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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________ to ________
Commission File Number: 1.000-26099
FARMERS & MERCHANTS BANCORP
(Exact name of registrant as specified in its charter)
Delaware 94-3327828
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
111 W. Pine Street, Lodi, California 95240
(Address of principal Executive offices) (Zip Code)
Registrant's telephone number, including area code (209) 367-2300
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
Number of shares of common stock of the registrant: Par value $0.01, authorized
2,000,000 shares; issued and outstanding 763,977 as of August 1, 2003.
1
FARMERS & MERCHANTS BANCORP
FORM 10-Q
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION Page
Item 1 - Financial Statements
Consolidated Balance Sheets as of June 30, 2003,
December 31, 2002 and June 30, 2002. 3
Consolidated Statements of Income for the Three Months
and Six Months Ended June 30, 2003 and 2002. 4
Consolidated Statements of Comprehensive Income for the Three
Months and Six Months Ended June 30, 2003 and 2002. 5
Statement of Changes in Shareholders' Equity for the Six
Months Ended June 30, 2003 and 2002. 6
Consolidated Statement of Cash Flows for the Six
Months Ended June 30, 2003 and 2002. 7
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis 12
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 19
Item 4 - Controls and Procedures 23
PART II. - OTHER INFORMATION 27
-----------------
Signatures 29
Index to Exhibits 30
2
PART I. - FINANCIAL INFORMATION
Item 1 - Financial Statements
FARMERS & MERCHANTS BANCORP
Consolidated Balance Sheets
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) June 30, December 31, June 30,
2003 2002 2002
Assets (Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents:
Cash and Due From $48,316 $45,389 $31,201
Federal Funds Sold - 8,185 5,985
- -----------------------------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 48,316 53,574 37,186
Investment Securities:
Available-for-Sale 218,010 206,063 166,128
Held-to-Maturity 42,907 27,870 29,846
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities 260,917 233,933 195,974
- -----------------------------------------------------------------------------------------------------------------------------------
Loans 750,137 698,693 659,923
Less: Unearned Income (2,168) (2,018) (1,546)
Less: Allowance for Loan Losses (17,091) (16,684) (13,093)
- -----------------------------------------------------------------------------------------------------------------------------------
Loans, Net 730,878 679,991 645,284
- -----------------------------------------------------------------------------------------------------------------------------------
Land, Buildings & Equipment 11,099 11,342 11,511
Interest Receivable and Other Assets 44,406 43,067 40,328
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $1,095,616 $1,021,907 $930,283
===================================================================================================================================
Liabilities & Shareholders' Equity
Deposits:
Demand $196,845 $205,997 $172,540
Interest Bearing Transaction 88,889 93,646 84,259
Savings 243,699 231,964 219,608
Time Deposits 328,299 318,618 303,679
- -----------------------------------------------------------------------------------------------------------------------------------
Total Deposits 857,732 850,225 780,086
- -----------------------------------------------------------------------------------------------------------------------------------
Federal Funds Purchased - 16,997 -
FHLB Borrowings 121,965 40,965 40,983
Other Liabilities 7,472 10,155 8,061
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 987,169 918,342 829,130
- -----------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common Stock 8 7 7
Additional Paid In Capital 72,717 64,979 65,661
Retained Earnings 33,052 36,749 32,644
Accumulated Other Comprehensive Income 2,670 1,830 2,841
- -----------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 108,447 103,565 101,153
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities & Shareholders' Equity $1,095,616 $1,021,907 $930,283
===================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
3
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Income (Unaudited)
(in thousands) Three Months Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------
Interest Income:
Interest & Fees on Loans $11,084 $10,226 $21,676 $20,128
Federal Funds Sold 18 187 97 330
Securities:
Investments Available-for-Sale:
Taxable 2,041 2,541 3,946 5,573
Non-taxable 285 240 569 477
Investments Held-to-Maturity:
Taxable 5 8 9 18
Non-taxable 437 352 772 713
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Income 13,870 13,554 27,069 27,239
- ---------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Interest Bearing Transaction 30 75 79 164
Savings 352 528 697 1,140
Time Deposits 1,737 2,264 3,644 4,897
Interest on Borrowed Funds 828 556 1,405 1,106
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 2,947 3,423 5,825 7,307
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income 10,923 10,131 21,244 19,932
Provision for Loan Losses 125 300 325 500
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 10,798 9,831 20,919 19,432
- ---------------------------------------------------------------------------------------------------------------------------
Non-Interest Income
Service Charges on Deposit Accounts 1,228 1,155 2,404 2,244
Net Gain (Loss) on Sale of Investment Securities 242 232 374 276
Other 1,717 1,564 3,360 2,635
- ---------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 3,187 2,951 6,138 5,155
- ---------------------------------------------------------------------------------------------------------------------------
Non-Interest Expense
Salaries & Employee Benefits 5,311 4,568 10,250 8,748
Occupancy 368 422 773 835
Equipment 497 559 1,098 1,192
Other Operating 2,144 2,010 3,948 3,730
- ---------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 8,320 7,559 16,069 14,505
- ---------------------------------------------------------------------------------------------------------------------------
Net Income Before Taxes 5,665 5,223 10,988 10,082
Provision for Taxes 2,021 1,903 3,943 3,700
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $3,644 $3,320 $7,045 $6,382
===========================================================================================================================
Earnings Per Share $4.76 $4.30 $9.19 $8.21
===========================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
4
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Comprehensive Income (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands) Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 3,644 $ 3,320 $ 7,045 $ 6,382
Other Comprehensive Income (Loss) -
Unrealized Gains on Derivative Instruments:
Unrealized holding gains arising during the period, net
of income tax effects of $30and $0 for the quarters ended
June 30, 2003 and 2002, respectively, and $85 and $0
for the six months ended June 30, 2003 and 2002, respectively. $ 41 $ 0 $ 117 $ 0
Unrealized Gains (Losses) on Securities:
Unrealized holding gains (losses) arising during the period, net of
income tax effects of $870 and $(269) for the quarters ended
June 30, 2003 and 2002, respectively, and of $682 and ($57)
for the six months ended June 30, 2003 and 2002, respectively. 1,200 371 940 (25)
Less: Reclassification adjustment for realized (gains) losses included
in net income, net of related income tax effects of ($101) and $0
for the quarters ended June 30, 2003 and 2002, respectively, and of
$(157) and $(2) for the six months ended June 30, 2003 and 2002,
respectively. (141) (8) (217) (4)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income 1,100 363 840 (29)
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 4,744 $ 3,683 $ 7,885 $ 6,353
==================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
5
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
(in thousands except share data) Accumulated
Common Additional Other Total
Shares Common Paid-In Retained Comprehensive Shareholders'
Outstanding Stock Capital Earnings Income Equity
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 719,269 $ 7 $ 61,360 $ 36,499 $ 2,870 $ 100,736
- --------------------------------------------------------------------------------------------------------------------------------
Net Income - - 6,382 - 6,382
Cash Dividends Declared on -
Common Stock - - (1,472) - (1,472)
5% Stock Dividend 34,501 - 8,625 (8,625) - -
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend - - (140) - (140)
Redemption of Stock (18,021) - (4,324) - - (4,324)
Changes in Net Unrealized Gain (Loss) on
Securities Available for Sale - - - (29) (29)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2002 735,749 $ 7 $ 65,661 $ 32,644 $ 2,841 $101,153
================================================================================================================================
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 733,021 $ 7 $ 64,979 $ 36,749 $ 1,830 $ 103,565
- --------------------------------------------------------------------------------------------------------------------------------
Net Income - - 7,045 - 7,045
Cash Dividends Declared on
Common Stock - - (1,604) - (1,604)
5% Stock Dividend 35,985 1 8,996 (8,996) - 1
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend - - (142) - (142)
Redemption of Stock (5,029) - (1,258) - - (1,258)
Unrealized Gains on Derivative Instruments 117 117
Changes in Net Unrealized Gain (Loss) on
Securities Available for Sale - - - 723 723
- --------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2003 763,977 $ 8 $ 72,717 $ 33,052 $ 2,670 $ 108,447
================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
6
FARMERS & MERCHANTS BANCORP
Consolidated Statement of Cash Flows (Unaudited) Six Months Ended
(in thousands) June 30, June 30,
2003 2002
- -------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $7,045 $6,382
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Loan Losses 325 500
Depreciation and Amortization 788 822
Provision for Deferred Income Taxes (50) (20)
Net Accretion of Investment Securities 810 (75)
Net Gain on Sale of Investment Securities (374) (315)
Net Change in Operating Assets & Liabilities:
(Increase) Decrease in Interest Receivable and Other Assets (1,796) (9,428)
Increase (Decrease) in Interest Payable and Other Liabilities (2,584) (1,375)
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities 4,164 (3,509)
Investing Activities:
Securities Available-for-Sale:
Purchased (139,443) (10,694)
Sold or Matured 128,276 87,808
Securities Held-to-Maturity:
Purchased (22,096) (249)
Matured 7,091 3,127
Net Loans Originated or Acquired (51,584) (56,478)
Principal Collected on Loans Charged Off 372 154
Net Additions to Premises and Equipment (545) (901)
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities (77,929) 22,767
Financing Activities:
Net Decrease in Demand, Interest-Bearing Transaction,
and Savings Accounts (2,174) (21,134)
Increase (Decrease) in Time Deposits 9,681 (18,491)
Federal Funds Purchased (16,997) 0
Federal Home Loan Bank Borrowings:
Advances 81,018 0
Paydowns (18) (17)
Cash Dividends (1,746) (1,612)
Stock Redemption (1,257) (4,324)
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 68,507 (45,578)
Increase (Decrease) in Cash and Cash Equivalents (5,258) (26,320)
Cash and Cash Equivalents at Beginning of Year 53,574 63,506
- -------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents as of June 30, 2003 and June 30, 2002 $48,316 $37,186
=============================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
7
FARMERS & MERCHANTS BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For the six months ended June 30, 2003 and June 30, 2002
Significant Accounting Policies
Farmers & Merchants Bancorp (the Company) was organized March 10, 1999. Its
primary operations are related to traditional banking activities through its
subsidiary Farmers & Merchants Bank of Central California (the Bank). The
consolidated financial statements of the Company and its subsidiaries are
prepared in conformity with generally accepted accounting principles and
prevailing practices within the banking industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect
reported amounts as of the date of the balance sheet and revenues and expenses
for the period. These estimates are based on information available as of the
date of the financial statements. Therefore, actual results could differ from
those estimates. The following is a summary of the significant accounting and
reporting policies used in preparing the consolidated financial statements.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company and the Company's wholly owned subsidiaries, F&M Bancorp, Inc. and the
Bank, along with the Bank's wholly owned subsidiaries, Farmers & Merchants
Investment Corporation and Farmers/Merchants Corp. Significant intercompany
transactions have been eliminated in consolidation. F & M Bancorp, Inc. was
created in March 2002 to protect the name F & M Bank, Farmers & Merchants
Investment Corporation has been dormant since 1991. Farmers/Merchants Corp. acts
as trustee on deeds of trust originated by the Bank.
Certain amounts in the prior years' financial statements and related footnote
disclosures have been reclassified to conform to the current-year presentation.
These reclassifications have no effect on previously reported net income.
Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, the Company has
defined cash and cash equivalents as those amounts included in the balance sheet
captions Cash and Due from Banks and Federal Funds Sold and Securities Purchased
Under Agreements to Resell. Generally, these transactions are for one-day
periods. For these instruments, the carrying amount is a reasonable estimate of
fair value.
Investment Securities
Investment securities are classified at the time of purchase as held-to-maturity
if it is management's intent and the Bank has the ability to hold the securities
until maturity. These securities are carried at cost, adjusted for amortization
of premium and accretion of discount using a methodology which approximates a
level yield of interest over the estimated remaining period until maturity.
Losses, reflecting a decline in value judged by the Bank to be other than
temporary, are recognized in the period in which they become known.
Securities are classified as available-for-sale if it is management's intent, at
the time of purchase, to hold the securities for an indefinite period of time
and/or to use the securities as part of the Company's asset/liability management
strategy. Securities classified as available-for-sale include securities which
may be sold to effectively manage interest rate risk exposure, prepayment risk,
satisfy liquidity demands and other factors. These securities are reported at
fair value with aggregate, unrealized gains or losses excluded from income and
included as a separate component of shareholders' equity, net of related income
taxes. Fair values are based on quoted market prices or broker/dealer price
quotations on a specific identification basis. Gains or losses on the sale of
these securities are computed using the specific identification method.
Unrealized losses on these securities, reflecting a decline in value judged by
the Company to be other than temporary, are recognized in the period in which
they become known.
8
Trading securities, if any, are acquired for short-term appreciation and are
recorded in a trading portfolio and are carried at fair value, with unrealized
gains and losses recorded in non-interest income.
Loans
Loans are reported at the principal amount outstanding net of unearned discounts
and deferred loan fees. Interest income on loans is accrued daily on the
outstanding balances using the simple interest method. Loan origination fees,
net of related loan origination costs, are deferred and recognized over the
contractual life of the loan as an adjustment to the yield. Loans are placed on
a non-accrual status when the collection of principal or interest is in doubt or
when they become past due for 90 days or more unless they are both well-secured
and in the process of collection. For this purpose a loan is considered
well-secured if it is collateralized by property having a net realizable value
in excess of the amount of the loan or is guaranteed by a financially capable
party. When a loan is placed on non-accrual status, the accrued and unpaid
interest receivable is reversed and charged against current income, thereafter,
interest income is recognized only as it is collected in cash. Loans placed on a
non-accrual status are returned to accrual status when the loans are paid
current as to principal and interest and future payments are expected to be made
in accordance with the contractual terms of the loan.
A loan is impaired when, based on current information and events, it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. When a loan is impaired, the recorded
amount of the loan in the Consolidated Balance Sheets is based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or on the observable or estimated market price of the loan or the fair
value of the collateral if the loan is collateral dependent. Impaired loans are
placed on a non-accrual status with income reported accordingly. Cash payments
are first applied as a reduction of the principal balance until collection of
the remaining principal and interest can be reasonably assured.
Allowance for Loan Losses
As a financial institution which assumes lending and credit risks as a principal
element in its business, credit losses will be experienced in the normal course
of business. Accordingly, the allowance for loan losses is maintained at a level
considered adequate by management to provide for losses that can be reasonably
estimated. The allowance is increased by provisions charged to operating expense
and reduced by net charge-offs. Management employs a systematic methodology for
determining the allowance for loan losses. On a quarterly basis, management
reviews the credit quality of the loan portfolio in determining the adequacy of
the allowance balance.
The conditions evaluated in connection with the allowance may include existing
general economic and business conditions affecting the key lending areas of the
Company, credit quality trends, collateral values, loan volumes and
concentration, seasoning of the loan portfolio, specific industry conditions,
recent loss experience, duration of the current business cycle, bank regulatory
examination results and findings of the Company's internal credit examiners.
The allowance also incorporates the results of measuring impaired loans as
provided in Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan-Income Recognition and Disclosures". These
accounting standards prescribe the measurement methods, income recognition and
disclosures related to impaired loans.
9
While the Company utilizes a systematic methodology in determining its
allowance, the allowance is based on estimates, and ultimate losses may vary
from current estimates. The estimates are reviewed periodically and, as
adjustments become necessary, are reported in earnings in the periods in which
they become known.
Premises and Equipment
Premises, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is computed principally
by the straight-line method over the estimated useful lives of the assets.
Estimated useful lives of buildings range from 30 to 40 years, and for furniture
and equipment from 3 to 8 years. Leasehold improvements are amortized over the
lesser of the terms of the respective leases, or their useful lives, which are
generally 5 to 10 years. Remodeling and capital improvements are capitalized
while maintenance and repairs are charged directly to occupancy expense.
Other Real Estate
Other real estate owned, which is included in other assets, is comprised of
properties acquired through foreclosures in satisfaction of indebtedness. These
properties are recorded upon acquisition at fair value less estimated selling
costs. Revised estimates to the fair value less cost to sell are reported as
adjustments to the carrying amount of the asset, provided that such adjusted
value is not in excess of the carrying amount at acquisition. Initial losses on
properties acquired through full or partial satisfaction of debt are treated as
credit losses and charged to the Allowance for Loan Losses at the time of
acquisition. Subsequent declines in value from the recorded amounts, routine
holding costs, and gains or losses upon disposition, if any, are included in
non-interest income or expense as incurred.
Income Taxes
As required, the Company uses the liability method of accounting for income
taxes. This method results in the recognition of deferred tax assets and
liabilities that are reflected at currently enacted income tax rates applicable
to the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes. The
deferred provision for income taxes is the result of the net change in the
deferred tax asset and deferred tax liability balances during the year. This
amount combined with the current taxes payable or refundable results in the
income tax expense for the current year.
Earnings Per Share
The actual number of shares outstanding at June 30, 2003, was 763,977. Basic
earnings per share is calculated on the basis of the weighted average number of
shares outstanding during the period. Weighted average number of shares for the
six months ending June 30, 2003 and 2002 were 766,971 and 777,402, respectively.
Earnings per share for the six months ending June 30, 2003 and 2002 were $9.19
and $8.21, respectively. Weighted average number of shares for the three months
ending June 30, 2003 and 2002 were 765,375 and 771,734, respectively. Earnings
per share for the three months ending June 30, 2003 and 2002 were $4.76 and
$4.30, respectively. Prior periods per share amounts have been restated for the
5% stock dividend declared during 2003 and 2002.
Dividends
Farmers & Merchants Bancorp common stock is not traded on any exchange. The
shares are primarily held by local residents and are not actively traded.
10
On April 1, 2003, the Board of Directors declared a 5% stock dividend payable
May 14, 2003, to shareholders of record at the close of business on April 15,
2003. Common stock shareholders of record as of April 15, 2003, received one
share of common stock for every 20 shares of common stock owned. Fractional
shares were not issued. For common stock share lots of less than 20 shares, a
cash dividend in the amount of $12.50 per share was paid in lieu of the stock
dividend.
The Board of Directors of Farmers & Merchants Bancorp declared a cash dividend
on June 3, 2003, in the amount of $2.10 per share, an increase from the $2.00
per share paid last year. The cash dividend was paid on July 1, 2003, to
stockholders of record as of June 17, 2003.
Segment Reporting
The Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" requires that public
companies report certain information about operating segments. It also requires
that public companies report certain information about their products and
services, the geographic areas in which they operate, and their major customers.
The Company is a community bank which offers a wide array of products and
services to its customers. Pursuant to its banking strategy, emphasis is placed
on building relationships with its customers, as opposed to building specific
lines of business. As a result, the Company is not organized around discernable
lines of business and prefers to work as an integrated unit to customize
solutions for its customers, with business line emphasis and product offerings
changing over time as needs and demands change.
Derivative Instruments and Hedging Activities
The Statement of Financial Accounting Standards, No. 133, "Accounting for
Derivative Instruments and Certain Hedging Activities" as amended by the
Statement of Financial Accounting Standards, No. 138, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value. Changes in the fair value of
those derivatives are accounted for depending on the intended use of the
derivative and the resulting designation under specified criteria. If the
derivative is designated as a fair value hedge, the changes in the fair value of
the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge,
designed to minimize interest rate risk, the effective portions of the change in
the fair value of the derivative are recorded in other comprehensive income.
Ineffective portions of changes in the fair value of cash flow hedges are
recognized in earnings. As required, SFAS No. 133 was adopted by the Company
effective January 1, 2001.
The Company utilizes derivative financial instruments such as interest rate
caps, floors, swaps and collars. These instruments are purchased and/or sold to
reduce the Company's exposure to changing interest rates. The Company marks to
market the value of its derivative financial instruments and reflects gain or
loss in earnings in the period of change or in other comprehensive income, as
appropriate.
Comprehensive Income
The Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. Other
comprehensive income refers to revenues, expenses, gains and losses that
generally accepted accounting principles recognize as changes in value to an
enterprise but are excluded from net income. For the Company, comprehensive
income includes net income (loss) and changes in fair value of its
available-for-sale investment securities, pension plan liability adjustments and
cash flow hedges.
11
Recent Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board (FASB or the "Board")
issued FASB Statement No. 150 (FAS 150 or the "Standard"), Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity. The Standard specifies that instruments within its scope embody
obligations of the issuer and that, therefore, the issuer must classify them as
liabilities.
FAS 150 represents phase 1 of the FASB's broader project on (1) distinguishing
between liability and equity instruments and (2) accounting for instruments that
have characteristics of both types of instruments (the "liabilities and equity
project"). The Standard covers a limited number of instruments that are to be
classified as liabilities. It is expected that phase 2 of the project, set to
begin in July, will address (1) separating compound financial instruments
(including convertible debt and conditionally redeemable stock) that have
characteristics of liabilities and equity into their liability and equity
components, (2) the definition of an ownership relationship, and (3) the
definition of liabilities in FASB Concepts Statement No. 6 (CON 6), Elements of
Financial Statements.
For calendar-year-end companies, FAS 150 will become effective at the beginning
of their third quarters. The Company does not anticipate that the adoption of
Statement No. 150 will have a material impact on the financial condition or
operating results of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis is written to provide greater insight into
the results of operations and the financial condition of Farmers & Merchants
Bancorp and its subsidiaries. For a more complete understanding of the Company
and its operations, reference should be made to the financial statements
included in this report and in the Company's 2002 Annual Report on Form 10-K.
Certain statements in this Report on Form 10-Q constitute "forward-looking
statements" and usually contain the words "estimate," "project," "expect,"
"objective," "goal," or similar expressions and include assumptions concerning
the Company's operations, future results and prospects. These forward-looking
statements are based upon current expectations and are subject to risk and
uncertainties. In connection with the "safe-harbor" provisions of the private
Securities Litigation Reform Act of 1995, the Company provides the following
cautionary statement identifying important factors which could cause the actual
results of events to differ materially from those set forth in or implied by the
forward-looking statements and related assumptions. Such factors include the
following: (i) the effect of changing regional and national economic conditions;
(ii) significant changes in interest rates and prepayment speeds; (iii) credit
risks of commercial, real estate, consumer, and other lending activities; (iv)
changes in federal and state banking regulations; (v) competitive pressure in
the banking industry and changes in banking or other laws and regulations or
governmental fiscal or monetary policies; (vi) uncertainty regarding the
economic outlook resulting from the continuing war on terrorism, as well as
actions taken or to be taken by the U.S. or other governments as a result of
further acts or threats of terrorism; (vii) dividend restrictions; (viii)
asset/liability pricing risks and liquidity risks; (ix) changes in the
securities markets; (x) certain operational risks involving data processing
systems or fraud; and (xi) other external developments which could materially
impact the Company's operational and financial performance. Readers are
cautioned not to place undue reliance on these forward-looking statements which
speak only as of the date hereof. The Company undertakes no obligation to update
any forward-looking statements to reflect events or circumstances arising after
the date on which they are made.
12
Analysis of the Results of Operations
Overview
For the three and six months ended June 30, 2003, Farmers & Merchants Bancorp
reported net income of $3,644,000 and $7,045,000, earnings per share of $4.76
and $9.19 and return on average assets of 1.34% for both periods. Return on
average shareholders' equity (net of accumulated other comprehensive income) was
13.84% and 13.54% for the three and six months ended June 30, 2003. For the
three and six months ended June 30, 2002, net income totaled $3,320,000 and
$6,382,000, earnings per share was $4.30 and $8.21 and return on average assets
was 1.42% and 1.37%, respectively. Return on average shareholders' equity (net
of accumulated other comprehensive income) for the three and six months ended
June 30, 2002 was 13.63% and 13.08%, respectively.
The Company's improved earnings performance in 2003 was due to a combination of
(1) growth in earning assets, (2) improvement in the mix of earning assets as
reflected by an increase in loans as a percentage of average earning assets, (3)
improvement in non-interest income and (4) a reduction of the Company's
effective tax rate from 36.6% at June 30, 2002 to 35.9% at June 30, 2003. These
factors combined to offset a decline in the Bank's net interest margin as a
result of the declining interest rate environment.
The following is a summary of the financial results for the six-month period
ended June 30, 2003 compared to June 30, 2002.
o Net income increased 10.4% to $7.0 million from $6.4 million.
o Net interest income increased 6.6% to $21.2 million from $19.9 million.
o The provision for loan losses decreased 35.0% to $325 thousand from $500
thousand.
o Non-interest income increased 19.1% to $6.1 million from $5.2 million.
o Non-interest expense increased 10.8% to $16.1 million from $14.5 million.
o Total assets increased 17.8% to $1.1 billion.
o Investment securities increased 33.1% to $260.9 million.
o Gross loans increased 13.7% to $750.1 million.
o Total deposits increased 10.0% to $857.7 million.
o Total shareholders' equity increased 7.2% to $108.4 million.
Net Interest Income
Net interest income is the amount by which the interest and fees on loans and
other interest earning assets exceed the interest paid on interest bearing
sources of funds. For the purpose of analysis, the interest earned on tax-exempt
investments and municipal loans is adjusted to an amount comparable to interest
subject to normal income taxes. This adjustment is referred to as "taxable
equivalent" and is noted wherever applicable. Interest income and expense are
affected by changes in the volume and mix of average interest earning assets and
average interest bearing liabilities, as well as fluctuations in interest rates.
Therefore, increases or decreases in net interest income are analyzed as changes
in volume, changes in rate and changes in the mix of assets and liabilities.
13
Net interest income increased 6.6% to $21.2 million during the first six months
of 2003, compared to $19.9 million at June 30, 2002. On a fully taxable
equivalent basis, net interest income increased 7.0% and totaled $22.0 million
at June 30, 2003, compared to $20.6 million for the first six months of 2002.
Net interest income on a taxable equivalent basis, expressed as a percentage of
average total earning assets, is referred to as the net interest margin, which
represents the average net effective yield on earning assets. For the six months
ended June 30, 2003, the net interest margin on a taxable equivalent basis was
4.54% compared to 4.78% in 2002. This decrease in net interest margin was
primarily a result of the declining interest rate environment between the first
six months of 2002 and the first six months of 2003.
Loans, generally the Company's highest earning asset, increased $90.2 million as
of June 30, 2003 compared to June 30, 2002. On an average balance basis, loans
increased by $100.6 million for the six months ended June 30, 2003. Due to the
decline in interest rates during 2002 and the first six months of 2003, the
yield on the loan portfolio decreased 52 basis points to 6.23% for the six
months ended June 30, 2003 compared to 6.75% for the six months ended June 30,
2002. This decrease in yield was offset by the growth in loan balances, which
resulted in interest revenue from loans increasing 7.7% to $21.7 million for the
first six months of 2003.
The investment portfolio is the other main component of the Company's earning
assets. The Company's investment policy is conservative. The Company invests
primarily in mortgage-backed securities, U.S. Treasuries, U.S. Government
Agencies, and high-grade municipals. Since the risk factor for these types of
investments is significantly lower than that of loans, the yield earned on
investments is generally less than that of loans.
Average investment securities increased $30.2 million compared to the average
balance at June 30, 2002. Even with the increase in the average balance of
investment securities there was a decrease in interest income of $1.3 million
for the six months ended June 30, 2003, due to the declining interest rate
environment. The average yield, on a taxable equivalent basis, in the investment
portfolio was 4.66% in 2003 compared to 6.44% in 2002. Net interest income on
the Schedule of Year-to-Date Average Balances and Interest Rates is shown on a
taxable equivalent basis, which is higher than net interest income on the
Consolidated Statements of Income because of adjustments that relate to income
on certain securities that are exempt from federal income taxes.
Average interest-bearing sources of funds increased $87.5 million or 13.4%. Of
that increase, average other borrowed funds increased $45.8 million and
interest-bearing deposits increased $41.7 million. Even as deposits increased,
interest expense decreased 20.3% as a result of declining interest rates paid
for those sources of funds. Overall, the average interest cost on deposits was
1.36% at June 30, 2003 and 2.04% at June 30, 2002.
The Company's earning assets and rate sensitive liabilities are subject to
repricing at different times, which exposes the Company to income fluctuations
when interest rates change. In order to minimize income fluctuations, the
Company attempts to match asset and liability maturities. However, some maturity
mismatch is inherent in the asset and liability mix.
During March and April, 2003, the Bank implemented an asset/liability strategy
designed to both increase its net interest margin and reduce the overall
maturity mismatch in its asset and liability mix. This strategy involved
borrowing $80 million of short-term advances from the Federal Home Loan Bank
(FHLB) and investing primarily in mortgage-backed securities and high-grade
municipals. Prepayments and maturities on these securities will either be
reinvested or used to fund loan growth.
14
Allowance and Provision for Loan Losses
As a financial institution that assumes lending and credit risks as a principal
element of its business, credit losses will be experienced in the normal course
of business. The allowance for loan losses is established to absorb losses
inherent in the portfolio. The allowance for loan losses is maintained at a
level considered by management to be adequate to provide for risks inherent in
the loan portfolio. The allowance is increased by provisions charged to
operating expense and reduced by net charge-offs. In determining the adequacy of
the allowance for loan losses, management takes into consideration examinations
by the Company's supervisory authorities, results of internal credit reviews,
financial condition of borrowers, loan concentrations, prior loan loss
experience, and general economic conditions. The allowance is based on estimates
and ultimate losses may vary from the current estimates. Management reviews
these estimates periodically and, when adjustments are necessary, they are
reported in the period in which they become known.
The Company's written lending policies, along with applicable laws and
regulations governing the extension of credit, require risk analysis as well as
ongoing portfolio and credit management through loan product diversification,
lending limits, ongoing credit reviews and approval policies prior to funding of
any loan. The Company manages and controls credit risk through diversification,
dollar limits on loans to one borrower and by primarily restricting loans made
to its principal market area. Loans that are performing but have shown some
signs of weakness are subjected to more stringent reporting. Fixed-rate real
estate loans are comprised primarily of loans with maturities of less than five
years. Generally, long-term residential loans are originated by the Company and
sold on the secondary market.
The appropriate allowance amount is based upon growth in the loan portfolio,
management's evaluation of the credit quality of the loan portfolio, the
prevailing economic climate, and its effect on borrowers' ability to repay loans
in accordance with the terms of the notes and current loan losses. After
reviewing all factors, management concluded that the current allowance for loan
losses was adequate.
As of June 30, 2003, the allowance for loan losses was $17.1 million, which
represents 2.3% of the total loan balances. As of June 30, 2002, the allowance
was $13.1 million or 2.0% of total loans. The table below illustrates the change
in the allowance for the first six months of 2003 and 2002.
Allowance for Loan Losses (in thousands)
Balance, December 31, 2002 $ 16,684
Provision Charged to Expense 325
Recoveries of Loans Previously Charged Off 372
Loans Charged Off (290)
==============================================================
Balance, June 30, 2003 $ 17,091
==============================================================
Balance, December 31, 2001 $ 12,709
Provision Charged to Expense 500
Recoveries of Loans Previously Charged Off 154
Loans Charged Off (270)
==============================================================
Balance, June 30, 2002 $ 13,093
==============================================================
15
Non-Interest Income
Overall, non-interest income increased $983 thousand or 19.1% for the six months
ended June 30, 2003 compared to the same period of 2002. Most of the growth
occurred in other non-interest income, which increased $725 thousand through the
first six months of 2003. The increase was mainly the result of: (1) an increase
of $140,000 in the cash surrender value of life insurance contracts, which is
recognized as other non-interest income, (2) an increase of $188,000 in fees
generated from ATM Non-Customer Use and (3) an increase of $135,000 in Gain on
Loan Sales.
Non-Interest Expense
Overall, non-interest expense increased $1.6 million or 10.8% over the first six
months of 2002, primarily as a result of a $1.5 million increase in Salaries and
Employee Benefits. This increase was due to: (1) 18 month cycle salary merit
increases which occurred in October, 2002, (2) increased contributions to the
Bank's Profit Sharing Plan and (3) increased expense recognition associated with
the Bank's Defined Benefit Pension Plan.
Income Taxes
The provision for income taxes increased 6.6% to $3.9 million for the first six
months of 2003. The Company's effective tax rate decreased for the first six
months of 2003 and was 35.9% compared to 36.7% for the same period in 2002.
Balance Sheet Analysis
Investment Securities
The Financial Accounting Standards Board statement, Accounting for Certain
Investments in Debt and Equity Securities, requires the Company to classify its
investments as held-to-maturity, trading or available-for-sale. Securities are
classified as held-to-maturity and are carried at amortized cost when the
Company has the positive intent and ability to hold the securities to maturity.
Trading securities are securities acquired for short-term appreciation and are
carried at fair value, with unrealized gains and losses recorded in non-interest
income. Securities classified as available-for-sale include securities, which
may be sold to effectively manage interest rate risk exposure, prepayment risk,
satisfy liquidity demand and other factors. These securities are reported at
fair value with aggregate, unrealized gains or losses excluded from income and
included as a separate component of shareholders' equity, net of related income
taxes.
The investment portfolio provides the Company with an income alternative to
loans. As of June 30, 2003 the investment portfolio represented 23.8% of the
Company's total assets. Total investment securities increased $64.9 million from
a year ago and now total $260.9 million. As previously discussed (see "Net
Interest Income"), the Bank has implemented an asset/liability strategy
involving FHLB borrowings invested in investment securities. Not included in the
investment portfolio are overnight investments in Federal Funds Sold. For the
six months ended June 30, 2003, average Federal Funds Sold was $11.6 million
compared to $32.9 million in 2002.
Loans
The Company's loan portfolio at June 30, 2003 increased $90.2 million from June
30, 2002. The increase was due to strong loan demand in the Company's market
area, along with an aggressive calling program on high quality loan prospects.
Additionally, on an average balance basis loans have increased $100.6 million or
16.7%. The table following sets forth the distribution of the loan portfolio by
type as of the dates indicated.
16
Loan Portfolio As Of:
(in thousands) June 30, 2003 Dec. 31, 2002 June 30, 2002
- -------------------------------------------------------------------------------
Real Estate $375,413 $322,074 $306,797
Real Estate Construction 61,993 66,467 51,963
Home Equity 48,377 45,150 34,643
Agricultural 115,722 109,130 102,642
Commercial 128,950 135,877 143,743
Consumer 19,682 19,995 20,135
- -------------------------------------------------------------------------------
Gross Loans 750,137 698,693 659,923
Less:
Unearned Income 2,168 2,018 1,546
Allowance for Loan Losses 17,091 16,684 13,093
- -------------------------------------------------------------------------------
Net Loans $730,878 $ 679,991 $ 645,284
===============================================================================
In the ordinary course of business, the Company enters into commitments to
extend credit to its customers. These commitments are not reflected in the
accompanying consolidated financial statements. As of June 30, 2003, the Company
had entered into commitments with certain customers amounting to $262.5 million
compared to $275.5 million at June 30, 2002. Letters of credit at June 30, 2003,
and June 30, 2002, were $18.1 million and $17.2 million, respectively.
Non-Performing Assets
Non-performing assets are comprised of non-performing loans and other real
estate owned. As set forth in the table below, non-performing loans as of June
30, 2003 were $2.9 million compared to $10.3 million at June 30, 2002. Accrued
interest reversed from income on loans placed on a non-accrual status totaled
$386 thousand at June 30, 2003 compared to $264 thousand at June 30, 2002. The
Company reported no other real estate owned for both June 30, 2003 and June 31,
2002.
Non-Performing Assets
(dollar amounts in thousands) June 30, 2003 Dec. 31, 2002 June 30, 2002
- -----------------------------------------------------------------------------------
Non-performing Loans $2,928 $2,907 $10,330
Other Real Estate Owned 0 0 0
===================================================================================
Total $2,928 $2,907 $10,330
===================================================================================
Non-Performing Assets
as a % of Total Loans 0.4% 0.4% 1.57%
Allowance for Loan Losses as a % of
Non-Performing Loans 583.7% 573.9% 126.7%
Except for non-performing loans shown in the table above, the Bank's management
is not aware of any loans as of June 30, 2003 for which known credit problems of
the borrower would cause serious doubts as to the ability of such borrowers to
comply with their present loan repayment terms, or any known events that would
result in the loan being designated as non-performing at some future date. The
Bank's management cannot, however, predict the extent to which any deterioration
in general economic conditions, real estate values, increase in general rates of
interest, change in the financial conditions or business of a borrower may
adversely affect a borrower's ability to pay.
17
Deposits
One of the key sources of funds to support earning assets (loans and
investments) is the generation of deposits from the Company's customer base. The
ability to grow the customer base and subsequently deposits is a significant
element in the performance of the Company.
At June 30, 2003, deposits totaled $857.7 million. This represents an increase
of 10.0% or $77.6 million from June 30, 2002. The increase was focused in demand
and savings accounts, which increased $24.3 million and $24.1 million,
respectively. The Bank's calling efforts for prospective customers includes
acquiring both loan and deposit relationships which results in new demand,
interest bearing transaction and savings accounts.
Federal Home Loan Bank Advances
Advances from the Federal Home Loan Bank are another key source of funds to
support earning assets. These advances are also used to manage the Bank's
interest rate risk exposure, and as opportunities exist to borrow and invest the
proceeds at a positive spread through the investment portfolio. FHLB advances as
of June 30, 2003 were $121.9 million compared to $40.9 million as of June 30,
2002. As previously discussed (see "Net Interest Income"), the Bank has
implemented an asset/liability strategy involving FHLB borrowings invested in
investment securities.
Capital
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Company and the Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
the Company and the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company and the
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios set
forth in the table below of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined in the regulations), and of
Tier I capital (as defined in the regulations) to average assets (as defined in
the regulations). Management believes, as of June 30, 2003, that the Company and
the Bank meet all capital adequacy requirements to which it is subject.
As of June 30, 2002, the most recent notification from the Federal Reserve Bank
categorized the Company and the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Company and the Bank must maintain minimum Total risk-based, Tier I
risk-based, Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institutions' categories.
18
To Be Well
Capitalized Under
Regulatory Capital Prompt Corrective
(in thousands) Actual Requirements Action Provisions
- ------------------------------------------------------------------------------------------------------------------
The Company: Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------
As of June 30, 2003
Total Capital to Risk Weighted Assets $117,929 12.19% $77,383 8.0% N/A N/A
Tier I Capital to Risk Weighted Assets 105,776 10.94% 38,692 4.0% N/A N/A
Tier I Capital to Average Assets 105,776 9.73% 43,464 4.0% N/A N/A
To Be Well
Capitalized Under
Regulatory Capital Prompt Corrective
(in thousands) Actual Requirements Action Provisions
- ------------------------------------------------------------------------------------------------------------------
The Bank: Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------
As of June 30, 2003
Total Capital to Risk Weighted Assets $116,150 12.03% $77,236 8.0% $96,545 10.0%
Tier I Capital to Risk Weighted Assets 104,020 10.77% 38,618 4.0% 57,927 6.0%
Tier I Capital to Average Assets 104,020 9.61% 43,286 4.0% 54,108 5.0%
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management
The Company has adopted a Risk Management Plan to ensure the proper control and
management of all risk factors inherent in the operation of the Company and the
Bank. Specifically, credit risk, interest rate risk, liquidity risk, compliance
risk, strategic risk, reputation risk and price risk can all affect the market
risk of the Company. These specific risk factors are not mutually exclusive. It
is recognized that any product or service offered by the Company may expose the
Company and Bank to one or more of these risk factors.
Credit Risk
Credit risk is the risk to earnings or capital arising from an obligor's failure
to meet the terms of any contract or otherwise fail to perform as agreed. Credit
risk is found in all activities where success depends on counterparty, issuer,
or borrower performance.
Credit risk in the investment portfolio and correspondent bank accounts is
addressed through defined limits in the Bank's policy statements. In addition,
certain securities carry insurance to enhance credit quality of the bond.
Credit risk in the loan portfolio is controlled by limits on industry
concentration, aggregate customer borrowings and geographic boundaries.
Standards on loan quality also are designed to reduce loan credit risk. Senior
Management, Directors' Committees, and the Board of Directors are provided with
information to appropriately identify, measure, control and monitor the credit
risk of the Bank.
The Company's methodology for assessing the appropriateness of the allowance is
conducted on a regular basis and considers all loans. The systemic methodology
consists of two major elements. The first major element includes a detailed
analysis of the loan portfolio in two phases. The first phase is conducted in
accordance with SFAS No. 114, "Accounting by Creditors for the Impairment of a
Loan" as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures." Individual loans are reviewed to
identify loans for impairment. A loan is impaired when principal and interest
are deemed uncollectable in accordance with the original contractual terms of
the loan. Impairment is measured as either the expected future cash flows
discounted at each loan's effective interest rate, the fair value of the loan's
collateral if the loan is collateral dependent, or an observable market price of
the loan (if one exists). Upon measuring the impairment, the Company will insure
an appropriate level of allowance is present or established.
19
Central to the first phase and the Company's credit risk management is its loan
risk rating system. The originating credit officer assigns borrowers an initial
risk rating, which is based primarily on a thorough analysis of each borrower's
financial position in conjunction with industry and economic trends. Approvals
are made based upon the amount of inherent credit risk specific to the
transaction and are reviewed for appropriateness by senior credit administration
personnel. Credits are monitored by credit administration personnel for
deterioration in a borrower's financial condition, which would impact the
ability of the borrower to perform under the contract. Risk ratings are adjusted
as necessary.
Based on the risk rating system specific allowances are established in cases
where management has identified significant conditions or circumstances related
to a credit that management believes indicates the possibility of loss.
Management performs a detailed analysis of these loans, including, but not
limited to, cash flows, appraisals of the collateral, conditions of the
marketplace for liquidating the collateral and assessment of the guarantors.
Management then determines the inherent loss potential and allocates a portion
of the allowance for losses as a specific allowance for each of these credits.
The second phase is conducted by segmenting the loan portfolio by risk rating
and into groups of loans with similar characteristics in accordance with SFAS
No. 5, "Accounting for Contingencies". In this second phase, groups of loans are
reviewed and applied the appropriate allowance percentage to determine a
portfolio formula allowance.
The second major element in the Company's methodology for assessing the
appropriateness of the allowance consists of management's considerations of all
known relevant internal and external factors that may affect a loan's
collectibility. This includes management's estimates of the amounts necessary
for concentrations, economic uncertainties, the volatility of the market value
of collateral and other relevant factors. The relationship of the two major
elements of the allowance to the total allowance may fluctuate from period to
period.
In the second major element of the analysis which considers all known relevant
internal and external factors that may affect a loan's collectibility is based
upon management's evaluation of various conditions, the effects of which are not
directly measured in the determination of the formula and specific allowances.
The evaluation of the inherent loss with respect to these conditions is subject
to a higher degree of uncertainty because they are not identified with specific
problem credits or portfolio segments. The conditions evaluated in connection
with the second element of the analysis of the allowance include, but are not
limited to the following conditions that existed as of the balance sheet date:
|X| then-existing general economic and business conditions affecting the
key lending areas of the Company;
|X| credit quality trends (including trends in non-performing loans
expected to result from existing conditions);
|X| collateral values;
|X| loan volumes and concentrations;
20
|X| seasoning of the loan portfolio;
|X| specific industry conditions within portfolio segments;
|X| recent loss experience in particular segments of the portfolio;
|X| duration of the current business cycle;
|X| bank regulatory examination results; and
|X| findings of the Company's internal credit examiners.
Management reviews these conditions in discussion with the Company's senior
credit officers. To the extent that any of these conditions is evidenced by a
specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's estimate of the effect of such condition may be
reflected as a specific allowance applicable to such credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's evaluation of the inherent loss related to such condition is
reflected in the second major element allowance.
Implicit in lending activities is the risk that losses will and do occur and
that the amount of such losses will vary over time. Consequently, the Company
maintains an allowance for loan losses by charging a provision for loan losses
to earnings. Loans determined to be losses are charged against the allowance for
loan losses. The Company's allowance for loan losses is maintained at a level
considered by management to be adequate to provide for estimated losses inherent
in the existing portfolio along with unused commitments to provide financing
including commitments under commercial and standby letters of credit.
Management believes that the allowance for loan losses at June 30, 2003 was
adequate to provide for both recognized losses and estimated inherent losses in
the portfolio. No assurances can be given that future events may not result in
increases in delinquencies, non-performing loans or net loan chargeoffs that
would increase the provision for loan losses and thereby adversely affect the
results of operations.
Asset / Liability Management
Interest Rate Risk
The mismatch between maturities of interest sensitive assets and liabilities
results in uncertainty in the Company's earnings and economic value and is
referred to as interest rate risk. Farmers & Merchants Bancorp's primary
objective in managing interest rate risk is to minimize the potential for
significant loss as a result of changes in interest rates.
The Company measures interest rate risk in terms of potential impact on both its
economic value and earnings. The methods for governing the amount of interest
rate risk include: (a) analysis of asset and liability mismatches (GAP
analysis); (b) the utilization of a simulation model; and (c) limits on
maturities of investment, loan and deposit products to relatively short periods
which reduces the market volatility of those instruments.
The gap analysis measures, at specific time intervals, the divergence between
earning assets and interest bearing liabilities for which repricing
opportunities will occur. A positive difference, or gap, indicates that earning
assets will reprice faster than interest-bearing liabilities. This will
generally produce a greater net interest margin during periods of rising
interest rates and a lower net interest margin during periods of declining
interest rates. Conversely, a negative gap will generally produce a lower net
interest margin during periods of rising interest rates and a greater net
interest margin during periods of decreasing interest rates.
21
The interest rates paid on deposit accounts do not always move in unison with
the rates charged on loans. In addition, the magnitude of changes in the rates
charged on loans is not always proportionate to the magnitude of changes in the
rate paid for deposits. Consequently, changes in interest rates do not
necessarily result in an increase or decrease in the net interest margin solely
as a result of the differences between repricing opportunities of earning assets
or interest bearing liabilities.
The Company also utilizes the results of a dynamic simulation model to quantify
the estimated exposure of net interest income to sustained interest rate
changes. The sensitivity of the Company's net interest income is measured over a
rolling one-year horizon.
The simulation model estimates the impact of changing interest rates on interest
income from all interest earning assets and the interest expense paid on all
interest bearing liabilities reflected on the Company's balance sheet. This
sensitivity analysis is compared to policy limits, which specify a maximum
tolerance level for net interest income exposure over a one-year horizon
assuming no balance sheet growth, given a 200 basis point upward and a 100 basis
point downward shift in interest rates. A shift in rates over a 12-month period
is assumed. Results that exceed policy limits, if any, are analyzed for risk
tolerance and reported to the Board with appropriate recommendations. At June
30, 2003, the Company's estimated net interest income sensitivity to changes in
interest rates, as a percent of net interest income was an increase in net
interest income of 1.37% if rates increase by 200 basis points and a decrease
in net interest income of 0.19% if rates decline 100 basis points.
The estimated sensitivity does not necessarily represent a Company forecast and
the results may not be indicative of actual changes to the Company's net
interest income. These estimates are based upon a number of assumptions
including: the nature and timing of interest rate levels including yield curve
shape, prepayments on loans and securities, pricing strategies on loans and
deposits, replacement of asset and liability cashflows, and other assumptions.
While the assumptions used are based on current economic and local market
conditions, there is no assurance as to the predictive nature of these
conditions including how customer preferences or competitor influences might
change. See Note 13 of the Notes to the Consolidated Financial Statements
located in the 2002 Annual Report to Shareholders.
Liquidity Risk
Liquidity risk is the risk to earnings or capital resulting from the Bank's
inability to meet its obligations when they come due without incurring
unacceptable losses. It includes the ability to manage unplanned decreases or
changes in funding sources and to recognize or address changes in market
conditions that affect the Bank's ability to liquidate assets or acquire funds
quickly and with minimum loss of value. The Company endeavors to maintain a cash
flow adequate to fund operations, handle fluctuations in deposit levels, respond
to the credit needs of borrowers and to take advantage of investment
opportunities as they arise. The principal sources of liquidity include credit
facilities from correspondent banks, brokerage firms and the Federal Home Loan
Bank, as well as, interest and principal payments on loans and investments,
proceeds from the maturity or sale of investments, and growth in deposits.
In general, liquidity risk is managed daily by controlling the level of Fed
Funds and the use of funds provided by the cash flow from the investment
portfolio. The Company maintains overnight investments in Fed Funds as a cushion
for temporary liquidity needs. During the second quarter of 2003, Federal Funds
averaged $4.3 million. The Company maintains Federal Fund credit lines of $50
million with major banks subject to the customary terms and conditions for such
arrangements and $175 million in repurchase lines with major brokers. In
addition the Company has additional borrowing capacity of $46 million from the
Federal Home Loan Bank.
22
At June 30, 2003, the Company had available liquid assets, which included cash
and cash equivalents and unpledged investment securities of approximately $172.3
million, which represents 15.7% of total assets.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains controls and procedures designed to ensure that
information is recorded and reported in all filings of financial reports. Such
information is reported to the Company's management, including its Chief
Executive Officer and its Chief Financial Officer to allow timely and accurate
disclosure based on the definition of "disclosure controls and procedures" in
Rule 13a-14(c). In designing these controls and procedures, management
recognizes that they can only provide reasonable assurance of achieving the
desired control objectives. Management also evaluated the cost-benefit
relationship of possible controls and procedures.
As of the end of the period covered by this report, the Company carried out an
evaluation of the effectiveness of Company's controls and disclosure procedures
under the supervision and with the participation of the Chief Executive Officer,
the Chief Financial Officer and other senior management of the Company. Based on
the foregoing, the Company's Chief Executive Officer and the Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.
Average Balance Sheets
The tables on the following pages reflect the Company's average balance sheets
and volume and rate analysis for the three and six-month periods ending June 30,
2003 and 2002.
The average yields on earning assets and average rates paid on interest-bearing
liabilities have been computed on an annualized basis for purposes of
comparability with full year data. Average balance amounts for assets and
liabilities are the computed average of daily balances.
The volume and rate analysis of net interest revenue summarizes the changes in
average asset and liability balances and interest earned and paid resulting from
changes in average asset and liability balances (volume) and changes in average
interest rates and the total net change in interest income and expenses. The
changes in interest due to both rate and volume have been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar amount
of the change in each.
23
Farmers & Merchants Bancorp
Quarterly Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
Three Months Ended June 30, Three Months Ended June 30,
2003 2002
Assets Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Federal Funds Sold $ 4,348 $ 18 1.66% $ 27,586 $ 187 2.72%
Investment Securities Available-for-Sale
U.S. Treasuries 0 0 0.00% 0 0 0.00%
U.S. Agencies 43,400 372 3.48% 4,314 56 5.26%
Municipals - Taxable 1,295 20 6.26% 1,597 23 5.84%
Municipals - Non-Taxable 31,973 447 5.67% 21,908 367 6.79%
Mortgage Backed Securities 156,574 1,450 3.76% 155,312 2,311 6.03%
Other 17,803 199 4.53% 9,462 152 6.51%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 251,045 2,488 4.02% 192,593 2,909 6.13%
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00% 0 0 0.00%
U.S. Agencies 0 0 0.00% 0 0 0.00%
Municipals - Taxable 0 0 0.00% 0 0 0.00%
Municipals - Non-Taxable 43,280 686 6.43% 29,436 537 7.40%
Mortgage Backed Securities 0 0 0.00% 0 0 0.00%
Other 469 6 5.19% 540 7 5.26%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 43,749 692 6.41% 29,976 544 7.36%
- ----------------------------------------------------------------------------------------------------------------------------------
Loans
Real Estate 411,976 6,660 6.48% 342,186 6,269 7.35%
Home Equity 47,905 627 5.25% 29,055 385 5.31%
Agricultural 107,073 1,389 5.20% 95,224 1,267 5.34%
Commercial 130,563 1,889 5.80% 128,138 1,849 5.79%
Installment 14,178 402 11.37% 15,862 361 9.13%
Credit Card 4,371 101 9.27% 3,268 74 9.08%
Municipal 1,223 16 5.25% 968 21 8.70%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Loans 717,289 11,084 6.20% 614,701 10,226 6.67%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 1,016,431 $14,282 5.64% 864,856 $13,866 6.43%
===================== ======================
Unrealized Gain/(Loss) on Securities Available-for-Sale 4,517 4,898
Allowance for Loan Losses (17,111) (13,106)
Cash and Due From Banks 29,182 28,656
All Other Assets 55,786 49,136
- ------------------------------------------------------------------------ ---------------
Total Assets $1,088,805 $934,440
======================================================================== ===============
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Interest Bearing DDA $89,099 $ 30 0.14% $87,554 $ 75 0.34%
Savings 244,690 352 0.58% 214,843 527 0.98%
Time Deposits 322,479 1,737 2.16% 308,999 2,266 2.94%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 656,268 2,119 1.30% 611,396 2,868 1.88%
Other Borrowed Funds 123,614 828 2.69% 40,990 556 5.44%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 779,882 $2,947 1.52% 652,386 $3,424 2.11%
===================== ======================
Demand Deposits (Non-Interest Bearing) 191,186 173,225
All Other Liabilities 10,360 8,499
- ------------------------------------------------------------------------ ---------------
Total Liabilities 981,428 834,110
Shareholders' Equity 107,377 100,330
- ------------------------------------------------------------------------ ---------------
Total Liabilities & Shareholders' Equity $1,088,805 $934,440
======================================================================== ===============
Net Interest Margin 4.42% 4.79%
==================================================================================================================================
Notes: Yields on municipal securities have been calculated on a fully taxable
equivalent basis using the combined Federal and State income tax rate of 42.06%.
Loan Fees are included in interest income for loans. Unearned discount is
included for rate calculation purposes. Nonaccrual loans and lease financing
receivables have been included in the average balances. Yields on securities
available-for-sale are based on historical cost.
24
Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
Six Months Ended June 30, Six Months Ended June 30,
2003 2002
Assets Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Federal Funds Sold $ 11,643 $ 97 1.68% $ 32,948 $ 330 2.02%
Investment Securities Available-for-Sale
U.S. Treasuries 0 0 0.00% 0 0 0.00%
U.S. Agencies 37,890 638 3.41% 5,072 133 5.32%
Municipals - Taxable 1,319 41 6.30% 1,618 51 6.39%
Municipals - Non-Taxable 31,963 893 5.66% 21,853 729 6.76%
Mortgage Backed Securities 136,569 2,819 4.19% 165,141 5,080 6.24%
Other 19,139 448 4.75% 9,404 310 6.68%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 226,880 4,839 4.32% 203,088 6,303 6.29%
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00% 0 0 0.00%
U.S. Agencies 0 0 0.00% 0 0 0.00%
Municipals - Taxable 0 0 0.00% 0 0 0.00%
Municipals - Non-Taxable 36,085 1,207 6.79% 29,632 1,089 7.45%
Mortgage Backed Securities 0 0 0.00% 0 0 0.00%
Other 474 13 5.56% 542 17 6.36%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 36,559 1,220 6.77% 30,174 1,106 7.43%
- ----------------------------------------------------------------------------------------------------------------------------------
Loans
Real Estate 398,413 13,102 6.63% 337,888 12,277 7.33%
Home Equity 47,226 1,214 5.18% 26,665 697 5.27%
Agricultural 103,650 2,678 5.21% 93,954 2,600 5.58%
Commercial 133,189 3,742 5.67% 122,805 3,649 5.99%
Consumer 13,934 705 10.20% 15,923 714 9.04%
Credit Card 4,361 203 9.39% 3,303 158 9.65%
Municipal 1,237 32 5.22% 876 33 7.60%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Loans 702,010 21,676 6.23% 601,414 20,128 6.75%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 977,092 $27,832 5.74% 867,624 $27,867 6.48%
====================== ====================
Unrealized Gain/(Loss) on Securities Available-for-Sale 4,503 5,002
Allowance for Loan Losses (16,975) (13,041)
Cash and Due From Banks 29,212 28,471
All Other Assets 55,047 46,718
- ------------------------------------------------------------------------- ---------------
Total Assets $1,048,879 $934,774
========================================================================= ===============
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Interest Bearing DDA $89,208 $ 79 0.18% $88,359 $ 164 0.37%
Savings 243,955 697 0.58% 212,769 1,140 1.08%
Time Deposits 321,664 3,644 2.28% 312,026 4,897 3.16%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 654,827 4,420 1.36% 613,154 6,201 2.04%
Other Borrowed Funds 86,788 1,405 3.26% 40,993 1,106 5.44%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 741,615 $5,825 1.58% 654,147 $7,307 2.25%
====================== ====================
Demand Deposits (Non-Interest Bearing) 191,973 171,769
All Other Liabilities 9,165 8,360
- ------------------------------------------------------------------------- ---------------
Total Liabilities 942,753 834,276
Shareholders' Equity 106,126 100,498
- ------------------------------------------------------------------------- ---------------
Total Liabilities & Shareholders' Equity $1,048,879 $934,774
========================================================================= ===============
Net Interest Margin 4.54% 4.78%
==================================================================================================================================
Notes: Yields on municipal securities have been calculated on a fully taxable
equivalent basis using the combined Federal and State income tax rate of 42.06%.
Loan Fees are included in interest income for loans. Unearned discount is
included for rate calculation purposes. Nonaccrual loans and lease financing
receivables have been included in the average balances. Yields on securities
available-for-sale are based on historical cost.
25
Farmers & Merchants Bancorp
Volume and Rate Analysis of Net Interest Revenue
(Rates on a Taxable Equivalent Basis)
(in thousands) Three Months Ended Six Months Ended
June 30, 2003 compared to June 30, 2002 June 30, 2003 compared to June 30, 2002
Interest Earning Assets Volume Rate Net Chg. Volume Rate Net Chg.
- -------------------------------------------------------------------------------------------------------------------------
Federal Funds Sold $ (116) $ (53) $ (169) $ (185) $ (48) $ (233)
Investment Securities Available for Sale
U.S. Treasuries 0 0 0 0 0 0
U.S. Agencies 454 (138) 316 661 (157) 504
Municipals - Taxable 0 (3) (3) (9) 0 (9)
Municipals - Non-Taxable 419 (339) 80 477 (313) 164
Mortgage Backed Securities 131 (992) (861) (779) (1,482) (2,261)
Other 314 (267) 47 392 (254) 138
- -----------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Available for Sale 1,318 (1,739) (421) 742 (2,206) (1,464)
- -----------------------------------------------------------------------------------------------------------------------------
Investment Securities Held to Maturity
U.S. Treasuries 0 0 0 0 0 0
U.S. Agencies 0 0 0 0 0 0
Municipals - Taxable 0 0 0 0 0 0
Municipals - Non-Taxable 565 (416) 149 364 (246) 118
Mortgage Backed Securities 0 0 0 0 0 0
Other 0 (1) (1) (2) (2) (4)
- -----------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Held to Maturity 565 (417) 148 362 (248) 114
- -----------------------------------------------------------------------------------------------------------------------------
Loans:
Real Estate 3,999 (3,608) 391 3,612 (2,787) 825
Home Equity 275 (33) 242 552 (35) 517
Agricultural 313 (191) 122 471 (393) 78
Commercial 35 5 40 544 (451) 93
Installment (31) 72 41 (187) 178 (9)
Credit Card 25 2 27 57 (12) 45
Other 26 (31) (5) 23 (24) (1)
- -----------------------------------------------------------------------------------------------------------------------------
Total Loans 4,642 (3,784) 858 5,072 (3,524) 1,548
- -----------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 6,409 (5,993) 416 5,991 (6,026) (35)
- -----------------------------------------------------------------------------------------------------------------------------
Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction 10 (55) (45) 5 (90) (85)
Savings 396 (571) (175) 407 (850) (443)
Time Deposits 606 (1,135) (529) 424 (1,677) (1,253)
- -----------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 1,012 (1,761) (749) 836 (2,617) (1,781)
Other Borrowed Funds 2,022 (1,750) 272 1,534 (1,235) 299
- -----------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 3,034 (3,511) (477) 2,370 (3,852) (1,482)
- -----------------------------------------------------------------------------------------------------------------------------
Total Change $3,375 $ (2,482) $ 893 $3,621 $ (2,174) $ 1,447
=============================================================================================================================
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.
26
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Certain lawsuits and claims arising in the ordinary course of business have been
filed or are pending against the Company or its subsidiaries. Based upon
information available to the Company, its review of such lawsuits and claims and
consultation with its counsel, the Company believes the liability relating to
these actions, if any, would not have a material adverse effect on its
consolidated financial statements.
ITEM 2. Changes in Securities
None
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Annual Meeting of Shareholders of Farmers & Merchants Bancorp held on April 21,
2003. The business conducted at the meeting included election of directors and
ratification of PricewaterhouseCoopers LLP as the Company's independent
auditors. Following is the voting results from the 2003 annual meeting of
shareholders. As of April 21, 2003, 563,327 shares represented in person and by
proxy participated in this election and shares were voted on the two measures
before the shareholders as follows:
1. ELECTION OF DIRECTORS
Directors % For % Withheld
--------- - --- - --------
Stewart C. Adams, Jr. 98.67 555,842 1.33 7,485
-------------- ------------------- ----------- ----------------
Ralph Burlington 98.77 556,417 1.23 6,910
-------------- ------------------- ----------- ----------------
Edward Corum, Jr. 98.77 556,388 1.23 6,939
-------------- ------------------- ----------- ----------------
Robert F. Hunnell 98.77 556,417 1.23 6,910
-------------- ------------------- ----------- ----------------
Ole R. Mettler 98.74 556,227 1.26 7,100
-------------- ------------------- ----------- ----------------
James E. Podesta 98.77 556,417 1.23 6,910
-------------- ------------------- ----------- ----------------
Kevin Sanguinetti 98.77 556,417 1.23 6,910
-------------- ------------------- ----------- ----------------
H. C. Schumacher 98.74 556,227 1.26 7,100
-------------- ------------------- ----------- ----------------
Kent A. Steinwert 98.74 556,227 1.26 7,100
-------------- ------------------- ----------- ----------------
Calvin (Kelly) Suess 98.77 556,417 1.23 6,910
-------------- ------------------- ----------- ----------------
Carl A. Wishek, Jr. 98.59 555,392 1.41 7,935
-------------- ------------------- ----------- ----------------
27
2. PROPOSAL TO RATIFY THE APPOINTMENT OF PRICEWATERHOUSECOOPERS, LLP
No. of Shares %
For: 549,280 74.93
------------------------ ---------------------
Against: 4,859 0.66
------------------------ ---------------------
Abstain 9,187 1.25
------------------------ ---------------------
ITEM 5. Other Information
None
ITEM 6(a). Exhibits
See Exhibit Index on Page 30
ITEM 6(b). Reports on Form 8-K
None
28
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FARMERS & MERCHANTS BANCORP
Date: August ___, 2003 /s/ Kent A. Steinwer
------------------------------
Kent A. Steinwert
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August ___, 2003 /s/ Stephen W. Haley
------------------------------
Stephen W. Haley
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
29
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 June 2, 1999, filed as Exhibit 10.3 to Registrant's 8-K dated
April 30, 1999, is incorporated herein by reference.
10.4 Amended and Restated Deferred Bonus Plan of Farmers & Merchants Bank of
Central California, executed May 11, 1999, filed as Exhibit 10.4 to
Registrant's 8-K dated April 30, 1999, is incorporated herein by reference.
10.5 Employment Agreement dated December 29, 2000, between Farmers & Merchants
Bank of Central California and Deborah E. Hodkin, filed as Exhibit 10.5 to
Registrant's 10-K for the year ended December 31, 2002, is incorporated
herein by reference.
10.6 Employment Agreement dated December 10, 2001, between Farmers & Merchants
Bank of Central California and Chris C. Nelson, filed as Exhibit 10.6 to
Registrant's 10-K for the year ended December 31, 2002, is incorporated
herein by reference.
10.7 Employment Agreement dated June 25, 2003, between Farmers & Merchants Bank
of Central California and Stephen W. Haley, filed as Exhibit 10.7 to
Registrant's 10-K for the year ended December 31, 2002, is incorporated
herein by reference.
31 Rule 13(a)-14(a)/15d-14(a) Certifications.
32 Chief Executive Officer and Chief Financial Officer Certification pursuant
to 10 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
30