<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
For Quarter Ended September 30, 2000 Commission File Number: 1.000-26099
FARMERS & MERCHANTS BANCORP
(Exact name of registrant as specified in its charter)
Delaware 94-3327828
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
121 W. Pine Street, Lodi, California 95240
(Address of principal Executive offices) (Zip Code)
Registrant's telephone number, including area code (209) 334-1101
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
Number of shares of common stock of the registrant: Par value $0.01, authorized
2,000,000 shares; issued and outstanding 687,514 as of November 6, 2000.
<PAGE>
FARMERS & MERCHANTS BANCORP
FORM 10-Q
TABLE OF CONTENTS
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PART I. - FINANCIAL INFORMATION Page
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Item 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 2000
December 31, 1999 and September 30, 1999. 3
Consolidated Statements of Income for the Three Months
and Nine Months Ended September 30, 2000 and 1999. 4
Consolidated Statements of Comprehensive Income for the Three
Months and Nine Months Ended September 30, 2000 and 1999. 5
Statement of Changes in Shareholders' Equity for the
Nine months ended September 30, 2000 and 1999. 6
Consolidated Statement of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999. 7
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis 9
PART II. - OTHER INFORMATION 22
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SIGNATURES 23
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2
<PAGE>
PART I. - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANCORP
Consolidated Balance Sheets
----------------------------------------------------------------------------------------------------
(in thousands) September 30, December 31, September 30,
2000 1999 1999
Assets (Unaudited) (Unaudited)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and Cash Equivalents:
Cash and Due From $ 28,936 $ 30,384 $ 22,981
Federal Funds Sold 14,900 11,600 -
----------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 43,836 41,984 22,981
Investment Securities:
Available-for Sale 282,423 297,580 292,251
Held-to-Maturity 44,303 49,275 51,213
----------------------------------------------------------------------------------------------------
Total Investment Securities 326,726 346,855 343,464
----------------------------------------------------------------------------------------------------
Loans 484,820 413,757 399,378
Less: Unearned Income (552) (348) (388)
Less: Allowance for Loan Losses (11,071) (9,787) (9,700)
----------------------------------------------------------------------------------------------------
Loans, Net 473,197 403,622 389,290
----------------------------------------------------------------------------------------------------
Land, Buildings & Equipment 12,137 12,707 11,988
Interest Receivable and Other Assets 15,487 14,713 15,059
----------------------------------------------------------------------------------------------------
Total Assets $871,383 $819,881 $782,782
====================================================================================================
Liabilities & Shareholders' Equity
Deposits:
Demand $154,256 $163,658 $145,293
Interest Bearing Transaction 81,129 86,503 74,389
Savings 162,676 179,294 168,686
Time Deposits Over $100,000 142,705 74,259 103,475
Time Deposits Under $100,000 192,204 181,429 157,104
----------------------------------------------------------------------------------------------------
Total Deposits 732,970 685,143 648,947
----------------------------------------------------------------------------------------------------
Federal Home Loan Bank Advances / Fed Funds Purchased 41,041 41,064 44,471
Other Liabilities 9,772 13,473 7,884
----------------------------------------------------------------------------------------------------
Total Liabilities 783,783 739,680 701,302
----------------------------------------------------------------------------------------------------
Shareholders' Equity
Common Stock 7 7 7
Additional Paid In Capital 53,587 47,993 48,105
Retained Earnings 36,189 36,040 36,002
Accumulated Other Comprehensive Income (Loss) (2,183) (3,839) (2,634)
----------------------------------------------------------------------------------------------------
Total Shareholders' Equity 87,600 80,201 81,480
----------------------------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $871,383 $819,881 $782,782
====================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE>
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Income (Unaudited)
----------------------------------------------------------------------------------------------------------------
(in thousands except per share data) Three Months Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
---------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest & Fees on Loans $11,475 $ 9,312 $31,979 $25,134
Federal Funds Sold 515 34 617 522
Interest on Investment Securities
Taxable 4,390 4,348 13,582 13,001
Non-taxable 717 787 2,212 2,496
----------------------------------------------------------------------------------------------------------------
Total Interest Income 17,097 14,481 48,390 41,153
----------------------------------------------------------------------------------------------------------------
Interest Expense:
Interest Bearing Transaction 192 179 571 526
Savings 1,017 1,034 3,105 3,070
Time Deposits Over $100,000 1,540 1,746 3,750 3,261
Time Deposits Under $100,000 3,347 1,166 8,271 5,234
Interest on Borrowed Funds 825 627 2,344 1,774
----------------------------------------------------------------------------------------------------------------
Total Interest Expense 6,921 4,752 18,041 13,865
----------------------------------------------------------------------------------------------------------------
Net Interest Income 10,176 9,729 30,349 27,288
Provision for Loan Losses 400 500 1,400 1,400
----------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 9,776 9,229 28,949 25,888
----------------------------------------------------------------------------------------------------------------
Non-Interest Income
Service Charges on Deposit Accounts 882 800 2,588 2,347
Net Gain (Loss) on Sale of Investment Securities (1) 7 (119) 149
Other 811 767 2,652 2,105
----------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 1,692 1,574 5,121 4,601
----------------------------------------------------------------------------------------------------------------
Non-Interest Expense
Salaries & Employee Benefits 4,100 3,825 12,262 11,247
Occupancy 435 436 1,291 1,244
Other Operating 2,377 2,823 7,136 7,218
----------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 6,912 7,084 20,689 19,709
----------------------------------------------------------------------------------------------------------------
Income Before Taxes 4,556 3,719 13,381 10,780
Provision for Income Taxes 1,728 1,316 5,035 3,751
----------------------------------------------------------------------------------------------------------------
Net Income $ 2,828 $ 2,403 $ 8,346 $ 7,029
================================================================================================================
Earnings Per Share $ 4.11 $ 3.46 $ 12.09 $ 10.11
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
<PAGE>
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Comprehensive Income (Unaudited)
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(in thousands) Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept.30,
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $2,828 $2,403 $ 8,346 $ 7,029
Other Comprehensive Income (Loss) -
Unrealized Gain (Loss) on Securities: 1,603 (621) 1,656 (3,466)
------------------------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) 1,603 (621) 1,656 (3,466)
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $4,431 $1,782 $10,002 $ 3,563
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
5
<PAGE>
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
--------------------------------------------------------------------------------------------------------------------------------
(in thousands except per share data) Accumulated
Common Additional Other Total
Shares Common Paid-In Retained Comprehensive Shareholders'
Outstanding Stock Capital Earnings Income (Loss) Equity
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 632,185 $6 $43,576 $34,991 $ 832 $79,405
================================================================================================================================
Net Income - - 7,029 - 7,029
Cash Dividends Declared on -
Common Stock - - (1,125) - (1,125)
5% Stock Dividend 31,110 1 4,822 (4,823) - -
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend - - (70) - (70)
Redemption of Stock (1,774) - (293) - - (293)
Changes in Net Unrealized Gain (Loss) on
Securities Available for Sale - - - (3,466) (3,466)
--------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 661,521 $7 $48,105 $36,002 $(2,634) $81,480
================================================================================================================================
--------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 660,989 $7 $47,993 $36,040 $(3,839) $80,201
================================================================================================================================
Net Income - - 8,346 - 8,346
Cash Dividends Declared on -
Common Stock - - (1,273) - (1,273)
5% Stock Dividend 32,496 - 6,824 (6,824) - -
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend - - (100) - (100)
Redemption of Stock (5,877) - (1,230) - - (1,230)
Changes in Net Unrealized Gain (Loss) on
Securities Available for Sale - - - 1,656 1,656
--------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 687,608 $7 $53,587 $36,189 $(2,183) $87,600
================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
6
<PAGE>
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANCORP
Consolidated Statement of Cash Flows (Unaudited) For Nine Months Ending
-------------------------------------------------------------------------------------
(in thousands) Sept. 30, Sept. 30,
2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net Income $ 8,346 $ 7,029
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Loan Losses 1,400 1,400
Depreciation and Amortization 1,341 1,323
Provision for Deferred Income Taxes (345) (405)
(Amortization) Accretion of Investment Security (307) 597
Discounts/Premiums
Net (Gain) Loss on Sale of Investment Securities 119 (149)
Net Change in Operating Assets & Liabilities:
(Increase) Decrease in Interest Receivable and Other (1,587) 2,097
Assets
Decrease in Interest Payable and Other Liabilities (3,701) (1,030)
-------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 5,266 10,862
Investing Activities:
Trading Securities:
Purchased - (15,490)
Sold or Matured - 15,478
Securities Available-for-Sale:
Purchased (41,514) (127,297)
Sold or Matured 59,609 141,067
Securities Held-to-Maturity:
Purchased (202) (1,978)
Matured 5,238 10,876
Net Loans Originated or Acquired (71,142) (70,740)
Principal Collected on Loans Charged Off 167 639
Net Additions to Premises and Equipment (771) (1,597)
-------------------------------------------------------------------------------------
Net Cash (Used) by Investing Activities (48,615) (49,042)
Financing Activities:
Net Decrease in Demand, Interest-Bearing Transaction,
and Savings Accounts (31,394) (10,288)
Increase in Time Deposits 79,221 31,848
Federal Funds Purchased - 1,400
Federal Home Loan Bank Borrowings:
Advances - -
Paydowns (23) (22)
Cash Dividends (1,373) (1,196)
Stock Redemption (1,230) (293)
-------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 45,201 21,449
Increase (Decrease) in Cash and Cash Equivalents 1,852 (16,731)
Cash and Cash Equivalents at Beginning of Period 41,984 39,712
-------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 43,836 $ 22,981
=====================================================================================
</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. Results for the period ended September 30, 2000, are not necessarily
indicative of results which may be expected for any other interim period or for
the year as a whole. A summary of the Corporations significant accounting
policies is set forth in Note 1 to the Consolidated Financial Statements in the
Corporation's Annual Report on Form 10-K for 1999.
2. Reclassifications
Certain reclassifications have been made in the 1999 financial information to
conform to the presentation used in 2000.
3. Earnings per Share
The actual number of shares outstanding at September 30, 2000, were 687,632.
Basic earnings per share is calculated on the basis of the weighted average
number of shares outstanding during the period. Weighted average number of
shares for the nine months ending September 30, 2000 and 1999 were 690,353 and
695,132 and for the three months ending September 30, 2000 and 1999, were
687,611 and 694,091, respectively. Prior period per share amounts have been
restated for the 5% stock dividend declared during 1999 and 2000.
4. Holding Company Formation
The accompanying financial statements include the accounts of Farmers &
Merchants Bancorp and the Bancorp's wholly owned subsidiary, Farmers & Merchants
Bank. Farmers & Merchants Bancorp was organized effective April 30, 1999.
Significant intercompany transactions have been eliminated in consolidation.
8
<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
and; (v) other external developments which could materially impact the Company's
operational and financial performance. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to update any forward-looking
statements to reflect events or circumstances arising after the date on which
they are made.
Introduction
The following discussion and analysis is intended to provide a better
understanding of the Company's performance during the first nine months of 2000
and the material changes in financial condition, operating income and expense of
the Company and its subsidiaries as shown in the accompanying financial
statements. This section should be read in conjunction with the consolidated
financial statements and the notes thereto, along with other financial
information included in this report.
Overview
For the nine months ended September 30, 2000, Farmers & Merchants Bancorp
reported net income of $8,346,000, earnings per share of $12.09, return on
average assets of 1.33% and return on average shareholders' equity of 12.75%.
For the nine months ending September 30, 1999, net income totaled $7,029,000,
earnings per share was $10.11, return on average assets was 1.23% and the return
on average shareholders' equity totaled 11.37%.
The Company's improved financial performance in 2000 was due to a combination of
increased revenue generated from its core business, which include improved
growth rates in both loans outstanding and deposit balances along with effective
capital management strategies.
9
<PAGE>
The following is a summary of the financial results for the nine-month period
ending September 30, 2000 compared to September 30, 1999.
. Net income for the period totaled $8.3 million, up 18.7% over last year.
. Net interest income increased 11.2% to $30.3 million from $27.3 million.
. The provision for loan losses remained at $1.4 million for both periods.
. Non-interest income increased 11.3% to $5.1 million, from the $4.6 million
reported for 1999.
. Non-interest expense increased 5.0% and totaled $20.7 million during the
first nine months of 2000.
. Total assets increased 11.3% to $871.4 million.
. Total loans increased 21.4% to $484.8 million, up $85.4 million.
. Total deposits increased 12.9% to $732.9 million.
. Total investment securities decreased to $326.7 million from $343.5 million
at September 30, 1999.
. Total Shareholders' Equity increased $6.1 million to $87.6 million.
Net Interest Income
Net interest income is the amount by which the interest and fees on loans and
interest earning assets exceeds the interest paid on interest bearing sources of
funds. For the purpose of analysis, the interest earned on tax-exempt
investments and municipal loans is adjusted to an amount comparable to interest
subject to normal income taxes. This adjustment is referred to as "taxable
equivalent" and is noted wherever applicable. Interest income and expense are
affected by changes in the volume and mix of average interest earning assets and
average interest bearing liabilities, as well as fluctuations in interest rates.
Therefore, increases or decreases in net interest income are analyzed as changes
in volume, changes in rate and changes in the mix of assets and liabilities.
Net interest income grew 11.2% to $30.3 million during the first nine months of
2000, compared to $27.3 million at September 30, 1999. On a fully taxable
equivalent basis, net interest income increased 10.2% and totaled $31.5 million
at September 30, 2000, compared to $28.6 million for the first nine months of
1999. Net interest income on a taxable equivalent basis, expressed as a
percentage of average total earning assets, is referred to as the net interest
margin, which represents the average net effective yield on earning assets. For
the nine months ended
10
<PAGE>
September 30, 2000, the net interest margin was 5.2% compared to 5.3% for the
same period in 1999. The decrease in net interest margin was primarily related
to a change in asset mix and the impact of their corresponding rates of
interest. Securities declined by $12.6 million, loans increased by $98.3 million
and interest-bearing deposits increased by $69.4 million.
Loans, the Company's highest earning asset, increased $85.4 million as of
September 30, 2000 compared to September 30, 1999. On an average balance basis,
loans have increased by $98.3 million. The yield on the loan portfolio declined
9 basis points to 9.47% for the nine months ending September 30, 2000 compared
to 9.56% for the nine months ending September 30, 1999. This decline in yield,
due to competitive pressures, was offset by the growth in balances, which had a
positive effect on interest revenue from loans in the amount of $6.8 million for
the first nine months of 2000.
The investment portfolio is the other main component of the Company's earning
assets. The Company's investment policy is conservative. The Company primarily
invests in mortgage-backed securities, U.S. Treasuries, U.S. Government
Agencies, and high-grade municipals. Since the risk factor for these types of
investments is significantly lower than that of loans, the yield earned on
investments is substantially less than that of loans.
Average investment securities decreased $12.0 million during the first nine
months of 2000. In spite of the decrease in the average balance of investment
securities, interest income increased 1.0% as a portion of the portfolio was
repositioned late in 1999. The average yield, on a taxable equivalent basis, in
the investment portfolio was 6.6% in 2000 compared to 6.3% in 1999. Net interest
income on the Average Balance Sheet is shown on a taxable equivalent basis,
which is higher than net interest income on the Consolidated Statements of
Income because of adjustments that relate to income on certain securities that
are exempt from federal income taxes.
Interest expense increased 30.1% as a result of growth in interest-bearing
deposit balances, additional borrowings, and an increase in interest rates paid
for those source of funds. Overall, interest-bearing sources of funds increased
$69.4 million or 13.1%. Of that increase, average borrowings increased $11.4
million and interest-bearing deposits increased 58.0 million. Interest expense
increased disproportionately from the increase in deposit balances due to the
rising rate environment and promotional rates paid on certain time deposit
products. Overall, the average interest cost on deposits was 3.8% at September
30, 2000 and 3.3% at September 30, 1999.
The Company's earning assets and rate sensitive liabilities are subject to
repricing at different times, which exposes the Company to income fluctuations
when interest rates change. In order to minimize income fluctuations, the
Company attempts to match asset and liability maturities. However, some maturity
mismatch is inherent in the asset and liability mix.
Allowance for Loan Losses
As a financial institution that assumes lending and credit risks as a principal
element of its business, the Company anticipates that credit losses will be
experienced in the normal course of business. The allowance for loan losses is
established to absorb losses inherent in the portfolio.
11
<PAGE>
The allowance for loan losses is maintained at a level considered by management
to be adequate to provide for risks inherent in the loan portfolio. In
determining the adequacy of the allowance for loan losses, management takes into
consideration examinations of Company supervisory authorities, results of
internal credit reviews, financial condition of borrowers, loan concentrations,
prior loan loss experience, and general economic conditions. The allowance is
based on estimates and ultimate future losses may vary from the current
estimates. Management reviews these estimates periodically and, when adjustments
are necessary, they are reported in the period in which they become known.
The Company's written lending policies, along with applicable laws and
regulations governing the extension of credit, require risk analysis as well as
ongoing portfolio and credit management through loan product diversification,
lending limits, ongoing credit reviews and approval policies prior to funding of
any loan. The Company manages and controls credit risk through diversification,
dollar limits on loans to one borrower and by primarily restricting loans made
to its principal market area. Loans that are performing but have shown some
signs of weakness are subjected to more stringent reporting. Fixed-rate real
estate loans are comprised primarily of loans with maturities of less than five
years. Long-term residential loans are originated by the Company and sold on the
secondary market.
The appropriate allowance amount is based upon growth in the loan portfolio,
management's evaluation of the credit quality of the loan portfolio, the
prevailing economic climate, and its effect on borrowers' ability to repay loans
in accordance with the terms of the notes and current loan losses. After
reviewing all factors, management concluded that the current amount in the
allowance for loan losses was adequate.
As of September 30, 2000, the allowance for loan losses was $11.1 million, which
represents 2.3% of the total loan balances. For the period ended September 30,
1999, the allowance was $9.7 million and 2.4% of total loans. The table below
illustrates the change in the allowance for the first nine months of 2000 and
1999.
<TABLE>
<CAPTION>
Allowance for Loan Losses (in thousands)
--------------------------
<S> <C>
Balance, December 31, 1999 $ 9,787
Provision Charged to Expense 1,400
Recoveries of Loans Previously Charged Off 167
Loans Charged Off (283)
----------------------------------------------------------------------------
Balance, September 30, 2000 $11,071
============================================================================
Balance, December 31, 1998 $ 8,589
Provision Charged to Expense 1,400
Recoveries of Loans Previously Charged Off 639
Loans Charged Off (928)
----------------------------------------------------------------------------
Balance, September 30, 1999 $ 9,700
============================================================================
</TABLE>
12
<PAGE>
Non-Interest Income
Non-interest income increased 11.3% for the nine months ending September 30,
2000, compared to the same period of 1999. This change was due to increases in
service charges on deposit accounts, gains on sale of other real estate owned
and growth in our fee income from alternative financial investments available to
our customers.
Non-Interest Expense
Salaries and Employee Benefits increased $1.0 million or 9.0% from the prior
year due to merit increases and additional staffing requirements related to loan
production. Offsetting this increase was a decrease in occupancy expense of $146
thousand or 5.2%. Other operating expense increased 2.0% or $111 thousand from
September 30, 1999. This was due to the increase in outside professional fees
and marketing efforts and other costs relating to the opening of a centralized
operations center and a new branch in the Modesto area. It is anticipated that
the future growth rate in other operating expense will remain modest and
comparable to the growth in assets.
Income Taxes
The provision for income taxes increased 34.2% to $5.0 million for the first
nine months of 2000. For the nine months ended September 30, 1999, the provision
totaled $3.8 million. Additionally, the Company's effective tax rate increased
due to the reduction of investments in tax-exempt securities.
Balance Sheet Analysis
Investment Securities
The Financial Accounting Standards Board statement, Accounting for Certain
Investments in Debt and Equity Securities, requires the Company to classify its
investments as held-to-maturity, trading or available-for-sale. Securities are
classified as held-to-maturity and accounted for at amortized cost when the
Company has the positive intent and ability to hold the securities to maturity.
Trading securities are securities acquired for short-term appreciation and are
carried at fair value, with unrealized gains and losses recorded in non-interest
income. As of September 30, 2000, there were no securities in the trading
portfolio. Securities the Company does not intend to hold to maturity are
classified as available-for-sale. This portion of the investment portfolio
provides the Company with liquidity that may be required to meet the needs of
Company borrowers and satisfy depositor's withdrawals.
The investment portfolio provides the Company with an income alternative to
loans. As of September 30, 2000 the investment portfolio represented 37.5% of
the Company's total assets. Total investment securities decreased $16.7 million
from a year ago and now total $326.7 million. Not included in the investment
portfolio are overnight investments in Federal Funds Sold. For the nine months
ended September 30, 2000, average Federal Funds Sold was $13.3 million compared
to $14.2 in 1999.
13
<PAGE>
Loans
The Company's loan portfolio at September 30, 2000 increased $85.4 million from
September 30, 1999. The increase is the result of an aggressive calling program
and a favorable economic climate in the Company's market area. Additionally, on
an average balance basis loans have increased $98.3 million or 27.7%. No
significant change in this trend is expected through the fourth quarter of 2000.
The table following sets forth the distribution of the loan portfolio by type as
of the dates indicated.
<TABLE>
<CAPTION>
Loan Portfolio As Of:
---------------------
(in thousands) Sept. 30, 2000 Dec. 31, 1999 Sept. 30, 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Real Estate Construction $ 27,880 $ 39,186 $ 37,605
Real Estate - Other 254,499 222,354 216,595
Commercial 177,152 129,969 123,843
Consumer 25,289 22,248 21,335
--------------------------------------------------------------------------------
Gross Loans 484,820 413,757 399,378
Less:
Unearned Income 552 348 388
Allowance for Loan Losses 11,071 9,787 9,700
--------------------------------------------------------------------------------
Net Loans $473,118 $403,622 $389,290
================================================================================
</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, 2000, non-performing loans were $2.7 million compared
to $2.9 million at September 30, 1999. Managing problem loans continues to be a
significant Company objective. The Company reported $299 thousand as other real
estate at September 30, 2000, compared to the $420 thousand as of September 30,
1999. Accrued interest reversed from income on loans placed on a non-accrual
status totaled $125 thousand for the nine months ended September 30, 2000
compared to $276 thousand for the nine months ended September 30, 1999.
<TABLE>
<CAPTION>
Non-Performing Assets
---------------------
(dollar amounts in thousands) Sept. 30, 2000 Dec. 31, 1999 Sept. 30, 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming Loans $2,734 $2,511 $2,948
OREO 299 204 420
-------------------------------------------------------------------------------
Total $3,033 $2,715 $3,368
================================================================================
Non-Performing Assets as a % of:
-------------------------------
Total Loans 0.6% 0.6% 0.8%
Allowance for Loan Loss 27.4% 27.7% 34.7%
</TABLE>
14
<PAGE>
Deposits
At September 30, 2000, deposits totaled $732.9 million. This represents an
increase of 12.9% or $84.0 million from September 30, 1999. The majority of the
increase was focused in time deposits over $100,000, which increased $39.2
million or 37.9%. This increase was the result of new and larger relationships
with municipal depositors in the Bank's service area. It is not anticipated that
this trend will change significantly through the fourth quarter of 2000.
The most volatile deposits in any financial institution are certificates of
deposit over $100,000. The Company has not found its certificates of deposit
over $100,000 to be as volatile as some other financial institutions as it does
not solicit these types of deposits from brokers. It has been the Company's
experience that large depositors have placed their funds with the Company due to
its strong reputation for safety and soundness.
Capital
Much attention has been directed at the capital adequacy of the financial
institution industry. The Company relies on capital generated through the
retention of earnings to satisfy its capital requirements. The Company engages
in an ongoing assessment of its capital needs in order to support business
growth and to insure depositor protection. Shareholders' Equity totaled $87.6
million at September 30, 2000 and $81.5 million at September 30, 1999, which
represents an increase of $6.1 million or 7.5%.
The Board of Governors of the Federal Reserve System, and the Federal Deposit
Insurance Corporation have adopted risk-based capital guidelines. The guidelines
are designed to make capital requirements more sensitive to differences in risk
related assets among Banking organizations, to take into account off-balance
sheet exposures and to aid in making the definition of Bank capital uniform.
Company assets and off-balance sheet items are categorized by risk. The results
of these regulations are that assets with a higher degree of risk require a
larger amount of capital; assets, such as cash, with a low degree of risk have
little or no capital requirements. Under the guidelines the Company is currently
required to maintain regulatory risk based capital equal to at least 8.0%. As of
September 30, 2000 the Company meets all capital adequacy requirements to which
it is subject. The following table illustrates the relationship between
regulatory capital requirements and the Company and Bank's capital position.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
Regulatory Capital Prompt Corrective
(in thousands) Actual Requirements Action Provisions
September 30, 2000 Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Bank Capital to Risk Weighted Assets $95,713 15.64% $48,952 8.0% $61,190 10.0%
Total Consolidated Capital to Risk Weighted Assets $96,948 17.03% $45,533 8.0% N/A N/A
Tier I Bank Capital to Risk Weighted Assets $88,022 14.38% $24,476 4.0% $36,714 6.0%
Tier I Consolidated Capital to Risk Weighted Assets $89,785 15.77% $22,766 4.0% N/A N/A
Tier I Bank Capital to Average Assets $88,022 10.05% $35,035 4.0% $43,794 5.0%
</TABLE>
15
<PAGE>
Risk Management
The Company has adopted a Risk Management Plan to ensure the proper control and
management of all risk factors inherent in the operation of the Company and the
Bank. Specifically, credit risk, interest rate risk, liquidity risk, compliance
risk, strategic risk, reputation risk and price risk can all affect the market
risk of the Company. These specific risk factors are not mutually exclusive. It
is recognized that any product or service offered by the Company may expose the
Company and Bank to one or more of these risk factors.
Credit Risk
Credit risk is the risk to earnings or capital arising from an obligor's failure
to meet the terms of any contract or otherwise fail to perform as agreed. Credit
risk is found in all activities where success depends on counterparty, issuer,
or borrower performance.
Central to the Company's credit risk management is a proven loan risk rating
system. Limitations on industry concentration, aggregate customer borrowings and
geographic boundaries also reduce loan credit risk. Credit risk in the
investment portfolio is minimized through clearly defined limits in the Bank's
policy statements. Senior Management, Directors' Committees, and the Board of
Directors are provided with timely and accurate information to appropriately
identify, measure, control and monitor the credit risk of the Company and the
Bank.
The allowance for loan losses is based on estimates of probable losses inherent
in the loan portfolio. The amount actually incurred with respect to these losses
can vary significantly from the estimated amounts. The Company's methodology
includes several features which are intended to reduce the difference between
estimated and actual losses.
Implicit in lending activities is the risk that losses will and do occur and
that the amount of such losses will vary over time. Consequently, the Company
maintains an allowance for loan losses by charging a provision for loan losses
to earnings. Loans determined to be losses are charged against the allowance for
loan losses. The Company's allowance for loan losses is maintained at a level
considered by management to be adequate to provide for estimated losses inherent
in the existing portfolio along with unused commitments to provide financing
including commitments under commercial and standby letters of credit.
The Company's methodology for assessing the appropriateness of the allowance
consists of several key elements, which include the formula allowance, specific
allowances for identified problem loans and portfolio segments and the
unallocated allowance. Specific allowances are established in cases where
management has identified conditions or circumstances related to credit that
management believes indicate the possibility that a loss may be incurred in
excess of the amount determined by the application of the formula reserve.
Management performs a detailed analysis of these loans, including, but not
limited to appraisals of the collateral, conditions of the marketplace for
liquidating the collateral and assessment of the guarantors. Management then
determines the loss potential and allocates a portion of the allowance for
losses for each of these credits.
16
<PAGE>
Management believes that the allowance for loan losses at September 30, 2000 was
adequate to provide for both recognized and potential losses and estimated
inherent losses in the portfolio. No assurances can be given that future events
may not result in increases in delinquencies, non-performing loans or net loan
chargeoffs that would increase the provision for loan losses and thereby
adversely affect the results of operations.
Asset / Liability Management - Interest Rate Risk
The mismatch between maturities of interest sensitive assets and liabilities
results in uncertainty in the Company's earnings and economic value and is
referred to as interest rate risk. Farmers & Merchants Bancorp's primary
objective in managing interest rate risk is to minimize the potential for
significant loss as a result of changes in interest rates.
The Company measures interest rate risk in terms of potential impact on both its
economic value and earnings. The methods for governing the amount of interest
rate risk include: analysis of asset and liability mismatches (GAP analysis),
the utilization of a simulation model and limits on maturities of investment,
loan and deposit products to relatively short periods which reduces the market
volatility of those instruments.
The gap analysis measures, at specific time intervals, the divergence between
earning assets and interest bearing liabilities for which repricing
opportunities will occur. A positive difference, or gap, indicates that earning
assets will reprice faster than interest-bearing liabilities. This will
generally produce a greater net interest margin during periods of rising
interest rates and a lower net interest margin during periods of declining
interest rates. Conversely, a negative gap will generally produce a lower net
interest margin during periods of rising interest rates and a greater net
interest margin during periods of decreasing interest rates.
The interest rates paid on deposit accounts do not always move in unison with
the rates charged on loans. In addition, the magnitude of changes in the rates
charged on loans is not always proportionate to the magnitude of changes in the
rate paid for deposits. Consequently, changes in interest rates do not
necessarily result in an increase or decrease in the net interest margin solely
as a result of the differences between repricing opportunities of earning assets
or interest bearing liabilities.
The Company also utilizes the results of a dynamic simulation model to quantify
the estimated exposure of net interest income to sustained interest rate
changes. The sensitivity of the Company's net interest income is measured over a
rolling one-year horizon. The simulation model estimates the impact of changing
interest rates on interest income from all interest earning assets and the
interest expense paid on all interest bearing liabilities reflected on the
Company's balance sheet. This sensitivity analysis is compared to policy limits,
which specify a maximum tolerance level for net interest income exposure over a
one-year horizon assuming no balance sheet growth, given both a 200 basis point
upward and downward shift in interest rates. A parallel and pro rata shift in
rates over a 12-month period is assumed. Results that exceed policy limits, if
any, are analyzed for risk tolerance and reported to the Board with appropriate
recommendations. At September 30, 2000, the Company's estimated net interest
income sensitivity to changes in interest rates, as a percent of net interest
income was an increase in net
17
<PAGE>
interest income of 5.05% if rates increase by 200 basis points and a decrease in
net interest income of 6.78% if rates decline 200 basis points.
The estimated sensitivity does not necessarily represent a Company forecast and
the results may not be indicative of actual changes to the Company's net
interest income. These estimates are based upon a number of assumptions
including: the nature and timing of interest rate levels including yield curve
shape, prepayments on loans and securities, pricing strategies on loans and
deposits, replacement of asset and liability cashflows, and other assumptions.
While the assumptions used are based on current economic and local market
conditions, there is no assurance as to the predictive nature of these
conditions including how customer preferences or competitor influences might
change.
Liquidity
Liquidity risk is the risk to earnings or capital resulting from the Bank's
inability to meet its obligations when they come due without incurring
unacceptable losses. It includes the ability to manage unplanned decreases or
changes in funding sources and to recognize or address changes in market
conditions that affect the Bank's ability to liquidate assets or acquire funds
quickly and with minimum loss of value. The Company endeavors to maintain a cash
flow adequate to fund operations, handle fluctuations in deposit levels, respond
to the credit needs of borrowers and to take advantage of investment
opportunities as they arise. The principal sources of liquidity include interest
and principal payments on loans and investments, proceeds from the maturity or
sale of investments, and growth in deposits.
In general, liquidity risk is managed daily by controlling the level of Fed
Funds and the use of funds provided by the cash flow from the investment
portfolio. The Company maintains overnight investments in Fed Funds as a reserve
for temporary liquidity needs. During the third quarter of 2000, Federal Funds
averaged $13.3 million. In addition, the Company maintains Federal Fund credit
lines of $136 million with major correspondent banks subject to the customary
terms and conditions for such arrangements.
At September 30, 2000, the Company had available liquid assets, which included
cash and unpledged investment securities of approximately $159.4 million, which
represents 18.3% of total assets.
Average Balance Sheets
The tables on the following pages reflect the Company's average balance sheets
and volume and rate analysis for the nine-month periods ending September 30,
2000 and 1999. The average yields on earning assets and average rates paid on
interest-bearing liabilities have been computed on an annualized basis for
purposes of comparability with full year data. Average balance amounts for
assets and liabilities are the computed average of daily balances.
18
<PAGE>
Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
-------------------------------------
Assets Balance Interest Rate
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Funds Sold $ 13,252 $ 617 6.20%
Investment Securities Available-for-Sale
U.S. Treasuries 9,461 393 5.53%
U.S. Agencies 7,139 312 5.82%
Municipals 24,047 1,177 6.52%
Mortgage Backed Securities 251,451 12,103 6.41%
Other 5,226 324 8.26%
--------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 297,324 14,309 6.41%
--------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00%
U.S. Agencies 1,997 89 5.94%
Municipals 44,270 2,500 7.52%
Mortgage Backed Securities 0 0 0.00%
Other 794 57 9.56%
--------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 47,061 2,646 7.49%
--------------------------------------------------------------------------------------------------
Loans
Real Estate 276,379 19,189 9.25%
Commercial 149,100 11,052 9.87%
Installment 20,465 1,440 9.37%
Credit Card 3,276 280 11.39%
Municipal 403 18 5.95%
--------------------------------------------------------------------------------------------------
Total Loans 449,623 31,979 9.47%
--------------------------------------------------------------------------------------------------
Total Earning Assets 807,260 $49,551 8.18%
=====================
Net Unrealized Gain/(Loss) on Securities (7,754)
Available-for-Sale
Allowance for Loan Losses (10,429)
Cash and Due From Banks 25,718
All Other Assets 30,394
------------------------------------------------------------------------
Total Assets $845,189
========================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Transaction $ 65,144 $ 571 1.17%
Savings 182,058 3,105 2.27%
Time Deposits Over $100,000 91,643 3,750 5.45%
Time Deposits Under $100,000 206,997 8,271 5.32%
--------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 545,842 15,697 3.83%
Other Borrowed Funds 55,331 2,344 5.64%
--------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 601,173 $18,041 4.00%
======================
Demand Deposits 152,457
All Other Liabilities 7,792
------------------------------------------------------------------------
Total Liabilities 761,422
Shareholders' Equity 83,767
------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $845,189
========================================================================
Net Interest Margin 5.20%
==================================================================================================
</TABLE>
Notes: Yields on municipal securities have been calculated on a fully taxable
equivalent basis using the applicable Federal and State income tax rates for the
period. Loan Fees are included in interest income for loans. Unearned discount
is included for rate calculation purposes. Nonaccrual loans and lease financing
receivables have been included in the average balances. Yields on securities
available-for-sale are based on historical cost.
19
<PAGE>
Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
---------------------------------------
Assets Balance Interest Rate
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Funds Sold $ 14,194 $ 522 4.92%
Investment Securities Available-for-Sale
U.S. Treasuries 21,566 856 5.31%
U.S. Agencies 9,438 442 6.26%
Municipals 24,287 1,159 6.38%
Mortgage Backed Securities 242,291 11,034 6.09%
Other 4,254 137 4.31%
------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 301,836 13,628 6.04%
------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 1,079 49 6.07%
U.S. Agencies 1,992 64 4.30%
Municipals 51,087 2,945 7.71%
Mortgage Backed Securities 0 0 0.00%
Other 1,014 109 14.37%
------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 55,172 3,167 7.67%
------------------------------------------------------------------------------------------------
Loans
Real Estate 222,820 16,206 9.72%
Commercial 110,081 7,567 9.19%
Installment 15,318 1,089 9.51%
Credit Card 2,879 259 12.03%
Municipal 275 13 6.32%
------------------------------------------------------------------------------------------------
Total Loans 351,373 25,134 9.56%
------------------------------------------------------------------------------------------------
Total Earning Assets 722,575 $42,451 7.85%
======================
Net Unrealized Gain/(Loss) on Securities (841)
Available-for-Sale
Allowance for Loan Losses (8,887)
Cash and Due From Banks 23,790
All Other Assets 26,346
----------------------------------------------------------------------
Total Assets $762,983
======================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Transaction $ 61,799 $ 526 1.14%
Savings 183,366 3,070 2.24%
Time Deposits Over $100,000 93,302 3,261 4.67%
Time Deposits Under $100,000 149,348 5,234 4.69%
------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 487,815 12,091 3.31%
Other Borrowed Funds 43,954 1,774 5.40%
------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 531,769 $13,865 3.49%
======================
Demand Deposits 142,775
All Other Liabilities 6,032
----------------------------------------------------------------------
Total Liabilities 680,576
Shareholders' Equity 82,407
----------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $762,983
======================================================================
Net Interest Margin 5.29%
================================================================================================
</TABLE>
Notes: Yields on municipal securities have been calculated on a fully taxable
equivalent basis using the applicable Federal and State income tax rates for the
period. Loan Fees are included in interest income for loans. Unearned discount
is included for rate calculation purposes. Nonaccrual loans and lease financing
receivables have been included in the average balances. Yields on securities
available-for-sale are based on historical cost.
20
<PAGE>
Farmers & Merchants Bancorp
Volume and Rate Analysis of Net Interest Revenue
(Rates on a Taxable Equivalent Basis)
(in thousands)
<TABLE>
<CAPTION>
2000 versus 1999
Amount of Increase
(Decrease) Due to Change in:
Average Average Net
Interest Earning Assets Balance Rate Change
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Funds Sold $ (54) $ 149 $ 95
Investment Securities Available for Sale
U.S. Treasuries (521) 59 (463)
U.S. Agencies (101) (29) (130)
Municipals (15) 33 18
Mortgage Backed Securities 445 624 1,069
Other 37 150 187
---------------------------------------------------------------------------------------------------------------
Total Investment Securities Available for Sale (156) 837 681
---------------------------------------------------------------------------------------------------------------
Investment Securities Held to Maturity
U.S. Treasuries (25) (25) (49)
U.S. Agencies 0 25 25
Municipals (377) (67) (445)
Mortgage Backed Securities 0 0 0
Other (21) (32) (52)
---------------------------------------------------------------------------------------------------------------
Total Investment Securities Held to Maturity (422) (99) (521)
---------------------------------------------------------------------------------------------------------------
Loans:
Real Estate 4,239 (1,256) 2,983
Commercial 2,880 605 3,485
Installment 376 (25) 351
Credit Card 42 (20) 21
Other 6 (1) 5
---------------------------------------------------------------------------------------------------------------
Total Loans 7,543 (698) 6,845
---------------------------------------------------------------------------------------------------------------
Total Earning Assets 6,911 189 7,100
---------------------------------------------------------------------------------------------------------------
Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction 30 15 45
Savings (28) 63 35
Time Deposits Over $100,000 (93) 582 489
Time Deposits Under $100,000 2,246 791 3,037
---------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 2,155 1,451 3,606
Other Borrowed Funds 484 86 570
---------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 2,639 1,537 4,176
---------------------------------------------------------------------------------------------------------------
Total Change $4,271 $(1,347) $2,924
===============================================================================================================
</TABLE>
Notes: Rate/volume variance is allocated based on the percentage relationship
of changes in volume and changes in rate to the total "net change." The above
figures have been rounded to the nearest whole number.
21
<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
-----------------------------------------------------------
ITEM 5. Other Information
-------------------------
None
ITEM 6(a). Exhibits
-------------------
27 Financial Data Schedule
ITEM 6(b). Reports on Form 8-K
------------------------------
The Company filed form 8-K on October 20, 2000, with respect to a change in
the registrant's certifying accountant.
22
<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 7, 2000 /s/ Kent A. Steinwert
---------------------------------
Kent A. Steinwert
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 7, 2000 /s/ John R. Olson
---------------------------------
John R. Olson
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
23
