<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
For Quarter Ended September 30, 1999 Commission File Number:_________
FARMERS & MERCHANTS BANCORP
(Exact name of registrant as specified in its charter)
Delaware 94-3327828
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
121 W. Pine Street, Lodi, California 95240
(Address of principal Executive offices) (Zip Code)
Registrant's telephone number, including area code (209) 334-1101
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Number of shares of common stock of the registrant: Par value $0.01, authorized
2,000,000 shares; issued and outstanding 661,405 as of October 29, 1999.
This Form 10-Q contains 23 pages.
<PAGE>
FARMERS & MERCHANTS BANCORP
FORM 10-Q
TABLE OF CONTENTS
___________________________
<TABLE>
<CAPTION>
PART I. - FINANCIAL INFORMATION Pages
--------------------- -----
<S> <C>
Item 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 1999
December 31, 1998 and September 30, 1998. 3
Consolidated Statements of Income for the Three Months
and Nine Months Ended September 30, 1999 and 1998. 4
Consolidated Statements of Comprehensive Income for the
Three Months and Nine Months Ended September 30, 1999 and 1998. 5
Statement of Changes in Shareholders' Equity as of
December 31, 1998 and September 30, 1999 6
Consolidated Statement of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998. 7
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis 9
PART II. - OTHER INFORMATION 22
-----------------
SIGNATURES 23
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</TABLE>
2
<PAGE>
PART I. - FINANCIAL INFORMATION
Item 1 - Financial Statements
FARMERS & MERCHANTS BANCORP
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands) September 30, December 31, September 30,
1999 1998 1998
Assets (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and Cash Equivalents:
Cash and Due From $ 22,981 $ 27,572 $ 20,575
Federal Funds Sold - 12,140 12,200
- ------------------------------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 22,981 39,712 32,775
Investment Securities:
Available-for Sale 292,251 312,305 253,353
Held-to-Maturity 51,213 60,152 75,526
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities 343,464 372,457 328,879
- ------------------------------------------------------------------------------------------------------------------------------------
Loans 399,378 329,471 317,502
Less: Unearned Income (388) (293) (412)
Less: Allowance for Loan Losses (9,700) (8,589) (8,285)
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, Net 389,290 320,589 308,805
- ------------------------------------------------------------------------------------------------------------------------------------
Land, Buildings & Equipment 11,988 11,714 11,406
Interest Receivable and Other Assets 15,059 14,327 10,801
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 782,782 $ 758,799 $ 692,666
====================================================================================================================================
Liabilities & Shareholders' Equity
Deposits:
Demand $ 145,293 $ 156,586 $ 127,631
Interest Bearing Transaction 74,389 75,575 53,171
Savings 168,686 166,495 172,717
Time Deposits Over $100,000 103,475 81,665 77,137
Time Deposits Under $100,000 157,104 147,066 138,437
- ------------------------------------------------------------------------------------------------------------------------------------
Total Deposits 648,947 627,387 569,093
- ------------------------------------------------------------------------------------------------------------------------------------
Fed Funds Purchased 3,400 2,000 -
Federal Home Loan Bank Advances 41,071 41,093 40,000
Other Liabilities 7,884 8,914 2,565
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 701,302 679,394 611,658
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Preferred Stock: Par Value $0.00, 1,000,000 Shares Authorized,
None Issued or Outstanding - - -
Common Stock: Par Value $0.01, 2,000,000 Shares Authorized,
661,521, 663,295, 664,815 Issued and Outstanding at September 30, 1999,
December 31, 1998 and September 30, 1998, Respectively 7 6 6
Additional Paid In Capital 48,105 43,576 43,804
Retained Earnings 36,002 34,991 35,375
Accumulated Other Comprehensive Income (Loss) (2,634) 832 1,823
- ------------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 81,480 79,405 81,008
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $ 782,782 $ 758,799 $ 692,666
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE>
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
(In Thousands) 1999 1998 1999 1998
----------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest & Fees on Loans $ 9,312 $ 7,924 $25,134 $22,349
Federal Funds Sold 34 214 522 608
Securities:
Investments Available-for-Sale:
Taxable 4,209 3,657 12,594 11,457
Non-taxable 211 134 682 229
Investments Held-to-Maturity:
Taxable 139 354 407 1,360
Non-taxable 576 736 1,814 2,278
- -------------------------------------------------------------------------------------------------------------------------
Total Interest Income 14,481 13,019 41,153 38,281
- -------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Interest Bearing Transaction 179 189 526 564
Savings 1,034 968 3,070 2,961
Time Deposits Over $100,000 1,166 1,005 3,261 2,952
Time Deposits Under $100,000 1,746 1,770 5,234 5,231
Interest on Borrowed Funds 627 473 1,774 1,067
- -------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 4,752 4,405 13,865 12,775
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income 9,729 8,614 27,288 25,506
Provision for Loan Losses 500 300 1,400 900
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 9,229 8,314 25,888 24,606
- -------------------------------------------------------------------------------------------------------------------------
Non-Interest Income
Service Charges on Deposit Accounts 394 496 2,347 2218
Net Gain on Sale of Investment Securities 7 4 149 238
Other 1,173 858 2,105 1,766
- -------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 1,574 1,358 4,601 4,222
- -------------------------------------------------------------------------------------------------------------------------
Non-Interest Expense
Salaries & Employee Benefits 3,825 3,463 11,247 10,496
Occupancy 966 986 2,833 2,923
Other Operating 2,293 1,999 5,629 5,623
- -------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 7,084 6,448 19,709 19,042
- -------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 3,719 3,224 10,780 9,786
Provision for Income Taxes 1,316 1,096 3,751 3,365
- -------------------------------------------------------------------------------------------------------------------------
Net Income $ 2,403 $ 2,128 $ 7,029 $ 6,421
=========================================================================================================================
Earning Per Share
Basic Earnings Per Common Share $ 3.63 $ 3.20 $ 10.61 $ 9.66
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
<PAGE>
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Comprehensive Income (Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
(in thousands) Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 2,403 $ 2,128 $ 7,029 $ 6,421
Other Comprehensive Income -
Unrealized Gain (Loss) on Securities: (621) 815 (3,466) 877
- -------------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (621) 815 (3,466) 877
- -------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 1,782 $ 2,943 $ 3,563 $ 7,298
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
5
<PAGE>
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
(In Thousands)
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Shareholders'
Stock Capital Earnings Income Equity
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 6 $ 43,576 $ 34,991 $ 832 $ 79,405
======================================================================================================================
Net Income - - 7,029 - 7,029
Cash Dividends Declared on -
Common Stock - - (1,125) - (1,125)
5% Stock Dividend 1 4,822 (4,823) - -
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend - - (70) - (70)
Redemption of Stock - (293) - - (293)
Changes in Net Unrealized Gain (Loss) on
Securities Available for Sale - - - (3,466) (3,466)
======================================================================================================================
Balance, September 30, 1999 $ 7 $ 48,105 $ 36,002 $ (2,634) $ 81,480
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
6
<PAGE>
FARMERS & MERCHANTS BANCORP
Consolidated Statement of Cash Flows (Unaudited) For Nine Months Ending
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(in thousands) Sept. 30, Sept. 30,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net Income $ 7,029 $ 6,421
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Possible Loan Losses 1,400 900
Depreciation and Amortization 1,323 808
Provision for Deferred Income Taxes (405) (50)
Accretion of Investment Security Discounts 597 (310)
Net (Gain) Loss on Sale of Investment Securities (149) (279)
Net Change in Operating Assets & Liabilities:
Decrease in Trading Account Assets - 40
(Increase) Decrease in Interest Receivable and Other Assets 2,097 1,789
(Decrease) in Interest Payable and Other Liabilities (1,030) (3,895)
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 10,862 5,424
Investing Activities:
Trading Securities:
Purchased (15,490) (20,013)
Sold or Matured 15,478 20,099
Securities Available-for-Sale:
Purchased (127,297) (61,243)
Sold or Matured 141,067 56,920
Securities Held-to-Maturity:
Purchased (1,978) (4,004)
Matured 10,876 27,526
Net Loans Originated or Acquired (70,740) (45,680)
Principal Collected on Loans Charged Off 639 393
Net Additions to Premises and Equipment (1,597) (604)
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities (49,042) (26,606)
Financing Activities:
Net (Decrease) in Demand, Interest-Bearing Transaction,
and Savings Accounts (10,288) (15,617)
Increase (Decrease) in Time Deposits 31,848 2,676
Federal Funds Purchased 1,400 0
Federal Home Loan Bank Borrowings:
Advances 0 40,000
Paydowns (22) 0
Cash Dividends (1,196) (1,112)
Stock Redemption (293) 0
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 21,449 25,947
Increase (Decrease) in Cash and Cash Equivalents (16,731) 4,765
Cash and Cash Equivalents at Beginning of Year 39,712 28,010
- -------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents as of Sept. 30, 1999 and Sept. 30, 1998 $ 22,981 $ 32,775
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statements
The foregoing financial statements are unaudited, however, in the opinion of
Management, all adjustments (comprised only of normal recurring accruals)
necessary for a fair presentation of the financial statements have been
included. A summary of the Corporations significant accounting policies is set
forth in Note 1 to the Consolidated Financial Statements in the Corporation's
Annual Report on Form 10-K for 1998.
2. Reclassifications
Certain reclassifications have been made in the 1998 financial information to
conform to the presentation used in 1999.
3. Interim Statements
The interim consolidated financial statements are unaudited and reflect all
adjustments and reclassifications which, in the opinion of management, are
necessary for a fair statement of the results of operations and financial
condition for the interim period. All adjustments and reclassifications are of
a normal and recurring nature. Results for the period ended September 30, 1999,
are not necessarily indicative of results which may be expected for any other
interim period or for the year as a whole.
4. Earnings per Share
The actual number of shares outstanding at September 30, 1999, were 661,521.
Basic earnings per share is calculated on the basis of the weighted average
number of shares outstanding during the period which were 661,595 and 664,815
for the three months ending September 30, 1999 and 1998, respectively. For the
nine-month periods ending September 30, 1999 and 1998, the weighted average
number of shares were 662,636 and 664,815. All 1999 per share information in
the financial statements and in Management's Discussion and Analysis has been
restated to give retroactive effect to the 5% stock dividend declared May 1,
1999.
5. Holding Company Formation
The accompanying financial statements include the accounts of Farmers &
Merchants Bancorp and the Bancorp's wholly owned subsidiary, Farmers & Merchants
Bank. Farmers & Merchants Bancorp was organized effective April 30, 1999.
Significant intercompany transactions have been eliminated in consolidation.
8
<PAGE>
ITEM 2.
Management's Discussion and Analysis
Forward -Looking Statements
This report contains various forward-looking statements, usually containing the
words "estimate," "project," "expect," "objective," "goal," or similar
expressions and includes assumptions concerning the Company's operations, future
results, and prospects. These forward-looking statements are based upon current
expectations and are subject to risk and uncertainties. In connection with the
"safe-harbor" provisions of the private Securities Litigation Reform Act of
1995, the company provides the following cautionary statement identifying
important factors which could cause the actual results of events to differ
materially from those set forth in or implied by the forward-looking statements
and related assumptions.
Such factors include the following: (i) the effect of changing regional and
national economic conditions; (ii) significant changes in interest rates and
prepayment speeds; (iii) credit risks of commercial, real estate, consumer, and
other lending activities; (iv) changes in federal and state Banking regulations;
(v) the year 2000, and; (vi) other external developments which could materially
impact the Company's operational and financial performance. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
update any forward-looking statements to reflect events or circumstances arising
after the date on which they are made.
Introduction
The following discussion and analysis is intended to provide a better
understanding of the Company's performance during the first nine months of 1999
and the material changes in financial condition, operating income and expense of
the Company and its subsidiaries as shown in the accompanying financial
statements. This section should be read in conjunction with the consolidated
financial statements and the notes thereto, along with other financial
information included in this report. Prior period per share amounts have been
restated for the 5% stock dividend declared during 1999.
Overview
For the nine months ended September 30, 1999, Farmers & Merchants Bancorp
reported net income of $7,029,000, earnings per share of $10.61, return on
average assets of 1.23% and return on average shareholders' equity of 11.37%.
For the nine months ending September 30, 1998, net income totaled $6,421,000,
earnings per share was $9.66, return on average assets was 1.27% and the return
on average shareholders' equity totaled 10.92%.
The Company's improved financial performance in 1999 was due to a combination of
increased revenue generated from its core business, which include improved
growth rates in both loans outstanding and deposit balances along with effective
capital management strategies.
9
<PAGE>
The following is a summary of the financial accomplishments achieved during the
nine-month period ending September 30, 1999 compared to September 30, 1998.
. Net interest income increased 7.0% to $27.3 million from $25.5 million.
. The provision for loan losses increased to $1.4 million from $0.9 million.
. Non-interest income increased 9.0% to $4.6 million during the first nine
months of 1999, up from the $4.2 million reported for the first nine months
of 1998.
. Non-interest expense was limited to an increase of 3.5% and totaled $19.7
million during the first nine months of 1999.
. Total assets increased 13.0% to $782.8 million.
. Total loans increased 25.8% to $399.4 million, up $81.9 million from
September 30, 1998.
. Total deposits increased 14.0% to $648.9 million.
. Total investment securities increased to $343.5 million from $328.9 million
at September 30, 1998.
. Total Shareholders' Equity increased $0.5 million to $81.5 million.
Net Interest Income
Net interest income is the amount by which the interest and fees on loans and
interest earned on earning assets exceeds the interest paid on interest bearing
sources of funds. For the purpose of analysis, the interest earned on tax-
exempt investments and municipal loans is adjusted to an amount comparable to
interest subject to normal income taxes. This adjustment is referred to as
"taxable equivalent" and is noted wherever applicable. Interest income and
expense are affected by changes in the volume and mix of average interest
earning assets and average interest bearing liabilities, as well as fluctuations
in interest rates. Therefore, increases or decreases in net interest income are
analyzed as changes in volume, changes in rate and changes in the mix of assets
and liabilities.
Net interest income grew 7.0% to $27.3 million during the first nine months of
1999, compared to $25.5 million at September 30, 1998. On a fully taxable
equivalent basis, net interest income increased 6.5% and totaled $28.6 million
at September 30, 1999, compared to $26.8 million for the first nine months of
1998. Net interest income on a taxable equivalent basis, expressed as a
percentage of average total earning assets, is referred to as the net interest
margin, which represents the average net effective yield on earning assets. For
the nine months ended September 30, 1999, the net interest margin was 5.30%
compared to 5.62% for the same period
10
<PAGE>
in 1998. The decrease in net interest margin was related to the decline in
interest rates earned on loans and investments resulting from competitive
pressure and a lower interest rate environment.
The predominant reasons for the growth in net interest income during 1999 was
the increase in average earning assets as well as the change in the mix of asset
totals and deposit balances. During the first nine months of 1999, average
earning assets increased $83.9 million while average interest bearing
liabilities increased $60.9 million.
Loans, the Company's highest earning asset, increased $81.9 million as of
September 30, 1999 compared to September 30, 1998. On an average balance basis,
loans have increased by $64.7 million during the year. The yield on the loan
portfolio declined 86 basis points to 9.6% for the nine months ending September
30, 1999 compared to 10.4% for the nine months ending September 30, 1998. This
decline in yield, due to competitive pressure and a lower interest rate
environment, was offset by the growth in balances, which had a positive effect
on interest revenue in the amount of $2.8 million for the first nine months of
1999.
The investment portfolio is the other main component of the Company's earning
assets. The Company's investment policy is conservative. The Company primarily
invests in mortgage-backed securities, U.S. Treasuries, U.S. Government
Agencies, and high-grade municipals. Since the risk factor for these types of
investments is significantly lower than that of loans, the yield earned on
investments is substantially less than that of loans.
Average investment securities increased $19.6 million during the first nine
months of 1999. Although there was a $19.6 million increase in the average
balance of investment securities, interest income increased 0.9% because of
declining interest rates. The average yield, on a taxable equivalent basis, in
the investment portfolio was 6.30% in 1999 compared to 6.61% in 1998.
Securities that have matured since September 1998 were replaced with securities
with yields at the lower prevailing rates. Net interest income on the Average
Balance Sheet is shown on a taxable equivalent basis, which is higher than net
interest income on the Consolidated Statements of Income because of adjustments
that relate to income on certain securities that are exempt from federal income
taxes.
Interest expense increased as a result of an increase in average deposits, which
grew 9.6%. The growth in interest expense on interest-bearing deposits was
limited to 3.3% due to the decline in average interest cost on interest-bearing
deposits. The average interest cost was 3.3% at September 30, 1999, with
interest expense totaling $12.1 million. For the nine months ending September
30, 1998, interest expense was $11.7 million and the average interest cost on
interest-bearing deposits was 3.5%.
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.
11
<PAGE>
Provision and Allowance for Loan Losses
As a financial institution that assumes lending and credit risks as a principal
element of its business, the Company anticipates that credit losses will be
experienced in the normal course of business. The provision for loan losses
creates a reserve to absorb potential future losses. The allowance for loan
losses is maintained at a level considered by management to be adequate to
provide for risks inherent in the loan portfolio. In determining the adequacy
of the allowance for loan losses, management takes into consideration
examinations of Company supervisory authorities, results of internal credit
reviews, financial condition of borrowers, loan concentrations, prior loan loss
experience, and general economic conditions. The allowance is based on
estimates and ultimate future losses may vary from the current estimates.
Management reviews these estimates periodically and, when adjustments are
necessary, they are reported in the period in which they become known.
The Company's written lending policies, along with applicable laws and
regulations governing the extension of credit, require risk analysis as well as
ongoing portfolio and credit management through loan product diversification,
lending limits, ongoing credit reviews and approval policies prior to funding of
any loan. The Company manages and controls credit risk through diversification,
dollar limits on loans to one borrower by primarily restricting loans made to
its principal market area. Loans that are performing but have shown some signs
of weakness are subjected to more stringent reporting. Fixed-rate real estate
loans are comprised primarily of loans with maturities of less than five years.
Long-term residential loans are originated by the Company and sold on the
secondary market.
The provision as of September 30, 1999 equaled $1.4 million, an increase of $500
thousand from September 30, 1998. The increase in the provision was the result
of management's evaluation of the credit quality of the loan portfolio, the
prevailing economic climate, and its effect on borrowers' ability to repay loans
in accordance with the terms of the notes and current loan losses. After
reviewing all factors, management concluded that an increase in the provision
for loan losses was appropriate.
As of September 30, 1999, the allowance for loan losses was $9.7 million, which
represents 2.4% of the total loan balances. For the period ended September 30,
1998, the allowance was $8.3 million and 2.6% of total loans. The table below
illustrates the change in the allowance for the first nine months of 1998 and
1999.
12
<PAGE>
<TABLE>
Allowance for Loan Losses
- -------------------------
<S> <C>
Balance, January 1, 1998 7,188
Provision Charged to Expense 900
Recoveries of Loans Previously Charged Off 393
Loans Charged Off (196)
===========================================================================
Balance, September 30, 1998 $8,285
===========================================================================
Balance, January 1, 1999 8,589
Provision Charged to Expense 1,400
Recoveries of Loans Previously Charged Off 639
Loans Charged Off (928)
===========================================================================
Balance, September 30, 1999 $9,700
===========================================================================
</TABLE>
Non-Interest Income
Non-interest income increased 9.0% for the nine months ending September 30,
1999, compared to the same period of 1998. This increase was due to increases
in service charges on deposit accounts, ATM fees, Mortgage Loan servicing fees,
and Credit Card fees.
Non-Interest Expense
Salaries and Employee Benefits increased $751 thousand or 7.2% from the prior
year due to merit increases and additional staffing requirements. Offsetting
this increase was a decrease in occupancy expense of $90 thousand or 3.1%. The
net effect was an increase in non-interest expense of 3.5% compared to the prior
year.
Income Taxes
The provision for income taxes increased 11.5% to $3.8 million for the first
nine months of 1999 as a result of improved earnings. For the nine months ended
September 30, 1998, the provision totaled $3.4 million.
Balance Sheet Analysis
Investment Securities
The Financial Accounting Standards Board statement, Accounting for Certain
Investments in Debt and Equity Securities, requires the Company to classify its
investments as held-to-maturity, trading or available-for-sale. Securities are
classified as held-to-maturity and accounted for at amortized cost when the
Company has the positive intent and ability to hold the securities to maturity.
Trading securities are securities acquired for short-term appreciation and are
carried at fair value, with unrealized gains and losses recorded in non-interest
income. As of September 30, there were no securities in the trading portfolio.
Securities the Company does not intend to hold to maturity are classified as
available-for-sale. This portion of the investment portfolio provides the
Company with liquidity that may be required to meet the needs of Company
borrowers and satisfy depositor's withdrawals.
13
<PAGE>
The investment portfolio provides the Company with an income alternative to
loans. As of September 30, 1999 the investment portfolio represented 43.9% of
the Company's total assets. Total investment securities increased $14.6 million
from a year ago and now total $343.5 million. Not included in the investment
portfolio are overnight investments in Federal Funds Sold. For the nine months
ended September 30, 1999, average Federal Funds Sold was $14.2 million compared
to $14.5 million in 1998.
Loans
The Company's loan portfolio at September 30, 1999 increased $81.9 million from
September 30, 1998. The increase is the result of an aggressive calling program
implemented during 1999 and an improved economic climate in the Company's market
area. Additionally, on an average balance basis loans have increased $64.7
million or 22.6%. The table following sets forth the distribution of the loan
portfolio by type as of the dates indicated.
<TABLE>
<CAPTION>
Loan Portfolio As Of:
- ---------------------
(dollar amounts in thousands) September 30, 1999 September 30, 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Real Estate Construction $ 37,605 $ 26,529
Other Real Estate 216,595 167,475
Commercial 123,843 107,326
Consumer 21,335 16,172
- ------------------------------------------------------------------------------
Gross Loans 399,378 317,502
Less:
Unearned Income 388 412
Allowance for Loan Losses 9,700 8,285
- ------------------------------------------------------------------------------
Net Loans $389,290 $308,805
==============================================================================
</TABLE>
Non-Performing Assets
The Company's policy is to place loans on non-accrual status when, for any
reason, principal or interest is past due for ninety days or more unless it is
both well secured and in the process of collection. Any interest accrued, but
unpaid, is reversed against current income. Thereafter, interest is recognized
as income only as it is collected in cash.
As a result of events beyond the Company's control, problem loans can and do
occur. As of September 30, 1999, non-performing loans were $2.9 million
compared to $4.1 million at September 30, 1998. Reducing problem loans
continues to be a significant Company objective. The Company reported $420
thousand in foreclosed loans as other real estate at September 30, 1999,
compared to the $1.3 million as of September 30, 1998. Accrued interest
reversed from income on loans placed on a non-accrual status totaled $276
thousand for the nine months ended September 30, 1999.
14
<PAGE>
<TABLE>
<CAPTION>
Non-Performing Assets
- ---------------------
Sept. 30, 1999 Dec. 31, 1998 Sept. 30, 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming Loans $2,948 $4,624 $4,125
OREO 420 636 1,343
Total $3,368 $5,260 $5,468
===============================================================================
Non-Performing Assets as a % of:
- -------------------------------
Total Loans 0.8% 1.6% 1.7%
Reserve for Loan Loss 34.7% 61.2% 65.9%
</TABLE>
Deposits
At September 30, 1999, deposits totaled $648.9 million. This represents an
increase of 14.0% or $79.8 million from September 30, 1998. The majority of the
increase was focused in time deposits over $100,000, which increased $26.3
million or 34.1%. The change in the mix of deposits occurs as interest rates
change. The expectations our customers have of future interest rates, dictates
their maturity and account selections. Time deposit rate promotions have been
very competitive this past quarter. We have offered some very attractive rates
which our current customers and new customers have chosen to invest in.
The most volatile deposits in any financial institution are certificates of
deposit over $100,000. The Company has not found its certificates of deposit
over $100,000 to be as volatile as some other financial institutions as it does
not solicit these types of deposits from brokers nor does it offer interest rate
premiums. It has been the Company's experience that large depositors have
placed their funds with the Company due to its strong reputation for safety,
security and liquidity.
Capital
Much attention has been directed at the capital adequacy of the financial
institution industry. The Company relies on capital generated through the
retention of earnings to satisfy its capital requirements. The Company engages
in an ongoing assessment of its capital needs in order to support business
growth and to insure depositor protection. Shareholders' Equity totaled $81.5
million at September 30, 1999 and $81.0 million at September 30, 1998, which
represents an increase of $500 thousand or 0.6%.
The Board of Governors of the Federal Reserve System, and the Federal Deposit
Insurance Corporation have adopted risk-based capital guidelines. The
guidelines are designed to make capital requirements more sensitive to
differences in risk related assets among Banking organizations, to take into
account off-balance sheet exposures and to aid in making the definition of Bank
capital uniform. Company assets and off-balance sheet items are categorized by
risk. The results of these regulations are that assets with a higher degree of
risk require a larger amount of capital; assets, such as cash, with a low degree
of risk have little or no capital requirements. Under the guidelines the
Company is currently required to maintain regulatory risk based capital equal to
at least 8.0%. As of September 30, 1999, the Company meets all
15
<PAGE>
capital adequacy requirements to which it is subject. The following table
illustrates the relationship between regulatory capital requirements and the
Company's capital position.
<TABLE>
<CAPTION>
Regulatory
Capital Adequacy
(in thousands) Company Capital Requirements
September 30, 1999 Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Capital to Risk Weighted Assets $88,663 19.20% $36,952 8.0%
Tier I Capital to Risk Weighted Assets $82,841 17.93% $18,476 4.0%
</TABLE>
Liquidity
Liquidity is the Company's ability to maintain a cash flow adequate to fund
operations, handle fluctuations in deposit levels, respond to the credit needs
of borrowers, and to take advantage of investment opportunities as they arise.
The principal sources of liquidity include interest and principal payments on
loans and investments, proceeds from the maturity or sale of investments, and
growth in deposits. The Company maintains overnight investments in Federal
Funds as a cushion for temporary liquidity needs. For the first nine months of
1999, Federal Funds averaged $14.2 million. In addition, the Company maintains
Federal Fund credit lines of $136 million with major correspondent Banks subject
to the customary terms and conditions for such arrangements.
Asset/Liability Management - Interest Rate Risk
The mismatch between maturities of interest sensitive assets and liabilities
results in uncertainty in the Company's earnings and economic value and is
referred to as interest rate risk. Farmers & Merchants Bancorp's primary
objective in managing interest rate risk is to minimize the potential for
significant loss as a result of changes in interest rates.
The Company measures interest rate risk in terms of potential impact on both its
economic value and earnings. The methods for governing the amount of interest
rate risk include: analysis of asset and liability mismatches (GAP analysis),
the utilization of a simulation model and limits on maturities of investment,
loan and deposit products to relatively short periods which reduces the market
volatility of those instruments.
The gap analysis measures, at specific time intervals, the divergences between
earning assets and interest bearing liabilities for which repricing
opportunities will occur. A positive difference, or gap, indicates that earning
assets will reprice faster than interest bearing liabilities. This will
generally produce a greater net interest margin during periods of rising
interest rates and a lower net interest margin during periods of declining
interest rates. Conversely, a negative gap will generally produce a lower net
interest margin during periods of rising interest rates and a greater net
interest margin during periods of decreasing interest rates.
The interest rates paid on deposit accounts do not always move in unison with
the rates charged on loans. In addition, the magnitude of changes in the rates
charged on loans is not always proportionate to the magnitude of changes in the
rate paid for deposits. Consequently, changes in interest rates do not
necessarily result in an increase or decrease in the net interest margin
16
<PAGE>
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 the 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 that specify a maximum tolerance level for net interest income exposure
over a one-year horizon assuming no balance sheet growth, given both a 200 basis
point upward and downward shift in interest rates. A parallel and pro rata
shift in rates over a 12-month period is assumed. Results that exceed policy
limits, if any, are analyzed for risk tolerance and reported to the Board with
appropriate recommendations. . The following reflects the Company's net
interest income sensitivity over a one-year horizon as of September 30, 1999.
Estimated Net
Simulated Interest Income
Rate Changes Sensitivity
----------------------------------------------------------
+200 Basis Points +3.35
- 200 Basis Points -4.50
The table indicates that net interest income would increase by approximately
3.35% over a 12-month period if there were an immediate sustained parallel
upward shift in interest rates. Net interest income would decrease
approximately 4.50% over a 12-month period if there were an immediate sustained
parallel 200 basis point downward shift in interest rates.
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.
Year 2000 Compliance
The Company has initiated a Company-wide program (Y2K) to prepare its computer
systems, applications and infrastructure for properly processing the dates after
December 31, 1999. Based on the Federal Financial Institutions Examination
Council guidelines, the Company's Y2K program consists of the following phases:
1. Awareness Phase - A strategic approach was developed to address the Year
2000 problem.
2. Assessment Phase - Detailed plans and target dates were developed.
17
<PAGE>
3. Renovation Phase - This phase includes code enhancements, hardware and
software upgrades, system replacements, vendor certification, and other
associated changes.
4. Validation Phase - This phase includes testing and conversion of system
applications.
5. Implementation Phase - This phase includes certification of Y2K compliance
and employee training and acceptance.
Phases one through five have been completed. All mission critical issues and
systems have been implemented. Monitoring of all systems to ensure continued
compliance will be an on-going process.
In addition, an assessment of the Y2K readiness of external entities with which
the Company conducts its operations is ongoing. The Company is continuing to
communicate with all of its significant obligors, counterparties, other credit
clients and vendors to determine the likely extent to which the Company may be
affected by third parties' Y2K plans and target dates. In this regard, the
Company had developed contingency plans in the event that external parties fail
to achieve their Y2K plans and target dates.
The Company estimated the total cost of the Y2K project to be approximately
$1,571,000, of which $1,203,000 has been incurred through 1998 and the remaining
$368,000 was incurred during the first quarter of 1999. No further significant
costs are anticipated. The costs of the Y2K program and the date on which the
Company plans to be Y2K compliant are based on management's best current
estimates, which were derived utilizing numerous assumptions of future events
including the availability of certain resources, third party vendors and other
factors. However, there can be no assurance that these estimates will be
achieved and actual results could differ from those plans.
Average Balance Sheets
The tables on the following pages reflect the Company's average balance sheets
and volume and rate analysis for the nine-month periods ending September 30,
1999 and 1998. The average yields on earning assets and average rates paid on
interest-bearing liabilities have been computed on an annualized basis for
purposes of comparability with full year data. Average balance amounts for
assets and liabilities are the computed average of daily balances.
18
<PAGE>
FARMERS & MERCHANTS BANCORP
Year-to-Date Average Balances and Interest Rates
(Rates on a Taxable Equivalent Basis)
<TABLE>
<CAPTION>
(In Thousands) Nine Months Ended September 30,
1999
Assets Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Funds Sold $ 14,194 $ 522 4.92%
Investment Securities:
U.S. Treasury 22,491 905 5.38%
U.S. Agencies 11,471 506 5.90%
Municipals 75,318 4,104 7.29%
Mortgage Backed Securities 241,620 11,034 6.11%
Other 5,267 246 6.24%
- -------------------------------------------------------------------------------------------------------------------
Total Investment Securities 356,167 16,795 6.30%
- -------------------------------------------------------------------------------------------------------------------
Loans:
Real Estate 222,820 16,206 9.72%
Commercial 110,081 7,567 9.19%
Installment 15,318 1,089 9.51%
Credit Card 2,879 259 12.03%
Municipal 275 13 6.32%
- -------------------------------------------------------------------------------------------------------------------
Total Loans 351,373 25,134 9.56%
- -------------------------------------------------------------------------------------------------------------------
Total Earning Assets 721,734 $ 42,451 7.86%
======================
Reserve for Loan Losses (8,887)
Cash and Due From Banks 23,790
All Other Assets 26,346
- ----------------------------------------------------------------------------------------
Total Assets $ 762,983
========================================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits:
Interest Bearing Transaction $ 61,799 $ 526 1.14%
Savings 183,366 3,070 2.24%
Time Deposits Over $100,000 93,302 3,261 4.67%
Time Deposits Under $100,000 149,348 5,234 4.69%
- -------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 487,815 12,091 3.31%
Other Borrowed Funds 43,954 1,774 5.40%
- -------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 531,769 $ 13,865 3.49%
======================
Demand Deposits 142,775
All Other Liabilities 6,032
- ----------------------------------------------------------------------------------------
Total Liabilities 680,576
Shareholders' Equity 82,407
- ----------------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $ 762,983
========================================================================================
Net Interest Margin 5.30%
===================================================================================================================
</TABLE>
19
<PAGE>
FARMERS & MERCHANTS BANCORP
Year-to-Date Average Balances and Interest Rates
(Rates on a Taxable Equivalent Basis)
<TABLE>
<CAPTION>
(In Thousands) Nine Months Ended September 30,
1998
Assets Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Funds Sold $ 14,542 $ 608 5.59%
Investment Securities:
U.S. Treasury 14,482 647 5.97%
U.S. Agencies 56,895 2,556 6.01%
Municipals 69,737 4,096 7.85%
Mortgage Backed Securities 191,066 9,083 6.36%
Other 4,407 269 8.16%
- -------------------------------------------------------------------------------------------------------------------
Total Investment Securities 336,587 16,651 6.61%
- -------------------------------------------------------------------------------------------------------------------
Loans:
Real Estate 183,028 14,158 10.34%
Commercial 88,577 6,954 10.50%
Installment 12,121 954 10.52%
Credit Card 2,855 276 12.93%
Municipal 123 8 8.70%
- -------------------------------------------------------------------------------------------------------------------
Total Loans 286,704 22,350 10.42%
- -------------------------------------------------------------------------------------------------------------------
Total Earning Assets 637,833 $39,609 8.30%
=====================
Reserve for Loan Losses (7,691)
Cash and Due From Banks 22,123
All Other Assets 23,789
- ---------------------------------------------------------------------------------------
Total Assets $676,054
=======================================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits:
Interest Bearing Transaction $ 55,076 $ 564 1.37%
Savings 177,869 2,961 2.23%
Time Deposits Over $100,000 76,459 2,952 5.16%
Time Deposits Under $100,000 135,754 5,231 5.15%
- -------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 445,158 11,708 3.52%
Other Borrowed Funds 25,649 1,067 5.56%
- -------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 470,807 $12,775 3.63%
=====================
Demand Deposits 121,888
All Other Liabilities 4,961
- ---------------------------------------------------------------------------------------
Total Liabilities 597,656
Shareholders' Equity 78,398
- ---------------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $676,054
=======================================================================================
Net Interest Margin 5.62%
===================================================================================================================
</TABLE>
20
<PAGE>
FARMERS & MERCHANTS BANCORP
Volume and Rate Analysis of Net Interest Revenue
(Rates on a Taxable Equivalent Basis)
<TABLE>
<CAPTION>
Sept. 30, 1999 vs Sept. 30, 1998
(In Thousands) Amount of Increase
(Decrease) Due to Change in:
--------------------------------------
Average Average Net
Interest Earning Assets Balance Rate Change
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Funds Sold $ (14) $ (72) $ (86)
Investment Securities:
U.S. Treasury 364 (106) 258
U.S. Agencies (2,004) (46) (2,050)
Municipals 420 (412) 8
Mortgage Backed Securities 2,531 (580) 1,951
Other 66 (89) (23)
- -----------------------------------------------------------------------------------------------------------------------
Total Investment Securities 1,377 (1,233) 144
- -----------------------------------------------------------------------------------------------------------------------
Loans:
Real Estate 3,381 (1,333) 2,048
Commercial 1,935 (1,322) 613
Installment 279 (144) 135
Credit Card 4 (21) (17)
Municipal 9 (4) 5
- -----------------------------------------------------------------------------------------------------------------------
Total Loans 5,608 (2,824) 2,784
- -----------------------------------------------------------------------------------------------------------------------
Total Earning Assets 6,971 (4,129) 2,842
- -----------------------------------------------------------------------------------------------------------------------
Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction 91 (129) (38)
Savings 92 17 109
Time Deposits Over $100,000 738 (430) 309
Time Deposits Under $100,000 667 (664) 3
- -----------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 1,588 (1,206) 383
Other Borrowed Funds 760 (54) 707
- -----------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 2,348 (1,260) 1,090
=======================================================================================================================
Total Change $ 4,623 $ (2,869) $ 1,752
=======================================================================================================================
</TABLE>
21
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings
- -------------------------
None
ITEM 2. Changes in Securities
- -----------------------------
None
ITEM 3. Defaults Upon Senior Securities
- ---------------------------------------
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
None
ITEM 5. Other Information
- -------------------------
None
ITEM 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibit
Exhibit 27 - Financial Data Schedule
22
<PAGE>
SIGNATURES
----------
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FARMERS & MERCHANTS BANCORP
Date: November 12, 1999 ___________________________________
Kent A. Steinwert
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1999 ___________________________________
John R. Olson
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 9/30/99
CONSOLIDATED BALANCE SHEETS AND THE 9/30/99 CONSOLIDATED STATEMENTS OF INCOME
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 22,981
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 292,251
<INVESTMENTS-CARRYING> 51,213
<INVESTMENTS-MARKET> 51,693
<LOANS> 399,378
<ALLOWANCE> 9,700
<TOTAL-ASSETS> 782,782
<DEPOSITS> 648,947
<SHORT-TERM> 3,400
<LIABILITIES-OTHER> 7,884
<LONG-TERM> 41,071
0
0
<COMMON> 7
<OTHER-SE> 81,473
<TOTAL-LIABILITIES-AND-EQUITY> 782,782
<INTEREST-LOAN> 25,134
<INTEREST-INVEST> 15,497
<INTEREST-OTHER> 522
<INTEREST-TOTAL> 41,153
<INTEREST-DEPOSIT> 13,865
<INTEREST-EXPENSE> 13,865
<INTEREST-INCOME-NET> 27,288
<LOAN-LOSSES> 1,400
<SECURITIES-GAINS> 149
<EXPENSE-OTHER> 19,709
<INCOME-PRETAX> 10,780
<INCOME-PRE-EXTRAORDINARY> 7,029
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,029
<EPS-BASIC> 10.61
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.86
<LOANS-NON> 2,932
<LOANS-PAST> 16
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,589
<CHARGE-OFFS> 928
<RECOVERIES> 639
<ALLOWANCE-CLOSE> 9,700
<ALLOWANCE-DOMESTIC> 9,700
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 9,700
</TABLE>
