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 March 31, 2001
For Quarter Ended March 31, 2001 Commission File Number: 1.000-26099
FARMERS & MERCHANTS BANCORP
(Exact name of registrant as specified in its charter)
Delaware 94-3327828
(State or other jurisdiction (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 687,381 as of May 3, 2001.
FARMERS & MERCHANTS BANCORP
FORM 10-Q
TABLE OF CONTENTS
______________________
PART I. - FINANCIAL INFORMATION Page
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Item 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 2001
December 31, 2000 and March 31, 2000. 3
Consolidated Statements of Income for the Three Months
Ended March 31, 2001 and 2000. 4
Consolidated Statements of Comprehensive Income for the Three
Months Ended March 31, 2001 and 2000. 5
Statement of Changes in Shareholders' Equity for the Three
Months Ended March 31, 2001 and 2000. 6
Consolidated Statement of Cash Flows for the Three
Months Ended March 31, 2001 and 2000. 7
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis 9
PART II. - OTHER INFORMATION 22
-----------------
SIGNATURES 23
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2
PART I. - FINANCIAL INFORMATION
Item 1 - Financial Statements
FARMERS & MERCHANTS BANCORP
Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, December 31, March 31,
2001 2000 2000
Assets (Unaudited) (Unaudited)
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Cash and Cash Equivalents:
Cash and Due From $ 26,596 $ 33,290 $ 25,275
Federal Funds Sold 56,400 41,000 2,570
- ------------------------------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 82,996 74,290 27,845
Investment Securities:
Available-for Sale 266,038 279,386 294,597
Held-to-Maturity 37,569 41,268 47,821
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Total Investment Securities 303,607 320,654 342,418
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Loans 491,780 497,730 423,743
Less: Unearned Income (278) (333) (365)
Less: Allowance for Loan Losses (12,174) (11,876) (10,265)
Loans, Net 479,328 485,521 413,113
Land, Buildings & Equipment 11,373 11,556 12,743
Interest Receivable and Other Assets 9,996 13,530 13,483
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 887,300 $ 905,551 $ 809,602
====================================================================================================================================
Liabilities & Shareholders' Equity
Deposits:
Demand $ 159,167 $ 183,779 $ 147,442
Interest Bearing Transaction 70,470 81,271 64,801
Savings 179,182 175,140 188,755
Time Deposits Over $100,000 148,041 135,757 101,242
Time Deposits Under $100,000 186,190 188,731 176,128
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Total Deposits 743,050 764,678 678,368
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Fed Funds Purchased/Borrowings 41,025 41,033 41,056
Other Liabilities 8,094 8,957 7,532
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Total Liabilities 792,169 814,668 726,956
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Shareholders' Equity
Common Stock 7 7 7
Additional Paid In Capital 53,552 53,559 47,765
Retained Earnings 39,568 36,527 38,754
Accumulated Other Comprehensive Income 2,004 790 (3,880)
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Total Shareholders' Equity 95,131 90,883 82,646
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Total Liabilities & Shareholders' Equity $ 887,300 $ 905,551 $ 809,602
====================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
3
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Income (Unaudited)
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Three Months
Ended March 31,
2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Income:
Interest & Fees on Loans $ 11,258 $ 9,679
Federal Funds Sold 602 48
Securities:
Investments Available-for-Sale:
Taxable 3,987 4,470
Non-taxable 235 223
Investments Held-to-Maturity:
Taxable 88 123
Non-taxable 420 519
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Total Interest Income 16,590 15,062
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Interest Expense:
Interest Bearing Transaction 182 188
Savings 943 1,074
Time Deposits Over $100,000 1,582 1,019
Time Deposits Under $100,000 3,135 2,310
Interest on Borrowed Funds 553 629
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Total Interest Expense 6,395 5,220
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Net Interest Income $ 10,195 9,842
Provision for Loan Losses 300 500
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Net Interest Income After Provision for Loan Losses 9,895 9,342
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Non-Interest Income
Service Charges on Deposit Accounts 897 845
Net Gain (Loss) on Sale of Investment Securities 88 (180)
Other 788 1,064
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Total Non-Interest Income 1,773 1,729
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Non-Interest Expense
Salaries & Employee Benefits 4,068 3,841
Occupancy 438 426
Equipment 515 424
Other Operating 1,699 2,044
- ----------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 6,720 6,735
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income Before Taxes 4,948 4,336
Provision for Taxes 1,908 1,622
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 3,040 $ 2,714
==================================================================================================================================
Earning Per Share $ 4.42 $ 3.95
==================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
4
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Comprehensive Income (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands) For Three Months
Ended March 31,
2000 2001
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 3,041 $ 2,714
Other Comprehensive Income (Loss) -
Unrealized holding gains (losses) arising during the period, net of
income tax effects of $886 and ($103) for the quarters ended March 31,
2001 and 2000, respectively. 1,264 (147)
Less: Reclassification adjustment for realized (gains) losses included in net
income, net of related income tax effects of ($38) and $74 for the quarters
ended March 31, 2001 and 2000, respectively (50) 106
- ---------------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) 1,214 (41)
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 4,255 $ 2,673
===========================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
5
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands) Accumulated
Common Additional Other Total
Shares Common Paid-In Retained Comprehensive Shareholders'
Outstanding Stock Capital Earnings Income Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 660,989 $ 7 $ 47,993 $ 36,040 $ (3,839) $ 80,201
====================================================================================================================================
Net Income - - 2,714 - 2,714
Cash Dividends Declared on -
Common Stock - - - - -
5% Stock Dividend - - - - -
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend - - - - -
Redemption of Stock (1,106) - (228) - - (228)
Changes in Net Unrealized Gain (Loss) on
Securities Available for Sale - - - (41) (41)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 659,883 $ 7 $ 47,765 $ 38,754 $ (3,880) $ 82,646
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 687,491 $ 7 $ 53,559 $ 36,527 $ 790 $ 90,883
====================================================================================================================================
Net Income - - 3,041 - 3,041
Cash Dividends Declared on -
Common Stock - - - - -
5% Stock Dividend - - - - -
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend - - - - -
Redemption of Stock (26) - (7) - - (7)
Changes in Net Unrealized Gain (Loss) on
Securities Available for Sale - - - 1,214 1,214
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 687,465 $ 7 $ 53,552 $ 39,568 $ 2,004 $ 95,131
===================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
6
FARMERS & MERCHANTS BANCORP
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------------------------------------------
(in thousands) March 31, March 31,
2001 2000
- --------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 3,041 $ 2,714
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Possible Loan Losses 300 500
Depreciation and Amortization 387 445
Provision for Deferred Income Taxes (240) (115)
Net Accretion of Investment Securities (125) (109)
Net (Gain) Loss on Sale of Investment Securities (88) 180
Net Change in Operating Assets & Liabilities:
Decrease in Trading Account Assets 0 0
Decrease in Interest Receivable and Other Assets 2,925 1,374
Decrease in Interest Payable and Other Liabilities (863) (5,940)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities 5,337 (951)
Investing Activities:
Trading Securities:
Purchased 0 0
Sold or Matured 0 0
Securities Available-for-Sale:
Purchased (1,131) (17,659)
Sold or Matured 16,624 20,482
Securities Held-to-Maturity:
Purchased (28) (48)
Matured 3,857 1,522
Net Loans Originated or Acquired 5,744 (10,056)
Principal Collected on Loans Charged Off 149 64
Net Additions to Premises and Equipment (204) (481)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities 25,011 (6,176)
Financing Activities:
Net (Decrease) in Demand, Interest-Bearing Transaction,
and Savings Accounts (31,371) (28,457)
Increase in Time Deposits 9,743 21,681
Federal Funds Purchased/Borrowings 0 0
Federal Home Loan Bank Borrowings:
Advances 0 0
Paydowns (8) (8)
Cash Dividends 0 0
- --------------------------------------------------------------------------------------------------------------------
Stock Redemption (6) (228)
- --------------------------------------------------------------------------------------------------------------------
Net Cash (Used) by Financing Activities (21,642) (7,012)
Increase (Decrease) in Cash and Cash Equivalents 8,706 (14,139)
Cash and Cash Equivalents at Beginning of Year 74,290 41,984
- --------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents as of March 31, 2001 and March 31, 2000 $ 82,996 $ 27,845
====================================================================================================================
7
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 March 31, 2001, 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 Corporation's 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 2000.
2. Reclassifications
Certain reclassifications may have been made in the 2000 financial information
to conform to the presentation used in 2001.
3. Earnings per Share
The actual number of shares outstanding at March 31, 2001, were 687,465. Basic
earnings per share is calculated on the basis of the weighted average number of
shares outstanding during the period. Weighted average number of shares for the
three months ending March 31, 2001 and 2000 were 687,466 and 692,835. Prior
period per share amounts have been restated for the 5% stock dividend declared
during 2000 and 1999.
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
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 three months of 2001
and the material changes in financial condition, operating income and expense of
the Company and its subsidiary as shown in the accompanying financial
statements. This section should be read in conjunction with the Company's
consolidated 2000 financial statements and the notes thereto, along with other
financial information included in this report.
Overview
For the three months ended March 31, 2001, Farmers & Merchants Bancorp reported
net income of $3,041,000, earnings per share of $4.42, return on average assets
of 1.39% and return on average shareholders' equity of 13.20%. For the three
months ending March 31, 2000, net income totaled $2,714,000, earnings per share
was $3.95, return on average assets was 1.35% and the return on average
shareholders' equity totaled 12.66%.
The Company's improved financial performance in 2001 was due to a combination of
increased revenue generated from its core business, which include improved
growth rates in both loans outstanding and deposit balances along with capital
management strategies.
9
The following is a summary of the financial results for the three-month period
ending March 31, 2001 compared to March 31, 2000.
. Net income for the period totaled $3.0 million, up 12.0% over one year ago.
. Net interest income increased 3.6% to $10.2 million from $9.8 million.
. The provision for loan losses totaled $300 thousand for the period compared
to $500 thousand one year ago.
. Non-interest income increased 2.5% to $1.8 million, from the $1.7 million
reported for 2000.
. Non-interest expense remained unchanged, totaling $6.7 million for both
periods.
. Total assets increased 9.6% to $887.3 million.
. Total loans increased 16.1% to $491.8 million, an increase of $68.0 million.
. Total deposits increased 9.5% to $743.0 million.
. Total investment securities totaled $303.6 million from $342.4 million at
March 31, 2000.
. Total Shareholders' Equity increased $12.5 million to $95.1 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 3.6% to $10.2 million during the first three months of
2001, compared to $9.8 million at March 31, 2000. On a fully taxable equivalent
basis, net interest income increased 2.8% and totaled $10.5 million at March 31,
2001, compared to $10.2 million for the first three months of 2000. 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 three months ended March
31, 2001, the net interest margin was 5.1% compared to 5.3% for the same period
in 2000. The
10
decrease in net interest margin was primarily related to an increase in the cost
of interest bearing deposits.
Loans, the Company's highest earning asset, increased $68.0 million as of March
31, 2001 compared to March 31, 2000. On an average balance basis, loans
increased by $64.0 million. The yield on the loan portfolio increased 19 basis
points to 9.38% for the three months ending March 31, 2001 compared to 9.19% for
the three months ending March 31, 2000. This increase in yield combined with the
growth in balances resulted in a positive effect on interest revenue from loans
in the amount of $1.6 million for the first three months of 2001.
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 $43.7 million compared to the average
balance at March 31, 2000. The decrease in the average balance of investment
securities was followed with a corresponding decrease in interest income of $670
thousand for the three months ending March 31, 2001. The average yield, on a
taxable equivalent basis, in the investment portfolio was 6.6% in 2001 compared
to 6.5% in 2000. 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 22.5% primarily as a result of growth in interest-
bearing deposit balances and an increase in interest rates paid for those
sources of funds. Overall, average interest-bearing sources of funds increased
$38.1 million or 6.6%. Of that increase, average borrowings decreased $3.9
million and interest-bearing deposits increased $43.5 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 4.2% at March 31,
2001 and 3.6% at March 31, 2000.
The Company's earning assets and rate sensitive liabilities are subject to
repricing at different times, which exposes the Company to income fluctuations
when interest rates change. In order to minimize income fluctuations, the
Company attempts to match asset and liability maturities. However, some maturity
mismatch is inherent in the asset and liability mix.
Allowance for Loan Losses
As a financial institution that assumes lending and credit risks as a principal
element of its business, the Company anticipates that credit losses will be
experienced in the normal course of business. The allowance for loan losses is
established to absorb losses inherent in the portfolio. The allowance for loan
losses is maintained at a level considered by management to be adequate to
provide for risks inherent in the loan portfolio. In determining the adequacy of
the allowance for loan losses, management takes into consideration examinations
by the Company's
11
supervisory authorities, results of internal credit reviews, financial condition
of borrowers, loan concentrations, prior loan loss experience, and general
economic conditions. The allowance is based on estimates and ultimate losses may
vary from the current estimates. Management reviews these estimates periodically
and, when adjustments are necessary, they are reported in the period in which
they become known.
The Company's written lending policies, along with applicable laws and
regulations governing the extension of credit, require risk analysis as well as
ongoing portfolio and credit management through loan product diversification,
lending limits, ongoing credit reviews and approval policies prior to funding of
any loan. The Company manages and controls credit risk through diversification,
dollar limits on loans to one borrower and by primarily restricting loans made
to its principal market area. Loans that are performing but have shown some
signs of weakness are subjected to more stringent reporting. Fixed-rate real
estate loans are comprised primarily of loans with maturities of less than five
years. Generally, long-term residential loans are originated by the Company and
sold on the secondary market.
The appropriate allowance amount is based upon growth in the loan portfolio,
management's evaluation of the credit quality of the loan portfolio, the
prevailing economic climate, and its effect on borrowers' ability to repay loans
in accordance with the terms of the notes and current loan losses. After
reviewing all factors, management concluded that the current amount in the
allowance for loan losses was adequate.
As of March 31, 2001, the allowance for loan losses was $12.2 million, which
represents 2.5% of the total loan balances. For the period ended March 31, 2000,
the allowance was $10.3 million and 2.4% of total loans. The table below
illustrates the change in the allowance for the first three months of 2001 and
2000.
Allowance for Loan Losses (in thousands)
- --------------------------
Balance, December 31, 2000 $ 11,876
Provision Charged to Expense 300
Recoveries of Loans Previously Charged Off 149
Loans Charged Off (151)
- -------------------------------------------------------------------------------
Balance, March 31, 2001 $ 12,174
===============================================================================
Balance, December 31, 1999 $ 9,787
Provision Charged to Expense 500
Recoveries of Loans Previously Charged Off 64
Loans Charged Off (86)
- -------------------------------------------------------------------------------
Balance, March 31, 2000 $ 10,265
===============================================================================
12
Non-Interest Income
Non-interest income increased 2.5% for the three months ending March 31, 2001,
compared to the same period of 2000. This change is the result of increases in
service charges on deposit accounts and a net gain on sale of investment
securities compared to a net loss on sale of investment securities during the
first quarter of 2000. Other non-interest income for the three months ended
March 31, 2001 shows a decline from March 31, 2000 because the prior year figure
includes a large nonrecurring gain on sale of other real estate owned.
Non-Interest Expense
Salaries and Employee Benefits increased $227 thousand or 5.9% from the prior
year due to merit increases and additional staffing requirements related to loan
production. Equipment expense increased $91 thousand or 21.5%. This was due to
upgraded computer equipment during the first quarter of 2001. Other operating
expense decreased 16.9% or $345 thousand from March 31, 2000. The primary reason
for this decrease was cost reductions related to the centralization of various
branch operations to a main operations center located in the main office in
Lodi, California, which opened during the first quarter of 2000. 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 17.6% to $1.9 million for the first
three months of 2001, primarily due to improved earnings. For the three months
ended March 31, 2000, the provision totaled $1.6 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. Securities classified as available-for-sale include securities, which
may be sold to effectively manage interest rate risk exposure, prepayment risk,
satisfy liquidity demand and other factors. These securities are reported at
fair value with aggregate, unrealized gains or losses excluded from income and
included as a separate component of shareholders' equity, net of related income
taxes.
The investment portfolio provides the Company with an income alternative to
loans. As of March 31, 2001 the investment portfolio represented 34.2% of the
Company's total assets. Total investment securities decreased $38.8 million from
a year ago and now total $303.6 million. Not included in the investment
portfolio are overnight investments in Federal Funds Sold. For the three months
ended March 31, 2001, average Federal Funds Sold was $42.8 million compared to
$3.3 in 2000.
13
Loans
The Company's loan portfolio at March 31, 2001 increased $68.0 million from
March 31, 2000. The increase is the result of an aggressive calling program on
high quality prospects and a favorable economic climate in the Company's market
area. Additionally, on an average balance basis loans have increased $64.0
million or 15.2%. Management believes that the growth rate in loans will
continue at a modest rate through second quarter, 2001. The table following sets
forth the distribution of the loan portfolio by type as of the dates indicated.
Loan Portfolio As Of:
- ---------------------
(in thousands) March 31, 2001 Dec. 31, 2000 March 31, 2000
- ------------------------------------------------------------------------------
Real Estate Construction $ 27,664 $ 28,354 $ 40,116
Real Estate - Other 262,154 261,910 231,500
Commercial 177,777 182,611 128,421
Consumer 24,185 24,855 23,706
- ------------------------------------------------------------------------------
Gross Loans 491,780 497,730 423,743
Less:
Unearned Income 278 333 365
Allowance for Loan Losses 12,174 11,876 10,265
- ------------------------------------------------------------------------------
Net Loans $479,215 $485,521 $413,113
==============================================================================
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 March 31, 2001, non-performing loans were $1.2 million compared to
$1.9 million at March 31, 2000. Managing problem loans continues to be a
significant Company objective. The Company reported no other real estate owned
at March 31, 2001, compared to the $200 thousand as of March 31, 2000. Accrued
interest reversed from income on loans placed on a non-accrual status totaled
$63 thousand at March 31, 2001 compared to $101 thousand at March 31, 2000.
Non-Performing Assets
- ---------------------
(dollar amounts in March 31, 2001 Dec. 31, 2000 March 31, 2000
thousands)
- --------------------------------------------------------------------------------
Nonperforming Loans $1,241 $1,495 $1,895
Other Real Estate Owned 0 88 200
- --------------------------------------------------------------------------------
Total $1,241 $1,583 $2,095
================================================================================
Non-Performing Assets
as a % of Total Loans 0.3% 0.3% 0.5%
Allowance for Loan Loss as a 980.9% 794.4% 541.7%
% of Non-Performing Loans
14
Deposits
At March 31, 2001, deposits totaled $743.1 million. This represents an increase
of 9.5% or $64.7 million from March 31, 2000. The majority of the increase was
focused in time deposits over $100,000, which increased $46.8 million or 46.2%.
This increase was the result of increased marketing and advertising efforts. It
is not anticipated that this trend will change significantly through the second
quarter of 2001.
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 $95.1
million at March 31, 2001 and $82.6 million at March 31, 2000, which represents
an increase of $12.5 million or 15.1%.
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
March 31, 2001 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
March 31, 2001 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------
Total Bank Capital to Risk Weighted Assets $ 99,569 15.11% $52,717 8.0% $65,896 10.0%
Total Consolidated Capital to Risk Weighted Assets $101,411 15.38% $52,751 8.0% N/A N/A
Tier I Bank Capital to Risk Weighted Assets $ 91,285 13.85% $26,358 4.0% $39,538 6.0%
Tier I Consolidated Capital to Risk Weighted Assets $ 93,127 14.12% $26,375 4.0% N/A N/A
Tier I Bank Capital to Average Assets $ 91,285 10.39% $35,150 4.0% $43,937 5.0%
Tier I Consolidated Capital to Average Assets $ 93,127 10.59% $35,167 4.0% N/A N/A
15
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 credit losses
inherent in the portfolio.
The Company's methodology for assessing the appropriateness of the allowance
consists of several key elements, which include the formula allowance, specific
allowances for identified problem loans and portfolio segments and the
unallocated allowance. Specific allowances are established in cases where
management has identified conditions or circumstances related to credit that
management believes indicate the possibility that a loss may be incurred in
excess of the amount determined by the application of the formula reserve.
Management performs a detailed analysis of these loans, including, but not
limited to appraisals of the collateral, conditions of the marketplace for
liquidating the collateral and assessment of the guarantors. Management then
determines the loss potential and allocates a portion of the allowance for
losses for each of these credits.
Management believes that the allowance for loan losses at March 31, 2001 was
adequate to provide for recognized, unidentified and estimated inherent losses
in the portfolio. No
16
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 March 31, 2001, the Company's estimated net interest income
sensitivity to changes in interest rates, as a percent of net interest income
was an increase in net interest income of 13.23% if rates increase by 200 basis
points and a decrease in net interest income of 17.16% if rates decline 200
basis points.
17
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 first quarter of 2001, Federal Funds
averaged $42.8 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 March 31, 2001, the Company had available liquid assets, which included cash
and unpledged investment securities of approximately $155.7 million, which
represents 17.5% of total assets.
Average Balance Sheets
The tables on the following pages reflect the Company's average balance sheets
and volume and rate analysis for the three-month periods ending March 31, 2001
and 2000. The average yields on earning assets and average rates paid on
interest-bearing liabilities have been computed on an annualized basis for
purposes of comparability with full year data. Average balance amounts for
assets and liabilities are the computed average of daily balances.
18
Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
Three Months Ended March 31,
2001
Assets Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------
Federal Funds Sold $ 42,778 $ 602 5.71%
Investment Securities Available-for-Sale
U.S. Treasuries 4,141 55 5.39%
U.S. Agencies 6,815 99 5.89%
Municipals 23,633 384 6.59%
Mortgage Backed Securities 232,961 3,747 6.52%
Other 5,542 53 3.88%
- -------------------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 273,092 4,338 6.44%
- -------------------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00%
U.S. Agencies 1,488 22 6.00%
Municipals 37,284 679 7.38%
Mortgage Backed Securities 0 0 0.00%
Other 672 18 10.86%
- -------------------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 39,444 719 7.39%
- -------------------------------------------------------------------------------------------------------------
Loans
Real Estate 291,987 6,685 9.29%
Commercial 169,807 3,935 9.40%
Installment 20,815 526 10.25%
Credit Card 3,485 103 11.99%
Municipal 572 9 6.38%
- -------------------------------------------------------------------------------------------------------------
Total Loans 486,666 11,258 9.38%
- -------------------------------------------------------------------------------------------------------------
Total Earning Assets 841,980 $16,917 8.15%
=======================
Unrealized Gain/(Loss) on Securities Available-for-Sale 1,637
Allowance for Loan Losses (11,941)
Cash and Due From Banks 26,570
All Other Assets 26,029
- --------------------------------------------------------------------------------------
Total Assets $ 884,275
======================================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Transaction $ 65,812 $ 182 1.12%
Savings 177,175 943 2.16%
Time Deposits Over $100,000 108,582 1,582 5.91%
Time Deposits Under $100,000 222,629 3,134 5.71%
- -------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 574,198 5,841 4.13%
Other Borrowed Funds 41,030 553 5.47%
- -------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 615,228 $ 6,394 4.21%
=======================
Demand Deposits 167,558
All Other Liabilities 8,527
- --------------------------------------------------------------------------------------
Total Liabilities 791,313
Shareholders' Equity 92,962
- --------------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $ 884,275
======================================================================================
Net Interest Margin 5.07%
=============================================================================================================
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
Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
Three Months Ended March 31,
2000
Assets Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------
Federal Funds Sold $ 3,315 $ 46 5.57%
Investment Securities Available-for-Sale
U.S. Treasuries 14,976 204 5.46%
U.S. Agencies 7,230 104 5.77%
Municipals 24,336 393 6.48%
Mortgage Backed Securities 255,946 4,057 6.36%
Other 4,720 77 6.54%
- -------------------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 307,208 4,835 6.31%
- -------------------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00%
U.S. Agencies 2,018 30 5.96%
Municipals 46,202 842 7.31%
Mortgage Backed Securities 0 0 0.00%
Other 856 19 8.90%
- -------------------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 49,076 891 7.28%
- -------------------------------------------------------------------------------------------------------------
Loans
Real Estate 270,212 6,112 9.07%
Commercial 129,362 3,030 9.39%
Installment 19,547 444 9.11%
Credit Card 3,227 89 11.06%
Municipal 270 4 5.94%
- -------------------------------------------------------------------------------------------------------------
Total Loans 422,618 9,679 9.19%
- -------------------------------------------------------------------------------------------------------------
Total Earning Assets 782,217 $ 15,451 7.92%
=======================
Unrealized Gain/(Loss) on Securities Available-for-Sale (8,651)
Reserve for Loan Losses (10,060)
Cash and Due From Banks 26,048
All Other Assets 30,180
- --------------------------------------------------------------------------------------
Total Assets $ 819,734
======================================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Transaction $ 66,394 $ 188 1.14%
Savings 192,567 1,074 2.24%
Time Deposits Over $100,000 82,248 1,019 4.97%
Time Deposits Under $100,000 189,427 2,310 4.89%
- -------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 530,636 4,591 3.47%
Other Borrowed Funds 44,948 629 5.61%
- -------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 575,584 $ 5,220 3.64%
=======================
Demand Deposits 152,281
All Other Liabilities 9,727
- --------------------------------------------------------------------------------------
Total Liabilities 737,592
Shareholders' Equity 82,142
- --------------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $ 819,734
======================================================================================
Net Interest Margin 5.25%
=============================================================================================================
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
Farmers & Merchants Bancorp
Volume and Rate Analysis of Net Interest Revenue
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
2001 versus 2000
Amount of Increase
(Decrease) Due to Change in:
----------------------------------------
Average Average Net
Interest Earning Assets Balance Rate Change
- ------------------------------------------------------------------------------------------------------------------------
Federal Funds Sold $ 554 $ 2 $ 556
Investment Securities Available for Sale
U.S. Treasuries (146) (3) (149)
U.S. Agencies (17) 12 (5)
Municipals (40) 31 (9)
Mortgage Backed Securities (896) 586 (310)
Other 68 (92) (24)
- ------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Available for Sale (1,031) 534 (497)
- ------------------------------------------------------------------------------------------------------------------------
Investment Securities Held to Maturity
U.S. Treasuries 0 0 0
U.S. Agencies (10) 2 (8)
Municipals (217) 53 (164)
Mortgage Backed Securities 0 0 0
Other (17) 17 (1)
- ------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Held to Maturity (244) 71 (173)
- ------------------------------------------------------------------------------------------------------------------------
Loans:
Real Estate 444 129 573
Commercial 904 1 905
Installment 29 53 82
Credit Card 7 8 14
Other 5 0 5
- ------------------------------------------------------------------------------------------------------------------------
Total Loans 1,387 192 1,579
- ------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 667 799 1,465
- ------------------------------------------------------------------------------------------------------------------------
Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction (3) (3) (6)
Savings (91) (40) (131)
Time Deposits Over $100,000 354 210 563
Time Deposits Under $100,000 422 402 824
- ------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 682 568 1,250
Other Borrowed Funds (58) (17) (76)
- ------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 624 551 1,174
- ------------------------------------------------------------------------------------------------------------------------
Total Change $ 43 $ 248 $ 291
========================================================================================================================
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
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings
- -------------------------
None
ITEM 2. Changes in Securities
- -----------------------------
None
ITEM 3. Defaults Upon Senior Securities
- ---------------------------------------
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
None
ITEM 5. Other Information
- -------------------------
None
ITEM 6(a). Exhibits
- -------------------
None
ITEM 6(b). Reports on Form 8-K
- ------------------------------
None
22
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: May 7, 2001 /s/ Kent A. Steinwert
------------------------------
Kent A. Steinwert
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 7, 2001 /s/ John R. Olson
------------------------------
John R. Olson
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
23