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 June 30, 2000
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 June 30, 2000 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 687,608 as of August 3, 2000.
FARMERS & MERCHANTS BANCORP
FORM 10-Q
TABLE OF CONTENTS
_____________________
PART I. - FINANCIAL INFORMATION Page
--------------------- ----
Item 1 - Financial Statements
Consolidated Balance Sheets as of June 30, 2000
December 31, 1999 and June 30, 1999. 3
Consolidated Statements of Income for the Three Months
and Six Months Ended June 30, 2000 and 1999. 4
Consolidated Statements of Comprehensive Income for the
Three Months and Six Months Ended June 30, 2000 and 1999. 5
Statement of Changes in Shareholders' Equity for the
Six months ended June 30, 2000. 6
Consolidated Statement of Cash Flows for the Six
Months Ended June 30, 2000 and 1999. 7
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis 9
PART II. - OTHER INFORMATION 23
-----------------
SIGNATURES 25
- ----------
PART I. - FINANCIAL INFORMATION
Item 1 - Financial Statements
FARMERS & MERCHANTS BANCORP
Consolidated Balance Sheets
- ----------------------------------------------------------------------------------------------------
(in thousands) June 30, December 31, June 30,
2000 1999 1999
Assets (Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------
Cash and Cash Equivalents:
Cash and Due From $ 27,691 $ 30,384 $ 28,099
Federal Funds Sold 7,350 11,600 -
- ----------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 35,041 41,984 28,099
Investment Securities:
Available-for Sale 286,512 297,580 297,678
Held-to-Maturity 47,287 49,275 53,612
- ----------------------------------------------------------------------------------------------------
Total Investment Securities 333,799 346,855 351,290
- ----------------------------------------------------------------------------------------------------
Loans 476,106 413,757 368,891
Less: Unearned Income (405) (348) (431)
Less: Allowance for Loan Losses (10,657) (9,787) (8,976)
- ----------------------------------------------------------------------------------------------------
Loans, Net 465,044 403,622 359,484
- ----------------------------------------------------------------------------------------------------
Land, Buildings & Equipment 12,473 12,707 11,839
Interest Receivable and Other Assets 15,409 14,713 14,006
- ----------------------------------------------------------------------------------------------------
Total Assets $861,766 $819,881 $764,719
====================================================================================================
Liabilities & Shareholders' Equity
Deposits:
Demand $150,869 $163,658 $141,667
Interest Bearing Transaction 77,085 86,503 60,791
Savings 163,355 179,294 181,934
Time Deposits Over $100,000 133,284 74,259 74,288
Time Deposits Under $100,000 182,686 181,429 168,938
- ----------------------------------------------------------------------------------------------------
Total Deposits 707,279 685,143 627,618
- ----------------------------------------------------------------------------------------------------
Fed Funds Purchased/Borrowings 62,049 41,064 49,579
Other Liabilities 9,264 13,473 7,787
- ----------------------------------------------------------------------------------------------------
Total Liabilities 778,592 739,680 684,984
- ----------------------------------------------------------------------------------------------------
Shareholders' Equity
Common Stock 7 7 7
Additional Paid In Capital 53,592 47,993 48,143
Retained Earnings 33,361 36,040 33,598
Accumulated Other Comprehensive Income (Loss) (3,786) (3,839) (2,013)
- ----------------------------------------------------------------------------------------------------
Total Shareholders' Equity 83,174 80,201 79,735
- ----------------------------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $861,766 $819,881 $764,719
====================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Income (Unaudited)
- ------------------------------------------------------------------------------------------------------
(in thousands except per share data) Three Months Six Month
Ended June 30, Ended June 30,
2000 1999 2000 1999
-----------------------------------------------
Interest Income:
Interest & Fees on Loans $ 10,825 $ 8,402 $ 20,504 $ 15,822
Federal Funds Sold 54 251 102 488
Interest on Investment Securities
Taxable 4,599 4,310 9,192 8,653
Non-taxable 753 842 1,495 1,709
- ------------------------------------------------------------------------------------------------------
Total Interest Income 16,231 13,805 31,293 26,672
- ------------------------------------------------------------------------------------------------------
Interest Expense:
Interest Bearing Transaction 191 177 379 347
Savings 1,014 1,029 2,088 2,036
Time Deposits Over $100,000 1,191 767 2,210 1,515
Time Deposits Under $100,000 2,614 2,018 4,924 4,068
Interest on Borrowed Funds 890 574 1,519 1,147
- ------------------------------------------------------------------------------------------------------
Total Interest Expense 5,900 4,565 11,120 9,113
- ------------------------------------------------------------------------------------------------------
Net Interest Income 10,331 9,240 20,173 17,559
Provision for Loan Losses 500 600 1,000 900
- ------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 9,831 8,640 19,173 16,659
- ------------------------------------------------------------------------------------------------------
Non-Interest Income
Service Charges on Deposit Accounts 861 787 1,706 1,547
Net Gain (Loss) on Sale of Investment Securities 62 52 (118) 142
Other 777 640 1,841 1,337
- ------------------------------------------------------------------------------------------------------
Total Non-Interest Income 1,700 1,479 3,429 3,026
- ------------------------------------------------------------------------------------------------------
Non-Interest Expense
Salaries & Employee Benefits 4,321 3,836 8,162 7,422
Occupancy 925 954 856 1,867
Other Operating 1,796 1,795 4,759 3,336
- ------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 7,042 6,585 13,777 12,625
- ------------------------------------------------------------------------------------------------------
Income Before Taxes 4,489 3,534 8,825 7,060
Provision for Income Taxes 1,685 1,221 3,307 2,434
- ------------------------------------------------------------------------------------------------------
Net Income $ 2,804 $ 2,313 $ 5,518 $ 4,626
======================================================================================================
Earnings Per Share $ 4.06 $3.32 $ 7.98 $ 6.65
======================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Comprehensive Income (Unaudited)
- ------------------------------------------------------------------------------------------------------------------
(in thousands) Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Net Income $ 2,804 $ 2,313 $5,518 $ 4,626
Other Comprehensive Income (Loss) -
Net Unrealized Gain (Loss) on Securities: 94 (2,520) 53 (2,845)
- ------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) 94 (2,520) 53 (2,845)
- ------------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $2,898 $ (207) $5,571 $ 1,781
==================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------
(In Thousands) Accumulated
Common Additional Other Total
Shares Common Paid-In Retained Comprehensive Shareholders'
Outstanding Stock Capital Earnings Income (Loss) Equity
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 660,989 $ 7 $ 47,993 $ 36,040 $ (3,839) $ 80,201
==========================================================================================================================
Net Income - - 5,518 - 5,518
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 (5,853) - (1,225) - - (1,225)
Changes in Net Unrealized Gain (Loss) on
Securities Available-for-Sale - - - 53 53
- --------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 687,632 $ 7 $ 53,592 $ 33,361 $ (3,786) $ 83,174
==========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements
FARMERS & MERCHANTS BANCORP
Consolidated Statement of Cash Flows (Unaudited) For Six Months Ending
- ---------------------------------------------------------------------------------------------------------------
(in thousands) June 30, June 30,
2000 1999
- ---------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 5,518 $ 4,626
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Loan Losses 1,000 900
Depreciation and Amortization 897 875
Provision for Deferred Income Taxes (230) (270)
(Amortization) Accretion of Investment Security Discounts/Premiums (206) 475
Net (Gain) Loss on Sale of Investment Securities 118 (142)
Net Change in Operating Assets & Liabilities:
(Increase) Decrease in Interest Receivable and Other Assets (503) 2,581
Decrease in Interest Payable and Other Liabilities (4,209) (1,127)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 2,385 7,918
Investing Activities:
Trading Securities:
Purchased - (15,490)
Sold or Matured - 15,478
Securities Available-for-Sale:
Purchased (40,649) (107,679)
Sold or Matured 51,855 117,170
Securities Held-to-Maturity:
Purchased (74) (1,142)
Matured 2,102 7,661
Net Loans Originated or Acquired (62,529) (40,123)
Principal Collected on Loans Charged Off 107 328
Net Additions to Premises and Equipment (663) (1,000)
- ---------------------------------------------------------------------------------------------------------------
Net Cash (Used) by Investing Activities (49,851) (24,797)
Financing Activities:
Net Decrease in Demand, Interest-Bearing Transaction,
and Savings Accounts (38,146) (14,263)
Increase in Time Deposits 60,282 14,494
Federal Funds Purchased - 6,486
Federal Home Loan Bank Borrowings:
Advances 21,000 -
Paydowns (15) -
Cash Dividends (1,373) (1,196)
Stock Redemption (1,225) (255)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 40,523 5,266
Decrease in Cash and Cash Equivalents (6,943) (11,613)
Cash and Cash Equivalents at Beginning of Period 41,984 39,712
- ---------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 35,041 $ 28,099
===============================================================================================================
The accompanying notes are an integral part of these consolidated financial statements
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 June 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 June 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
six months ending June 30, 2000 and 1999 were 691,740 and 695,660 and for the
three months ending June 30, 2000 and 1999, were 690,644 and 695,531,
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.
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 six 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 six months ended June 30, 2000, Farmers & Merchants Bancorp reported net
income of $5,518,000, earnings per share of $7.98, return on average assets of
1.35% and return on average shareholders' equity of 12.76%. For the six months
ending June 30, 1999, net income totaled $4,626,000, earnings per share was
$6.65, return on average assets was 1.23% and the return on average
shareholders' equity totaled 11.26%.
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.
The following is a summary of the financial accomplishments achieved during the
six-month period ending June 30, 2000 compared to June 30, 1999.
. Net income for the period totaled $5.5 million, up 19.3% from last year.
. Net interest income increased 14.9% to $20.2 million from $17.6 million.
. The provision for loan losses increased to $1.0 million from $900 thousand.
. Non-interest income increased 13.3% to $3.4 million during the first six
months of 2000, up from the $3.0 million reported for the first six months
of 1999.
. Non-interest expense increased 9.1% and totaled $13.8 million during the
first six months of 2000.
. Total assets increased 12.7% to $861.8 million.
. Total loans increased 29.1% to $476.1 million, up $107.2 million from June
30, 1999.
. Total deposits increased 12.7% to $707.3 million.
. Total investment securities decreased to $333.8 million from $351.3 million
at June 30, 1999.
. Total Shareholders' Equity increased $3.4 million to $83.2 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 14.9% to $20.2 million during the first six months of
2000, compared to $17.6 million at June 30, 1999. On a fully taxable equivalent
basis, net interest income increased 13.6% and totaled $20.9 million at June 30,
2000, compared to $18.4 million for the first six 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 six months ended June 30,
2000, the net interest margin was 5.33% compared to 5.20% for the same period in
1999. The
increase in net interest margin was primarily related to a change in asset mix.
Securities declined by $17.4 million and loans increased by $107.2 million. This
shift in addition to the growth in loan balances helped offset competitive loan
pricing.
Loans, the Company's highest earning asset, increased $107.2 million as of June
30, 2000 compared to June 30, 1999. On an average balance basis, loans have
increased by $101.9 million. The yield on the loan portfolio declined 12 basis
points to 9.44% for the six months ending June 30, 2000 compared to 9.56% for
the six months ending June 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 $4.7 million for the first six
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 six
months of 2000. In spite of the decrease in the average balance of investment
securities, interest income increased 1.9% as a portion of the portfolio was
repositioned late in 1999. The average yield, on a taxable equivalent basis, in
the investment portfolio was 6.59% in 2000 compared to 6.28% 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 as a result of an increase in average interest-
bearing deposits, which grew 9.7%. Interest expense on interest-bearing deposits
grew 20.5% due to both rate increases on time deposits and increases in
interest-bearing deposits of $46.9 million. The average interest cost on
deposits was 3.6% at June 30, 2000 and 3.3% at June 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 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 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 provision as of June 30, 2000 totaled $1.0 million, an increase of $100
thousand from June 30, 1999. The increase in the provision was the result of
growth in the loan portfolio and 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 June 30, 2000, the allowance for loan losses was $10.6 million, which
represents 2.2% of the total loan balances. For the period ended June 30, 1999,
the allowance was $8.9 million and 2.4% of total loans. The table below
illustrates the change in the allowance for the first six months of 2000 and
1999.
Allowance for Loan Losses (in thousands)
- --------------------------
Balance, December 31, 1999 9,787
Provision Charged to Expense 1,000
Recoveries of Loans Previously Charged Off 107
Loans Charged Off (237)
=============================================================================
Balance, June 30, 2000 $10,657
=============================================================================
Balance, December 31, 1998 8,589
Provision Charged to Expense 900
Recoveries of Loans Previously Charged Off 328
Loans Charged Off (841)
=============================================================================
Balance, June 30, 1999 $8,976
=============================================================================
Non-Interest Income
Non-interest income increased 13.3% for the six months ending June 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 $740 thousand or 10.0% 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 $92
thousand or 4.9%. Other operating expense increased 15.1% or $504 thousand from
June 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 be comparable to the
growth in net income. The net effect was an increase in non-interest expense of
9.1% compared to the prior year.
Income Taxes
The provision for income taxes increased 35.9% to $3.3 million for the first six
months of 2000 as a result of improved earnings. For the six months ended June
30, 1999, the provision totaled $2.4 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 June 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.
The investment portfolio provides the Company with an income alternative to
loans. As of June 30, 2000 the investment portfolio represented 38.7% of the
Company's total assets. Total investment securities decreased $17.5 million from
a year ago and now total $333.8 million. Not included in the investment
portfolio are overnight investments in Federal Funds Sold. For the six months
ended June 30, 2000, average Federal Funds Sold was $3.3 million compared to
$20.1 in 1999.
Loans
The Company's loan portfolio at June 30, 2000 increased $107.2 million from June
30, 1999. The increase is the result of an aggressive calling program
implemented during 1999 and a favorable economic climate in the Company's market
area. Additionally, on an average balance basis loans have increased $101.9
million or 30.5%. No significant change in this trend is
expected through the third quarter of 2000. The table following sets forth the
distribution of the loan portfolio by type as of the dates indicated.
Loan Portfolio As Of:
- ---------------------
(in thousands) June 30, 2000 Dec. 31, 1999 June 30, 1999
- ------------------------------------------------------------------------------
Real Estate Construction $ 30,454 $ 39,186 $ 36,338
Real Estate - Other 253,433 222,354 196,255
Commercial 167,346 129,969 116,795
Consumer 24,873 22,248 19,503
- ------------------------------------------------------------------------------
Gross Loans 476,106 413,757 368,891
Less:
Unearned Income 405 348 431
Allowance for Loan Losses 10,657 9,787 8,976
- ------------------------------------------------------------------------------
Net Loans $465,044 $403,622 $359,484
==============================================================================
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 June 30, 2000, non-performing loans were $2.3 million compared to
$2.8 million at June 30, 1999. Managing problem loans continues to be a
significant Company objective. The Company reported $200 thousand as other real
estate at June 30, 2000, compared to the $440 thousand as of June 30, 1999.
Accrued interest reversed from income on loans placed on a non-accrual status
totaled $102 thousand for the six months ended June 30, 2000 compared to $268
thousand for the six months ended June 30, 1999.
Non-Performing Assets
- ---------------------
(dollar amounts in June 30, 2000 Dec. 31, 1999 June 30, 1999
thousands)
- -------------------------------------------------------------------------------
Nonperforming Loans $2,347 $2,511 $2,812
OREO 200 204 440
===============================================================================
Total $2,547 $2,715 $3,252
===============================================================================
Non-Performing Assets as a % of:
- --------------------------------
Total Loans 0.5% 0.6% 0.9%
Allowance for Loan Loss 23.9% 27.7% 36.2%
Deposits
At June 30, 2000, deposits totaled $707.3 million. This represents an increase
of 12.7% or $79.7 million from June 30, 1999. The majority of the increase was
focused in time deposits over $100,000, which increased $59.0 million or 79.4%.
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
third 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 $83.2
million at June 30, 2000 and $79.7 million at June 30, 1999, which represents an
increase of $3.4 million or 4.3%.
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
June 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.
To Be Well
Capitalized Under
Regulatory Capital Prompt Corrective
(in thousands) Actual Requirements Action Provisions
June 30, 2000 Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------
Total Bank Capital to Risk Weighted Assets $92,689 15.55% $47,678 8.0% $59,597 10.0%
Total Consolidated Capital to Risk Weighted Assets $94,003 16.79% $44,787 8.0% $55,984 10.0%
Tier I Bank Capital to Risk Weighted Assets $85,200 14.29% $23,839 4.0% $35,758 6.0%
Tier I Consolidated Capital to Risk Weighted Assets $86,960 15.53% $22,393 4.0% $33,590 6.0%
Tier I Bank Capital to Average Assets $85,200 10.25% $33,250 4.0% $41,562 5.0%
Risk Management
The Company has adopted a Risk Management Plan to ensure the proper control and
management of all risk factors inherent in the operation of the Company and the
Bank. Specifically, credit risk, interest rate risk, liquidity risk, compliance
risk, strategic risk, reputation risk and price risk can all affect the market
risk of the Company. These specific risk factors are
not mutually exclusive. It is recognized that any product or service offered by
the Company may expose the Company and Bank to one or more of these risk
factors.
Credit Risk
Credit risk is the risk to earnings or capital arising from an obligor's failure
to meet the terms of any contract or otherwise fail to perform as agreed. Credit
risk is found in all activities where success depends on counterparty, issuer,
or borrower performance.
Central to the Company's credit risk management is a proven loan risk rating
system. Limitations on industry concentration, aggregate customer borrowings and
geographic boundaries also reduce loan credit risk. Credit risk in the
investment portfolio is minimized through clearly defined limits in the Bank's
policy statements. Senior Management, Directors' 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.
Management believes that the allowance for loan losses at June 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 June 30, 2000, the Bank's estimated net interest income
sensitivity, as a percent of net interest income, for a parallel change in
interest rates of 200 basis points was 6.83% for rates up and (8.24%) for rates
down.
The estimated sensitivity does not necessarily represent a Company forecast and
the results may not be indicative of actual changes to the Company's net
interest income. These estimates are based upon a number of assumptions
including: the nature and timing of interest rate levels including yield curve
shape, prepayments on loans and securities, pricing strategies on loans and
17
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 second quarter of 2000, Federal Funds
averaged $3.3 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 June 30, 2000, the Company had available liquid assets, which included cash
and unpledged investment securities of approximately $321.5 million, which
represents 37.3% of total assets.
Year 2000 Update
- ----------------
The Company is pleased to report that its efforts to prepare for the year 2000
were completely successful. The following is a summary of the more relevant
facts:
. There were no system interruptions as a result of the date change.
. There are no further costs anticipated related to the year 2000.
. The costs to become compliant approximate the $1,571,000 previously
reported.
. During the fourth quarter of 1999 and first half of 2000, there was no
significant change in the Company's revenue or spending patterns due
to year 2000 issues.
. The Company has not postponed any material project or capital
improvements due to the year 2000.
. The Company is not aware of any customer or third party vendor that
will not be able to perform in accordance with existing contracts or
service agreements.
Average Balance Sheets
18
The tables on the following pages reflect the Company's average balance sheets
and volume and rate analysis for the six-month periods ending June 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.
19
Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
Six Months Ended June 30,
2000
Assets Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------
Federal Funds Sold $ 3,292 $ 102 6.21%
Investment Securities Available-for-Sale
U.S. Treasuries 11,694 325 5.57%
U.S. Agencies 7,145 208 5.84%
Municipals 24,052 784 6.54%
Mortgage Backed Securities 253,311 8,133 6.44%
Other 4,821 225 9.36%
- ------------------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 301,023 9,675 6.45%
- ------------------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00%
U.S. Agencies 1,996 59 5.93%
Municipals 45,100 1,701 7.56%
Mortgage Backed Securities 0 0 0.00%
Other 818 38 9.32%
- ------------------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 47,914 1,798 7.52%
- ------------------------------------------------------------------------------------------------------------
Loans
Real Estate 273,211 12,624 9.27%
Commercial 138,961 6,763 9.76%
Installment 20,032 921 9.22%
Credit Card 3,225 186 11.57%
Municipal 320 10 6.27%
- ------------------------------------------------------------------------------------------------------------
Total Loans 435,749 20,504 9.44%
- ------------------------------------------------------------------------------------------------------------
Total Earning Assets 787,978 $32,078 8.16%
===========================
Net Unrealized Gain/(Loss) on Securities Available-for-Sale (8,539)
Allowance for Loan Losses (10,192)
Cash and Due From Banks 25,419
All Other Assets 30,186
- ---------------------------------------------------------------------------------
Total Assets $824,852
=================================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Transaction $ 65,175 $ 379 1.17%
Savings 185,189 2,088 2.26%
Time Deposits Over $100,000 85,542 2,210 5.18%
Time Deposits Under $100,000 194,066 4,924 5.09%
- ------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 529,972 9,601 3.63%
Other Borrowed Funds 54,160 1,519 5.62%
- ------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 584,132 $11,120 3.82%
===========================
Demand Deposits 151,137
All Other Liabilities 7,470
- ---------------------------------------------------------------------------------
Total Liabilities 742,739
Shareholders' Equity 82,113
- ---------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $824,852
=================================================================================
Net Interest Margin 5.33%
============================================================================================================
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.
Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
Six Months Ended June 30,
1999
Assets Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------
Federal Funds Sold $ 20,148 $ 488 4.88%
Investment Securities Available-for-Sale
U.S. Treasuries 21,133 564 5.38%
U.S. Agencies 10,588 332 6.32%
Municipals 24,796 789 6.42%
Mortgage Backed Securities 243,294 7,299 6.05%
Other 4,233 94 4.48%
- ------------------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 304,044 9,078 6.02%
- ------------------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 1,627 50 6.20%
U.S. Agencies 1,991 41 4.15%
Municipals 52,251 2,013 7.77%
Mortgage Backed Securities 0 0 0.00%
Other 1,056 69 13.18%
- -------------------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 56,925 2,173 7.70%
- ------------------------------------------------------------------------------------------------------------
Loans
Real Estate 212,147 10,195 9.69%
Commercial 103,706 4,732 9.20%
Installment 14,931 704 9.51%
Credit Card 2,846 183 12.97%
Municipal 225 8 7.17%
- ------------------------------------------------------------------------------------------------------------
Total Loans 333,855 15,822 9.56%
- ------------------------------------------------------------------------------------------------------------
Total Earning Assets 714,972 $27,561 7.77%
===========================
Net Unrealized Gain/(Loss) on Securities Available-for-Sale 205
Allowance for Loan Losses (8,685)
Cash and Due From Banks 22,993
All Other Assets 25,205
- ---------------------------------------------------------------------------------
Total Assets $754,690
=================================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Transaction $ 60,502 $ 347 1.16%
Savings 184,467 2,036 2.23%
Time Deposits Over $100,000 65,175 1,515 4.69%
Time Deposits Under $100,000 172,907 4,068 4.74%
- ------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 483,051 7,966 3.33%
Other Borrowed Funds 42,766 1,147 5.41%
- ------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 525,817 $ 9,113 3.49%
===========================
Demand Deposits 140,826
All Other Liabilities 5,886
- ---------------------------------------------------------------------------------
Total Liabilities 672,529
Shareholders' Equity 82,161
- ---------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $754,690
=================================================================================
Net Interest Margin 5.20%
============================================================================================================
Notes: Yields on municipal securities have been calculated on a fully taxable
equivalent basis using the applicable Federal and State income tax rates for the
period. Loan Fees are included in interest income for loans. Unearned discount
is included for rate calculation purposes. Nonaccrual loans and lease financing
receivables have been included in the average balances. Yields on securities
available-for-sale are based on historical cost.
Farmers & Merchants Bancorp
Volume and Rate Analysis of Net Interest Revenue
(Rates on a Taxable Equivalent Basis)
(in thousands)
2000 versus 1999
Amount of Increase
(Decrease) Due to Change in:
-----------------------------------------
Average Average Net
Interest Earning Assets Balance Rate Change
- -----------------------------------------------------------------------------------------------------------
Federal Funds Sold $ (695) $ 309 $ (386)
Investment Securities Available for Sale
U.S. Treasuries (296) 57 (239)
U.S. Agencies (101) (23) (124)
Municipals (39) 33 (6)
Mortgage Backed Securities 325 509 834
Other 14 117 131
- -----------------------------------------------------------------------------------------------------------
Total Investment Securities Available for Sale (96) 692 596
- -----------------------------------------------------------------------------------------------------------
Investment Securities Held to Maturity
U.S. Treasuries (25) (25) (50)
U.S. Agencies 0 17 18
Municipals (261) (51) (312)
Mortgage Backed Securities 0 0 0
Other (13) (18) (31)
- -----------------------------------------------------------------------------------------------------------
Total Investment Securities Held to Maturity (299) (76) (375)
- -----------------------------------------------------------------------------------------------------------
Loans:
Real Estate 3,671 (1,241) 2,429
Commercial 1,723 308 2,031
Installment 278 (61) 217
Credit Card 46 (43) 3
Other 5 (3) 2
- -----------------------------------------------------------------------------------------------------------
Total Loans 5,723 (1,040) 4,682
- -----------------------------------------------------------------------------------------------------------
Total Earning Assets 4,632 (115) 4,517
- -----------------------------------------------------------------------------------------------------------
Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction 29 3 32
Savings 10 42 52
Time Deposits Over $100,000 520 175 695
Time Deposits Under $100,000 538 318 856
- -----------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 1,097 538 1,635
Other Borrowed Funds 323 48 372
- -----------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 1,420 586 2,007
- -----------------------------------------------------------------------------------------------------------
Total Change $3,212 $ (702) $2,510
===========================================================================================================
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.
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
- -----------------------------------------------------------
Annual Meeting of Shareholders of Farmers & Merchants Bancorp held on April 17,
2000.
The business conducted at the meeting included election of directors and
ratification of Arthur Andersen LLP as the Company's independent auditors.
Following is the voting results from the 2000 annual meeting of shareholders. As
of April 17, 2000, 493,574 shares represented in person and by proxy
participated in this election and the shares were voted on the two measures as
follows:
1. ELECTION OF DIRECTORS
% of % of
Voting Voting
Shares For Shares Withheld
Directors ------ --- ------ --------
Stewart C. Adams, Jr. 99.48 490,997 0.52 2,577
---------- ---------- ---------- ----------
Ralph Burlington 99.99 493,542 0.01 32
---------- ---------- ---------- ----------
Robert F. Hunnell 99.72 492,182 0.28 1,392
---------- ---------- ---------- ----------
Ole R. Mettler 99.99 493,542 0.01 32
---------- ---------- ---------- ----------
James E. Podesta 99.99 493,542 0.01 32
---------- ---------- ---------- ----------
Harry C. Schumacher 99.99 493,542 0.01 32
---------- ---------- ---------- ----------
George Scheideman 99.75 492,339 0.25 1,235
---------- ---------- ---------- ----------
Hugh Steacy 99.99 493,511 0.01 63
---------- ---------- ---------- ----------
Kent A. Steinwert 99.99 493,542 0.01 32
---------- ---------- ---------- ----------
Calvin (Kelly) Suess 99.99 493,542 0.01 32
---------- ---------- ---------- ----------
Carl A. Wishek, Jr. 99.24 489,843 0.76 3,731
---------- ---------- ---------- ----------
2. PROPOSAL TO RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN
LLP.
No. of Shares % of Total Shares
For: 483,556 73.25
------------------------ ------------------------
Against: 4,453 0.67
------------------------ ------------------------
Abstain 5,565 0.84
------------------------ ------------------------
ITEM 5. Other Information
- -------------------------
None
ITEM 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibit
Exhibit 27 - Financial Data Schedule
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: August 10, 2000 /s/ Kent A. Steinwert
-----------------------------
Kent A. Steinwert
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 10, 2000 /s/ John R. Olson
-----------------------------
John R. Olson
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)