FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
Commission File Number: 1.000-26099
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FARMERS & MERCHANTS BANCORP
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(Exact name of registrant as specified in its charter)
Delaware 94-3327828
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
121 West Pine Street, Lodi, California 95240
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(Address of principal Executive offices)
Registrant's telephone number, including area code: (209) 334-1101
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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 719,378 as of October 25, 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 September 30, 2001
December 31, 2000 and September 30, 2000. 3
Consolidated Statements of Income for the Three Months
and Nine Months Ended September 30, 2001 and 2000. 4
Consolidated Statements of Comprehensive Income for the Three
Months and Nine Months Ended September 30, 2001 and 2000. 5
Statement of Changes in Shareholders' Equity for the Nine
Months Ended September 30, 2001 and 2000. 6
Consolidated Statement of Cash Flows for the Nine
Months Ended September 30, 2001 and 2000. 7
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis 10
PART II. - OTHER INFORMATION 25
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SIGNATURES 26
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2
PART I. - FINANCIAL INFORMATION
Item 1 - Financial Statements
FARMERS & MERCHANTS BANCORP
Consolidated Balance Sheets
- -------------------------------------------------------------------------------------------------------------------------
(in thousands) September 30, December 31, September 30,
2001 2000 2000
Assets (Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents:
Cash and Due From $ 33,391 $ 33,290 $ 28,936
Federal Funds Sold 46,600 41,000 14,900
- ------------------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 79,991 74,290 43,836
Investment Securities:
Available-for-Sale 251,117 279,386 282,423
Held-to-Maturity 32,113 41,268 44,303
- ------------------------------------------------------------------------------------------------------------------------
Total Investment Securities 283,230 320,654 326,726
- ------------------------------------------------------------------------------------------------------------------------
Loans 558,584 497,730 484,820
Less: Unearned Income (586) (333) (552)
Less: Allowance for Loan Losses (13,029) (11,876) (11,071)
- ------------------------------------------------------------------------------------------------------------------------
Loans, Net 544,969 485,521 473,197
- ------------------------------------------------------------------------------------------------------------------------
Land, Buildings & Equipment 11,643 11,556 12,137
Interest Receivable and Other Assets 12,755 13,530 15,487
- ------------------------------------------------------------------------------------------------------------------------
Total Assets $932,588 $905,551 $871,383
========================================================================================================================
Liabilities & Shareholders' Equity
Deposits:
Demand $166,128 $183,779 $154,256
Interest Bearing Transaction 80,058 81,271 81,129
Savings 189,847 175,140 162,676
Time Deposits Over $100,000 155,126 135,757 142,705
Time Deposits Under $100,000 189,378 188,731 192,204
- ------------------------------------------------------------------------------------------------------------------------
Total Deposits 780,537 764,678 732,970
- ------------------------------------------------------------------------------------------------------------------------
Fed Funds Purchased/Borrowings 41,009 41,033 41,041
Other Liabilities 9,755 8,957 9,772
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities 831,301 814,668 783,783
- ------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common Stock 7 7 7
Additional Paid In Capital 61,392 53,559 53,587
Retained Earnings 36,063 36,527 36,189
Accumulated Other Comprehensive Income 3,825 790 (2,183)
- ------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 101,287 90,883 87,600
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $932,588 $905,551 $871,383
========================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
3
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Income (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------
(in thousands) Three Months Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
Interest Income:
Interest & Fees on Loans $11,065 $11,602 $33,808 $32,106
Federal Funds Sold 458 515 1,560 617
Securities:
Investments Available-for-Sale:
Taxable 3,605 4,293 11,453 13,288
Non-taxable 242 224 692 670
Investments Held-to-Maturity:
Taxable 37 97 190 294
Non-taxable 381 493 1,214 1,542
- ---------------------------------------------------------------------------------------------------------------------
Total Interest Income 15,788 17,224 48,917 48,517
- ---------------------------------------------------------------------------------------------------------------------
Interest Expense:
Interest Bearing Transaction 159 192 507 571
Savings 957 1,017 2,827 3,105
Time Deposits Over $100,000 1,919 1,540 5,871 3,750
Time Deposits Under $100,000 2,246 3,347 7,366 8,271
Interest on Borrowed Funds 570 825 1,680 2,344
- ---------------------------------------------------------------------------------------------------------------------
Total Interest Expense 5,851 6,921 18,251 18,041
- ---------------------------------------------------------------------------------------------------------------------
Net Interest Income 9,937 10,303 30,666 30,476
Provision for Loan Losses 150 400 750 1,400
- ---------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 9,787 9,903 29,916 29,076
- ---------------------------------------------------------------------------------------------------------------------
Non-Interest Income
Service Charges on Deposit Accounts 1,102 882 3,058 2,588
Net Gain (Loss) on Sale of Investment Securities 39 (1) 105 (119)
Other 1,194 684 2,978 2,525
- ---------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 2,335 1,565 6,141 4,994
- ---------------------------------------------------------------------------------------------------------------------
Non-Interest Expense
Salaries & Employee Benefits 4,265 4,193 13,007 12,472
Occupancy 445 412 1,258 1,268
Equipment 496 478 1,459 1,397
Other Operating 1,745 1,829 5,021 5,552
- ---------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 6,951 6,912 20,745 20,689
- ---------------------------------------------------------------------------------------------------------------------
Net Income Before Taxes 5,171 4,556 15,312 13,381
Provision for Taxes 2,009 1,728 5,949 5,035
- ---------------------------------------------------------------------------------------------------------------------
Net Income $ 3,162 $ 2,828 $ 9,363 $ 8,346
=====================================================================================================================
Earning Per Share $ 4.39 $ 3.92 $ 12.99 $ 11.52
=====================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
4
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Comprehensive Income (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30
2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 3,162 $ 2,828 $ 9,363 $ 8,346
Other Comprehensive Income (Loss) -
Unrealized holding gains (losses) arising during the period, net of income
tax effects of $964 and $466 for the quarters ended September 30, 2001 and
2000, respectively, and of $2,167 and $1,109 for the nine months ended
September 30, 2001 and 2000, respectively. 1,378 666 3,096 1,586
Less: Reclassification adjustment for realized (gains) losses included in net
income, net of related income tax effects of ($1) and ($656) for the quarters
ended September 30, 2001 and 2000, respectively, and of $44 and ($49) for the
nine months ended September 30, 2001 and 2000, respectively. (1) 937 (61) 70
- ------------------------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income 1,377 1,603 3,035 1,656
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 4,539 $ 4,431 $ 12,398 $ 10,002
====================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
5
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands except share data)
Common Additional
Shares Common Paid-In Retained
Outstanding Stock Capital Earnings
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 660,989 $ 7 $ 47,993 $ 36,040
====================================================================================================================================
Net Income - - 8,346
Cash Dividends Declared on
Common Stock - - (1,273)
5% Stock Dividend 32,496 - 6,824 (6,824)
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend - - (100)
Redemption of Stock (5,877) - (1,230) -
Changes in Net Unrealized Gain (Loss) on
Securities Available for Sale - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 687,608 $ 7 $ 53,587 $ 36,189
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 687,491 $ 7 $ 53,559 $ 36,527
====================================================================================================================================
Net Income - - 9,363
Cash Dividends Declared on
Common Stock - - (1,406)
5% Stock Dividend 33,831 - 8,288 (8,288)
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend - - (133)
Redemption of Stock (1,924) - (455) -
Changes in Net Unrealized Gain (Loss) on
Securities Available for Sale - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2001 719,398 $ 7 $ 61,392 $ 36,063
====================================================================================================================================
(in thousands except share data) Accumulated
Other Total
Comprehensive Shareholders'
Income (Loss) Equity
- ----------------------------------------------------------------------------------
Balance, December 31, 1999 $ (3,839) $ 80,201
==================================================================================
Net Income - 8,346
Cash Dividends Declared on -
Common Stock - (1,273)
5% Stock Dividend - -
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend - (100)
Redemption of Stock - (1,230)
Changes in Net Unrealized Gain (Loss) on
Securities Available for Sale 1,656 1,656
- ----------------------------------------------------------------------------------
Balance, September 30, 2000 $ (2,183) $ 87,600
==================================================================================
- ----------------------------------------------------------------------------------
Balance, December 31, 2000 $ 790 $ 90,883
==================================================================================
Net Income - 9,363
Cash Dividends Declared on -
Common Stock - (1,406)
5% Stock Dividend - -
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend - (133)
Redemption of Stock - (455)
Changes in Net Unrealized Gain (Loss) on
Securities Available for Sale 3,035 3,035
- ----------------------------------------------------------------------------------
Balance, September 30, 2001 $ 3,825 $101,287
==================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
6
FARMERS & MERCHANTS BANCORP
Consolidated Statement of Cash Flows (Unaudited) Nine Months Ended
- ---------------------------------------------------------------------------------------------------------------------
(in thousands) Sept. 30, Sept. 30,
2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $9,363 $8,346
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Loan Losses 750 1,400
Depreciation and Amortization 1,172 1,341
Provision for Deferred Income Taxes (720) (345)
Net Accretion of Investment Securities (307) (307)
Net (Gain) Loss on Sale of Investment Securities (90) 119
Net Change in Operating Assets & Liabilities:
Decrease in Trading Account Assets 0 0
Decrease in Interest Receivable and Other Assets (628) (1,587)
Decrease in Interest Payable and Other Liabilities 798 (3,701)
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 10,338 5,266
Investing Activities:
Trading Securities:
Purchased (308) 0
Sold or Matured 824 0
Securities Available-for-Sale:
Purchased (14,985) (41,514)
Sold or Matured 48,105 59,609
Securities Held-to-Maturity:
Purchased (629) (202)
Matured 9,972 5,238
Net Loans Originated or Acquired (60,855) (71,142)
Principal Collected on Loans Charged Off 657 167
Net Additions to Premises and Equipment (1,259) (771)
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (18,478) (48,615)
Financing Activities:
Net Decrease in Demand, Interest-Bearing Transaction,
and Savings Accounts (4,157) (31,394)
Increase in Time Deposits 20,016 79,221
Federal Home Loan Bank Borrowings:
Advances 0 0
Paydowns (24) (23)
Cash Dividends (1,539) (1,373)
Stock Redemption (455) (1,230)
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 13,841 45,201
Increase in Cash and Cash Equivalents 5,701 1,852
Cash and Cash Equivalents at Beginning of Year 74,290 41,984
- ---------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents as of Sept. 30, 2001 and Sept. 30, 2000 $79,991 $43,836
=====================================================================================================================
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Earnings per Share
The actual number of shares outstanding at September 30, 2001, were 719,398.
Basic earnings per share is calculated on the basis of the weighted average
number of shares outstanding during the period. Weighted average number of
shares for the nine months ending September 30, 2001 and 2000 were 721,080 and
724,184. Earnings per share for the nine months ending September 30, 2001 and
2000 were $12.99 and $11.52, respectively. Weighted average number of shares for
the three months ending September 30, 2001 and 2000 were 720,805 and 721,442,
respectively. Earnings per share for the three months ending September 30, 2001
and 2000 were $4.39 and $3.92, respectively. Prior period per share amounts
have been restated for the 5% stock dividend declared during 2001 and 2000.
2. Basis of Presentation
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. 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. Certain reclassifications may have been made in the 2000 financial
information to conform to the presentation used in 2001 and all material
intercompany transactions have been eliminated in consolidation. The results
for the three and nine months ended September 30, 2001, are not necessarily
indicative of results which may be expected for any other interim period or for
the year as a whole. The unaudited consolidated financial statements presented
herein should be read in conjunction with the Company's consolidated financial
statements and notes included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2000.
3. Impact of Recently Issued Accounting Standards
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that all business combinations initiated after June 30, 2001 be accounted for by
a single method - the purchase method. Statement 141 also specifies the
criteria required for intangible assets be recognized and reported apart from
goodwill. Statement 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. Statement 142 also requires that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141 immediately and
Statement 142 effective January 1, 2002. The Company does not have any goodwill
or intangible assets acquired in business combinations completed before July 1,
2001. The Company does not expect adoption of Statements No. 141 and 142 to
have a material impact on the financial condition or operating results of the
Company.
8
4. Impact of Recently Issued Accounting Standards (Cont'd)
In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement
Obligations. This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement requires that the fair value
of a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset.
This Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company does not expect adoption of Statement
No. 143 to have a material impact on the financial condition or operating
results of the Company.
In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. In the past, two accounting models existed
for long-lived assets to be disposed of. Statement No. 144 establishes a single
accounting model for long-lived assets to be disposed of by sale. This
statement also broadens the presentation of discontinued operations to include
more disposal transactions. Therefore, the accounting for similar events and
circumstances will be the same. Additionally, the information value of reported
financial information will be improved. Finally, resolving significant
implementation issues will improve compliance with the requirements of this
Statement and, therefore, comparability among entities and the representational
faithfulness of reported financial information.
This Statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company does not expect adoption of
Statement No. 144 to have a material impact on the financial condition or
operating results of the Company.
9
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, uncertainties and assumptions, which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from those set forth in or implied by the forward-looking statements
and related assumptions.
Some factors that may cause actual results to differ from the forward-looking
statements include the following: (i) the effect of changing regional and
national economic conditions; (ii) significant changes in interest rates and
prepayment speeds; (iii) credit risks of commercial, real estate, consumer, and
other lending activities; (iv) changes in federal and state Banking regulations
and; (v) other external developments which could materially impact the Company's
operational and financial performance. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to update any forward-looking
statements to reflect events or circumstances arising after the date on which
they are made.
Introduction
The following discussion and analysis is intended to provide a better
understanding of the Company's performance during the first nine months of 2001
and the material changes related to the Company and its subsidiaries' financial
condition, operating results, asset and liability management, liquidity and
capital resources and 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 and nine months ended September 30, 2001, Farmers & Merchants
Bancorp reported net income of $3,162,000 and $9,363,000, earnings per share of
$4.39 and $12.99 and return on average assets of 1.37% and 1.39%. Return on
average shareholders' equity (net of accumulated other comprehensive income) was
13.32% for both the three and nine months ended September 30, 2001. For the
three and nine months ending September 30, 2000, net income totaled $2,828,000
and $8,346,000, earnings per share of $3.92 and $11.52, return on average assets
was 1.28% and 1.33% and the return on average shareholders' equity (net of
accumulated other comprehensive income) totaled 12.48% and 12.75%.
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.
10
The following is a summary of the financial results for the nine-month period
ending September 30, 2001 compared to September 30, 2000.
. Net income totaled $9.4 million, up 12.2% over one year ago.
. Net interest income increased 0.6% to $30.7 million from $30.5 million.
. The provision for loan losses totaled $750 thousand for the period compared
to $1.4 million one year ago.
. Non-interest income increased 23.0% to $6.1 million, from the $5.0 million
reported for 2000.
. Non-interest expense remained unchanged, totaling $20.7 million for both
periods.
. Total assets increased 7.0% to $932.6 million.
. Gross loans increased 15.2% to $558.6 million, an increase of $73.8 million.
. Total deposits increased 6.5% to $780.5 million.
. Total investment securities totaled $283.2 million from $326.7 million at
September 30, 2000.
. Total shareholders' equity increased $13.7 million to $101.3 million.
Net Interest Income
Net interest income is the Company's primary source of income and is determined
by the difference between interest and fees earned on loans and interest earning
assets and interest paid on interest bearing liabilities. Net interest income
for the three and nine months ended September 30, 2001 totaled $9.9 million and
$30.7 million, representing a decrease of $366 thousand and an increase of $190
thousand when compared to the $10.3 million and $30.5 million achieved during
the three and nine months ended September 30, 2000.
Interest income is generated primarily from loans, investment securities and
federal funds sold. Total interest and fees on earning assets were $15.8
million and $48.9 million for the three and nine months ended September 30,
2001, a decrease of 8.3% and an increase of 0.8% from the $17.2 million and
$48.5 million for the same period in 2000. Interest income is affected by
changes in volume of and rates earned on interest earning assets. The decrease
in interest income for the three months ended September 30, 2001 was primarily
the result of a decrease in the rates earned on interest-earning assets due to
the Federal Reserve's dramatic decrease in the federal funds and discount rates
which was followed by a corresponding drop in the prime rate. The
11
increase in interest income for the nine months ended September 30, 2001 was
primarily the result of an increase in the volume of interest-earning assets.
Loans, the Company's highest earning asset, increased $73.8 million as of
September 30, 2001 compared to September 30, 2000. On an average balance basis,
loans increased by $63.8 million for the three months ended September 30, 2001
and $62.8 million for the nine months ended September 30, 2001. The yield on
the loan portfolio decreased 153 and 68 basis points to 8.12% and 8.79% for the
three and nine months ending September 30, 2001 compared to 9.65% and 9.47% for
the three and nine months ending September 30, 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 $46.2 million for the nine months ended
September 30, 2001 compared to the same period of 2000. The decrease in the
average balance of investment securities was due to normal maturities. This
resulted in a corresponding decrease in interest income of $2.4 million for the
nine months ending September 30, 2001. The average yield, on a taxable
equivalent basis, in the investment portfolio was 6.5% for the nine months ended
September 30, 2001 compared to 6.6% at September 30, 2000.
Interest expense is a function of the volume of and the rates paid on interest-
bearing liabilities. Interest-bearing liabilities primarily consist of deposits
and borrowed funds. Total Interest expense was $5.8 million and $18.3 million
for the three and nine months ended September 30, 2001, compared with $6.9
million and $18.0 million for the same period in 2000, a decrease of $1.1
million and an increase of $210 thousand. The decrease in interest expense for
the three months ended September 30, 2001 was due to the decline in interest
rates during the period. The increase in interest expense for the nine months
ended September 30, 2001 was a result of growth in interest-bearing deposit
balances and time deposit repricing that lags behind the drop in interest rates.
For the nine months ended September 30, 2001 average interest-bearing sources of
funds increased $34.7 million or 5.8%. Of that increase, average borrowings
decreased $14.3 million and interest-bearing deposits increased $49.0 million.
Overall, the average interest cost on deposits was 3.7% at September 30, 2001
and 3.8% at September 30, 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.
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. Net interest
margin provides a measurement of the Company's ability to
12
employ funds profitably during the period being measured. For the three months
ended September 30, 2001, the net interest margin was 4.6% compared to 5.0% for
the same period in 2000. For the nine months ended September 30, 2001, the net
interest margin was 4.9% compared to 5.2% for the same period in 2000. The
decrease in net interest margin was primarily related to the drop in interest
rates experienced during 2001.
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 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 September 30, 2001, the allowance for loan losses was $13.0 million, which
represents 2.3% of the total loan balances. For the period ended September 30,
2000, the allowance was $11.1 million and 2.3% of total loans. The table below
illustrates the change in the allowance for the first nine months of 2001 and
2000.
13
Allowance for Loan Losses (in thousands)
- --------------------------
Balance, December 31, 1999 $ 9,787
Provision Charged to Expense 1,400
Recoveries of Loans Previously Charged Off 167
Loans Charged Off (283)
- ---------------------------------------------------------------------------
Balance, September 30, 2000 $11,071
===========================================================================
Balance, December 31, 2000 $11,876
Provision Charged to Expense 750
Recoveries of Loans Previously Charged Off 657
Loans Charged Off (254)
- ---------------------------------------------------------------------------
Balance, September 30, 2001 $13,029
===========================================================================
Non-Interest Income
Non-interest income increased 23.0% for the nine months ending September 30,
2001, compared to the same period of 2000. For the third quarter of 2001, non-
interest income increased 49.2% over last year. These changes are 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 2000. Additionally, SBA loans were sold during the third quarter of 2001,
resulting in a gain of $123 thousand and the mortgage loan servicing portfolio
was sold resulting in a one-time gain of $299 thousand.
Non-Interest Expense
Salaries and Employee Benefits increased $535 thousand or 4.3% from the prior
year due to additional staffing requirements related to loan production and
normal salary progression. For the third quarter of 2001, Salaries and Employee
Benefits increased $72 thousand from the third quarter of 2000. While occupancy
expense remained relatively unchanged on a year-to-date basis, for the quarter
ended September 30, 2001, occupancy expense increased $33 thousand or 8.0%.
This increase was primarily due to increases in rent paid by the Bank and higher
energy costs. Equipment expense increased $18 thousand for the quarter and $62
thousand as of September 30, 2001. This was due to upgraded computer equipment
and software during the first nine months of 2001. Other operating expense
decreased 4.6% and 9.6% or $84 and $531 thousand from the three months and nine
months ending September 30, 2000. The primary reason for this decrease was a
cost containment program implemented during the year. Total non-interest
expense on a year-to-date basis remained relatively unchanged from the prior
year. 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 16.3% to $2.0 million for the third
quarter of 2001, and 18.2% to $5.9 million for the first nine months of 2001,
primarily due to improved earnings. For the three and nine months ended
September 30, 2000, the provision totaled $1.7 million and $5.0 million.
Additionally, the Company's effective tax rate increased due to the decline
through maturities of investments in tax-exempt securities.
14
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 September 30, 2001 the investment portfolio represented 30.4% of
the Company's total assets. Total investment securities decreased $43.5 million
from a year ago and now total $283.2 million. Not included in the investment
portfolio are overnight investments in Federal Funds Sold. For the nine months
ended September 30, 2001, average Federal Funds Sold was $46.3 million compared
to $13.3 in 2000.
Loans
The Company's loan portfolio at September 30, 2001 increased $73.8 million from
September 30, 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
$62.8 million or 14.0%. Management believes that the growth rate in loans will
continue at a modest rate through the end of 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) Sept. 30, 2001 Dec. 31, 2000 Sept. 30, 2000
- -------------------------------------------------------------------------------
Real Estate Construction $ 40,588 $ 28,354 $ 27,880
Real Estate - Other 284,649 261,910 254,499
Commercial 210,560 182,611 177,152
Consumer 22,787 24,855 25,289
- -------------------------------------------------------------------------------
Gross Loans 558,584 497,730 484,820
Less:
Unearned Income 586 333 552
Allowance for Loan Losses 13,029 11,876 11,071
- -------------------------------------------------------------------------------
Net Loans $544,969 $485,521 $473,197
===============================================================================
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
15
collection. Any interest accrued, but unpaid, is reversed against current
income. Thereafter, interest is recognized as income only as it is collected in
cash.
As a result of events beyond the Company's control, problem loans can and do
occur. As of September 30, 2001, non-performing loans were $1.5 million
compared to $2.7 million at September 30, 2000. Managing problem loans
continues to be a significant Company objective. The Company reported no other
real estate owned at September 30, 2001, compared to the $299 thousand as of
September 30, 2000. Accrued interest reversed from income on loans placed on a
non-accrual status totaled $36 thousand at September 30, 2001 compared to $125
thousand at September 30, 2000.
Non-Performing Assets
- ---------------------
(dollar amounts in thousands) Sept. 30, 2001 Dec. 31, 2000 Sept. 30, 2000
- ----------------------------------------------------------------------------------------
Nonperforming Loans $1,537 $1,495 $2,734
Other Real Estate Owned 0 88 299
- -----------------------------------------------------------------------------------------
Total $1,537 $1,583 $3,033
=========================================================================================
Non-Performing Assets
as a % of Total Loans 0.3% 0.3% 0.6%
Allowance for Loan Losses as
a % of Non-Performing Loans 847.7% 794.4% 404.9%
Deposits
At September 30, 2001, deposits totaled $780.5 million. This represents an
increase of 6.5% or $47.6 million from September 30, 2000. The majority of the
increase was focused in savings accounts and time deposits over $100,000, which
increased $27.2 million and $12.4 million, respectively. This increase was the
result of business development efforts. Additionally, due to the decline in the
equity market, customers are placing funds into safer, FDIC insured investments
like savings accounts and certificates of deposit. It is not anticipated that
this trend will change significantly through the fourth quarter of 2001.
Time deposits under $100,000 have declined $2.8 million from September 30, 2000.
This decline was the result of deposit promotions during 2000 with no comparable
promotion in 2001. In addition, the interest rate differential between liquid
deposits and time deposits is not as great in 2001 compared to 2000, making the
Bank's liquid accounts more attractive.
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 $101.3
million at September 30, 2001 and $87.6 million at September 30, 2000, which
represents an increase of $13.7 million or 15.6%.
The Board of Governors of the Federal Reserve System, and the Federal Deposit
Insurance Corporation have adopted risk-based capital guidelines. The
guidelines are designed to make
16
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%. The Company's and Bank's
actual capital amounts and ratios met all regulatory requirements as of
September 30, 2001 and were summarized as follows:
To Be Well
Capitalized Under
Regulatory Capital Prompt Corrective
(in thousands) Actual Requirements Action Provisions
- ----------------------------------------------------------------------------------------------------------------------
The Company: Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------
As of September 30, 2001
Total Capital to Risk Weighted Assets $106,784 14.39% $59,409 8.0% N/A N/A
Tier I Capital to Risk Weighted Assets $ 97,462 13.13% $29,705 4.0% N/A N/A
Tier I Capital to Average Assets $ 97,462 10.60% $36,782 4.0% N/A N/A
To Be Well
Capitalized Under
Regulatory Capital Prompt Corrective
(in thousands) Actual Requirements Action Provisions
- ----------------------------------------------------------------------------------------------------------------------
The Bank: Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------
As of September 30, 2001
Total Capital to Risk Weighted Assets $105,652 14.24% $59,350 8.0% $74,188 10.0%
Tier I Capital to Risk Weighted Assets $ 96,332 12.98% $29,675 4.0% $44,513 6.0%
Tier I Capital to Average Assets $ 96,332 10.48% $36,752 4.0% $45,940 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
17
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 September 30, 2001 was
adequate to provide for recognized, unidentified 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
18
gap, indicates that earning assets will reprice faster than interest-bearing
liabilities. This will generally produce a greater net interest margin during
periods of rising interest rates and a lower net interest margin during periods
of declining interest rates. Conversely, a negative gap will generally produce a
lower net interest margin during periods of rising interest rates and a greater
net interest margin during periods of decreasing interest rates.
The interest rates paid on deposit accounts do not always move in unison with
the rates charged on loans. In addition, the magnitude of changes in the rates
charged on loans is not always proportionate to the magnitude of changes in the
rate paid for deposits. Consequently, changes in interest rates do not
necessarily result in an increase or decrease in the net interest margin solely
as a result of the differences between repricing opportunities of earning assets
or interest bearing liabilities.
The Company also utilizes the results of a dynamic simulation model to quantify
the estimated exposure of net interest income to sustained interest rate
changes. The sensitivity of the Company's net interest income is measured over
a rolling one-year horizon. The simulation model estimates the impact of
changing interest rates on interest income from all interest earning assets and
the interest expense paid on all interest bearing liabilities reflected on the
Company's balance sheet. This sensitivity analysis is compared to policy
limits, which specify a maximum tolerance level for net interest income exposure
over a one-year horizon assuming no balance sheet growth, given both a 200 basis
point upward and downward shift in interest rates. A parallel and pro rata
shift in rates over a 12-month period is assumed. Results that exceed policy
limits, if any, are analyzed for risk tolerance and reported to the Board with
appropriate recommendations. At September 30, 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 13.3% if rates
increase by 200 basis points and a decrease in net interest income of 20.0% if
rates decline 200 basis points.
The estimated sensitivity does not necessarily represent a Company forecast and
the results may not be indicative of actual changes to the Company's net
interest income. These estimates are based upon a number of assumptions
including: the nature and timing of interest rate levels including yield curve
shape, prepayments on loans and securities, pricing strategies on loans and
deposits, replacement of asset and liability cashflows, and other assumptions.
While the assumptions used are based on current economic and local market
conditions, there is no assurance as to the predictive nature of these
conditions including how customer preferences or competitor influences might
change.
Liquidity
Liquidity risk is the risk to earnings or capital resulting from the Bank's
inability to meet its obligations when they come due without incurring
unacceptable losses. It includes the ability to manage unplanned decreases or
changes in funding sources and to recognize or address changes in market
conditions that affect the Bank's ability to liquidate assets or acquire funds
quickly and with minimum loss of value. The Company endeavors to maintain a
cash flow adequate to fund operations, handle fluctuations in deposit levels,
respond to the credit needs of borrowers and to take advantage of investment
opportunities as they arise. The principal sources of liquidity
19
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 nine months of 2001,
Federal Funds averaged $46.3 million. In addition, the Company maintains
Federal Fund credit lines of $136 million with major correspondent banks subject
to the customary terms and conditions for such arrangements.
At September 30, 2001, the Company had available liquid assets, which included
cash and unpledged investment securities of approximately $140.9 million, which
represents 15.1% 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 and nine-month periods ending
September 30, 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.
The volume and rate analysis of net interest revenue summarizes the changes in
average asset and liability balances and interest earned and paid resulting from
changes in average asset and liability balances (volume) and changes in average
interest rates and the total net change in interest income and expenses. The
changes in interest due to both rate and volume have been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar amount
of the change in each.
20
Farmers & Merchants Bancorp
Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
Three Months Ended September 30,
2001
Assets Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------
Federal Funds Sold $ 52,125 $ 458 3.49%
Investment Securities Available-for-Sale
U.S. Treasuries 0 0 0.00%
U.S. Agencies 5,078 72 5.63%
Municipals - Taxable 1,850 30 6.43%
Municipals - Non-Taxable 22,161 369 6.61%
Mortgage Backed Securities 215,810 3,410 6.27%
Other 6,099 93 6.05%
- ------------------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 250,998 3,974 6.28%
- ------------------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00%
U.S. Agencies 0 0 0.00%
Municipals - Taxable 1,012 21 8.23%
Municipals - Non-Taxable 31,643 581 7.29%
Mortgage Backed Securities 0 0 0.00%
Other 635 16 10.00%
- ------------------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 33,290 618 7.37%
- ------------------------------------------------------------------------------------------------------------
Loans
Real Estate 314,255 6,590 8.32%
Commercial 203,390 3,876 7.56%
Installment 18,973 491 10.27%
Credit Card 3,358 95 11.22%
Municipal 887 13 5.81%
Total Loans 540,863 11,065 8.12%
- ------------------------------------------------------------------------------------------------------------
Total Earning Assets 877,276 $16,115 7.29%
=============================
Unrealized Gain/(Loss) on Securities Available-for-Sale 4,210
Allowance for Loan Losses (12,987)
Cash and Due From Banks 29,309
All Other Assets 24,598
- -------------------------------------------------------------------------------
Total Assets $ 922,406
===============================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Interest Bearing DDA $ 78,712 $ 159 0.80%
Savings 186,783 957 2.03%
Time Deposits 346,865 4,165 4.76%
- -----------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 612,360 5,281 3.42%
Other Borrowed Funds 41,012 570 5.51%
- -----------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 653,372 $ 5,851 3.55%
============================
Demand Deposits 161,383
All Other Liabilities 10,191
Total Liabilities 824,946
Shareholders' Equity 97,460
- -------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $ 922,406
===============================================================================
Net Interest Margin 4.64%
===========================================================================================================
Three Months Ended September 30,
2000
Assets Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------
Federal Funds Sold $ 32,915 $ 515 6.21%
Investment Securities Available-for-Sale
U.S. Treasuries 5,044 68 5.35%
U.S. Agencies 7,127 104 5.79%
Municipals - Taxable 3,210 51 6.30%
Municipals - Non-Taxable 20,827 342 6.51%
Mortgage Backed Securities 247,746 3,970 6.36%
Other 6,028 100 6.58%
- --------------------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 289,982 4,635 6.34%
- --------------------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00%
U.S. Agencies 1,998 30 5.96%
Municipals - Taxable 2,930 49 6.63%
Municipals - Non-Taxable 39,688 752 7.52%
Mortgage Backed Securities 0 0 0.00%
Other 747 18 9.56%
- --------------------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 45,363 849 7.43%
- --------------------------------------------------------------------------------------------------------------
Loans
Real Estate 282,648 6,692 9.39%
Commercial 169,156 4,288 10.06%
Installment 21,323 519 9.66%
Credit Card 3,379 94 11.04%
Municipal 566 9 6.31%
- --------------------------------------------------------------------------------------------------------------
Total Loans 477,072 11,602 9.65%
- --------------------------------------------------------------------------------------------------------------
Total Earning Assets 845,332 $17,601 8.26%
=============================
Unrealized Gain/(Loss) on Securities Available-for-Sale (6,195)
Allowance for Loan Losses (10,900)
Cash and Due From Banks 26,314
All Other Assets 30,146
- ---------------------------------------------------------------------------------
Total Assets $884,697
=================================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Interest Bearing DDA $ 65,087 $ 192 1.17%
Savings 175,877 1,017 2.29%
Time Deposits 336,303 4,887 5.77%
Total Interest Bearing Deposits 577,267 6,096 4.19%
Other Borrowed Funds 55,979 825 5.85%
- --------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 633,246 $ 6,921 4.34%
=============================
Demand Deposits 155,101
All Other Liabilities 9,398
Total Liabilities 797,745
Shareholders' Equity 86,952
- ---------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $884,697
=================================================================================
Net Interest Margin 5.01%
==============================================================================================================
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.
21
Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
Nine Months Ended September 30,
2001
Assets Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------
Federal Funds Sold $ 46,302 $ 1,560 4.49%
Investment Securities Available-for-Sale
U.S. Treasuries 1,365 55 5.37%
U.S. Agencies 5,655 243 5.72%
Municipals - Taxable 1,942 91 6.24%
Municipals - Non-Taxable 21,903 1,056 6.42%
Mortgage Backed Securities 225,320 10,778 6.37%
Other 5,441 279 6.83%
- --------------------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 261,626 12,502 6.37%
- --------------------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00%
U.S. Agencies 491 22 5.97%
Municipals - Taxable 2,291 114 6.63%
Municipals - Non-Taxable 33,088 1,852 7.45%
Mortgage Backed Securities 0 0 0.00%
Other 651 49 10.03%
- --------------------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 36,521 2,037 7.43%
- --------------------------------------------------------------------------------------------------------------
Loans
Real Estate 301,020 20,322 8.99%
Commercial 187,168 11,627 8.28%
Installment 19,908 1,515 10.14%
Credit Card 3,428 280 10.88%
Municipal 894 57 8.49%
- --------------------------------------------------------------------------------------------------------------
Total Loans $ 12,418 33,801 8.79%
- --------------------------------------------------------------------------------------------------------------
Total Earning Assets 856,867 $49,900 7.76%
==============================
Unrealized Gain/(Loss) on Securities Available-for-Sale 2,940
Allowance for Loan Losses (12,469)
Cash and Due From Banks 27,912
All Other Assets 25,518
- --------------------------------------------------------------------------------
Total Assets $900,768
================================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Interest Bearing DDA $75,376 $ 507 0.90%
Savings 181,402 2,827 2.08%
Time Deposits 338,108 13,237 5.22%
Total Interest Bearing Deposits 594,886 16,571 3.71%
Other Borrowed Funds 41,021 1,680 5.46%
- --------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 635,907 $18,251 3.82%
==============================
Demand Deposits 159,882
All Other Liabilities 9,513
- --------------------------------------------------------------------------------
Total Liabilities 805,302
Shareholders' Equity 95,466
- --------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $900,768
================================================================================
Net Interest Margin 4.92%
==============================================================================================================
Nine Months Ended September 30,
2000
Assets Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------
Federal Funds Sold $ 13,252 $ 617 6.20%
Investment Securities Available-for-Sale
U.S. Treasuries 9,461 393 5.53%
U.S. Agencies 7,139 312 5.82%
Municipals - Taxable 2,997 155 6.89%
Municipals - Non-Taxable 21,050 1,022 6.47%
Mortgage Backed Securities 251,451 12,103 6.41%
Other 5,226 324 8.26%
- ---------------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 297,324 14,309 6.41%
- ---------------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00%
U.S. Agencies 1,997 89 5.94%
Municipals - Taxable 2,927 148 6.74%
Municipals - Non-Taxable 41,343 2,352 7.58%
Mortgage Backed Securities 0 0 0.00%
Other 794 57 9.56%
- ---------------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 47,061 2,646 7.49%
- ---------------------------------------------------------------------------------------------------------
Loans
Real Estate 276,379 19,189 9.25%
Commercial 149,100 11,052 9.87%
Installment 20,465 1,440 9.37%
Credit Card 3,276 280 11.39%
Municipal 403 18 5.95%
- ---------------------------------------------------------------------------------------------------------
Total Loans 449,623 31,979 9.47%
- ---------------------------------------------------------------------------------------------------------
Total Earning Assets 807,260 $49,551 8.18%
=========================
Unrealized Gain/(Loss) on Securities Available-for-Sale (7,754)
Allowance for Loan Losses (10,429)
Cash and Due From Banks 25,718
All Other Assets 30,394
- --------------------------------------------------------------------------------
Total Assets $845,189
================================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Interest Bearing DDA $65,144 $ 571 1.17%
Savings 182,058 3,105 2.27%
Time Deposits 298,640 12,021 5.36%
Total Interest Bearing Deposits 545,842 15,697 3.83%
Other Borrowed Funds 55,331 2,344 5.64%
- ---------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 601,173 $18,041 4.00%
=========================
Demand Deposits 152,457
All Other Liabilities 7,792
- --------------------------------------------------------------------------------
Total Liabilities 761,422
Shareholders' Equity 83,767
- --------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $845,189
================================================================================
Net Interest Margin 5.20%
=========================================================================================================
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.
22
Farmers & Merchants Bancorp
Volume and Rate Analysis of Net Interest Revenue
(Rates on a Taxable Equivalent Basis)
(in thousands)
Three Months Ended
Sept. 30, 2001 compared to Sept. 30, 2000
Interest Earning Assets Volume Rate Net Chg.
- --------------------------------------------------------------------------------------------------------------
Federal Funds Sold $ 990 $ (1,047) $ (57)
Investment Securities Available for Sale
U.S. Treasuries (34) (34) (68)
U.S. Agencies (30) (2) (32)
Municipals - Taxable (28) 7 (21)
Municipals - Non-Taxable 23 4 27
Mortgage Backed Securities (505) (55) (560)
Other 8 (15) (7)
- --------------------------------------------------------------------------------------------------------------
Total Investment Securities Available for Sale (566) (95) (661)
- --------------------------------------------------------------------------------------------------------------
Investment Securities Held to Maturity
U.S. Treasuries 0 0 0
U.S. Agencies (15) (15) (30)
Municipals - Taxable (89) 61 (28)
Municipals - Non-Taxable (149) (22) (171)
Mortgage Backed Securities 0 0 0
Other (7) 5 (2)
- --------------------------------------------------------------------------------------------------------------
Total Investment Securities Held to Maturity (260) 29 (231)
- --------------------------------------------------------------------------------------------------------------
Loans:
Real Estate 2,951 (3,053) (102)
Commercial 3,608 (4,020) (412)
Installment (183) 155 (28)
Credit Card (3) 4 1
Other 9 (5) 4
- --------------------------------------------------------------------------------------------------------------
Total Loans 6,382 (6,919) (537)
- --------------------------------------------------------------------------------------------------------------
Total Earning Assets 6,546 (8,032) (1,486)
- --------------------------------------------------------------------------------------------------------------
Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction 178 (211) (33)
Savings 303 (363) (60)
Time Deposits 221 (943) (722)
- --------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 702 (1,517) (815)
Other Borrowed Funds (210) (45) (255)
- --------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 492 (1,562) (1,070)
- --------------------------------------------------------------------------------------------------------------
Total Change $6,054 $ (6,470) $ (416)
==============================================================================================================
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.
23
Farmers & Merchants Bancorp
Volume and Rate Analysis of Net Interest Revenue
(Rates on a Taxable Equivalent Basis)
(in tho|usands) Nine Months Ended
Sept. 30, 2001 compared to Sept. 30, 2000
Interest Earning Assets Volume Rate Net Chg.
- --------------------------------------------------------------------------------------------------------------
Federal Funds Sold $ 1,258 $ (315) $ 943
Investment Securities Available for Sale
U.S. Treasuries (327) (11) (338)
U.S. Agencies (63) (6) (69)
Municipals - Taxable (51) (13) (64)
Municipals - Non-Taxable 46 (12) 34
Mortgage Backed Securities (1,250) (75) (1,325)
Other 20 (65) (45)
- --------------------------------------------------------------------------------------------------------------
Total Investment Securities Available for Sale (1,625) (182) (1,807)
- --------------------------------------------------------------------------------------------------------------
Investment Securities Held to Maturity
U.S. Treasuries 0 0 0
U.S. Agencies (68) 1 (67)
Municipals - Taxable (32) (2) (34)
Municipals - Non-Taxable (462) (38) (500)
Mortgage Backed Securities 0 0 0
Other (12) 4 (8)
- --------------------------------------------------------------------------------------------------------------
Total Investment Securities Held to Maturity (574) (35) (609)
- --------------------------------------------------------------------------------------------------------------
Loans:
Real Estate 1,944 (811) 1,133
Commercial 3,270 (2,695) 575
Installment (59) 134 75
Credit Card 17 (17) 0
Other 29 10 39
- --------------------------------------------------------------------------------------------------------------
Total Loans 5,201 (3,379) 1,822
- --------------------------------------------------------------------------------------------------------------
Total Earning Assets 4,260 (3,911) 349
- --------------------------------------------------------------------------------------------------------------
Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction 116 (180) (64)
Savings (11) (267) (278)
Time Deposits 1,734 (518) 1,216
- --------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 1,839 (965) 874
Other Borrowed Funds (588) (76) (664)
- --------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 1,251 (1,041) 210
- --------------------------------------------------------------------------------------------------------------
Total Change $ 3,009 $ (2,870) $ 139
==============================================================================================================
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.
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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
- -------------------
Index to Exhibits
-----------------
Exhibit No. Description
----------- -----------
2 Plan of Reorganization as filed on Form 8-K dated April 30,
1999, are incorporated herein by reference.
3(i) Amended and Restated Certificate of Incorporation of Farmers
& Merchants Bancorp, filed as Exhibit 3(i) to Registrant's
8-K dated April 30, 1999, is incorporated herein by
reference.
3(ii) By-Laws of Farmers & Merchants Bancorp, filed as Exhibit
3(ii) to Registrant's 8-K dated April 30, 1999, is
incorporated herein by reference.
10.1 Employment Agreement dated July 8, 1997, between Farmers &
Merchants Bank of Central California and Kent A. Steinwert,
filed as Exhibit 10.1 to Registrant's 8-K dated April 30,
1999, is incorporated herein by reference.
10.2 Employment Agreement dated July 8, 1997, between Farmers &
Merchants Bank of Central California and Richard S.
Erichson, filed as Exhibit 10.2 to Registrant's 8-K dated
April 30, 1999, is incorporated herein by reference.
10.3 Deferred Bonus Plan of Farmers & Merchants Bank of Central
California adopted as of March 2, 1999, filed as Exhibit
10.3 to Registrant's 8-K dated April 30, 1999, is
incorporated herein by reference.
25
10.4 Amended and Restated Deferred Bonus Plan of Farmers &
Merchants Bank of Central California, executed May 11, 1999,
filed as Exhibit 10.4 to Registrant's 8-K dated April 30,
1999, is incorporated herein by reference.
16 Letter regarding change in certifying accountants filed as
exhibit 16 to Registrants 8-K filed October 20, 2000 is
incorporated herein by reference.
ITEM 6(b). Reports on Form 8-K
- ------------------------------
None
SIGNATURES
----------
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FARMERS & MERCHANTS BANCORP
Date: November 13, 2001 /s/ Kent A. Steinwert
------------------------
Kent A. Steinwert
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2001 /s/ John R. Olson
------------------------
John R. Olson
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
26