-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VbKvz1M4vJXVLGgeXE0YI/fheTkykfdS4F3MYB/kVhVkux3LEuQZOvY6by4Rp4YR 9VzgSNx7SCFFhL1MSk4hTA== 0000929624-99-001936.txt : 19991115 0000929624-99-001936.hdr.sgml : 19991115 ACCESSION NUMBER: 0000929624-99-001936 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARMERS & MERCHANTS BANCORP CENTRAL INDEX KEY: 0001085913 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 943327828 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26099 FILM NUMBER: 99749071 BUSINESS ADDRESS: STREET 1: 121 WEST PINE ST CITY: LODI STATE: CA ZIP: 95240-2184 BUSINESS PHONE: 2093672411 MAIL ADDRESS: STREET 1: C/O PILLSBURY MADISON & SUTRO LLP STREET 2: P O BOX 7880 CITY: SAN FRANCISCO STATE: CA ZIP: 94120 10-Q 1 FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ For Quarter Ended September 30, 1999 Commission File Number:_________ FARMERS & MERCHANTS BANCORP (Exact name of registrant as specified in its charter) Delaware 94-3327828 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 121 W. Pine Street, Lodi, California 95240 (Address of principal Executive offices) (Zip Code) Registrant's telephone number, including area code (209) 334-1101 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Number of shares of common stock of the registrant: Par value $0.01, authorized 2,000,000 shares; issued and outstanding 661,405 as of October 29, 1999. This Form 10-Q contains 23 pages. FARMERS & MERCHANTS BANCORP FORM 10-Q TABLE OF CONTENTS ___________________________
PART I. - FINANCIAL INFORMATION Pages --------------------- ----- Item 1 - Financial Statements Consolidated Balance Sheets as of September 30, 1999 December 31, 1998 and September 30, 1998. 3 Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 1999 and 1998. 4 Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 1999 and 1998. 5 Statement of Changes in Shareholders' Equity as of December 31, 1998 and September 30, 1999 6 Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1999 and 1998. 7 Notes to Consolidated Financial Statements 8 Item 2 - Management's Discussion and Analysis 9 PART II. - OTHER INFORMATION 22 ----------------- SIGNATURES 23 - ----------
2 PART I. - FINANCIAL INFORMATION Item 1 - Financial Statements FARMERS & MERCHANTS BANCORP Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------------------------------------ (In Thousands) September 30, December 31, September 30, 1999 1998 1998 Assets (Unaudited) (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ Cash and Cash Equivalents: Cash and Due From $ 22,981 $ 27,572 $ 20,575 Federal Funds Sold - 12,140 12,200 - ------------------------------------------------------------------------------------------------------------------------------------ Total Cash and Cash Equivalents 22,981 39,712 32,775 Investment Securities: Available-for Sale 292,251 312,305 253,353 Held-to-Maturity 51,213 60,152 75,526 - ------------------------------------------------------------------------------------------------------------------------------------ Total Investment Securities 343,464 372,457 328,879 - ------------------------------------------------------------------------------------------------------------------------------------ Loans 399,378 329,471 317,502 Less: Unearned Income (388) (293) (412) Less: Allowance for Loan Losses (9,700) (8,589) (8,285) - ------------------------------------------------------------------------------------------------------------------------------------ Loans, Net 389,290 320,589 308,805 - ------------------------------------------------------------------------------------------------------------------------------------ Land, Buildings & Equipment 11,988 11,714 11,406 Interest Receivable and Other Assets 15,059 14,327 10,801 - ------------------------------------------------------------------------------------------------------------------------------------ Total Assets $ 782,782 $ 758,799 $ 692,666 ==================================================================================================================================== Liabilities & Shareholders' Equity Deposits: Demand $ 145,293 $ 156,586 $ 127,631 Interest Bearing Transaction 74,389 75,575 53,171 Savings 168,686 166,495 172,717 Time Deposits Over $100,000 103,475 81,665 77,137 Time Deposits Under $100,000 157,104 147,066 138,437 - ------------------------------------------------------------------------------------------------------------------------------------ Total Deposits 648,947 627,387 569,093 - ------------------------------------------------------------------------------------------------------------------------------------ Fed Funds Purchased 3,400 2,000 - Federal Home Loan Bank Advances 41,071 41,093 40,000 Other Liabilities 7,884 8,914 2,565 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities 701,302 679,394 611,658 - ------------------------------------------------------------------------------------------------------------------------------------ Shareholders' Equity Preferred Stock: Par Value $0.00, 1,000,000 Shares Authorized, None Issued or Outstanding - - - Common Stock: Par Value $0.01, 2,000,000 Shares Authorized, 661,521, 663,295, 664,815 Issued and Outstanding at September 30, 1999, December 31, 1998 and September 30, 1998, Respectively 7 6 6 Additional Paid In Capital 48,105 43,576 43,804 Retained Earnings 36,002 34,991 35,375 Accumulated Other Comprehensive Income (Loss) (2,634) 832 1,823 - ------------------------------------------------------------------------------------------------------------------------------------ Total Shareholders' Equity 81,480 79,405 81,008 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities & Shareholders' Equity $ 782,782 $ 758,799 $ 692,666 ====================================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 3 FARMERS & MERCHANTS BANCORP Consolidated Statements of Income (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------- Three Months Nine Months Ended September 30, Ended September 30, (In Thousands) 1999 1998 1999 1998 ---------------------------------------------------- Interest Income: Interest & Fees on Loans $ 9,312 $ 7,924 $25,134 $22,349 Federal Funds Sold 34 214 522 608 Securities: Investments Available-for-Sale: Taxable 4,209 3,657 12,594 11,457 Non-taxable 211 134 682 229 Investments Held-to-Maturity: Taxable 139 354 407 1,360 Non-taxable 576 736 1,814 2,278 - ------------------------------------------------------------------------------------------------------------------------- Total Interest Income 14,481 13,019 41,153 38,281 - ------------------------------------------------------------------------------------------------------------------------- Interest Expense: Interest Bearing Transaction 179 189 526 564 Savings 1,034 968 3,070 2,961 Time Deposits Over $100,000 1,166 1,005 3,261 2,952 Time Deposits Under $100,000 1,746 1,770 5,234 5,231 Interest on Borrowed Funds 627 473 1,774 1,067 - ------------------------------------------------------------------------------------------------------------------------- Total Interest Expense 4,752 4,405 13,865 12,775 - ------------------------------------------------------------------------------------------------------------------------- Net Interest Income 9,729 8,614 27,288 25,506 Provision for Loan Losses 500 300 1,400 900 - ------------------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 9,229 8,314 25,888 24,606 - ------------------------------------------------------------------------------------------------------------------------- Non-Interest Income Service Charges on Deposit Accounts 394 496 2,347 2218 Net Gain on Sale of Investment Securities 7 4 149 238 Other 1,173 858 2,105 1,766 - ------------------------------------------------------------------------------------------------------------------------- Total Non-Interest Income 1,574 1,358 4,601 4,222 - ------------------------------------------------------------------------------------------------------------------------- Non-Interest Expense Salaries & Employee Benefits 3,825 3,463 11,247 10,496 Occupancy 966 986 2,833 2,923 Other Operating 2,293 1,999 5,629 5,623 - ------------------------------------------------------------------------------------------------------------------------- Total Non-Interest Expense 7,084 6,448 19,709 19,042 - ------------------------------------------------------------------------------------------------------------------------- Income Before Taxes 3,719 3,224 10,780 9,786 Provision for Income Taxes 1,316 1,096 3,751 3,365 - ------------------------------------------------------------------------------------------------------------------------- Net Income $ 2,403 $ 2,128 $ 7,029 $ 6,421 ========================================================================================================================= Earning Per Share Basic Earnings Per Common Share $ 3.63 $ 3.20 $ 10.61 $ 9.66 =========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 4 FARMERS & MERCHANTS BANCORP Consolidated Statements of Comprehensive Income (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------- (in thousands) Three Months Ended Nine Months Ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- Net Income $ 2,403 $ 2,128 $ 7,029 $ 6,421 Other Comprehensive Income - Unrealized Gain (Loss) on Securities: (621) 815 (3,466) 877 - ------------------------------------------------------------------------------------------------------------------------- Total Other Comprehensive Income (621) 815 (3,466) 877 - ------------------------------------------------------------------------------------------------------------------------- Comprehensive Income $ 1,782 $ 2,943 $ 3,563 $ 7,298 =========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 5 FARMERS & MERCHANTS BANCORP Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
- ------------------------------------------------------------------------------------------------------------------ (In Thousands) Accumulated Additional Other Total Common Paid-In Retained Comprehensive Shareholders' Stock Capital Earnings Income Equity - ---------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 $ 6 $ 43,576 $ 34,991 $ 832 $ 79,405 ====================================================================================================================== Net Income - - 7,029 - 7,029 Cash Dividends Declared on - Common Stock - - (1,125) - (1,125) 5% Stock Dividend 1 4,822 (4,823) - - Cash Paid in Lieu of Fractional Shares Related to Stock Dividend - - (70) - (70) Redemption of Stock - (293) - - (293) Changes in Net Unrealized Gain (Loss) on Securities Available for Sale - - - (3,466) (3,466) ====================================================================================================================== Balance, September 30, 1999 $ 7 $ 48,105 $ 36,002 $ (2,634) $ 81,480 ======================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 6 FARMERS & MERCHANTS BANCORP Consolidated Statement of Cash Flows (Unaudited) For Nine Months Ending
- ------------------------------------------------------------------------------------------------------------------- (in thousands) Sept. 30, Sept. 30, 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Operating Activities: Net Income $ 7,029 $ 6,421 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Possible Loan Losses 1,400 900 Depreciation and Amortization 1,323 808 Provision for Deferred Income Taxes (405) (50) Accretion of Investment Security Discounts 597 (310) Net (Gain) Loss on Sale of Investment Securities (149) (279) Net Change in Operating Assets & Liabilities: Decrease in Trading Account Assets - 40 (Increase) Decrease in Interest Receivable and Other Assets 2,097 1,789 (Decrease) in Interest Payable and Other Liabilities (1,030) (3,895) - ------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 10,862 5,424 Investing Activities: Trading Securities: Purchased (15,490) (20,013) Sold or Matured 15,478 20,099 Securities Available-for-Sale: Purchased (127,297) (61,243) Sold or Matured 141,067 56,920 Securities Held-to-Maturity: Purchased (1,978) (4,004) Matured 10,876 27,526 Net Loans Originated or Acquired (70,740) (45,680) Principal Collected on Loans Charged Off 639 393 Net Additions to Premises and Equipment (1,597) (604) - ------------------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Investing Activities (49,042) (26,606) Financing Activities: Net (Decrease) in Demand, Interest-Bearing Transaction, and Savings Accounts (10,288) (15,617) Increase (Decrease) in Time Deposits 31,848 2,676 Federal Funds Purchased 1,400 0 Federal Home Loan Bank Borrowings: Advances 0 40,000 Paydowns (22) 0 Cash Dividends (1,196) (1,112) Stock Redemption (293) 0 - ------------------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Financing Activities 21,449 25,947 Increase (Decrease) in Cash and Cash Equivalents (16,731) 4,765 Cash and Cash Equivalents at Beginning of Year 39,712 28,010 - ------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents as of Sept. 30, 1999 and Sept. 30, 1998 $ 22,981 $ 32,775 ===================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Financial Statements The foregoing financial statements are unaudited, however, in the opinion of Management, all adjustments (comprised only of normal recurring accruals) necessary for a fair presentation of the financial statements have been included. A summary of the Corporations significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements in the Corporation's Annual Report on Form 10-K for 1998. 2. Reclassifications Certain reclassifications have been made in the 1998 financial information to conform to the presentation used in 1999. 3. Interim Statements The interim consolidated financial statements are unaudited and reflect all adjustments and reclassifications which, in the opinion of management, are necessary for a fair statement of the results of operations and financial condition for the interim period. All adjustments and reclassifications are of a normal and recurring nature. Results for the period ended September 30, 1999, are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole. 4. Earnings per Share The actual number of shares outstanding at September 30, 1999, were 661,521. Basic earnings per share is calculated on the basis of the weighted average number of shares outstanding during the period which were 661,595 and 664,815 for the three months ending September 30, 1999 and 1998, respectively. For the nine-month periods ending September 30, 1999 and 1998, the weighted average number of shares were 662,636 and 664,815. All 1999 per share information in the financial statements and in Management's Discussion and Analysis has been restated to give retroactive effect to the 5% stock dividend declared May 1, 1999. 5. Holding Company Formation The accompanying financial statements include the accounts of Farmers & Merchants Bancorp and the Bancorp's wholly owned subsidiary, Farmers & Merchants Bank. Farmers & Merchants Bancorp was organized effective April 30, 1999. Significant intercompany transactions have been eliminated in consolidation. 8 ITEM 2. Management's Discussion and Analysis Forward -Looking Statements This report contains various forward-looking statements, usually containing the words "estimate," "project," "expect," "objective," "goal," or similar expressions and includes assumptions concerning the Company's operations, future results, and prospects. These forward-looking statements are based upon current expectations and are subject to risk and uncertainties. In connection with the "safe-harbor" provisions of the private Securities Litigation Reform Act of 1995, the company provides the following cautionary statement identifying important factors which could cause the actual results of events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Such factors include the following: (i) the effect of changing regional and national economic conditions; (ii) significant changes in interest rates and prepayment speeds; (iii) credit risks of commercial, real estate, consumer, and other lending activities; (iv) changes in federal and state Banking regulations; (v) the year 2000, and; (vi) other external developments which could materially impact the Company's operational and financial performance. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made. Introduction The following discussion and analysis is intended to provide a better understanding of the Company's performance during the first nine months of 1999 and the material changes in financial condition, operating income and expense of the Company and its subsidiaries as shown in the accompanying financial statements. This section should be read in conjunction with the consolidated financial statements and the notes thereto, along with other financial information included in this report. Prior period per share amounts have been restated for the 5% stock dividend declared during 1999. Overview For the nine months ended September 30, 1999, Farmers & Merchants Bancorp reported net income of $7,029,000, earnings per share of $10.61, return on average assets of 1.23% and return on average shareholders' equity of 11.37%. For the nine months ending September 30, 1998, net income totaled $6,421,000, earnings per share was $9.66, return on average assets was 1.27% and the return on average shareholders' equity totaled 10.92%. The Company's improved financial performance in 1999 was due to a combination of increased revenue generated from its core business, which include improved growth rates in both loans outstanding and deposit balances along with effective capital management strategies. 9 The following is a summary of the financial accomplishments achieved during the nine-month period ending September 30, 1999 compared to September 30, 1998. . Net interest income increased 7.0% to $27.3 million from $25.5 million. . The provision for loan losses increased to $1.4 million from $0.9 million. . Non-interest income increased 9.0% to $4.6 million during the first nine months of 1999, up from the $4.2 million reported for the first nine months of 1998. . Non-interest expense was limited to an increase of 3.5% and totaled $19.7 million during the first nine months of 1999. . Total assets increased 13.0% to $782.8 million. . Total loans increased 25.8% to $399.4 million, up $81.9 million from September 30, 1998. . Total deposits increased 14.0% to $648.9 million. . Total investment securities increased to $343.5 million from $328.9 million at September 30, 1998. . Total Shareholders' Equity increased $0.5 million to $81.5 million. Net Interest Income Net interest income is the amount by which the interest and fees on loans and interest earned on earning assets exceeds the interest paid on interest bearing sources of funds. For the purpose of analysis, the interest earned on tax- exempt investments and municipal loans is adjusted to an amount comparable to interest subject to normal income taxes. This adjustment is referred to as "taxable equivalent" and is noted wherever applicable. Interest income and expense are affected by changes in the volume and mix of average interest earning assets and average interest bearing liabilities, as well as fluctuations in interest rates. Therefore, increases or decreases in net interest income are analyzed as changes in volume, changes in rate and changes in the mix of assets and liabilities. Net interest income grew 7.0% to $27.3 million during the first nine months of 1999, compared to $25.5 million at September 30, 1998. On a fully taxable equivalent basis, net interest income increased 6.5% and totaled $28.6 million at September 30, 1999, compared to $26.8 million for the first nine months of 1998. Net interest income on a taxable equivalent basis, expressed as a percentage of average total earning assets, is referred to as the net interest margin, which represents the average net effective yield on earning assets. For the nine months ended September 30, 1999, the net interest margin was 5.30% compared to 5.62% for the same period 10 in 1998. The decrease in net interest margin was related to the decline in interest rates earned on loans and investments resulting from competitive pressure and a lower interest rate environment. The predominant reasons for the growth in net interest income during 1999 was the increase in average earning assets as well as the change in the mix of asset totals and deposit balances. During the first nine months of 1999, average earning assets increased $83.9 million while average interest bearing liabilities increased $60.9 million. Loans, the Company's highest earning asset, increased $81.9 million as of September 30, 1999 compared to September 30, 1998. On an average balance basis, loans have increased by $64.7 million during the year. The yield on the loan portfolio declined 86 basis points to 9.6% for the nine months ending September 30, 1999 compared to 10.4% for the nine months ending September 30, 1998. This decline in yield, due to competitive pressure and a lower interest rate environment, was offset by the growth in balances, which had a positive effect on interest revenue in the amount of $2.8 million for the first nine months of 1999. The investment portfolio is the other main component of the Company's earning assets. The Company's investment policy is conservative. The Company primarily invests in mortgage-backed securities, U.S. Treasuries, U.S. Government Agencies, and high-grade municipals. Since the risk factor for these types of investments is significantly lower than that of loans, the yield earned on investments is substantially less than that of loans. Average investment securities increased $19.6 million during the first nine months of 1999. Although there was a $19.6 million increase in the average balance of investment securities, interest income increased 0.9% because of declining interest rates. The average yield, on a taxable equivalent basis, in the investment portfolio was 6.30% in 1999 compared to 6.61% in 1998. Securities that have matured since September 1998 were replaced with securities with yields at the lower prevailing rates. Net interest income on the Average Balance Sheet is shown on a taxable equivalent basis, which is higher than net interest income on the Consolidated Statements of Income because of adjustments that relate to income on certain securities that are exempt from federal income taxes. Interest expense increased as a result of an increase in average deposits, which grew 9.6%. The growth in interest expense on interest-bearing deposits was limited to 3.3% due to the decline in average interest cost on interest-bearing deposits. The average interest cost was 3.3% at September 30, 1999, with interest expense totaling $12.1 million. For the nine months ending September 30, 1998, interest expense was $11.7 million and the average interest cost on interest-bearing deposits was 3.5%. The Company's earning assets and rate sensitive liabilities are subject to repricing at different times, which exposes the Company to income fluctuations when interest rates change. In order to minimize income fluctuations, the Company attempts to match asset and liability maturities. However, some maturity mismatch is inherent in the asset and liability mix. 11 Provision and Allowance for Loan Losses As a financial institution that assumes lending and credit risks as a principal element of its business, the Company anticipates that credit losses will be experienced in the normal course of business. The provision for loan losses creates a reserve to absorb potential future losses. The allowance for loan losses is maintained at a level considered by management to be adequate to provide for risks inherent in the loan portfolio. In determining the adequacy of the allowance for loan losses, management takes into consideration examinations of Company supervisory authorities, results of internal credit reviews, financial condition of borrowers, loan concentrations, prior loan loss experience, and general economic conditions. The allowance is based on estimates and ultimate future losses may vary from the current estimates. Management reviews these estimates periodically and, when adjustments are necessary, they are reported in the period in which they become known. The Company's written lending policies, along with applicable laws and regulations governing the extension of credit, require risk analysis as well as ongoing portfolio and credit management through loan product diversification, lending limits, ongoing credit reviews and approval policies prior to funding of any loan. The Company manages and controls credit risk through diversification, dollar limits on loans to one borrower by primarily restricting loans made to its principal market area. Loans that are performing but have shown some signs of weakness are subjected to more stringent reporting. Fixed-rate real estate loans are comprised primarily of loans with maturities of less than five years. Long-term residential loans are originated by the Company and sold on the secondary market. The provision as of September 30, 1999 equaled $1.4 million, an increase of $500 thousand from September 30, 1998. The increase in the provision was the result of management's evaluation of the credit quality of the loan portfolio, the prevailing economic climate, and its effect on borrowers' ability to repay loans in accordance with the terms of the notes and current loan losses. After reviewing all factors, management concluded that an increase in the provision for loan losses was appropriate. As of September 30, 1999, the allowance for loan losses was $9.7 million, which represents 2.4% of the total loan balances. For the period ended September 30, 1998, the allowance was $8.3 million and 2.6% of total loans. The table below illustrates the change in the allowance for the first nine months of 1998 and 1999. 12 Allowance for Loan Losses - ------------------------- Balance, January 1, 1998 7,188 Provision Charged to Expense 900 Recoveries of Loans Previously Charged Off 393 Loans Charged Off (196) =========================================================================== Balance, September 30, 1998 $8,285 =========================================================================== Balance, January 1, 1999 8,589 Provision Charged to Expense 1,400 Recoveries of Loans Previously Charged Off 639 Loans Charged Off (928) =========================================================================== Balance, September 30, 1999 $9,700 ===========================================================================
Non-Interest Income Non-interest income increased 9.0% for the nine months ending September 30, 1999, compared to the same period of 1998. This increase was due to increases in service charges on deposit accounts, ATM fees, Mortgage Loan servicing fees, and Credit Card fees. Non-Interest Expense Salaries and Employee Benefits increased $751 thousand or 7.2% from the prior year due to merit increases and additional staffing requirements. Offsetting this increase was a decrease in occupancy expense of $90 thousand or 3.1%. The net effect was an increase in non-interest expense of 3.5% compared to the prior year. Income Taxes The provision for income taxes increased 11.5% to $3.8 million for the first nine months of 1999 as a result of improved earnings. For the nine months ended September 30, 1998, the provision totaled $3.4 million. Balance Sheet Analysis Investment Securities The Financial Accounting Standards Board statement, Accounting for Certain Investments in Debt and Equity Securities, requires the Company to classify its investments as held-to-maturity, trading or available-for-sale. Securities are classified as held-to-maturity and accounted for at amortized cost when the Company has the positive intent and ability to hold the securities to maturity. Trading securities are securities acquired for short-term appreciation and are carried at fair value, with unrealized gains and losses recorded in non-interest income. As of September 30, there were no securities in the trading portfolio. Securities the Company does not intend to hold to maturity are classified as available-for-sale. This portion of the investment portfolio provides the Company with liquidity that may be required to meet the needs of Company borrowers and satisfy depositor's withdrawals. 13 The investment portfolio provides the Company with an income alternative to loans. As of September 30, 1999 the investment portfolio represented 43.9% of the Company's total assets. Total investment securities increased $14.6 million from a year ago and now total $343.5 million. Not included in the investment portfolio are overnight investments in Federal Funds Sold. For the nine months ended September 30, 1999, average Federal Funds Sold was $14.2 million compared to $14.5 million in 1998. Loans The Company's loan portfolio at September 30, 1999 increased $81.9 million from September 30, 1998. The increase is the result of an aggressive calling program implemented during 1999 and an improved economic climate in the Company's market area. Additionally, on an average balance basis loans have increased $64.7 million or 22.6%. The table following sets forth the distribution of the loan portfolio by type as of the dates indicated.
Loan Portfolio As Of: - --------------------- (dollar amounts in thousands) September 30, 1999 September 30, 1998 - ------------------------------------------------------------------------------ Real Estate Construction $ 37,605 $ 26,529 Other Real Estate 216,595 167,475 Commercial 123,843 107,326 Consumer 21,335 16,172 - ------------------------------------------------------------------------------ Gross Loans 399,378 317,502 Less: Unearned Income 388 412 Allowance for Loan Losses 9,700 8,285 - ------------------------------------------------------------------------------ Net Loans $389,290 $308,805 ==============================================================================
Non-Performing Assets The Company's policy is to place loans on non-accrual status when, for any reason, principal or interest is past due for ninety days or more unless it is both well secured and in the process of collection. Any interest accrued, but unpaid, is reversed against current income. Thereafter, interest is recognized as income only as it is collected in cash. As a result of events beyond the Company's control, problem loans can and do occur. As of September 30, 1999, non-performing loans were $2.9 million compared to $4.1 million at September 30, 1998. Reducing problem loans continues to be a significant Company objective. The Company reported $420 thousand in foreclosed loans as other real estate at September 30, 1999, compared to the $1.3 million as of September 30, 1998. Accrued interest reversed from income on loans placed on a non-accrual status totaled $276 thousand for the nine months ended September 30, 1999. 14
Non-Performing Assets - --------------------- Sept. 30, 1999 Dec. 31, 1998 Sept. 30, 1998 - ------------------------------------------------------------------------------- Nonperforming Loans $2,948 $4,624 $4,125 OREO 420 636 1,343 Total $3,368 $5,260 $5,468 =============================================================================== Non-Performing Assets as a % of: - ------------------------------- Total Loans 0.8% 1.6% 1.7% Reserve for Loan Loss 34.7% 61.2% 65.9%
Deposits At September 30, 1999, deposits totaled $648.9 million. This represents an increase of 14.0% or $79.8 million from September 30, 1998. The majority of the increase was focused in time deposits over $100,000, which increased $26.3 million or 34.1%. The change in the mix of deposits occurs as interest rates change. The expectations our customers have of future interest rates, dictates their maturity and account selections. Time deposit rate promotions have been very competitive this past quarter. We have offered some very attractive rates which our current customers and new customers have chosen to invest in. The most volatile deposits in any financial institution are certificates of deposit over $100,000. The Company has not found its certificates of deposit over $100,000 to be as volatile as some other financial institutions as it does not solicit these types of deposits from brokers nor does it offer interest rate premiums. It has been the Company's experience that large depositors have placed their funds with the Company due to its strong reputation for safety, security and liquidity. Capital Much attention has been directed at the capital adequacy of the financial institution industry. The Company relies on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to insure depositor protection. Shareholders' Equity totaled $81.5 million at September 30, 1999 and $81.0 million at September 30, 1998, which represents an increase of $500 thousand or 0.6%. The Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation have adopted risk-based capital guidelines. The guidelines are designed to make capital requirements more sensitive to differences in risk related assets among Banking organizations, to take into account off-balance sheet exposures and to aid in making the definition of Bank capital uniform. Company assets and off-balance sheet items are categorized by risk. The results of these regulations are that assets with a higher degree of risk require a larger amount of capital; assets, such as cash, with a low degree of risk have little or no capital requirements. Under the guidelines the Company is currently required to maintain regulatory risk based capital equal to at least 8.0%. As of September 30, 1999, the Company meets all 15 capital adequacy requirements to which it is subject. The following table illustrates the relationship between regulatory capital requirements and the Company's capital position.
Regulatory Capital Adequacy (in thousands) Company Capital Requirements September 30, 1999 Amount Ratio Amount Ratio - -------------------------------------------------------------------------------------------------------------------- Total Capital to Risk Weighted Assets $88,663 19.20% $36,952 8.0% Tier I Capital to Risk Weighted Assets $82,841 17.93% $18,476 4.0%
Liquidity Liquidity is the Company's ability to maintain a cash flow adequate to fund operations, handle fluctuations in deposit levels, respond to the credit needs of borrowers, and to take advantage of investment opportunities as they arise. The principal sources of liquidity include interest and principal payments on loans and investments, proceeds from the maturity or sale of investments, and growth in deposits. The Company maintains overnight investments in Federal Funds as a cushion for temporary liquidity needs. For the first nine months of 1999, Federal Funds averaged $14.2 million. In addition, the Company maintains Federal Fund credit lines of $136 million with major correspondent Banks subject to the customary terms and conditions for such arrangements. Asset/Liability Management - Interest Rate Risk The mismatch between maturities of interest sensitive assets and liabilities results in uncertainty in the Company's earnings and economic value and is referred to as interest rate risk. Farmers & Merchants Bancorp's primary objective in managing interest rate risk is to minimize the potential for significant loss as a result of changes in interest rates. The Company measures interest rate risk in terms of potential impact on both its economic value and earnings. The methods for governing the amount of interest rate risk include: analysis of asset and liability mismatches (GAP analysis), the utilization of a simulation model and limits on maturities of investment, loan and deposit products to relatively short periods which reduces the market volatility of those instruments. The gap analysis measures, at specific time intervals, the divergences between earning assets and interest bearing liabilities for which repricing opportunities will occur. A positive difference, or gap, indicates that earning assets will reprice faster than interest bearing liabilities. This will generally produce a greater net interest margin during periods of rising interest rates and a lower net interest margin during periods of declining interest rates. Conversely, a negative gap will generally produce a lower net interest margin during periods of rising interest rates and a greater net interest margin during periods of decreasing interest rates. The interest rates paid on deposit accounts do not always move in unison with the rates charged on loans. In addition, the magnitude of changes in the rates charged on loans is not always proportionate to the magnitude of changes in the rate paid for deposits. Consequently, changes in interest rates do not necessarily result in an increase or decrease in the net interest margin 16 solely as a result of the differences between repricing opportunities of earning assets or interest bearing liabilities. The Company also utilizes the results of a dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. The sensitivity of the Company's net interest income is measured over a rolling one-year horizon. The simulation model estimates the impact of changing interest rates on the interest income from all interest earning assets and the interest expense paid on all interest bearing liabilities reflected on the Company's balance sheet. This sensitivity analysis is compared to policy limits that specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given both a 200 basis point upward and downward shift in interest rates. A parallel and pro rata shift in rates over a 12-month period is assumed. Results that exceed policy limits, if any, are analyzed for risk tolerance and reported to the Board with appropriate recommendations. . The following reflects the Company's net interest income sensitivity over a one-year horizon as of September 30, 1999. Estimated Net Simulated Interest Income Rate Changes Sensitivity ---------------------------------------------------------- +200 Basis Points +3.35 - 200 Basis Points -4.50 The table indicates that net interest income would increase by approximately 3.35% over a 12-month period if there were an immediate sustained parallel upward shift in interest rates. Net interest income would decrease approximately 4.50% over a 12-month period if there were an immediate sustained parallel 200 basis point downward shift in interest rates. The estimated sensitivity does not necessarily represent a Company forecast and the results may not be indicative of actual changes to the Company's net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, pricing strategies on loans and deposits, replacement of asset and liability cashflows, and other assumptions. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change. Year 2000 Compliance The Company has initiated a Company-wide program (Y2K) to prepare its computer systems, applications and infrastructure for properly processing the dates after December 31, 1999. Based on the Federal Financial Institutions Examination Council guidelines, the Company's Y2K program consists of the following phases: 1. Awareness Phase - A strategic approach was developed to address the Year 2000 problem. 2. Assessment Phase - Detailed plans and target dates were developed. 17 3. Renovation Phase - This phase includes code enhancements, hardware and software upgrades, system replacements, vendor certification, and other associated changes. 4. Validation Phase - This phase includes testing and conversion of system applications. 5. Implementation Phase - This phase includes certification of Y2K compliance and employee training and acceptance. Phases one through five have been completed. All mission critical issues and systems have been implemented. Monitoring of all systems to ensure continued compliance will be an on-going process. In addition, an assessment of the Y2K readiness of external entities with which the Company conducts its operations is ongoing. The Company is continuing to communicate with all of its significant obligors, counterparties, other credit clients and vendors to determine the likely extent to which the Company may be affected by third parties' Y2K plans and target dates. In this regard, the Company had developed contingency plans in the event that external parties fail to achieve their Y2K plans and target dates. The Company estimated the total cost of the Y2K project to be approximately $1,571,000, of which $1,203,000 has been incurred through 1998 and the remaining $368,000 was incurred during the first quarter of 1999. No further significant costs are anticipated. The costs of the Y2K program and the date on which the Company plans to be Y2K compliant are based on management's best current estimates, which were derived utilizing numerous assumptions of future events including the availability of certain resources, third party vendors and other factors. However, there can be no assurance that these estimates will be achieved and actual results could differ from those plans. Average Balance Sheets The tables on the following pages reflect the Company's average balance sheets and volume and rate analysis for the nine-month periods ending September 30, 1999 and 1998. The average yields on earning assets and average rates paid on interest-bearing liabilities have been computed on an annualized basis for purposes of comparability with full year data. Average balance amounts for assets and liabilities are the computed average of daily balances. 18 FARMERS & MERCHANTS BANCORP Year-to-Date Average Balances and Interest Rates (Rates on a Taxable Equivalent Basis)
(In Thousands) Nine Months Ended September 30, 1999 Assets Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------- Federal Funds Sold $ 14,194 $ 522 4.92% Investment Securities: U.S. Treasury 22,491 905 5.38% U.S. Agencies 11,471 506 5.90% Municipals 75,318 4,104 7.29% Mortgage Backed Securities 241,620 11,034 6.11% Other 5,267 246 6.24% - ------------------------------------------------------------------------------------------------------------------- Total Investment Securities 356,167 16,795 6.30% - ------------------------------------------------------------------------------------------------------------------- Loans: Real Estate 222,820 16,206 9.72% Commercial 110,081 7,567 9.19% Installment 15,318 1,089 9.51% Credit Card 2,879 259 12.03% Municipal 275 13 6.32% - ------------------------------------------------------------------------------------------------------------------- Total Loans 351,373 25,134 9.56% - ------------------------------------------------------------------------------------------------------------------- Total Earning Assets 721,734 $ 42,451 7.86% ====================== Reserve for Loan Losses (8,887) Cash and Due From Banks 23,790 All Other Assets 26,346 - ---------------------------------------------------------------------------------------- Total Assets $ 762,983 ======================================================================================== Liabilities & Shareholders' Equity Interest Bearing Deposits: Interest Bearing Transaction $ 61,799 $ 526 1.14% Savings 183,366 3,070 2.24% Time Deposits Over $100,000 93,302 3,261 4.67% Time Deposits Under $100,000 149,348 5,234 4.69% - ------------------------------------------------------------------------------------------------------------------- Total Interest Bearing Deposits 487,815 12,091 3.31% Other Borrowed Funds 43,954 1,774 5.40% - ------------------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities 531,769 $ 13,865 3.49% ====================== Demand Deposits 142,775 All Other Liabilities 6,032 - ---------------------------------------------------------------------------------------- Total Liabilities 680,576 Shareholders' Equity 82,407 - ---------------------------------------------------------------------------------------- Total Liabilities & Shareholders' Equity $ 762,983 ======================================================================================== Net Interest Margin 5.30% ===================================================================================================================
19 FARMERS & MERCHANTS BANCORP Year-to-Date Average Balances and Interest Rates (Rates on a Taxable Equivalent Basis)
(In Thousands) Nine Months Ended September 30, 1998 Assets Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------- Federal Funds Sold $ 14,542 $ 608 5.59% Investment Securities: U.S. Treasury 14,482 647 5.97% U.S. Agencies 56,895 2,556 6.01% Municipals 69,737 4,096 7.85% Mortgage Backed Securities 191,066 9,083 6.36% Other 4,407 269 8.16% - ------------------------------------------------------------------------------------------------------------------- Total Investment Securities 336,587 16,651 6.61% - ------------------------------------------------------------------------------------------------------------------- Loans: Real Estate 183,028 14,158 10.34% Commercial 88,577 6,954 10.50% Installment 12,121 954 10.52% Credit Card 2,855 276 12.93% Municipal 123 8 8.70% - ------------------------------------------------------------------------------------------------------------------- Total Loans 286,704 22,350 10.42% - ------------------------------------------------------------------------------------------------------------------- Total Earning Assets 637,833 $39,609 8.30% ===================== Reserve for Loan Losses (7,691) Cash and Due From Banks 22,123 All Other Assets 23,789 - --------------------------------------------------------------------------------------- Total Assets $676,054 ======================================================================================= Liabilities & Shareholders' Equity Interest Bearing Deposits: Interest Bearing Transaction $ 55,076 $ 564 1.37% Savings 177,869 2,961 2.23% Time Deposits Over $100,000 76,459 2,952 5.16% Time Deposits Under $100,000 135,754 5,231 5.15% - ------------------------------------------------------------------------------------------------------------------- Total Interest Bearing Deposits 445,158 11,708 3.52% Other Borrowed Funds 25,649 1,067 5.56% - ------------------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities 470,807 $12,775 3.63% ===================== Demand Deposits 121,888 All Other Liabilities 4,961 - --------------------------------------------------------------------------------------- Total Liabilities 597,656 Shareholders' Equity 78,398 - --------------------------------------------------------------------------------------- Total Liabilities & Shareholders' Equity $676,054 ======================================================================================= Net Interest Margin 5.62% ===================================================================================================================
20 FARMERS & MERCHANTS BANCORP Volume and Rate Analysis of Net Interest Revenue (Rates on a Taxable Equivalent Basis)
Sept. 30, 1999 vs Sept. 30, 1998 (In Thousands) Amount of Increase (Decrease) Due to Change in: -------------------------------------- Average Average Net Interest Earning Assets Balance Rate Change - ----------------------------------------------------------------------------------------------------------------------- Federal Funds Sold $ (14) $ (72) $ (86) Investment Securities: U.S. Treasury 364 (106) 258 U.S. Agencies (2,004) (46) (2,050) Municipals 420 (412) 8 Mortgage Backed Securities 2,531 (580) 1,951 Other 66 (89) (23) - ----------------------------------------------------------------------------------------------------------------------- Total Investment Securities 1,377 (1,233) 144 - ----------------------------------------------------------------------------------------------------------------------- Loans: Real Estate 3,381 (1,333) 2,048 Commercial 1,935 (1,322) 613 Installment 279 (144) 135 Credit Card 4 (21) (17) Municipal 9 (4) 5 - ----------------------------------------------------------------------------------------------------------------------- Total Loans 5,608 (2,824) 2,784 - ----------------------------------------------------------------------------------------------------------------------- Total Earning Assets 6,971 (4,129) 2,842 - ----------------------------------------------------------------------------------------------------------------------- Interest Bearing Liabilities Interest Bearing Deposits: Transaction 91 (129) (38) Savings 92 17 109 Time Deposits Over $100,000 738 (430) 309 Time Deposits Under $100,000 667 (664) 3 - ----------------------------------------------------------------------------------------------------------------------- Total Interest Bearing Deposits 1,588 (1,206) 383 Other Borrowed Funds 760 (54) 707 - ----------------------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities 2,348 (1,260) 1,090 ======================================================================================================================= Total Change $ 4,623 $ (2,869) $ 1,752 =======================================================================================================================
21 PART II. OTHER INFORMATION - --------------------------- ITEM 1. Legal Proceedings - ------------------------- None ITEM 2. Changes in Securities - ----------------------------- None ITEM 3. Defaults Upon Senior Securities - --------------------------------------- Not applicable ITEM 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- None ITEM 5. Other Information - ------------------------- None ITEM 6. Exhibits and Reports on Form 8-K - ---------------------------------------- (a) Exhibit Exhibit 27 - Financial Data Schedule 22 SIGNATURES ---------- Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FARMERS & MERCHANTS BANCORP Date: November 12, 1999 ___________________________________ Kent A. Steinwert President and Chief Executive Officer (Principal Executive Officer) Date: November 12, 1999 ___________________________________ John R. Olson Executive Vice President and Chief Financial Officer (Principal Accounting Officer) 23 EX-27 2 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 9/30/99 CONSOLIDATED BALANCE SHEETS AND THE 9/30/99 CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 22,981 0 0 0 292,251 51,213 51,693 399,378 9,700 782,782 648,947 3,400 7,884 41,071 0 0 7 81,473 782,782 25,134 15,497 522 41,153 13,865 13,865 27,288 1,400 149 19,709 10,780 7,029 0 0 7,029 10.61 0 7.86 2,932 16 0 0 8,589 928 639 9,700 9,700 0 9,700
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