-----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, Ba0cuxd8wXEQ7wCmz33NZeBp5PZxvdRuKe9dGX66ILehBH34UJ2ViEyvMhpd2hOW J0Ev8/PGblDuvvMisTqrcw== 0001085913-04-000017.txt : 20040507 0001085913-04-000017.hdr.sgml : 20040507 20040507131101 ACCESSION NUMBER: 0001085913-04-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARMERS & MERCHANTS BANCORP CENTRAL INDEX KEY: 0001085913 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] 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: 04788023 BUSINESS ADDRESS: STREET 1: 121 WEST PINE ST CITY: LODI STATE: CA ZIP: 95240-2184 BUSINESS PHONE: 2093672411 MAIL ADDRESS: STREET 1: FARMERS AND MERCHANTS BANCORP STREET 2: 121 WEST PINE ST CITY: LODI STATE: CA ZIP: 95240-2184 10-Q 1 form10-q_1stqtr2004.txt FORM 10-Q FOR Q1 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ________ to ________ Commission File Number: 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.) 111 W. Pine Street, Lodi, California 95240 (Address of principal Executive offices) (Zip Code) Registrant's telephone number, including area code (209) 367-2300 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ] Number of shares of common stock of the registrant: Par value $0.01, authorized 2,000,000 shares; issued and outstanding 760,642 as of April 27, 2004. 1 FARMERS & MERCHANTS BANCORP FORM 10-Q TABLE OF CONTENTS PART I. - FINANCIAL INFORMATION Page Item 1 - Financial Statements Consolidated Balance Sheets as of March 31, 2004, December 31, 2003 and March 31, 2003. 3 Consolidated Statements of Income for the Three Months Ended March 31, 2004 and 2003. 4 Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2004 and 2003. 5 Statement of Changes in Shareholders' Equity for the Three Months Ended March 31, 2004 and 2003. 6 Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2004 and 2003. 7 Notes to Consolidated Financial Statements 8 Item 2 - Management's Discussion and Analysis 13 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 21 Item 4 - Controls and Procedures 25 PART II. - OTHER INFORMATION 28 Signatures 29 Index to Exhibits 30 2 PART I. - FINANCIAL INFORMATION Item 1 - Financial Statements FARMERS & MERCHANTS BANCORP Consolidated Balance Sheets
- -------------------------------------------------------------------------- -------------- -------------- -------------- (in thousands) March 31, December 31, March 31, 2004 2003 2003 Assets (Unaudited) (Unaudited) - -------------------------------------------------------------------------- -------------- -------------- -------------- Cash and Cash Equivalents: Cash and Due From $34,764 $35,800 $32,997 Federal Funds Sold 2,900 0 5,790 - -------------------------------------------------------------------------- -------------- -------------- -------------- Total Cash and Cash Equivalents 37,664 35,800 38,787 Investment Securities: Available-for Sale 210,330 223,965 272,239 Held-to-Maturity 35,981 37,957 44,602 - -------------------------------------------------------------------------- -------------- -------------- -------------- Total Investment Securities 246,311 261,922 316,841 - -------------------------------------------------------------------------- -------------- -------------- -------------- Loans 799,034 808,998 688,802 Less: Unearned Income (1,929) (2,092) (1,977) Less: Allowance for Loan Losses (17,564) (17,220) (16,871) - -------------------------------------------------------------------------- -------------- -------------- -------------- Loans, Net 779,541 789,686 669,954 - -------------------------------------------------------------------------- -------------- -------------- -------------- Land, Buildings & Equipment 11,130 11,209 11,323 Interest Receivable and Other Assets 46,915 49,948 42,689 - -------------------------------------------------------------------------- -------------- -------------- -------------- Total Assets $1,121,561 $1,148,565 $1,079,594 ========================================================================== ============== ============== ============== Liabilities & Shareholders' Equity - -------------------------------------------------------------------------- -------------- -------------- -------------- Deposits: Demand $217,328 $223,000 $189,999 Interest Bearing Transaction 93,655 96,869 90,675 Savings 279,263 276,016 249,862 Time Deposits 316,346 308,464 319,452 - -------------------------------------------------------------------------- -------------- -------------- -------------- Total Deposits 906,592 904,349 849,988 - -------------------------------------------------------------------------- -------------- -------------- -------------- Fed Funds Purchased 0 1,000 0 FHLB Borrowings 80,918 111,928 100,956 Subordinated Debentures 10,310 10,310 0 Other Liabilities 10,278 11,373 22,444 - -------------------------------------------------------------------------- -------------- -------------- -------------- Total Liabilities 1,008,098 1,038,960 973,388 - -------------------------------------------------------------------------- -------------- -------------- -------------- Shareholders' Equity Common Stock 8 8 7 Additional Paid In Capital 71,560 72,506 64,479 Retained Earnings 41,551 37,650 40,150 Accumulated Other Comprehensive Income 344 (559) 1,570 - -------------------------------------------------------------------------- -------------- -------------- -------------- Total Shareholders' Equity 113,463 109,605 106,206 - -------------------------------------------------------------------------- -------------- -------------- -------------- Total Liabilities & Shareholders' Equity $1,121,561 $1,148,565 $1,079,594 ========================================================================== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements 3 FARMERS & MERCHANTS BANCORP Consolidated Statements of Income (Unaudited)
- -------------------------------------------------------------------------- --------------- -------------- Three Months Ended March 31, 2004 2003 - -------------------------------------------------------------------------- --------------- -------------- Interest Income Interest & Fees on Loans $11,673 $10,592 Federal Funds Sold 52 79 Securities: Taxable 1,726 1,909 Non-taxable 594 619 - -------------------------------------------------------------------------- --------------- -------------- Total Interest Income 14,045 13,199 - -------------------------------------------------------------------------- --------------- -------------- Interest Expense Interest Bearing Transaction 14 49 Savings 256 345 Time Deposits 1,322 1,907 Interest on Borrowed Funds 716 577 Interest on Subordinated Debentures 105 0 - -------------------------------------------------------------------------- --------------- -------------- Total Interest Expense 2,413 2,878 - -------------------------------------------------------------------------- --------------- -------------- Net Interest Income 11,632 10,321 Provision for Loan Losses 375 200 - -------------------------------------------------------------------------- --------------- -------------- Net Interest Income After Provision for Loan Losses 11,257 10,121 - -------------------------------------------------------------------------- --------------- -------------- Non-Interest Income Service Charges on Deposit Accounts 1,189 1,176 Net Gain (Loss) on Sale of Investment Securities 641 132 Credit Card Merchant Fees 384 354 Increase in Cash Surrender Value of Life Insurance 420 383 Other 910 906 - -------------------------------------------------------------------------- --------------- -------------- Total Non-Interest Income 3,544 2,951 - -------------------------------------------------------------------------- --------------- -------------- Non-Interest Expense Salaries & Employee Benefits 6,053 4,939 Occupancy 459 405 Equipment 440 601 Other Operating 1,746 1,804 - -------------------------------------------------------------------------- --------------- -------------- Total Non-Interest Expense 8,698 7,749 - -------------------------------------------------------------------------- --------------- -------------- Net Income Before Taxes 6,103 5,323 Provision for Taxes 2,201 1,922 - -------------------------------------------------------------------------- --------------- -------------- Net Income $3,902 $3,401 ========================================================================== =============== ============== Earnings Per Share $5.12 $4.43 ========================================================================== =============== ==============
The accompanying notes are an integral part of these consolidated financial statements 4 FARMERS & MERCHANTS BANCORP Consolidated Statements of Comprehensive Income (Unaudited)
- --------------------------------------------------------------------------------------- ----------- ---------- (in thousands) For Three Months Ended March 31, 2004 2003 - --------------------------------------------------------------------------------------- ----------- ---------- Net Income $ 3,902 $ 3,401 Other Comprehensive Income (Loss) - Unrealized Gains on Derivative Instruments: Unrealized holding gains arising during the period, net of income tax effects of $75 and $55 for the quarters ended March 31, 2004 and 2003, respectively. 104 76 Less: Reclassification adjustment for realized gains included in net income, net of related income tax effects of $(32) and $0 for the quarters ended March 31, 2004 and 2003, respectively. (44) - Unrealized Gains (Losses) on Securities: Unrealized holding gains (losses) arising during the period, net of income tax effects of $882 and $(188) for the quarters ended March 31, 2004 and 2003, respectively. 1,215 (260) Less: Reclassification adjustment for realized gains included in net income, net of related income tax effects of $(269) and $(56) for the quarters ended March 31, 2004 and 2003, respectively. (372) (76) - --------------------------------------------------------------------------------------- ----------- ---------- Total Other Comprehensive Income (Loss) 903 (260) - --------------------------------------------------------------------------------------- ----------- ---------- Comprehensive Income $ 4,805 $ 3,141 ======================================================================================= =========== ==========
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) Accumulated Common Additional Other Total Shares Common Paid-In Retained Comprehensive Shareholders' Outstanding Stock Capital Earnings Income Equity - --------------------------------------- --------------- ------------ ------------- ------------- ------------------ ---------------- Balance, December 31, 2002 733,021 $ 7 $ 64,979 $ 36,749 $ 1,830 $ 103,565 ======================================= =============== ============ ============= ============= ================== ================ Net Income - - 3,401 - 3,401 Redemption of Stock (2,000) - (500) - - (500) Unrealized Gains on Derivative Instruments - - - 76 76 Changes in Net Unrealized Gain (Loss) on Securities Available for Sale - - - (336) (336) - --------------------------------------- --------------- ------------ ------------- ------------- ------------------ ---------------- Balance, March 31, 2003 731,021 $ 7 $ 64,479 $ 40,150 $ 1,570 $ 106,206 ======================================= =============== ============ ============= ============= ================== ================ - --------------------------------------- --------------- ------------ ------------- ------------- ------------------ ---------------- Balance, December 31, 2003 763,274 $ 8 $ 72,506 $ 37,650 $ (559) $ 109,605 ======================================= =============== ============ ============= ============= ================== ================ Net Income - - 3,902 - 3,902 Redemption of Stock (2,632) - (946) (1) - (947) Unrealized Gains on Derivative Instruments - - - 59 59 Changes in Net Unrealized Gain (Loss) on Securities Available for Sale - - - 844 844 - --------------------------------------- --------------- ------------ ------------- ------------- ------------------ ---------------- Balance, March 31, 2004 760,642 $ 8 $ 71,560 $ 41,551 $ 344 $ 113,463 ======================================= =============== ============ ============= ============= ================== ================
The accompanying notes are an integral part of these consolidated financial statements 6 FARMERS & MERCHANTS BANCORP
Consolidated Statement of Cash Flows (Unaudited) Three Months Ended - ------------------------------------------------------------------------------------ --------------------------- (in thousands) Mar. 31 Mar. 31 2004 2003 - ----- ------------------------------------------------------------------------------ ------------- ------------- Operating Activities: Net Income $3,902 $3,401 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Loan Losses 375 200 Depreciation and Amortization 389 396 Provision for Deferred Income Taxes (180) (25) Net Amortization of Investment Security Premium & Discounts 344 286 Net Gain on Sale of Investment Securities (641) (133) Net Decrease in Interest Receivable and Other Assets 3,213 689 Net (Decrease) Increase in Interest Payable and Other Liabilities (1,095) 12,331 - ------------------------------------------------------------------------------------ ------------- ------------- Net Cash Provided by Operating Activities 6,307 17,145 Investing Activities: Securities Available-for-Sale: Purchased (36,981) (113,013) Sold or Matured 51,700 46,087 Securities Held-to-Maturity: Purchased 0 (18,303) Matured 2,092 1,589 Net Increase in Loans 9,740 9,814 Principal Collected on Loans Previously Charged Off 30 23 Net Additions to Premises and Equipment (310) (377) - ------------------------------------------------------------------------------------ ------------- ------------- Net Cash Provided (Used) by Investing Activities 26,271 (74,180) Financing Activities: Net Decrease in Demand, Interest-Bearing Transaction, and Savings Accounts (5,639) (1,071) Increase in Time Deposits 7,882 834 Net Decrease in Federal Funds Purchased (1,000) (16,997) Net Increase (Decrease) in Federal Home Loan Bank Advances Advances (31,000) 59,991 Paydowns (10) (9) Stock Redemption (947) (500) - ------------------------------------------------------------------------------------ ------------- ------------- Net Cash (Used) Provided by Financing Activities (30,714) 42,248 Increase (Decrease) in Cash and Cash Equivalents 1,864 (14,787) Cash and Cash Equivalents at Beginning of Year 35,800 53,574 - ------------------------------------------------------------------------------------ ------------- ------------- Cash and Cash Equivalents as of March 31, 2004 and March 31, 2003 $37,664 $38,787 ==================================================================================== ============= =============
The accompanying notes are an integral part of these consolidated financial statements 7 FARMERS & MERCHANTS BANCORP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) For the three months ended March 31, 2004 and March 31, 2003 1. Significant Accounting Policies Farmers & Merchants Bancorp (the Company) was organized March 10, 1999. 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 as of the date of the balance sheet and revenues and expenses for the period. 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 subsidiaries, F & M Bancorp, Inc. and the Bank, along with the Bank's wholly owned subsidiaries, Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. The investment in the Bank is carried at the Company's equity in the underlying net assets. Significant intercompany transactions have been eliminated in consolidation. F & M Bancorp, Inc. was created in March 2002 to protect the name F & M Bank, Farmers & Merchants Investment Corporation has been dormant since 1991. Farmers/Merchants Corp. acts as trustee on deeds of trust originated by the Bank. In December 2003, the Company formed a wholly owned subsidiary, FMCB Statutory Trust I. FMCB Statutory Trust I, is a non-consolidated subsidiary per generally accepted accounting principals (GAAP), and was formed for the sole purpose of issuing Trust Preferred Securities. Certain amounts in the prior years' financial statements and related footnote disclosures have been reclassified to conform to the current-year presentation. These reclassifications have no effect on previously reported income. 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 Company 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 Company to be other than temporary, are recognized in the period in which they become known. 8 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, if any, 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 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. Thereafter, interest income is recognized as it is collected in cash. 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 estimated. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. Management employs a systematic methodology for determining the allowance for loan losses. On a quarterly basis, management reviews the credit quality of the loan portfolio 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. The conditions evaluated in connection with the allowance may include existing general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentration, seasoning of the loan portfolio, specific industry conditions, recent loss experience, duration of the current business cycle, bank regulatory examination results and findings of the Company's internal credit examiners. 9 The allowance also incorporates the results of measuring impaired loans as provided in Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures". These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. 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. 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 recorded at fair value less estimated selling costs upon acquisition. Revised estimates to the fair value less cost to sell are reported as adjustments to the carrying amount of the asset, provided that such adjusted value is not in excess of the carrying amount at acquisition. 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 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 The actual number of shares outstanding at March 31, 2004, was 760,642. 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 three months ending March 31, 2004 and 2003 were 762,851 and 768,584, respectively. Earnings per share for the three months ending March 31, 2004 and 2003 were $5.12 and $4.43, respectively. Prior periods per share amounts have been restated for the 5% stock dividend declared during 2003 and 2002. 10 Dividends Farmers & Merchants Bancorp common stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. No cash or stock dividends were declared during the first quarter of 2004 or 2003. On April 6, 2004, the Board of Directors declared a 5% stock dividend payable May 12, 2004, to shareholders of record at the close of business on April 16, 2004. Common stock shareholders of record as of April 16, 2004, will receive one share of common stock for every 20 shares of common stock owned. Fractional shares will not be issued. For common stock share lots of less than 20 shares, a cash dividend in the amount of $17.15 per share will be paid in lieu of the stock dividend. Segment Reporting The Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" requires that public companies report certain information about operating segments. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is a community bank which offers a wide array of products and services to its customers. Pursuant to its banking strategy, emphasis is placed on building relationships with its customers, as opposed to building specific lines of business. As a result, the Company is not organized around discernable lines of business and prefers to work as an integrated unit to customize solutions for its customers, with business line emphasis and product offerings changing over time as needs and demands change. Thus, all necessary requirements of SFAS No. 131 have been met by the Company as of March 31, 2004. Derivative Instruments and Hedging Activities The Statement of Financial Accounting Standards, No. 133, "Accounting for Derivative Instruments and Certain Hedging Activities" as amended by the Statement of Financial Accounting Standards, No. 138, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. Changes in the fair value of those derivatives are accounted for depending on the intended use of the derivative and the resulting designation under specified criteria. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, designed to minimize interest rate risk, the effective portions of the change in the fair value of the derivative are recorded in other comprehensive income. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. As required, SFAS No. 133 was adopted by the Company effective January 1, 2001. The Company utilizes derivative financial instruments such as interest rate caps, floors, swaps and collars. These instruments are purchased and/or sold to reduce the Company's exposure to changing interest rates. The Company marks to market the value of its derivative financial instruments and reflects gain or loss in earnings in the period of change or in other comprehensive income. Comprehensive Income The Statement of Financial Accounting Standards, "Reporting Comprehensive Income" 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, minimum pension liability adjustments and cash flow hedges. 11 2. Recent Accounting Developments Derivative Instruments and Hedging Activities In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). The provisions of SFAS No.149 that relate to SFAS No. 133 and No. 138 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, provisions of SFAS No. 149 which relate to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003. The changes in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, SFAS No. 149 (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of SFAS No. 133 and No. 138, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FIN 45, and (4) amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except as stated above and for hedging relationships designated after June 30, 2003. In addition, except as stated above, all provisions of SFAS No.149 should be applied prospectively. The adoption of SFAS No. 149 did not have a material impact on the Company's financial condition or operating results. Certain Financial Instruments with Characteristics of both Liabilities and Equity In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). This statement requires that an issuer classify financial instruments that are within its scope as a liability. Many of those instruments were classified as equity under previous guidance. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company's financial condition or operating results. Consolidation of Variable Interest Entities In January 2003, the FASB issued FIN 46. FIN 46 explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period ending after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. 12 FIN 46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. FIN 46 may have an impact on the treatment of the trust preferred securities we have issued and ability for those instruments to continue to provide the Company with Tier 1 capital. FIN 46 prevents the Company from consolidating the trust entity that issued these trust preferred securities. The Federal Reserve has issued regulations which allow for the inclusion of these instruments in Tier 1 capital regardless of the impact of FIN 46 on the consolidation of the trusts. There remains the potential that this determination by the Federal Reserve may be changed at a later date. We do not expect FIN 46 to have any other material impact on the Company's financial condition or operating results. 3. Interim-Period Disclosure of Employee Benefit Plans Components of Net Periodic Pension Cost: Three months ended March 31 Pension Benefits ----------------------------------- (in thousands) 2004 2003 -------------- ------------- Service cost $ 12 $ 13 Interest cost 64 56 Expected return on assets (57) (32) Amortization of (gain)/loss 126 94 Amortization of prior service cost 0 0 Amortization of transition obligation 0 0 -------------- ------------- Net periodic pension cost $ 145 $ 131 ============== ============= Employer Contributions The Company previously disclosed in its financial statements for the year ended December 31, 2003 that it expected to contribute $222,000 to its Pension Plan in 2004. As of March 31, 2004, $0 has been contributed to the Plan. The Company still expects to contribute at least $222,000 to the Plan in 2004. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Forward-Looking Statements Management's discussion and analysis is written to provide greater insight into the results of operations and the financial condition of Farmers & Merchants Bancorp and its subsidiaries. For a more complete understanding of the Company and its operations, reference should be made to the financial statements included in this report and in the Company's 2003 Annual Report on Form 10-K. Certain statements in this Report on Form 10-Q constitute "forward-looking statements" and usually contain 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. 13 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 laws or regulations; (v) competitive pressure in the banking industry; (vi) changes in governmental fiscal or monetary policies; (vii) uncertainty regarding the economic outlook resulting from the continuing war on terrorism, as well as actions taken or to be taken by the U.S. or other governments as a result of further acts or threats of terrorism; (viii) dividend restrictions; (ix) asset/liability pricing risks and liquidity risks; (x) changes in the securities markets; (xi) certain operational risks involving data processing systems or fraud; (xii) the State of California's fiscal difficulties; and (xiii) other external developments which could materially impact the Company's operational and financial performance. Additional information on these and other factors that could affect financial results are included in the Company's Securities and Exchange Commission filings. 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. Overview The Company's primary service area encompasses the northern Central Valley of California, a territory that is significantly impacted by the agricultural industry. Accordingly, any discussion of the Company's Financial Condition and Results of Operations is influenced by the seasonal banking needs of its customers. Comparisons of the current quarter's results, both in terms of the balance sheet and income statement, are most meaningful to the same quarter in the prior year, not to the prior calendar quarter. For the three months ended March 31, 2004, Farmers & Merchants Bancorp reported net income of $3,902,000, earnings per share of $5.12 and return on average assets of 1.38%. Return on average shareholders' equity was 14.07% for the three months ended March 31, 2004. For the three months ended March 31, 2003, net income totaled $3,401,000, earnings per share was $4.43 and return on average assets was 1.35%. Return on average shareholders' equity for the three months ended March 31, 2003 was 12.98%. The Company's improved earnings performance in the first quarter of 2004 when compared to the same period last year was due to a combination of (1) growth in earning assets, (2) improvement in the mix of earning assets as reflected by an increase in loans as a percentage of average earning assets, (3) improvement in non-interest income and (4) an improvement in the efficiency ratio from 58.39% for the three months ended March 31, 2003 to 57.31% for the three months ended March 31, 2004. These factors combined to offset the continuing negative impact on the Bank's net interest income of declining market interest rates during 2002 and 2003. The following is a summary of the financial results for the three-month period ended March 31, 2004 compared to March 31, 2003. o Net income increased 14.7% to $3.9 million from $3.4 million. o Earnings per share increased 15.6% to $5.12 from $4.43. o Net interest income increased 12.7% to $11.6 million from $10.3 million. o Total assets increased 3.9% to $1.1 billion. 14 o Gross loans increased 16.0% to $799.0 million. o Total deposits increased 6.7% to $906.6 million. o Total shareholders' equity increased 6.8% to $113.5 million after stock repurchases of $947,000. Results of Operations Net Interest Income Net interest income is the amount by which the interest and fees on loans and other interest earning assets exceed 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. 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 increased 12.7% to $11.6 million during the first three months of 2004, compared to $10.3 million at March 31, 2003. On a fully taxable equivalent basis, net interest income increased 12.2% and totaled $11.9 million at March 31, 2004, compared to $10.7 million for the first three months of 2003. The primary reason for the increase in net interest income during the first quarter of 2004 when compared to the same period last year was an improvement in the volume and mix (as reflected by an increase in loans as a percentage of average earning assets) of earning assets. These factors combined to offset the continuing negative impact on the Bank's net interest income of declining market interest rates during 2002 and 2003. During 2003, the Federal Reserve Bank dropped their Discount Rate by 25 basis points, following a drop of 50 basis points during 2002. This resulted in an equivalent drop in the Bank's prime rate, the index on which many of its loans are priced. 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. For the first quarter of 2004, the Company's net interest margin was 4.56% compared to 4.62% in 2003. The decrease in the net interest margin was due primarily to the continuing negative impact of declines in market interest rates during 2002 and 2003. The Bank's earning assets, particularly loans, generally reprice more quickly than its interest bearing liabilities, causing a decrease in net interest margin as market interest rates decline. As market interest rates begin to rise, the net interest margin is expected to improve. Loans, generally the Company's highest earning asset, increased $110.2 million as of March 31, 2004 compared to March 31, 2003. On an average balance basis, loans increased by $102.5 million for the three months ended March 31, 2004. Due to the continuing negative impact of a decline in interest rates during 2002 and 2003 the yield on the loan portfolio decreased 31 basis points to 5.95% for the three months ended March 31, 2004 compared to 6.26% for the three months ended March 31, 2003. This decrease in yield was offset by the growth in loan balances, which resulted in interest revenue from loans increasing 10.2% to $1.1 million for the first three months of 2004. 15 The investment portfolio is the other main component of the Company's earning assets. The Company's investment policy is conservative. The Company invests primarily 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 generally less than that of loans. Average investment securities increased $14.4 million compared to the average balance at March 31, 2003. Even with the increase in the average balance of investment securities there was a decrease in interest income of $220,000 for the three months ended March 31, 2004, due to the continuing negative impact of a decline in interest rates during 2002 and 2003. The average yield, on a taxable equivalent basis, in the investment portfolio was 4.38% in 2004 compared to 5.04% in 2003. Net interest income on the Schedule of Year-to-Date Average Balances and Interest Rates located on page 26 is shown on a taxable equivalent basis, which is higher than net interest income on the Consolidated Statements of Income because of adjustments that relate to income on certain securities that are exempt from federal income taxes. Average interest-bearing sources of funds increased $91.1 million or 13.0%. Of that increase, average borrowed funds (primarily FHLB Advances) increased $49.3 million, subordinated debentures increased $10.3 million and interest-bearing deposits increased $31.5 million. Even as interest-bearing sources of funds increased, interest expense decreased 16.2% as a result of declining interest rates paid for those sources of funds. Overall, the average interest cost on interest-bearing sources of funds was 1.2% at March 31, 2004 and 1.7% at March 31, 2003. Allowance and Provision for Loan Losses As a financial institution that assumes lending and credit risks as a principal element of its business, 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. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. 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. After reviewing all factors, management concluded that the allowance for loan losses as of March 31, 2004 was adequate. The Company has established credit management policies and procedures that govern both the approval of new loans and the monitoring of the existing portfolio. The Company manages and controls credit risk through comprehensive underwriting and approval standards, portfolio diversification guidelines, dollar limits on loans to one borrower and by restricting loans made primarily to its principal market area where management believes it is better able to assess the applicable risk. Management reports regularly to the Board of Directors regarding trends and conditions in the loan portfolio and regularly conducts credit reviews of individual loans. Loans that are performing but have shown some signs of weakness are subjected to more stringent reporting and oversight. 16 As of March 31, 2004, the allowance for loan losses was $17.6 million, which represents 2.2% of the total loan balances. As of March 31, 2003 the allowance was $16.9 million or 2.4% of total loans. The table below illustrates the change in the allowance for the first three months of 2004 and 2003. Allowance for Loan Losses (in thousands) Balance, December 31, 2003 $ 17,220 Provision Charged to Expense 375 Recoveries of Loans Previously Charged Off 31 Loans Charged Off (62) ============================================================================== Balance, March 31, 2004 $ 17,564 ============================================================================== Balance, December 31, 2002 $ 16,684 Provision Charged to Expense 200 Recoveries of Loans Previously Charged Off 23 Loans Charged Off (36) ============================================================================== Balance, March 31, 2003 $ 16,871 ============================================================================== Non-Interest Income Overall, non-interest income increased $593,000 or 20.1% for the three months ended March 31, 2004 compared to the same period of 2003. Most of the growth occurred in gain on sale of investment securities, which increased $509,000 through the first three months of 2004. The increase was mainly the result of the Company's decision to take advantage of the decline in interest rates that began in early January 2004 and continued through early April 2004, by selling approximately $29.8 million in investment securities for a gain. Non-Interest Expense Overall, non-interest expense increased $949,000 or 12.2% over the first three months of 2004, primarily as a result of a $1.1 million increase in Salaries and Employee Benefits. This increase was due primarily to increased contributions to the Bank's retirement plans and incentive compensation plans. Income Taxes The provision for income taxes increased 14.5% to $2.2 million for the first three months of 2004. The Company's effective tax rate decreased to 36.06% for the first three months of 2004 compared to 36.11% for the same period in 2003. Financial Condition 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 are carried 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. 17 The investment portfolio provides the Company with an income alternative to loans. As of March 31, 2004 the investment portfolio represented 21.9% of the Company's total assets. Total investment securities decreased $70.5 million from a year ago and now total $246.3 million. As previously discussed (see "Non Interest Income"), the Bank took advantage of the decline in interest rates that began in January 2004 to sell approximately $29.8 million in investment securities for a gain. The Bank intends to reinvest these funds as rates rise. Not included in the investment portfolio are overnight investments in Federal Funds Sold. For the three months ended March 31, 2004, average Federal Funds Sold was $20.6 million compared to $19.0 million in 2003. Loans The Company's loan portfolio at March 31, 2004 increased $110.2 million from March 31, 2003. The increase was due to strong loan demand in the Company's market area, along with an aggressive calling program on high quality loan prospects. Additionally, on an average balance basis loans have increased $102.5 million or 14.9%. The table following sets forth the distribution of the loan portfolio by type as of the dates indicated. Loan Portfolio As Of:
(in thousands) March 31, 2004 Dec. 31, 2003 March 31, 2003 - --------------------------------------------------- ------------------------------------------- Real Estate $407,475 $386,735 $323,487 Real Estate Construction 65,598 77,115 67,607 Home Equity 54,805 55,827 47,171 Agricultural 124,679 134,862 101,162 Commercial 129,804 136,955 130,281 Consumer 16,673 17,504 19,094 - --------------------------------------------------- ------------------------------------------- Gross Loans 799,034 808,998 688,802 Less: Unearned Income 1,929 2,092 1,977 Allowance for Loan Losses 17,564 17,220 16,871 - --------------------------------------------------- ------------------------------------------- Net Loans $779,541 $ 789,686 $ 669,954 =================================================== ===========================================
In the ordinary course of business, the Company enters into commitments to extend credit to its customers. These commitments are not reflected in the accompanying consolidated financial statements. As of March 31, 2004, the Company had entered into commitments with certain customers amounting to $328.3 million compared to $295.0 million at March 31, 2003. Letters of credit at March 31, 2004, and March 31, 2003, were $12.5 million and $18.7 million, respectively. Non-Performing Assets Non-performing assets are comprised of non-performing loans and other real estate owned. As set forth in the table below, non-performing loans as of March 31, 2004 were $2.6 million compared to $3.3 million at March 31, 2003. Accrued interest reversed from income on loans placed on a non-accrual status totaled $329 thousand at March 31, 2004 compared to $333 thousand at March 31, 2003. The Company reported no other real estate owned for both March 31, 2004 and March 31, 2003. Non-Performing Assets (dollar amounts in thousands) March 31, 2004 18 December 31, 2003 March 31, 2003 - ------------------------------------------------------------------------- Non-performing Loans $2,580 $2,584 $3,273 Other Real Estate Owned 0 0 0 ========================================================================= Total $2,580 $2,584 $3,273 ========================================================================= Non-Performing Assets as a % of Total Loans 0.3% 0.3% 0.5% Allowance for Loan Losses as a % of Non-Performing Loans 680.77% 666.4% 515.5% Except for non-performing loans shown in the table above, the Bank's management is not aware of any loans as of March 31, 2004 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present loan repayment terms, or any known events that would result in the loan being designated as non-performing at some future date. The Bank's management cannot, however, predict the extent to which any deterioration in general economic conditions, real estate values, increase in general rates of interest, change in the financial conditions or business of a borrower may adversely affect a borrower's ability to pay. Deposits One of the key sources of funds to support earning assets (loans and investments) is the generation of deposits from the Company's customer base. The ability to grow the customer base and subsequently deposits is a significant element in the performance of the Company. At March 31, 2004, deposits totaled $906.6 million. This represents an increase of 6.7% or $56.6 million from March 31, 2003. The increase was focused in demand and savings deposit accounts, which increased $27.3 million and $29.4 million, respectively. The Bank's calling efforts for prospective customers includes acquiring both loan and deposit relationships which results in new demand, interest bearing transaction and savings accounts. Federal Home Loan Bank Advances Advances from the Federal Home Loan Bank are another key source of funds to support earning assets. These advances are also used to manage the Bank's interest rate risk exposure, and as opportunities exist to borrow and invest the proceeds at a positive spread through the investment portfolio. FHLB advances as of March 31, 2004 were $80.9 million compared to $100.9 million as of March 31, 2003. As previously discussed (see "Non Interest Income"), the Bank sold certain investment securities during the first quarter of 2004 and used these funds, in part, to reduce FHLB advances. Long-term Subordinated Debentures On December 17, 2003 the Company raised $10 million through an offering of trust preferred securities. Although this amount is reflected as subordinated debt on the Company's balance sheet, under applicable regulatory guidelines, trust preferred securities qualify as regulatory capital (see Capital). These securities accrue interest at a variable rate based upon 3-month Libor plus 2.85%. Interest rates reset quarterly and were 3.96% as of March 31, 2004. 19 Capital The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios set forth in the table below of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and of Tier I capital (as defined in the regulations) to average assets (as defined in the regulations). Management believes, as of March 31, 2004, that the Company and the Bank meet all capital adequacy requirements to which it is subject. As of September 30, 2003, the most recent notification from the Federal Reserve Bank categorized the Company and the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Company and the Bank must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institutions' categories.
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 March 31, 2004 Total Capital to Risk Weighted Assets $135,864 13.39% $81,185 8.0% N/A N/A Tier I Capital to Risk Weighted Assets $123,119 12.13% $40,593 4.0% N/A N/A Tier I Capital to Average Assets $123,119 10.88% $45,257 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 March 31, 2004 Total Capital to Risk Weighted Assets $131,158 13.04% $ 80,482 8.0% $100,602 10.0% Tier I Capital to Risk Weighted Assets $118,521 11.78% $ 40,241 4.0% $ 60,361 6.0% Tier I Capital to Average Assets $118,521 10.53% $ 45,031 4.0% $ 56,289 5.0%
As previously discussed (see Long-term Subordinated Debentures), in order to supplement its regulatory capital base, during December, 2003 the Company raised $10 million of trust preferred securities. Under applicable regulatory guidelines, trust preferred securities qualify as Tier 1 capital up to a maximum of 25% of Tier 1 capital. Any additional portion of trust preferred securities would qualify as Tier 2 capital. The Company has received notification from the Federal Reserve Bank of San Francisco that all of the Company's trust preferred securities currently qualify as Tier 1 capital. 20 In accordance with the provisions of Financial Accounting Standard Board Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), the Company does not consolidate the subsidiary trust which has issued the trust preferred securities. Previously, financing subsidiaries were generally consolidated with their parents under generally accepted accounting principles. As a result of this new accounting interpretation, on July 2, 2003, the Federal Reserve Board issued Supervisory Letter (SR 03-13) which preserves the historical capital treatment of trust preferred securities as Tier I Capital despite the deconsolidation of these securities. That Supervisory Letter remained in effect at December 31, 2003 and March 31, 2004, and the Company continues to include these securities in its Tier I capital. There remains the potential that this determination by the Federal Reserve Board may change at a later date and the Federal Reserve Board continues to review its position on this matter. If Tier I capital treatment for the Company's trust preferred securities were disallowed, there would be a reduction in our consolidated capital ratios. However, the Company would remain "well-capitalized" in the event that the Federal Reserve Board elected to change its position with regards to the capital treatment of trust preferred securities. If Tier I capital treatment were disallowed, the Company may be able to redeem the trust preferred securities pursuant to their terms, and have the ability to identify and obtain alternative sources of capital. As part of an overall capital management program, in 1998 the Board approved a stock repurchase program. Since 1999, the Company has repurchased over 39,000 shares for total consideration of $9.6 million. The Company will continue to repurchase shares when it believes it is in the best long-term interest of shareholder value. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Risk Management The Company has adopted a Risk Management Plan which aims 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 the 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. Credit risk in the investment portfolio and correspondent bank accounts is addressed through defined limits in the Bank's policy statements. In addition, certain securities carry insurance to enhance credit quality of the bond. Credit risk in the loan portfolio is controlled by limits on industry concentration, aggregate customer borrowings and geographic boundaries. Standards on loan quality also are designed to reduce loan credit risk. Senior Management, Directors' Committees, and the Board of Directors are regularly provided with information intended to identify, measure, control and monitor the credit risk of the Bank. 21 The Company's methodology for assessing the appropriateness of the allowance is applied on a regular basis and considers all loans. The systematic methodology consists of two major elements. The first major element includes a detailed analysis of the loan portfolio in two phases. The first phase is conducted in accordance with SFAS No. 114, "Accounting by Creditors for the Impairment of a Loan" as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures." Individual loans are reviewed to identify loans for impairment. A loan is impaired when principal and interest are deemed uncollectable in accordance with the original contractual terms of the loan. Impairment is measured as either the expected future cash flows discounted at each loan's effective interest rate, the fair value of the loan's collateral if the loan is collateral dependent, or an observable market price of the loan (if one exists). Upon measuring the impairment, the Company will ensure an appropriate level of allowance is present or established. Central to the first phase and the Company's credit risk management is its loan risk rating system. The originating credit officer assigns borrowers an initial risk rating, which is based primarily on a thorough analysis of each borrower's financial position in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior credit administration personnel. Credits are monitored by credit administration personnel for deterioration in a borrower's financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary. Based on the risk rating system specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates the possibility of loss. Management performs a detailed analysis of these loans, including, but not limited to, cash flows, appraisals of the collateral, conditions of the marketplace for liquidating the collateral and assessment of the guarantors. Management then determines the inherent loss potential and allocates a portion of the allowance for losses as a specific allowance for each of these credits. The second phase is conducted by segmenting the loan portfolio by risk rating and into groups of loans with similar characteristics in accordance with SFAS No. 5, "Accounting for Contingencies". In this second phase, groups of loans are reviewed and applied the appropriate allowance percentage to determine a portfolio formula allowance. The second major element in the Company's methodology for assessing the appropriateness of the allowance consists of management's considerations of all known relevant internal and external factors that may affect a loan's collectibility. This includes management's estimates of the amounts necessary for concentrations, economic uncertainties, the volatility of the market value of collateral and other relevant factors. The relationship of the two major elements of the allowance to the total allowance may fluctuate from period to period. The second major element of the analysis, which considers all known relevant internal and external factors that may affect a loan's collectibility, is based upon management's evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the second element of the analysis of the allowance include, but are not limited to the following conditions that existed as of the balance sheet date: |X| then-existing general economic and business conditions affecting the key lending areas of the Company; |X| credit quality trends (including trends in non-performing loans expected to result from existing conditions); 22 |X| collateral values; |X| loan volumes and concentrations; |X| seasoning of the loan portfolio; |X| specific industry conditions within portfolio segments; |X| recent loss experience in particular segments of the portfolio; |X| duration of the current business cycle; |X| bank regulatory examination results; and |X| findings of the Company's internal credit examiners. Management reviews these conditions in discussion with the Company's senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's evaluation of the inherent loss related to such condition is reflected in the second major element allowance. 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. Management believes that the allowance for loan losses at March 31, 2004 was adequate to provide for both recognized losses and estimated inherent losses in the portfolio. No assurances can be given that future events may not result in increases in delinquencies, non-performing loans or net loan chargeoffs that would increase the provision for loan losses and thereby adversely affect the results of operations. Market Risk - 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. The Company'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 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. 23 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 a 200 basis point upward and a 100 basis point downward shift in interest rates. A 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 March 31, 2004, 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 2.60% if rates increase by 200 basis points and a decrease in net interest income of 1.51% if rates decline 100 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. See Note 13 of the Notes to the Consolidated Financial Statements located in the 2003 Annual Report to Shareholders. Liquidity Risk Liquidity risk is the risk to earnings or capital resulting from the Bank's inability to meet its obligations when they come due without incurring unacceptable losses. It includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect the Bank's ability to liquidate assets or acquire funds quickly and with minimum loss of value. The Company endeavors to maintain a cash flow adequate to fund operations, handle fluctuations in deposit levels, respond to the credit needs of borrowers and to take advantage of investment opportunities as they arise. The principal sources of liquidity include credit facilities from correspondent banks, brokerage firms and the Federal Home Loan Bank, as well as, 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 Federal Funds and the use of funds provided by the cash flow from the investment portfolio. The Company maintains overnight investments in Federal Funds as a cushion for temporary liquidity needs. During the first quarter of 2004, Federal Funds averaged $20.6 million. The Company maintains Federal Fund credit lines of $50 million with major banks subject to the customary terms and conditions for such arrangements and $175 million in repurchase lines with major brokers. In addition the Company has additional borrowing capacity of $129 million from the Federal Home Loan Bank. 24 At March 31, 2004, the Company had available liquid assets, which included cash and cash equivalents and unpledged investment securities of approximately $154.9 million, which represents 13.8% of total assets. ITEM 4. CONTROLS AND PROCEDURES The Company maintains controls and procedures designed to ensure that information is recorded and reported in all filings of financial reports. Such information is reported to the Company's management, including its Chief Executive Officer and its Chief Financial Officer to allow timely and accurate disclosure based on the definition of "disclosure controls and procedures" in Rule 13a-15(e). In designing these controls and procedures, management recognizes that they can only provide reasonable assurance of achieving the desired control objectives. Management also evaluated the cost-benefit relationship of possible controls and procedures. As of the end of the period covered by this report, the Company carried out an evaluation of the effectiveness of Company's controls and disclosure procedures under the supervision and with the participation of the Chief Executive Officer, the Chief Financial Officer and other senior management of the Company. Based on the foregoing, the Company's Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation. Average Balance Sheets The tables on the following pages reflect the Company's average balance sheets and volume and rate analysis for the three month periods ending March 31, 2004 and 2003. 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. 25 Farmers & Merchants Bancorp Year-to-Date Average Balances and Interest Rates (Interest and Rates on a Taxable Equivalent Basis) (in thousands)
Three Months Ended March 31, Three Months Ended March 31, 2004 2003 Assets Balance Interest Rate Balance Interest Rate - --------------------------------------------------------- ------------- --------- ---------- ------------ ---------- --------- Federal Funds Sold $ 20,585 $ 52 1.02% $ 19,036 $ 79 1.68% Investment Securities Available-for-Sale U.S. Treasuries 0 0 0.00% 0 0 0.00% U.S. Agencies 63,061 577 3.71% 32,318 266 3.34% Municipals - Taxable 1,089 17 6.33% 1,343 21 6.34% Municipals - Non-Taxable 24,021 343 5.79% 31,953 446 5.66% Mortgage Backed Securities 113,393 1,016 3.63% 116,312 1,369 4.77% Other 7,867 111 5.72% 20,428 249 4.94% - --------------------------------------------------------- ------------- --------- ---------- ------------ ---------- --------- Total Investment Securities Available-for-Sale 209,431 2,064 4.00% 202,354 2,351 4.71% - --------------------------------------------------------- ------------- --------- ---------- ------------ ---------- --------- Investment Securities Held-to-Maturity U.S. Treasuries 0 0 0.00% 0 0 0.00% U.S. Agencies 0 0 0.00% 0 0 0.00% Municipals - Taxable 0 0 0.00% 0 0 0.00% Municipals - Non-Taxable 36,301 590 6.59% 28,814 522 7.34% Mortgage Backed Securities 0 0 0.00% 0 0 0.00% Other 372 5 5.45% 479 7 5.93% - --------------------------------------------------------- ------------- --------- ---------- ------------ ---------- --------- Total Investment Securities Held-to-Maturity 36,673 595 6.58% 29,293 529 7.32% - --------------------------------------------------------- ------------- --------- ---------- ------------ ---------- --------- Loans Real Estate 459,385 7,179 6.29% 384,719 6,442 6.79% Home Equity 55,201 637 4.64% 46,543 587 5.11% Agricultural 124,139 1,574 5.10% 100,195 1,289 5.22% Commercial 133,283 1,884 5.69% 135,856 1,853 5.53% Consumer 11,439 275 9.67% 13,685 303 8.98% Credit Card 4,552 112 9.90% 4,352 102 9.51% Municipal 1,096 12 4.40% 1,250 16 5.19% - --------------------------------------------------------- ------------- --------- ---------- ------------ ---------- --------- Total Loans 789,095 11,673 5.95% 686,600 10,592 6.26% - --------------------------------------------------------- ------------- --------- ---------- ------------ ---------- --------- Total Earning Assets 1,055,784 $14,384 5.48% 937,283 $13,550 5.86% ========= ========== ========== ========= Unrealized Gain/(Loss) on Securities Available-for-Sale 2,832 4,496 Allowance for Loan Losses (17,382) (16,837) Cash and Due From Banks 31,471 29,239 All Other Assets 60,139 54,307 - --------------------------------------------------------- ------------- ------------ Total Assets $1,132,844 $1,008,488 ========================================================= ============= ============ Liabilities & Shareholders' Equity Interest Bearing Deposits Interest Bearing DDA $94,147 $ 14 0.06% $89,325 $ 49 0.22% Savings 277,378 256 0.37% 243,202 345 0.58% Time Deposits 313,344 1,322 1.70% 320,855 1,907 2.41% - --------------------------------------------------------- ------------- --------- ---------- ------------ ---------- --------- Total Interest Bearing Deposits 684,869 1,592 0.93% 653,382 2,301 1.43% Other Borrowed Funds 98,766 716 2.92% 49,493 577 4.73% Subordinated Debentures 10,310 105 4.10% 0 0 0.00% - --------------------------------------------------------- ------------- --------- ---------- ------------ ---------- --------- Total Interest Bearing Liabilities 793,945 $2,413 1.22% 702,875 $2,878 1.66% ========= ========== ========== ========= Demand Deposits (Non-Interest Bearing) 217,893 192,794 All Other Liabilities 10,066 7,999 - --------------------------------------------------------- ------------- ------------ Total Liabilities 1,021,904 903,668 Shareholders' Equity 110,940 104,820 - --------------------------------------------------------- ------------- ------------ Total Liabilities & Shareholders' Equity $1,132,844 $1,008,488 ========================================================= ============= ============ Net Interest Margin 4.56% 4.62% ========================================================= ============= ========= ========== ============ ========== =========
Notes: Yields on municipal securities have been calculated on a fully taxable equivalent basis using the combined Federal and State income tax rate of 42.06%. 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. 26 Farmers & Merchants Bancorp Volume and Rate Analysis of Net Interest Revenue (Rates on a Taxable Equivalent Basis)
(in thousands) Three Months Ended Mar. 31, 2004 compared to Mar. 31, 2003 Interest Earning Assets Volume Rate Net Chg. - -------------------------------------------------------- ------------- ------------ --------- Federal Funds Sold $ 39 $ (66) $ (27) Investment Securities Available for Sale U.S. Treasuries 0 0 0 U.S. Agencies 278 33 311 Municipals - Taxable (4) 0 (4) Municipals - Non-Taxable (172) 69 (103) Mortgage Backed Securities (33) (320) (353) Other (363) 225 (138) - -------------------------------------------------------- ------------- ------------ --------- Total Investment Securities Available for Sale (294) 7 (287) - -------------------------------------------------------- ------------- ------------ --------- Investment Securities Held to Maturity U.S. Treasuries 0 0 0 U.S. Agencies 0 0 0 Municipals - Taxable 0 0 0 Municipals - Non-Taxable 360 (292) 68 Mortgage Backed Securities 0 0 0 Other (2) 0 (2) - -------------------------------------------------------- ------------- ------------ --------- Total Investment Securities Held to Maturity 358 (292) 66 - -------------------------------------------------------- ------------- ------------ --------- Loans: Real Estate 3,344 (2,607) 737 Home Equity 327 (277) 50 Agricultural 476 (191) 285 Commercial (157) 188 31 Installment (147) 119 (28) Credit Card 5 5 10 Other (1) (2) (3) - -------------------------------------------------------- ------------- ------------ --------- Total Loans 3,847 (2,765) 1,082 - -------------------------------------------------------- ------------- ------------ --------- Total Earning Assets 3,950 (3,116) 834 - -------------------------------------------------------- ------------- ------------ --------- Interest Bearing Liabilities Interest Bearing Deposits: Transaction 18 (53) (35) Savings 256 (345) (89) Time Deposits (43) (542) (585) - -------------------------------------------------------- ------------- ------------ --------- Total Interest Bearing Deposits 231 (940) (709) Other Borrowed Funds 1,396 (1,257) 139 Subordinated Debentures 52 53 105 - -------------------------------------------------------- ------------- ------------ --------- Total Interest Bearing Liabilities 1,679 (2,144) (465) - -------------------------------------------------------- ------------- ------------ --------- Total Change $ 2,271 $ (972) $ 1,299 ======================================================== ============= ============ =========
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. 27 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings Certain lawsuits and claims arising in the ordinary course of business have been filed or are pending against the Company or its subsidiaries. Based upon information available to the Company, its review of such lawsuits and claims and consultation with its counsel, the Company believes the liability relating to these actions, if any, would not have a material adverse effect on its consolidated financial statements. ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 2(e) The following table indicates the number of shares repurchased by Farmers & Merchants Bancorp during the first quarter of 2004.
Number of Shares Average Purchased as Part of a Maximum Number that May Number of Price per Publicly Announced Yet Be Purchased Under First Quarter 2004 Shares Share Plan or Program the Plan or Program - ------------------------------- ---------------- -------------- ------------------------ --------------------------- 01/01/2004 - 01/31/2004 35 300 0 N/A 02/01/2004 - 02/29/2004 0 0 0 N/A 03/01/2004 - 03/31/2004 2,597 360 0 N/A - ------------------------------- ---------------- -------------- ------------------------ --------------------------- Total 2,632 360 0
1,000 of the above shares were repurchased in open-market transactions and the balance in private transactions. The Company's common stock is not listed on any exchange, nor is it included on the NASDAQ National Market or the NASDAQ Small Cap Market. However, trades may be reported on the OTC Bulletin Board under the symbol "FMCB.OB". Management is aware that there are private transactions in the Company's common stock. When the Company repurchases shares in private transactions the price is determined based upon the most recent transactions that have occurred between third party shareholders. See Financial Condition - Capital for a discussion of the Company's share repurchase activities and strategies. ITEM 3. Defaults Upon Senior Securities Not applicable ITEM 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the Company's stockholders during the first quarter of 2004. ITEM 5. Other Information None 28 ITEM 6(a). Exhibits See Exhibit Index on Page 30. ITEM 6(b). Reports on Form 8-K During the quarter ended March 31, 2004, the Company filed the following Current Reports of Form 8-K: Description Date of Report Annual and quarterly results of operations February 9, 2004 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 /s/ Kent A. Steinwert Date: May 7, 2004 __________________________ Kent A. Steinwert President and Chief Executive Officer (Principal Executive Officer) /s/ Stephen W. Haley Date: May 7, 2004 __________________________ Stephen W. Haley Executive Vice President and Chief Financial Officer (Principal Accounting Officer) 29 Index to Exhibits Exhibit No. Description 31 Rule 13(a)-14(a)/15d-14(a) Certifications. 32 Chief Executive Officer and Chief Financial Officer Certification pursuant to 10 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. 30 EX-31 2 form10-q_1stqtr2004ex31.txt FORM 10-Q 1ST QTR 2004 SECT. 302 CERT. EX. 31 Exhibit 31 Certification I, Kent A. Steinwert, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Farmers & Merchants Bancorp; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 7, 2004 /s/ Kent A. Steinwert ----------------------------------------- Kent A. Steinwert President & Chief Executive Officer Exhibit 31 Certification I, Stephen W. Haley, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Farmers & Merchants Bancorp; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 5, 2004 /s/ Stephen W. Haley ----------------------------------------- Stephen W. Haley Executive Vice President & Chief Financial Officer EX-32 3 form10-q_1stqtr2004ex32.txt FORM 10-Q 1ST QTR 2004 SECT. 906 CERT. EX. 32 Exhibit 32 STATEMENT OF CHIEF EXECUTIVE OFFICER UNDER 10 U.S.C. SECTION 1350 In connection with the filing of the Quarterly Report of Farmers & Merchants Bancorp (the "Company") on Form 10-Q for the period ending March 31, 2004 (the "Report"), I, Kent A. Steinwert, the chief executive officer of the Company, certify pursuant to section 1350 of chapter 63 of title 18 of the United States Code that, to my knowledge, (i) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Kent A. Steinwert --------------------------- Kent A. Steinwert President & Chief Executive Officer May 7, 2004 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32 STATEMENT OF CHIEF FINANCIAL OFFICER UNDER 10 U.S.C. SECTION 1350 In connection with the filing of the Quarterly Report of Farmers & Merchants Bancorp (the "Company") on Form 10-Q for the period ending March 31, 2004 (the "Report"), I, Stephen W. Haley , the chief financial officer of the Company, certify pursuant to section 1350 of chapter 63 of title 18 of the United States Code that, to my knowledge, (i) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Stephen W. Haley --------------------------- Stephen W. Haley Executive Vice President & CFO May 5, 2004 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----