---------------------------------------------------------------------------------------------------- Total Loans 294,622 29,707 10.08% - ---------------------------------------------------------------------------------------------------- Total Earning Assets 650,386 $52,964 8.14% ====================== Unrealized Gain/(Loss) on Securities Available for Sale 401 Allowance for Loan Losses (7,889) Cash and Due From Banks 22,739 All Other Assets 24,304 - ------------------------------------------------------------------------------ Total Assets $689,941 ============================================================================== Liabilities & Shareholders' Equity Interest Bearing Deposits Transaction $ 56,242 $ 768 1.37% Savings 177,301 4,025 2.27% Time Deposits Over $100,000 62,129 3,193 5.14% Time Deposits Under $100,000 153,109 7,794 5.09% - ---------------------------------------------------------------------------------------------------- Total Interest Bearing Deposits 448,781 15,780 3.52% Other Borrowed Funds 29,899 1,648 5.51% - ---------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities 478,680 $17,428 3.64% ====================== Demand Deposits 126,470 All Other Liabilities 5,453 - ------------------------------------------------------------------------------ Total Liabilities 610,603 Shareholders' Equity 79,338 - ------------------------------------------------------------------------------ Total Liabilities & Shareholders' Equity $689,941 ============================================================================== Net Interest Margin 5.46% ====================================================================================================
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. 15 Volume and Rate Analysis of Net Interest Income (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 $ 284 $ 223 $ 507 Investment Securities Available for Sale U.S. Treasuries (704) 49 (655) U.S. Agencies (102) (29) (131) Municipals (14) 2 (11) Mortgage Backed Securities 412 737 1,149 Other 59 27 87 - ------------------------------------------------------------------------------------------------------------------- Total Investment Securities Available for Sale (349) 787 439 - ------------------------------------------------------------------------------------------------------------------- Investment Securities Held to Maturity U.S. Treasuries (24) (25) (49) U.S. Agencies 0 26 26 Municipals (528) (133) (660) Mortgage Backed Securities 0 0 0 Other (21) (14) (35) - ------------------------------------------------------------------------------------------------------------------- Total Investment Securities Held to Maturity (573) (146) (718) - ------------------------------------------------------------------------------------------------------------------- Loans: Real Estate 4,481 (489) 3,992 Commercial 4,177 864 5,042 Installment 416 87 502 Credit Card 55 (25) 30 Other 11 0 12 - ------------------------------------------------------------------------------------------------------------------- Total Loans 9,140 438 9,578 - ------------------------------------------------------------------------------------------------------------------- Total Earning Assets 8,503 1,302 9,805 - ------------------------------------------------------------------------------------------------------------------- Interest Bearing Liabilities Interest Bearing Deposits: Transaction 28 35 63 Savings (70) 57 (13) Time Deposits Over $100,000 1,255 749 2,004 Time Deposits Under $100,000 1,832 1,459 3,291 Total Interest Bearing Deposits 3,045 2,299 5,345 Other Borrowed Funds 470 80 550 - ------------------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities 3,515 2,379 5,895 - ------------------------------------------------------------------------------------------------------------------- Total Change $ 4,988 $ (1,077) $ 3,910 ===================================================================================================================
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. 16 Volume and Rate Analysis of Net Interest Revenue (Rates on a Taxable Equivalent Basis) (in thousands)
1999 versus 1998 Amount of Increase (Decrease) Due to Change in: ----------------------------------- Average Average Net Interest Earning Assets Volume Rate Change - ------------------------------------------------------------------------------------------------------------------- Federal Funds Sold $ (107) $ (43) $ (150) Investment Securities Available-for-Sale U.S. Treasuries 490 (95) 395 U.S. Agencies (1,241) (161) (1,402) Municipals 816 0 816 Mortgage Backed Securities 2,628 (349) 2,279 Other 39 (39) 0 - ------------------------------------------------------------------------------------------------------------------- Total Investment Securities Available-for-Sale 2,732 (644) 2,088 - ------------------------------------------------------------------------------------------------------------------- Investment Securities Held-to-Maturity U.S. Treasuries (73) 2 (71) U.S. Agencies (830) (157) (987) Municipals (805) (127) (932) Mortgage Backed Securities 0 0 0 Other (19) (6) (25) - ------------------------------------------------------------------------------------------------------------------- Total Investment Securities Held-to-Maturity (1,727) (288) (2,015) - ------------------------------------------------------------------------------------------------------------------- Loans: Real Estate 4,387 (900) 3,486 Commercial 1,804 (570) 1,234 Installment 341 (180) 161 Credit Card 7 (12) (5) Other 14 (4) 10 - ------------------------------------------------------------------------------------------------------------------- Total Loans 6,553 (1,666) 4,886 - ------------------------------------------------------------------------------------------------------------------- Total Earning Assets 7,451 (2,641) 4,809 - ------------------------------------------------------------------------------------------------------------------- Interest Bearing Liabilities Interest Bearing Deposits: Transaction 89 (143) (53) Savings 162 (48) 115 Time Deposits Over $100,000 432 (289) 142 Time Deposits Under $100,000 1,123 (608) 516 - ------------------------------------------------------------------------------------------------------------------- Total Interest Bearing Deposits 1,807 (1,087) 720 Other Borrowed Funds 742 (28) 714 - ------------------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities 2,549 (1,115) 1,434 - ------------------------------------------------------------------------------------------------------------------- Total Change $ 4,902 $ (1,526) $ 3,375 ===================================================================================================================
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. 17 Investment Portfolio The following table summarizes the balances and distributions of the investment securities held on the dates indicated.
Available Held to Available Held to Available Held to for Sale Maturity for Sale Maturity for Sale Maturity -------------------------------------------------------------- December 31: (in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------- U. S. Treasury $ 5,047 $ 0 $ 11,875 $ 0 $ 9,099 $ 2,006 U. S. Agency 7,090 1,999 7,013 1,995 12,138 1,990 Municipal 23,975 38,585 23,042 46,423 24,047 55,088 Mortgage-Backed Securities 237,734 0 251,003 0 257,644 0 Other 5,540 684 4,647 857 9,377 1,068 - ---------------------------------------------------------------------------------------------------------------- Total Book Value $279,386 $41,268 $297,580 $49,275 $312,305 $60,152 ================================================================================================================ Fair Value $279,386 $41,833 $297,580 $49,411 $312,305 $62,149 ================================================================================================================
Analysis of Investment Securities Available for Sale The following table is a summary of the relative maturities and yields of the Company's investment securities Available for Sale as of December 31, 2000. Municipal securities have been calculated on a fully taxable equivalent basis using the applicable Federal and State income tax rates for the period
Investment Securities Available for Sale Fair Average December 31, 2000 (in thousands) Value Yield - ------------------------------------------------------------------------------------------------------- U.S. Treasury One year or less - - After one year through five years $ 5,047 5.33% After five years through ten years - - After ten years - - - ------------------------------------------------------------------------------------------------------- Total U.S. Treasury Securities 5,047 5.33% - ------------------------------------------------------------------------------------------------------- U.S. Agency One year or less 1,999 6.15% After one year through five years 5,091 5.65% After five years through ten years - - After ten years - - - ------------------------------------------------------------------------------------------------------- Total U.S. Agency Securities 7,090 5.79% - ------------------------------------------------------------------------------------------------------- Municipal One year or less 507 4.92% After one year through five years 1,862 5.57% After five years through ten years 15,977 6.19% After ten years 5,629 6.25% - ------------------------------------------------------------------------------------------------------- Total Municipal Securities 23,975 6.13% - ------------------------------------------------------------------------------------------------------- Mortgage-Backed Securities One year or less 1,620 6.38% After one year through five years 8,112 7.13% After five years through ten years 30,570 6.53% After ten years 197,432 6.43% - ------------------------------------------------------------------------------------------------------- Total Mortgage-Backed Securities 237,734 6.47% - ------------------------------------------------------------------------------------------------------- Other One year or less 5,540 5.92% After one year through five years - - After five years through ten years - - After ten years - - - ------------------------------------------------------------------------------------------------------- Total Other Securities 5,540 5.92% - ------------------------------------------------------------------------------------------------------- Total Investment Securities Available for Sale $279,386 6.39% =======================================================================================================
Note: The average yield for floating rate securities is calculated using the current stated yield. 18 Analysis of Investment Securities Held to Maturity The following table is a summary of the relative maturities and yields of the Company's investment securities Held to Maturity as of December 31, 2000. Municipal securities have been calculated on a fully taxable equivalent basis using the applicable Federal and State income tax rates for the period
Investment Securities Held to Maturity Book Average December 31, 2000 (in thousands) Value Yield - ------------------------------------------------------------------------------------------------------------------- U.S. Treasury One year or less - - After one year through five years - - After five years through ten years - - After ten years - - - ------------------------------------------------------------------------------------------------------------------- Total U.S. Treasury Securities - - - ------------------------------------------------------------------------------------------------------------------- U.S. Agency One year or less $1,999 5.83% After one year through five years - - After five years through ten years - - After ten years - - - ------------------------------------------------------------------------------------------------------------------- Total U.S. Agency Securities 1,999 5.83% - ------------------------------------------------------------------------------------------------------------------- Municipal One year or less 10,087 5.41% After one year through five years 17,409 7.00% After five years through ten years 10,487 6.88% After ten years 602 6.34% - ------------------------------------------------------------------------------------------------------------------- Total Municipal Securities 38,585 6.54% - ------------------------------------------------------------------------------------------------------------------- Other One year or less - - After one year through five years - - After five years through ten years - - After ten years 684 11.11% - ------------------------------------------------------------------------------------------------------------------- Total Other Securities 684 11.11% - ------------------------------------------------------------------------------------------------------------------- Total Investment Securities $41,268 6.58% ===================================================================================================================
19 Loan Data (in thousands) The following table shows the Bank's loan composition by type of loan. December 31, 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------- Real Estate $261,910 $222,354 $180,468 $150,804 $141,408 Real Estate Construction 28,354 39,186 26,529 25,796 24,972 Commercial 182,611 129,969 105,403 79,977 84,073 Installment 20,965 18,953 14,035 12,322 9,690 Credit Card 3,619 3,235 2,989 2,873 3,276 Other 271 60 64 128 152 - -------------------------------------------------------------------------------- Total Loans 497,730 413,757 329,488 271,900 263,571 Less: Unearned Income 333 348 310 294 284 Allowance for Loan Losses 11,876 9,787 8,589 7,188 10,031 - -------------------------------------------------------------------------------- Loans, Net $485,521 $403,622 $320,589 $264,418 $253,256 ================================================================================ There were no concentrations of loans exceeding 10% of total loans which were not otherwise disclosed as a category of loans in the above table. Non-Performing Loans (in thousands)
December 31, 2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Nonaccrual Loans Real Estate $ 948 $ 754 $3,997 $4,911 $5,881 Commercial 520 1,713 595 580 1,055 Installment 4 32 9 7 18 Credit Card 0 0 0 0 0 Other 0 0 0 0 0 - ---------------------------------------------------------------------------------------------------------------- Total Nonaccrual Loans 1,472 2,499 4,601 5,498 6,954 - ---------------------------------------------------------------------------------------------------------------- Accruing Loans Past Due 90 Days or More Real Estate 0 0 0 0 357 Commercial 0 0 0 0 0 Installment 0 0 0 0 1 Credit Card 23 12 23 6 31 Other 0 0 0 0 0 - ---------------------------------------------------------------------------------------------------------------- Total Accruing Loans Past Due 90 Days or More 23 12 23 6 389 - ---------------------------------------------------------------------------------------------------------------- Total Non-Performing Loans $1,495 $2,511 $4,624 $5,504 $7,343 ================================================================================================================ Other Real Estate Owned $88 $204 $636 $2,231 $2,805 Non-Performing Loans as a Percent of Total Loans 0.30% 0.61% 1.40% 2.02% 2.79% ================================================================================================================ Allowance for Loan Losses as a Percent of Total Loans 2.39% 2.37% 2.61% 2.64% 3.81% ================================================================================================================
The Bank's policy is to place loans (Excluding Credit Card Loans) on nonaccrual status when the 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. The gross interest income that would have been recorded if the loans had been current for the year ending December 31, 2000 was $71,000. For a discussion of impaired loan policy see Note 4. in the Notes to the Consolidated Financial Statements of the Company's 2000 Annual Report. 20 Provision and Allowance for Loan Losses (in thousands) The following table summarizes the loan loss experience of the Company for the periods indicated:
2000 1999 1998 1997 1996 - ----------------------------------------------------------------------------------------------- Balance at Beginning of Year $ 9,787 $ 8,589 $ 7,188 $10,031 $ 7,089 Provision Charged to Expense 2,800 1,700 1,400 5,450 4,000 Charge Offs: Real Estate 45 794 194 892 803 Commercial 659 404 91 7,672 226 Installment 177 80 73 78 99 Credit Card 48 30 73 94 93 Other 0 0 0 0 0 - ----------------------------------------------------------------------------------------------- Total Charge Offs $ 929 $ 1,308 $ 431 $ 8,736 $ 1,221 - ----------------------------------------------------------------------------------------------- Recoveries: Real Estate 0 3 1 208 56 Commercial 156 775 388 201 58 Installment 53 21 36 26 40 Credit Card 9 7 7 8 9 Other 0 0 0 0 0 - ----------------------------------------------------------------------------------------------- Total Recoveries 218 806 432 443 163 - ----------------------------------------------------------------------------------------------- Net Recoveries (Charge-Offs) (711) (502) 1 (8,293) (1,058) - ----------------------------------------------------------------------------------------------- Balance at End of Year* $ 11,876 $ 9,787 $ 8,589 $ 7,188 $10,031 =============================================================================================== Ratios: Consolidated Allowance for Loan Losses to: Loans at Year End 2.39% 2.37% 2.61% 2.64% 3.81% Average Loans 2.60% 2.70% 2.92% 2.74% 3.78% Consolidated Net Charge-Offs to: Loans at Year End 0.14% 0.12% 0.00% 3.05% 0.40% Average Loans 0.16% 0.14% 0.00% 3.16% 0.40%
For a description of the Company's policy regarding the Allowance for Loan Losses, see Note 1. in the Notes to the Consolidated Financial Statements of the 2000 Annual Report. Allocation of the Allowance for Loan Losses
(in thousands) Amount of Allowance Allocation at December 31, -------------------------------------------------- 2000 1999 1998 1997 1996 - ----------------------------------------------------------------------------------------------- Real Estate $ 2,875 $ 2,609 $ 3,107 $ 3,020 $ 3,658 Real Estate Construction 311 461 456 516 646 Commercial 3,846 3,382 2,530 1,927 5,598 Installment 129 147 229 82 55 Other 86 81 73 62 67 Unallocated 4,629 3,107 2,194 1,581 7 - ----------------------------------------------------------------------------------------------- Total $11,876 $ 9,787 $ 8,589 $ 7,188 $ 10,031 ===============================================================================================
Percent of Loans in Each Category to Total Loans at December 31, -------------------------------------------------- 2000 1999 1998 1997 1996 -------------------------------------------------- Real Estate 52.6% 53.7% 54.8% 55.5% 53.7% Real Estate Construction 5.7% 9.5% 8.1% 9.5% 9.5% Commercial 36.7% 31.4% 32.0% 29.4% 31.9% Installment 4.2% 4.6% 4.3% 4.5% 3.7% Other 0.8% 0.8% 0.9% 1.1% 1.3% - ----------------------------------------------------------------------------------------------- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===============================================================================================
21 Maturities and Rate Sensitivity of Loans (in thousands) The following table shows the maturity distribution and interest rate sensitivity of loans of the Company on December 31, 2000
Over One Year to Over One Year Five Five or Less Years Years Total Percent - ------------------------------------------------------------------------------------------------------------------- Real Estate $108,941 $139,784 $41,539 $290,264 61.38% Commercial 107,811 56,147 18,653 182,611 38.62% - ------------------------------------------------------------------------------------------------------------------- Total $216,752 $195,931 $60,192 $472,875 100.00% =================================================================================================================== Rate Sensitivity: Predetermined Rate $ 32,007 $ 58,712 $23,598 $114,317 24.17% Floating Rate 184,744 137,219 36,595 358,558 75.83% - ------------------------------------------------------------------------------------------------------------------ Total $216,751 $195,931 $60,193 $472,875 100.00% ================================================================================================================== Percent 45.84% 41.43% 12.73% 100.00% ======================================================================================================
The "One Year Or Less" column includes Demand loans, Overdrafts and Past Due Loans. The Company does not have an automatic rollover policy for maturing loans. Commitments and Lines of Credit It is not the policy of the Company to issue formal commitments or lines of credit except to a limited number of well-established and financially responsible local commercial and agricultural enterprises. Such commitments can be either secured or unsecured and are typically in the form of revolving lines of credit for seasonal working capital needs. Occasionally, such commitments are in the form of letters of credit to facilitate the customer's particular business transaction. Commitment fees are generally not charged except where letters of credit are involved. Commitments and lines of credit typically mature within one year. 22 Analysis of Certificates of Deposit (In thousands) The following table sets forth, by time remaining to maturity, the Company's time deposits in amounts of $100,000 or more for the periods indicated. December 31, 2000 - -------------------------------------------------------------------------------- Time Deposits of $100,000 or More Three Months or Less $64,778 Over Three Months Through Six Months 31,358 Over Six Months Through Twelve Months 32,749 Over Twelve Months 6,872 - -------------------------------------------------------------------------------- Total Time Deposits of $100,000 or More $135,757 ================================================================================ Refer to the Year-To-Date Average Balances and Rate Schedules for information on separate deposit categories. Ratios Refer to the Five Year Financial Summary of Operations located on page 28 of the Farmers & Merchants Bancorp Annual Report for the year ending December 31, 2000 for calculations of Return on Average Equity, Return on Average Assets, Dividend Payout Ratio and Equity to Assets Ratio. Short-Term Borrowings Refer to Note 9. of the Farmers & Merchants Bancorp Annual Report for the year ending December 31, 2000. 23 Item 2. Properties Farmers & Merchants Bancorp along with its subsidiaries are headquartered in Lodi, California. Executive offices are located at 121 W. Pine Street. Banking services are provided in eighteen locations in the Company's service area. Of the eighteen locations, fourteen are owned and four are leased. The expiration of the leases occurs between the years 2001 and 2010. Item 3. Legal Proceedings Not Applicable Item 4. Submission of Matters to a Vote of Security Holders Not Applicable PART II Item 5. Market for the Registrant's Common Stock and Related Security Matters The common stock of Farmers & Merchants Bancorp is not widely held nor is it actively traded. Consequently, it is not listed on any stock exchange or sold in the over-the-counter market. The following table summarizes the actual high and low selling prices for the Company's common stock since the first quarter of 1999. These figures are based on activity posted on the Electronic Bulletin Board and on stock transactions between individual shareholders that are reported to the Company. Calendar Quarter High Low ---------------- ------- ------- 2000 Fourth quarter $245.00 $240.00 Third quarter 235.00 210.00 Second quarter 210.00 210.00 First quarter 210.00 205.00 1999 Fourth quarter $210.00 $210.00 Third quarter 207.00 165.00 Second quarter 165.00 150.00 First quarter 150.00 150.00 Beginning in 1975 and continuing through 2000, the Company has issued a 5% stock dividend annually. For information regarding cash dividends declared, refer to Quarterly Financial Data which appears in the Farmers & Merchants Bancorp 2000 Annual Report, located in Exhibit 13 and incorporated herein by reference. Item 6. Selected Financial Data The selected financial data for the five years ended December 31, 2000, which appears in the Five-Year Financial Summary of the Company's 2000 Annual Report, located in Exhibit 13, is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The management's discussion and analysis section of the Company's 2000 Annual Report, located in Exhibit 13, is incorporated herein by reference. 24 Item 8. Financial Statements and Supplementary Data The Consolidated Financial Statements and the related Notes to Consolidated Financial Statements of the Company's 2000 Annual Report, located in Exhibit 13, are incorporated herein by reference. (See listing below.) Statement - --------- Report of Management Report of Independent Accountants Consolidated Statements of Income - Years ended December 31, 2000, 1999 and 1998. Consolidated Balance Sheets - December 31, 2000 and 1999. Consolidated Statements of Changes in Shareholders' Equity - Years ended December 31, 2000, 1999 and 1998. Consolidated Statements of Cash Flows - Years ended December 31, 2000, 1999 and 1998. Consolidated Statements of Comprehensive Income. Notes to Consolidated Financial Statements. Five Year Financial Summary of Operations Selected Quarterly Financial Data Management's Discussion and Analysis Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures The information required by this section is contained in an 8-K filed October 20, 2000, and is incorporated herein by reference. PART III Item 10, 11, 12, and 13. The information required by these items is contained in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 16, 2001, and is incorporated herein by reference. The definitive Proxy Statement will be filed with the Commission within 120 days after the close of the Company's fiscal year pursuant to Regulation 14A of the Securities Exchange Act of 1934. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) Financial Statements: Incorporated herein by reference, are listed in Item 8 hereof. (2) Financial Statement Schedules: None (3) Exhibits: See Exhibit Index (b) Reports on form 8-K filed during the last quarter of 2000: The Company filed form 8-K on October 20, 2000 with respect to a change in the registrant's certifying accountant. 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Farmers & Merchants Bancorp (Registrant) By /s/ John R. Olson --------------------------- John R. Olson Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 13, 2001 /s/ Kent A. Steinwert President and - ------------------------------- Chief Executive Officer Kent A. Steinwert /s/ Richard S. Erichson Executive Vice President - ------------------------------- Senior Credit Officer Richard S. Erichson /s/ Donald H. Fraser Executive Vice President - ------------------------------- Wholesale/Retail Market Manager Donald H. Fraser /s/ Deborah E. Hodkin Executive Vice President - ------------------------------- Chief Administrative Officer Deborah E. Hodkin /s/ John R. Olson Executive Vice President & - ------------------------------- Chief Financial Officer John R. Olson Principal Accounting Officer /s/ Ole R. Mettler /s/ George D. Scheideman - ------------------------------- ---------------------------------- Ole R. Mettler, Chairman George D. Scheideman, Director /s/ Stewart Adams, Jr., /s/ Hugh Steacy - ------------------------------- ---------------------------------- Stewart Adams, Jr., Director Hugh Steacy, Director /s/ Ralph Burlington /s/ Robert F. Hunnell - ------------------------------- ---------------------------------- Ralph Burlington, Director Robert F. Hunnell, Director /s/ Calvin Suess /s/ James E. Podesta - ------------------------------- ---------------------------------- Calvin Suess, Director James E. Podesta, Director Absent /s/ Harry C. Schumacher - ------------------------------- ---------------------------------- Carl Wishek, Jr., Director Harry C. Schumacher, Director 26 Index to Exhibits - ----------------- Exhibit No. Description - ----------- ----------- 2 Plan of Reorganization as filed on Form 8-K dated April 30, 1999, are incorporated herein by reference. 3(i) Amended and Restated Certificate of Incorporation of Farmers & Merchants Bancorp, filed as Exhibit 3(i) to Registrant's 8-K dated April 30, 1999, is incorporated herein by reference. 3(ii) By-Laws of Farmers & Merchants Bancorp, filed as Exhibit 3(i) to Registrant's 8-K dated April 30, 1999, is incorporated herein by reference. 10.1 Employment Agreement dated July 8, 1997, between Farmers & Merchants Bank of Central California and Kent A. Steinwert, filed as Exhibit 10.1 to Registrant's 8-K dated April 30, 1999, is incorporated herein by reference. 10.2 Employment Agreement dated July 8, 1997, between Farmers & Merchants Bank of Central California and Richard S. Erichson, filed as Exhibit 10.2 to Registrant's 8-K dated April 30, 1999, is incorporated herein by reference. 10.3 Deferred Bonus Plan of Farmers & Merchants Bank of Central California adopted as of March 2, 1999, filed as Exhibit 10.3 to Registrant's 8-K dated April 30, 1999, is incorporated herein by reference. 10.4 Amended and Restated Deferred Bonus Plan of Farmers & Merchants Bank of Central California, executed May 11, 1999, filed as Exhibit 10.4 to Registrant's 8-K dated April 30, 1999, is incorporated herein by reference. 13 Annual Report to Shareholders of Farmers & Merchants Bancorp for the year ended December 31, 2000 16 Letter regarding change in certifying accountants filed as exhibit 16 to Registrants 8-K filed October 20, 2000 is incorporated herein by reference. 21 Subsidiaries of the Registrant as of February 14, 2000, filed as Exhibit 21 to Registrant's 10-K filed March 23, 2000, is incorporated herein by reference. 27 Financial Data Schedule 99 Report of Independent Public Accountants issued by Arthur Andersen LLP 27 EX-13 2 0002.txt ANNUAL REPORT TO SHAREHOLDERS Exhibit 13 ================================================================================ Farmers & Merchants Bancorp 2000 Annual Report ================================================================================ 28 To the Shareholders: It is with great pleasure and tremendous pride that we present to you Farmers & Merchants Bancorp's annual financial reports for 2000; a record year in the Institution's 84-year history. Throughout 2000, the Board of Directors and management team remained steadfast in their longstanding commitment to maximize Shareholder value, exceed customers' expectations, reinvest in the communities served and foster employee commitment and satisfaction. Our emphasis on increasing market penetration, improving operating efficiency and increasing capital management discipline also contributed to the strong financial results in 2000. We are pleased to report that 2000 was the most profitable and successful year in Farmers & Merchants Bancorp's history. Net income after taxes totaled $11,020,000, a 19.6% increase over the prior year. The growth in profits was driven by an 11.2% increase in net interest income, a 17.5% surge in non- interest income and aggressive cost containment measures which limited the growth in total expenses to only 1.95%. Loans outstanding grew by 20% and deposits expanded by 11.6% contributing to the jump in net interest income. Other key financial yardsticks also showed significant improvement. Operating leverage continued to strengthen as the revenue growth rate exceeded the growth rate of expenses. In 2000, we achieved a 7.93% spread between revenue and expense growth, up from 4.3% in 1999. We also continued to exercise the "Common Stock Repurchase" program originally approved by Shareholders and employed in 1998. As a result, return on equity increased by 184 basis points over the prior year. In the future, Management will remain focused on increasing market penetration, improving operating leverage and further strengthening capital management discipline. Efforts to enhance our delivery and distribution capabilities will be ongoing. In June 2001, we will convert our data processing to a state-of-the- art core operating system. The new computer system will further enhanced our ability to service customers and enable us to offer several new and improved products and services. In addition, expanding the Bank's presence in key markets in order to capitalize on growth opportunities is being evaluated. It is also important to note that the Board of Directors and management are anticipating and preparing for greater financial performance challenges in 2001 and 2002 due to the slowing economy, the Federal Reserve Bank's decision to reduce interest rates, weak agricultural commodity prices and the current disruption and imbalance in California's energy supplies. We deeply appreciate the significant contributions made by the Board of Directors during 2000. We also wish to acknowledge the Directors' ongoing commitment to represent the Shareholders' best interests. The record 2000 financial performance would not have been possible without the Bank employees' extraordinary accomplishments. We are proud of our loyal and talented staff and extend a special "thank you" for their outstanding results in 2000. The support provided by our Shareholders has always been a major source of strength for the Bank. Your continued confidence and satisfaction with your investment in Farmers & Merchants Bancorp remains of the utmost importance to us. Please remember that you can help to strengthen your investment by recommending Farmers & Merchants Bank to your friends, associates and new acquaintances. /s/ Kent A. Steinwert /s/ Ole R. Mettler Kent A. Steinwert Ole R. Mettler President & Chief Executive Officer Chairman of the Board 29 Report of Management The management of Farmers & Merchants Bancorp (the Company) and its subsidiary has the responsibility for the preparation, integrity and reliability of the consolidated financial statements and related financial information contained in this annual report. The financial statements were prepared in accordance with generally accepted accounting principles and prevailing practices of the banking industry. Where amounts must be based on estimates and judgments, they represent the best estimates and judgments of management. Management has established and is responsible for maintaining an adequate internal control structure designed to provide reasonable, but not absolute, assurance as to the integrity and reliability of the financial statements, safeguarding of assets against loss from unauthorized use or disposition and the prevention and detection of fraudulent financial reporting. The internal control structure includes: an effective financial accounting environment; a comprehensive internal audit function; an independent audit committee of the Board of Directors; and extensive financial and operating policies and procedures. Management also recognizes its responsibility for fostering a strong ethical climate which is supported by a code of conduct, appropriate levels of management authority and responsibility, an effective corporate organizational structure and appropriate selection and training of personnel. The Board of Directors, primarily through its audit committee, oversees the adequacy of the Company's internal control structure. The audit committee, whose members are neither officers nor employees of the Company, meet periodically with management, internal auditors and internal credit examiners to review the functioning of each and to ensure that each is properly discharging its responsibilities. In addition, PricewaterhouseCoopers LLP, independent auditors, are engaged to audit the Company's financial statements. PricewaterhouseCoopers LLP, obtains and maintains an understanding of the Company's accounting and financial controls and conducts its audit in accordance with generally accepted auditing standards which includes such audit procedures as it considers necessary to express the opinion in the report that follows. Management recognizes that there are inherent limitations in the effectiveness of any internal control structure. However, management has assessed and believes that, as of December 31, 2000, the Company's internal control structure, as described above, provides reasonable assurance as to the integrity and reliability of the financial statements and related financial information. Management also is responsible for compliance with federal and state laws and regulations concerning loans to insiders and dividend restrictions designated by the FDIC as safety and soundness laws and regulations. Management assessed its compliance with the designated laws and regulations relating to safety and soundness. Based on this assessment, Management believes that the Bank complied with the designated laws and regulations relating to safety and soundness for the year ended December 31, 2000. /s/ Kent A. Steinwert /s/ John R. Olson Kent A. Steinwert John R. Olson President & Executive Vice President & Chief Executive Officer Chief Financial Officer 30 [LETTERHEAD OF PRICEWATERHOUSECOOPERS] Report of Independent Accountants To the Board of Directors and Shareholders of Farmers & Merchants Bancorp: In our opinion, the accompanying consolidated balance sheet as of December 31, 2000 and the related consolidated statement of income, changes in shareholders' equity, comprehensive income and cash flows present fairly, in all material respects, the financial position of Farmers & Merchants Bancorp and its subsidiaries at December 31, 2000, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The financial statements of the Company as of December 31, 1999 and for the two years then ended were audited by other independent accountants whose report dated February 4, 2000 expressed an unqualified opinion on those statements. /s/ PricewaterhouseCoopers LLP February 9, 2001 31
Consolidated Statements of Income - ------------------------------------------------------------------------------------------------------------------------ (in thousands except per share data) Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ Interest Income Interest and Fees on Loans $44,171 $34,593 $29,706 Interest on Federal Funds Sold and Securities Purchased Under Agreements to Resell 1,300 793 943 Interest on Investment Securities: Taxable 17,574 17,398 17,141 Tax-Exempt 3,082 3,271 3,404 Total Interest Income 66,127 56,055 51,194 - ------------------------------------------------------------------------------------------------------------------------ Interest Expense Interest on Deposits 21,845 16,500 15,780 Interest on Borrowed Funds 2,912 2,362 1,648 Total Interest Expense 24,757 18,862 17,428 - ------------------------------------------------------------------------------------------------------------------------ Net Interest Income 41,370 37,193 33,766 Provision for Loan Losses 2,800 1,700 1,400 Net Interest Income After Provision for Loan Losses 38,570 35,493 32,366 - ------------------------------------------------------------------------------------------------------------------------ Non-Interest Income Service Charges on Deposit Accounts 3,464 3,163 2,842 Net Gain (Loss) on Sale of Investment Securities (120) (302) 333 Credit Card Merchant Fees 976 783 611 Other 2,328 2,014 2,033 Total Non-Interest Income 6,648 5,658 5,819 - ------------------------------------------------------------------------------------------------------------------------ Non-Interest Expense Salaries and Employee Benefits 16,235 15,351 14,493 Occupancy Expense 1,730 1,691 1,787 Equipment Expense 1,916 2,268 2,103 Other 7,667 7,711 7,712 Total Non-Interest Expense 27,548 27,021 26,095 - ------------------------------------------------------------------------------------------------------------------------ Income Before Income Taxes 17,670 14,130 12,090 Provision for Income Taxes 6,650 4,914 4,030 - ------------------------------------------------------------------------------------------------------------------------ Net Income $11,020 $ 9,216 $ 8,060 ======================================================================================================================== Earnings Per Share $ 15.98 $ 13.26 $ 11.56 ========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 32
Consolidated Balance Sheets - ---------------------------------------------------------------------------------------------------------------------------- (in thousands except per share data) December 31, Assets 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents: Cash and Due from Banks $ 33,290 $ 30,384 Federal Funds Sold and Securities Purchased Under Agreements to Resell 41,000 11,600 Total Cash and Cash Equivalents 74,290 41,984 - ---------------------------------------------------------------------------------------------------------------------------- Investment Securities: Available-for-Sale 279,386 297,580 Held-to-Maturity 41,268 49,275 Total Investment Securities 320,654 346,855 - ---------------------------------------------------------------------------------------------------------------------------- Loans: 497,397 413,409 Less: Reserve for Loan Losses 11,876 9,787 Loans, Net 485,521 403,622 - ---------------------------------------------------------------------------------------------------------------------------- Premises and Equipment, Net 11,556 12,707 Interest Receivable and Other Assets 13,530 14,713 Total Assets $905,551 $819,881 ============================================================================================================================ Liabilities Deposits: Demand $183,779 $163,658 Interest-Bearing Transaction Accounts 81,271 73,120 Savings 175,140 192,677 Time 324,488 255,688 Total Deposits 764,678 685,143 - ---------------------------------------------------------------------------------------------------------------------------- Federal Home Loan Bank Advances 41,033 41,064 Interest Payable and Other Liabilities 8,957 13,473 Total Liabilities 814,668 739,680 - ---------------------------------------------------------------------------------------------------------------------------- Shareholders' Equity Preferred Stock: No Par Value. 1,000,000 Authorized, None Issued or Outstanding - - Common Stock: Par Value $0.01, 2,000,000 Shares Authorized, 687,491 and 660,989 Issued and Outstanding at December 31, 2000 and 1999, Respectively 7 7 Additional Paid-In Capital 53,559 47,993 Retained Earnings 36,527 36,040 Accumulated Other Comprehensive Income (Loss) 790 (3,839) Total Shareholders' Equity 90,883 80,201 - ---------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $905,551 $819,881 ============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 33
Consolidated Statements of Changes in Shareholders' Equity - ---------------------------------------------------------------------------------------------------------------------------- (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, 1997 603,985 $ 6 $39,406 $34,465 $ 946 $74,823 - -------------------------------------------------------------------------------------------------------------------------- Net Income 8,060 8,060 Cash Dividends Declared on Common Stock (3,070) (3,070) 5% Stock Dividend 29,720 4,399 (4,399) Cash Paid in Lieu of Fractional Shares Related to Stock Dividend (65) (65) Redemption of Stock (1,520) (229) (229) Change in Net Unrealized Gain (Loss) on Securities Available-for-Sale (114) (114) - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 632,185 $ 6 $43,576 $34,991 $ 832 $79,405 - -------------------------------------------------------------------------------------------------------------------------- Net Income 9,216 9,216 Cash Dividends Declared on Common Stock (3,273) (3,273) 5% Stock Dividend 31,110 1 4,821 (4,822) Cash Paid in Lieu of Fractional Shares Related to Stock Dividend (72) (72) Redemption of Stock (2,306) (404) (404) Change in Net Unrealized Gain (Loss) on Securities Available-for-Sale (4,671) (4,671) - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 660,989 $ 7 $47,993 $36,040 $(3,839) $80,201 - -------------------------------------------------------------------------------------------------------------------------- Net Income 11,020 11,020 Cash Dividends Declared on Common Stock (3,609) (3,609) 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 (5,994) (1,258) (1,258) Change in Net Unrealized Gain (Loss) on Securities Available-for-Sale 4,629 4,629 - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 687,491 $ 7 $53,559 $36,527 $ 790 $90,883 ==========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 34
Consolidated Statements of Comprehensive Income - -------------------------------------------------------------------------------------------------------------------------- (in thousands) Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- Net Income $11,020 $ 9,216 $8,060 Other Comprehensive Income (Loss) Unrealized Gains (Losses) on Securities: Unrealized holding gains (losses) arising during the period, net of income tax effects of $3,188, $(3,386) and $12 for the years ended December 31, 2000, 1999 and 1998, respectively. 4,558 (4,841) 18 Less: Reclassification adjustment for realized gains (losses) included in net income, net of related income tax effects of $49, $119 and $(92) for the years ended December 31, 2000, 1999 and 1998, respectively. 71 170 (132) - ------------------------------------------------------------------------------------------------------------------------- Total Other Comprehensive Income (Loss) 4,629 (4,671) (114) - ------------------------------------------------------------------------------------------------------------------------- Comprehensive Income $15,649 $ 4,545 $7,946 =========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 35
Consolidated Statements of Cash Flows ========================================================================================================================== (in thousands) Year Ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- Operating Activities Net Income $ 11,020 $ 9,216 $ 8,060 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Loan Losses 2,800 1,700 1,400 Depreciation and Amortization 1,760 1,770 1,637 Provision for Deferred Income Taxes (730) (457) (542) Net Amortization of Investment Security Premium & Discounts (435) 674 221 Net (Gain) Loss on Sale of Investment Securities 120 302 (333) Trading Securities: Purchased - (15,490) (30,345) Sold or Matured - 15,478 30,454 Net (Increase) Decrease in Interest Receivable and Other Assets (1,325) 3,338 (552) Net Increase in Interest Payable and Other Liabilities (4,516) 4,559 2,454 - -------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 8,694 21,090 12,454 - -------------------------------------------------------------------------------------------------------------------------- Investing Activities Securities Available-for-Sale: Purchased (42,873) (171,788) (171,197) Sold or Matured 69,161 177,675 105,926 Securities Held-to-Maturity: Purchased (398) (2,114) (4,070) Matured 8,493 12,927 42,819 Net Increase in Loans (84,916) (85,540) (58,003) Principal Collected on Loans Previously Charged Off 217 807 432 Net Additions to Premises and Equipment (609) (2,763) (1,742) - -------------------------------------------------------------------------------------------------------------------------- Net Cash Used for Investing Activities (50,925) (70,796) (85,835) - -------------------------------------------------------------------------------------------------------------------------- Financing Activities Net Increase in Demand, Interest-Bearing Transaction, and Savings Accounts 10,735 30,189 29,520 Net Increase in Time Deposits 68,800 27,567 15,834 Net Increase (Decrease) in Federal Funds Purchased - (2,000) 2,000 Net Increase (Decrease) in Federal Home Loan Bank Advances (31) (29) 41,093 Stock Redemption (1,258) (404) (229) Cash Dividends (3,709) (3,345) (3,135) - ------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 74,537 51,978 85,083 - ------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents 32,306 2,272 11,702 Cash and Cash Equivalents at Beginning of Year 41,984 39,712 28,010 - ------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 74,290 $ 41,984 $ 39,712 ========================================================================================================================= Supplementary Data Cash Payments made for Income Taxes $ 8,100 $ 4,520 $ 5,436 Interest Paid $ 24,139 $ 18,743 $ 17,685 =========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 36 Notes to Consolidated Financial Statements 1. Significant Accounting Policies Farmers & Merchants Bancorp (the Company) was organized April 30, 1999. Its' primary operations are related to traditional banking activities through its subsidiary Farmers & Merchants Bank of Central California (the Bank). The consolidated financial statements of the Company and its subsidiary, the Bank, are prepared in conformity with generally accepted accounting principles and prevailing practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect reported amounts. These estimates are based on information available as of the date of the financial statements. Therefore, actual results could differ from those estimates. The following is a summary of the significant accounting and reporting policies used in preparing the consolidated financial statements. Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company and the Company's wholly owned subsidiary the Bank along with the Bank's wholly owned subsidiaries, Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Significant intercompany transactions have been eliminated in consolidation. Farmers & Merchants Investment Corporation has been dormant since 1991. Farmers/Merchants Corp. acts as trustee on deeds of trust originated by the Bank. Certain amounts in the prior years' financial statements have been reclassified to conform with the current presentation. These reclassifications have no effect on previously reported income. Information in this report dated prior to April 30, 1999 is for Farmers & Merchants Bank of Central California. Cash and Cash Equivalents For purposes of the Consolidated Statements of Cash Flows, the Company has defined cash and cash equivalents as those amounts included in the balance sheet captions Cash and Due from Banks and Federal Funds Sold and Securities Purchased Under Agreements to Resell. Generally, these transactions are for one-day periods. For these instruments, the carrying amount is a reasonable estimate of fair value. Investment Securities Investment securities are classified at the time of purchase as held-to-maturity if it is management's intent and the Bank has the ability to hold the securities until maturity. These securities are carried at cost, adjusted for amortization of premium and accretion of discount using a methodology which approximates a level yield of interest over the estimated remaining period until maturity. Losses, reflecting a decline in value judged by the Bank to be other than temporary, are recognized in the period in which they become known. Securities are classified as available-for-sale if it is management's intent, at the time of purchase, to hold the securities for an indefinite period of time and/or to use the securities as part of the Company's asset/liability management strategy. Securities classified as available-for-sale include securities which may be sold to effectively manage interest rate risk exposure, prepayment risk, satisfy liquidity demands and other factors. These securities are reported at fair value with aggregate, unrealized gains or losses excluded from income and included as a separate component of shareholders' equity, net of related income taxes. Fair values are based on quoted market prices or broker/dealer price quotations on a specific identification basis. Gains or losses on the sale of these securities are computed using the specific identification method. Unrealized losses on these securities, reflecting a decline in value judged by the Company to be other than temporary, are recognized in the period in which they become known. Trading securities are acquired for short-term appreciation and are recorded in a trading portfolio and are carried at fair value, with unrealized gains and losses recorded in non-interest income. Loans Loans are reported at the principal amount outstanding net of unearned discounts and deferred loan fees. Interest income on loans is accrued daily on the outstanding balances using the simple interest method. Loan origination 37 fees are deferred and recognized over the contractual life of the loan as an adjustment to the yield. Loans are placed on a non-accrual status when the collection of principal or interest is in doubt or when they become past due for 90 days or more unless they are both well-secured and in the process of collection. For this purpose a loan is considered well-secured if it is collateralized by property having a net realizable value in excess of the amount of the loan or is guaranteed by a financially capable party. When a loan is placed on non-accrual status, the accrued and unpaid interest receivable is reversed and charged against current income, thereafter, interest income is recognized only as it is collected in cash. Loans placed on a non-accrual status are returned to accrual status when the loans are paid current as to principal and interest and future payments are expected to be made in accordance with the contractual terms of the loan. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the recorded amount of the loan in the Consolidated Balance Sheets is based on the present value of expected future cash flows discounted at the loan's effective interest rate or on the observable or estimated market price of the loan or the fair value of the collateral if the loan is collateral dependent. Impaired loans are placed on a non-accrual status with income reported accordingly. Cash payments are first applied as a reduction of the principal balance until collection of the remaining principal and interest can be reasonably assured. Allowance for Loan Losses As a financial institution which assumes lending and credit risks as a principal element in its business, the Company anticipates that credit losses will be experienced in the normal course of business. Accordingly, the allowance for loan losses is maintained at a level considered adequate by management to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to operating expense and reduced by net charge- offs. Management reviews the credit quality of the loan portfolio on a quarterly basis and considers problem loans, delinquencies, internal credit reviews, current economic conditions, loan loss experience and other factors in determining the adequacy of the allowance balance. While the Company utilizes a systematic methodology in determining its allowance, the allowance is based on estimates, and ultimate losses may vary from current estimates. The estimates are reviewed periodically and, as adjustments become necessary, are reported in earnings in the periods in which they become known. Management has allocated specific reserves to various loan categories. Nevertheless, the allowance is general in nature and is available for the loan portfolio as a whole. Premises and Equipment Premises, equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation is computed principally by the straight line method over the estimated useful lives of the assets. Estimated useful lives of buildings range from 30 to 40 years, and for furniture and equipment from 3 to 8 years. Leasehold improvements are amortized over the lesser of the terms of the respective leases, or their useful lives, which are generally 5 to 10 years. Remodeling and capital improvements are capitalized while maintenance and repairs are charged directly to occupancy expense. Other Real Estate Other real estate owned, which is included in other assets, is comprised of properties acquired through foreclosures in satisfaction of indebtedness. These properties are carried at the lower of the recorded loan balance or their estimated net realizable value based on current appraisals. Initial losses on properties acquired through full or partial satisfaction of debt are treated as credit losses and charged to the Allowance for Loan Losses at the time of acquisition. Subsequent declines in value from the recorded amounts, routine holding costs, and gains or losses upon disposition, if any, are included in non-interest income or expense as incurred. Income Taxes As required, the Company uses the liability method of accounting for income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability 38 balances during the year. This amount combined with the current taxes payable or refundable results in the income tax expense for the current year. Earnings Per Share Earnings per share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. Prior years have been restated for the 5% stock dividend paid in each of the years presented. Comprehensive Income On January 1, 1998, the Company adopted the Statement of Financial Accounting Standards, Reporting Comprehensive Income. This statement establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Other comprehensive income refers to revenues, expenses, gains and losses that generally accepted accounting principles recognize as changes in value to an enterprise but are excluded from net income. For the Company, comprehensive income includes net income (loss) and changes in fair value of its available-for-sale investment securities. 2. Securities Purchased Under Agreements to Resell The Company enters into purchases and sales of securities under agreements to resell substantially identical securities. These types of security transactions are generally for one day periods and are primarily whole loan securities rated AA or better. During 2000, the underlying securities purchased under resale agreements were delivered into the Bank's account at a third-party custodian that recognizes the Company's rights and interest in these securities. 3. Investment Securities The amortized cost, fair values and unrealized gains and losses of the securities available-for-sale are as follows: (in thousands)
Amortized Gross Unrealized Fair/Book ------------------------- December 31, 2000 Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------------- U.S. Treasury Securities $ 5,037 $ 10 $ - $ 5,047 Securities of U.S. Government Agencies 7,108 - 18 7,090 Obligations of States and Political Subdivisions 24,184 97 306 23,975 Mortgage-Backed Securities 236,173 1,921 360 237,734 Other 5,540 - - 5,540 - -------------------------------------------------------------------------------------------------------------- Total $278,042 $2,028 $ 684 $279,386 =============================================================================================================== December 31, 1999 - --------------------------------------------------------------------------------------------------------------- U.S. Treasury Securities $ 12,158 $ 3 $ 286 $ 11,875 Securities of U.S. Government Agencies 7,156 - 143 7,013 Obligations of States and Political Subdivisions 24,093 3 1,054 23,042 Mortgage-Backed Securities 256,051 108 5,156 251,003 Other 4,647 - - 4,647 - --------------------------------------------------------------------------------------------------------------- Total $304,105 $ 114 $6,639 $297,580 ==============================================================================================================
39 The book values, estimated fair values, and unrealized gains and losses of investments classified as held-to-maturity are as follows: (in thousands)
Book Gross Unrealized Fair ---------------------- December 31, 2000 Value Gains Losses Value - -------------------------------------------------------------------------------------------------------------- Securities of U.S. Government Agencies $ 1,999 $ - $ 2 $ 1,997 Obligations of States and Political Subdivisions 38,585 537 18 39,104 Other 684 48 - 732 - -------------------------------------------------------------------------------------------------------------- Total $41,268 $585 $ 20 $41,833 ============================================================================================================== December 31, 1999 - -------------------------------------------------------------------------------------------------------------- Securities of U.S. Government Agencies $ 1,995 $ - $ 10 $ 1,985 Obligations of States and Political Subdivisions 46,423 344 257 46,510 Other 857 59 - 916 - -------------------------------------------------------------------------------------------------------------- Total $49,275 $403 $267 $49,411 ==============================================================================================================
Fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. The remaining principal maturities of debt securities as of December 31, 2000 and 1999 are shown below. Expected maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
After 1 After 5 Total Securities Available-for-Sale Within but but Over Fair December 31, 2000 (in thousands) 1 Year Within 5 Within 10 10 years Value - --------------------------------------------------------------------------------------------------------------- U.S. Treasury Securities $ - $ 5,047 $ - $ - $ 5,047 Securities of U.S. Government Agencies 7,090 - - - 7,090 Obligations of States and Political Subdivisions 757 7,616 13,628 1,974 23,975 Mortgage-Backed Securities 42,210 179,536 15,988 - 237,734 Other 5,540 - - - 5,540 - --------------------------------------------------------------------------------------------------------------- Total $55,597 $192,199 $29,616 $1,974 $279,386 =============================================================================================================== 1999 Totals $16,412 $216,882 $60,021 $4,265 $297,580 ===============================================================================================================
After 1 After 5 Total Securities Held-to-Maturity Within but but Over Book December 31, 2000 (in thousands) 1 Year Within 5 Within 10 10 years Value - -------------------------------------------------------------------------------------------------------------- Securities of U.S. Government Agencies $ 1,999 $ - $ - $ - 1,999 Obligations of States and Political Subdivisions 13,092 20,534 4,959 - 38,585 Other - - - 684 684 - -------------------------------------------------------------------------------------------------------------- Total $15,091 $20,534 $ 4,959 $ 684 $41,268 ============================================================================================================== 1999 Totals $ 7,494 $23,879 $16,691 $1,211 $49,275 ==============================================================================================================
40 Proceeds from sales of securities available-for-sale were as follows: (in thousands) Gross Gross Gross Proceeds Gains Losses - -------------------------------------------------------------------------------- 2000 $21,744 $ 56 $199 1999 $54,231 $ 285 $118 1998 $16,254 $ 137 $ 1 As of December 31, 2000, securities carried at $192,200,000 were pledged to secure public and other deposits as required by law. 4. Loans and Allowance for Loan Losses Loans as of December 31, consisted of the following:
(in thousands) 2000 1999 - --------------------------------------------------------------------------------------------------------------- Real Estate $261,910 $222,354 Real Estate Construction 28,354 39,186 Commercial 182,611 129,969 Consumer 24,855 22,248 - --------------------------------------------------------------------------------------------------------------- 497,730 413,757 Less: Unearned Income on Loans (333) (348) - --------------------------------------------------------------------------------------------------------------- Total Loans $497,397 $413,409 =============================================================================================================== Non-Accrual Loans $ 1,472 $ 2,499 =============================================================================================================== Changes in the allowance for loan losses consisted of the following: (in thousands) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------- Balance, January 1 $ 9,787 $ 8,589 $ 7,188 Provision Charged to Operating Expense 2,800 1,700 1,400 Recoveries of Loans Previously Charged Off 218 807 432 Loans Charged Off (929) (1,309) (431) - --------------------------------------------------------------------------------------------------------------- Balance, December 31 $ 11,876 $ 9,787 $ 8,589 ===============================================================================================================
A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the recorded amount of the loan in the Consolidated Balance Sheets is based on the present value of expected future cash flows discounted at the loan's effective interest rate or on the observable or estimated market price of the loan or the fair value of the collateral if the loan is collateral dependent. All impaired loans have been assigned a related allowance for credit losses. As of December 31, 2000 and 1999 the total recorded investment in impaired loans was $1,472,000 and $2,499,000, respectively. The related allowance for credit losses was $257,000 and $364,000 for the years ended 2000 and 1999, respectively. For income reporting purposes, impaired loans are placed on a non-accrual status and are more fully discussed in Note 1. Cash payments are first applied as a reduction of the loan's principal balance until collection of the remaining principal and interest can be reasonably assured. Thereafter, interest income is recognized as it is collected in cash. The average balance of impaired loans was $2.3 million, $3.4million and $1.4 million for the years ended 2000, 1999 and 1998 respectively. There was no interest income reported on impaired loans in 2000 and 1999. Interest income forgone on loans placed on nonaccrual status was $71,000, $48,000 and $681,000 for the years ended December 31, 2000, 1999 and 1998 respectively. 41 5. Premises and Equipment Premises and equipment as of December 31, consisted of the following:
(in thousands) 2000 1999 - ------------------------------------------------------------------------------- Land and Buildings $15,723 $15,226 Furniture, Fixtures and Equipment 13,180 14,085 Leasehold Improvements 835 835 - ------------------------------------------------------------------------------- 29,738 30,146 Less: Accumulated Depreciation and Amortization 18,182 17,439 - ------------------------------------------------------------------------------- Total $11,556 $12,707 ===============================================================================
Depreciation and amortization on premises and equipment included in occupancy and equipment expense amounted to $1,760,000, $1,770,000 and $1,637,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Total rental expense for premises were $207,000, $240,000 and $228,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Rental income was $81,000, $81,000 and $68,000 for the years ended December 31, 2000, 1999 and 1998, respectively. 6. Other Real Estate Other real estate, included in Interest Receivable and Other Assets, totaled $89,000 and $204,000 at December 31, 2000 and 1999, respectively. Other real estate includes property no longer utilized for business operations and property acquired through foreclosure proceedings. These properties are carried at the lower of cost or estimated net realizable value determined at the date acquired. Losses arising from the acquisition of these properties are charged against the allowance for loan losses. Subsequent declines in value, routine holding costs and net gains or losses on disposition are included in other operating expense as incurred. 7. Deposits Deposits of $100,000 or more were as follows: (in thousands)
December 31, 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------- Balance $135,757 $74,259 $62,371 ==========================================================================================================
At December 31, 2000, the scheduled maturities of time deposits were as follows: (in thousands) Scheduled Maturities - ---------------------------------------------------------------------------------------------------------- 2001 $ 291,945 2002 22,016 2003 10,328 2004 197 2005 and thereafter 2 - ---------------------------------------------------------------------------------------------------------- Total $ 324,488 ==========================================================================================================
42 8. Income Taxes Current and deferred income tax expense (benefit) provided for the years ended December 31, consisted of the following:
(in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------- Current Federal $ 5,229 $ 3,764 $ 3,220 State 2,151 1,607 1,352 - ---------------------------------------------------------------------------- Total Current 7,380 5,371 4,572 - ---------------------------------------------------------------------------- Deferred Federal (493) (383) (502) State (237) (74) (40) - ---------------------------------------------------------------------------- Total Deferred (730) (457) (542) - ---------------------------------------------------------------------------- Total Provision for Taxes $ 6,650 $ 4,914 $ 4,030 ============================================================================
The total provision for income taxes differs from the federal statutory rate as follows:
(in thousands) 2000 1999 1998 Amount Rate Amount Rate Amount Rate - ------------------------------------------------------------------------------------------------------- Tax Provision at Federal Statutory Rate $6,185 35.0 % $ 4,804 34.0 % $ 4,111 34.0 % Interest on Obligations of States and Political Subdivisions Exempt from Federal Taxation (740) (4.2)% (1,008) (7.1)% (1,001) (8.3)% State and Local Income Taxes, Net of Federal Income Tax Benefit 1,263 7.2 % 1,012 7.2 % 866 7.2 % Other, Net (58) (0.4)% 106 0.7 % 54 0.4 % - ------------------------------------------------------------------------------------------------------- Total Provision for Taxes $6,650 37.6 % $ 4,914 34.8 % $ 4,030 33.3 % =======================================================================================================
The components of the net deferred tax assets as of December 31, are as follows:
(in thousands) 2000 1999 - ------------------------------------------------------------------------------- Deferred Tax Assets Allowance for Loan Losses $4,628 $3,720 Unrealized (Loss) Gain on Securities Available-for-Sale (553) 2,685 Accrued Liabilities 1,133 1,021 Deferred Compensation 810 666 Other Real Estate 302 468 State Franchise Tax 731 521 Interest on Non-Accrual Loans 83 108 - ------------------------------------------------------------------------------- Total Deferred Tax Assets 7,134 9,189 - ------------------------------------------------------------------------------- Deferred Tax Liabilities Depreciation (383) (532) Securities Accretion (842) (477) Other (463) (226) - ------------------------------------------------------------------------------- Total Deferred Tax Liabilities (1,688) (1,235) - ------------------------------------------------------------------------------- Net Deferred Tax Assets $ 5,446 $ 7,954 ===============================================================================
The net deferred tax assets are reported in Interest Receivable and Other Assets on the Company's Consolidated Balance Sheets. 43 9. Short Term Borrowings As of December 31, 2000 and 1999, the Company had unused lines of credit available for short term liquidity purposes of $136 million. Federal Funds purchased and advances from the Federal Reserve Bank are generally issued on an overnight basis. 10. Federal Home Loan Bank Advances The Company's Advances from the Federal Home Loan Bank of San Francisco consist of the following as of December 31,
(in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------------------ 5.35% note payable due February 2, 2008 with interest due quarterly, callable February 2, $25,000 $25,000 2003 and quarterly thereafter. 5.38% note payable due August 12, 2008 with interest due quarterly, callable August 12, 15,000 15,000 2003 and quarterly thereafter. 5.60% amortizing note, interest and principal payable monthly with final maturity of 1,033 1,064 September 25, 2018. - ------------------------------------------------------------------------------------------------------------------ Total $41,033 $41,064 ==================================================================================================================
In accordance with the Collateral Pledge and Security Agreement, advances are secured by all Federal Home Loan Bank stock held by the company and by agency and mortgage-backed securities, classified as available-for-sale, with carrying values of $64,346,000. 11. Shareholders' Equity Beginning in 1975 and continuing through 2000, the Company has issued an annual 5% stock dividend. Earnings per share amounts have been restated for each year presented to reflect the stock dividend. Dividends from the Bank constitute the principal source of cash to the Company. The Company is a legal entity separate and distinct from the Bank. Under regulations controlling California state chartered banks, the Bank is, to some extent, limited in the amount of dividends that can be paid to shareholders without prior approval of the State Department of Financial Institutions. These regulations require approval if total dividends declared by a state chartered bank in any calendar year exceed the bank's net profits for that year combined with its retained net profits for the preceding two calendar years. As of December 31, 2000, the Bank could declare dividends of $18,106,000 without approval of the California State Banking Department. These regulations apply to all California state chartered banks. The Accumulated Other Comprehensive Income is the result of the accounting standard, Reporting Comprehensive Income. This accounting principle requires securities classified as available-for-sale be reported at their fair values. Unrealized gains and losses are reported on a net-of-tax basis as a component of Shareholders' Equity. The Company and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve Bank of San Francisco and the Federal Deposit Insurance Corporation. These 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 aid in making the definition of banking capital uniform. Bank 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. Failure to meet these minimum capital requirements can initiate certain disciplinary actions by regulators. As of December 31, 2000 and 1999, the Company and the Bank meet all capital adequacy requirements to which they are subject. The following table illustrates the relationship between the Bank's regulatory capital requirements and the Bank's capital position. 44
To Be Well Capitalized Under Regulatory Capital Prompt Corrective (in thousands) Actual Requirements Action Provisions December 31, 2000 Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------------- Total Bank Capital to Risk Weighted Assets $96,150 15.22% $50,548 8.0% $63,185 10.0% Total Consolidated Capital to Risk Weighted Assets $97,419 15.41% $50,582 8.0% N/A N/A Tier I Bank Capital to Risk Weighted Assets $88,203 13.96% $25,274 4.0% $37,911 6.0% Tier I Consolidated Capital to Risk Weighted Assets $90,092 14.25% $25,291 4.0% N/A N/A Tier I Bank Capital to Average Assets $88,203 10.00% $35,268 4.0% $44,085 5.0% Tier I Consolidated Capital to Average Assets $90,092 10.21% $35,285 4.0% N/A N/A December 31, 1999 - ------------------------------------------------------------------------------------------------------------------------- Total Bank Capital to Risk Weighted Assets $89,573 16.70% $42,915 8.0% $53,644 10.0% Total Consolidated Capital to Risk Weighted Assets $90,784 16.92% $42,922 8.0% N/A N/A Tier I Bank Capital to Risk Weighted Assets $82,829 15.44% $21,458 4.0% $32,187 6.0% Tier I Consolidated Capital to Risk Weighted Assets $84,040 15.66% $21,461 4.0% N/A N/A Tier I Bank Capital to Average Assets $82,829 10.37% $31,938 4.0% $39,923 5.0% Tier I Consolidated Capital to Average Assets $84,040 10.53% $31,938 4.0% N/A N/A
12. Employee Benefit Plans The Company, through the Bank, sponsors a defined benefit pension plan covering all employees of Farmers & Merchants Bank of Central California who have completed one year of service and attained age 21. The Plan provides benefits, up to a maximum stated in the plan, based on each covered employee's years of service and highest five-year average compensation earned while a participant in the plan. Plan benefits are fully vested after five years of plan service. The Company's funding policy is to contribute annually an amount that is not less than the ERISA minimum funding requirement and not in excess of the maximum tax-deductible contribution as developed in accordance with the aggregate cost method. The following schedule states the change in benefit obligations for the years ended December 31:
(in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Benefit Obligation at Beginning of Year $5,263 $5,009 Service Cost 572 536 Interest Cost 404 360 Benefits Paid (704) (779) Actuarial Loss 498 137 - ------------------------------------------------------------------------------------------------------------------------ Total Benefit Obligation at End of Year $6,033 $5,263 ======================================================================================================================== The Change in Plan Assets are as follows: (in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Fair Value of Plan Assets at Beginning of Year $5,505 $4,959 Employer Contribution 701 666 Benefits Paid (704) (779) Actual Return on Plan Assets (156) 659 - ------------------------------------------------------------------------------------------------------------------------ Total Fair Value of Plan Assets at End of Year $5,346 $5,505 ========================================================================================================================
45 The following table sets forth the Plan's funded status along with amounts recognized and not recognized in the Bank's Consolidated Balance Sheets for the years ended December 31:
(in thousands) 2000 1999 - --------------------------------------------------------------------------------------------------------------------- Benefit Obligation $6,033 $5,263 Fair Value of Plan Assets 5,346 5,505 - --------------------------------------------------------------------------------------------------------------------- Funded Status (687) 242 Unrecognized Net Asset at Transition (85) (114) Unrecognized Prior Service Cost (63) (69) Unrecognized Net Loss 1,561 492 - --------------------------------------------------------------------------------------------------------------------- Net Amounts Recognized $ 726 $ 551 ===================================================================================================================== Amounts Recognized: - --------------------------------------------------------------------------------------------------------------------- Prepaid Benefit Cost $ 726 $ 551 Accrued Benefit Liability - - Intangible Asset - - - --------------------------------------------------------------------------------------------------------------------- Net Amounts Recognized $ 726 $ 551 =====================================================================================================================
The components of the net periodic benefit costs are as follows:
(in thousands) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Service Cost $ 572 $ 536 $ 441 Interest Cost 404 360 331 Expected Return on Plan Assets (473) (426) (355) Amortization of Unrecognized Net Asset at Transition (28) (28) (28) Unrecognized Prior Service Cost (7) (7) (7) Unrecognized Net Loss 57 96 49 - --------------------------------------------------------------------------------------------------------------------- Total Net Periodic Benefit Cost $ 525 $ 531 $ 431 ===================================================================================================================== Assumptions Used in the Accounting were: Discount Rate (Settlement Rate) 7.25% 7.50% 6.50% Rate of Increase in Salary Levels 4.00% 4.00% 5.00% Expected Return on Assets 9.00% 9.00% 9.00% =====================================================================================================================
Substantially all full-time employees of the Bank with one or more years of service also participate in a defined contribution profit sharing plan. Contributions to this plan are made at the discretion of the Board of Directors and the Board can terminate the plan at any time. The Bank contributed $515,000, $485,000 and $465,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The employees are permitted, within limitations imposed by tax law, to make pretax contributions to the 401(k) feature of the Plan. The Bank does not match employee contributions within the 401(k) feature of the Plan. The Bank sponsors a Deferred Bonus Plan for certain employees. Deferred bonuses are granted and benefits accumulate based on the cumulative profits during the employee's participation period. The Bank contributed $132,000, $111,000 and $54,000 for the years ended December 31, 2000, 1999 and 1998 respectively. 13. Fair Value of Financial Instruments The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosure about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. In some cases, book value is a reasonable estimate of fair value due to the relatively short 46 period of time between origination of the instrument and its expected realization. The following table summarized the book value and estimated fair value of financial instruments as of December 31:
- --------------------------------------------------------------------------------------------------------------- 2000 1999 Carrying Estimated Carrying Estimated ASSETS: (in thousands) Amount Fair Value Amount Fair Value - --------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents $ 74,290 $ 74,290 $ 41,984 $ 41,984 Investment Securities Held-to-Maturity 41,268 41,833 49,275 49,411 Investment Securities Available-for-Sale 279,386 279,386 297,580 297,580 Loans, Net of Unearned Income 497,397 500,036 413,409 416,857 Less: Allowance for Loan Losses 11,876 11,876 9,787 9,787 Loans, Net of Allowance 485,521 488,160 403,622 407,070 LIABILITIES: Deposits: Noninterest-bearing 183,779 183,779 163,658 163,658 Interest-bearing 580,889 581,603 521,485 457,234 Federal Home Loan Bank Advances 41,033 41,397 41,064 38,936
The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value are explained below: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and due from bank and federal funds sold are a reasonable estimate of fair value. Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for fixed-rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Commitments to extend credit and standby letters of credit: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. Deposit liabilities: The fair value of demand deposits, interest bearing transaction accounts and savings accounts is the amount payable on demand as of December 31. The fair value of fixed-maturity certificates of deposit is estimated by discounting expected future cash flows utilizing interest rates currently being offered for deposits of similar remaining maturities. Short-term borrowings: The fair value of federal funds purchased and other short-term borrowings is approximated by the book value. The fair value for Federal Home Loan Bank borrowings is determined using discounted future cash flows. Limitations: Fair value estimates presented herein are based on pertinent information available to management as of December 31, 2000 and 1999. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented above. 47 14. Commitments and Contingencies In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These instruments include commitments to extend credit, letters of credit and financial guarantees that are not reflected in the Consolidated Balance Sheets. The Company's exposure to credit loss in the event of nonperformance by the other party with regards to standby letters of credit, undisbursed loan commitments and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer's creditworthiness are performed on a case-by-case basis. Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third party. The Company had standby letters of credit outstanding of $5,054,000 at December 31, 2000, and $6,635,000 at December 31, 1999. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition contained in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Undisbursed loan commitments totaled $164,698,000 and $153,329,000 as of December 31, 2000 and 1999, respectively. Since many of these commitments are expected to expire without fully being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company does not anticipate any loss as a result of these transactions. The Company is obligated under a number of noncancellable operating leases for premises and equipment used for banking purposes. Minimum future rental commitments under noncancellable operating leases as of December 31, 2000 were $89,000, $41,000, $41,000, $41,000, and $41,000 for the years 2001 to 2005 and $171,000 thereafter. In the ordinary course of business, the Company becomes involved in litigation arising out of its normal business activities. Management, after consultation with legal counsel, is of the opinion that the ultimate liability, if any, resulting from the disposition of such claims would not be material in relation to the financial position of the Company. The Company may be required to maintain average reserves on deposit with the Federal Reserve Bank primarily based on deposits outstanding. There were no reserve requirements during 2000 or at December 31, 2000 and 1999. 15. Transactions with Related Parties The Company, in the ordinary course of business, has had, and expects to have in the future, deposit and loan transactions with Directors, executive officers and their affiliated companies. These transactions were on substantially the same terms, including interest rates, as those prevailing at the time for comparable transactions with unaffiliated parties and do not involve more than normal credit risk or other unfavorable features. Loan transactions with Directors, executive officers and their affiliated companies during the year ended December 31, 2000, were as follows: (in thousands) - -------------------------------------------------------------------------------- Loan Balances December 31, 1999 $ 1,105 Disbursements During 2000 3,477 Loan Reductions During 2000 (3,282) - -------------------------------------------------------------------------------- Loan Balances December 31, 2000 $ 1,300 ================================================================================ 48 16. Future Impact of Accounting Standards Not Yet Adopted In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). In June 1999, the FASB issued SFAS 137, Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133, that amends SFAS 133, deferring its effective date. SFAS 133 is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if so, the type of hedge transaction. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified as earnings in the periods in which earnings are affected by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be recognized in current period earnings. In June 2000, the FASB issued SFAS 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, which addressed a limited number of implementation issues arising from SFAS 133. The Company adopted SFAS 133, as amended by SFAS 138, on January 1, 2001. Adoption of SFAS 133 did not have a material effect on the Company's financial position or results of operations. In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125 (SFAS 140), which replaces FASB Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 125). SFAS 140 revises the standards for accounting for securitizations, other transfers of financial assets and collateral, and requires certain disclosures, but it carries over most of the provisions of SFAS 125, which the Company adopted in fiscal year 1997, without reconsideration. SFAS 140 also provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities and provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The collateral recognition and disclosure provisions of SFAS 140 are required for fiscal years ending after December 15, 2000. The provisions of SFAS 140 that govern transfers and servicing of financial assets and extinguishments of liabilities are effective for transactions occurring after March 31, 2001. This Statement is to be applied prospectively with certain exceptions. Other than those exceptions, earlier or retroactive application of its accounting provisions is not permitted. The Company adopted the collateral recognition and disclosure provisions of SFAS 140 in the year ended December 31, 2000, as required. Adoption of the collateral recognition and disclosure provisions of SFAS 140 did not significantly impact the Company's financial position, results of operations or financial statement disclosures. The Company does not expect that the adoption of the provisions of SFAS 140 on March 31, 2001 will have a material effect on the Company's financial position or results of operations. 49 17. Parent Company Financial Information Farmers & Merchants Bancorp was organized April 30, 1999. As a result, comparative financial information is not available. The financial information below is for the year ended December 31, 2000 and for the eight- month period ended December 31, 1999. Farmers & Merchants Bancorp Balance Sheet
(in thousands) 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- Cash $ 1,261 $ 1,126 Investment in Farmers and Merchants Bank of Central California 88,993 78,991 Other Assets 629 84 - ----------------------------------------------------------------------------------------------------------------------- Total Assets $ 90,883 $80,201 ======================================================================================================================= Liabilities $ - $ - Shareholders' Equity 90,883 80,201 - ----------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders Equity $ 90,883 $80,201 =======================================================================================================================
Farmers & Merchants Bancorp Income Statement for the period ending December 31,
2000 1999 - ----------------------------------------------------------------------------------------------------------------------- Equity Earnings in Farmers and Merchants Bank of Central California $ 11,178 $ 6,298 Other Expenses, Net (158) (116) - ----------------------------------------------------------------------------------------------------------------------- Net Income $ 11,020 $ 6,182 =======================================================================================================================
Farmers & Merchants Bancorp Statement of Cash Flows for the period ending December 31,
2000 1999 - ----------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net Income $ 11,020 $ 6,182 Adjustments to Reconcile Net Income to Net Cash Used in Operating Activities: Earnings from Farmers and Merchants Bank of Central California (11,178) (6,298) Net (Increase) in Interest Receivable and Other Assets (544) (84) - ----------------------------------------------------------------------------------------------------------------------- Net Cash Used in Operating Activities (702) (200) - ----------------------------------------------------------------------------------------------------------------------- Investing Activities: Dividends Received from Farmers and Merchants Bank of Central California 5,804 5,075 - ----------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Investing Activities 5,804 5,075 - ----------------------------------------------------------------------------------------------------------------------- Financing Activities: Stock Redemption (1,258) (404) Cash Dividends (3,709) (3,345) - ----------------------------------------------------------------------------------------------------------------------- Net Cash Used by Financing Activities (4,967) (3,749) - ----------------------------------------------------------------------------------------------------------------------- Increase in Cash and Cash Equivalents 135 1,126 Cash and Cash Equivalents at Beginning of Year 1,126 - - ----------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 1,261 $ 1,126 =======================================================================================================================
50 Five Year Financial Summary of Operations (in thousands, except per share data)
2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ Total Interest Income $ 66,127 $ 56,055 $ 51,194 $ 45,975 $ 45,060 Total Interest Expense 24,757 18,862 17,428 16,422 15,557 - ------------------------------------------------------------------------------------------------------------------------ Net Interest Income 41,370 37,193 33,766 29,553 29,503 Provision for Loan Losses 2,800 1,700 1,400 5,450 4,000 - ------------------------------------------------------------------------------------------------------------------------ Net Interest income After Provision for Loan Losses 38,570 35,493 32,366 24,103 25,503 Total Non-Interest Income 6,648 5,658 5,819 5,112 5,157 Total Non-Interest Expense 27,548 27,021 26,095 24,177 22,013 - ------------------------------------------------------------------------------------------------------------------------ Income Before Income Taxes 17,670 14,130 12,090 5,038 8,647 Provision for Income Taxes 6,650 4,914 4,030 1,027 1,566 - ------------------------------------------------------------------------------------------------------------------------ Net Income $ 11,020 $ 9,216 $ 8,060 $ 4,011 $ 7,081 ======================================================================================================================== Balance Sheet Data Total Assets $905,551 $819,881 $758,799 $663,316 $632,805 Loans 497,397 413,409 329,178 271,606 263,287 Allowance for Loan Losses 11,876 9,787 8,589 7,188 10,031 Deposits 764,678 685,143 627,387 582,033 554,617 Federal Home Loan Bank Advances 41,033 41,064 41,093 - - Shareholders' Equity 90,883 80,201 79,405 74,823 72,717 Selected Ratios Return on Average Assets 1.29% 1.19% 1.17% .63% 1.17% Return on Average Equity 12.94% 11.10% 10.16% 5.43% 9.89% Dividend Payout Ratio 33.66% 36.30% 38.91% 73.10% 39.08% Average Loan to Average Deposits 59.96% 52.93% 48.93% 47.07% 50.28% Average Equity to Average Assets Ratio 10.04% 10.86% 11.33% 11.65% 11.91% Period-end Shareholders' Equity to Total 10.04% 9.78% 10.46% 11.28% 11.49% Assets Per Share Data (1) Net Income $ 15.98 $ 13.26 $ 11.56 $ 5.75 $ 10.15 Cash Dividends Declared $ 5.25 $ 4.72 $ 4.41 $ 4.11 $ 3.88
(1) Net Income is based on the weighted average number of shares outstanding of 689,642, 694,764, 697,105, 697,311 and 697,311 for the years ended December 31, 2000, 1999, 1998, 1997 and 1996, respectively. Prior years' cash dividends declared have been restated for the 5% stock dividend issued in each of the above years. 51 Quarterly Financial Data (in thousands, except for per share data)
First Second Third Fourth 2000 Quarter Quarter Quarter Quarter Total ------------------------------------------------------------------------------------------------------------- Total Interest Income $15,062 $16,231 $17,097 $17,737 $66,127 Total Interest Expense 5,220 5,900 6,921 6,716 24,757 ------------------------------------------------------------------------------------------------------------- Net Interest Income 9,842 10,331 10,176 11,021 41,370 Provision for Loan Losses 500 500 400 1,400 2,800 ------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 9,342 9,831 9,776 9,621 38,570 Total Non-Interest Income 1,729 1,700 1,692 1,527 6,648 Total Non-Interest Expense 6,735 7,042 6,912 6,859 27,548 ------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 4,336 4,489 4,556 4,289 17,670 Provision for Income Taxes 1,622 1,685 1,728 1,615 6,650 ------------------------------------------------------------------------------------------------------------- Net Income $ 2,714 $ 2,804 $ 2,828 $ 2,674 $11,020 ============================================================================================================= Earnings Per Share $ 3.92 $ 4.06 $ 4.11 $ 3.89 $ 15.98 ============================================================================================================= 1999 ------------------------------------------------------------------------------------------------------------- Total Interest Income $12,867 $13,804 $14,481 $14,903 $56,055 Total Interest Expense 4,548 4,564 4,752 4,998 18,862 ------------------------------------------------------------------------------------------------------------- Net Interest Income 8,319 9,240 9,729 9,905 37,193 Provision for Loan Losses 300 600 500 300 1,700 ------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 8,019 8,640 9,229 9,605 35,493 Total Non-Interest Income 1,547 1,479 1,574 1,058 5,658 Total Non-Interest Expense 6,040 6,584 7,084 7,313 27,021 ------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 3,526 3,535 3,719 3,350 14,130 Provision for Income Taxes 1,213 1,222 1,316 1,163 4,914 ------------------------------------------------------------------------------------------------------------- Net Income $ 2,313 $ 2,313 $ 2,403 $ 2,187 $ 9,216 ============================================================================================================= Earnings Per Share $ 3.49 $ 3.49 $ 3.63 $ 3.31 $ 13.92 =============================================================================================================
Farmers & Merchants Bancorp stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. Dividends declared semiannually during the past three years were for the following amounts: June 2000, 1999 and 1998, $1.85, $1.70 and $1.65 per share, respectively, and for December 2000, 1999, and 1998, $3.40, $3.25 and $3.20 per share, respectively. Based on information from shareholders and from Company stock transfer records, the prices paid in 2000, 1999 and 1998 ranged from $135.00 to $245.00 per share Management's Discussion and Analysis Forward -Looking Statements This annual 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, 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. 52 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) 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 Farmers & Merchants Bancorp and subsidiaries' performance during 2000 and 1999 the material changes in financial condition, operating income and expense of the Company and its subsidiaries as shown in the accompanying financial statements. Farmers & Merchants Bancorp is a bank holding company formed April 30, 1999. Its subsidiary, Farmers & Merchants Bank of Central California is a state- chartered bank with 17 offices located in Sacramento, San Joaquin and Stanislaus Counties. Virtually all of the Company's business activities are conducted within its market area. 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. Per share amounts for 1999 and 1998 have been restated to reflect the 5% stock dividend declared during 2000. Overview At the completion of our 84th year, management is pleased to present the highest reported income in the Company's history. As of December 31, 2000, Farmers & Merchants Bancorp reported net income of $11,020,000, earnings per share of $15.98, return on average assets of 1.29% and return on average equity of 12.94%. For the year 1999, net income totaled $9,216,000, earnings per share was $13.26, return on average assets was 1.19% and return on average equity was 11.10%. For the year 1998, net income totaled $8,060,000, earnings per share was $11.56 for the year, return on average assets was 1.17%, and the return on average shareholders' equity totaled 10.16%. As of December 31, 2000, consolidated assets were $905.6 million, gross loans were $497.4 million and deposits were $764.7 million. Total consolidated assets increased $85.7 million, gross loans increased $84.0 million and deposits grew $79.5 million. The Company's improved financial performance in 2000 was due to a combination of increased revenue generated from its core business, improvement in the Company's asset mix and effective capital management strategies. The following is a summary of the financial accomplishments achieved during 2000: . Net interest income increased 11.2% to $41,370,000 from $37,193,000 reported during 1999. . The provision for loan losses increased to $2,800,000 during 2000 compared to $1,700,000 in 1999. . Non-interest income (net of securities transactions) increased 17.5% during 2000, when compared to 1999. . Non-interest expense was limited to a growth of 2.0% during 2000 compared to an increase of 3.5% in 1999. . Total assets increased 10.5% to $905,551,000. . Total loans increased 20.3% to $497,397,000. . Non-accrual loans decreased 40.5% and totaled $1.5 million at December 31. 53 . Total investment securities decreased to $320,654,000 from $346,855,000 in 1999. . Total Shareholders' Equity increased to $90,883,000 from $80,201,000 in 1999. 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 11.2% to $41.4 million during 2000. During 1999, net interest income was $37.2 million representing an increase of 10.2% over 1998. On a fully taxable equivalent basis, net interest income increased 10.1% and totaled $42.8 million during 2000, compared to $38.9 million for 1999. In 1998, on a taxable equivalent basis, net interest income increased 12.8% or $4.0 million from that of 1997. 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 2000, the net interest margin was 5.24% compared to 5.31% in 1999. The decrease in net interest margin was the result of the competitive climate in the Bank's market area during the year 2000. The predominant reasons for the growth in net interest income during 2000 was the increase in the volume of average earning assets as well as the change in the mix of asset totals and deposit balances. As a result of aggressive marketing efforts and calling programs, average interest-earning assets increased $84.4 million during 2000 while average interest bearing liabilities increased $67.2 million. Loans, the Company's highest earning asset, increased $84.0 million as of December 31, 2000 compared to 1999. On an average balance basis, loans increased by $94.7 million during the year, which contributed to the corresponding increase in interest and fees on loans of $9.6 million. The yield on the loan portfolio remained relatively constant at 9.7% in 2000 compared to 9.5% in 1999. The investment portfolio represents a significant portion 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. Interest income from investment securities was virtually unchanged from one year ago despite a decline in average investment securities of $15.2 million during 2000. During the first quarter the Bank restructured a portion of its available- for-sale investment portfolio by selling lower yielding securities at a small loss and replacing them with higher yielding securities. The earnings improvement over the life of the securities more than offset the losses taken on the securities sold. This restructuring resulted in an overall improvement in the portfolio yield. The average yield, on a taxable equivalent basis, in the investment portfolio was 6.5% in 2000 versus 6.3% in 1999. The tax equivalent yield in 1998 was 6.6%. Net interest income on a taxable equivalent basis is higher than net interest income on the Consolidated Statements of Income because it reflects 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 deposit balances, a general increase in interest rates offered during the second half of 2000 and a change in the deposit mix. Accordingly, interest expense increased 31.3%. Average interest cost on interest-bearing deposits increased to $21.8 million in 2000. The percentage increase in interest expense was higher than the increase in deposit growth due to the growth in time deposits and a general increase in market rates. Several deposit gathering promotions in conjunction with the Bank's prospect calling efforts resulted in a growth in total deposits of 11.6%. The increase was primarily centered in the time deposit area, 54 which grew 26.9%. Total interest expense on deposit accounts for 2000 was $21.80 million. In 1999, interest expense on deposits was $16.5 million. The average rate paid on interest-bearing deposits was 3.90% in 2000 and 3.30% in 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 represents the current period credit cost of maintaining an appropriate allowance for loan 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 bank 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 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 Provision for Loan Losses totaled $2.8 million in 2000, compared to $1.7 million in 1999. The increase in the provision was the result of growth in the overall loan portfolio, management's evaluation of the credit quality of the loan portfolio, current loan losses, the prevailing economic climate, and its effect on borrowers' ability to repay loans in accordance with the terms of the notes. As of December 31, 2000, the allowance for loan losses was $11.9 million, which represented 2.4% of the total loan balance. In 1999, the allowance for loan losses was $9.8 million or 2.4% of the total loan balance. Non-Interest Income Non-Interest income for the Company includes income derived from services offered by the Bank, such as, merchant card, investment services and other miscellaneous business services; it also includes service charges and fees from deposit accounts and net gains and losses from the sale of investment securities and other real estate owned. Before securities transactions, non-interest income increased 13.6% in 2000 over 1999. The increase was primarily due to the increase in the service charges on deposit accounts. Total non-interest income was $6.6 million, which included $120,000 in security losses. As previously mentioned, security losses were taken to restructure a portion of the investment portfolio by replacing lower yielding investments with securities having higher returns. In 1999, non-interest income was $5.7 million. In 1998, the Company recorded $5.8 million of non-interest income. Non-Interest Expense Non-interest expense totaled $27.5 million during 2000, an increase of $527 thousand or 2.0% over that reported in 1999. The increase in 1999 over 1998 was 3.6% with total non-interest expense reported at $27.0 million. Salaries and employee benefits, the largest component of non-interest expense, increased $884 thousand in 2000, representing an increase of 5.8% over that of 1999. During 1999, the increase was $858 thousand or 5.9% over 1998. The increase was primarily the net result of merit increases for Company employees along with incentive bonuses. At the end of 2000, the Company had 296.2 full time equivalent employees compared to 321.9 at the end of 1999. Occupancy expense increased 2.3% during 2000. Equipment expense decreased $352 thousand or 15.5% and totaled $1.9 million during 2000. During 1999, equipment expense increased 7.9% or $165 thousand over the previous year. Other operating expense totaled $7.7 million and remained unchanged from the prior year. 55 Income Taxes The provision for income taxes increased 35.3% during 2000 as a result of improved earnings and an increase in the effective tax rate. In 1999 the provision increased 21.9% due to increased earnings over 1998. The effective tax rate in 2000 was 37.6% compared to 34.8% in 1999. The increase in the effective tax rate in 2000 was due to a decline in tax advantaged investment securities during the year. Current tax law causes the Company's current taxes payable to approximate or exceed the current provision for taxes on the income statement. Two provisions have had a significant effect on the Company's current income tax liability; the restrictions on the deductibility of loan losses and the mandatory use of accrual accounting for taxes rather than the cash basis method of accounting. 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. As of December 31, the Company classified securities as either held-to-maturity or available- for-sale. 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 December 31, there were no securities in the trading portfolio. 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. Securities for which the Company does not have the intent 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. The Company's total investment portfolio represented 35% of the Company's total assets during 2000 and 42% of the Company's total assets during 1999. Not included in the investment portfolio are overnight investments in Federal Funds Sold. In 2000, average Federal Funds Sold on a year to date basis was $20.5 million compared to $15.6 million in 1999. The Company's investment portfolio at the end of 2000 decreased $26.2 million or 7.6% from 1999. The proceeds from the decline in the investment portfolio was used to fund the Company's loan growth during 2000. On an average balance basis, the Company decreased its investment in Obligations of States and Political Subdivisions (municipals) by $212 thousand. The Company generally replaces maturities of municipal securities, to the point of a maximum tax benefit, with "qualified issues." Qualified issues are municipal obligations that are considered "small issues" and meet Internal Revenue Service requirements. By meeting these requirements, the interest earned from qualified issues is exempt from federal income taxes. Note 3 in the Notes to Consolidated Financial Statements displays the classifications of the Company's investment portfolio, the market value of the Company's investment portfolio and the maturity distribution. Loans 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 and oversight. 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 in the secondary market. 56 As of December 31, 2000, loans totaled $497.4 million, a 20.3% increase over that of 1999. On an average balance basis the Company's loan portfolio increased $94.7 million over the average balance in 1999. In 1999, average balances increased from the prior year by 23.1% or $68.1 million. This increase was due to strong loan demand in the Company's market area along with an aggressive calling program. Non-Performing Loans 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 December 31, 2000, non-accrual loans were $1.5 million compared to $2.5 million at the end of 1999. Reducing problem loans continues to be an important Company objective. The Company reported $88 thousand in foreclosed loans as other real estate in 2000, compared to the $204 thousand reported in 1999. Interest forgone on loans placed on a non-accrual status totaled $71 thousand at December 31, 2000. The reduction in the non-accrual loans and other real estate resulted from a focused effort to reduce problem assets. Although management believes that non-performing loans are generally well secured and that potential losses are provided for in the Company's reserve for loan losses, there can be no assurance that future deterioration in economic conditions or collateral values will not result in future credit losses. Deposits At December 31, 2000, deposits totaled $764.7 million. This represents an increase of $79.5 million or 11.6% from the deposit totals of $685.1 million reported in 1999. The majority of the increase was concentrated in demand and time deposits, which increased $20.1 million and $68.8 million, respectively. The Company increased its marketing efforts for deposits during 2000 and ran several successful deposit campaigns contributing to the strong growth in deposit balances. The change in the mix of deposits occurs as interest rates change. The expectations our customers have of future interest rates, dictates their maturity and account selections. As rates increased during 2000, some customers locked in rates in anticipation of future declines while other customers placed their funds in transaction accounts because they anticipated rates would rise and were unwilling to commit their deposits to long term investments at the current rates. 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, security and liquidity. Federal Home Loan Bank Advances Advances from the Federal Home Loan Bank are used to match fund long-term real estate loans and, as opportunities exist, the Bank borrows funds and invests the proceeds at a positive spread through the investment portfolio. These activities contribute to the Bank and Company's earnings as well as help offset the Bank's interest rate risk. The average rate paid for other borrowed funds was 5.60% in 2000 compared to 5.42% in 1999. Capital 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 $90.9 million at December 31, 2000 and $80.2 million at the end of 1999. 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 57 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 these guidelines the Company is currently required to maintain regulatory risk based capital equal to at least 8.0%. As of December 31, 2000, the Company's risk based capital was 15.2%, well above regulatory risk based capital guidelines. In 1998, the Shareholders approved a stock repurchase program. During 2000, the company repurchased 5,994 shares at an average share price of $210 per share. In 1999, the Company repurchased 2,306 shares at an average share price of $175. 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 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 that 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 reserve for losses as a specific allowance for each of these credits. Management believes that the allowance for loan losses at December 31, 2000 was adequate to provide for both recognized losses and estimated inherent losses in the portfolio. No assurances can be given that future events may 58 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 December 31, 2000, the Bank's estimated net interest income sensitivity, as a percent of net interest income, for a parallel change in interest rates of 200 basis points was 6.09% for rates up and (8.86)% in rates down. 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 59 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 cushion for temporary liquidity needs. During 2000, Federal Funds averaged $20.5 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 December 31, 2000, the Company had available liquid assets, which included cash and unpledged investment securities of approximately $161.9 million, which represents 17.9% of total assets. 60 EX-27 3 0003.txt FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 12/31/00 CONSOLIDATED BALANCE SHEETS AND THE 12/31/00 CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-2000 JAN-01-2000 DEC-31-2000 33,290 0 41,000 0 279,386 41,268 41,833 497,397 11,876 905,551 764,678 0 8,957 41,033 0 0 7 90,876 905,551 44,171 20,656 1,300 66,127 21,845 24,757 41,370 2,800 (120) 27,548 17,670 11,020 0 0 11,020 15.98 0 8.27 1,472 23 0 0 9,787 929 218 11,876 11,876 0 4,629
EX-99 4 0004.txt REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 99 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and the Board of Directors of Farmers & Merchants Bancorp: We have audited the accompanying consolidated balance sheet of Farmers & Merchants Bancorp (a Delaware corporation) and subsidiaries as of December 31, 1999, and the related consolidated statements of income, changes in shareholders' equity, cash flows and comprehensive income for each of the two years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Farmers & Merchants Bancorp and subsidiaries as of December 31, 1999, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP San Francisco, California, February 4, 2000 -----END PRIVACY-ENHANCED MESSAGE-----