-----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, ReMtd/dwjH8gXEOasGqAkMa9Peb6bHsuwrTbfS/VKWHmBikq3bFKNb+Acm/duqMW hiVG2oz+ke2reDpq7/Rj8Q== 0001021408-01-509947.txt : 20020410 0001021408-01-509947.hdr.sgml : 20020410 ACCESSION NUMBER: 0001021408-01-509947 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARMERS & MERCHANTS BANCORP CENTRAL INDEX KEY: 0001085913 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 943327828 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26099 FILM NUMBER: 1784410 BUSINESS ADDRESS: STREET 1: 121 WEST PINE ST CITY: LODI STATE: CA ZIP: 95240-2184 BUSINESS PHONE: 2093672411 MAIL ADDRESS: STREET 1: C/O PILLSBURY MADISON & SUTRO LLP STREET 2: P O BOX 7880 CITY: SAN FRANCISCO STATE: CA ZIP: 94120 10-Q 1 d10q.txt FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 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 of (I.R.S. Employer Identification No.) incorporation or organization) 121 West Pine Street, Lodi, California 95240 --------------------------------------------- (Address of principal Executive offices) Registrant's telephone number, including area code: (209) 334-1101 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Number of shares of common stock of the registrant: Par value $0.01, authorized 2,000,000 shares; issued and outstanding 719,378 as of October 25, 2001. FARMERS & MERCHANTS BANCORP FORM 10-Q TABLE OF CONTENTS _________________
PART I. - FINANCIAL INFORMATION Page --------------------- ---- Item 1 - Financial Statements Consolidated Balance Sheets as of September 30, 2001 December 31, 2000 and September 30, 2000. 3 Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2001 and 2000. 4 Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 2001 and 2000. 5 Statement of Changes in Shareholders' Equity for the Nine Months Ended September 30, 2001 and 2000. 6 Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2001 and 2000. 7 Notes to Consolidated Financial Statements 8 Item 2 - Management's Discussion and Analysis 10 PART II. - OTHER INFORMATION 25 ----------------- SIGNATURES 26 - ----------
2 PART I. - FINANCIAL INFORMATION Item 1 - Financial Statements FARMERS & MERCHANTS BANCORP Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------------------------- (in thousands) September 30, December 31, September 30, 2001 2000 2000 Assets (Unaudited) (Unaudited) - ------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents: Cash and Due From $ 33,391 $ 33,290 $ 28,936 Federal Funds Sold 46,600 41,000 14,900 - ------------------------------------------------------------------------------------------------------------------------ Total Cash and Cash Equivalents 79,991 74,290 43,836 Investment Securities: Available-for-Sale 251,117 279,386 282,423 Held-to-Maturity 32,113 41,268 44,303 - ------------------------------------------------------------------------------------------------------------------------ Total Investment Securities 283,230 320,654 326,726 - ------------------------------------------------------------------------------------------------------------------------ Loans 558,584 497,730 484,820 Less: Unearned Income (586) (333) (552) Less: Allowance for Loan Losses (13,029) (11,876) (11,071) - ------------------------------------------------------------------------------------------------------------------------ Loans, Net 544,969 485,521 473,197 - ------------------------------------------------------------------------------------------------------------------------ Land, Buildings & Equipment 11,643 11,556 12,137 Interest Receivable and Other Assets 12,755 13,530 15,487 - ------------------------------------------------------------------------------------------------------------------------ Total Assets $932,588 $905,551 $871,383 ======================================================================================================================== Liabilities & Shareholders' Equity Deposits: Demand $166,128 $183,779 $154,256 Interest Bearing Transaction 80,058 81,271 81,129 Savings 189,847 175,140 162,676 Time Deposits Over $100,000 155,126 135,757 142,705 Time Deposits Under $100,000 189,378 188,731 192,204 - ------------------------------------------------------------------------------------------------------------------------ Total Deposits 780,537 764,678 732,970 - ------------------------------------------------------------------------------------------------------------------------ Fed Funds Purchased/Borrowings 41,009 41,033 41,041 Other Liabilities 9,755 8,957 9,772 - ------------------------------------------------------------------------------------------------------------------------ Total Liabilities 831,301 814,668 783,783 - ------------------------------------------------------------------------------------------------------------------------ Shareholders' Equity Common Stock 7 7 7 Additional Paid In Capital 61,392 53,559 53,587 Retained Earnings 36,063 36,527 36,189 Accumulated Other Comprehensive Income 3,825 790 (2,183) - ------------------------------------------------------------------------------------------------------------------------ Total Shareholders' Equity 101,287 90,883 87,600 - ------------------------------------------------------------------------------------------------------------------------ Total Liabilities & Shareholders' Equity $932,588 $905,551 $871,383 ========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 3 FARMERS & MERCHANTS BANCORP Consolidated Statements of Income (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------ (in thousands) Three Months Nine Months Ended September 30, Ended September 30, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ Interest Income: Interest & Fees on Loans $11,065 $11,602 $33,808 $32,106 Federal Funds Sold 458 515 1,560 617 Securities: Investments Available-for-Sale: Taxable 3,605 4,293 11,453 13,288 Non-taxable 242 224 692 670 Investments Held-to-Maturity: Taxable 37 97 190 294 Non-taxable 381 493 1,214 1,542 - --------------------------------------------------------------------------------------------------------------------- Total Interest Income 15,788 17,224 48,917 48,517 - --------------------------------------------------------------------------------------------------------------------- Interest Expense: Interest Bearing Transaction 159 192 507 571 Savings 957 1,017 2,827 3,105 Time Deposits Over $100,000 1,919 1,540 5,871 3,750 Time Deposits Under $100,000 2,246 3,347 7,366 8,271 Interest on Borrowed Funds 570 825 1,680 2,344 - --------------------------------------------------------------------------------------------------------------------- Total Interest Expense 5,851 6,921 18,251 18,041 - --------------------------------------------------------------------------------------------------------------------- Net Interest Income 9,937 10,303 30,666 30,476 Provision for Loan Losses 150 400 750 1,400 - --------------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 9,787 9,903 29,916 29,076 - --------------------------------------------------------------------------------------------------------------------- Non-Interest Income Service Charges on Deposit Accounts 1,102 882 3,058 2,588 Net Gain (Loss) on Sale of Investment Securities 39 (1) 105 (119) Other 1,194 684 2,978 2,525 - --------------------------------------------------------------------------------------------------------------------- Total Non-Interest Income 2,335 1,565 6,141 4,994 - --------------------------------------------------------------------------------------------------------------------- Non-Interest Expense Salaries & Employee Benefits 4,265 4,193 13,007 12,472 Occupancy 445 412 1,258 1,268 Equipment 496 478 1,459 1,397 Other Operating 1,745 1,829 5,021 5,552 - --------------------------------------------------------------------------------------------------------------------- Total Non-Interest Expense 6,951 6,912 20,745 20,689 - --------------------------------------------------------------------------------------------------------------------- Net Income Before Taxes 5,171 4,556 15,312 13,381 Provision for Taxes 2,009 1,728 5,949 5,035 - --------------------------------------------------------------------------------------------------------------------- Net Income $ 3,162 $ 2,828 $ 9,363 $ 8,346 ===================================================================================================================== Earning Per Share $ 4.39 $ 3.92 $ 12.99 $ 11.52 =====================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 4 FARMERS & MERCHANTS BANCORP Consolidated Statements of Comprehensive Income (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------- (in thousands) Three Months Ended Nine Months Ended Sept. 30, Sept. 30, Sept. 30, Sept. 30 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- Net Income $ 3,162 $ 2,828 $ 9,363 $ 8,346 Other Comprehensive Income (Loss) - Unrealized holding gains (losses) arising during the period, net of income tax effects of $964 and $466 for the quarters ended September 30, 2001 and 2000, respectively, and of $2,167 and $1,109 for the nine months ended September 30, 2001 and 2000, respectively. 1,378 666 3,096 1,586 Less: Reclassification adjustment for realized (gains) losses included in net income, net of related income tax effects of ($1) and ($656) for the quarters ended September 30, 2001 and 2000, respectively, and of $44 and ($49) for the nine months ended September 30, 2001 and 2000, respectively. (1) 937 (61) 70 - ------------------------------------------------------------------------------------------------------------------------------------ Total Other Comprehensive Income 1,377 1,603 3,035 1,656 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive Income $ 4,539 $ 4,431 $ 12,398 $ 10,002 ====================================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 5 FARMERS & MERCHANTS BANCORP Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------ (in thousands except share data) Common Additional Shares Common Paid-In Retained Outstanding Stock Capital Earnings - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1999 660,989 $ 7 $ 47,993 $ 36,040 ==================================================================================================================================== Net Income - - 8,346 Cash Dividends Declared on Common Stock - - (1,273) 5% Stock Dividend 32,496 - 6,824 (6,824) Cash Paid in Lieu of Fractional Shares Related to Stock Dividend - - (100) Redemption of Stock (5,877) - (1,230) - Changes in Net Unrealized Gain (Loss) on Securities Available for Sale - - - - ------------------------------------------------------------------------------------------------------------------------------------ Balance, September 30, 2000 687,608 $ 7 $ 53,587 $ 36,189 ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 2000 687,491 $ 7 $ 53,559 $ 36,527 ==================================================================================================================================== Net Income - - 9,363 Cash Dividends Declared on Common Stock - - (1,406) 5% Stock Dividend 33,831 - 8,288 (8,288) Cash Paid in Lieu of Fractional Shares Related to Stock Dividend - - (133) Redemption of Stock (1,924) - (455) - Changes in Net Unrealized Gain (Loss) on Securities Available for Sale - - - - ------------------------------------------------------------------------------------------------------------------------------------ Balance, September 30, 2001 719,398 $ 7 $ 61,392 $ 36,063 ==================================================================================================================================== (in thousands except share data) Accumulated Other Total Comprehensive Shareholders' Income (Loss) Equity - ---------------------------------------------------------------------------------- Balance, December 31, 1999 $ (3,839) $ 80,201 ================================================================================== Net Income - 8,346 Cash Dividends Declared on - Common Stock - (1,273) 5% Stock Dividend - - Cash Paid in Lieu of Fractional Shares Related to Stock Dividend - (100) Redemption of Stock - (1,230) Changes in Net Unrealized Gain (Loss) on Securities Available for Sale 1,656 1,656 - ---------------------------------------------------------------------------------- Balance, September 30, 2000 $ (2,183) $ 87,600 ================================================================================== - ---------------------------------------------------------------------------------- Balance, December 31, 2000 $ 790 $ 90,883 ================================================================================== Net Income - 9,363 Cash Dividends Declared on - Common Stock - (1,406) 5% Stock Dividend - - Cash Paid in Lieu of Fractional Shares Related to Stock Dividend - (133) Redemption of Stock - (455) Changes in Net Unrealized Gain (Loss) on Securities Available for Sale 3,035 3,035 - ---------------------------------------------------------------------------------- Balance, September 30, 2001 $ 3,825 $101,287 ==================================================================================
The accompanying notes are an integral part of these consolidated financial statements 6
FARMERS & MERCHANTS BANCORP Consolidated Statement of Cash Flows (Unaudited) Nine Months Ended - --------------------------------------------------------------------------------------------------------------------- (in thousands) Sept. 30, Sept. 30, 2001 2000 - --------------------------------------------------------------------------------------------------------------------- Operating Activities: Net Income $9,363 $8,346 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Loan Losses 750 1,400 Depreciation and Amortization 1,172 1,341 Provision for Deferred Income Taxes (720) (345) Net Accretion of Investment Securities (307) (307) Net (Gain) Loss on Sale of Investment Securities (90) 119 Net Change in Operating Assets & Liabilities: Decrease in Trading Account Assets 0 0 Decrease in Interest Receivable and Other Assets (628) (1,587) Decrease in Interest Payable and Other Liabilities 798 (3,701) - --------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 10,338 5,266 Investing Activities: Trading Securities: Purchased (308) 0 Sold or Matured 824 0 Securities Available-for-Sale: Purchased (14,985) (41,514) Sold or Matured 48,105 59,609 Securities Held-to-Maturity: Purchased (629) (202) Matured 9,972 5,238 Net Loans Originated or Acquired (60,855) (71,142) Principal Collected on Loans Charged Off 657 167 Net Additions to Premises and Equipment (1,259) (771) - --------------------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities (18,478) (48,615) Financing Activities: Net Decrease in Demand, Interest-Bearing Transaction, and Savings Accounts (4,157) (31,394) Increase in Time Deposits 20,016 79,221 Federal Home Loan Bank Borrowings: Advances 0 0 Paydowns (24) (23) Cash Dividends (1,539) (1,373) Stock Redemption (455) (1,230) - --------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 13,841 45,201 Increase in Cash and Cash Equivalents 5,701 1,852 Cash and Cash Equivalents at Beginning of Year 74,290 41,984 - --------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents as of Sept. 30, 2001 and Sept. 30, 2000 $79,991 $43,836 =====================================================================================================================
7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Earnings per Share The actual number of shares outstanding at September 30, 2001, were 719,398. Basic earnings per share is calculated on the basis of the weighted average number of shares outstanding during the period. Weighted average number of shares for the nine months ending September 30, 2001 and 2000 were 721,080 and 724,184. Earnings per share for the nine months ending September 30, 2001 and 2000 were $12.99 and $11.52, respectively. Weighted average number of shares for the three months ending September 30, 2001 and 2000 were 720,805 and 721,442, respectively. Earnings per share for the three months ending September 30, 2001 and 2000 were $4.39 and $3.92, respectively. Prior period per share amounts have been restated for the 5% stock dividend declared during 2001 and 2000. 2. Basis of Presentation The accompanying financial statements include the accounts of Farmers & Merchants Bancorp and the Bancorp's wholly owned subsidiary, Farmers & Merchants Bank. Farmers & Merchants Bancorp was organized effective April 30, 1999. The foregoing financial statements are unaudited; however, in the opinion of Management, all adjustments (comprised only of normal recurring accruals) necessary for a fair presentation of the financial statements have been included. Certain reclassifications may have been made in the 2000 financial information to conform to the presentation used in 2001 and all material intercompany transactions have been eliminated in consolidation. The results for the three and nine months ended September 30, 2001, are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole. The unaudited consolidated financial statements presented herein should be read in conjunction with the Company's consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 3. Impact of Recently Issued Accounting Standards In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that all business combinations initiated after June 30, 2001 be accounted for by a single method - the purchase method. Statement 141 also specifies the criteria required for intangible assets be recognized and reported apart from goodwill. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company is required to adopt the provisions of Statement 141 immediately and Statement 142 effective January 1, 2002. The Company does not have any goodwill or intangible assets acquired in business combinations completed before July 1, 2001. The Company does not expect adoption of Statements No. 141 and 142 to have a material impact on the financial condition or operating results of the Company. 8 4. Impact of Recently Issued Accounting Standards (Cont'd) In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not expect adoption of Statement No. 143 to have a material impact on the financial condition or operating results of the Company. In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In the past, two accounting models existed for long-lived assets to be disposed of. Statement No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale. This statement also broadens the presentation of discontinued operations to include more disposal transactions. Therefore, the accounting for similar events and circumstances will be the same. Additionally, the information value of reported financial information will be improved. Finally, resolving significant implementation issues will improve compliance with the requirements of this Statement and, therefore, comparability among entities and the representational faithfulness of reported financial information. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company does not expect adoption of Statement No. 144 to have a material impact on the financial condition or operating results of the Company. 9 ITEM 2. Management's Discussion and Analysis Forward-Looking Statements This report contains various forward-looking statements, usually containing the words "estimate," "project," "expect," "objective," "goal," or similar expressions and includes assumptions concerning the Company's operations, future results, and prospects. These forward-looking statements are based upon current expectations and are subject to risk, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Some factors that may cause actual results to differ from the forward-looking statements include the following: (i) the effect of changing regional and national economic conditions; (ii) significant changes in interest rates and prepayment speeds; (iii) credit risks of commercial, real estate, consumer, and other lending activities; (iv) changes in federal and state Banking regulations and; (v) other external developments which could materially impact the Company's operational and financial performance. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made. Introduction The following discussion and analysis is intended to provide a better understanding of the Company's performance during the first nine months of 2001 and the material changes related to the Company and its subsidiaries' financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Company's consolidated 2000 financial statements and the notes thereto, along with other financial information included in this report. Overview For the three and nine months ended September 30, 2001, Farmers & Merchants Bancorp reported net income of $3,162,000 and $9,363,000, earnings per share of $4.39 and $12.99 and return on average assets of 1.37% and 1.39%. Return on average shareholders' equity (net of accumulated other comprehensive income) was 13.32% for both the three and nine months ended September 30, 2001. For the three and nine months ending September 30, 2000, net income totaled $2,828,000 and $8,346,000, earnings per share of $3.92 and $11.52, return on average assets was 1.28% and 1.33% and the return on average shareholders' equity (net of accumulated other comprehensive income) totaled 12.48% and 12.75%. The Company's improved financial performance in 2001 was due to a combination of increased revenue generated from its core business, which include improved growth rates in both loans outstanding and deposit balances along with capital management strategies. 10 The following is a summary of the financial results for the nine-month period ending September 30, 2001 compared to September 30, 2000. . Net income totaled $9.4 million, up 12.2% over one year ago. . Net interest income increased 0.6% to $30.7 million from $30.5 million. . The provision for loan losses totaled $750 thousand for the period compared to $1.4 million one year ago. . Non-interest income increased 23.0% to $6.1 million, from the $5.0 million reported for 2000. . Non-interest expense remained unchanged, totaling $20.7 million for both periods. . Total assets increased 7.0% to $932.6 million. . Gross loans increased 15.2% to $558.6 million, an increase of $73.8 million. . Total deposits increased 6.5% to $780.5 million. . Total investment securities totaled $283.2 million from $326.7 million at September 30, 2000. . Total shareholders' equity increased $13.7 million to $101.3 million. Net Interest Income Net interest income is the Company's primary source of income and is determined by the difference between interest and fees earned on loans and interest earning assets and interest paid on interest bearing liabilities. Net interest income for the three and nine months ended September 30, 2001 totaled $9.9 million and $30.7 million, representing a decrease of $366 thousand and an increase of $190 thousand when compared to the $10.3 million and $30.5 million achieved during the three and nine months ended September 30, 2000. Interest income is generated primarily from loans, investment securities and federal funds sold. Total interest and fees on earning assets were $15.8 million and $48.9 million for the three and nine months ended September 30, 2001, a decrease of 8.3% and an increase of 0.8% from the $17.2 million and $48.5 million for the same period in 2000. Interest income is affected by changes in volume of and rates earned on interest earning assets. The decrease in interest income for the three months ended September 30, 2001 was primarily the result of a decrease in the rates earned on interest-earning assets due to the Federal Reserve's dramatic decrease in the federal funds and discount rates which was followed by a corresponding drop in the prime rate. The 11 increase in interest income for the nine months ended September 30, 2001 was primarily the result of an increase in the volume of interest-earning assets. Loans, the Company's highest earning asset, increased $73.8 million as of September 30, 2001 compared to September 30, 2000. On an average balance basis, loans increased by $63.8 million for the three months ended September 30, 2001 and $62.8 million for the nine months ended September 30, 2001. The yield on the loan portfolio decreased 153 and 68 basis points to 8.12% and 8.79% for the three and nine months ending September 30, 2001 compared to 9.65% and 9.47% for the three and nine months ending September 30, 2000. The investment portfolio is the other main component of the Company's earning assets. The Company's investment policy is conservative. The Company primarily invests in mortgage-backed securities, U.S. Treasuries, U.S. Government Agencies, and high-grade municipals. Since the risk factor for these types of investments is significantly lower than that of loans, the yield earned on investments is substantially less than that of loans. Average investment securities decreased $46.2 million for the nine months ended September 30, 2001 compared to the same period of 2000. The decrease in the average balance of investment securities was due to normal maturities. This resulted in a corresponding decrease in interest income of $2.4 million for the nine months ending September 30, 2001. The average yield, on a taxable equivalent basis, in the investment portfolio was 6.5% for the nine months ended September 30, 2001 compared to 6.6% at September 30, 2000. Interest expense is a function of the volume of and the rates paid on interest- bearing liabilities. Interest-bearing liabilities primarily consist of deposits and borrowed funds. Total Interest expense was $5.8 million and $18.3 million for the three and nine months ended September 30, 2001, compared with $6.9 million and $18.0 million for the same period in 2000, a decrease of $1.1 million and an increase of $210 thousand. The decrease in interest expense for the three months ended September 30, 2001 was due to the decline in interest rates during the period. The increase in interest expense for the nine months ended September 30, 2001 was a result of growth in interest-bearing deposit balances and time deposit repricing that lags behind the drop in interest rates. For the nine months ended September 30, 2001 average interest-bearing sources of funds increased $34.7 million or 5.8%. Of that increase, average borrowings decreased $14.3 million and interest-bearing deposits increased $49.0 million. Overall, the average interest cost on deposits was 3.7% at September 30, 2001 and 3.8% at September 30, 2000. 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. 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. Net interest margin provides a measurement of the Company's ability to 12 employ funds profitably during the period being measured. For the three months ended September 30, 2001, the net interest margin was 4.6% compared to 5.0% for the same period in 2000. For the nine months ended September 30, 2001, the net interest margin was 4.9% compared to 5.2% for the same period in 2000. The decrease in net interest margin was primarily related to the drop in interest rates experienced during 2001. Allowance for Loan Losses As a financial institution that assumes lending and credit risks as a principal element of its business, the Company anticipates that credit losses will be experienced in the normal course of business. The allowance for loan losses is established to absorb losses inherent in the portfolio. 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 by the Company's 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 Company's written lending policies, along with applicable laws and regulations governing the extension of credit, require risk analysis as well as ongoing portfolio and credit management through loan product diversification, lending limits, ongoing credit reviews and approval policies prior to funding of any loan. The Company manages and controls credit risk through diversification, dollar limits on loans to one borrower and by primarily restricting loans made to its principal market area. Loans that are performing but have shown some signs of weakness are subjected to more stringent reporting. Fixed-rate real estate loans are comprised primarily of loans with maturities of less than five years. Generally, long-term residential loans are originated by the Company and sold on the secondary market. The appropriate allowance amount is based upon growth in the loan portfolio, management's evaluation of the credit quality of the loan portfolio, the prevailing economic climate, and its effect on borrowers' ability to repay loans in accordance with the terms of the notes and current loan losses. After reviewing all factors, management concluded that the current amount in the allowance for loan losses was adequate. As of September 30, 2001, the allowance for loan losses was $13.0 million, which represents 2.3% of the total loan balances. For the period ended September 30, 2000, the allowance was $11.1 million and 2.3% of total loans. The table below illustrates the change in the allowance for the first nine months of 2001 and 2000. 13 Allowance for Loan Losses (in thousands) - -------------------------- Balance, December 31, 1999 $ 9,787 Provision Charged to Expense 1,400 Recoveries of Loans Previously Charged Off 167 Loans Charged Off (283) - --------------------------------------------------------------------------- Balance, September 30, 2000 $11,071 =========================================================================== Balance, December 31, 2000 $11,876 Provision Charged to Expense 750 Recoveries of Loans Previously Charged Off 657 Loans Charged Off (254) - --------------------------------------------------------------------------- Balance, September 30, 2001 $13,029 =========================================================================== Non-Interest Income Non-interest income increased 23.0% for the nine months ending September 30, 2001, compared to the same period of 2000. For the third quarter of 2001, non- interest income increased 49.2% over last year. These changes are the result of increases in service charges on deposit accounts and a net gain on sale of investment securities compared to a net loss on sale of investment securities during 2000. Additionally, SBA loans were sold during the third quarter of 2001, resulting in a gain of $123 thousand and the mortgage loan servicing portfolio was sold resulting in a one-time gain of $299 thousand. Non-Interest Expense Salaries and Employee Benefits increased $535 thousand or 4.3% from the prior year due to additional staffing requirements related to loan production and normal salary progression. For the third quarter of 2001, Salaries and Employee Benefits increased $72 thousand from the third quarter of 2000. While occupancy expense remained relatively unchanged on a year-to-date basis, for the quarter ended September 30, 2001, occupancy expense increased $33 thousand or 8.0%. This increase was primarily due to increases in rent paid by the Bank and higher energy costs. Equipment expense increased $18 thousand for the quarter and $62 thousand as of September 30, 2001. This was due to upgraded computer equipment and software during the first nine months of 2001. Other operating expense decreased 4.6% and 9.6% or $84 and $531 thousand from the three months and nine months ending September 30, 2000. The primary reason for this decrease was a cost containment program implemented during the year. Total non-interest expense on a year-to-date basis remained relatively unchanged from the prior year. It is anticipated that the future growth rate in other operating expense will remain modest and comparable to the growth in assets. Income Taxes The provision for income taxes increased 16.3% to $2.0 million for the third quarter of 2001, and 18.2% to $5.9 million for the first nine months of 2001, primarily due to improved earnings. For the three and nine months ended September 30, 2000, the provision totaled $1.7 million and $5.0 million. Additionally, the Company's effective tax rate increased due to the decline through maturities of investments in tax-exempt securities. 14 Balance Sheet Analysis Investment Securities The Financial Accounting Standards Board statement, Accounting for Certain Investments in Debt and Equity Securities, requires the Company to classify its investments as held-to-maturity, trading or available-for-sale. Securities are classified as held-to-maturity and accounted for at amortized cost when the Company has the positive intent and ability to hold the securities to maturity. Trading securities are securities acquired for short-term appreciation and are carried at fair value, with unrealized gains and losses recorded in non-interest income. Securities classified as available-for-sale include securities, which may be sold to effectively manage interest rate risk exposure, prepayment risk, satisfy liquidity demand 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. The investment portfolio provides the Company with an income alternative to loans. As of September 30, 2001 the investment portfolio represented 30.4% of the Company's total assets. Total investment securities decreased $43.5 million from a year ago and now total $283.2 million. Not included in the investment portfolio are overnight investments in Federal Funds Sold. For the nine months ended September 30, 2001, average Federal Funds Sold was $46.3 million compared to $13.3 in 2000. Loans The Company's loan portfolio at September 30, 2001 increased $73.8 million from September 30, 2000. The increase is the result of an aggressive calling program on high quality prospects and a favorable economic climate in the Company's market area. Additionally, on an average balance basis loans have increased $62.8 million or 14.0%. Management believes that the growth rate in loans will continue at a modest rate through the end of 2001. The table following sets forth the distribution of the loan portfolio by type as of the dates indicated. Loan Portfolio As Of: - --------------------- (in thousands) Sept. 30, 2001 Dec. 31, 2000 Sept. 30, 2000 - ------------------------------------------------------------------------------- Real Estate Construction $ 40,588 $ 28,354 $ 27,880 Real Estate - Other 284,649 261,910 254,499 Commercial 210,560 182,611 177,152 Consumer 22,787 24,855 25,289 - ------------------------------------------------------------------------------- Gross Loans 558,584 497,730 484,820 Less: Unearned Income 586 333 552 Allowance for Loan Losses 13,029 11,876 11,071 - ------------------------------------------------------------------------------- Net Loans $544,969 $485,521 $473,197 =============================================================================== Non-Performing Assets The Company's policy is to place loans on non-accrual status when, for any reason, principal or interest is past due for ninety days or more unless it is both well secured and in the process of 15 collection. Any interest accrued, but unpaid, is reversed against current income. Thereafter, interest is recognized as income only as it is collected in cash. As a result of events beyond the Company's control, problem loans can and do occur. As of September 30, 2001, non-performing loans were $1.5 million compared to $2.7 million at September 30, 2000. Managing problem loans continues to be a significant Company objective. The Company reported no other real estate owned at September 30, 2001, compared to the $299 thousand as of September 30, 2000. Accrued interest reversed from income on loans placed on a non-accrual status totaled $36 thousand at September 30, 2001 compared to $125 thousand at September 30, 2000.
Non-Performing Assets - --------------------- (dollar amounts in thousands) Sept. 30, 2001 Dec. 31, 2000 Sept. 30, 2000 - ---------------------------------------------------------------------------------------- Nonperforming Loans $1,537 $1,495 $2,734 Other Real Estate Owned 0 88 299 - ----------------------------------------------------------------------------------------- Total $1,537 $1,583 $3,033 ========================================================================================= Non-Performing Assets as a % of Total Loans 0.3% 0.3% 0.6% Allowance for Loan Losses as a % of Non-Performing Loans 847.7% 794.4% 404.9%
Deposits At September 30, 2001, deposits totaled $780.5 million. This represents an increase of 6.5% or $47.6 million from September 30, 2000. The majority of the increase was focused in savings accounts and time deposits over $100,000, which increased $27.2 million and $12.4 million, respectively. This increase was the result of business development efforts. Additionally, due to the decline in the equity market, customers are placing funds into safer, FDIC insured investments like savings accounts and certificates of deposit. It is not anticipated that this trend will change significantly through the fourth quarter of 2001. Time deposits under $100,000 have declined $2.8 million from September 30, 2000. This decline was the result of deposit promotions during 2000 with no comparable promotion in 2001. In addition, the interest rate differential between liquid deposits and time deposits is not as great in 2001 compared to 2000, making the Bank's liquid accounts more attractive. Capital Much attention has been directed at the capital adequacy of the financial institution industry. The Company relies on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to insure depositor protection. Shareholders' Equity totaled $101.3 million at September 30, 2001 and $87.6 million at September 30, 2000, which represents an increase of $13.7 million or 15.6%. 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 16 capital requirements more sensitive to differences in risk related assets among Banking organizations, to take into account off-balance sheet exposures and to aid in making the definition of Bank capital uniform. Company assets and off- balance sheet items are categorized by risk. The results of these regulations are that assets with a higher degree of risk require a larger amount of capital; assets, such as cash, with a low degree of risk have little or no capital requirements. Under the guidelines the Company is currently required to maintain regulatory risk based capital equal to at least 8.0%. The Company's and Bank's actual capital amounts and ratios met all regulatory requirements as of September 30, 2001 and were summarized as follows:
To Be Well Capitalized Under Regulatory Capital Prompt Corrective (in thousands) Actual Requirements Action Provisions - ---------------------------------------------------------------------------------------------------------------------- The Company: Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------------------- As of September 30, 2001 Total Capital to Risk Weighted Assets $106,784 14.39% $59,409 8.0% N/A N/A Tier I Capital to Risk Weighted Assets $ 97,462 13.13% $29,705 4.0% N/A N/A Tier I Capital to Average Assets $ 97,462 10.60% $36,782 4.0% N/A N/A
To Be Well Capitalized Under Regulatory Capital Prompt Corrective (in thousands) Actual Requirements Action Provisions - ---------------------------------------------------------------------------------------------------------------------- The Bank: Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------------------- As of September 30, 2001 Total Capital to Risk Weighted Assets $105,652 14.24% $59,350 8.0% $74,188 10.0% Tier I Capital to Risk Weighted Assets $ 96,332 12.98% $29,675 4.0% $44,513 6.0% Tier I Capital to Average Assets $ 96,332 10.48% $36,752 4.0% $45,940 5.0%
Risk Management The Company has adopted a Risk Management Plan to ensure the proper control and management of all risk factors inherent in the operation of the Company and the Bank. Specifically, credit risk, interest rate risk, liquidity risk, compliance risk, strategic risk, reputation risk and price risk can all affect the market risk of the Company. These specific risk factors are 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 17 Committees, and the Board of Directors are provided with timely and accurate information to appropriately identify, measure, control and monitor the credit risk of the Company and the Bank. The allowance for loan losses is based on estimates of probable losses inherent in the loan portfolio. The amount actually incurred with respect to these losses can vary significantly from the estimated amounts. The Company's methodology includes several features which are intended to reduce the difference between estimated and actual losses. Implicit in lending activities is the risk that losses will and do occur and that the amount of such losses will vary over time. Consequently, the Company maintains an allowance for loan losses by charging a provision for loan losses to earnings. Loans determined to be losses are charged against the allowance for loan losses. The Company's allowance for loan losses is maintained at a level considered by management to be adequate to provide for estimated credit losses inherent in the portfolio. The Company's methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowances for identified problem loans and portfolio segments and the unallocated allowance. Specific allowances are established in cases where management has identified conditions or circumstances related to credit that management believes indicate the possibility that a loss may be incurred in excess of the amount determined by the application of the formula reserve. Management performs a detailed analysis of these loans, including, but not limited to appraisals of the collateral, conditions of the marketplace for liquidating the collateral and assessment of the guarantors. Management then determines the loss potential and allocates a portion of the allowance for losses for each of these credits. Management believes that the allowance for loan losses at September 30, 2001 was adequate to provide for recognized, unidentified and estimated inherent losses in the portfolio. No assurances can be given that future events may not result in increases in delinquencies, non-performing loans or net loan chargeoffs that would increase the provision for loan losses and thereby adversely affect the results of operations. Asset/Liability Management - Interest Rate Risk The mismatch between maturities of interest sensitive assets and liabilities results in uncertainty in the Company's earnings and economic value and is referred to as interest rate risk. Farmers & Merchants Bancorp's primary objective in managing interest rate risk is to minimize the potential for significant loss as a result of changes in interest rates. The Company measures interest rate risk in terms of potential impact on both its economic value and earnings. The methods for governing the amount of interest rate risk include: analysis of asset and liability mismatches (GAP analysis), the utilization of a simulation model and limits on maturities of investment, loan and deposit products to relatively short periods which reduces the market volatility of those instruments. The gap analysis measures, at specific time intervals, the divergence between earning assets and interest bearing liabilities for which repricing opportunities will occur. A positive difference, or 18 gap, indicates that earning assets will reprice faster than interest-bearing liabilities. This will generally produce a greater net interest margin during periods of rising interest rates and a lower net interest margin during periods of declining interest rates. Conversely, a negative gap will generally produce a lower net interest margin during periods of rising interest rates and a greater net interest margin during periods of decreasing interest rates. The interest rates paid on deposit accounts do not always move in unison with the rates charged on loans. In addition, the magnitude of changes in the rates charged on loans is not always proportionate to the magnitude of changes in the rate paid for deposits. Consequently, changes in interest rates do not necessarily result in an increase or decrease in the net interest margin solely as a result of the differences between repricing opportunities of earning assets or interest bearing liabilities. The Company also utilizes the results of a dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. The sensitivity of the Company's net interest income is measured over a rolling one-year horizon. The simulation model estimates the impact of changing interest rates on interest income from all interest earning assets and the interest expense paid on all interest bearing liabilities reflected on the Company's balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given both a 200 basis point upward and downward shift in interest rates. A parallel and pro rata shift in rates over a 12-month period is assumed. Results that exceed policy limits, if any, are analyzed for risk tolerance and reported to the Board with appropriate recommendations. At September 30, 2001, the Company's estimated net interest income sensitivity to changes in interest rates, as a percent of net interest income was an increase in net interest income of 13.3% if rates increase by 200 basis points and a decrease in net interest income of 20.0% if rates decline 200 basis points. The estimated sensitivity does not necessarily represent a Company forecast and the results may not be indicative of actual changes to the Company's net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, pricing strategies on loans and deposits, replacement of asset and liability cashflows, and other assumptions. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change. Liquidity Liquidity risk is the risk to earnings or capital resulting from the Bank's inability to meet its obligations when they come due without incurring unacceptable losses. It includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect the Bank's ability to liquidate assets or acquire funds quickly and with minimum loss of value. The Company endeavors to maintain a cash flow adequate to fund operations, handle fluctuations in deposit levels, respond to the credit needs of borrowers and to take advantage of investment opportunities as they arise. The principal sources of liquidity 19 include interest and principal payments on loans and investments, proceeds from the maturity or sale of investments, and growth in deposits. In general, liquidity risk is managed daily by controlling the level of Fed Funds and the use of funds provided by the cash flow from the investment portfolio. The Company maintains overnight investments in Fed Funds as a reserve for temporary liquidity needs. During the first nine months of 2001, Federal Funds averaged $46.3 million. In addition, the Company maintains Federal Fund credit lines of $136 million with major correspondent banks subject to the customary terms and conditions for such arrangements. At September 30, 2001, the Company had available liquid assets, which included cash and unpledged investment securities of approximately $140.9 million, which represents 15.1% of total assets. Average Balance Sheets The tables on the following pages reflect the Company's average balance sheets and volume and rate analysis for the three-month and nine-month periods ending September 30, 2001 and 2000. The average yields on earning assets and average rates paid on interest-bearing liabilities have been computed on an annualized basis for purposes of comparability with full year data. Average balance amounts for assets and liabilities are the computed average of daily balances. The volume and rate analysis of net interest revenue summarizes the changes in average asset and liability balances and interest earned and paid resulting from changes in average asset and liability balances (volume) and changes in average interest rates and the total net change in interest income and expenses. The changes in interest due to both rate and volume have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each. 20 Farmers & Merchants Bancorp Average Balances and Interest Rates (Interest and Rates on a Taxable Equivalent Basis) (in thousands)
Three Months Ended September 30, 2001 Assets Balance Interest Rate - ------------------------------------------------------------------------------------------------------------ Federal Funds Sold $ 52,125 $ 458 3.49% Investment Securities Available-for-Sale U.S. Treasuries 0 0 0.00% U.S. Agencies 5,078 72 5.63% Municipals - Taxable 1,850 30 6.43% Municipals - Non-Taxable 22,161 369 6.61% Mortgage Backed Securities 215,810 3,410 6.27% Other 6,099 93 6.05% - ------------------------------------------------------------------------------------------------------------ Total Investment Securities Available-for-Sale 250,998 3,974 6.28% - ------------------------------------------------------------------------------------------------------------ Investment Securities Held-to-Maturity U.S. Treasuries 0 0 0.00% U.S. Agencies 0 0 0.00% Municipals - Taxable 1,012 21 8.23% Municipals - Non-Taxable 31,643 581 7.29% Mortgage Backed Securities 0 0 0.00% Other 635 16 10.00% - ------------------------------------------------------------------------------------------------------------ Total Investment Securities Held-to-Maturity 33,290 618 7.37% - ------------------------------------------------------------------------------------------------------------ Loans Real Estate 314,255 6,590 8.32% Commercial 203,390 3,876 7.56% Installment 18,973 491 10.27% Credit Card 3,358 95 11.22% Municipal 887 13 5.81% Total Loans 540,863 11,065 8.12% - ------------------------------------------------------------------------------------------------------------ Total Earning Assets 877,276 $16,115 7.29% ============================= Unrealized Gain/(Loss) on Securities Available-for-Sale 4,210 Allowance for Loan Losses (12,987) Cash and Due From Banks 29,309 All Other Assets 24,598 - ------------------------------------------------------------------------------- Total Assets $ 922,406 =============================================================================== Liabilities & Shareholders' Equity Interest Bearing Deposits Interest Bearing DDA $ 78,712 $ 159 0.80% Savings 186,783 957 2.03% Time Deposits 346,865 4,165 4.76% - ----------------------------------------------------------------------------------------------------------- Total Interest Bearing Deposits 612,360 5,281 3.42% Other Borrowed Funds 41,012 570 5.51% - ----------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities 653,372 $ 5,851 3.55% ============================ Demand Deposits 161,383 All Other Liabilities 10,191 Total Liabilities 824,946 Shareholders' Equity 97,460 - ------------------------------------------------------------------------------- Total Liabilities & Shareholders' Equity $ 922,406 =============================================================================== Net Interest Margin 4.64% =========================================================================================================== Three Months Ended September 30, 2000 Assets Balance Interest Rate - -------------------------------------------------------------------------------------------------------------- Federal Funds Sold $ 32,915 $ 515 6.21% Investment Securities Available-for-Sale U.S. Treasuries 5,044 68 5.35% U.S. Agencies 7,127 104 5.79% Municipals - Taxable 3,210 51 6.30% Municipals - Non-Taxable 20,827 342 6.51% Mortgage Backed Securities 247,746 3,970 6.36% Other 6,028 100 6.58% - -------------------------------------------------------------------------------------------------------------- Total Investment Securities Available-for-Sale 289,982 4,635 6.34% - -------------------------------------------------------------------------------------------------------------- Investment Securities Held-to-Maturity U.S. Treasuries 0 0 0.00% U.S. Agencies 1,998 30 5.96% Municipals - Taxable 2,930 49 6.63% Municipals - Non-Taxable 39,688 752 7.52% Mortgage Backed Securities 0 0 0.00% Other 747 18 9.56% - -------------------------------------------------------------------------------------------------------------- Total Investment Securities Held-to-Maturity 45,363 849 7.43% - -------------------------------------------------------------------------------------------------------------- Loans Real Estate 282,648 6,692 9.39% Commercial 169,156 4,288 10.06% Installment 21,323 519 9.66% Credit Card 3,379 94 11.04% Municipal 566 9 6.31% - -------------------------------------------------------------------------------------------------------------- Total Loans 477,072 11,602 9.65% - -------------------------------------------------------------------------------------------------------------- Total Earning Assets 845,332 $17,601 8.26% ============================= Unrealized Gain/(Loss) on Securities Available-for-Sale (6,195) Allowance for Loan Losses (10,900) Cash and Due From Banks 26,314 All Other Assets 30,146 - --------------------------------------------------------------------------------- Total Assets $884,697 ================================================================================= Liabilities & Shareholders' Equity Interest Bearing Deposits Interest Bearing DDA $ 65,087 $ 192 1.17% Savings 175,877 1,017 2.29% Time Deposits 336,303 4,887 5.77% Total Interest Bearing Deposits 577,267 6,096 4.19% Other Borrowed Funds 55,979 825 5.85% - -------------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities 633,246 $ 6,921 4.34% ============================= Demand Deposits 155,101 All Other Liabilities 9,398 Total Liabilities 797,745 Shareholders' Equity 86,952 - --------------------------------------------------------------------------------- Total Liabilities & Shareholders' Equity $884,697 ================================================================================= Net Interest Margin 5.01% ==============================================================================================================
Notes: Yields on municipal securities have been calculated on a fully taxable equivalent basis using the applicable Federal and State income tax rates for the period. Loan Fees are included in interest income for loans. Unearned discount is included for rate calculation purposes. Nonaccrual loans and lease financing receivables have been included in the average balances. Yields on securities available-for-sale are based on historical cost. 21 Farmers & Merchants Bancorp Year-to-Date Average Balances and Interest Rates (Interest and Rates on a Taxable Equivalent Basis) (in thousands)
Nine Months Ended September 30, 2001 Assets Balance Interest Rate - -------------------------------------------------------------------------------------------------------------- Federal Funds Sold $ 46,302 $ 1,560 4.49% Investment Securities Available-for-Sale U.S. Treasuries 1,365 55 5.37% U.S. Agencies 5,655 243 5.72% Municipals - Taxable 1,942 91 6.24% Municipals - Non-Taxable 21,903 1,056 6.42% Mortgage Backed Securities 225,320 10,778 6.37% Other 5,441 279 6.83% - -------------------------------------------------------------------------------------------------------------- Total Investment Securities Available-for-Sale 261,626 12,502 6.37% - -------------------------------------------------------------------------------------------------------------- Investment Securities Held-to-Maturity U.S. Treasuries 0 0 0.00% U.S. Agencies 491 22 5.97% Municipals - Taxable 2,291 114 6.63% Municipals - Non-Taxable 33,088 1,852 7.45% Mortgage Backed Securities 0 0 0.00% Other 651 49 10.03% - -------------------------------------------------------------------------------------------------------------- Total Investment Securities Held-to-Maturity 36,521 2,037 7.43% - -------------------------------------------------------------------------------------------------------------- Loans Real Estate 301,020 20,322 8.99% Commercial 187,168 11,627 8.28% Installment 19,908 1,515 10.14% Credit Card 3,428 280 10.88% Municipal 894 57 8.49% - -------------------------------------------------------------------------------------------------------------- Total Loans $ 12,418 33,801 8.79% - -------------------------------------------------------------------------------------------------------------- Total Earning Assets 856,867 $49,900 7.76% ============================== Unrealized Gain/(Loss) on Securities Available-for-Sale 2,940 Allowance for Loan Losses (12,469) Cash and Due From Banks 27,912 All Other Assets 25,518 - -------------------------------------------------------------------------------- Total Assets $900,768 ================================================================================ Liabilities & Shareholders' Equity Interest Bearing Deposits Interest Bearing DDA $75,376 $ 507 0.90% Savings 181,402 2,827 2.08% Time Deposits 338,108 13,237 5.22% Total Interest Bearing Deposits 594,886 16,571 3.71% Other Borrowed Funds 41,021 1,680 5.46% - -------------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities 635,907 $18,251 3.82% ============================== Demand Deposits 159,882 All Other Liabilities 9,513 - -------------------------------------------------------------------------------- Total Liabilities 805,302 Shareholders' Equity 95,466 - -------------------------------------------------------------------------------- Total Liabilities & Shareholders' Equity $900,768 ================================================================================ Net Interest Margin 4.92% ============================================================================================================== Nine Months Ended September 30, 2000 Assets Balance Interest Rate - --------------------------------------------------------------------------------------------------------- Federal Funds Sold $ 13,252 $ 617 6.20% Investment Securities Available-for-Sale U.S. Treasuries 9,461 393 5.53% U.S. Agencies 7,139 312 5.82% Municipals - Taxable 2,997 155 6.89% Municipals - Non-Taxable 21,050 1,022 6.47% Mortgage Backed Securities 251,451 12,103 6.41% Other 5,226 324 8.26% - --------------------------------------------------------------------------------------------------------- Total Investment Securities Available-for-Sale 297,324 14,309 6.41% - --------------------------------------------------------------------------------------------------------- Investment Securities Held-to-Maturity U.S. Treasuries 0 0 0.00% U.S. Agencies 1,997 89 5.94% Municipals - Taxable 2,927 148 6.74% Municipals - Non-Taxable 41,343 2,352 7.58% Mortgage Backed Securities 0 0 0.00% Other 794 57 9.56% - --------------------------------------------------------------------------------------------------------- Total Investment Securities Held-to-Maturity 47,061 2,646 7.49% - --------------------------------------------------------------------------------------------------------- Loans Real Estate 276,379 19,189 9.25% Commercial 149,100 11,052 9.87% Installment 20,465 1,440 9.37% Credit Card 3,276 280 11.39% Municipal 403 18 5.95% - --------------------------------------------------------------------------------------------------------- Total Loans 449,623 31,979 9.47% - --------------------------------------------------------------------------------------------------------- Total Earning Assets 807,260 $49,551 8.18% ========================= Unrealized Gain/(Loss) on Securities Available-for-Sale (7,754) Allowance for Loan Losses (10,429) Cash and Due From Banks 25,718 All Other Assets 30,394 - -------------------------------------------------------------------------------- Total Assets $845,189 ================================================================================ Liabilities & Shareholders' Equity Interest Bearing Deposits Interest Bearing DDA $65,144 $ 571 1.17% Savings 182,058 3,105 2.27% Time Deposits 298,640 12,021 5.36% Total Interest Bearing Deposits 545,842 15,697 3.83% Other Borrowed Funds 55,331 2,344 5.64% - --------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities 601,173 $18,041 4.00% ========================= Demand Deposits 152,457 All Other Liabilities 7,792 - -------------------------------------------------------------------------------- Total Liabilities 761,422 Shareholders' Equity 83,767 - -------------------------------------------------------------------------------- Total Liabilities & Shareholders' Equity $845,189 ================================================================================ Net Interest Margin 5.20% =========================================================================================================
Notes: Yields on municipal securities have been calculated on a fully taxable equivalent basis using the applicable Federal and State income tax rates for the period. Loan Fees are included in interest income for loans. Unearned discount is included for rate calculation purposes. Nonaccrual loans and lease financing receivables have been included in the average balances. Yields on securities available-for-sale are based on historical cost. 22 Farmers & Merchants Bancorp Volume and Rate Analysis of Net Interest Revenue (Rates on a Taxable Equivalent Basis) (in thousands)
Three Months Ended Sept. 30, 2001 compared to Sept. 30, 2000 Interest Earning Assets Volume Rate Net Chg. - -------------------------------------------------------------------------------------------------------------- Federal Funds Sold $ 990 $ (1,047) $ (57) Investment Securities Available for Sale U.S. Treasuries (34) (34) (68) U.S. Agencies (30) (2) (32) Municipals - Taxable (28) 7 (21) Municipals - Non-Taxable 23 4 27 Mortgage Backed Securities (505) (55) (560) Other 8 (15) (7) - -------------------------------------------------------------------------------------------------------------- Total Investment Securities Available for Sale (566) (95) (661) - -------------------------------------------------------------------------------------------------------------- Investment Securities Held to Maturity U.S. Treasuries 0 0 0 U.S. Agencies (15) (15) (30) Municipals - Taxable (89) 61 (28) Municipals - Non-Taxable (149) (22) (171) Mortgage Backed Securities 0 0 0 Other (7) 5 (2) - -------------------------------------------------------------------------------------------------------------- Total Investment Securities Held to Maturity (260) 29 (231) - -------------------------------------------------------------------------------------------------------------- Loans: Real Estate 2,951 (3,053) (102) Commercial 3,608 (4,020) (412) Installment (183) 155 (28) Credit Card (3) 4 1 Other 9 (5) 4 - -------------------------------------------------------------------------------------------------------------- Total Loans 6,382 (6,919) (537) - -------------------------------------------------------------------------------------------------------------- Total Earning Assets 6,546 (8,032) (1,486) - -------------------------------------------------------------------------------------------------------------- Interest Bearing Liabilities Interest Bearing Deposits: Transaction 178 (211) (33) Savings 303 (363) (60) Time Deposits 221 (943) (722) - -------------------------------------------------------------------------------------------------------------- Total Interest Bearing Deposits 702 (1,517) (815) Other Borrowed Funds (210) (45) (255) - -------------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities 492 (1,562) (1,070) - -------------------------------------------------------------------------------------------------------------- Total Change $6,054 $ (6,470) $ (416) ==============================================================================================================
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. 23 Farmers & Merchants Bancorp Volume and Rate Analysis of Net Interest Revenue (Rates on a Taxable Equivalent Basis)
(in tho|usands) Nine Months Ended Sept. 30, 2001 compared to Sept. 30, 2000 Interest Earning Assets Volume Rate Net Chg. - -------------------------------------------------------------------------------------------------------------- Federal Funds Sold $ 1,258 $ (315) $ 943 Investment Securities Available for Sale U.S. Treasuries (327) (11) (338) U.S. Agencies (63) (6) (69) Municipals - Taxable (51) (13) (64) Municipals - Non-Taxable 46 (12) 34 Mortgage Backed Securities (1,250) (75) (1,325) Other 20 (65) (45) - -------------------------------------------------------------------------------------------------------------- Total Investment Securities Available for Sale (1,625) (182) (1,807) - -------------------------------------------------------------------------------------------------------------- Investment Securities Held to Maturity U.S. Treasuries 0 0 0 U.S. Agencies (68) 1 (67) Municipals - Taxable (32) (2) (34) Municipals - Non-Taxable (462) (38) (500) Mortgage Backed Securities 0 0 0 Other (12) 4 (8) - -------------------------------------------------------------------------------------------------------------- Total Investment Securities Held to Maturity (574) (35) (609) - -------------------------------------------------------------------------------------------------------------- Loans: Real Estate 1,944 (811) 1,133 Commercial 3,270 (2,695) 575 Installment (59) 134 75 Credit Card 17 (17) 0 Other 29 10 39 - -------------------------------------------------------------------------------------------------------------- Total Loans 5,201 (3,379) 1,822 - -------------------------------------------------------------------------------------------------------------- Total Earning Assets 4,260 (3,911) 349 - -------------------------------------------------------------------------------------------------------------- Interest Bearing Liabilities Interest Bearing Deposits: Transaction 116 (180) (64) Savings (11) (267) (278) Time Deposits 1,734 (518) 1,216 - -------------------------------------------------------------------------------------------------------------- Total Interest Bearing Deposits 1,839 (965) 874 Other Borrowed Funds (588) (76) (664) - -------------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities 1,251 (1,041) 210 - -------------------------------------------------------------------------------------------------------------- Total Change $ 3,009 $ (2,870) $ 139 ==============================================================================================================
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. 24 PART II. OTHER INFORMATION - --------------------------- ITEM 1. Legal Proceedings - ------------------------- None ITEM 2. Changes in Securities - ----------------------------- None ITEM 3. Defaults Upon Senior Securities - --------------------------------------- Not applicable ITEM 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- None ITEM 5. Other Information - ------------------------- None ITEM 6(a). Exhibits - ------------------- 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(ii) 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. 25 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. 16 Letter regarding change in certifying accountants filed as exhibit 16 to Registrants 8-K filed October 20, 2000 is incorporated herein by reference. ITEM 6(b). Reports on Form 8-K - ------------------------------ None SIGNATURES ---------- Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FARMERS & MERCHANTS BANCORP Date: November 13, 2001 /s/ Kent A. Steinwert ------------------------ Kent A. Steinwert President and Chief Executive Officer (Principal Executive Officer) Date: November 13, 2001 /s/ John R. Olson ------------------------ John R. Olson Executive Vice President and Chief Financial Officer (Principal Accounting Officer) 26 -----END PRIVACY-ENHANCED MESSAGE-----