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 Secretary of State granted authority to officially change the Bank's name 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. In 1997, a loan production office was opened in the community of Walnut Grove.
On April 30, 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"). Farmers & Merchants Bank is the Company's principal asset. Farmers & Merchants Bancorp is a bank holding company incorporated in the State of Delaware on February 22, 1999, and registered under the Bank Holding Company Act of 1956, as amended. The Company's securities as of December 31, 2001, consist of 719,269 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.
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. The Company has not engaged in any other activities to date. 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 Dividends and Other Transfer of Funds on Page 6. 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.
1999 also saw the opening of our Centralized Loan Center in Lodi. Growth will continue in 2002 with a move to new facilities for our Turlock Main Office and the addition of our Vintage Faire Office in Modesto.
Service Area
The Company services the northern Central Valley with 18 banking offices. The area includes Sacramento, San Joaquin, Stanislaus and Merced Counties with branches in Sacramento, Elk Grove, Galt, Lodi, Walnut Grove, 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 with investment advisors
Employees
At December 31, 2001 the Company employed a total of 304 full time equivalent employees. The Company believes that its employee relations are excellent.
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.
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 Company and the Bank are influenced by prevailing economic conditions, 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 actions and policy directives of the Federal Reserve Board determine, to a significant degree, the cost and the availability of funds obtained from money market sources for lending and investing. Federal Reserve Board policies and regulations also influence, directly and indirectly, the rates of interest paid by commercial banks on their time and savings deposits through its open market operations in U.S. Government securities and adjustments to the discount rates applicable to borrowings by depository institutions and others. The actions of the Federal Reserve Board in these areas influence the growth of Bank loans, investments and deposits and also affect the interest rates earned on interest-earning assets and paid on interest-bearing liabilities. The nature and impact of future changes in such policies on the Company of future changes in economic conditions and monetary and fiscal policies are not predictable.
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 Federal Reserve Board may require that the Company terminate an activity or terminate control of or liquidate or divest certain subsidiaries of affiliates when the Federal Reserve Board 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 Federal Reserve Board 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 Federal Reserve Board prior to purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve Board, 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 transitions between Farmers & Merchants Bancorp and its subsidiaries. Further, the Company is required by the Federal Reserve Board to maintain certain levels of capital. See " Capital."
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. Any loans and commitments to lend included in such transactions are made in accordance with applicable law, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons of similar creditworthiness, and on terms not involving more than the normal risks of collection or presenting other unfavorable features.
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 Federal Reserve Board, may engage in any, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve Board 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 Federal Reserve Board 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 Federal Reserve Boards' 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. 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 Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board's regulations or both.
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.
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 "Capital."
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 $13.3 million at December 31, 2001.
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 "Prompt Corrective Regulatory Action and Other Enforcement Mechanisms" and "Capital Standards" for a discussion of these additional restrictions on capital distributions.
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 restriction with respect to transactions involving the transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of federal law. See "Item 1. Business - Supervision and Regulation - Prompt Corrective Action and Other Enforcement Mechanisms."
Capital
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-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted 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 3%. 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, 2001 and 2000 the Company and the Bank's risk-based capital ratios were as follows:
Prompt Corrective Action
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, 2001 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 supervising agencies for unsafe or unsound practices in conducting their businesses for violations of law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions vary commensurate with the severity of the violation.
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 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, 2001, 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.
The Community Reinvestment Act ("CRA")
The Bank is subject to certain fair lending requirements and reporting obligations involving lending, investing and other CRA activities. CRA requires each Company to identify the communities served by the Company's offices and to identify the types of credit and investments the Company is prepared to extend within such communities including low and moderate income neighborhoods. It also requires the Company's regulators to assess the Company'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 in 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, 1998 through December 31, 1999. The Bank received a high satisfactory rating in the three areas of testing which include lending, investment and service. The Bank received an overall rating of satisfactory in complying with its CRA obligations.
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 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.
Statistical Disclosure
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 2001 Annual Report to Shareholders, located in Exhibit 13, incorporated herein by reference and with the Company's Consolidated Financial Statements and the Notes thereto included in Company's 2001 Annual Report to Shareholders, located in Exhibit 13, incorporated herein by reference.
Farmers & Merchants Bancorp Year-to-Date Average Balances and Interest Rates (Interest and Rates on a Taxable Equivalent Basis) (dollars in thousands)
Notes: Yields on municipal securities have been calculated on a fully taxable equivalent basis using the applicable Federal and State income tax rates for the period. Loan Fees are included in interest income for loans. Unearned discount is included for rate calculation purposes. Nonaccrual loans and lease financing receivables have been included in the average balances. Yields on securities available-for-sale are based on historical cost.
Farmers & Merchants Bancorp Year-to-Date Average Balances and Interest Rates (Interest and Rates on a Taxable Equivalent Basis) (dollars in thousands)
Notes: Yields on municipal securities have been calculated on a fully taxable equivalent basis using the applicable Federal and State income tax rates for the period. Loan Fees are included in interest income for loans. Unearned discount is included for rate calculation purposes. Nonaccrual loans and lease financing receivables have been included in the average balances. Yields on securities available-for-sale are based on historical cost.
Farmers & Merchants Bancorp Year-to-Date Average Balances and Interest Rates (Interest and Rates on a Taxable Equivalent Basis) (dollars in thousands)
Notes: Yields on municipal securities have been calculated on a fully taxable equivalent basis using the applicable Federal and State income tax rates for the period. Loan Fees are included in interest income for loans. Unearned discount is included for rate calculation purposes. Nonaccrual loans and lease financing receivables have been included in the average balances. Yields on securities available-for-sale are based on historical cost.
Farmers & Merchants Bancorp Volume and Rate Analysis of Net Interest Revenue (Rates on a Taxable Equivalent Basis) (in thousands)
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.
Farmers & Merchants Bancorp Volume and Rate Analysis of Net Interest Income (Rates on a Taxable Equivalent Basis) (in thousands)
2000 versus 1999 Amount of Increase (Decrease) Due to Change in: --------------------------- Average Average Net Interest Earning Assets Balance Rate Change - -------------------------------------------------------------------------------- Federal Funds Sold $ 284 $ 223 $ 507 Investment Securities Available-for-Sale U.S. Treasuries (704) 49 (655) U.S. Agencies (102) (29) (131) Municipals - Taxable 11 (1) 10 Municipals - Non-Taxable (25) 4 (21) Mortgage Backed Securities 412 737 1,149 Other 59 27 86 - ------------------------------------------------------------------------------- Total Investment Securities Available-for-Sale (349) 787 438 - -------------------------------------------------------------------------------
Investment Securities Held-to-Maturity U.S. Treasuries (24) (25) (49) U.S. Agencies 0 26 26 Municipals - Taxable (38) 0 (38) Municipals - Non-Taxable (489) (134) (623) Mortgage Backed Securities 0 0 0 Other (21) (14) (35) - ------------------------------------------------------------------------------- Total Investment Securities Held-to-Maturity (572) (147) (719) - -------------------------------------------------------------------------------
Loans: Real Estate 4,481 (489) 3,992 Commercial 4,178 864 5,042 Installment 416 87 503 Credit Card 55 (24) 31 Other 11 0 11 - ------------------------------------------------------------------------------- Total Loans 9,141 438 9,579 - ------------------------------------------------------------------------------- Total Earning Assets 8,504 1,301 9,805 - -------------------------------------------------------------------------------
Interest Bearing Liabilities Interest Bearing Deposits: Transaction 28 35 63 Savings (70) 57 (13) Time Deposits 3,079 2,216 5,295 - ------------------------------------------------------------------------------- Total Interest Bearing Deposits 3,037 2,308 5,345 Other Borrowed Funds 470 80 550 - ------------------------------------------------------------------------------- Total Interest Bearing Liabilities 3,507 2,388 5,895 - ------------------------------------------------------------------------------- Total Change $4,997 $(1,087) $3,910 ===============================================================================
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.
Farmers & Merchants Bancorp Investment Portfolio
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, 2001. 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, 2001 (in thousands) Value Yield - ------------------------------------------------------------------------ U.S. Treasury One year or less -- -- After one year through five years -- -- After five years through ten years -- -- After ten years -- -- - ------------------------------------------------------------------------ Total U.S. Treasury Securities -- -- - ------------------------------------------------------------------------ U.S. Agency One year or less 12,771 6.67% After one year through five years -- -- After five years through ten years -- -- After ten years -- -- - ------------------------------------------------------------------------ Total U.S. Agency Securities 12,771 6.67% - ------------------------------------------------------------------------ Municipal - Non-Taxable One year or less 869 4.84% After one year through five years 13,529 4.66% After five years through ten years 6,940 5.86% After ten years 985 6.25% - ------------------------------------------------------------------------ Total Non-Taxable Municipal Securities 22,323 5.11% - ------------------------------------------------------------------------ Municipal - Taxable One year or less 126 5.90% After one year through five years -- -- After five years through ten years 1,627 6.25% After ten years -- -- - ------------------------------------------------------------------------ Total Taxable Municipal Securities 1,753 6.22% - ------------------------------------------------------------------------ Mortgage-Backed Securities One year or less 60,266 6.39% After one year through five years 136,118 6.38% After five years through ten years -- -- After ten years -- -- - ------------------------------------------------------------------------ Total Mortgage-Backed Securities 196,384 6.38% - ------------------------------------------------------------------------ Other One year or less 4,463 5.05% After one year through five years 5,158 7.34% After five years through ten years -- -- After ten years -- -- - ------------------------------------------------------------------------ Total Other Securities 9,621 6.28% - ------------------------------------------------------------------------ Total Investment Securities Available for Sale $242,852 6.28% ========================================================================
Note: The average yield for floating rate securities is calculated using the current stated yield.
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, 2001. 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, 2001 (in thousands) Value Yield - ----------------------------------------------------------------------------- U.S. Treasury One year or less -- -- After one year through five years -- -- After five years through ten years -- -- After ten years -- -- - ----------------------------------------------------------------------------- Total U.S. Treasury Securities -- -- - ----------------------------------------------------------------------------- U.S. Agency One year or less -- -- After one year through five years -- -- After five years through ten years -- -- After ten years -- -- - ----------------------------------------------------------------------------- Total U.S. Agency Securities -- -- - ----------------------------------------------------------------------------- Municipal - Non-Taxable One year or less 4,510 5.05% After one year through five years 20,566 4.90% After five years through ten years 3,365 5.08% After ten years 3,696 6.56% - ----------------------------------------------------------------------------- Total Non-Taxable Municipal Securities 32,137 5.13% - ----------------------------------------------------------------------------- Municipal - Taxable One year or less -- -- After one year through five years -- -- After five years through ten years -- -- After ten years -- -- - ----------------------------------------------------------------------------- Total Taxable Municipal Securities -- -- - ----------------------------------------------------------------------------- Other One year or less -- -- After one year through five years -- -- After five years through ten years -- -- After ten years 561 10.63% - ----------------------------------------------------------------------------- Total Other Securities 561 10.63% - ----------------------------------------------------------------------------- Total Investment Securities $32,698 5.23% =============================================================================
Farmers & Merchants Bancorp Loan Data (in thousands)
The following table shows the Bank's loan composition by type of loan.
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)
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, 2001 was $26,000. For a discussion of impaired loan policy see Note 4. in the Notes to the Consolidated Financial Statements of the Company's 2001 Annual Report.
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:
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, ---------------------------------------------- 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------- Real Estate $ 3,716 $ 2,875 $2,609 $3,107 $3,020 Real Estate Construction 520 311 461 456 516 Commercial 7,595 3,846 3,382 2,530 1,927 Installment 283 129 147 229 82 Other 435 86 81 73 62 Unallocated 160 4,629 3,107 2,194 1,581 - ----------------------------------------------------------------------------- Total $12,709 $11,876 $9,787 $8,589 $7,188 =============================================================================
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% Commercial 37.8% 36.7% 31.4% 32.0% 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% =======================================================================
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 $ 25,313 $ 67,222 $211,916 $304,451 50.47% Real Estate Construction 35,584 8,847 5,261 49,692 8.24% Commercial 141,003 67,511 19,395 227,909 37.78% Consumer 7,222 12,370 1,541 21,133 3.50% - ------------------------------------------------------------------------------ Total $209,122 $155,950 $238,113 $603,185 100.00% ==============================================================================
Rate Sensitivity: Predetermined Rate $ 36,104 $ 70,534 $15,031 $121,669 20.17% Floating Rate 173,018 85,416 223,082 481,516 79.83% - ------------------------------------------------------------------------------ Total $209,122 $155,950 $238,113 $603,185 100.00% ============================================================================== Percent 34.67% 25.85% 39.48% 100.00% =====================================================================
The "One Year Or Less" column includes Demand loans, Overdrafts and Past Due Loans. The Company does not have an automatic rollover policy for maturing loans.
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 transaction. Commitment fees are generally not charged except where letters of credit are involved. Commitments and lines of credit typically mature within one year.
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, - --------------------------------------------------------------------------- Time Deposits of $100,000 or More Three Months or Less $ 67,281 Over Three Months Through Six Months 44,538 Over Six Months Through Twelve Months 21,124 Over Twelve Months 13,489 - -------------------------------------------------------------------------- Total Time Deposits of $100,000 or More $146,432 ========================================================================== 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 49 of the Farmers & Merchants Bancorp Annual Report for the year ending December 31, 2001 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 for the year ending December 31, 2001.
Item 2.
Item 2. Properties
Farmers & Merchants Bancorp along with its subsidiaries are headquartered in Lodi, California. Executive offices are located at 121 W. Pine Street. Banking services are provided in eighteen locations in the Company's service area. Of the eighteen locations, fourteen are owned and four are leased. The expiration of the leases occurs between the years 2002 and 2010.
Item 3.
Item 3. Legal Proceedings
Not Applicable
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Security Matters The common stock of Farmers & Merchants Bancorp is not widely held nor is it actively traded. Consequently, it is not listed on any stock exchange or sold in the over-the-counter market.
The following table summarizes the actual high and low selling prices for the Company's common stock since the first quarter of 2000. These figures are based on activity posted on the Electronic Bulletin Board and on stock transactions between individual shareholders that are reported to the Company.
Calendar Quarter High Low ---------------- ---- ---
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
2000 Fourth quarter $245.00 $240.00 Third quarter 235.00 210.00 Second quarter 210.00 210.00 First quarter 210.00 205.00
Beginning in 1975 and continuing through 2001, 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 2001 Annual Report, located in Exhibit 13 and incorporated herein by reference.
Item 6.
Item 6. Selected Financial Data
The selected financial data for the five years ended December 31, 2001, which appears in the Five-Year Financial Summary of the Company's 2001 Annual Report, located in Exhibit 13, is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The management's discussion and analysis section of the Company's 2001 Annual Report, located in Exhibit 13, is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements and the related Notes to Consolidated Financial Statements of the Company's 2001 Annual Report, located in Exhibit 13, are incorporated herein by reference. (See listing below.)
Statement - ---------
Report of Management Report of Independent Accountants Consolidated Statements of Income - Years ended December 31, 2001, 2000 and 1999. Consolidated Balance Sheets - December 31, 2001 and 2000. Consolidated Statements of Changes in Shareholders' Equity - Years ended December 31, 2001, 2000 and 1999. Consolidated Statements of Cash Flows - Years ended December 31, 2001, 2000 and 1999. Consolidated Statements of Comprehensive Income. Notes to Consolidated Financial Statements. Five Year Financial Summary of Operations Selected Quarterly Financial Data Management's Discussion and Analysis
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Not Applicable
PART III
Item 10, 11, 12, and 13.
The information required by these items is contained in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 15, 2002, and is incorporated herein by reference. The definitive Proxy Statement will be filed with the Commission within 120 days after the close of the Company's fiscal year pursuant to Regulation 14A of the Securities Exchange Act of 1934.
PART IV
Item 14. 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 2001: None
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: /s/ John R. Olson -------------------------------- 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 12, 2002
/s/ Kent A. Steinwert President and - ---------------------------------- Chief Executive Officer Kent A. Steinwert
/s/ Richard S. Erichson Executive Vice President - ---------------------------------- Senior Credit Officer Richard S. Erichson
/s/ Stephen A. Fleming Executive Vice President - ---------------------------------- Head of Business Banking Stephen A. Fleming
/s/ Donald H. Fraser Executive Vice President - ---------------------------------- Wholesale/Retail Market Manager Donald H. Fraser
/s/ Deborah E. Hodkin Executive Vice President - ---------------------------------- Chief Administrative Officer Deborah E. Hodkin
/s/ Chris C. Nelson Executive Vice President - ---------------------------------- Director of Retail Banking Chris C. Nelson
/s/ John R. Olson Executive Vice President & - ---------------------------------- Chief Financial Officer John R. Olson Principal Accounting Officer
/s/ Ole R. Mettler /s/ George D. Scheideman - ---------------------------------- ------------------------------------- Ole R. Mettler, Chairman George D. Scheideman, Director
/a/ Stewart Adams /s/ Kevin Sanguinetti - ---------------------------------- ------------------------------------- Stewart Adams, Jr., Director Kevin Sanguinetti, Director
/s/ Ralph Burlington /s/ Robert F. Hunnell - ---------------------------------- ------------------------------------- Ralph Burlington, Director Robert F. Hunnell, Director
/s/ Calvin Suess /s/ James E. Podesta - ---------------------------------- -------------------------------------- Calvin Suess, Director James E. Podesta, Director
/s/ Carl Wishek /s/ Harry C. Schumacher - ---------------------------- -------------------------------------- Carl Wishek, Jr., Director Harry C. Schumacher, Director
Index to Exhibits - -----------------
Item 14. 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 2001: None
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: /s/ John R. Olson -------------------------------- 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 12, 2002
/s/ Kent A. Steinwert President and - ---------------------------------- Chief Executive Officer Kent A. Steinwert
/s/ Richard S. Erichson Executive Vice President - ---------------------------------- Senior Credit Officer Richard S. Erichson
/s/ Stephen A. Fleming Executive Vice President - ---------------------------------- Head of Business Banking Stephen A. Fleming
/s/ Donald H. Fraser Executive Vice President - ---------------------------------- Wholesale/Retail Market Manager Donald H. Fraser
/s/ Deborah E. Hodkin Executive Vice President - ---------------------------------- Chief Administrative Officer Deborah E. Hodkin
/s/ Chris C. Nelson Executive Vice President - ---------------------------------- Director of Retail Banking Chris C. Nelson
/s/ John R. Olson Executive Vice President & - ---------------------------------- Chief Financial Officer John R. Olson Principal Accounting Officer
/s/ Ole R. Mettler /s/ George D. Scheideman - ---------------------------------- ------------------------------------- Ole R. Mettler, Chairman George D. Scheideman, Director
/a/ Stewart Adams /s/ Kevin Sanguinetti - ---------------------------------- ------------------------------------- Stewart Adams, Jr., Director Kevin Sanguinetti, Director
/s/ Ralph Burlington /s/ Robert F. Hunnell - ---------------------------------- ------------------------------------- Ralph Burlington, Director Robert F. Hunnell, Director
/s/ Calvin Suess /s/ James E. Podesta - ---------------------------------- -------------------------------------- Calvin Suess, Director James E. Podesta, Director
/s/ Carl Wishek /s/ Harry C. Schumacher - ---------------------------- -------------------------------------- Carl Wishek, Jr., Director Harry C. Schumacher, Director
Index to Exhibits - -----------------