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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission File Number: 1.000-26099
FARMERS & MERCHANTS BANCORP
(Exact name of registrant as specified in its charter)
Delaware 94-3327828
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
121 W. Pine Street, Lodi, California 95240
(Address of principal Executive offices) (Zip Code)
Registrant's telephone number, including area code (209) 334-1101
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par
Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 7, 2002, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $175,312,000 based on the
sales price of that day of $250.00.
The number of shares of Common Stock outstanding as of March 7, 2002: 701,248
Documents Incorporated by Reference:
Portions of the Annual Report to Shareholders for 2001 are incorporated by
reference in Part II, Item 5 through 8, definitive proxy statement for the 2002
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A are incorporated by reference in Part III,
Items 10 through 13.
FARMERS & MERCHANTS BANCORP
FORM 10-K
TABLE OF CONTENTS
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PART I Page
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Item 1. Business 3
- General Development of the Business 3
- Service Area
- Employees
- Competition
- Government Policies
- Supervision and Regulation
- Statistical Disclosure
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
PART II
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Item 5. Market for the Registrant's Common Stock and Related
Security Matters 23
Item 6. Selected Financial Data 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 24
PART III
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Item 10. Directors and Executive Officers of the Company 24
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial
Owners and Management 24
Item 13. Certain Relationships and Related Transactions 24
Item 14. Exhibits, Financial Statement Schedules and
Reports on Forms 8-k 24
Signatures 25
2
Introduction
This annual report contains various forward-looking statements, usually
containing the words "estimate," "project," "expect," "objective," "goal," or
similar expressions and includes assumptions concerning the Company's
operations, future results, and prospects. These forward-looking statements are
based upon current expectations and are subject to risk and uncertainties. In
connection with the "safe-harbor" provisions of the private Securities
Litigation Reform Act of 1995, the Company provides the following cautionary
statement identifying important factors which could cause the actual results of
events to differ materially from those set forth in or implied by the
forward-looking statements and related assumptions.
Such factors include the following: (i) the effect of changing regional and
national economic conditions; (ii) significant changes in interest rates and
prepayment speeds; (iii) credit risks of commercial, real estate, consumer, and
other lending activities; (iv) changes in federal and state Banking regulations;
and (v) other external developments which could materially impact the Company's
operational and financial performance. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
hereof. The Company undertakes no obligation to update any forward-looking
statements to reflect events or circumstances arising after the date on which
they are made.
PART I
Item 1. Business
General Development of the Business
August 1, 1916 marked the first day of business for Farmers & Merchants Bank of
Lodi. The Bank was incorporated under the laws of the State of California and
was licensed by the California Department of Financial Institutions as a
state-chartered bank. The Bank prospered and grew even through the Depression
years. Farmers & Merchants' first venture out of Lodi occurred in response to
the closure of the only bank serving the community of Galt, requiring area
residents to drive miles away for the simplest banking transaction. To meet this
need, the Galt office was opened in 1948. Shortly thereafter branches were
opened in Linden, North Modesto and South Sacramento. On April 12, 1957, the
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
3
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
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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
5
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.
6
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.
7
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:
To Be Well
Capitalized Under
Regulatory Capital Prompt Corrective
(in thousands) Actual Requirements Action Provisions
December 31, 2001 Amount Ratio Amount Ratio Amount Ratio
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The Bank:
Total Bank Capital to Risk Weighted Assets $100,842 12.93% $ 62,391 8.00% $ 77,988 10.00%
Tier I Bank Capital to Risk Weighted Assets $ 91,104 11.68% $ 31,195 4.00% $ 46,793 6.00%
Tier I Bank Capital to Average Assets $ 91,104 9.57% $ 38,077 4.00% $ 47,596 5.00%
The Company:
Total Consolidated Capital to Risk Weighted Assets $107,591 13.76% $ 62,543 8.00% N/A N/A
Tier I Consolidated Capital to Risk Weighted Assets $ 97,829 12.57% $ 31,271 4.00% N/A N/A
Tier I Consolidated Capital to Average Assets $ 97,829 10.25% $ 38,159 4.00% N/A N/A
December 31, 2000 Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------
The Bank:
Total Bank Capital to Risk Weighted Assets $96,150 15.22% $ 50,548 8.0% $ 63,185 10.0%
Tier I Bank Capital to Risk Weighted Assets $88,203 13.96% $ 25,274 4.0% $ 37,911 6.0%
Tier I Bank Capital to Average Assets $88,203 10.00% $ 35,268 4.0% $ 44,085 5.0%
The Company:
Total Consolidated Capital to Risk Weighted Assets $97,419 15.41% $ 50,582 8.0% N/A N/A
Tier I Consolidated Capital to Risk Weighted Assets $90,092 14.25% $ 25,291 4.0% N/A N/A
Tier I Consolidated Capital to Average Assets $90,092 10.21% $ 35,285 4.0% N/A N/A
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
8
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
9
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
10
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.
11
Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(dollars in thousands)
Year Ended December 31,
2001
Assets Balance Interest Rate
- ------------------------------------------------------------------------------------
Federal Funds Sold $ 51,923 $ 1,922 3.70%
Investment Securities Available-for-Sale
U.S. Treasuries 1,021 55 5.39%
U.S. Agencies 6,813 342 5.02%
Municipals - Taxable 1,909 119 6.23%
Municipals - Non-Taxable 21,945 1,425 6.50%
Mortgage Backed Securities 219,352 13,946 6.36%
Other 6,208 454 7.31%
- ------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 257,248 16,341 6.35%
- ------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00%
U.S. Agencies 367 22 5.99%
Municipals - Taxable 1,714 114 6.65%
Municipals - Non-Taxable 32,572 2,455 7.54%
Mortgage Backed Securities 0 0 0.00%
Other 629 60 9.54%
- ------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 35,282 2,651 7.51%
- ------------------------------------------------------------------------------------
Loans
Real Estate 308,980 26,831 8.68%
Commercial 192,383 14,759 7.67%
Consumer 19,331 1,930 9.98%
Credit Card 3,410 363 10.65%
Municipal 1,005 73 7.26%
- ------------------------------------------------------------------------------------
Total Loans 525,109 43,956 8.37%
- ------------------------------------------------------------------------------------
Total Earning Assets 869,562 $64,871 7.46%
===============
Unrealized Gain/(Loss) on Securities Available-for-Sale 3,685
Allowance for Loan Losses (12,640)
Cash and Due From Banks 28,568
All Other Assets 25,395
- ------------------------------------------------------------------
Total Assets $914,570
==================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Interest Bearing DDA $ 78,228 $ 626 0.80%
Savings 185,352 3,581 1.93%
Time Deposits 338,488 16,831 4.97%
- ------------------------------------------------------------------------------------
Total Interest Bearing Deposits 602,068 21,038 3.49%
Other Borrowed Funds 41,017 2,242 5.47%
- ------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 643,085 $23,280 3.62%
===============
Demand Deposits 165,938
All Other Liabilities 9,650
- ------------------------------------------------------------------
Total Liabilities 818,673
Shareholders' Equity 95,897
- ------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $914,570
==================================================================
Net Interest Margin 4.78%
====================================================================================
Notes: Yields on municipal securities have been calculated on a fully taxable
equivalent basis using the 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.
12
Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(dollars in thousands)
Year Ended December 31,
2000
Assets Balance Interest Rate
- --------------------------------------------------------------------------------------
Federal Funds Sold $ 20,481 $ 1,300 6.35%
Investment Securities Available-for-Sale
U.S. Treasuries 8,350 461 5.52%
U.S. Agencies 7,133 416 5.83%
Municipals - Taxable 2,997 189 6.31%
Municipals - Non-Taxable 20,805 1,342 6.45%
Mortgage Backed Securities 248,708 15,977 6.42%
Other 5,340 328 6.14%
- --------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 293,333 18,713 6.38%
- --------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00%
U.S. Agencies 1,997 119 5.96%
Municipals - Taxable 2,927 197 6.73%
Municipals - Non-Taxable 40,199 3,003 7.47%
Mortgage Backed Securities 0 0 0.00%
Other 770 75 9.74%
- --------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 45,893 3,394 7.40%
- --------------------------------------------------------------------------------------
Loans
Real Estate 279,313 26,374 9.44%
Commercial 153,678 15,318 9.97%
Consumer 20,592 2,021 9.81%
Credit Card 3,340 425 12.72%
Municipal 509 33 6.48%
- --------------------------------------------------------------------------------------
Total Loans 457,432 44,171 9.66%
- --------------------------------------------------------------------------------------
Total Earning Assets 817,139 $67,579 8.27%
=================
Unrealized Gain/(Loss) on Securities Available-for-Sale (6,571)
Allowance for Loan Losses (10,676)
Cash and Due From Banks 26,303
All Other Assets 30,098
- ------------------------------------------------------------------
Total Assets $856,293
==================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Interest Bearing DDA $ 65,678 $ 778 1.18%
Savings 181,476 4,127 2.27%
Time Deposits 306,787 16,940 5.52%
- --------------------------------------------------------------------------------------
Total Interest Bearing Deposits 553,941 21,845 3.94%
Other Borrowed Funds 52,017 2,912 5.60%
- --------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 605,958 $24,757 4.09%
=================
Demand Deposits 156,941
All Other Liabilities 8,244
- ------------------------------------------------------------------
Total Liabilities 771,143
Shareholders' Equity 85,150
- ------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $856,293
==================================================================
Net Interest Margin 5.24%
======================================================================================
Notes: Yields on municipal securities have been calculated on a fully taxable
equivalent basis using the 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.
13
Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(dollars in thousands)
Year Ended December 31,
1999
Assets Balance Interest Rate
- -------------------------------------------------------------------------------------
Federal Funds Sold $ 15,580 $ 793 5.09%
Investment Securities Available-for-Sale
U.S. Treasuries 21,145 1,116 5.28%
U.S. Agencies 8,864 547 6.17%
Municipals - Taxable 2,824 179 6.34%
Municipals - Non-Taxable 21,190 1,364 6.44%
Mortgage Backed Securities 242,092 14,828 6.12%
Other 4,350 241 5.54%
- -------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 300,465 18,275 6.08%
- -------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 807 49 6.07%
U.S. Agencies 1,993 93 4.67%
Municipals - Taxable 3,502 235 6.71%
Municipals - Non-Taxable 46,683 3,626 7.77%
Mortgage Backed Securities 0 0 0.00%
Other 975 110 1.28%
- -------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 53,960 4,113 7.62%
- -------------------------------------------------------------------------------------
Loans
Real Estate 231,955 22,382 9.65%
Commercial 111,233 10,276 9.24%
Installment 16,319 1,519 9.31%
Credit Card 2,917 395 13.54%
Municipal 330 21 6.36%
- -------------------------------------------------------------------------------------
Total Loans 362,754 34,593 9.54%
- -------------------------------------------------------------------------------------
Total Earning Assets 732,759 $57,773 7.88%
===============
Unrealized Gain/(Loss) on Securities Available-for-Sale (1,983)
Reserve for Loan Losses (9,097)
Cash and Due From Banks 25,240
All Other Assets 27,801
- ------------------------------------------------------------------
Total Assets $774,720
==================================================================
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Transaction $ 63,298 $ 715 1.13%
Savings 184,547 4,140 2.24%
Time Deposits 247,352 11,645 4.71%
- -------------------------------------------------------------------------------------
Total Interest Bearing Deposits 495,197 16,500 3.33%
Other Borrowed Funds 43,585 2,362 5.42%
- -------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 538,782 $18,862 3.50%
===============
Demand Deposits 146,529
All Other Liabilities 6,418
- ------------------------------------------------------------------
Total Liabilities 691,729
Shareholders' Equity 82,991
- ------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $774,720
==================================================================
Net Interest Margin 5.31%
=====================================================================================
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.
14
Farmers & Merchants Bancorp
Volume and Rate Analysis of Net Interest Revenue
(Rates on a Taxable Equivalent Basis)
(in thousands)
2001 versus 2000
Amount of Increase
(Decrease) Due to Change in:
-----------------------------
Average Average Net
Interest Earning Assets Balance Rate Change
- ----------------------------------------------------------------------------------
Federal Funds Sold $ 1,342 $ (720) $ 622
Investment Securities Available-for-Sale
U.S. Treasuries (395) (11) (406)
U.S. Agencies (18) (56) (74)
Municipals - Taxable (68) (2) (70)
Municipals - Non-Taxable 74 9 83
Mortgage Backed Securities (1,868) (163) (2,031)
Other 58 68 126
- ----------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale (2,217) (155) (2,372)
- ----------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0
U.S. Agencies (98) 1 (97)
Municipals - Taxable (81) (2) (83)
Municipals - Non-Taxable (575) 27 (548)
Mortgage Backed Securities 0 0 0
Other (14) (2) (16)
- ----------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity (768) 24 (744)
- ----------------------------------------------------------------------------------
Loans:
Real Estate 2,673 (2,216) 457
Commercial 3,394 (3,952) (558)
Installment (126) 35 (91)
Credit Card 9 (70) (61)
Other 35 4 39
- ----------------------------------------------------------------------------------
Total Loans 5,985 (6,199) (214)
- ----------------------------------------------------------------------------------
Total Earning Assets 4,342 (7,050) (2,708)
- ----------------------------------------------------------------------------------
Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction 131 (282) (151)
Savings 86 (632) (546)
Time Deposits 1,661 (1,770) (109)
- ----------------------------------------------------------------------------------
Total Interest Bearing Deposits 1,878 (2,684) (806)
Other Borrowed Funds (603) (68) (671)
- ----------------------------------------------------------------------------------
Total Interest Bearing Liabilities 1,275 (2,752) (1,477)
- ----------------------------------------------------------------------------------
Total Change $ 3,067 $(4,298) $(1,231)
==================================================================================
Notes: Rate/volume variance is allocated based on the percentage relationship of
changes in volume and changes in rate to the total "net change." The above
figures have been rounded to the nearest whole number.
15
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.
16
Farmers & Merchants Bancorp
Investment Portfolio
The following table summarizes the balances and distributions of the
investment securities held on the dates indicated. Available Held to Available Held to Available Held to
for Sale Maturity for Sale Maturity for Sale Maturity
------------------------------------------------------------------
December 31: (in thousands) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
U. S. Treasury $ 0 $ 0 $ 5,047 $ 0 $ 11,875 $ 0
U. S. Agency 12,771 0 7,090 1,999 7,013 1,995
Municipal 24,076 32,137 23,975 38,585 23,042 46,423
Mortgage-Backed Securities 196,384 0 237,734 0 251,003 0
Other 9,621 561 5,540 684 4,647 857
- -------------------------------------------------------------------------------------------------------------------------------
Total Book Value $242,852 $32,698 $279,386 $41,268 $297,580 $49,275
===============================================================================================================================
Fair Value $242,852 $33,546 $279,386 $41,833 $297,580 $49,411
===============================================================================================================================
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.
17
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%
=============================================================================
18
Farmers & Merchants Bancorp
Loan Data
(in thousands)
The following table shows the Bank's loan composition by type of loan.
December 31,
2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------
Real Estate $304,451 $261,910 $222,354 $180,468 $150,804
Real Estate Construction 49,692 28,354 39,186 26,529 25,796
Commercial 227,909 182,611 129,969 105,403 79,977
Consumer 17,022 20,965 18,953 14,035 12,322
Credit Card 3,157 3,619 3,235 2,989 2,873
Other 954 271 60 64 128
- ----------------------------------------------------------------------------------
Total Loans 603,185 497,730 413,757 329,488 271,900
Less:
Unearned Income 1,016 333 348 310 294
Allowance for Loan Losses 12,709 11,876 9,787 8,589 7,188
- ----------------------------------------------------------------------------------
Loans, Net $589,460 $485,521 $403,622 $320,589 $264,418
==================================================================================
There were no concentrations of loans exceeding 10% of total loans which were
not otherwise disclosed as a category of loans in the above table.
Non-Performing Loans
(in thousands)
December 31,
2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------
Nonaccrual Loans
Real Estate $1,015 $ 948 $ 754 $3,997 $4,911
Commercial 1,302 520 1,713 595 580
Installment 36 4 32 9 7
Credit Card 0 0 0 0 0
Other 0 0 0 0 0
- ---------------------------------------------------------------------------------------------
Total Nonaccrual Loans 2,353 1,472 2,499 4,601 5,498
- ---------------------------------------------------------------------------------------------
Accruing Loans Past Due 90 Days or More
Real Estate 0 0 0 0 0
Commercial 0 0 0 0 0
Installment 0 0 0 0 0
Credit Card 56 23 12 23 6
Other 0 0 0 0 0
- ---------------------------------------------------------------------------------------------
Total Accruing Loans Past Due 90 Days or More 56 23 12 23 6
- ---------------------------------------------------------------------------------------------
Total Non-Performing Loans $2,409 $1,495 $2,511 $4,624 $5,504
Other Real Estate Owned $ 0 $ 88 $ 204 $ 636 $2,231
=============================================================================================
Non-Performing Loans as a Percent of Total Loans 0.40% 0.30% 0.61% 1.40% 2.02%
=============================================================================================
Allowance for Loan Losses
as a Percent of Total Loans 2.11% 2.39% 2.37% 2.61% 2.64%
=============================================================================================
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.
19
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:
2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------
Balance at Beginning of Year $ 11,876 $ 9,787 $ 8,589 $ 7,188 $10,031
Provision Charged to Expense 1,000 2,800 1,700 1,400 5,450
Charge Offs:
Real Estate 0 45 794 194 892
Commercial 601 659 404 91 7,672
Installment 68 177 80 73 78
Credit Card 85 48 30 73 94
Other 0 0 0 0 0
- -----------------------------------------------------------------------------------------------
Total Charge Offs 754 929 1,308 431 8,736
- -----------------------------------------------------------------------------------------------
Recoveries:
Real Estate 18 0 3 1 208
Commercial 525 156 775 388 201
Installment 14 53 21 36 26
Credit Card 30 9 7 7 8
Other 0 0 0 0 0
- -----------------------------------------------------------------------------------------------
Total Recoveries 587 218 806 432 443
- -----------------------------------------------------------------------------------------------
Net Recoveries (Charge-Offs) (167) (711) (502) 1 (8,293)
- -----------------------------------------------------------------------------------------------
Balance at End of Year* $ 12,709 $11,876 $ 9,787 $ 8,589 $7,188
===============================================================================================
Ratios:
Consolidated Allowance for Loan Losses to:
Loans at Year End 2.11% 2.39% 2.37% 2.61% 2.64%
Average Loans 2.42% 2.60% 2.70% 2.92% 2.74%
Consolidated Net Charge-Offs to:
Loans at Year End 0.03% 0.14% 0.12% 0.00% 3.05%
Average Loans 0.03% 0.16% 0.14% 0.00% 3.16%
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%
=======================================================================
20
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.
21
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,
2001
- ---------------------------------------------------------------------------
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.
22
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. Legal Proceedings
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
PART II
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. 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. 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.
23
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. 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
24
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
25
Index to Exhibits
- -----------------
Exhibit No. Description
- ----------- -----------
2 Plan of Reorganization as filed on Form 8-K dated April 30, 1999, are
incorporated herein by reference.
3(i) Amended and Restated Certificate of Incorporation of Farmers & Merchants
Bancorp, filed as Exhibit 3(i) to Registrant's 8-K dated April 30, 1999, is
incorporated herein by reference.
3(ii) By-Laws of Farmers & Merchants Bancorp, filed as Exhibit 3(i) to Registrant's 8-K
dated April 30, 1999, is incorporated herein by reference.
10.1 Employment Agreement dated July 8, 1997, between Farmers & Merchants Bank of Central
California and Kent A. Steinwert, filed as Exhibit 10.1 to Registrant's 8-K dated
April 30, 1999, is incorporated herein by reference.
10.2 Employment Agreement dated July 8, 1997, between Farmers & Merchants Bank of
Central California and Richard S. Erichson, filed as Exhibit 10.2 to Registrant's 8-K
dated April 30, 1999, is incorporated herein by reference.
10.3 Deferred Bonus Plan of Farmers & Merchants Bank of Central California adopted as
of March 2, 1999, filed as Exhibit 10.3 to Registrant's 8-K dated April 30, 1999, is
incorporated herein by reference.
10.4 Amended and Restated Deferred Bonus Plan of Farmers & Merchants Bank of
Central California, executed May 11, 1999, filed as Exhibit 10.4 to Registrant's 8-K
dated April 30, 1999, is incorporated herein by reference.
13 Annual Report to Shareholders of Farmers & Merchants Bancorp for the year ended
December 31, 2001
16 Letter regarding change in certifying accountants filed as exhibit 16 to Registrants 8-
K filed October 20, 2000 is incorporated herein by reference.
21 Subsidiaries of the Registrant as of February 14, 2000, filed as Exhibit 21 to
Registrant's 10-K filed March 23, 2000, is incorporated herein by reference.
99 Report of Independent Public Accountants issued by Arthur Andersen
LLP
26