UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________.
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.)
111 W. Pine Street, Lodi, California 95240
(Address of principal Executive offices) (Zip Code)
Registrant's telephone number, including area code (209) 367-2300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value Per Share
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 13, 2003, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $183,255,250 based on the
sales price of that day of $250.00 per share.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [X] No [ ]
The aggregate market value of the Registrant's common stock held by
non-affiliates on June 28, 2002 (based on the closing sale price of the Common
Stock) was $183,937,250.
The number of shares of Common Stock outstanding as of March 13, 2003:
733,021
Documents Incorporated by Reference:
Portions of the Annual Report to Shareholders for fiscal year ended
December 31, 2002 are incorporated by reference in Part II, Items 5 through 8
and Part IV, Items 14 and 15. Portions of the definitive Proxy Statement for the
2003 Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A are incorporated by reference in Part III,
Items 10 through 13.
FARMERS & MERCHANTS BANCORP
FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1. Business 4
- General Development of the Business
- Service Area
- Employees
- Competition
- Government Policies
- Supervision and Regulation
- Risk Factors
- Statistical Disclosures
Item 2. Properties 27
Item 3. Legal Proceedings 27
Item 4. Submission of Matters to a Vote of Security Holders 27
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 27
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 28
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 28
PART III
Item 10. Directors and Executive Officers of the Company 28
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters 29
Item 13. Certain Relationships and Related Transactions 29
2
PART IV
Item 14. Controls and Procedures 29
Item 15. Exhibits, Financial Statement Schedules and
Reports on Forms 8-K 29
Signatures 30
Certifications 31
Index to Exhibits 33
3
Introduction - Forward Looking Statements
This annual report contains various forward-looking statements, usually
containing the words "estimate," "project," "expect," "objective," "goal," or
similar expressions and includes assumptions concerning the Company's
operations, future results, and prospects. These forward-looking statements are
based upon current expectations and are subject to risk and uncertainties. In
connection with the "safe-harbor" provisions of the private Securities
Litigation Reform Act of 1995, the Company provides the following cautionary
statement identifying important factors which could cause the actual results of
events to differ materially from those set forth in or implied by the
forward-looking statements and related assumptions. Such factors include the
following: (i) the effect of changing regional and national economic conditions;
(ii) significant changes in interest rates and prepayment speeds; (iii) credit
risks of commercial, real estate, consumer, and other lending activities; (iv)
changes in federal and state banking regulations; (v) competitive pressure in
the banking industry and changes in banking or other laws and regulations or
governmental fiscal or monetary policies; (vi) uncertainty regarding the
economic outlook resulting from the continuing war on terrorism, as well as
actions taken or to be taken by the U.S. or other governments as a result of
further acts or threats of terrorism or as a result of military action in Iraq;
(vii) dividend restrictions; (viii) asset/liability pricing risks and liquidity
risks; (ix) changes in the securities markets; (x) certain operational risks
involving data processing systems or fraud; and (xi) 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.
PART I
Item 1. Business
General Development of the Business
August 1, 1916 marked the first day of business for Farmers & Merchants Bank of
Lodi. The Bank was incorporated under the laws of the State of California and
was licensed by the California Department of Financial Institutions as a
state-chartered bank. The Bank prospered and grew even through the Depression
years. Farmers & Merchants' first venture out of Lodi occurred in response to
the closure of the only bank serving the community of Galt, requiring area
residents to drive miles away for the simplest banking transaction. To meet this
need, the Galt office was opened in 1948. Shortly thereafter branches were
opened in Linden, North Modesto and South Sacramento. On April 12, 1957, the
Bank's name was changed to Farmers & Merchants Bank of Central California.
The Bank continued expansion in the Lodi market area and also acquired three
offices in Turlock and Hilmar in 1985. The service area was next expanded by
opening a loan production office in the community of Elk Grove. This office was
later converted to a full service branch. A third office was also opened in
Modesto. The year 2002 saw the opening of the Lincoln Center office with its
state of the art Merchant Center. This is the Company's first branch in the city
of Stockton. The Walnut Grove office was closed in 2002 upon the expiration of
the lease. Those customers are now serviced through the Lodi Main Office.
On March 10, 1999, Farmers & Merchants Bancorp (referred to herein on a
consolidated basis as the "Company"), pursuant to a reorganization, acquired all
of the voting stock of Farmers & Merchants Bank of Central California (the
"Bank"). The Bank is the Company's principal asset. Farmers & Merchants Bancorp
is a bank holding company incorporated in the State of Delaware, and registered
under the Bank Holding Company Act of 1956, as amended. The Company's
outstanding securities as of December 31, 2002, consisted of 733,021 shares of
common stock, $0.01 par value and no shares of preferred stock issued. The
Bank's two wholly owned subsidiaries are Farmers & Merchants Investment
Corporation and Farmers/Merchants Corp. Both Companies were organized during
1986. Farmers & Merchants Investment Corporation is currently dormant and
Farmers/Merchants Corp. acts as trustee on deeds of trust originated by the
Bank.
4
During 2002, the Company completed a fictitious name filing in California to
begin using the streamlined name, "F & M Bank" as part of a larger effort to
enhance the Company's image and build brand name recognition. A legal review was
completed by outside counsel to ensure any existing copyrights were not
violated. The company is in the process of converting daily operating and image
advertising to the "F & M Bank" name and the Company's logo, slogan and signage
were redesigned to incorporate the trade name, "F & M Bank". A new corporation,
F & M Bancorp, Inc., was established in California during 2002 to support the
Company's rebranding activities and legal rights to the "F & M Bank" trade name.
The Company's principal business is to serve as a holding company for the Bank
and for other banking or banking related subsidiaries which the Company may
establish or acquire. As a legal entity separate and distinct from its
subsidiary, the Company's principal source of funds is, and will continue to be,
dividends paid by and other funds advanced from the Bank. Legal limitations are
imposed on the amount of dividends that may be paid and loans that may be made
by the Bank to the Company. See Item 1. Business - Dividends and Other Transfer
of Funds. The Bank's deposit accounts are insured under the Federal Deposit
Insurance Act up to applicable limits. The Bank is a member of the Federal
Reserve System.
Service Area
The Company services the northern Central Valley of California with
17 banking offices. The area includes Sacramento, San Joaquin, Stanislaus and
Merced Counties with branches in Sacramento, Elk Grove, Galt, Lodi, Stockton,
Linden, Modesto, Turlock and Hilmar.
Through its network of banking offices, the Company emphasizes personalized
service along with a full range of banking services to businesses and
individuals located in the service areas of its offices. Although the Company
focuses on marketing of its services to small and medium sized businesses, a
full range of retail banking services are made available to the local consumer
market.
The Company offers a wide range of deposit instruments. These include checking,
savings, money market, time certificates of deposit, individual retirement
accounts and online banking services for both business and personal accounts.
The Company also serves as a federal tax depository for its business customers.
The Company provides a full complement of lending products, including
commercial, real estate construction, agribusiness, installment, credit card and
real estate loans. Commercial products include lines of credit and other working
capital financing and letters of credit. Financing products for individuals
include automobile financing, lines of credit, residential real estate, home
improvement and home equity lines of credit.
The Company also offers a wide range of specialized services designed for the
needs of its commercial accounts. These services include a credit card program
for merchants, collection services, payroll services, on-line account access,
and electronic funds transfers by way of domestic and international wire and
automated clearinghouse.
The Company makes available investment products to customers, including mutual
funds and annuities. These investment products are offered through a third
party, which employs investment advisors to meet with and provide investment
advice to the Company's customers.
Employees
At December 31, 2002, the Company employed a total of 292 full time equivalent
employees. The Company believes that its employee relations are excellent.
5
Competition
The Banking and financial services industry in California generally, and in the
Company's market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation, changes
in technology and product delivery systems, and the accelerating pace of
consolidation among financial service providers. The Company competes with other
major commercial banks, diversified financial institutions, savings banks,
credit unions, savings and loan associations, money market and other mutual
funds, mortgage companies, and a variety of other nonbanking financial services
and advisory companies. Federal legislation in recent years seems to favor
competition between different types of financial service providers and to foster
new entrants into the financial services market, and it is anticipated that this
trend will continue. Using the financial holding company structure, insurance
companies and securities firms may compete more directly with banks and bank
holding companies.
Many of our competitors are much larger in total assets and capitalization, have
greater access to capital markets and offer a broader range of financial
services than the Company. In order to compete with other financial service
providers, the Company relies upon personal contact by its officers, directors,
employees, and shareholders, along with various promotional activities and
specialized services. In those instances where the Company is unable to
accommodate a customer's needs, the Company may arrange for those services to be
provided through its correspondents.
Government Policies
The Bank's profitability, like most financial institutions, is primarily
dependent on interest rate differentials. The difference between the interest
rates paid by the Bank on interest-bearing liabilities, such as deposits and
other borrowings, and the interest rates received by the Bank on its
interest-earning assets, such as loans extended to its customers and securities
held in its investment portfolio, comprise the major portion of the Company's
earnings. These rates are highly sensitive to many factors that are beyond the
control of the Company and the Bank, such as inflation, recession and
unemployment, and the impact which future changes in economic conditions might
have on the Company and the Bank cannot be predicted.
The business of the Company and the Bank is also influenced by the monetary and
fiscal policies of the federal government and the policies of regulatory
agencies, particularly the Board of Governors of the Federal Reserve System (the
"FRB"). The FRB implements national monetary policies (with objectives such as
curbing inflation and combating recession) through its open-market operations in
U.S. Government securities by adjusting the required level of reserves for
depository institutions subject to its reserve requirements, and by varying the
target federal funds and discount rates applicable to borrowings by depository
institutions. The actions of the FRB in these areas influence the growth of bank
loans, investments, and deposits and also affect interest rates earned on
interest-earning assets and paid on interest-bearing liabilities. The nature and
impact on the Company and the Bank of any future changes in monetary and fiscal
policies cannot be predicted.
From time to time, legislative acts, as well as regulations, are enacted which
have the effect of increasing the cost of doing business, limiting or expanding
permissible activities, or affecting the competitive balance between banks and
other financial services providers. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies, and
other financial institutions and financial services providers are frequently
made in the U.S. Congress, in the state legislatures, and before various
regulatory agencies. This legislation may change banking statues and the
operating environment of the Company and its subsidiaries in substantial and
unpredictable ways. If enacted, such legislation could increase or decrease the
cost of doing business, limit or expand permissible activities or affect the
competitive balance among banks, savings associations, credit unions, and other
financial institutions. The Company cannot predict whether any of this potential
legislation will be enacted, and if enacted, the effect that it, or any
implementing regulations, would have on the financial condition or results of
operations of the Company or any of its subsidiaries. See Item 1. Business -
Supervision and Regulation.
6
Supervision and Regulation
General
Bank holding companies and banks are extensively regulated under both federal
and state law. The regulation is intended primarily for the protection of
depositors and the deposit insurance fund and not for the benefit of
shareholders of the Company. Set forth below is a summary description of the
material laws and regulations, which relate to the operations of the Company and
the Bank. This description does not purport to be complete and is qualified in
its entirety by reference to the applicable laws and regulations.
In recent years significant legislative proposals and reforms affecting the
financial services industry have been discussed and evaluated by Congress, the
state legislature and before the various Bank regulatory agencies. These
proposals may increase or decrease the cost of doing business, limiting or
expanding permissible activities, or enhance the competitive position of other
financial service providers. The likelihood and timing of any such proposals or
bills and the impact they might have on the Company and its subsidiaries cannot
be predicted.
The Company
The Company is a registered bank holding company and is subject to regulation
under the Bank Holding Company Act of 1956 "BHCA", as amended. Accordingly, the
Company's operations, and its subsidiaries are subject to extensive regulation
and examination by the Board of Governors of the Federal Reserve System "FRB".
The Company is required to file with the FRB quarterly and annual reports and
such additional information as the FRB may require pursuant to the Bank Holding
Company Act. The FRB conducts periodic examinations of the Company and its
subsidiaries.
The FRB may require that the Company terminate an activity or terminate control
of or liquidate or divest certain subsidiaries of affiliates when the FRB
believes the activity or the control of the subsidiary or affiliate constitutes
a significant risk to the financial safety, soundness or stability of any of its
banking subsidiaries. The FRB also has the authority to regulate provisions of
certain bank holding company debt, including authority to impose interest
ceilings and reserve requirements on such debt. Under certain circumstances, the
Company must file written notice and obtain approval from the FRB prior to
purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the FRB, a bank holding company and
its nonbanking subsidiaries are prohibited from requiring certain tie-in
arrangements in connection with an extension of credit, lease or sale of
property or furnishing of services. For example, with certain exceptions, a bank
may not condition an extension of credit on a promise by its customer to obtain
other services provided by it, its holding company or other subsidiaries, or on
a promise by its customer not to obtain other services from a competitor. In
addition, federal law imposes certain restrictions on transactions between
Farmers & Merchants Bancorp and its subsidiaries. Further, the Company is
required by the FRB to maintain certain levels of capital. See Item 1. Business
- - Capital Standards.
Directors, officers and principal shareholders of Farmers & Merchants Bancorp,
and the companies with which they are associated, have had and will continue to
have banking transactions with the Bank in the ordinary course of business. All
extensions of credit are made on substantially the same terms (including
interest rates and collateral) as, and following credit-underwriting procedures
that are not less stringent than, those prevailing at the time for comparable
transactions by the bank with other persons not covered by 12 USC 215.1 et seq
and who are not employed by the bank, and does not involve more than the normal
risk of repayment or present other unfavorable features. Extensions of credit to
insiders have been and may be made pursuant to a benefit or compensation program
that is widely available to employees of the bank and that does not give
preference to any insider of the bank over other employees.
7
The Company is prohibited by the BHCA, except in certain statutorily prescribed
instances, from acquiring direct or indirect ownership or control of more than
5% of the outstanding voting share of any company that is not a bank or bank
holding company and from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks or furnishing services to
its subsidiaries. However, the Company, subject to the prior approval of the
FRB, may engage in any, or acquire shares of companies engaged in, activities
that are deemed by the FRB to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Removal of many of the
activity limitations is currently under review by Congress, but whether any
legislation liberalizing permitted bank holding company activities will be
enacted is not known.
Under FRB regulations, a bank holding company is required to serve as a source
of financial and managerial strength to its subsidiary banks and may not conduct
its operations in an unsafe or unsound manner. In addition, it is the FRB's
policy that in serving as a source of strength to its subsidiary banks, a bank
holding company should stand ready to use available resources to provide
adequate capital funds to its subsidiary banks during periods of financial
stress or adversity and should maintain the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its
subsidiary banks. This support may be required at times when a bank holding
company may not be able to provide such support. A bank holding company's
failure to meet its obligations to serve as a source of strength to its
subsidiary banks will generally be considered by the FRB to be an unsafe and
unsound banking practice or a violation of the FRB's regulations or both.
The Gramm-Leach-Bliley Act of 1999 ("GLBA") eliminated many of the restrictions
placed on the activities of bank holding companies that become financial holding
companies. Among other things, GLBA repealed certain Glass-Steagall Act
restrictions on affiliations between banks and securities firms, and amended the
BHCA to permit bank holding companies that are financial holding companies to
engage in activities, and acquire companies engaged in activities, that are:
financial in nature (including insurance underwriting, insurance company
portfolio investment, financial advisory, securities underwriting, dealing and
market-making, and merchant banking activities); incidental to financial
activities; or complementary to financial activities if the FRB determines that
they pose no substantial risk to the safety or soundness of depository
institutions or the financial system in general. The Company has not become a
financial holding company. GLBA also permits national banks to engage in
activities considered financial in nature through a financial subsidiary,
subject to certain conditions and limitations and with the approval of the
Comptroller of the Currency.
The Company's securities are registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). As such, the Company is subject to the information, proxy solicitation,
insider trading and other requirements and restrictions of the Exchange Act.
The Bank
The Bank, as a California chartered bank, is subject to primary supervision,
periodic examination and regulation by the California Department of Financial
Institutions ("DFI") and the FRB. If, as a result of an examination of the Bank,
the FRB should determine that the financial condition, capital resources, asset
quality, earnings prospects, management, liquidity, or other aspects of the
Bank's operations are unsatisfactory or that the Bank or its management is
violating or has violated any law or regulation, various remedies are available
to the FRB. Such remedies include the power to enjoin "unsafe or unsound"
practices, to require affirmative action to correct any conditions resulting
from any violation or practice, to issue an administrative order that can be
judicially enforced, to direct an increase in capital, to restrict the growth of
the Bank, to assess civil monetary penalties, to remove officers and directors
and ultimately to terminate the Bank's deposit insurance, which for a California
chartered bank would result in a revocation of the Bank's charter. The DFI has
many of the same remedial powers.
8
Various requirements and restrictions under the laws of the State of California
and the United States affect the operations of the Bank. State and federal
statues and regulations relate to many aspects of the Bank's operations,
including reserves against deposits, ownership of deposit accounts, interest
rates payable on deposits, loans, investments, mergers and acquisitions,
borrowings, dividends, locations of branch offices, and capital requirements.
Further, the Bank is required to maintain certain levels of capital. See Item 1.
Business - Capital Standards.
The USA Patriot Act
Title III of the United and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act")
includes numerous provisions for fighting international money laundering and
blocking terrorist access to the U.S. financial system. The provisions of Title
III of the USA Patriot Act which affect banking organizations, including the
Bank, relate principally to U.S. banking organizations' relationships with
foreign banks and with persons who are resident outside the United States. The
USA Patriot Act does not immediately impose any new filing or reporting
obligations for banking organizations, but does require certain additional due
diligence and record keeping practices. Some requirements take effect without
the issuance of regulations. Other provisions are to be implemented through
regulations that will be promulgated by the U.S. Department of the Treasury (the
"Treasury"), in consultation with the FRB and other federal financial
institutions regulators. The federal banking agencies have begun proposing and
implementing regulations interpreting the USA Patriot Act.
Part of the USA Patriot Act is the International Money Laundering Abatement and
Financial Anti-Terrorism Act of 2001 ("IMLAFATA"). Among its provisions,
IMLAFATA requires each financial institution to: (i) establish an anti-money
laundering program; (ii) establish due diligence policies, procedures and
controls with respect to its private banking accounts and correspondent banking
accounts involving foreign individuals and certain foreign banks; and (iii)
avoid establishing, maintaining, administering, or managing correspondent
accounts in the United States for, or on behalf of, a foreign bank that does not
have a physical presence in any country. In addition, IMLAFATA contains a
provision encouraging cooperation among financial institutions, regulatory
authorities and law enforcement authorities with respect to individuals,
entities and organizations engaged in, or reasonably suspected of engaging in,
terrorist acts or money laundering activities. IMLAFATA expands the
circumstances under which funds in a bank account may be forfeited and requires
covered financial institutions to respond under certain circumstances to
requests for information from federal banking agencies within 120 hours.
IMLAFATA also amends the BHCA and the Bank Merger Act to require the federal
banking agencies to consider the effectiveness of a financial institution's
anti-money laundering activities when reviewing an application under these acts.
Pursuant to IMLAFATA, the Secretary of the Treasury, in consultation with the
heads of other government agencies, has adopted and proposed special measures
applicable to banks, bank holding companies, and/or other financial
institutions. These measures include enhanced record keeping and reporting
requirements for certain financial transactions that are of primary money
laundering concern, due diligence requirements concerning the beneficial
ownership of certain types of accounts, and restrictions or prohibitions on
certain types of accounts with foreign financial institutions.
Privacy Restrictions
The GLBA, in addition to the previously described changes in permissible
non-banking activities permitted to banks, bank holding companies and financial
holding companies, also required the federal banking agencies, among others
federal regulatory agencies, to adopt regulations governing the privacy of
consumer financial information. The FRB adopted such regulations and required
full compliance with the regulations by July 1, 2001. The Bank is subject to the
FRB's regulations.
9
The regulations impose three main requirements established by the GLBA. First, a
banking organization must provide initial notices to customers about their
privacy policies, describing the conditions under which they may disclose
nonpublic personal information to nonaffiliated third parties and affiliates.
Second, banking organizations must provide annual notices of their privacy
policies to their customers. Third, banking organizations must provide a
reasonable method for customers to "opt-out" of disclosures to nonaffiliated
third parties.
In connection with the regulations governing the privacy of consumer financial
information, the federal banking agencies, including the FRB, adopted guidelines
for safeguarding confidential customer information, effective on July 1, 2001.
The guidelines require banking organizations to establish an information
security program to: (1) identify and assess the risks that may threaten
customer information; (2) develop a written plan containing policies and
procedures to manage and control these risks; (3) implement and test the plan;
and (4) adjust the plan on a continuing basis to account for changes in
technology, the sensitivity of customer information, and internal or external
threats. The guidelines also outline the responsibilities of directors of
banking organizations in overseeing the protection of customer information.
The Company complies with all provisions of the GLBA and all implementing
regulations, and the Bank has developed appropriate policies and procedures to
meet its responsibilities in connection with the privacy provisions of GLBA.
Dividends and Other Transfer of Funds
Dividends from the Bank constitute the principal source of income to the
Company. The Company is a legal entity separate and distinct from the Bank. The
Bank is subject to various statutory and regulatory restrictions on its ability
to pay dividends to the Company. Under such restrictions, the amount available
for payment of dividends to the Company by the Bank totaled $14.5 million at
December 31, 2002.
The FRB and the DFI also have authority to prohibit the Bank from engaging in
activities that, in their opinion, constitute unsafe or unsound practices in
conducting its business. It is possible, depending upon the financial condition
of the bank in question and other factors, that the FRB and the DFI could assert
that the payment of dividends or other payments might, under some circumstances,
be an unsafe or unsound practice. Further, the FRB and the FDIC have established
guidelines with respect to the maintenance of appropriate levels of capital by
banks or bank holding companies under their jurisdiction. Compliance with the
standards set forth in such guidelines and the restrictions that are or may be
imposed under the prompt corrective action provisions of federal law could limit
the amount of dividends which the Bank or the Company may pay. An insured
depository institution is prohibited from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions if after such transaction the institution would be
undercapitalized. The DFI may impose similar limitations on the Bank. See Item
1. Business - Prompt Corrective Action and Other Enforcement Mechanisms and Item
1. Business - Capital Standards for a discussion of these additional
restrictions on capital distributions.
Transactions with Affiliates
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, the Company or other affiliates, the purchase of, or investments in,
stock or other securities thereof, the taking of such securities as collateral
for loans, and the purchase of assets of the Company or other affiliates. Such
restrictions prevent the Company and other affiliates from borrowing from the
Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in the
Company or to or in any other affiliates are limited, individually, to 10% of
the Bank's capital and surplus (as defined by federal regulations), and such
secured loans and investments are limited, in the aggregate, to 20% of the
Bank's capital and surplus (as defined by federal regulations). California law
also imposes certain restrictions with respect to transactions with affiliates.
Additionally, limitations involving the transactions with affiliates may be
imposed on the Bank under the prompt corrective action provisions of federal
law. See Item 1. Business - Prompt Corrective Action and Other Enforcement
Mechanisms.
10
Capital Standards
The Federal Reserve Board and the FDIC have established risk-based minimum
capital guidelines with respect to the maintenance of appropriate levels of
capital by United States banking organizations. These guidelines are intended to
provide a measure of capital that reflects the degree of risk associated with a
banking organization's operations for both transactions reported on the balance
sheet as assets and transactions, such as letters of credit and recourse
arrangements, which are recorded as off balance sheet items. Under these
guidelines, nominal dollar amounts of assets and credit equivalent amounts of
off balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such as
certain U.S. Treasury securities, to 100% for assets with relatively high credit
risk, such as commercial loans.
The federal banking agencies require a minimum ratio of qualifying total capital
to risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to
risk-weighted assets of 4%. In addition to the risked-based guidelines, federal
banking regulators require banking organizations to maintain a minimum amount of
Tier 1 capital to total assets, referred to as the leverage ratio. For a banking
organization rated in the highest of the five categories used by regulators to
rate banking organizations, the minimum leverage ratio of Tier 1 capital to
total assets must be 4%. In addition to these uniform risk-based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above minimum guidelines and ratios.
As of December 31, 2002 and 2001 the Company and the Bank's risk-based capital
ratios were as follows:
To Be Well
Capitalized Under
Regulatory Capital Prompt Corrective
(in thousands) Actual Requirements Action Provisions
December 31, 2002 Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------
The Bank:
Total Bank Capital to Risk Weighted Assets $108,191 11.73% $ 73,766 8.00% $92,208 10.00%
Tier I Bank Capital to Risk Weighted Assets $ 96,602 10.48% $ 36,883 4.00% $55,325 6.00%
Tier I Bank Capital to Average Assets $ 96,602 9.84% $ 39,259 4.00% $49,074 5.00%
The Company:
Total Consolidated Capital to Risk Weighted Assets $113,370 12.25% $ 74,058 8.00% N/A N/A
Tier I Consolidated Capital to Risk Weighted Assets $101,735 10.99% $ 37,029 4.00% N/A N/A
Tier I Consolidated Capital to Average Assets $101,735 10.32% $ 39,439 4.00% N/A N/A
December 31, 2001 Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------
The Bank:
Total Bank Capital to Risk Weighted Assets $100,842 12.93% $ 62,391 8.00% $ 77,988 10.00%
Tier I Bank Capital to Risk Weighted Assets $ 91,104 11.68% $ 31,195 4.00% $ 46,793 6.00%
Tier I Bank Capital to Average Assets $ 91,104 9.57% $ 38,077 4.00% $ 47,596 5.00%
The Company:
Total Consolidated Capital to Risk Weighted Assets $107,591 13.76% $ 62,543 8.00% N/A N/A
Tier I Consolidated Capital to Risk Weighted Assets $ 97,829 12.51% $ 31,271 4.00% N/A N/A
Tier I Consolidated Capital to Average Assets $ 97,829 10.25% $ 38,159 4.00% N/A N/A
11
Prompt Corrective Action and Other Enforcement Mechanisms
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
among other things, identifies five capital categories for insured depository
institutions (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized) and requires the
respective Federal regulatory agencies to implement systems for "prompt
corrective action" for insured depository institutions that do not meet minimum
capital requirements within such categories. FDICIA imposes progressively more
restrictive constraints on operations, management and capital distributions,
depending on the category in which an institution is classified. Failure to meet
the capital guidelines could also subject a banking institution to capital
raising requirements. An "undercapitalized" Company must develop a capital
restoration plan. At December 31, 2002 the Company exceeded all of the required
ratios for classification as "well capitalized."
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or practice warrants such treatment. At each
successive lower capital category, an insured depository institution is subject
to more restrictions.
Banking agencies have also adopted regulations which mandate that regulators
take into consideration (i) concentrations of credit risk; (ii) interest rate
risk (when the interest rate sensitivity of an institution's assets does not
match the sensitivity of its liabilities or its off-balance-sheet position); and
(iii) risks from non-traditional activities, as well as an institution's ability
to manage those risks, when determining the adequacy of an institution's
capital. That evaluation will be made as a part of the institution's regular
safety and soundness examination. In addition, the banking agencies have amended
their regulatory capital guidelines to incorporate a measure for market risk. In
accordance with the amended guidelines, the Company and any company with
significant trading activity must incorporate a measure for market risk in its
regulatory capital calculations.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal banking agencies for unsafe or unsound practices in conducting
their businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a depository institution),
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if such equitable
relief was not granted. Additionally, a holding company's inability to serve as
a source of strength to its subsidiary banking organizations could serve as an
additional basis for a regulatory action against the holding company.
Safety and Soundness Standards
The federal banking agencies have adopted guidelines designed to assist the
federal banking agencies in identifying and addressing potential safety and
soundness concerns before capital becomes impaired. The guidelines set forth
operational and managerial standards relating to: (i) internal controls,
information systems and internal audit systems, (ii) loan documentation, (iii)
credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation,
fees and benefits. In addition, the federal banking agencies have also adopted
safety and soundness guidelines with respect to asset quality and earnings
standards. These guidelines provide six standards for establishing and
maintaining a system to identify problem assets and prevent those assets from
12
deteriorating. Under these standards, any insured depository institution should:
(i) conduct periodic asset quality reviews to identify problem assets, (ii)
estimate the inherent losses in problem assets and establish reserves that are
sufficient to absorb estimated losses, (iii) compare problem asset totals to
capital, (iv) take appropriate corrective action to resolve problem assets, (v)
consider the size and potential risks of material asset concentrations, and (vi)
provide periodic asset quality reports with adequate information for management
and the board of directors to assess the level of asset risk. These guidelines
also set forth standards for evaluating and monitoring earnings and for ensuring
that earnings are sufficient for the maintenance of adequate capital and
reserves.
Premiums for Deposit Insurance
The Company's deposit accounts are insured by the Bank Insurance Fund ("BIF"),
as administered by the FDIC, up to the maximum permitted by law. Insurance of
deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operation, or has violated any applicable law, regulation, rule, order,
or condition imposed by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits, which as of
December 31, 2002, ranged from 0 to 27 basis points per $100 of insured
deposits, based on the risk a particular institution poses to its deposit
insurance fund. The risk classification is based on an institution's capital
group and supervisory subgroup assignment. An institution's risk category is
based upon whether the institution is well capitalized, adequately capitalized,
or less than adequately capitalized. Each insured depository institution is also
assigned to one of the following "supervisory subgroups." Subgroup A, B or C.
Subgroup A institutions are financially sound institutions with few minor
weaknesses; Subgroup B institutions are institutions that demonstrate weaknesses
which, if not corrected, could result in significant deterioration; and Subgroup
C institutions are institutions for which there is a substantial probability
that the FDIC will suffer a loss in connection with the institution unless
effective action is taken to correct the areas of weakness. Insured institutions
are not allowed to disclose their risk assessment classification and no
assurance can be given as to what the future level of premiums will be.
Community Reinvestment Act ("CRA") and Fair Lending
The Bank is subject to certain fair lending requirements and reporting
obligations involving lending, investing and other CRA activities. CRA requires
each insured depository institution to identify the communities served by the
institution's offices and to identify the types of credit and investments the
institution is prepared to extend within such communities including low and
moderate income neighborhoods. It also requires the institution's regulators to
assess the institution's performance in meeting the credit needs of its
community and to take such assessment into consideration in reviewing
application for mergers, acquisitions, relocation of existing branches, opening
of new branches and other transactions. A bank may be subject to substantial
penalties and corrective measures for a violation of certain fair lending laws.
The federal banking agencies may take compliance with such laws and CRA into
consideration when regulating and supervising other banking activities.
A bank's compliance with its CRA obligations is based on a performance based
evaluation system which bases CRA ratings on an institution's lending service
and investment performance. An unsatisfactory rating may be the basis for
denying a merger application. The Bank's latest CRA examination was completed by
the Federal Reserve Bank of San Francisco and covered the time period of January
1, 2000 through September 30, 2001 for the lending area and January 1, 2000
through December 31, 2001 for both the investment and service areas. The Bank
received a high satisfactory rating in the lending area and an outstanding
rating in the areas of investment and service. The Bank received an overall
rating of outstanding in complying with its CRA obligations.
13
Recently Enacted Legislation, Regulations and Accounting Guidance
On July 30, 2002, President Bush signed into law The Sarbanes-Oxley Act of 2002.
This new legislation addresses accounting oversight and corporate governance
matters, including:
|X| the creation of a five-member oversight board that will set standards for
accountants and have investigative and disciplinary powers;
|X| the prohibition of accounting firms from providing various types of
consulting services to public clients and requiring accounting firms to
rotate partners among public client assignments every five years;
|X| increased penalties for financial crimes;
|X| expanded disclosure of corporate operations and internal controls and
certification of financial statements;
|X| enhanced controls on, and reporting of, insider trading; and
|X| prohibition on lending to officers and directors of public companies,
although the Bank may continue to make these loans within the constraints
of existing banking regulations.
Risk Factors that May Affect Future Results
The following discusses certain factors that may affect the Company's financial
results and operations and should be considered in evaluating the Company.
Economic Conditions and Geographic Concentration. The Company's operations are
located primarily in Sacramento, San Joaquin, Stanislaus and Merced Counties, in
the Central Valley of California. As a result of this geographic concentration,
the Company's results depend largely upon economic conditions in these areas. A
deterioration in economic conditions in the Company's market areas could have a
material adverse impact on the quality of the Company's loan portfolio, the
demand for its products and services and its financial condition and results of
operations.
Interest Rates. The Company's earnings are impacted by changing interest rates.
Changes in interest rates impact the level of loans, deposits and investments,
the credit profile of existing loans and the rates received on loans and
securities and the rates paid on deposits and borrowings. The Company does not
attempt to predict interest rates and positions the balance sheet in a manner to
minimize the affects of changing interest rates. However, significant
fluctuations in interest rates may have an adverse affect on the Company's
financial condition and results of operations.
Government Regulations and Monetary Policy. The banking industry is subject to
extensive federal and state supervision and regulation. Significant new laws or
changes in existing loans, or repeals of existing laws may cause the Company's
results to differ materially. Further, federal monetary policy, particularly as
implemented through the Federal Reserve System, significantly affects credit
conditions for the Company and a material change in these conditions could have
a material adverse impact on the Company's financial condition and results of
operations.
Competition. The banking and financial services business in the Company's market
areas is highly competitive. The increasingly competitive environment is a
result of changes in regulation, changes in technology and product delivery
systems, and the accelerating pace of consolidation among financial service
providers. The results of the Company may differ if circumstances affecting the
nature or level of completion change.
Credit Quality. A significant source of risk arises from the possibility that
losses will be sustained because borrowers, guarantors and related parties
adopted underwriting and credit monitoring procedures and credit policies,
including the establishment and review of the allowance for credit losses, that
management believes are appropriate to minimize this risk by assessing the
likelihood of nonperformance, tracking loan performance and diversifying the
Company's credit portfolio. These policies and procedures, however, may not
prevent unexpected losses that could have a material adverse effect on the
Company's results.
14
War on Terrorism. The terrorist attacks on the World Trade Center and the
Pentagon on September 11, 2001, ongoing acts or threats of terrorism and actions
taken by the U.S. or other governments as a result of such acts or threats, have
contributed to the continuing downturn in U.S. economic conditions and have
resulted in increased uncertainty regarding the economic outlook. Past
experience suggests that shocks to American society of far less severity have
resulted in a temporary loss of consumer and business confidence and a reduction
in the rate of economic growth. Continual deterioration in either the U.S. or
the California economy could adversely affect the Company's financial condition
and results of operations.
California Energy Crisis. Due to problems associated with the deregulation of
the electrical power industry in California, California utilities and other
energy industry participants have experienced difficulties with the supply and
price of electricity and natural gas. The California energy situation continues
to be fluid and subject to many uncertainties and a number of lawsuits and
regulatory proceedings have been commenced concerning various aspects of the
current energy situation. The long-term impact of the energy crisis in
California on the Company's markets and business cannot be predicted, but could
result in a sustained period of economic difficulties. This could have an
adverse effect on the demand for new loans, the ability of borrowers to repay
outstanding loans, the value of real estate and other collateral securing loans
and, as a result, on the Company's financial condition and results of
operations.
Critical Accounting Policies. The Company's financial statements are presented
in accordance with accounting principles generally accepted in the United States
of America ("US GAAP"). The financial information contained within our financial
statements is, to a significant extent, financial information that is based on
approximate measures of the financial effects of transactions and events that
have already occurred. A variety of factors could affect the ultimate value that
is obtained either when earning income, recognizing an expense, recovering an
asset or relieving a liability. Along with other factors, we use historical loss
factors to determine the inherent loss that may be present in our loan and lease
portfolio. Actual losses could differ significantly from the historical loss
factors that we use. Other estimates that we use are fair value of our
securities and expected useful lives of our depreciable assets. Other than
derivative financial instruments purchased and/or sold to reduce the Company's
exposure to changing interest rates, we have not entered into derivative
contracts for our customers or for ourselves, which relate to interest rate,
credit, equity, commodity, energy, or weather-related indices. US GAAP itself
may change from one previously acceptable method to another method. Although the
economics of our transactions would be the same, the timing of events that would
impact our transactions could change. Accounting standards and interpretation
currently affecting the Company and its subsidiaries my change at any time, and
the Company's financial condition and results of operations may be adversely
affected.
Our most significant estimates are approved by our Management team, which is
comprised of our most senior officers. At each financial reporting period, a
review of these estimates is then presented to our Board of Directors. As of
December 31, 2002, we have not created any special purpose entities to
securitize assets or to obtain off-balance sheet funding. [Although we have sold
a number of loans in the past two years, those loans have been sold to third
parties without recourse, subject to customary representations and warranties.]
Limited Public Market; Volatility in Stock Price. The Company's common stock is
not listed on any exchange, nor is it included on the NASDAQ National Market or
the NASDAQ Small Cap Market. However, trades may be reported on the OTC Bulletin
Board under the symbol "FMCB". Management is aware that there are private
transactions in the Company's common stock. However, the limited trading market
for the Company's common stock may make it difficult for stockholders to dispose
of their shares. Also, the price of the Company's Common Stock may be affected
by general market price movements as well as developments specifically related
to the financial services sector, including interest rate movements, quarterly
variations, or changes in financial estimates by securities analysts and a
significant reduction in the price of the stock of another participant in the
financial services industry.
15
Statistical Disclosures
The tables on the following pages set forth certain statistical information for
Farmers & Merchants Bancorp on a consolidated basis. Averages are computed on a
daily average basis. This information should be read in conjunction with
"Management's Discussion and Analysis" in the Company's 2002 Annual Report to
Shareholders, which is filed herewith as Exhibit 13, and which is incorporated
herein by reference and with the Company's Consolidated Financial Statements and
the Notes thereto included in Company's 2002 Annual Report to Shareholders, also
contained in Exhibit 13, and which is incorporated herein by reference.
16
Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(dollars in thousands)
Year Ended December 31,
2002
Assets Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------
Federal Funds Sold $ 33,032 $ 555 1.68%
Investment Securities Available-for-Sale
U.S. Treasuries 0 0 0.00%
U.S. Agencies 6,930 276 3.98%
Municipals - Taxable 1,532 96 6.27%
Municipals - Non-Taxable 22,265 1,549 6.96%
Mortgage Backed Securities 139,628 8,292 5.94%
Other 10,994 703 6.39%
- ---------------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 181,349 10,916 6.02%
- ---------------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00%
U.S. Agencies 0 0 0.00%
Municipals - Taxable 0 0 0.00%
Municipals - Non-Taxable 28,756 2,173 7.56%
Mortgage Backed Securities 0 0 0.00%
Other 534 32 5.99%
- ---------------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 29,290 2,205 7.53%
- ---------------------------------------------------------------------------------------------------------
Loans
Real Estate 386,840 26,884 6.95%
Agricultural 98,270 5,404 5.50%
Commercial 132,799 7,837 5.90%
Consumer 15,376 1,396 9.08%
Credit Card 3,424 320 9.35%
Municipal 1,122 70 6.24%
- ---------------------------------------------------------------------------------------------------------
Total Loans 637,831 41,911 6.57%
- ---------------------------------------------------------------------------------------------------------
Total Earning Assets 881,502 $55,587 6.31%
=======================
Unrealized Gain/(Loss) on Securities Available-for-Sale 4,588
Allowance for Loan Losses (13,189)
Cash and Due From Banks 28,934
All Other Assets 50,389
- ----------------------------------------------------------------------------------
Total Assets $952,224
==================================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Interest Bearing DDA $87,002 $ 272 0.31%
Savings 220,115 1,940 0.88%
Time Deposits 312,919 9,157 2.93%
- ---------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 620,036 11,369 1.83%
Other Borrowed Funds 41,255 2,227 5.40%
- ---------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 661,291 $13,596 2.06%
=======================
Demand Deposits 180,163
All Other Liabilities 8,804
- ----------------------------------------------------------------------------------
Total Liabilities 850,258
Shareholders' Equity 101,966
- ----------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $952,224
==================================================================================
Net Interest Margin 4.76%
=========================================================================================================
Notes: Yields on municipal securities have been calculated on a fully taxable
equivalent basis using the combined Federal and State income tax rate of 42.06%.
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.
17
Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(dollars in thousands)
Year Ended December 31,
2001
Assets Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------
Federal Funds Sold $ 51,923 $ 1,922 3.70%
Investment Securities Available-for-Sale
U.S. Treasuries 1,021 55 5.39%
U.S. Agencies 6,813 342 5.02%
Municipals - Taxable 1,909 119 6.23%
Municipals - Non-Taxable 21,945 1,426 6.50%
Mortgage Backed Securities 219,352 13,946 6.36%
Other 6,208 454 7.31%
- ---------------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 257,248 16,342 6.35%
- ---------------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00%
U.S. Agencies 367 22 5.99%
Municipals - Taxable 1,714 114 6.65%
Municipals - Non-Taxable 32,572 2,455 7.54%
Mortgage Backed Securities 0 0 0.00%
Other 629 60 9.54%
- ---------------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 35,282 2,651 7.51%
- ---------------------------------------------------------------------------------------------------------
Loans
Real Estate 308,980 26,831 8.68%
Agricultural 88,379 6,813 7.71%
Commercial 104,004 7,946 7.64%
Consumer 19,331 1,930 9.98%
Credit Card 3,410 363 10.65%
Municipal 1,005 73 7.26%
- ---------------------------------------------------------------------------------------------------------
Total Loans 525,109 43,956 8.37%
- ---------------------------------------------------------------------------------------------------------
Total Earning Assets 869,562 $64,871 7.46%
=======================
Unrealized Gain/(Loss) on Securities Available-for-Sale 3,685
Allowance for Loan Losses (12,640)
Cash and Due From Banks 28,568
All Other Assets 25,395
- ----------------------------------------------------------------------------------
Total Assets $914,570
==================================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Interest Bearing DDA $78,228 $ 626 0.80%
Savings 185,352 3,581 1.93%
Time Deposits 338,488 16,831 4.97%
- ---------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 602,068 21,038 3.49%
Other Borrowed Funds 41,017 2,242 5.47%
- ---------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 643,085 $23,280 3.62%
=======================
Demand Deposits 165,938
All Other Liabilities 9,650
- ----------------------------------------------------------------------------------
Total Liabilities 818,673
Shareholders' Equity 95,897
- ----------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $914,570
==================================================================================
Net Interest Margin 4.78%
=========================================================================================================
Notes: Yields on municipal securities have been calculated on a fully taxable
equivalent basis using the combined Federal and State income tax rate of 42.06%.
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.
18
Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(dollars in thousands)
Year Ended December 31,
2000
Assets Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------
Federal Funds Sold $ 20,481 $ 1,300 6.35%
Investment Securities Available-for-Sale
U.S. Treasuries 8,350 461 5.52%
U.S. Agencies 7,133 416 5.83%
Municipals - Taxable 2,997 189 6.31%
Municipals - Non-Taxable 20,805 1,342 6.45%
Mortgage Backed Securities 248,708 15,977 6.42%
Other 5,340 328 6.14%
- ---------------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 293,333 18,713 6.38%
- ---------------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00%
U.S. Agencies 1,997 119 5.96%
Municipals - Taxable 2,927 197 6.73%
Municipals - Non-Taxable 40,199 3,003 7.47%
Mortgage Backed Securities 0 0 0.00%
Other 770 75 9.74%
- ---------------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 45,893 3,394 7.40%
- ---------------------------------------------------------------------------------------------------------
Loans
Real Estate 279,313 26,374 9.44%
Agricultural 70,596 7,438 10.54%
Commercial 83,082 7,880 9.48%
Consumer 20,592 2,021 9.81%
Credit Card 3,340 425 12.72%
Municipal 509 33 6.48%
- ---------------------------------------------------------------------------------------------------------
Total Loans 457,432 44,171 9.66%
- ---------------------------------------------------------------------------------------------------------
Total Earning Assets 817,139 $67,579 8.27%
=======================
Unrealized Gain/(Loss) on Securities Available-for-Sale (6,571)
Allowance for Loan Losses (10,676)
Cash and Due From Banks 26,303
All Other Assets 30,098
- ----------------------------------------------------------------------------------
Total Assets $856,293
==================================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Interest Bearing DDA $65,678 $ 778 1.18%
Savings 181,476 4,127 2.27%
Time Deposits 306,787 16,940 5.52%
- ---------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 553,941 21,845 3.94%
Other Borrowed Funds 52,017 2,912 5.60%
- ---------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 605,958 $24,757 4.09%
=======================
Demand Deposits 156,941
All Other Liabilities 8,244
- ----------------------------------------------------------------------------------
Total Liabilities 771,143
Shareholders' Equity 85,150
- ----------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $856,293
==================================================================================
Net Interest Margin 5.24%
=========================================================================================================
Notes: Yields on municipal securities have been calculated on a fully taxable
equivalent basis using the combined Federal and State income tax rate of 42.06%.
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
Volume and Rate Analysis of Net Interest Revenue
(Rates on a Taxable Equivalent Basis) 2002 versus 2001
(in thousands) Amount of Increase
(Decrease) Due to Change in:
-------------------------------------
Average Average Net
Interest Earning Assets Balance Rate Change
- -------------------------------------------------------------------------------------------------------------------
Federal Funds Sold $ (546) $ (821) $ (1,367)
Investment Securities Available for Sale
U.S. Treasuries (28) (27) (55)
U.S. Agencies 6 (72) (66)
Municipals - Taxable (24) 1 (23)
Municipals - Non-Taxable 21 102 123
Mortgage Backed Securities (4,786) (868) (5,654)
Other 315 (66) 249
- -------------------------------------------------------------------------------------------------------------------
Total Investment Securities Available for Sale (4,496) (930) (5,426)
- -------------------------------------------------------------------------------------------------------------------
Investment Securities Held to Maturity
U.S. Treasuries 0 0 0
U.S. Agencies (11) (11) (22)
Municipals - Taxable (57) (57) (114)
Municipals - Non-Taxable (289) 7 (282)
Mortgage Backed Securities 0 0 0
Other (8) (20) (28)
- -------------------------------------------------------------------------------------------------------------------
Total Investment Securities Held to Maturity (365) (82) (446)
- -------------------------------------------------------------------------------------------------------------------
Loans:
Real Estate 6,008 (5,955) 53
Agricultural 701 (2,111) (1,409)
Commercial (612) 503 (109)
Installment (370) (164) (534)
Credit Card 1 (44) (43)
Other 7 (10) (3)
- -------------------------------------------------------------------------------------------------------------------
Total Loans 5,737 (7,781) (2,045)
- -------------------------------------------------------------------------------------------------------------------
Total Earning Assets 330 (9,614) (9,283)
- -------------------------------------------------------------------------------------------------------------------
Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction 63 (417) (354)
Savings 578 (2,218) (1,641)
Time Deposits (1,190) (6,484) (7,674)
- -------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits (550) (9,120) (9,669)
Other Borrowed Funds 13 (28) (15)
- -------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities (537) (9,147) (9,684)
- -------------------------------------------------------------------------------------------------------------------
Total Change $867 $ (466) $401
===================================================================================================================
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.
20
Farmers & Merchants Bancorp
Volume and Rate Analysis of Net Interest Revenue
(Rates on a Taxable Equivalent Basis) 2001 versus 2000
(in thousands) Amount of Increase
(Decrease) Due to Change in:
-------------------------------------
Average Average Net
Interest Earning Assets Balance Rate Change
- -------------------------------------------------------------------------------------------------------------------
Federal Funds Sold $1,342 $ (720) $ 622
Investment Securities Available-for-Sale
U.S. Treasuries (395) (11) (406)
U.S. Agencies (18) (56) (74)
Municipals - Taxable (68) (2) (70)
Municipals - Non-Taxable 74 9 83
Mortgage Backed Securities (1,868) (163) (2,031)
Other 58 68 126
- -------------------------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale (2,217) (155) (2,372)
- -------------------------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0
U.S. Agencies (98) 1 (97)
Municipals - Taxable (81) (2) (83)
Municipals - Non-Taxable (575) 27 (548)
Mortgage Backed Securities 0 0 0
Other (14) (2) (16)
- -------------------------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity (768) 24 (744)
- -------------------------------------------------------------------------------------------------------------------
Loans:
Real Estate 2,673 (2,216) 457
Agricultural 1,631 (2,256) (625)
Commercial 1,766 (1,700) 66
Installment (126) 35 (91)
Credit Card 9 (70) (61)
Other 35 5 40
- -------------------------------------------------------------------------------------------------------------------
Total Loans 5,988 (6,202) (214)
- -------------------------------------------------------------------------------------------------------------------
Total Earning Assets 4,345 (7,053) (2,708)
- -------------------------------------------------------------------------------------------------------------------
Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction 131 (282) (151)
Savings 86 (632) (546)
Time Deposits 1,661 (1,770) (109)
- -------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 1,878 (2,684) (806)
Other Borrowed Funds (603) (68) (671)
- -------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 1,275 (2,752) (1,477)
- -------------------------------------------------------------------------------------------------------------------
Total Change $3,070 $ (4,301) $ (1,231)
===================================================================================================================
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
Farmers & Merchants Bancorp
Investment Portfolio
The following table summarizes the balances and distributions of the investment
securities held on the dates indicated.
Available Held to Available Held to Available Held to
for Sale Maturity for Sale Maturity for Sale Maturity
---------------------------------------------------------------------
December 31: (in thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
U. S. Treasury $ 0 $ 0 $ 0 $ 0 $5,047 $ 0
U. S. Agency 26,984 0 12,771 0 7,090 1,999
Municipal 34,352 27,351 24,076 32,137 23,975 38,585
Mortgage-Backed Securities 117,335 0 196,384 0 237,734 0
Corporate Bonds 17,703 0 0 0 0 0
Other 9,689 519 9,621 561 5,540 684
- -------------------------------------------------------------------------------------------------------------------------------
Total Book Value $206,063 $27,870 $242,852 $32,698 $279,386 $41,268
===============================================================================================================================
Fair Value $206,063 $29,111 $242,852 $33,546 $279,386 $41,833
===============================================================================================================================
Analysis of Investment Securities Available-for-Sale
The following table is a summary of the relative maturities and yields of the
Company's investment securities Available-for-Sale as of December 31, 2002.
Municipal securities have been calculated on a fully taxable equivalent basis
using the applicable Federal and State income tax rates for the period
Investment Securities Available-for-Sale Fair Average
December 31, 2002 (in thousands) Value Yield
- -------------------------------------------------------------------------------------------------------------------
U.S. Agency
One year or less - -
After one year through five years 26,984 5.13%
After five years through ten years - -
After ten years - -
- -------------------------------------------------------------------------------------------------------------------
Total U.S. Agency Securities 26,984 5.13%
- -------------------------------------------------------------------------------------------------------------------
Municipal - Non-Taxable
One year or less 2,088 5.74%
After one year through five years 26,654 3.96%
After five years through ten years 3,209 5.75%
After ten years 972 6.25%
- -------------------------------------------------------------------------------------------------------------------
Total Non-Taxable Municipal Securities 32,923 4.31%
- -------------------------------------------------------------------------------------------------------------------
Municipal - Taxable
One year or less - -
After one year through five years - -
After five years through ten years 1,429 6.25%
After ten years - -
- -------------------------------------------------------------------------------------------------------------------
Total Taxable Municipal Securities 1,429 6.25%
- -------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities
One year or less 64,047 6.13%
After one year through five years 43,030 5.17%
After five years through ten years 10,257 5.00%
After ten years - -
- -------------------------------------------------------------------------------------------------------------------
Total Mortgage-Backed Securities 117,334 5.68%
- -------------------------------------------------------------------------------------------------------------------
Corporate Bonds
One year or less 8,163 1.80%
After one year through five years 9,541 6.42%
After five years through ten years - -
After ten years - -
- -------------------------------------------------------------------------------------------------------------------
Total Mortgage-Backed Securities 17,704 4.29%
- -------------------------------------------------------------------------------------------------------------------
Other
One year or less 4,596 7.24%
After one year through five years 5,093 7.32%
After five years through ten years - -
After ten years - -
- -------------------------------------------------------------------------------------------------------------------
Total Other Securities 9,689 7.28%
- -------------------------------------------------------------------------------------------------------------------
Total Investment Securities Available for Sale 206,063 4.98%
Note: The average yield for floating rate securities is calculated using the
current stated yield.
22
Farmers & Merchants Bancorp
Analysis of Investment Securities Held-to-Maturity
The following table is a summary of the relative maturities and yields of the
Company's investment securities Held-to-Maturity as of December 31, 2002.
Municipal securities have been calculated on a fully taxable equivalent basis
using the applicable Federal and State income tax rates for the period
Investment Securities Held-to-Maturity Book Average
December 31, 2002 (in thousands) Value Yield
- -------------------------------------------------------------------------------------------------------------------
Municipal - Non-Taxable
One year or less 7,234 5.05%
After one year through five years 16,144 4.90%
After five years through ten years 1,699 5.08%
After ten years 2,274 6.56%
- -------------------------------------------------------------------------------------------------------------------
Total Non-Taxable Municipal Securities 27,351 5.09%
- -------------------------------------------------------------------------------------------------------------------
Other
One year or less - -
After one year through five years - -
After five years through ten years - -
After ten years 519 5.98%
- -------------------------------------------------------------------------------------------------------------------
Total Other Securities 519 5.98%
- -------------------------------------------------------------------------------------------------------------------
Total Investment Securities $27,870 5.11%
===================================================================================================================
23
Farmers & Merchants Bancorp
Loan Data
(in thousands)
The following table shows the Bank's loan composition by type of loan.
December 31,
2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Real Estate $367,224 $304,451 $261,910 $222,354 $180,468
Real Estate Construction 66,467 49,692 28,354 39,186 26,529
Agricultural 109,130 110,707 83,770 67,774 55,816
Commercial 135,877 117,202 98,841 62,195 49,587
Consumer 13,948 17,022 20,965 18,953 14,035
Credit Card 4,252 3,157 3,619 3,235 2,989
Other 1,795 954 271 60 64
- ------------------------------------------------------------------------------------------------------------------
Total Loans 698,693 603,185 497,730 413,757 329,488
Less:
Unearned Income 2,018 1,016 333 348 310
Allowance for Loan Losses 16,684 12,709 11,876 9,787 8,589
- ------------------------------------------------------------------------------------------------------------------
Loans, Net $679,991 $589,460 $485,521 $403,622 $320,589
==================================================================================================================
There were no concentrations of loans exceeding 10% of total loans which were
not otherwise disclosed as a category of loans in the above table.
Non-Performing Loans
(in thousands)
December 31,
2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Nonaccrual Loans
Real Estate $2,180 $1,015 $948 $754 $3,997
Commercial 452 1,302 520 1,713 595
Consumer 2 36 4 32 9
Credit Card 0 0 0 0 0
Other 263 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------
Total Nonaccrual Loans 2,897 2,353 1,472 2,499 4,601
- ------------------------------------------------------------------------------------------------------------------
Accruing Loans Past Due 90 Days or More
Real Estate 1 0 0 0 0
Commercial 0 0 0 0 0
Consumer 0 0 0 0 0
Credit Card 9 56 23 12 23
Other 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------
Total Accruing Loans Past Due 90 Days or More 10 56 23 12 23
- ------------------------------------------------------------------------------------------------------------------
Total Non-Performing Loans $2,907 $2,409 $1,495 $2,511 $4,624
==================================================================================================================
Other Real Estate Owned $0 $0 $88 $204 $636
Non-Performing Loans as a Percent of Total Loans 0.42% 0.40% 0.30% 0.61% 1.40%
==================================================================================================================
Allowance for Loan Losses
as a Percent of Total Loans 2.39% 2.11% 2.39% 2.37% 2.61%
==================================================================================================================
The Bank's policy is to place loans (Excluding Credit Card Loans) on nonaccrual
status when the 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. The gross interest income
that would have been recorded if the loans had been current for the year ending
December 31, 2002 was $331,000. For a discussion of impaired loan policy see
Note 4. in the Notes to the Consolidated Financial Statements of the Company's
2002 Annual Report to Shareholders.
24
Farmers & Merchants Bancorp
Provision and Allowance for Loan Losses
(dollars in thousands)
The following table summarizes the loan loss experience of the Company for the
periods indicated:
2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Year $ 12,709 $ 11,876 $ 9,787 $ 8,589 $ 7,188
Provision Charged to Expense 4,926 1,000 2,800 1,700 1,400
Charge Offs:
Real Estate 0 0 45 794 194
Agricultural 149 94 218 0 15
Commercial 966 507 441 404 76
Consumer 78 68 177 80 73
Credit Card 93 85 48 30 73
Other 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------
Total Charge Offs 1,286 754 929 1,308 431
- ------------------------------------------------------------------------------------------------------------------
Recoveries:
Real Estate 0 18 0 3 1
Agricultural 141 0 2 16 2
Commercial 149 525 154 759 386
Consumer 34 14 53 21 36
Credit Card 11 30 9 7 7
Other 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Total Recoveries 335 587 218 806 432
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Net Recoveries (Charge-Offs) (951) (167) (711) (502) 1
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Balance at End of Year* $ 16,684 $ 12,709 $ 11,876 $ 9,787 $ 8,589
==================================================================================================================
Ratios:
Consolidated Allowance for Loan Losses to:
Loans at Year End 2.77% 2.55% 2.87% 2.97% 3.16%
Average Loans 2.62% 2.42% 2.60% 2.70% 2.92%
Consolidated Net Charge-Offs to:
Loans at Year End 0.16% 0.03% 0.17% 0.15% 0.00%
Average Loans 0.15% 0.03% 0.16% 0.14% 0.00%
For a description of the Company's policy regarding the Allowance for Loan
Losses, see Note 1. in the Notes to the Consolidated Financial Statements of the
2001 Annual Report.
Allocation of the Allowance for Loan Losses
(dollars in thousands) Amount of Allowance Allocation at December 31,
------------------------------------------------------------------
2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Real Estate $ 5,287 $ 3,716 $ 2,875 $2,609 $3,107
Real Estate Construction 793 520 311 461 456
Agricultural 3,702 3,722 1,769 1,759 1,341
Commercial 5,681 3,873 2,077 1,623 1,189
Consumer 427 283 129 147 229
Other 715 435 86 81 73
Unallocated 79 160 4,629 3,107 2,194
- ------------------------------------------------------------------------------------------------------------------
Total $16,684 $12,709 $11,876 $9,787 $8,589
==================================================================================================================
Percent of Loans in Each Category
to Total Loans at December 31,
------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------------------------------------------------------
Real Estate 50.5% 52.6% 53.7% 54.8% 55.5%
Real Estate Construction 8.2% 5.7% 9.5% 8.1% 9.5%
Agricultural 18.4% 16.8% 16.4% 16.9% 0.0%
Commercial 19.4% 19.9% 15.0% 15.0% 29.4%
Installment 2.8% 4.2% 4.6% 4.3% 4.5%
Other 0.7% 0.8% 0.8% 0.9% 1.1%
- ------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
==================================================================================================================
25
Farmers & Merchants Bancorp
Maturities and Rate Sensitivity of Loans
(in thousands)
The following table shows the maturity distribution and interest rate
sensitivity of loans of the Company on December 31, 2001
Over One
Year to Over
One Year Five Five
or Less Years Years Total Percent
- ------------------------------------------------------------------------------------------------------------------
Real Estate $27,739 $91,565 $247,920 $367,224 54.11%
Real Estate Construction 15,685 36,627 14,155 66,467 9.79%
Agricultural 77,910 22,581 8,639 109,130 16.08%
Commercial 83,799 36,586 15,492 135,877 20.02%
Total $205,133 $187,359 $286,206 $678,698 100.00%
==================================================================================================================
Rate Sensitivity:
Predetermined Rate $26,844 $62,697 $18,689 $108,230 15.95%
Floating Rate 176,272 126,680 267,516 570,468 84.05%
- ------------------------------------------------------------------------------------------------------------------
Total $203,116 $189,377 $286,205 $678,698 100.00%
==================================================================================================================
Percent 29.93% 27.90% 42.17% 100.00%
=====================================================================================================
Commitments and Lines of Credit
It is not the policy of the Company to issue formal commitments or lines of
credit except to a limited number of well-established and financially
responsible local commercial and agricultural enterprises. Such commitments can
be either secured or unsecured and are typically in the form of revolving lines
of credit for seasonal working capital needs. Occasionally, such commitments are
in the form of letters of credit to facilitate the customer's particular
business transactions. Commitment fees are generally not charged except where
letters of credit are involved. Commitments and lines of credit typically mature
within one year.
26
Farmers & Merchants Bancorp
Analysis of Certificates of Deposit
(In thousands)
The following table sets forth, by time remaining to maturity, the Company's
time deposits in amounts of $100,000 or more for the periods indicated.
December 31,
2002
- ------------------------------------------------------------------------------------------------
Time Deposits of $100,000 or More
Three Months or Less $75,673
Over Three Months Through Six Months 37,259
Over Six Months Through Twelve Months 20,767
Over Twelve Months 14,306
- ------------------------------------------------------------------------------------------------
Total Time Deposits of $100,000 or More $148,005
================================================================================================
Refer to the Year-To-Date Average Balances and Rate Schedules for information on
separate deposit categories.
Ratios
Refer to the Five Year Financial Summary of Operations located on page 28 of the
Farmers & Merchants Bancorp Annual Report to Shareholders for the year ending
December 31, 2002 for calculations of Return on Average Equity (net of
accumulated other comprehensive income), Return on Average Assets, Dividend
Payout Ratio and Equity to Assets Ratio.
Short-Term Borrowings
Refer to Note 9 of the Farmers & Merchants Bancorp Annual Report to Shareholders
for the year ending December 31, 2002.
27
Item 2. Properties
Farmers & Merchants Bancorp along with its subsidiaries are headquartered in
Lodi, California. Executive offices are located at 111 W. Pine Street. Banking
services are provided in seventeen locations in the Company's service area. Of
the eighteen locations, fourteen are owned and three are leased. The expiration
of these leases occurs between the years 2003 and 2010.
Item 3. Legal Proceedings
Certain lawsuits and claims arising in the ordinary course of business have been
filed or are pending against the Company or its subsidiaries. Based upon
information available to the Company, its review of such lawsuits and claims and
consultation with its counsel, the Company believes the liability relating to
these actions, if any, would not have a material adverse effect on its
consolidated financial statements.
Item 4. Submission of Matters to a Vote of Security Holders No matters were
submitted to a vote of the Company's stockholders during the fourth quarter of
2002.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The common stock of Farmers & Merchants Bancorp is not widely held, is not
listed on any exchange, nor is it included on the NASDAQ National Market or the
NASDAQ Small Cap Market. However, trades may be reported on the OTC Bulletin
Board under the symbol "FMCB".
The following table summarizes the actual high and low selling prices for the
Company's common stock since the first quarter of 2001. These figures are based
on activity posted on the OTC Bulletin Board and on stock transactions between
individual shareholders that are reported to the Company.
Calendar Quarter High Low
2002 Fourth quarter $300.00 $250.00
Third quarter 310.00 250.00
Second quarter 320.00 250.00
First quarter 259.50 238.00
2001 Fourth quarter $250.00 $250.00
Third quarter 265.00 226.00
Second quarter 250.00 219.00
First quarter 245.00 206.00
As of December 31, 2002, there were approximately 1,200 holders of record of the
Company's common stock.
Beginning in 1975 and continuing through 2002, the Company has issued a 5% stock
dividend annually. For information regarding cash dividends declared, refer to
Quarterly Financial Data which appears in the Farmers & Merchants Bancorp 2002
Annual Report to Shareholders, which is filed herewith as Exhibit 13 and which
is incorporated herein by reference.
There are regulatory limitations on cash dividends that may be paid by the
Company under state and federal laws. See Item 1. Business - Supervision and
Regulation.
28
Item 6. Selected Financial Data
The selected financial data for the five years ended December 31, 2002, which
appears in the Five-Year Financial Summary of the Company's 2002 Annual Report
to Shareholders, which is filed herewith as Exhibit 13, and which is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
See Management's Discussion and Analysis in the Company's 2002 Annual Report to
Shareholders which is filed herewith as Exhibit 13, and which is incorporated
herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk See
"Management's Discussion and Analysis" in the Company's 2002 Annual Report to
Shareholders which is filed herewith as Exhibit 13 and which is incorporated
herein by reference.
Item 8. Financial Statements and Supplementary Data
See Consolidated Financial Statements and the related Notes to Consolidated
Financial Statements in the Company's 2002 Annual Report to Shareholders which
is filed herewith as Exhibit 13, and which are incorporated herein by reference.
(See table below.)
FARMERS & MERCHANTS BANCORP
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
Report of Management 5
Report of Independent Accountants 6
Consolidated Financial Statements
Consolidated Statements of Income-Years ended
December 31, 2002, 2001 and 2000. 7
Consolidated Balance Sheets-December 31, 2002 and 2001. 8
Consolidated Statements of Changes in Shareholders' Equity-Years
ended December 31, 2002, 2001 and 2000. 9
Consolidated Statements of Cash Flows-Years Ended December 31, 2002,
2001 and 2000 10
Consolidated Statements of Comprehensive Income. 11
Notes to Consolidated Financial Statements 12
Management's Discussion and Analysis 30
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures None
PART III
Item 10. Directors and Executive Officers of the Company
See "Election of Directors," "Executive Officers" and "Compliance with Section
16(a) of the Exchange Act" in the Company's definitive proxy statement for the
2002 Annual Meeting of Shareholders as filed with the Commission and which is
incorporated herein by reference.
29
Item 11. Executive Compensation
See "Compensation of Directors and Executive Officers," "Report of Personnel
Committee of the Board of Directors on Executive Compensation," "Deferred Bonus
Plan," "Profit Sharing Plan," "Defined Benefit Pension Plan," "Money Purchase
Plan," "Employment Contracts and Termination of Employment and Change in Control
Arrangements," "Compensation Committee Interlocks and Insider Participation" and
"Performance Graph" in the Company's definitive proxy statement for the 2002
Annual Meeting of Shareholders as filed with the Commission and which is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters See "Security Ownership of Certain Beneficial Owners
and Management" in the Company's definitive proxy statement for the 2002 Annual
Meeting of Shareholders as filed with the Commission and which is incorporated
herein by reference. The Company does not have any equity compensation plans
which require disclosure under Item 201(d) of Regulation S-K.
Item 13. Certain Relationships and Related Transactions
See "Employment Contracts and Termination of Employment and Change in Control
Arrangements" and "Certain Relationships and Related Transactions" in the
Company's definitive proxy statement for the 2002 Annual Meeting of Shareholders
as filed with the Commission and which is incorporated herein by reference.
PART IV
Item 14. Controls and Procedures
See "Controls and Procedures" under "Management's Discussion and Analysis" in
the Company's 2002 Annual Report to Shareholders which is filed herewith as
Exhibit 13 and which is incorporated herein by reference.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements: Incorporated herein by reference, are
listed in Item 8 hereof.
(2) Financial Statement Schedules: None
(3) Exhibits: See Exhibit Index
(b) Reports on form 8-K filed during the last quarter of 2002: None
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
(Registrant)
By ______________________________
John R. Olson
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 25, 2003
/s/Kent A. Steinwert
______________________________ President and
Kent A. Steinwert Chief Executive Officer
/s/John R. Olson
_____________________________ Executive Vice President &
John R. Olson Chief Financial Officer
Principal Accounting Officer
- ----------------------------- ------------------------------
Ole R. Mettler, Chairman James E. Podesta, Director
- ---------------------------- ------------------------------
Stewart Adams, Jr., Director Kevin Sanguinetti, Director
- ---------------------------- ------------------------------
Ralph Burlington, Director Harry C. Schumacher, Director
- ---------------------------- ------------------------------
Edward Corum, Jr., Director Calvin Suess, Director
- ---------------------------- ------------------------------
Robert F. Hunnell, Director Carl Wishek, Jr., Director
31
Certification
I, Kent A. Steinwert, certify that:
1. I have reviewed this annual report on Form 10-K of Farmers & Merchants
Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a)
designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) valuated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 25, 2003 /s/ Kent A. Steinwert
----------------------------
Kent A. Steinwert
President & Chief Executive Officer
32
Certification
I, John R. Olson, certify that:
1. I have reviewed this annual report on Form 10-K of Farmers & Merchants
Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a)
designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) valuated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 25, 2003 /s/ John R. Olson
----------------------------
John R. Olson
Executive Vice President
& Chief Financial Officer
33
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(i) 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.
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.
10.5 Employment Agreement dated December 29, 2000, between Farmers &
Merchants Bank of Central California and Deborah E. Hodkin, filed as
Exhibit 10.5 to Registrant's 10-K for the year ended December 31,
2002.
10.6 Employment Agreement dated December 10, 2001, between Farmers &
Merchants Bank of Central California and Chris C. Nelson, filed as
Exhibit 10.6 to Registrant's 10-K for the year ended December 31,
2002.
10.7 Employment Agreement dated March 25, 2003, between Farmers & Merchants
Bank of Central California and Stephen W. Haley, filed as Exhibit 10.7
to Registrant's 10-K for the year ended December 31, 2002.
13 Annual Report to Shareholders of Farmers & Merchants Bancorp for the
year ended December 31, 2002
16 Letter regarding change in certifying accountants filed as exhibit 16
to Registrants 8-K filed October 20, 2000 is incorporated herein by
reference.
21 Subsidiaries of the Registrant as of December 31, 2002, filed as
Exhibit 21 to Registrant's 10-K for the year ended December 31, 2002.
99.1 Chief Executive Officer Certification pursuant to 10 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Chief Financial Officer Certification pursuant to 10 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
34