UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-K
--------------------------
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 Par Value Per Share
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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [X] No [ ]
The aggregate market value of the Registrant's common stock held by
non-affiliates on June 30, 2003 (based on the last reported trade on June 24,
2003) was $229,193,100.
The number of shares of Common Stock outstanding as of March 5, 2004:
762,239
Documents Incorporated by Reference:
Portions of the Annual Report to Shareholders for fiscal year ended December 31,
2003 are incorporated by reference in Part II, Items 5 through 9A and Part IV,
Item 15. Portions of the definitive Proxy Statement for the 2004 Annual Meeting
of Shareholders to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A are incorporated by reference in Part III, Items 10 through
14.
1
FARMERS & MERCHANTS BANCORP
FORM 10-K
TABLE OF CONTENTS
PART I Page
Introduction 4
Item 1. Business 4
- General Development of the Business
- Service Area
- Employees
- Competition
- Government Policies
- Supervision and Regulation
- Risk Factors
- Statistical Disclosure
Item 2. Properties 27
Item 3. Legal Proceedings 27
Item 4. Submission of Matters to a Vote of Security Holders 27
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 27
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 28
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 28
Item 9A. Controls and Procedures 28
2
PART III
Item 10. Directors and Executive Officers of the Company 29
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters 29
Item 13. Certain Relationships and Related Transactions 29
Item 14. Principal Accountant Fees and Services 29
PART IV
Item 15. Exhibits, Financial Statement Schedules and
Reports on Forms 8-K 29
Signatures 30
Index to Exhibits 31
3
Introduction - Forward Looking Statements
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 laws or regulations; (v) changes in
governmental fiscal or monetary policies; (vi) competitive pressure in the
banking industry; (vii) 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; (viii) dividend restrictions; (ix) asset/liability pricing risks and
liquidity risks; (x) changes in the securities markets; (xi) certain operational
risks involving data processing systems or fraud; (xii) the State of
California's fiscal difficulties; and (xiii) other external developments which
could materially impact the Company's operational and financial performance.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. The Company undertakes no
obligation to update any forward-looking statements to reflect events or
circumstances arising after the date on which they are made.
PART I
Item 1. Business
General Development of the Business
August 1, 1916 marked the first day of business for Farmers & Merchants Bank of
Lodi. The Bank was incorporated under the laws of the State of California and
was licensed by the California Department of Financial Institutions as a
state-chartered bank. The Bank prospered and grew even through the Depression
years. Farmers & Merchants' first venture out of Lodi occurred in response to
the closure of the only bank serving the community of Galt, requiring area
residents to drive miles away for the simplest banking transaction. To meet this
need, the Galt office was opened in 1948. Shortly thereafter branches were
opened in Linden, North Modesto and South Sacramento. On April 12, 1957, the
Bank's name was changed to Farmers & Merchants Bank of Central California.
The Bank continued expansion in the Lodi market area and also acquired three
offices in Turlock and Hilmar in 1985. The service area was next expanded by
opening a loan production office in the community of Elk Grove. This office was
later converted to a full service branch. A third office was also opened in
Modesto. The year 2002 saw the opening of the Lincoln Center office with its
state of the art Merchant Center. This is the Company's first branch in the city
of Stockton. In September, 2003 the Bank opened its fourth office in Modesto.
Located across from the Vintage Faire Mall, this branch incorporates state of
the art technology throughout and represents the template for the Bank's future
branch expansions and renovations.
On March 10, 1999, Farmers & Merchants Bancorp (together with its subsidiaries,
the "Company"), pursuant to a reorganization, acquired all of the voting stock
of Farmers & Merchants Bank of Central California (the "Bank"). Farmers &
Merchants Bancorp is a bank holding company incorporated in the State of
Delaware, and registered under the Bank Holding Company Act of 1956, as amended.
The Company's outstanding securities as of December 31, 2003 consisted of
763,274 shares of common stock, $0.01 par value and no shares of preferred stock
issued. The Bank is the Company's principal asset.
4
The Bank's two wholly owned subsidiaries are Farmers & Merchants Investment
Corporation and Farmers/Merchants Corp. Farmers & Merchants Investment
Corporation is currently dormant and Farmers/Merchants Corp. acts as trustee on
deeds of trust originated by the Bank.
During 2002, the Company completed a fictitious name filing in California to
begin using the streamlined name, "F & M Bank" as part of a larger effort to
enhance the Company's image and build brand name recognition. The Company is in
the process of converting daily operating and image advertising to the "F & M
Bank" name and the Company's logo, slogan and signage were redesigned to
incorporate the trade name, "F & M Bank".
During 2003 the Company formed a wholly owned Connecticut statutory business
trust, FMCB Statutory Trust I, for the sole purpose of issuing trust preferred
securities. See Note 19 of Notes to Consolidated Financial Statements.
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. 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 Item 1. Business - Dividends and Other Transfer
of Funds. The Bank's deposit accounts are insured under the Federal Deposit
Insurance Act up to applicable limits. The Bank is a member of the Federal
Reserve System.
Service Area
The Company services the northern Central Valley of California with 18 banking
offices. The area includes Sacramento, San Joaquin, Stanislaus and Merced
Counties with branches in Sacramento, Elk Grove, Galt, Lodi, Stockton, Linden,
Modesto, Turlock and Hilmar.
Through its network of banking offices, the Company emphasizes personalized
service along with a full range of banking services to businesses and
individuals located in the service areas of its offices. Although the Company
focuses on marketing of its services to small and medium sized businesses, a
full range of retail banking services are made available to the local consumer
market.
The Company offers a wide range of deposit instruments. These include checking,
savings, money market, time certificates of deposit, individual retirement
accounts and online banking services for both business and personal accounts.
The Company also serves as a federal tax depository for its business customers.
The Company provides a full complement of lending products, including
commercial, real estate construction, agribusiness, installment, credit card and
real estate loans. Commercial products include lines of credit and other working
capital financing and letters of credit. Financing products for individuals
include automobile financing, lines of credit, residential real estate, home
improvement and home equity lines of credit.
The Company also offers a wide range of specialized services designed for the
needs of its commercial accounts. These services include a credit card program
for merchants, collection services, payroll services, on-line account access,
and electronic funds transfers by way of domestic and international wire and
automated clearinghouse.
The Company makes available investment products to customers, including mutual
funds and annuities. These investment products are offered through a third
party, which employs investment advisors to meet with and provide investment
advice to the Company's customers.
5
Employees
At December 31, 2003, the Company employed a total of 291 full time equivalent
employees. The Company believes that its employee relations are excellent.
Competition
The banking and financial services industry in California generally, and in the
Company's market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation, changes
in technology and product delivery systems, and the accelerating pace of
consolidation among financial service providers. The Company competes with other
major commercial banks, diversified financial institutions, savings banks,
credit unions, savings and loan associations, money market and other mutual
funds, mortgage companies, and a variety of other nonbanking financial services
and advisory companies. Federal legislation in recent years has encouraged
competition between different types of financial service providers and has
fostered new entrants into the financial services market, and it is anticipated
that this trend will continue. Using the financial holding company structure,
insurance companies and securities firms may compete more directly with banks
and bank holding companies.
Many of our competitors are much larger in total assets and capitalization, have
greater access to capital markets and offer a broader range of financial
services than the Company. In order to compete with other financial service
providers, the Company relies upon personal contact by its officers, directors,
employees, and shareholders, along with various promotional activities and
specialized services. In those instances where the Company is unable to
accommodate a customer's needs, the Company may arrange for those services to be
provided through its correspondents.
Government Policies
The Bank's profitability, like most financial institutions, is primarily
dependent on interest rate differentials. The difference between the interest
rates paid by the Bank on interest-bearing liabilities, such as deposits and
other borrowings, and the interest rates received by the Bank on its
interest-earning assets, such as loans extended to its customers and securities
held in its investment portfolio, comprise the major portion of the Company's
earnings. These rates are highly sensitive to many factors that are beyond the
control of the Company and the Bank, such as inflation, recession and
unemployment, and the impact which future changes in economic conditions might
have on the Company and the Bank cannot be predicted.
The business of the Company and the Bank is also influenced by the monetary and
fiscal policies of the federal government and the policies of regulatory
agencies, particularly the Federal Reserve Bank (the "FRB"). The FRB implements
national monetary policies (with objectives such as curbing inflation and
combating recession) through its open-market operations in U.S. Government
securities by adjusting the required level of reserves for depository
institutions subject to its reserve requirements, and by varying the target
federal funds and discount rates applicable to borrowings by depository
institutions. The actions of the FRB in these areas influence the growth of bank
loans, investments, and deposits and also affect interest rates earned on
interest-earning assets and paid on interest-bearing liabilities. The nature and
impact on the Company and the Bank of any future changes in monetary and fiscal
policies cannot be predicted.
From time to time, legislative acts, as well as regulations, are enacted which
have the effect of increasing the cost of doing business, limiting or expanding
permissible activities, or affecting the competitive balance between banks and
other financial services providers. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies, and
other financial institutions and financial services providers are frequently
made in the U.S. Congress, in the state legislatures, and before various
regulatory agencies. This legislation may change banking statues and the
operating environment of the Company and its subsidiaries in substantial and
unpredictable ways. If enacted, such legislation could increase or decrease the
cost of doing business, limit or expand permissible activities or affect the
competitive balance among banks, savings associations, credit unions, and other
financial institutions. The Company cannot predict whether any of this potential
legislation will be enacted, and if enacted, the effect that it, or any
implementing regulations, would have on the financial condition or results of
operations of the Company or any of its subsidiaries. See Item 1. Business --
Supervision and Regulation, below.
6
Supervision and Regulation
General
Bank holding companies and banks are extensively regulated under both federal
and state law. The regulation is intended primarily for the protection of
depositors and the deposit insurance fund and not for the benefit of
shareholders of the Company. Set forth below is a summary description of the
material laws and regulations, which relate to the operations of the Company and
the Bank. This description does not purport to be complete and is qualified in
its entirety by reference to the applicable laws and regulations.
In recent years significant legislative proposals and reforms affecting the
financial services industry have been discussed and evaluated by Congress, the
state legislature and before the various Bank regulatory agencies. These
proposals may increase or decrease the cost of doing business, limiting or
expanding permissible activities, or enhance the competitive position of other
financial service providers. The likelihood and timing of any such proposals or
bills and the impact they might have on the Company and its subsidiaries cannot
be predicted.
The Company
The Company is a registered bank holding company and is subject to regulation
under the Bank Holding Company Act of 1956 ("BHCA"), as amended. Accordingly,
the Company's operations, and its subsidiaries are subject to extensive
regulation and examination by the 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 FRB may require that the Company terminate an activity or terminate control
of or liquidate or divest certain subsidiaries of affiliates when the FRB
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 FRB 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 FRB prior to
purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the FRB, 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 transactions between
Farmers & Merchants Bancorp and its subsidiaries. Further, the Company is
required by the FRB to maintain certain levels of capital. See Item 1. Business
- - Capital Standards.
Directors, officers and principal shareholders of the Company, 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. All such
extensions of credit are made on substantially the same terms (including
interest rates and collateral) as, and following credit-underwriting procedures
that are not less stringent than, those prevailing at the time for comparable
transactions by the Bank with other persons not covered by 12 USC 215.1 et seq.
and who are not employed by the Bank, and does not involve more than the normal
risk of repayment or present other unfavorable features. Extensions of credit to
insiders have been and may be made pursuant to a benefit or compensation program
that is widely available to employees of the Bank and that does not give
preference to any insider of the Bank over other employees.
7
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 shares 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
FRB, may engage in any, or acquire shares of companies engaged in, activities
that are deemed by the FRB to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
Under FRB 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 FRB's
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. This support may be required at times when a bank holding
company may not be able to provide such support. 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 FRB to be an unsafe and
unsound banking practice or a violation of the FRB's regulations or both.
The Gramm-Leach-Bliley Act of 1999 ("GLBA") eliminated many of the restrictions
placed on the activities of bank holding companies that become financial holding
companies. Among other things, GLBA repealed certain Glass-Steagall Act
restrictions on affiliations between banks and securities firms, and amended the
BHCA to permit bank holding companies that are financial holding companies to
engage in activities, and acquire companies engaged in activities, that are:
financial in nature (including insurance underwriting, insurance company
portfolio investment, financial advisory, securities underwriting, dealing and
market-making, and merchant banking activities); incidental to financial
activities; or complementary to financial activities if the FRB determines that
they pose no substantial risk to the safety or soundness of depository
institutions or the financial system in general. The Company has not become a
financial holding company. GLBA also permits national banks to engage in
activities considered financial in nature through a financial subsidiary,
subject to certain conditions and limitations.
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.
8
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 Item 1.
Business - Capital Standards.
The USA Patriot Act
Title III of the United and Strengthening America by Providing Appropriate Tools
Required to intercept and Obstruct Terrorism Act of 2001 (the USA Patriot Act")
includes numerous provisions for fighting international money laundering and
blocking terrorism access to the U.S. financial system. The USA Patriot Act
requires certain additional due diligence and record keeping practices,
including, but not limited to, new customers, correspondent and private banking
accounts.
Part of the USA Patriot Act requires covered financial institutions to: (i)
establish an anti-money laundering program; (ii) establish appropriate
anti-money laundering policies, procedures and controls; (iii) appoint a
Bank Secrecy Act officer responsible for day-to-day compliance; and (iv) conduct
independent audits. The Patriot Act also expands penalties for violation of the
anti-money laundering laws, including expending the circumstances under which
funds in a bank account may be forfeited. The Patriot Act also requires covered
financial institutions to respond under certain circumstances to requests for
information from federal banking agencies within 120 hours.
Privacy Restrictions
The GLBA, in addition to the previous described changes in permissible
non-banking activities permitted to banks, bank holding companies and financial
holding companies, also requires financial institutions in the U.S. to provide
certain privacy disclosures to customers and consumers, to comply with certain
restrictions on the sharing and usage of personally identifiable information,
and to implement and maintain commercially reasonable customer information
safeguarding standards.
The Company believes that it complies with all provisions of the GLBA and all
implementing regulations and the Bank has developed appropriate policies and
procedures to meet its responsibilities in connection with the privacy
provisions of GLBA.
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 $20.8 million at
December 31, 2003.
The FRB and the DFI also have authority to prohibit the Bank from engaging in
activities that, in their opinion, constitute unsafe or unsound practices in
conducting its business. It is possible, depending upon the financial condition
of the bank in question and other factors, that the FRB and the DFI could assert
that the payment of dividends or other payments might, under some circumstances,
be an unsafe or unsound practice. Further, the FRB and the FDIC have established
guidelines with respect to the maintenance of appropriate levels of capital by
banks or bank holding companies under their jurisdiction. Compliance with the
standards set forth in such guidelines and the restrictions that are or may be
imposed under the prompt corrective action provisions of federal law could limit
the amount of dividends which the Bank or the Company may pay. An insured
depository institution is prohibited from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions if after such transaction the institution would be
undercapitalized. The DFI may impose similar limitations on the Bank. See
"Prompt Corrective Regulatory Action and Other Enforcement Mechanisms" and
"Capital Standards" for a discussion of these additional restrictions on capital
distributions.
9
Transactions with Affiliates
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, the Company or other affiliates, the purchase of, or investments in,
stock or other securities thereof, the taking of such securities as collateral
for loans, and the purchase of assets of the Company or other affiliates. Such
restrictions prevent the Company and other affiliates from borrowing from the
Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in the
Company or to or in any other affiliates are limited, individually, to 10% of
the Bank's capital and surplus (as defined by federal regulations), and such
secured loans and investments are limited, in the aggregate, to 20% of the
Bank's capital and surplus (as defined by federal regulations).
In addition, the Company and its operating subsidiaries generally may not
purchase a low-quality asset from an affiliate, and other specified transactions
between the Company or its operating subsidiaries and an affiliate must be on
terms and conditions that are consistent with safe and sound banking practices.
Also, the Company and its operating subsidiaries may engage in transactions with
affiliates only on terms and under conditions that are substantially the same,
or at least as favorable to the Company or its subsidiaries, as those prevailing
at the time for comparable transactions with (or that in good faith would be
offered to) non-affiliated companies.
California law also imposes certain restrictions with respect to transactions
with affiliates. Additionally, limitations involving the transactions with
affiliates may be imposed on the Bank under the prompt corrective action
provisions of federal law. See Item 1. Business - Prompt Corrective Action and
Other Enforcement Mechanisms.
Capital Standards
The FRB and the FDIC have established risk-based 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 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-weighted assets of 8% and a minimum ratio of Tier 1 capital to risk-
weighted assets of 4%. In addition to the risk-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 4%. 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.
10
As of December 31, 2003 and 2002 the Company and the Bank's risk-based capital
ratios were as follows:
To Be Well
Capitalized Under
Regulatory Capital Prompt Corrective
(in thousands) Actual Requirements Action Provisions
December 31, 2003 Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------
The Bank:
Total Bank Capital to Risk Weighted Assets $123,825 12.39% $79,966 8.00% $99,958 10.00%
Tier I Bank Capital to Risk Weighted Assets $111,272 11.13% $39,983 4.00% $59,975 6.00%
Tier I Bank Capital to Average Assets $111,272 9.91% $44,908 4.00% $56,135 5.00%
The Company:
Total Consolidated Capital to Risk Weighted Assets $132,751 13.24% $80,189 8.00% N/A N/A
Tier I Consolidated Capital to Risk Weighted Assets $120,164 11.99% $40,095 4.00% N/A N/A
Tier I Consolidated Capital to Average Assets $120,164 10.67% $45,036 4.00% N/A N/A
December 31, 2002 Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------
The Bank:
Total Bank Capital to Risk Weighted Assets $108,191 11.73% $73,766 8.00% $92,208 10.00%
Tier I Bank Capital to Risk Weighted Assets $ 96,602 10.48% $36,883 4.00% $55,325 6.00%
Tier I Bank Capital to Average Assets $ 96,602 9.84% $39,259 4.00% $49,074 5.00%
The Company:
Total Consolidated Capital to Risk Weighted Assets $113,370 12.25% $ 74,058 8.00% N/A N/A
Tier I Consolidated Capital to Risk Weighted Assets $101,735 10.99% $ 37,029 4.00% N/A N/A
Tier I Consolidated Capital to Average Assets $101,735 10.32% $ 39,439 4.00% N/A N/A
Prompt Corrective Action and Other Enforcement Mechanisms
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, 2003 the Company exceeded all of the required
ratios for classification as "well capitalized." It should be noted, however,
that the Company's capital category is determined solely for the purpose of
applying the federal banking agencies' prompt corrective action regulations and
the capital category may not constitute an accurate representation of the Bank's
overall financial condition or prospects.
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.
11
Banking agencies have also adopted regulations which mandate that regulators
take into consideration (i) concentrations of credit risk; (ii) interest rate
risk (when the interest rate sensitivity of an institution's assets does not
match the sensitivity of its liabilities or its off-balance-sheet position); and
(iii) risks from non-traditional activities, as well as an institution's ability
to manage those risks, when determining the adequacy of an institution's
capital. That evaluation will be made as a part of the institution's regular
safety and soundness examination. In addition, the banking agencies have amended
their regulatory capital guidelines to incorporate a measure for market risk. In
accordance with the amended guidelines, the Company and any company with
significant trading activity must incorporate a measure for market risk in its
regulatory capital calculations.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal banking agencies for unsafe or unsound practices in conducting
their businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a depository institution),
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if such equitable
relief was not granted. Additionally, a holding company's inability to serve as
a source of strength to its subsidiary banking organizations could serve as an
additional basis for a regulatory action against the holding company.
Safety and Soundness Standards
The federal banking agencies have adopted guidelines designed to assist the
federal banking agencies in identifying and addressing potential safety and
soundness concerns before capital becomes impaired. The guidelines set forth
operational and managerial standards relating to: (i) internal controls,
information systems and internal audit systems, (ii) loan documentation, (iii)
credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation,
fees and benefits. In addition, the federal banking agencies have also adopted
safety and soundness guidelines with respect to asset quality and earnings
standards. These guidelines provide six standards for establishing and
maintaining a system to identify problem assets and prevent those assets from
deteriorating. Under these standards, any insured depository institution should:
(i) conduct periodic asset quality reviews to identify problem assets, (ii)
estimate the inherent losses in problem assets and establish reserves that are
sufficient to absorb estimated losses, (iii) compare problem asset totals to
capital, (iv) take appropriate corrective action to resolve problem assets, (v)
consider the size and potential risks of material asset concentrations, and (vi)
provide periodic asset quality reports with adequate information for management
and the board of directors to assess the level of asset risk. These guidelines
also set forth standards for evaluating and monitoring earnings and for ensuring
that earnings are sufficient for the maintenance of adequate capital and
reserves.
Premiums for Deposit Insurance
The Company's deposit accounts are insured by the Bank Insurance Fund ("BIF"),
as administered by the FDIC, up to the maximum permitted by law. Insurance of
deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operation, or has violated any applicable law, regulation, rule, order,
or condition imposed by the FDIC or the institution's primary regulator.
12
The FDIC charges an annual assessment for the insurance of deposits, which as of
December 31, 2003, ranged from 0 to 27 basis points per $100 of insured
deposits, based on the results of examinations, findings by the Company's
primary federal regulator and other information deemed relevant by the FDIC to
the Company's financial condition and the risk posed to the BIF.. 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.
Community Reinvestment Act ("CRA") and Fair Lending
The Bank is subject to certain fair lending requirements and reporting
obligations involving lending, investing and other CRA activities. CRA requires
each insured depository institution to identify the communities served by the
institution's offices and to identify the types of credit and investments the
institution is prepared to extend within such communities including low and
moderate income neighborhoods. It also requires the institution's regulators to
assess the institution's performance in meeting the credit needs of its
community and to take such assessment into consideration in reviewing
application for mergers, acquisitions, relocation of existing branches, opening
of new branches and other transactions. A bank may be subject to substantial
penalties and corrective measures for a violation of certain fair lending laws.
The federal banking agencies may take compliance with such laws and CRA into
consideration when regulating and supervising other banking activities.
A bank's compliance with its CRA obligations is based on a performance based
evaluation system which bases CRA ratings on an institution's lending service
and investment performance. An unsatisfactory rating may be the basis for
denying a merger application. The Bank's latest CRA examination was completed by
the Federal Reserve Bank of San Francisco and covered the time period of January
1, 2000 through September 30, 2001. The Bank received a High Satisfactory rating
in the lending area and an Outstanding rating in the areas of investment and
service. The Bank received an overall rating of Outstanding in complying with
its CRA obligations.
Recently Enacted Legislation, Regulations and Accounting Guidance
On July 30, 2002, President Bush signed into law The Sarbanes-Oxley Act of 2002.
This new legislation addresses accounting oversight and corporate governance
matters, including:
|X| the creation of a five-member oversight board that will set standards for
accountants and have investigative and disciplinary powers;
|X| the prohibition of accounting firms from providing various types of
consulting services to public clients and requiring accounting firms to rotate
partners among public client assignments every five years;
|X| increased penalties for financial crimes;
|X| expanded disclosure of corporate operations and internal controls and
certification of financial statements;
|X| enhanced controls on, and reporting of, insider trading; and
|X| prohibition on lending to officers and directors of public companies,
although the Bank may continue to make these loans within the constraints of
existing banking regulations.
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.
13
Economic Conditions. The Company's operations are located primarily 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 and Prepayment Speeds. The Company's earnings are impacted by
changing interest rates. Changes in interest rates impact the prepayment speeds
and 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 which seeks to minimize the effects
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.
Credit Risks. A significant source of risk arises from the possibility that
losses will be sustained because borrowers, guarantors and related parties may
not effectively manage their business affairs and cash flows and may be
adversely affected by general economic conditions. The Company has 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.
Government Laws and Regulations. 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.
Government Fiscal and Monetary Policy. 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.
Competitive Pressures. The banking and financial services business in the
Company's market areas is highly competitive. The increasingly competitive
environment is a result of changes in regulation, changes in technology and
product delivery systems, and the accelerating pace of consolidation among
financial service providers. The results of the Company may differ if
circumstances affecting the nature or level of completion change.
War on Terrorism. Acts or threats of terrorism and actions taken by the U.S. or
other governments as a result of such acts or threats may result in a downturn
in U.S. economic conditions and could adversely affect business and economic
conditions in the U.S. generally and in our principal markets.
State of California's Fiscal Difficulties. California's state government has
undergone a serious fiscal and budgetary crises in the recent past. While the
California electorate on March 2, 2004 approved various ballot measures aimed at
addressing this situation, including a $15 billion bond issue, the long-term
impact of this situation on the California economy and the Company's markets
cannot be predicted.
14
Critical Accounting Policies. The Company's financial statements are presented
in accordance with accounting principles generally accepted in the United States
of America ("US GAAP"). The financial information contained within our financial
statements is, to a significant extent, financial information that is based on
approximate measures of the financial effects of transactions and events that
have already occurred. A variety of factors could affect the ultimate value that
is obtained either when earning income, recognizing an expense, recovering an
asset or relieving a liability. Along with other factors, we use historical loss
factors to determine the inherent loss that may be present in our loan and lease
portfolio. Actual losses could differ significantly from the historical loss
factors that we use. Other estimates that we use are fair value of our
securities and expected useful lives of our depreciable assets. Other than
derivative financial instruments purchased and/or sold to reduce the Company's
exposure to changing interest rates, we have not entered into derivative
contracts for our customers or for ourselves, which relate to interest rate,
credit, equity, commodity, energy, or weather-related indices. US GAAP itself
may change from one previously acceptable method to another method. Although the
economics of our transactions would be the same, the timing of events that would
impact our transactions could change. Accounting standards and interpretation
currently affecting the Company and its subsidiaries my change at any time, and
the Company's financial condition and results of operations may be adversely
affected.
Our most significant estimates are approved by our Management team, which is
comprised of our most senior officers. At each financial reporting period, a
review of these estimates is then presented to our Board of Directors. As of
December 31, 2003, we have not created any special purpose entities to
securitize assets or to obtain off-balance sheet funding. Although we have sold
a number of loans in the past two years, those loans have been sold to third
parties without recourse, subject to customary representations and warranties.
Limited Public Market and Volatility in Stock Price. The Company's common stock
is not listed on any exchange, nor is it included on the NASDAQ National Market
or the NASDAQ Small Cap Market. However, trades may be reported on the OTC
Bulletin Board under the symbol "FMCB.OB". Management is aware that there are
private transactions in the Company's common stock. However, the limited trading
market for the Company's common stock may make it difficult for stockholders to
dispose of their shares. Also, the price of the Company's Common Stock may be
affected by general market price movements as well as developments specifically
related to the financial services sector, including interest rate movements,
quarterly variations, or changes in financial estimates by securities analysts
and a significant reduction in the price of the stock of another participant in
the financial services industry.
Statistical Disclosures
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 2003 Annual Report to
Shareholders, which is filed herewith as Exhibit 13, and which is incorporated
herein by reference and with the Company's Consolidated Financial Statements and
the Notes thereto included in Company's 2003 Annual Report to Shareholders, also
contained in Exhibit 13, and which is incorporated herein by reference.
15
Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(dollars in thousands)
Year Ended December 31,
2003
Assets Balance Interest Rate
- ------------------------------------------------------------------ ------------- ---------- ----------
Federal Funds Sold $ 15,871 $ 190 1.20%
Investment Securities Available-for-Sale
U.S. Treasuries 0 0 0.00%
U.S. Agencies 48,682 1,675 3.44%
Municipals - Taxable 1,255 78 6.22%
Municipals - Non-Taxable 31,477 1,767 5.61%
Mortgage Backed Securities 121,096 4,549 3.76%
Other 14,257 742 5.20%
- ------------------------------------------------------------------ ------------- ---------- ----------
Total Investment Securities Available-for-Sale 216,767 8,811 4.06%
- ------------------------------------------------------------------ ------------- ---------- ----------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00%
U.S. Agencies 0 0 0.00%
Municipals - Taxable 0 0 0.00%
Municipals - Non-Taxable 38,444 2,542 6.61%
Mortgage Backed Securities 0 0 0.00%
Other 442 25 5.66%
- ------------------------------------------------------------------ ------------- ---------- ----------
Total Investment Securities Held-to-Maturity 38,886 2,567 6.60%
- ------------------------------------------------------------------ ------------- ---------- ----------
Loans
Real Estate 425,081 27,456 6.46%
Home Equity 49,000 2,489 5.08%
Agricultural 113,123 5,801 5.13%
Commercial 131,587 7,339 5.58%
Consumer 13,528 1,326 9.80%
Credit Card 4,343 410 9.44%
Municipal 1,240 65 5.24%
- ------------------------------------------------------------------ ------------- ---------- ----------
Total Loans 737,902 44,886 6.08%
- ------------------------------------------------------------------ ------------- ---------- ----------
Total Earning Assets 1,009,426 $56,454 5.59%
========== ==========
Unrealized Gain/(Loss) on Securities Available-for-Sale 3,542
Allowance for Loan Losses (17,096)
Cash and Due From Banks 30,209
All Other Assets 57,174
- ------------------------------------------------------------------ -------------
Total Assets $1,083,255
================================================================== =============
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Interest Bearing DDA $ 89,896 $ 113 0.13%
Savings 254,270 1,306 0.51%
Time Deposits 322,513 6,695 2.08%
- ------------------------------------------------------------------ ------------- ---------- ----------
Total Interest Bearing Deposits 666,679 8,114 1.22%
Other Borrowed Funds 100,724 2,942 2.92%
Subordinated Debt 434 16 3.69%
- ------------------------------------------------------------------ ------------- ---------- ----------
Total Interest Bearing Liabilities 767,837 $11,072 1.44%
========== ==========
Demand Deposits 198,483
All Other Liabilities 8,960
- ------------------------------------------------------------------ -------------
Total Liabilities 975,280
Shareholders' Equity 107,975
- ------------------------------------------------------------------ -------------
Total Liabilities & Shareholders' Equity $1,083,255
================================================================== =============
Net Interest Margin 4.50%
================================================================== ============= ========== ==========
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.
16
Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(dollars in thousands)
Year Ended December 31,
2002
Assets Balance Interest Rate
- ----------------------------------------------------------------- ------------- ---------- ----------
Federal Funds Sold $ 33,032 $ 555 1.68%
Investment Securities Available-for-Sale
U.S. Treasuries 0 0 0.00%
U.S. Agencies 6,930 276 3.98%
Municipals - Taxable 1,532 96 6.27%
Municipals - Non-Taxable 22,265 1,549 6.96%
Mortgage Backed Securities 139,628 8,292 5.94%
Other 10,994 703 6.39%
- ----------------------------------------------------------------- ------------- ---------- ----------
Total Investment Securities Available-for-Sale 181,349 10,916 6.02%
- ----------------------------------------------------------------- ------------- ---------- ----------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00%
U.S. Agencies 0 0 0.00%
Municipals - Taxable 0 0 0.00%
Municipals - Non-Taxable 28,756 2,173 7.56%
Mortgage Backed Securities 0 0 0.00%
Other 534 32 5.99%
- ----------------------------------------------------------------- ------------- ---------- ----------
Total Investment Securities Held-to-Maturity 29,290 2,205 7.53%
- ----------------------------------------------------------------- ------------- ---------- ----------
Loans
Real Estate 353,060 25,114 7.11%
Home Equity 33,780 1,770 5.24%
Agricultural 98,270 5,404 5.50%
Commercial 132,799 7,837 5.90%
Consumer 15,376 1,396 9.08%
Credit Card 3,424 320 9.35%
Municipal 1,122 70 6.24%
- ----------------------------------------------------------------- ------------- ---------- ----------
Total Loans 637,831 41,911 6.57%
- ----------------------------------------------------------------- ------------- ---------- ----------
Total Earning Assets 881,502 $55,587 6.31%
========== ==========
Unrealized Gain/(Loss) on Securities Available-for-Sale 4,588
Allowance for Loan Losses (13,189)
Cash and Due From Banks 28,934
All Other Assets 50,389
- ----------------------------------------------------------------- -------------
Total Assets $952,224
================================================================= =============
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Interest Bearing DDA $87,002 $ 272 0.31%
Savings 220,115 1,940 0.88%
Time Deposits 312,919 9,157 2.93%
- ----------------------------------------------------------------- ------------- ---------- ----------
Total Interest Bearing Deposits 620,036 11,369 1.83%
Other Borrowed Funds 41,255 2,227 5.40%
Subordinated Debt 0 0 0.00%
- ----------------------------------------------------------------- ------------- ---------- ----------
Total Interest Bearing Liabilities 661,291 $13,596 2.06%
========== ==========
Demand Deposits 180,163
All Other Liabilities 8,804
- ----------------------------------------------------------------- -------------
Total Liabilities 850,258
Shareholders' Equity 101,966
- ----------------------------------------------------------------- -------------
Total Liabilities & Shareholders' Equity $952,224
================================================================= =============
Net Interest Margin 4.76%
================================================================= ============= ========== ==========
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.
17
Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(dollars in thousands)
Year Ended December 31,
2001
Assets Balance Interest Rate
- ----------------------------------------------------------------------------- ----------- ----------- ----------
Federal Funds Sold $ 51,923 $ 1,922 3.70%
Investment Securities Available-for-Sale
U.S. Treasuries 1,021 55 5.39%
U.S. Agencies 6,813 342 5.02%
Municipals - Taxable 1,909 119 6.23%
Municipals - Non-Taxable 21,945 1,426 6.50%
Mortgage Backed Securities 219,352 13,946 6.36%
Other 6,208 454 7.31%
- ----------------------------------------------------------------------------- ----------- ----------- ----------
Total Investment Securities Available-for-Sale 257,248 16,342 6.35%
- ----------------------------------------------------------------------------- ----------- ----------- ----------
Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00%
U.S. Agencies 367 22 5.99%
Municipals - Taxable 1,714 114 6.65%
Municipals - Non-Taxable 32,572 2,455 7.54%
Mortgage Backed Securities 0 0 0.00%
Other 629 60 9.54%
- ----------------------------------------------------------------------------- ----------- ----------- ----------
Total Investment Securities Held-to-Maturity 35,282 2,651 7.51%
- ----------------------------------------------------------------------------- ----------- ----------- ----------
Loans
Real Estate 292,684 25,423 8.69%
Home Equity 16,296 1,408 8.64%
Agricultural 88,379 6,813 7.71%
Commercial 104,004 7,946 7.64%
Consumer 19,331 1,930 9.98%
Credit Card 3,410 363 10.65%
Municipal 1,005 73 7.26%
- ----------------------------------------------------------------------------- ----------- ----------- ----------
Total Loans 525,109 43,956 8.37%
- ----------------------------------------------------------------------------- ----------- ----------- ----------
Total Earning Assets 869,562 $64,871 7.46%
=========== ==========
Unrealized Gain/(Loss) on Securities Available-for-Sale 3,685
Allowance for Loan Losses (12,640)
Cash and Due From Banks 28,568
All Other Assets 25,395
- ----------------------------------------------------------------------------- -----------
Total Assets $914,570
============================================================================= ===========
Liabilities & Shareholders' Equity
Interest Bearing Deposits
Interest Bearing DDA $78,228 $ 626 0.80%
Savings 185,352 3,581 1.93%
Time Deposits 338,488 16,831 4.97%
- ----------------------------------------------------------------------------- ----------- ----------- ----------
Total Interest Bearing Deposits 602,068 21,038 3.49%
Other Borrowed Funds 41,017 2,242 5.47%
Subordinated Debt 0 0 0.00%
- ----------------------------------------------------------------------------- ----------- ----------- ----------
Total Interest Bearing Liabilities 643,085 $23,280 3.62%
=========== ==========
Demand Deposits 165,938
All Other Liabilities 9,650
- ----------------------------------------------------------------------------- -----------
Total Liabilities 818,673
Shareholders' Equity 95,897
- ----------------------------------------------------------------------------- -----------
Total Liabilities & Shareholders' Equity $914,570
============================================================================= ===========
Net Interest Margin 4.78%
============================================================================= =========== =========== ==========
Notes: Yields on municipal securities have been calculated on a fully taxable
equivalent basis using the 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.
18
Farmers & Merchants Bancorp
Volume and Rate Analysis of Net Interest Revenue
(Rates on a Taxable Equivalent Basis) 2003 versus 2002
(in thousands) Amount of Increase
(Decrease) Due to Change in:
--------------------------------------
Interest Earning Assets Volume Rate Net Chg.
- -------------------------------------------------------------------------------------- ------------ ----------- -------------
Federal Funds Sold $ (393) $ 28 $ (365)
Investment Securities Available for Sale
U.S. Treasuries 0 0 0
U.S. Agencies 1,443 (44) 1,399
Municipals - Taxable (17) (1) (18)
Municipals - Non-Taxable 557 (339) 218
Mortgage Backed Securities (803) (2,940) (3,743)
Other 177 (138) 39
- -------------------------------------------------------------------------------------- ------------ ----------- -------------
Total Investment Securities Available for Sale 1,357 (3,462) (2,105)
- -------------------------------------------------------------------------------------- ------------ ----------- -------------
Investment Securities Held to Maturity
U.S. Treasuries 0 0 0
U.S. Agencies 0 0 0
Municipals - Taxable 0 0 0
Municipals - Non-Taxable 665 (296) 369
Mortgage Backed Securities 0 0 0
Other (8) 1 (7)
- -------------------------------------------------------------------------------------- ------------ ----------- -------------
Total Investment Securities Held to Maturity 657 (295) 362
- -------------------------------------------------------------------------------------- ------------ ----------- -------------
Loans:
Real Estate 5,001 (2,659) 2,342
Home Equity 774 (55) 719
Agricultural 885 (488) 397
Commercial (1,276) 778 (498)
Installment (173) 103 (70)
Credit Card 87 3 90
Other 9 (14) (5)
- -------------------------------------------------------------------------------------- ------------ ----------- -------------
Total Loans 5,307 (2,332) 2,975
- -------------------------------------------------------------------------------------- ------------ ----------- -------------
Total Earning Assets 6,928 (6,061) 867
- -------------------------------------------------------------------------------------- ------------ ----------- -------------
Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction 3 (162) (159)
Savings 273 (907) (634)
Time Deposits 299 (2,761) (2,462)
- -------------------------------------------------------------------------------------- ------------ ----------- -------------
Total Interest Bearing Deposits 575 (3,830) (3,255)
Other Borrowed Funds 2,093 (1,378) 715
Subordinated Debt 8 8 16
- -------------------------------------------------------------------------------------- ------------ ----------- -------------
Total Interest Bearing Liabilities 2,676 (5,200) (2,524)
- -------------------------------------------------------------------------------------- ------------ ----------- -------------
Total Change $4,252 $ (861) $3,391
====================================================================================== ============ =========== =============
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.
19
Farmers & Merchants Bancorp
Volume and Rate Analysis of Net Interest Revenue
(Rates on a Taxable Equivalent Basis) 2002 versus 2001
(in thousands) Amount of Increase
(Decrease) Due to Change in:
------------------------------------------
Interest Earning Assets Volume Rate Net Chg.
- -------------------------------------------------------------------------- -------------- ------------ --------------
Federal Funds Sold $ (546) $ (821) $ (1,367)
Investment Securities Available for Sale
U.S. Treasuries (28) (27) (55)
U.S. Agencies 6 (72) (66)
Municipals - Taxable (24) 1 (23)
Municipals - Non-Taxable 21 102 123
Mortgage Backed Securities (4,786) (868) (5,654)
Other 315 (66) 249
- -------------------------------------------------------------------------- -------------- ------------ --------------
Total Investment Securities Available for Sale (4,496) (930) (5,426)
- -------------------------------------------------------------------------- -------------- ------------ --------------
Investment Securities Held to Maturity
U.S. Treasuries 0 0 0
U.S. Agencies (11) (11) (22)
Municipals - Taxable (57) (57) (114)
Municipals - Non-Taxable (289) 7 (282)
Mortgage Backed Securities 0 0 0
Other (8) (20) (28)
- -------------------------------------------------------------------------- -------------- ------------ --------------
Total Investment Securities Held to Maturity (365) (81) (446)
- -------------------------------------------------------------------------- -------------- ------------ --------------
Loans:
Real Estate 4,751 (5,060) (309)
Home Equity 1,108 (746) 362
Agricultural 701 (2,110) (1,409)
Commercial (612) 503 (109)
Installment (370) (164) (534)
Credit Card 1 (44) (43)
Other 7 (10) (3)
- -------------------------------------------------------------------------- -------------- ------------ --------------
Total Loans 5,586 (7,631) (2,045)
- -------------------------------------------------------------------------- -------------- ------------ --------------
Total Earning Assets 179 (9,463) (9,284)
- -------------------------------------------------------------------------- -------------- ------------ --------------
Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction 63 (417) (354)
Savings 578 (2,219) (1,641)
Time Deposits (1,190) (6,484) (7,674)
- -------------------------------------------------------------------------- -------------- ------------ --------------
Total Interest Bearing Deposits (549) (9,120) (9,669)
Other Borrowed Funds 13 (28) (15)
Subordinated Debt 0 0 0
- -------------------------------------------------------------------------- -------------- ------------ --------------
Total Interest Bearing Liabilities (536) (9,148) (9,684)
- -------------------------------------------------------------------------- -------------- ------------ --------------
Total Change $715 $ (315) $400
========================================================================== ============== ============ ==============
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.
20
Farmers & Merchants Bancorp
Investment Portfolio
The following table summarizes the balances and distributions of the investment
securities held on the dates indicated.
Available Held to Available Held to Available Held to
for Sale Maturity for Sale Maturity for Sale Maturity
------------ ----------- ------------ ------------ ----------- ------------
December 31: (in thousands) 2003 2002 2001
- ------------------------------------------- ------------------------ ------------------------- ------------------------
U. S. Agency $76,398 $ - $26,984 $ - $12,771 $ -
Municipal 28,794 37,582 34,352 27,351 24,076 32,137
Mortgage-Backed Securities 108,953 - 117,335 - 196,384 -
Corporate Bonds - - 17,703 - - -
Other 9,820 375 9,689 519 9,621 561
- ------------------------------------------- ------------ ----------- ------------ ------------ ----------- ------------
Total Book Value $223,965 $37,957 $206,063 $27,870 $242,852 $32,698
=========================================== ============ =========== ============ ============ =========== ============
Fair Value $223,965 $38,739 $206,063 $29,111 $242,852 $33,546
=========================================== ============ =========== ============ ============ =========== ============
Analysis of Investment Securities Available-for-Sale
The following table is a summary of the relative maturities and yields of the
Company's investment securities Available-for-Sale as of December 31, 2003.
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, 2003 (in thousands) Value Yield
- ----------------------------------------------------------------- ------------ ----------- ------------ ------------ -----------
U.S. Agency
One year or less $15,021 3.50%
After one year through five years 61,377 4.39%
After five years through ten years - -
After ten years - -
- ----------------------------------------------------------------- ------------ ----------- ------------ ------------ -----------
Total U.S. Agency Securities 76,398 4.21%
- ----------------------------------------------------------------- ------------ ----------- ------------ ------------ -----------
Municipal - Non-Taxable
One year or less 6,066 3.70%
After one year through five years 20,577 4.20%
After five years through ten years 0 0.00%
After ten years 958 6.34%
- ----------------------------------------------------------------- ------------ ----------- ------------ ------------ -----------
Total Non-Taxable Municipal Securities 27,601 4.16%
- ----------------------------------------------------------------- ------------ ----------- ------------ ------------ -----------
Municipal - Taxable
One year or less - -
After one year through five years - -
After five years through ten years 1,193 6.25%
After ten years - -
- ----------------------------------------------------------------- ------------ ----------- ------------ ------------ -----------
Total Taxable Municipal Securities 1,193 6.25%
- ----------------------------------------------------------------- ------------ ----------- ------------ ------------ -----------
Mortgage-Backed Securities
One year or less 3,212 6.17%
After one year through five years 90,817 4.87%
After five years through ten years 14,924 4.34%
After ten years - -
- ----------------------------------------------------------------- ------------ ----------- ------------ ------------ -----------
Total Mortgage-Backed Securities 108,953 4.84%
- ----------------------------------------------------------------- ------------ ----------- ------------ ------------ -----------
Other
One year or less 9,820 4.45%
After one year through five years - -
After five years through ten years - -
After ten years - -
- ----------------------------------------------------------------- ------------ ----------- ------------ ------------ -----------
Total Other Securities 9,820 4.45%
- ----------------------------------------------------------------- ------------ ----------- ------------ ------------ -----------
Total Investment Securities Available for Sale $223,965 4.53%
================================================================= ============ =========== ============ ============ ===========
Note: The average yield for floating rate securities is calculated using the
current stated yield.
21
Farmers & Merchants Bancorp
Analysis of Investment Securities Held-to-Maturity
The following table is a summary of the relative maturities and yields of the
Company's investment securities Held-to-Maturity as of December 31, 2003.
Municipal securities have been calculated on a fully taxable equivalent basis
using the applicable Federal and State income tax rates for the period
Investment Securities Held-to-Maturity Book Average
December 31, 2003 (in thousands) Value Yield
- ----------------------------------------------------------------- ------------ ----------- ------------ ------------ -----------
Municipal - Non-Taxable
One year or less $ 6,147 4.93%
After one year through five years 17,784 4.17%
After five years through ten years 11,402 3.48%
After ten years 2,249 6.75%
- ----------------------------------------------------------------- ------------ ----------- ------------ ------------ -----------
Total Non-Taxable Municipal Securities 37,582 4.24%
- ----------------------------------------------------------------- ------------ ----------- ------------ ------------ -----------
Other
One year or less - -
After one year through five years - -
After five years through ten years - -
After ten years 375 4.88%
- ----------------------------------------------------------------- ------------ ----------- ------------ ------------ -----------
Total Other Securities 375 4.88%
- ----------------------------------------------------------------- ------------ ----------- ------------ ------------ -----------
Total Investment Securities Held-to-Maturity $37,957 4.25%
================================================================= ============ =========== ============ ============ ===========
22
Farmers & Merchants Bancorp
Loan Data
(in thousands)
The following table shows the Bank's loan composition by type of loan.
December 31,
2003 2002 2001 2000 1999
- -------------------------------------------- -------------- --------------- --------------- -------------- ---------------
Real Estate $386,735 $322,074 $282,328 $245,652 $207,760
Real Estate Construction 77,115 66,467 49,692 28,354 39,186
Home Equity 55,827 45,150 22,123 16,258 14,594
Agricultural 134,862 109,130 110,707 83,770 67,774
Commercial 136,955 135,877 117,202 98,841 62,195
Consumer 11,979 13,948 17,022 20,965 18,953
Credit Card 4,549 4,252 3,157 3,619 3,235
Other 976 1,795 954 271 60
- -------------------------------------------- -------------- --------------- --------------- -------------- ---------------
Total Loans 808,998 698,693 603,185 497,730 413,757
Less:
Unearned Income 2,092 2,018 1,016 333 348
Allowance for Loan Losses 17,220 16,684 12,709 11,876 9,787
- -------------------------------------------- -------------- --------------- --------------- -------------- ---------------
Loans, Net $789,686 $679,991 $589,460 $485,521 $403,622
============================================ ============== =============== =============== ============== ===============
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,
2003 2002 2001 2000 1999
- -------------------------------------------------------------- --------------- --------------- -------------- ---------------
Nonaccrual Loans
Real Estate $1,670 $2,180 $1,015 $948 $754
Commercial 516 452 1,302 520 1,713
Consumer 181 2 36 4 32
Credit Card 0 0 0 0 0
Other 0 263 0 0 0
- -------------------------------------------------------------- --------------- --------------- -------------- ---------------
Total Nonaccrual Loans 2,367 2,897 2,353 1,472 2,499
- -------------------------------------------------------------- --------------- --------------- -------------- ---------------
Accruing Loans Past Due 90 Days or More
Real Estate 139 1 0 0 0
Commercial 41 0 0 0 0
Consumer 0 0 0 0 0
Credit Card 37 9 56 23 12
Other 0 0 0 0 0
- -------------------------------------------------------------- --------------- --------------- -------------- ---------------
Total Accruing Loans Past Due 90 Days or More 217 10 56 23 12
- -------------------------------------------------------------- --------------- --------------- -------------- ---------------
Total Non-Performing Loans $2,584 $2,907 $2,409 $1,495 $2,511
============================================================== =============== =============== ============== ===============
Other Real Estate Owned $0 $0 $0 $88 $204
Non-Performing Loans as a Percent of Total Loans 0.32% 0.42% 0.40% 0.30% 0.61%
============================================================== =============== =============== ============== ===============
Allowance for Loan Losses
as a Percent of Total Loans 2.13% 2.39% 2.11% 2.39% 2.37%
============================================================== =============== =============== ============== ===============
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, 2003 was $356,000. For a discussion of impaired loan policy see
Note 4. in the Notes to the Consolidated Financial Statements of the Company's
2003 Annual Report to Shareholders.
23
Farmers & Merchants Bancorp
Provision and Allowance for Loan Losses
(dollars in thousands)
The following table summarizes the loan loss experience of the Company for the
periods indicated:
2003 2002 2001 2000 1999
- -------------------------------------------------------------- --------------- -------------- --------------- --------------
Balance at Beginning of Year $ 16,684 $ 12,709 $ 11,876 $ 9,787 $ 8,589
Provision Charged to Expense 625 4,926 1,000 2,800 1,700
Charge Offs:
Real Estate 1 0 0 45 794
Agricultural 0 149 94 218 0
Commercial 282 966 507 441 404
Consumer 175 78 68 177 80
Credit Card 239 93 85 48 30
Other 0 0 0 0 0
- -------------------------------------------------------------- --------------- -------------- --------------- --------------
Total Charge Offs 697 1,286 754 929 1,308
- -------------------------------------------------------------- --------------- -------------- --------------- --------------
Recoveries:
Real Estate 143 0 18 0 3
Agricultural 17 141 0 2 16
Commercial 394 149 525 154 759
Consumer 25 34 14 53 21
Credit Card 29 11 30 9 7
Other 0 0 0 0 0
- -------------------------------------------------------------- --------------- -------------- --------------- --------------
Total Recoveries 608 335 587 218 806
- -------------------------------------------------------------- --------------- -------------- --------------- --------------
Net Recoveries (Charge-Offs) (89) (951) (167) (711) (502)
- -------------------------------------------------------------- --------------- -------------- --------------- --------------
Balance at End of Year* $ 17,220 $ 16,684 $ 12,709 $ 11,876 $ 9,787
============================================================== =============== ============== =============== ==============
Ratios:
Consolidated Allowance for Loan Losses to:
Loans at Year End 2.46% 2.77% 2.55% 2.87% 2.97%
Average Loans 2.33% 2.62% 2.42% 2.60% 2.70%
Consolidated Net Charge-Offs to:
Loans at Year End 0.01% 0.16% 0.03% 0.17% 0.15%
Average Loans 0.01% 0.15% 0.03% 0.16% 0.14%
For a description of the Company's policy regarding the Allowance for Loan
Losses, see Note 1. in the Notes to the Consolidated Financial Statements of the
2003 Annual Report to Shareholders.
Allocation of the Allowance for Loan Losses
(dollars in thousands) Amount of Allowance Allocation at December 31,
-----------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ------------------------------------------------- --------------- --------------- -------------- --------------- --------------
Real Estate $ 6,216 $ 4,718 $ 3,433 $ 2,730 $2,488
Real Estate Construction 1,080 912 593 311 461
Home Equity 471 450 210 145 121
Agricultural 4,681 3,702 3,722 1,769 1,759
Commercial 3,957 5,681 3,873 2,077 1,623
Consumer 104 427 283 129 147
Other 569 715 435 86 81
Unallocated 142 79 160 4,629 3,107
- ------------------------------------------------- --------------- --------------- -------------- --------------- --------------
Total $17,220 $16,684 $12,709 $11,876 $9,787
================================================= =============== =============== ============== =============== ==============
Percent of Loans in Each Category
to Total Loans at December 31,
-----------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------- --------------- -------------- --------------- --------------
Real Estate 47.8% 46.1% 46.8% 49.4% 50.2%
Real Estate Construction 9.5% 9.5% 8.2% 5.7% 9.5%
Home Equity 6.9% 6.5% 3.7% 3.3% 3.5%
Agricultural 16.7% 15.6% 18.4% 16.8% 16.4%
Commercial 16.9% 19.4% 19.4% 19.9% 15.0%
Consumer 1.5% 2.0% 2.8% 4.2% 4.6%
Credit Card 0.6% 0.6% 0.5% 0.7% 0.8%
Other 0.1% 0.3% 0.2% 0.1% 0.0%
- ------------------------------------------------- --------------- --------------- -------------- --------------- --------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
================================================= =============== =============== ============== =============== ==============
24
Farmers & Merchants Bancorp
Maturities and Rate Sensitivity of Loans
(in thousands)
The following table shows the maturity distribution and interest
rate sensitivity of loans of the Company on December 31, 2003
Over One
Year to Over
One Year Five Five
or Less Years Years Total Percent
- --------------------------------------------- --------------- --------------- -------------- --------------- --------------
Real Estate $38,642 $78,245 $269,848 $386,735 48.86%
Real Estate Construction 53,298 13,197 10,620 77,115 9.74%
Home Equity 99 445 55,283 55,827 7.05%
Agricultural 92,997 29,574 12,294 134,865 17.04%
Commercial 69,267 55,603 12,085 136,955 17.30%
- --------------------------------------------- --------------- --------------- -------------- --------------- --------------
Total $254,303 $177,064 $360,130 $791,497 100.00%
============================================= =============== =============== ============== =============== ==============
Rate Sensitivity:
Predetermined Rate $18,596 $61,218 $85,679 $165,493 20.91%
Floating Rate 235,708 115,846 274,450 626,004 79.09%
- --------------------------------------------- --------------- --------------- -------------- --------------- --------------
Total $254,304 $177,064 $360,129 $791,497 100.00%
============================================= =============== =============== ============== =============== ==============
Percent 32.13% 22.37% 45.50% 100.00%
============================================= =============== =============== ============== ===============
Commitments and Lines of Credit
It is not the policy of the Company to issue formal commitments or lines of
credit except to a limited number of well-established and financially
responsible local commercial and agricultural enterprises. Such commitments can
be either secured or unsecured and are typically in the form of revolving lines
of credit for seasonal working capital needs. Occasionally, such commitments are
in the form of letters of credit to facilitate the customer's particular
business transactions. Commitment fees are generally not charged except where
letters of credit are involved. For further discussion about commitments and
contingencies, see Note 15 in the Company's 2003 Annual Report to Shareholders.
25
Farmers & Merchants Bancorp
Analysis of Certificates of Deposit
(In thousands)
The following table sets forth, by time remaining to maturity, the Company's
time deposits in amounts of $100,000 or more for the periods indicated.
December 31,
2003
- -------------------------------------------------------------- --------------
Time Deposits of $100,000 or More
Three Months or Less $66,275
Over Three Months Through Six Months 55,767
Over Six Months Through Twelve Months 18,632
Over Twelve Months 15,912
- -------------------------------------------------------------- --------------
Total Time Deposits of $100,000 or More $156,586
============================================================== ==============
Refer to the Year-To-Date Average Balances and Rate Schedules for information on
separate deposit categories.
Ratios
Refer to the Five Year Financial Summary of Operations located in the Farmers &
Merchants Bancorp Annual Report to Shareholders for the year ending December 31,
2003 for calculations of Return on Average Equity (net of accumulated other
comprehensive income), Return on Average Assets, Dividend Payout Ratio and
Equity to Assets Ratio.
Short-Term Borrowings
Refer to Note 9 of the Farmers & Merchants Bancorp Annual Report to Shareholders
for the year ending December 31, 2003.
26
Item 2. Properties
Farmers & Merchants Bancorp along with its subsidiaries are headquartered in
Lodi, California. Executive offices are located at 111 W. Pine Street. Banking
services are provided in eighteen locations in the Company's service area. Of
the eighteen locations, fifteen are owned and three are leased. The expiration
of these leases occurs between the years 2005 and 2010.
Item 3. 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 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 2003.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The common stock of Farmers & Merchants Bancorp is not widely held, is not
listed on any exchange, nor is it included on the NASDAQ National Market or the
NASDAQ Small Cap Market. However, trades may be reported on the OTC Bulletin
Board under the symbol "FMCB.OB".
The following table summarizes the actual high and low selling prices for the
Company's common stock since the first quarter of 2002. These figures are based
on activity posted on the OTC Bulletin Board and on stock transactions between
individual shareholders that are reported to the Company.
Calendar Quarter High Low
2003 Fourth quarter $375.00 $300.00
Third quarter 330.00 297.00
Second quarter 305.00 225.00
First quarter 285.71 250.00
2002 Fourth quarter $300.00 $250.00
Third quarter 310.00 250.00
Second quarter 320.00 250.00
First quarter 259.50 238.00
As of March 5, 2004, there were approximately 1,350 holders of record of the
Company's common stock.
Beginning in 1975 and continuing through 2003, the Company has issued a 5% stock
dividend annually. For information regarding cash dividends declared, refer to
Quarterly Financial Data which appears in the Farmers & Merchants Bancorp 2003
Annual Report to Shareholders, which is filed herewith as Exhibit 13 and which
is incorporated herein by reference.
There are regulatory limitations on cash dividends that may be paid by the
Company under state and federal laws. See Item 1. Business - Supervision and
Regulation.
27
Item 6. Selected Financial Data
The selected financial data for the five years ended December 31, 2003, which
appears in the Five-Year Financial Summary of the Company's 2003 Annual Report
to Shareholders, which is filed herewith as Exhibit 13, and which is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
See Management's Discussion and Analysis in the Company's 2003 Annual Report to
Shareholders which is filed herewith as Exhibit 13, and which is incorporated
herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See Management's Discussion and Analysis in the Company's 2003 Annual Report to
Shareholders which is filed herewith as Exhibit 13 and which is incorporated
herein by reference.
Item 8. Financial Statements and Supplementary Data
See Consolidated Financial Statements and the related Notes to Consolidated
Financial Statements in the Company's 2003 Annual Report to Shareholders which
is filed herewith as Exhibit 13, and which are incorporated herein by reference
(see table below).
FARMERS & MERCHANTS BANCORP
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
IN EXHIBIT 13
Page
Report of Management 6
Report of Independent Auditors 7
Consolidated Financial Statements
Consolidated Statements of Income - Years ended December 31, 2003,
2002 and 2001. 8
Consolidated Balance Sheets - December 31, 2003 and 2002. 9
Consolidated Statements of Changes in Shareholders' Equity - Years
ended December 31, 2003, 2002 and 2001. 10
Consolidated Statements of Comprehensive Income. 11
Consolidated Statements of Cash Flows - Years Ended December 31, 2003,
2002 and 2001 12
Notes to Consolidated Financial Statements 13
Management's Discussion and Analysis 33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None
Item 9A. Controls and Procedures
See "Management's Discussion and Analysis" in the Company's 2003 Annual Report
to Shareholders which is filed herewith as Exhibit 13 and which is incorporated
herein by reference.
28
PART III
Item 10. Directors and Executive Officers of the Company
See "Election of Directors," "Executive Officers" and "Compliance with Section
16(a) of the Exchange Act" in the Company's definitive proxy statement for the
2004 Annual Meeting of Shareholders as filed with the Commission and which is
incorporated herein by reference.
The Company has adopted an Employee Code of Conduct which complies with the Code
of Ethics requirements of the Securities and Exchange Commission. A copy of the
Code of Conduct is attached to this filing as Exhibit 14 and is posted on the
Company's website. The Company intends to disclose promptly any amendment to, or
waiver from any provision of, the Code of Conduct applicable to senior financial
officers, and any waiver from any provision of the Code of Conduct applicable to
directors, on its website. The Company's website address is www.fmbonline.com.
Item 11. Executive Compensation
See "Compensation of Directors and Executive Officers," "Report of Personnel
Committee of the Board of Directors on Executive Compensation," "Deferred Bonus
Plan," "Profit Sharing Plan," "Defined Benefit Pension Plan", "Indexed
Retirement Plan and Life Insurance Arrangements", "Money Purchase Plan,"
"Employment Contracts and Termination of Employment and Change in Control
Arrangements," "Compensation Committee Interlocks and Insider Participation" and
"Performance Graph" in the Company's definitive proxy statement for the 2004
Annual Meeting of Shareholders as filed with the Commission and which is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
See "Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive proxy statement for the 2004 Annual Meeting of Shareholders
as filed with the Commission and which is incorporated herein by reference. The
Company does not have any equity compensation plans which require disclosure
under Item 201(d) of Regulation S-K.
Item 13. Certain Relationships and Related Transactions
See "Employment Contracts and Termination of Employment and Change in Control
Arrangements" and "Certain Relationships and Related Transactions" in the
Company's definitive proxy statement for the 2004 Annual Meeting of Shareholders
as filed with the Commission and which is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
See "Audit and Non-Audit Fees" in the Company's definitive proxy statement for
the 2004 Annual Meeting of Shareholders as filed with the Commission and which
is incorporated herein by reference.
PART IV
Item 15. 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 2003.
During the quarter ended December 31, 2003 the Company filed the following
Current Reports of Form 8-K:
Description Date of Report
Quarterly results of operations October 29, 2003
Cash dividend declared December 8, 2003
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Farmers & Merchants Bancorp
(Registrant)
By /s/ Stephen W. Haley
Stephen W. Haley
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 10, 2004
/s/ Kent A. Steinwert
______________________________ President and
Kent A. Steinwert Chief Executive Officer
/s/ Stephen W. Haley
_____________________________ Executive Vice President &
Stephen W. Haley Chief Financial Officer
Principal Accounting Officer
/s/ Ole R. Mettler /s/ James E. Podesta
______________________________ ______________________________
Ole R. Mettler, Chairman James E. Podesta, Director
/s/ Stewart Adams, Jr. /s/ Kevin Sanguinetti
______________________________ ______________________________
Stewart Adams, Jr., Director Kevin Sanguinetti, Director
/s/ Ralph Burlington /s/ Harry C. Schumacher
______________________________ ______________________________
Ralph Burlington, Director Harry C. Schumacher, Director
/s/ Edward Corum, Jr. /s/ Calvin Suess
______________________________ ______________________________
Edward Corum, Jr., Director Calvin Suess, Director
/s/ Robert F. Hunnell /s/ Carl Wishek, Jr.
______________________________ ______________________________
Robert F. Hunnell, Director Carl Wishek, Jr., Director
30
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.
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 March 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.
10.8 Indexed Retirement Plan of Farmers & Merchants Bank of Central
California adopted as of December, 2001, and implemented as of January
1, 2003.
13 Annual Report to Shareholders of Farmers & Merchants Bancorp for the
year ended December 31, 2003.
14 Code of Conduct of Farmers & Merchants Bancorp.
16 Letter regarding change in certifying accountants filed as exhibit 16
to Registrants 8-K filed October 20, 2000, is incorporated herein by
reference.
21 Subsidiaries of the Registrant as of December 31, 2003.
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.
31