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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, 1999
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
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Commission File Number: _____________
FARMERS & MERCHANTS BANCORP
(Exact name of registrant as specified in its charter)
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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 10, 2000, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $138,610,920.
The number of shares of Common Stock outstanding as of March 10,
2000: 660,052
The following documents are incorporated by reference herein:
Portions of the Annual Report to Shareholders'
Portions of Proxy Statement for Annual Meeting of Shareholders
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FARMERS & MERCHANTS BANCORP
FORM 10-K
TABLE OF CONTENTS
Page
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PART I
Item 1. Business................................................... 3
--General.................................................. 3
--Statistical Disclosure................................... 10
Item 2. Properties................................................. 22
Item 3. Legal Proceedings.......................................... 22
Item 4. Submission of Matters to a Vote of Security Holders........ 22
Item 4(A). Executive Officers of the Registrant....................... 22
PART II
Item 5. Market for the Registrant's Common Stock and Related 23
Security Matters...........................................
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................ 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................. 23
PART III
Item 10. Directors and Executive Officers of the Company............ 24
Item 11. Executive Compensation..................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and 24
Management.................................................
Item 13. Certain Relationships and Related Transactions............. 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on 24
Forms 8-K..................................................
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
Farmers & Merchants Bancorp (referred to herein on a consolidated basis as
the "Company") 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 commenced business April 30, 1999 when pursuant
to a reorganization, it acquired all of the voting stock of Farmers &
Merchants Bank of Central California. Farmers & Merchants Bank is the
Company's principal asset. The Company's securities consist of 660,989 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
Company.
The Company's principal business is to serve as a holding company for the
Bank and for other banking or banking related subsidiaries which the Company
may establish or acquire. The Company has not engaged in any other activities
to date. As a legal entity separate and distinct from its subsidiary, The
Company's principal source of funds is, and will continue to be, dividends
paid by and other funds advanced from the Bank. Legal limitations are imposed
on the amount of dividends that may be paid and loans that may be made by the
Bank to the Company. See Dividends and Other Transfer of Funds on Page 6.
The Bank was incorporated under the laws of the State of California in
1916, is licensed by the California Department of Financial Institutions as a
state chartered bank. The Company's deposit accounts are insured under the
Federal Deposit Insurance Act up to applicable limits. The Company is a member
of the Federal Reserve System. At December 31, 1999, the Company had $820
million in total assets, $685 million in total deposits and $413 million in
gross loans.
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.
3
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, 1999 the Company employed 358 persons. Full time equivalent
employees were 322. The Company believes that its employee relations are
satisfactory.
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 these competitors are much larger in total assets and
capitalization, have greater access to capital markets and offer a broader
range of financial services than the Company. In order to compete with other
financial service providers, the Company relies upon personal contact by its
officers, directors, employees, and shareholders, along with various
promotional activities and specialized services. In those instances where the
Company is unable to accommodate a customer's needs, the Company may arrange
for those services to be provided through its correspondents.
Government Policies
The Company and the Bank are influenced by prevailing economic conditions,
monetary and fiscal policies of the federal government and the policies of
regulatory agencies, particularly the Board of Governors of the Federal
Reserve System. The actions and policy directives of the Federal Reserve Board
determine, to a significant degree, the cost and the availability of funds
obtained from money market sources for lending and investing. Federal Reserve
Board policies and regulations also influence, directly and indirectly, the
rates of interest paid by commercial banks on their time and savings deposits
through its open market operations in U.S. Government securities and
adjustments to the discount rates applicable to borrowings by depository
institutions
4
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, as amended.
Accordingly, the Company's operations, and its subsidiaries are subject to
extensive regulation and examination by the Board of Governors of the Federal
Reserve System (FRB). The Company is required to file with the FRB quarterly
and annual reports and such additional information as the FRB may require
pursuant to the Bank Holding Company Act. The FRB conducts periodic
examinations of the Company and its subsidiaries.
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries
of affiliates when the Federal Reserve Board believes the activity or the
control of the subsidiary or affiliate constitutes a significant risk to the
financial safety, soundness or stability of any of its banking subsidiaries.
The Federal Reserve Board also has the authority to regulate provisions of
certain bank holding company debt, including authority to impose interest
ceilings and reserve requirements on such debt. Under certain circumstances,
the Company must file written notice and obtain approval from the Federal
Reserve Board prior to purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve Board, a bank
holding company and its nonbanking subsidiaries are prohibited from requiring
certain tie-in arrangements in connection with an extension of credit, lease
or sale of property or furnishing of services. For example, with certain
exceptions, a bank may not condition an extension of credit on a promise by
its customer to obtain other services provided by it, its holding company or
other subsidiaries, or on a promise by its customer not to obtain other
services from a competitor. In addition, federal law imposes certain
restrictions on transitions between Farmers & Merchants Bancorp and its
subsidiaries. Further, the Company is required by the Federal Reserve Board to
maintain certain levels of capital. See "Capital."
Directors, officers and principal shareholders of Farmers & Merchants
Bancorp, and the companies with which they are associated, have had and will
continue to have banking transactions with the Bank in the ordinary course of
business. Any loans and commitments to lend included in such transactions are
made in accordance with applicable law, on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons of similar creditworthiness, and on
terms not involving more than the normal risks of collectibility or presenting
other unfavorable features.
5
The Company is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control
of more than 5% of the outstanding voting share of any company that is not a
bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiaries. However, the Company, subject to the
prior approval of the Federal Reserve Board, may engage in any, or acquire
shares of companies engaged in, activities that are deemed by the Federal
Reserve Board to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. Removal of many of the activity
limitations is currently under review by Congress, but whether any legislation
liberalizing permitted bank holding company activities will be enacted is not
known.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Boards' policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary
banks will generally be considered by the Federal Reserve Board to be an
unsafe and unsound banking practice or a violation of the Federal Reserve
Board's regulations or both.
The Company's securities are registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). As such, the Company is subject to the information, proxy
solicitation, insider trading and other requirements and restrictions of the
Exchange Act.
The Bank
The Bank, as a California chartered bank, is subject to primary
supervision, periodic examination and regulation by the California Department
of Financial Institutions ("DFI") and the FRB. If, as a result of an
examination of the Bank, the FRB should determine that the financial
condition, capital resources, asset quality, earnings prospects, management,
liquidity, or other aspects of the Bank's operations are unsatisfactory or
that the Bank or its management is violating or has violated any law or
regulation, various remedies are available to the FRB. Such remedies include
the power to enjoin "unsafe or unsound" practices, to require affirmative
action to correct any conditions resulting from any violation or practice, to
issue an administrative order that can be judicially enforced, to direct an
increase in capital, to restrict the growth of the Bank, to assess civil
monetary penalties, to remove officers and directors and ultimately to
terminate the Bank's deposit insurance, which for a California chartered bank
would result in a revocation of the Bank's charter. The DFI has many of the
same remedial powers.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statues and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, ownership of deposit
accounts, interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, and capital
requirements. Further, the Bank is required to maintain certain levels of
capital. See "Capital."
Dividends and Other Transfer of Funds
Dividends from the Bank constitute the principal source of income to the
Company. The Company is a legal entity separate and distinct from the Bank.
The Bank is subject to various statutory and regulatory restrictions on its
ability to pay dividends to the Company. Under such restrictions, the amount
available for payment of dividends to the Company by the Bank totaled $11.9
million at December 31, 1999.
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
6
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 designate 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 10.0% of the Bank's capital and surplus (as defined by
federal regulations), and such secured loans and investments are limited, in
the aggregate, to 20.0% of the Bank's capital and surplus (as defined by
federal regulations). California law also imposes certain restriction with
respect to transactions involving the transactions with affiliates may be
imposed on the Bank under the prompt corrective action provisions of federal
law. See "Item 1. Business--Supervision and Regulation--Prompt Corrective
Action and Other Enforcement Mechanisms."
Capital
The Federal Reserve Board and the FDIC have established risk-based minimum
capital guidelines with respect to the maintenance of appropriate levels of
capital by United States Banking organizations. These guidelines are intended
to provide a measure of capital that reflects the degree of risk associated
with a banking organization's operations for both transactions reported on the
balance sheet as assets and transactions, such as letters of credit and
recourse arrangements, which are recorded as off balance sheet items. Under
these guidelines, nominal dollar amounts of assets and credit equivalent
amounts of off balance sheet items are multiplied by one of several risk
adjustment percentages, which range from 0% for assets with low credit risk,
such as certain U.S. Treasury securities, to 100% for assets with relatively
high credit risk, such as commercial loans.
The federal banking agencies require a minimum ratio of qualifying total
capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%. In addition to the risked-based guidelines,
federal banking regulators require banking organizations to maintain a minimum
amount of Tier 1 capital to total assets, referred to as the leverage ratio.
For a banking organization rated in the highest of the five categories used by
regulators to rate banking organizations, the minimum leverage ratio of Tier 1
capital to total assets must be 3%. In addition to these uniform risk-based
capital guidelines and leverage ratios that apply across the industry, the
regulators have the discretion to set individual minimum capital requirements
for specific institutions at rates significantly above minimum guidelines and
ratios.
7
As of December 31, 1999 and 1998 the Company and the Bank's risk-based
capital ratios were as follows:
To Be Well
Capitalized Under
Regulatory Capital
Regulatory Capital Prompt Corrective
Actual Requirements Action Provisions
(in thousands) ------------- ------------------- -------------------
December 31, 1999 Amount Ratio Amount Ratio Amount Ratio
- ----------------- ------- ----- ------------------- ---------- --------
Total Bank Capital to
Risk Weighted Assets... $89,573 16.70% $ 42,915 8.0% $ 53,644 10.0%
Total Consolidated
Capital to Risk
Weighted Assets........ $90,784 16.92% $ 42,922 8.0% $ 53,653 10.0%
Tier I Bank Capital to
Risk Weighted Assets... $82,829 15.44% $ 21,458 4.0% $ 32,187 6.0%
Tier I Consolidated
Capital to Risk
Weighted Assets........ $84,040 15.66% $ 21,461 4.0% $ 32,192 6.0%
Tier I Bank Capital to
Average Assets......... $82,829 10.37% $ 31,938 4.0% $ 39,923 5.0%
December 31, 1998
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Total Capital to Risk
Weighted Assets........ $84,106 20.80% $ 32,344 8.0% $ 40,431 10.0%
Tier I Capital to Risk
Weighted Assets........ $79,009 19.54% $ 16,172 4.0% $ 24,258 6.0%
Tier I Capital to
Average Assets......... $79,009 11.45% $ 27,598 4.0% $ 34,497 5.0%
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, 1999 the Company exceeded all of the required ratios for
classification as "well capitalized."
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or practice warrants such treatment. At each
successive lower capital category, an insured depository institution is
subject to more restrictions.
Banking agencies have also adopted regulations which mandate that
regulators take into consideration (i) concentrations of credit risk; (ii)
interest rate risk (when the interest rate sensitivity of an institution's
assets does not match the sensitivity of its liabilities or its off-balance-
sheet position); and (iii) risks from non-traditional activities, as well as
an institution's ability to manage those risks, when determining the adequacy
of an institution's capital. That evaluation will be made as a part of the
institution's regular safety and soundness examination. In addition, the
banking agencies have amended their regulatory capital 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 their 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
8
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, 1999, ranged from 0 to 27 basis points per $100 of insured
deposits, based on the risk a particular institution poses to its deposit
insurance fund. The risk classification is based on an institution's capital
group and supervisory subgroup assignment. An institution's risk category is
based upon whether the institution is well capitalized, adequately
capitalized, or less than adequately capitalized. Each insured depository
institution is also assigned to one of the following "supervisory subgroups."
Subgroup A, B or C. Subgroup A institutions are financially sound institutions
with few minor weaknesses; Subgroup B institutions are institutions that
demonstrate weaknesses which, if not corrected, could result in significant
deterioration; and Subgroup C institutions are institutions for which there is
a substantial probability that the FDIC will suffer a loss in connection with
the institution unless effective action is taken to correct the areas of
weakness. Insured institutions are not allowed to disclose their risk
assessment classification and no assurance can be given as to what the future
level of premiums will be.
The Community Reinvestment Act ("CRA")
The Bank is subject to certain fair lending requirements and reporting
obligations involving lending, investing and other CRA activities. CRA
requires each Company to identify the communities served by the Company's
offices and to identify the types of credit and investments the Company is
prepared to extend within such communities including low and moderated 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 and other transactions, such as the Branch Acquisition. 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 Company completed a CRA examination
during 1998, and received a satisfactory rating in complying with its CRA
obligations.
9
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 regulation, changes in
technology and product delivery systems, and the accelerating pace of
consolidation amount financial services 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 1999 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 1999 Annual Report to Shareholders, located in Exhibit
13, incorporated herein by reference.
10
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
Twelve Months Ended
December 1999
------------------------
Balance Interest Rate
-------- -------- -----
Assets
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.......................................... 24,014 1,543 6.42%
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.......................................... 50,185 3,861 7.69%
Mortgage Backed Securities.......................... -- -- 0.00%
Other............................................... 975 110 11.28%
-------- ------- -----
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 Over $100,000......................... 71,015 3,335 4.70%
Time Deposits Under $100,000........................ 176,337 8,310 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.
11
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
Twelve Months Ended
December 1998
------------------------
Balance Interest Rate
-------- -------- -----
Assets
Federal Funds Sold.................................. $ 17,665 $ 943 5.34%
Investment Securities Available-for-Sale
U.S. Treasuries.................................... 12,024 721 6.00%
U.S. Agencies...................................... 28,767 1,949 6.78%
Municipals......................................... 11,304 726 6.42%
Mortgage Backed Securities......................... 199,319 12,549 6.30%
Other.............................................. 3,708 241 6.50%
-------- ------- -----
Total Investment Securities Available-for-Sale.... 255,122 16,186 6.34%
-------- ------- -----
Investment Securities Held-to-Maturity U.S.
Treasuries......................................... 2,015 120 5.96%
U.S. Agencies...................................... 19,216 1,080 5.62%
Municipals......................................... 60,600 4,793 7.91%
Mortgage Backed Securities......................... 0 0 0.00%
Other.............................................. 1,146 135 11.78%
-------- ------- -----
Total Investment Securities Held-to-Maturity...... 82,977 6,128 7.39%
-------- ------- -----
Loans
Real Estate........................................ 186,840 18,896 10.11%
Commercial......................................... 91,983 9,042 9.83%
Installment........................................ 12,807 1,358 10.60%
Credit Card........................................ 2,865 400 13.96%
Municipal.......................................... 127 11 8.66%
-------- ------- -----
Total Loans....................................... 294,622 29,707 10.08%
-------- ------- -----
Total Earning Assets.............................. 650,386 $52,964 8.14%
======= =====
Unrealized Gain/(Loss) on Securities Available for
Sale............................................... 401
Reserve for Loan Losses............................. (7,889)
Cash and Due From Banks............................. 22,739
All Other Assets.................................... 24,304
--------
Total Assets...................................... $689,941
========
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Transaction........................................ $ 56,242 $ 768 1.37%
Savings............................................ 177,301 4,025 2.27%
Time Deposits Over $100,000........................ 62,129 3,193 5.14%
Time Deposits Under $100,000....................... 153,109 7,794 5.09%
-------- ------- -----
Total Interest Bearing Deposits................... 448,781 15,780 3.52%
Other Borrowed Funds................................ 29,899 1,648 5.51%
-------- ------- -----
Total Interest Bearing Liabilities................ 478,680 $17,428 3.64%
======= =====
Demand Deposits..................................... 126,470
All Other Liabilities............................... 5,453
Total Liabilities................................. 610,603
Shareholders' Equity................................ 79,338
--------
Total Liabilities & Shareholders' Equity.......... $689,941
========
Net Interest Margin................................. 5.46%
=====
- --------
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
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
Twelve Months Ended
December 1997
------------------------
Balance Interest Rate
-------- -------- -----
Assets
Federal Funds Sold................................... $ 13,002 $ 724 5.57%
Investment Securities Available-for-Sale
U.S. Treasuries..................................... 14,476 890 6.15%
U.S. Agencies....................................... 49,079 3,004 6.12%
Municipals.......................................... 6,841 512 7.48%
Mortgage Backed Securities.......................... 131,123 8,240 6.28%
Other............................................... 5,132 280 5.46%
-------- ------- -----
Total Investment Securities Available-for-Sale..... 206,651 12,926 6.25%
-------- ------- -----
Investment Securities Held-to-Maturity
U.S. Treasuries..................................... 3,587 229 6.38%
U.S. Agencies....................................... 36,941 2,132 5.77%
Municipals.......................................... 66,954 5,460 8.16%
Mortgage Backed Securities.......................... 0 0 0.00%
Other............................................... 1,446 135 9.34%
-------- ------- -----
Total Investment Securities Held-to-Maturity....... 108,928 7,956 7.30%
-------- ------- -----
Loans
Real Estate......................................... 168,949 16,976 10.05%
Commercial.......................................... 79,457 7,784 9.80%
Installment......................................... 10,756 1,104 10.26%
Credit Card......................................... 2,959 409 13.82%
Municipal........................................... 396 30 7.58%
-------- ------- -----
Total Loans........................................ 262,517 26,303 10.02%
-------- ------- -----
Total Earning Assets............................... 591,098 $47,909 8.11%
======= =====
Unrealized Gain/(Loss) on Securities Available for
Sale................................................ (4)
Reserve for Loan Losses.............................. (7,631)
Cash and Due From Banks.............................. 23,706
All Other Assets..................................... 27,431
--------
Total Assets....................................... $634,600
========
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Transaction......................................... $ 51,896 $ 840 1.62%
Savings............................................. 181,917 4,703 2.59%
Time Deposits Over $100,000......................... 63,765 3,347 5.25%
Time Deposits Under $100,000........................ 145,972 7,432 5.09%
-------- ------- -----
Total Interest Bearing Deposits.................... 443,550 16,322 3.68%
Other Borrowed Funds................................. 1,784 100 5.61%
-------- ------- -----
Total Interest Bearing Liabilities................. 445,334 $16,422 3.69%
======= =====
Demand Deposits...................................... 112,439
All Other Liabilities................................ 3,007
--------
Total Liabilities.................................. 560,780
Shareholders' Equity................................. 73,820
--------
Total Liabilities & Shareholders' Equity........... $634,600
========
Net Interest Margin.................................. 5.33%
=====
- --------
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
Volume and Rate Analysis of Net Interest Revenue
(Rates on a Taxable Equivalent Basis)
(in thousands)
1999 versus 1998
Amount of Increase
(Decrease) Due to
Change in:
-------------------------
Average Average Net
Volume Rate Change
------- ------- -------
Interest Earning Assets
Federal Funds Sold................................... $ (107) $ (43) $ (150)
Investment Securities Available-for-Sale
U.S. Treasuries..................................... 490 (95) 395
U.S. Agencies....................................... (1,241) (161) (1,402)
Municipals.......................................... 816 0 816
Mortgage Backed Securities.......................... 2,628 (349) 2,279
Other............................................... 39 (39) 0
------- ------- -------
Total Investment Securities Available-for-Sale.... 2,732 (644) 2,088
------- ------- -------
Investment Securities Held-to-Maturity
U.S. Treasuries..................................... (73) 2 (71)
U.S. Agencies....................................... (830) (157) (987)
Municipals.......................................... (805) (127) (932)
Mortgage Backed Securities.......................... 0 0 0
Other............................................... (19) (6) (25)
------- ------- -------
Total Investment Securities Held-to-Maturity...... (1,727) (288) (2,015)
------- ------- -------
Loans:
Real Estate......................................... 4,387 (900) 3,486
Commercial.......................................... 1,804 (570) 1,234
Installment......................................... 341 (180) 161
Credit Card......................................... 7 (12) (5)
Other............................................... 14 (4) 10
------- ------- -------
Total Loans....................................... 6,553 (1,666) 4,886
------- ------- -------
Total Earning Assets.............................. 7,451 (2,641) 4,809
------- ------- -------
Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction......................................... 89 (143) (53)
Savings............................................. 162 (48) 115
Time Deposits Over $100,000......................... 432 (289) 142
Time Deposits Under $100,000........................ 1,123 (608) 516
------- ------- -------
Total Interest Bearing Deposits................... 1,807 (1,087) 720
Other Borrowed Funds................................. 742 (28) 714
------- ------- -------
Total Interest Bearing Liabilities................ 2,549 (1,115) 1,434
------- ------- -------
Total Change......................................... $ 4,902 $(1,526) $ 3,375
======= ======= =======
- --------
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.
14
Volume and Rate Analysis of Net Interest Revenue
(Rates on a Taxable Equivalent Basis)
(in thousands)
1998 versus 1997
Amount of Increase
(Decrease) Due to
Change in:
------------------------
Average Average Net
Volume Rate Change
------- ------- -------
Interest Earning Assets
Federal Funds Sold.................................... $ 250 $ (31) $ 219
Investment Securities Available-for-Sale
U.S. Treasuries...................................... (148) (22) (169)
U.S. Agencies........................................ (1,349) 294 (1,055)
Municipals........................................... 295 (80) 214
Mortgage Backed Securities........................... 4,294 15 4,309
Other................................................ (87) 48 (39)
------- ----- -------
Total Investment Securities Available-for-Sale..... 3,005 255 3,260
------- ----- -------
Investment Securities Held-to-Maturity
U.S. Treasuries...................................... (94) (14) (109)
U.S. Agencies........................................ (998) (54) (1,052)
Municipals........................................... (506) (161) (667)
Mortgage Backed Securities........................... 0 0 0
Other................................................ (31) 31 0
------- ----- -------
Total Investment Securities Held-to-Maturity....... (1,629) (198) (1,828)
------- ----- -------
Loans:
Real Estate.......................................... 1,809 112 1,920
Commercial........................................... 1,231 27 1,258
Installment.......................................... 217 38 254
Credit Card.......................................... (13) 4 (9)
Other................................................ (22) 3 (19)
------- ----- -------
Total Loans........................................ 3,222 184 3,404
------- ----- -------
Total Earning Assets............................... 4,848 210 5,055
------- ----- -------
Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction.......................................... 66 (138) (72)
Savings.............................................. (116) (562) (678)
Time Deposits Over $100,000.......................... (85) (69) (154)
Time Deposits Under $100,000......................... 363 (1) 362
------- ----- -------
Total Interest Bearing Deposits.................... 228 (770) (542)
Other Borrowed Funds................................. 1,550 (2) 1,548
------- ----- -------
Total Interest Bearing Liabilities................. 1,778 (772) 1,006
------- ----- -------
Total Change.......................................... $ 3,070 $ 982 $ 4,049
======= ===== =======
- --------
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
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) 1999 1998 1997
- --------------------------- ------------------ ------------------ ------------------
U. S. Treasury............. $ 11,875 $ 0 $ 9,099 $ 2,006 $ 18,292 $ 2,022
U. S. Agency............... 7,013 1,995 12,138 1,990 39,053 33,158
Municipal.................. 23,042 46,423 24,047 55,088 1,013 62,478
Mortgage-Backed
Securities................ 251,003 0 257,644 0 185,698 --
Other...................... 4,647 857 9,377 1,068 3,140 1,271
-------- ------- -------- ------- -------- --------
Total Book Value........ $297,580 $49,275 $312,305 $60,152 $247,196 $ 98,929
======== ======= ======== ======= ======== ========
Fair Value.............. $297,580 $49,411 $312,305 $62,149 $247,196 $100,658
======== ======= ======== ======= ======== ========
Analysis of Investment Securities Available-for-Sale
The following table is a summary of the relative maturities and yields of
Farmers & Merchants Bank of Central California's investment securities
Available-for-Sale as of December 31, 1999. 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.
Investment Securities Available-for-Sale Fair Average
December 31, 1999 (in thousands) Value Yield
- ---------------------------------------- -------- -------
U.S. Treasury
One year or less............................................. 2,006 6.04%
After one year through five years............................ 9,869 5.16%
After five years through ten years........................... -- --
After ten years.............................................. -- --
-------- ----
Total U.S. Treasury Securities.............................. 11,875 5.31%
-------- ----
U.S. Agency
One year or less............................................. -- --
After one year through five years............................ 7,013 5.80%
After five years through ten years........................... -- --
After ten years.............................................. -- --
-------- ----
Total U.S. Agency Securities................................ 7,013 5.80%
-------- ----
Municipal
One year or less............................................. 1,000 6.65%
After one year through five years............................ 5,157 6.32%
After five years through ten years........................... 13,381 6.49%
After ten years.............................................. 3,504 6.51%
-------- ----
Total Municipal Securities.................................. 23,042 6.46%
-------- ----
Mortgage-Backed Securities
One year or less............................................. 8,759 6.84%
After one year through five years............................ 194,843 6.35%
After five years through ten years........................... 46,640 6.75%
After ten years.............................................. 761 7.04%
-------- ----
Total Mortgage-Backed Securities............................ 251,003 6.44%
-------- ----
Other
One year or less............................................. 4,647 6.56%
After one year through five years............................ -- --
After five years through ten years........................... -- --
After ten years.............................................. -- --
-------- ----
Total Other Securities...................................... 4,647 6.56%
-------- ----
Total Investment Securities Available-for-Sale.............. $297,580 6.39%
======== ====
- -------
Note: The average yield for floating rate securities is calculated using the
current stated yield.
16
Analysis of Investment Securities Held-to-Maturity
The following table is a summary of the relative maturities and yields of
Farmers & Merchants Bank of Central California's investment securities Held-
to-Maturity as of December 31, 1999. 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.
Investment Securities Held-to-Maturity Fair Average
December 31, 1999 (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............................. 1,995 5.93%
After five years through ten years............................ -- --
After ten years............................................... -- --
------- ----
Total U.S. Agency Securities................................. 1,995 5.93%
------- ----
Municipal
One year or less.............................................. 7,494 7.90%
After one year through five years............................. 21,884 7.58%
After five years through ten years............................ 16,691 7.30%
After ten years............................................... 354 6.73%
------- ----
Total Municipal Securities................................... 46,423 7.52%
------- ----
Other
One year or less.............................................. -- --
After one year through five years............................. -- --
After five years through ten years............................ -- --
After ten years............................................... 857 8.97%
------- ----
Total Other Securities....................................... 857 8.97%
------- ----
Total Investment Securities.................................. $49,275 7.49%
======= ====
17
Loan Data (in thousands)
The following table shows the Bank's loan composition by type of loan.
December 31,
--------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Real Estate...................... $222,354 $180,468 $150,804 $141,408 $141,574
Real Estate Construction......... 39,186 26,529 25,796 24,972 27,928
Commercial....................... 129,969 105,403 79,977 84,073 75,136
Installment...................... 18,953 14,035 12,322 9,690 10,905
Credit Card...................... 3,235 2,989 2,873 3,276 3,212
Other............................ 60 64 128 152 175
-------- -------- -------- -------- --------
Total Loans....................... 413,757 329,488 271,900 263,571 258,930
Less:
Unearned Income.................. 348 310 294 284 441
Reserve for Possible Loan
Losses.......................... 9,787 8,589 7,188 10,031 7,089
-------- -------- -------- -------- --------
Loans, Net........................ $403,622 $320,589 $264,418 $253,256 $251,400
======== ======== ======== ======== ========
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,
---------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ -------
Nonaccrual Loans
Real Estate......................... $ 754 $3,997 $4,911 $5,881 $ 8,441
Commercial.......................... 1,713 595 580 1,055 4,711
Installment......................... 32 9 7 18 106
Credit Card......................... 0 0 0 0 0
Other............................... 0 0 0 0 0
------ ------ ------ ------ -------
Total Nonaccrual Loans............... 2,499 4,601 5,498 6,954 13,258
------ ------ ------ ------ -------
Accruing Loans Past Due 90 Days or
More
Real Estate......................... 0 0 0 357 0
Commercial.......................... 0 0 0 0 0
Installment......................... 0 0 0 1 5
Credit Card......................... 12 23 6 31 33
Other............................... 0 0 0 0 0
------ ------ ------ ------ -------
Total Accruing Loans Past Due 90 Days
or More............................. 12 23 6 389 38
------ ------ ------ ------ -------
Total Non-Performing Loans........... $2,511 $4,624 $5,504 $7,343 $13,296
====== ====== ====== ====== =======
Other Real Estate Owned.............. $ 204 $ 636 $2,231 $2,805 $ 2,584
Non-Performing Loans as a Percent of
Total Loans......................... 0.61% 1.40% 2.02% 2.79% 5.13%
====== ====== ====== ====== =======
Allowance for Possible Loan Losses as
a Percent of Total Loans............ 2.37% 2.61% 2.64% 3.81% 2.74%
====== ====== ====== ====== =======
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, 1999 was $48,000. For a discussion of
impaired loan policy see Note 4 in the Bank's 1999 Annual Report.
18
Maturities and Rate Sensitivity of Loans (in thousands)
The following table shows the maturity distribution and interest rate
sensitivity of loans of the Bank on December 31, 1999
Over One
Year to Over
One Year Five Five
or Less Years Years Total Percent
-------- -------- ------- -------- -------
Real Estate..................... $ 90,072 $129,863 $41,605 $261,540 66.80%
Commercial...................... 78,218 41,098 10,653 129,969 33.20%
-------- -------- ------- -------- ------
Total........................ $168,290 $170,961 $52,258 $391,509 100.00%
======== ======== ======= ======== ======
Rate Sensitivity:
Predetermined Rate............. $ 20,071 $ 55,529 $26,759 $102,359 26.14%
Floating Rate.................. 148,219 115,432 25,499 289,150 73.86%
-------- -------- ------- -------- ------
Total........................ $168,290 $170,961 $52,258 $391,509 100.00%
======== ======== ======= ======== ======
Percent......................... 42.98% 43.67% 13.35% 100.00%
======== ======== ======= ========
The "One Year Or Less" column includes Demand loans, Overdrafts and Past
Due Loans. Farmers & Merchants Bank does not have an automatic rollover policy
for maturing loans.
Commitments and Lines of Credit
It is not the policy of the Bank 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.
19
Provision and Reserve for Loan Losses (in thousands)
The following table summarizes the loan loss experience of Farmers &
Merchants Bank of Central California for the periods indicated:
1999 1998 1997 1996 1995
------ ------ ------- ------- -------
Balance at Beginning of Year....... $8,589 $7,188 $10,031 $ 7,089 $ 7,582
Provision Charged to Expense....... 1,700 1,400 5,450 4,000 1,000
Charge Offs:
Real Estate....................... 794 194 892 803 1,723
Commercial........................ 405 91 7,672 226 286
Installment....................... 80 73 78 99 141
Credit Card....................... 30 73 94 93 60
Other............................. 0 0 0 0 0
------ ------ ------- ------- -------
Total Charge Offs............... $1,309 $ 431 $ 8,736 $ 1,221 $ 2,210
------ ------ ------- ------- -------
Recoveries:
Real Estate....................... 3 1 208 56 531
Commercial........................ 776 388 201 58 116
Installment....................... 21 36 26 40 65
Credit Card....................... 7 7 8 9 5
Other............................. 0 0 0 0 0
------ ------ ------- ------- -------
Total Recoveries................ 807 432 443 163 717
------ ------ ------- ------- -------
Net Recoveries (Charge-Offs)....... (502) 1 (8,293) (1,058) (1,493)
------ ------ ------- ------- -------
Balance at End of Year*............ $9,787 $8,589 $ 7,188 $10,031 $ 7,089
====== ====== ======= ======= =======
Ratios:
Consolidated Reserve for Loan
Losses to:
Loans at Year End................. 2.37% 2.61% 2.64% 3.81% 2.74%
Average Loans..................... 2.70% 2.92% 2.74% 3.78% 2.90%
Consolidated Net Charge-Offs to:
Loans at Year End................. 0.12% 0.00% 3.05% 0.40% 0.58%
Average Loans..................... 0.14% 0.00% 3.16% 0.40% 0.61%
For a description of the Bank's policy regarding the Reserve for Loan
Losses, see Note 1 in the Notes to the Consolidated Financial Statements of
the 1999 Annual Report.
Allocation of the Reserve for Loan Losses (in thousands)
Amount of Allowance Reserve at
December 31,
-----------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------- ------
Real Estate............................... $2,609 $3,107 $3,020 $ 3,658 $4,150
Real Estate Construction.................. 461 456 516 646 820
Commercial................................ 3,382 2,530 1,927 5,598 1,221
Installment............................... 147 229 82 55 51
Other--Including Management's Economic
Judgment Factor.......................... 2,081 673 62 67 54
Unallocated............................... 1,107 1,594 1,581 7 793
------ ------ ------ ------- ------
Total.................................. $9,787 $8,589 $7,188 $10,031 $7,089
====== ====== ====== ======= ======
20
Distribution of Loans by Type
Percent of Loans in Each
Category to Total Loans at
December 31,
---------------------------------
1999 1998 1997 1996 1995
----- ----- ----- ----- -----
Real Estate.................................. 53.7% 54.8% 55.5% 53.7% 54.7%
Real Estate Construction..................... 9.5% 8.1% 9.5% 9.5% 10.8%
Commercial................................... 31.4% 32.0% 29.4% 31.9% 29.0%
Installment.................................. 4.6% 4.3% 4.5% 3.7% 4.2%
Other........................................ 0.8% 0.9% 1.1% 1.3% 1.3%
----- ----- ----- ----- -----
Total..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Analysis of Certificates of Deposit (In thousands)
The following table sets forth, by time remaining to maturity, the Bank's
time deposits in amounts of $100,000 or more for the periods indicated.
December 31,
---------------
1999 1998
------- -------
Time Deposits of $100,000 or More
Three Months or Less.......................................... $23,594 $32,146
Over Three Months Through Six Months.......................... 22,235 17,516
Over Six Months Through Twelve Months......................... 23,143 11,009
Over Twelve Months............................................ 5,287 1,700
------- -------
Total Time Deposits of $100,000 or More..................... $74,259 $62,371
======= =======
Refer to the Year-To-Date Average Balances and Rate Schedules for
information on separate deposit categories.
Return on Equity and Assets
Refer to the Five Year Financial Summary of Operations located in the
Bank's Annual Report for the year ending December 31, 1999.
Short-Term Borrowings
Refer to Note 9. of the Bank's Annual Report for the year ending December
31, 1999.
21
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 2000 and 2001.
Item 3. Legal Proceedings
In the ordinary course of business, the Company becomes involved in
litigation arising out of its normal business activities. Management, after
consultation with legal council, is of the opinion that the ultimate
liability, if any, resulting from the disposition of such claims would not be
material in relation to the financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to shareholders during the fourth quarter of
1999.
Item 4(A). Executive Officers of the Registrant
As of January 18, 2000, the principal officers of the Company are:
Year
Name of Birth Principal Occupation During Past Five Years
---- -------- -------------------------------------------
Kent A. Steinwert....... 1952 President and Chief Executive Officer of the
Banksince 8/18/1997
Elected to Board of Directors, 10/27/1998
President and Chief Executive Officer of the
Company since 3/09/1999
Former Bank America Southern California
Regional Sales and Marketing Manager
Richard S. Erichson..... 1947 Executive Vice President, Senior Credit
Officer of the Bank Since 12/14/1998
Executive Vice President, Senior Credit
Officer of the Company Since 3/09/1999
Former Bank of America Vice President,
Senior Commercial Portfolio Manager
Donald H. Fraser........ 1936 Executive Vice President, Chief Operating
Officer, Secretary of the Bank Since
4/20/1996, prior thereto, Senior Vice
President and Chief Operating Officer of the
Bank
John R. Olson........... 1952 Executive Vice President & CFO, Treasurer of
the Bank since 4/20/1996, Prior thereto,
Senior Vice President and Chief Financial
Officer of the Bank
Douglas E. Eddy......... 1948 Senior Vice President, Branch Admin./Sales
Management of the Bank since 2/1/1999, First
Vice President and Credit Administrator of
the Bank from April 1996 to December 1998,
prior thereto, Vice President and Credit
Administrator of the Bank
Lamoin V. Schulz........ 1946 Senior Vice President, Director of Personnel
of the Bank Since 4/20/1998, prior thereto,
First Vice President, Director of Personnel
of the Bank
Kenneth W. Smith........ 1959 Senior Vice President, Commercial Credit
Administrator Since 3/01/1999
Former Bank of America Associate Commercial
Banking Manager
22
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 1998.
Calendar Quarter High Low
---------------- ------- -------
1999 Fourth quarter................................ $210.00 $210.00
Third quarter................................. 207.00 165.00
Second quarter................................ 165.00 150.00
First quarter................................. 150.00 150.00
1998 Fourth quarter................................ $150.00 $150.00
Third quarter................................. 150.00 150.00
Second quarter................................ 160.00 145.00
First quarter................................. 145.00 135.00
Beginning in 1975 and continuing through 1999, the Company has issued a 5%
stock dividend annually.
Item 6. Selected Financial Data
The selected financial data for the five years ended December 31, 1999,
which appears in the Five-Year Financial Summary of the Company's 1999 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 1999
Annual Report, located in Exhibit 13, is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements and the related Notes to Consolidated
Financial Statements of the Company's 1999 Annual Report, located in Exhibit
13, are incorporated herein by reference.
Statement
Report of Management
Independent Auditors' Report.
Consolidated Statement of Income--Years ended December 31, 1999, 1998
and 1997.
Consolidated Balance Sheet--December 31, 1999 and 1998.
Consolidated Statement of Changes in Shareholders' Equity--Years ended
December 31, 1999, 1998 and 1997.
Consolidated Statement of Cash Flows--Years ended December 31, 1999,
1998 and 1997.
Consolidated Statement of Comprehensive Income.
Notes to Consolidated Financial Statements.
Five Year Financial Summary of Operations
Selected Quarterly Financial Data
Managements Discussion and Analysis
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None
23
PART III
Item 10. Directors and Executive Officers of the Company
The information required by item 401 of Regulation S-K for this Item 10
with respect to the Directors is contained in the Company's 2000 Proxy
Statement and is incorporated herein by reference. For information concerning
the executive officers of the Company, see Item 4(A), "Executive Officers of
the Registrant" above.
Item 11. Executive Compensation
The information required by this section is contained in the Company's 2000
Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this section is contained in the Company's 2000
Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this section is contained in the Company's 2000
Proxy Statement and is incorporated herein by reference.
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 1999: 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 Company
of Central California
(Registrant)
By __________________________________
John R. Olson
Treasurer
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 21, 2000.
President and Chief Executive Officer
______________________________________
Kent A. Steinwert
Executive Vice PresidentSenior Credit
______________________________________ Officer
Richard S. Erichson
Executive Vice President Chief
______________________________________ Operations Officer
Donald H. Fraser
Executive Vice President & Chief
______________________________________ Financial Officer Principal Accounting
John R. Olson Officer
______________________________________ ______________________________________
Ole R. Mettler, Chairman George D. Schiedeman, Director
______________________________________ ______________________________________
Stewart Adams, Jr., Director Hugh Steacy, Director
______________________________________ ______________________________________
Ralph Burlington, Director Robert F. Hunnell, Director
______________________________________ ______________________________________
Calvin Suess, Director James E. Podesta, Director
______________________________________ ______________________________________
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, 1999................................
21 Subsidiaries of the Registrant as of February 14, 2000..........
27 Financial Data Schedule.........................................
26