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.
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
|
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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%
================================================================= ============ =========== ============ ============ ===========
|
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.
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%
================================================= =============== =============== ============== =============== ==============
|
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.
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.
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.
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.
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 |
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
|
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.
Exhibit 10.8
FARMERS & MERCHANTS BANK OF CENTRAL CALIFORNIA
EXECUTIVE INDEXED RETIREMENT AGREEMENT
THIS AGREEMENT isa adopted this 1st day of January 2003, by and between FARMERS & MERCHANTS BANK OF CENTRAL CALIFORNIA, a state-chartered commercial bank located in Lodi, California, or its successors (the "Company") and __________________ (the "Executive").
INTRODUCTION
To attract, retain and reward quality Executives and to provide a potentially higher level of retirement income, the Company is willing to provide the Executive with this Executive Indexed Retirement Agreement. The Company will pay the benefits from its general assets.
AGREEMENT
The Executive and the Company agree as follows:
Article 1
Definitions
Whenever used in this Agreement, the following words and phrases shall have the meanings specified:
1.1 "Adjustment Rate" shall mean the figure equal to one minus the Company's highest marginal tax rate for the current calendar year.
1.2 "Change of Control" means a change of control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934 (the "Act"), provided, however, that without limitation, such a Change of Control shall be deemed to have occurred if:
1.2.1 any person or group (as such terms are used in connection with Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 and 13d-5 under the Act), directly or indirectly, of securities of the Company representing forty percent (40%) or more of the combined voting power of the Company's then outstanding securities; or
1.2.2 the Company is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter.
1.3 "Disability" means the Executive suffering a sickness, accident or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled. The Executive must submit proof to the Company of the carrier's or Social Security Administration's determination upon the request of the Company.
1.4 "Normal Retirement Age" means the Executive's sixty-fifth (65th) birthday.
1.5 "Normal Retirement Date" means the later of Normal Retirement Age or Termination of Employment.
1.6 "Plan Year" means each calendar year from January 1 through December
31. In the year of implementation, it shall commence with the date of this
Agreement and end on December 31, 2003.
1.7 "Retirement Account" means the account maintained on the books of the Company as described in Section 2.2.
1.8 "Simulated Investments" mean investments specified by the Company for use in measuring the Retirement Benefit. Subject to Article 2, the Company can change the Simulated Investments only with the Executive's written agreement. The Simulated Investments shall be of equal initial amounts.
1.9 "Simulated Investment Earnings" means the after-tax rate of return on a Simulated Investment. If the Simulated Investment is a life insurance policy, the Simulated Investment Earnings shall track cash surrender value and not include receipt of the policy's death benefit.
1.10 "Termination of Employment" means the Executive ceases to be employed by the Company for any reason, voluntary or involuntary, other than a leave of absence approved by the Company.
1.11 "Termination for Cause" means the Company terminating the Executive's employment for conviction of a felony resulting in a material economic adverse effect on the Company.
1.12 "Years of Employment" means the total number of twelve-month periods during which the Executive has been employed on a full-time basis by the Company, inclusive of any leave of absence approved by the Company.
Article 2 Retirement Account
2.1 Simulated Investments. The Company shall establish two Simulated Investments in the amount of $___________ as of January 1, 2003, as follows:
2.1.1 Simulated Investment Number One shall track the cash surrender value of specified life insurance policies as described in Appendix A.
2.1.2 Simulated Investment Number Two shall track the value of a simulated investment account comprised of both principal and accumulated net after-tax interest earnings. Pre-tax interest earnings equal the current 5-year Treasury Bill rate, which shall initially be set at 4.30%, which shall continue through December 31, 2003. Each January 1 thereafter the rate shall be reset based on the average 5-year Treasury Bill rate for the previous month of December according to Bloomberg. Simulated Investment Number Two assumes the income tax rate to be the Company's highest marginal tax rate for the current calendar year (which is 42.046%, using a Federal rate of 35% and a State franchise tax rate of 10.84%), and assumes that interest (net of tax) shall be compounded on an annual basis at the end of each Plan Year.
2.2 Retirement Account. The Company shall establish a Retirement Account on its books for the Executive. The amount to be added to the Retirement Account each year until Termination of Employment, but not beyond Normal Retirement Age, will be:
2.2.1 Prior to November 1, 2003: fifty percent (50%) of the sum determined by subtracting the value of Simulated Investment Number Two from the value of Simulated Investment Number One and dividing the difference by the Adjustment Rate.
2.2.2 Effective November 1, 2003: one hundred percent (100%) of the sum determined by subtracting the value of Simulated Investment Number Two from the value of Simulated Investment Number One and dividing the difference by the Adjustment Rate.
Simulated 50% of Excess Amount
Investment #1* Simulated Gain*** Allocated to
6.0% Investment #2 (Simulated the Participant's
(Tax-Preferred 4.3% Investment #1 Retirement
Asset) (Taxable Asset) minus #2 / 2) Account**
------------------------------------------------------------------------
Asset Allocation: $1,000,000 (1) (2) (3) (4)
---------------------------------------------------------------------------------------------------------------------
Pre-Tax Income 60,000 43,000
After-Tax Income (42.046% tax) 60,000 24,920 17,540 $30,265
---------------------------------------------------------------------------------------------------------------------
|
*Year end cash value of the life insurance policy. Cash Value is the policy earning minus the mortality charge. **The amount allocated to the Participant's Retirement Account is calculated by taking the excess gain (17,540) and dividing this number by one (1) minus the company's highest marginal tax rate (currently 42.046%) For Example: 1-.42046 = .57954. Therefore 17,540/.57954 = 30,265. ***After November 1, 2003 this would be 100% of excess gain.
In addition, the annual amount added to the Retirement Account shall never be less than one percent (1%) of Simulated Investment Number One.
2.3 Statement of Accounts. The Company shall provide to the Executive, within sixty (60) days after each Plan Year, a statement setting forth the Executive's Retirement Account balance.
2.4 Accounting Device Only. The Retirement Account and Simulated Investments are solely devices for measuring amounts to be paid under this Agreement. They are not a trust fund of any kind. The Executive is a general unsecured creditor of the Company for the payment of benefits. The benefits represent the mere Company promise to pay such benefits. The Executive's rights are not subject in any manner to anticipation, alienation, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Executive's creditors.
Article 3 Normal Retirement
Upon the Executive attaining their Normal Retirement Date, the Company shall pay a benefit to the Executive which is equal to the Executive's Retirement Account balance as of the month ending immediately following the Executive's Normal Retirement Date. The Company shall pay the benefit to the Executive as elected on Appendix B.
Article 4 Early Termination of Employment
Upon the Executive's Termination of Employment prior to Normal Retirement Age and prior to completing five (5) Years of Employment for any reason other than Change of Control or Disability, the Company shall not pay a benefit to the Executive under this Agreement.
Upon the Executive's Termination of Employment prior to Normal Retirement Age and after completing five (5) Years of Employment for any reason other than Termination for Cause, the Company shall pay a benefit to the Executive which is equal to the Executive's Retirement Account balance as of the month ending immediately following the Executive's Termination of Employment. The Company shall pay the benefit to the Executive as elected on Appendix B.
Upon the Executive's Termination for Cause, the Company shall not pay any benefit to the Executive under this Agreement.
Article 5 Disability Benefit
Upon the Executive's Termination of Employment following a Disability, the Company shall pay to the Executive a benefit equal to the Retirement Account balance as of the month immediately following the Executive's Disability. The Company shall pay the benefit to the Executive as elected on Appendix B.
Article 6 Change of Control
Upon a Change of Control the Executive shall be entitled to receive a benefit in the amount of the present value of $___________, "N" years in the future applying a discount value of "Y". For purposes of this calculation, "N" is defined as the number of years between the Executive's age on the date that the Change of Control event occurs and his/her sixty-fifth (65th) birthday, and "Y" is the 5-year Treasury Bill rate on the date that the Change of Control event occurs. The Company shall pay the benefit to the Executive as elected on Appendix B.
Date of Change of Control Event January 1, 2007 ------------------------------------------------------------------------ Date of Birth of Executive MM/DD/YYYY ------------------------------------------------------------------------ Age of Executive at Change of Control Event __ ------------------------------------------------------------------------ N= __ ------------------------------------------------------------------------ Y=* 5% ------------------------------------------------------------------------ Future Value of Benefit at Age 65** $_______ ------------------------------------------------------------------------ Present Value of Benefit at Date of COC Event $_______ ------------------------------------------------------------------------ |
* assumed for purposes of this example
Article 7 Death Benefits
The company shall not pay a death benefit under this Agreement if the executive elects to have their benefit paid in any manner other than a lump-sum death benefit. A death benefit may be provided according to the terms of a separate Split Dollar Agreement entered into by the Company and the Executive.
Article 8 Beneficiaries
8.1 Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Company. The Executive may revoke or modify the designation at any time by filing a new designation. However, designations will only be effective if signed by the Executive and received by the Company during the Executive's lifetime. The Executive's beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive's estate.
8.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Company may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Company may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Company from all liability with respect to such benefit.
Article 9 General Limitations
9.1 Suicide or Misstatement. The Company shall not pay any benefit under this Agreement if the Executive commits suicide within three years after the date of this Agreement. In addition, the Company shall not pay any benefit under this Agreement if the Executive has made any material misstatement of fact provided to the Company, or on any application for any benefits provided by the Company to the Executive, which causes the Company financial harm.
Article 10 Claims and Review Procedures
10.1 Claims Procedure. Any person or entity ("claimant") who has not received benefits under this Agreement that he or she believes should be paid shall make a claim for such benefits as follows:
10.1.1 Initiation - Written Claim. The claimant initiates a claim by submitting to the Company a written claim for the benefits.
10.1.2 Timing of Company Response. The Company shall respond to such claimant within 90 days after receiving the claim. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision.
10.1.3 Notice of Decision. If the Company denies part or all of the claim, the Company shall notify the claimant in writing of such denial. The Company shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth:
(a) The specific reasons for the denial,
(b) A reference to the specific provisions of this Agreement on which the denial is based,
(c) A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed,
(d) An explanation of this Agreement's review procedures and the time limits applicable to such procedures, and
(e) A statement of the claimant's right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.
10.2 Review Procedure. If the Company denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Company of the denial, as follows:
10.2.1 Initiation - Written Request. To initiate the review, the claimant, within 60 days after receiving the Company's notice of denial, must file with the Company a written request for review.
10.2.2 Additional Submissions - Information Access. The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim. The Company shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant's claim for benefits.
10.2.3 Considerations on Review. In considering the review, the Company shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.
10.2.4 Timing of Company Response. The Company shall respond in writing to such claimant within 60 days after receiving the request for review. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision.
10.2.5 Notice of Decision. The Company shall notify the claimant in writing of its decision on review. The Company shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth:
(a) The specific reasons for the denial,
(b) A reference to the specific provisions of this Agreement on which the denial is based,
(c) A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant's claim for benefits, and
(d) A statement of the claimant's right to bring a civil action under ERISA Section 502(a).
Article 11 Amendments and Termination
This Agreement may be amended or terminated only by a written agreement signed by the Company and the Executive.
Article 12 Miscellaneous
12.1 Binding Effect. This Agreement shall bind the Executive and the Company and their beneficiaries, survivors, successors, executors, administrators and transferees.
12.2 No Guarantee of Employment. This Agreement is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company's right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time.
12.3 Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of the State of California except to the extent preempted by the laws of the United States of America.
12.4 Reorganization. The Company shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm or person unless such succeeding or continuing company, firm or person agrees to assume and discharge the obligations of the Company under this Agreement. Upon the occurrence of such event, the term "Company" as used in this Agreement shall be deemed to refer to the successor or survivor company.
12.5 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.
12.6 Tax Withholding. The Company shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.
12.7 Unfunded Arrangement. The Executive is a general unsecured creditor of the Company for the payment of benefits under this Agreement. The benefits represent the mere promise by the Company to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive's life or any other asset held in connection with this Agreement is a general asset of the Company to which the Executive has no preferred or secured claim.
12.8 Entire Agreement. This Agreement constitutes the entire agreement between the Company and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein.
12.9 Administration. The Company shall have powers which are necessary to administer this Agreement, including but not limited to:
(a) Establishing and revising the method of accounting for the Agreement;
(b) Maintaining a record of benefit payments; and (c) Establishing rules and prescribing any forms necessary or desirable to administer the Agreement.
12.10 Named Fiduciary. The Company shall be the named fiduciary and plan administrator under this Agreement. The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals.
IN WITNESS WHEREOF, the Executive and a duly authorized Company officer have signed this Agreement.
EXECUTIVE: COMPANY:
____________________________________ FARMERS & MERCHANTS BANK OF
Executive CENTRAL CALIFORNIA
By _______________________________
Title _______________________________
|
Appendix A
Simulated Policy Data
FARMERS & MERCHANTS BANK OF CENTRAL CALIFORNIA
EXECUTIVE INDEXED RETIREMENT AGREEMENT
Name of Executive:_____________
-------------------------------- ---------------------------------------- Insurance Carrier: Clarica Life Insurance Company -------------------------------- ---------------------------------------- Policy Type: Universal Life, No Load -------------------------------- ---------------------------------------- Product Name: -------------------------------- ---------------------------------------- Insured's Sex and Age: -------------------------------- ---------------------------------------- Classification: -------------------------------- ---------------------------------------- Initial Face Amount: -------------------------------- ---------------------------------------- Single Premium Amount: -------------------------------- ---------------------------------------- Issue Date: -------------------------------- ---------------------------------------- Death Benefit Option: -------------------------------- ---------------------------------------- -------------------------------- ---------------------------------------- Insurance Carrier: Jefferson-Pilot Life Insurance Company -------------------------------- ---------------------------------------- Policy Type: Universal Life, No Load -------------------------------- ---------------------------------------- Product Name: -------------------------------- ---------------------------------------- Insured's Sex and Age: -------------------------------- ---------------------------------------- Classification: -------------------------------- ---------------------------------------- Initial Face Amount: -------------------------------- ---------------------------------------- Single Premium Amount: -------------------------------- ---------------------------------------- Issue Date: -------------------------------- ---------------------------------------- Death Benefit Option: -------------------------------- ---------------------------------------- -------------------------------- ---------------------------------------- Insurance Carrier: New York Life Insurance Company -------------------------------- ---------------------------------------- Policy Type: Universal Life, No Load -------------------------------- ---------------------------------------- Product Name: -------------------------------- ---------------------------------------- Insured's Sex and Age: -------------------------------- ---------------------------------------- Classification: -------------------------------- ---------------------------------------- Initial Face Amount: -------------------------------- ---------------------------------------- Single Premium Amount: -------------------------------- ---------------------------------------- Issue Date: -------------------------------- ---------------------------------------- Death Benefit Option: -------------------------------- ---------------------------------------- -------------------------------- ---------------------------------------- Insurance Carrier: West Coast Life Insurance Company -------------------------------- ---------------------------------------- Policy Type: Universal Life, No Load -------------------------------- ---------------------------------------- Product Name: -------------------------------- ---------------------------------------- Insured's Sex and Age: -------------------------------- ---------------------------------------- Classification: -------------------------------- ---------------------------------------- Initial Face Amount: -------------------------------- ---------------------------------------- Single Premium Amount: -------------------------------- ---------------------------------------- Issue Date: -------------------------------- ---------------------------------------- Death Benefit Option: -------------------------------- ---------------------------------------- |
Appendix B
Form of Benefit Payment
FARMERS & MERCHANTS BANK OF CENTRAL CALIFORNIA
EXECUTIVE INDEXED RETIREMENT AGREEMENT
I elect to receive the Benefits under Article 3 of the Agreement in the following manner: [Initial One]
____ Payable in a lump sum within forty-five (45) days after the Normal Retirement Date.
____ Payable over _____ years [insert number of years, not to exceed 25 years] in equal monthly installments commencing with the month following the Normal Retirement Date, determined by calculating a fixed annuity for the number of years chosen using the Retirement Account Balance, crediting interest on the unpaid balance as determined in accordance with Section 2.1.2.
____ Payable in a lump sum to my beneficiary upon my death, crediting interest on the unpaid balance as determined in accordance with Section 2.1.2.
____ Payable over _____ years [insert number of years, not to exceed 25 years] in equal monthly installments commencing ____________________________, determined by calculating a fixed annuity for the number of years chosen using the Retirement Account Balance, crediting interest on the unpaid balance as determined in accordance with Section 2.1.2.
I understand that I may change the manner in which this benefit is paid to me at any time up to thirteen (13) months prior to Retirement and I accept any tax consequences relating to said change.
Signature ______________________________ Date _______________________ Executive
I elect to receive the Benefits under Article 4 of the Agreement in the following manner: [Initial One]
____ Payable in a lump sum within forty-five (45) days after Termination of Employment.
____ Payable over _____ years [insert number of years, not to exceed 25 years] in equal monthly installments commencing with the month following Termination of Employment, determined by calculating a fixed annuity for the number of years chosen using the Retirement Account Balance, crediting interest on the unpaid balance as determined in accordance with Section 2.1.2.
____ Payable in a lump sum to my beneficiary upon my death, crediting interest on the unpaid balance as determined in accordance with Section 2.1.2.
____ Payable over _____ years [insert number of years, not to exceed 25 years] in equal monthly installments commencing ____________________________, determined by calculating a fixed annuity for the number of years chosen using the Retirement Account Balance, crediting interest on the unpaid balance as determined in accordance with Section 2.1.2.
I understand that I may change the manner in which this benefit is paid to me at any time up to thirteen (13) months prior to Termination of Employment and I accept any tax consequences relating to said change.
Signature ______________________________ Date _____________________ Executive
I elect to receive the Benefits under Article 5 of the Agreement in the following manner: [Initial One]
____ Payable in a lump sum within forty-five (45) days after Termination of Employment following a Disability.
____ Payable over _____ years [insert number of years, not to exceed 25 years] in equal monthly installments commencing with the month following Termination of Employment following a Disability, determined by calculating a fixed annuity for the number of years chosen using the Retirement Account Balance, crediting interest on the unpaid balance as determined in accordance with Section 2.1.2.
____ Payable in a lump sum to my beneficiary upon my death, crediting interest on the unpaid balance as determined in accordance with Section 2.1.2.
____ Payable over _____ years [insert number of years, not to exceed 25 years] in equal monthly installments commencing ____________________________, determined by calculating a fixed annuity for the number of years chosen using the Retirement Account Balance, crediting interest on the unpaid balance as determined in accordance with Section 2.1.2.
I understand that I may change the manner in which this benefit is paid to me at any time up to thirteen (13) months prior to Termination of Employment following a Disability and I accept any tax consequences relating to said change.
Signature ______________________________ Date _______________________ Executive
I elect to receive the Change of Control Benefit under Article 6 of the Agreement in the following manner: [Initial One]
____ Payable in a lump sum within forty-five (45) days after a Change of Control (as defined in Article 1.2).
____ Payable over _____ years [insert number of years, not to exceed 25 years] in equal monthly installments commencing with the month following a Change of Control, determined by calculating a fixed annuity for the number of years chosen using the Change of Control Benefit, crediting interest on the unpaid balance as determined in accordance with Section 2.1.2.
____ Payable in a lump sum to my beneficiary upon my death, crediting interest on the unpaid balance as determined in accordance with Section 2.1.2.
____ Payable over _____ years [insert number of years, not to exceed 25 years] in equal monthly installments commencing _________________________, determined by calculating a fixed annuity for the number of years chosen using the Change of Control Benefit, crediting interest on the unpaid balance as determined in accordance with Section 2.1.2.
I understand that I may change the manner in which this benefit is paid to me at any time up to 13 months prior to a Change of Control event occurring and I accept any tax consequences relating to said change.
Signature ______________________________ Date _______________________
Executive
------------------------------------------------------------------------------
|
Received by the Company this _____ day of _____________, 2003.
By ____________________________________ Title __________________________
Beneficiary Designation
FARMERS & MERCHANTS BANK OF CENTRAL CALIFORNIA
EXECUTIVE INDEXED RETIREMENT AGREEMENT
I designate the following as beneficiary of benefits under this Agreement payable following my death:
Primary: _____________________________________________________________________
Relationship: _________________________________________________________________
Contingent: __________________________________________________________________
Relationship: ________________________________________________________________
Note: To name a trust as beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement.
I understand that I may change these beneficiary designations by filing a new written designation with the Company. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our marriage is subsequently dissolved.
Signature ________________________________
Date _________________________________
Received by the Company this ________ day of ___________________, 2003.
By ______________________________________
Title _____________________________________
Exhibit 13
Farmers & Merchants Bancorp
2003 Annual Report
To Our Shareholders:
We are pleased to announce that 2003 was the most profitable and successful year in the Company's history. The strong results represent the 6th sequential year and 24th consecutive quarter of improved profit performance over the same period the prior year. The company's success in 2003 was once again drive by our longstanding commitment to deliver personalized customer service and reinvest in the communities we serve. This established trend of improving performance increasingly evidences the value being created by systematic implementation of the Long Term Strategic Plan carefully crafted by the Board of Directors and Executive Management.
For 2003, Farmers & Merchants Bancorp generated net income after tax of $14,775,000 or $19.30 per share of common stock, an 11.3% increase over the prior year. Gross loans reached $807 million, up 15.8%, and investment securities increased 11.9% to $262 million. Total deposits expanded 6.4% to $904 million centered in growth of demand, savings and money market balances. Return on average assets was 1.36% and return on average equity reached 13.88%, a 37 basis points rise over 2002. In conjunction with the strong results, over $2,000,000 in capital improvements were completed during 2003. Additionally, the reserve for future loan losses was increased to $17,220,000 providing the Company with a strong reserve against the potential financial impacts of future negative economic events.
Based on the Company's strong performance, the Board of Directors unanimously approved the 29th consecutive 5% stock dividend last April. In addition, the Board of Directors a9lso unanimously declared two cash dividends totaling $4,736,000 or $6.20 per share of common stock. The cash dividends declared during 2003 represented a 7.5% increase over 2002.
During 2003, we began to evolve our strategic focus from initiatives designed to modernize the Company's technology and work processes to expansion of our product lines and delivery capabilities including new branch openings. We commenced a project to reengineer our Loan Service Center in order to increase processing volumes and improve customer response times. This effort will include installation of an advanced automated loan processing system and is expected to be completed by 3rd quarter 2004.
Last September, we held the grand opening of our new Vintage Faire Branch, the fourth F&M office in Modesto. Vintage Faire is the first branch to incorporate our new retail model bank design which features state-of-the-art customer service technology. The following month, we opened our new Point West Loan Production Office, located near the Arden Fair Mall in the heart of Sacramento. Staffed with experienced business lenders, the Point West Office will focus on expanding F&M's wholesale lending activity in this major metropolitan market. Additional branch expansions and remodels are planned for 2004. During the second half of the year, we are slated to open a second Galt office in a new neighborhood shopping center. Negotiations are also underway to reposition our Westgate Office in order to better service the growth on the west side of Lodi.
During 2004, we expect the Banking Industry will continue to experience a challenging earnings environment. Many banks' net interest margin will remain under pressure due to the persistent low market interest rates. The Board of Directors and Management Team are proactively addressing these challenges by further improving operating efficiency and enhancing capital and asset/liability management practices. We believe the geographic territory served by the Company offers significant growth opportunities and feel the functionality and value of our products and customer solutions will differentiate Farmers & Merchants Bancorp from the competition. These advantages in the hands of our talented team of employees have the potential to build value for our shareholders over time.
We appreciate the significant contributions made by the Board of Directors during 2003, and wish to acknowledge their ongoing commitment to represent the shareholder's best interest. Special recognition is also owed to our exceptional employees for their dedication and tremendous accomplishments this past year. Their ability to consistently deliver consummate customer service was an essential ingredient in the creation of shareholder value in 2003.
On behalf of our Board of Directors and all of the F&M employees, thank you for your confidence and support. We extend our best wishes to you for a healthy and prosperous 2004.
/s/Kent A. Steinwert /s/Ole R. Mettler Kent A. Steinwert Ole R. Mettler President & Chief Executive Officer Chairman of the Board |
FARMERS & MERCHANTS BANCORP
Mission Statement
Our mission is to become "THE PREMIER" community bank serving the financial needs of communities throughout California's Great Central Valley. To successfully accomplish this mission, the Company will:
|X| Consistently provide shareholders with a competitive return on investment.
|X| Strengthen and discipline capital management.
|X| Be staffed by highly skilled and motivated employees, properly supported by continuing education, advanced technology and quality products.
|X| Carefully target and successfully penetrate desired market segments.
|X| Deliver an extraordinary level of personalized service backed by value added financial products.
|X| Conservatively manage all risks.
|X| Be exemplary in community development, reinvestment and service.
|X| Develop and foster local ownership in order to maintain independence.
FARMERS & MERCHANTS BANCORP
Operating Philosophy
Farmers & Merchants Bancorp was founded, and exists today, for the purpose of generating a competitive return for it's shareholders through the delivery of financial services to the communities it serves. In order to accomplish this purpose, we will strive to benefit four distinct constituents: shareholders, customers, employees and the communities we serve. Although the short-term interests of these groups may occasionally differ, in the long run we believe them to be complimentary. We are convinced that our purpose can only be achieved through diligent attention to all four. Building the Company's financial strength by delivering a reliable stream of earnings is fundamental to the interest of each group. The Company's economic viability has positive implications for all concerned. We are committed to maintaining the Company's independence in order to accomplish our purpose of pro-actively benefiting each constituent.
The Board of Directors and Executive Management Team recognizes that each constituent has different needs and aspirations, and are committed to the following goals:
|X| Shareholders, our owners, can expect a competitive return on their investment, taking into consideration the maintenance of capital adequacy and capital expenditure requirements. We strive to build their pride of ownership in an organization respected for it's accomplishments, and recognized for community leadership.
|X| Customers, whose patronage allows us to function and prosper, are entitled to financial services of the highest quality, delivered by knowledgeable and caring employees. Our customers must be assured of a reasonable return on the deposits entrusted to us, and fair terms on borrowed funds. We acknowledge that the protection of their deposits, as well as their personal privacy, are absolute priorities. We will always strive to deliver a level of service that is "beyond their expectations." Making banking easy for the customer is a core strategy.
|X| Employees, who are skilled and dedicated, are fundamental to our success.
They can anticipate fair compensation, respect, acknowledgment of superior
performance, a productive and healthy work environment, equal employment
opportunity, and an employer in whom they can take great pride.
|X| The communities we serve can expect a commitment to reinvestment, leadership in pursuing economic vitality, and an ongoing effort to improve the overall quality of life. We will be diligent in aiding community based service organizations through both financial and volunteer support.
Report of Management
The management of Farmers & Merchants Bancorp (the Company) and its subsidiary has the responsibility for the preparation, integrity and reliability of the consolidated financial statements and related financial information contained in this annual report. The financial statements were prepared in accordance with generally accepted accounting principles and prevailing practices of the banking industry. Where amounts must be based on estimates and judgments, they represent the best estimates and judgments of management.
Management has established and is responsible for maintaining an adequate internal control structure designed to provide reasonable, but not absolute, assurance as to the integrity and reliability of the financial statements, safeguarding of assets against loss from unauthorized use or disposition and the prevention and detection of fraudulent financial reporting. The internal control structure includes: an effective financial accounting environment; a comprehensive internal audit function; an independent audit committee of the Board of Directors; and extensive financial and operating policies and procedures. Management also recognizes its responsibility for fostering a strong ethical climate which is supported by a code of conduct, appropriate levels of management authority and responsibility, an effective corporate organizational structure and appropriate selection and training of personnel.
The Board of Directors, primarily through its audit committee, oversees the adequacy of the Company's internal control structure. The audit committee, whose members are neither officers nor employees of the Company, meet periodically with management, internal auditors and internal credit examiners to review the functioning of each and to ensure that each is properly discharging its responsibilities. In addition, PricewaterhouseCoopers LLP, independent auditors, are engaged to audit the Company's financial statements.
PricewaterhouseCoopers LLP, obtains and maintains an understanding of the Company's accounting and financial controls and conducts its audit in accordance with generally accepted auditing standards which includes such audit procedures as it considers necessary to express the opinion in the report that follows.
Management recognizes that there are inherent limitations in the effectiveness of any internal control structure. However, management has assessed and believes that, as of December 31, 2003, the Company's internal control structure, as described above, provides reasonable assurance as to the integrity and reliability of the financial statements and related financial information.
Management also is responsible for compliance with federal and state laws and regulations concerning loans to insiders and dividend restrictions designated by the Federal Deposit Insurance Corporation as safety and soundness laws and regulations.
Management assessed its compliance with the designated laws and regulations relating to safety and soundness. Based on this assessment, management believes that the Bank complied with the designated laws and regulations relating to safety and soundness for the year ended December 31, 2003.
/s/Kent A. Steinwert /s/Stephen W. Haley Kent A. Steinwert Stephen W. Haley President & Executive Vice President & Chief Executive Officer Chief Financial Officer |
Report of Independent Auditors
To the Board of Directors and
Shareholders of Farmers & Merchants Bancorp:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in shareholders' equity, of comprehensive income and of cash flows present fairly, in all material respects, the financial position of Farmers & Merchants Bancorp and its subsidiaries (the "Company") at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
February 13, 2004
|
Consolidated Statements of Income
(in thousands except per share data)
Year Ended December 31,
2003 2002 2001
-------------------------------------------------------------------------------- ----------- ----------- -----------
Interest Income
Interest and Fees on Loans $44,886 $41,911 $43,956
Interest on Federal Funds Sold and Securities Purchased
Under Agreements to Resell 190 555 1,922
Interest on Investment Securities:
Taxable 7,065 9,400 15,112
Tax-Exempt 2,743 2,372 2,540
-------------------------------------------------------------------------------- ----------- ----------- -----------
Total Interest Income 54,884 54,238 63,530
-------------------------------------------------------------------------------- ----------- ----------- -----------
Interest Expense
Interest on Deposits 8,115 11,369 21,038
Interest on Borrowed Funds 2,942 2,227 2,242
Interest on Subordinated Debentures 16 - -
-------------------------------------------------------------------------------- ----------- ----------- -----------
Total Interest Expense 11,073 13,596 23,280
-------------------------------------------------------------------------------- ----------- ----------- -----------
Net Interest Income 43,811 40,642 40,250
Provision for Loan Losses 625 4,926 1,000
-------------------------------------------------------------------------------- ----------- ----------- -----------
Net Interest Income After Provision for Loan Losses 43,186 35,716 39,250
-------------------------------------------------------------------------------- ----------- ----------- -----------
Non-Interest Income
Service Charges on Deposit Accounts 4,892 4,760 4,179
Net Gain on Sale of Investment Securities 935 276 88
Credit Card Merchant Fees 1,658 1,415 1,207
Gain on Sale of Assets - 2,800 -
Increase in Cash Surrender Value of Life Insurance 1,540 1,433 -
Other 3,893 3,182 2,900
-------------------------------------------------------------------------------- ----------- ----------- -----------
Total Non-Interest Income 12,918 13,866 8,374
-------------------------------------------------------------------------------- ----------- ----------- -----------
Non-Interest Expense
Salaries and Employee Benefits 21,058 17,796 16,986
Occupancy Expense 1,591 1,709 1,680
Equipment Expense 2,415 2,146 2,026
Other 8,222 7,458 6,794
-------------------------------------------------------------------------------- ----------- ----------- -----------
Total Non-Interest Expense 33,286 29,109 27,486
-------------------------------------------------------------------------------- ----------- ----------- -----------
Income Before Income Taxes 22,818 20,473 20,138
Provision for Income Taxes 8,043 7,054 7,821
-------------------------------------------------------------------------------- ----------- ----------- -----------
Net Income $14,775 $13,419 $12,317
================================================================================ =========== =========== ===========
Earnings Per Share $ 19.30 $ 17.34 $ 15.57
================================================================================ =========== =========== ===========
|
The accompanying notes are an integral part of these consolidated financial statements
Consolidated Balance Sheets
(in thousands except per share data)
December 31,
Assets 2003 2002
---------------------------------------------------------------------------------------- ------------- -------------
Cash and Cash Equivalents:
Cash and Due from Banks $ 35,800 $ 45,389
Federal Funds Sold and Securities Purchased Under Agreements to Resell - 8,185
---------------------------------------------------------------------------------------- ------------- -------------
Total Cash and Cash Equivalents 35,800 53,574
---------------------------------------------------------------------------------------- ------------- -------------
Investment Securities:
Available-for-Sale 223,965 206,063
Held-to-Maturity 37,957 27,870
---------------------------------------------------------------------------------------- ------------- -------------
Total Investment Securities 261,922 233,933
---------------------------------------------------------------------------------------- ------------- -------------
Loans: 806,906 696,675
Less: Allowance for Loan Losses 17,220 16,684
---------------------------------------------------------------------------------------- ------------- -------------
Loans, Net 789,686 679,991
---------------------------------------------------------------------------------------- ------------- -------------
Premises and Equipment, Net 11,209 11,342
Interest Receivable and Other Assets 49,948 43,067
---------------------------------------------------------------------------------------- ------------- -------------
Total Assets $1,148,565 $1,021,907
======================================================================================== ============= =============
Liabilities
Deposits:
Demand $ 223,000 $ 205,997
Interest-Bearing Transaction Accounts 96,869 93,646
Savings 276,016 231,964
Time 308,464 318,618
---------------------------------------------------------------------------------------- ------------- -------------
Total Deposits 904,349 850,225
---------------------------------------------------------------------------------------- ------------- -------------
Federal Funds Purchased 1,000 16,997
Federal Home Loan Bank Advances 111,928 40,965
Subordinated Debentures 10,310 -
Interest Payable and Other Liabilities 11,373 10,155
---------------------------------------------------------------------------------------- ------------- -------------
Total Liabilities 1,038,960 918,342
---------------------------------------------------------------------------------------- ------------- -------------
Shareholders' Equity
Preferred Stock: No Par Value. 1,000,000 Authorized, None Issued or Outstanding - -
Common Stock: Par Value $0.01, 2,000,000 Shares Authorized, 763,274 and
769,006 Issued and Outstanding at December 31, 2003 and 2002, Respectively 8 7
Additional Paid-In Capital 72,506 64,979
Retained Earnings 37,650 36,749
Accumulated Other Comprehensive (Loss) Income (559) 1,830
---------------------------------------------------------------------------------------- ------------- -------------
Total Shareholders' Equity 109,605 103,565
---------------------------------------------------------------------------------------- ------------- -------------
Total Liabilities and Shareholders' Equity $1,148,565 $1,021,907
======================================================================================== ============= =============
|
The accompanying notes are an integral part of these consolidated financial statements
Consolidated Statements of Changes in Shareholders' Equity
(in thousands except per share data)
Accumulated
Common Additional Other Total
Shares Common Paid-In Retained Comprehensive Shareholders'
Outstanding Stock Capital Earnings Income(Loss) Equity
--------------------------------------------------------- --------- ------------- ----------- ------------------- -----------------
Balance, December 31, 2000 687,491 $ 7 $53,559 $36,527 $790 $90,883
--------------------------------------------------------- --------- ------------- ----------- ------------------- -----------------
Net Income 12,317 12,317
Cash Dividends Declared on
Common Stock (3,923) (3,923)
5% Stock Dividend 33,831 8,289 (8,289) -
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend (133) (133)
Redemption of Stock (2,053) (488) (488)
Change in Net Unrealized Gain on
Securities Available-for-Sale 2,080 2,080
--------------------------------------------------------- --------- ------------- ----------- ------------------- -----------------
Balance, December 31, 2001 719,269 $ 7 $61,360 $36,499 $ 2,870 $100,736
--------------------------------------------------------- --------- ------------- ----------- ------------------- -----------------
Net Income 13,419 13,419
Cash Dividends Declared on
Common Stock (4,404) (4,404)
5% Stock Dividend 34,501 8,625 (8,625) -
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend (140) (140)
Redemption of Stock (20,749) (5,006) (5,006)
Unrealized Gains on Derivative Instruments 117 117
Minimum Pension Plan Liability Adjustment (731) (731)
Change in Net Unrealized Loss on
Securities Available-for-Sale (426) (426)
--------------------------------------------------------- --------- ------------- ----------- ------------------- -----------------
Balance, December 31, 2002 733,021 $ 7 $64,979 $36,749 $ 1,830 $103,565
--------------------------------------------------------- --------- ------------- ----------- ------------------- -----------------
Net Income 14,775 14,775
Cash Dividends Declared on
Common Stock (4,736) (4,736)
5% Stock Dividend 35,985 1 8,995 (8,996) -
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend (142) (142)
Redemption of Stock (5,732) (1,468) (1,468)
Change in Net Unrealized Gains on
Derivative Instruments (29) (29)
Minimum Pension Plan Liability Adjustment (1,257) (1,257)
Change in Net Unrealized Loss on
Securities Available-for-Sale (1,103) (1,103)
--------------------------------------------------------- --------- ------------- ----------- ------------------- -----------------
Balance, December 31, 2003 763,274 $ 8 $72,506 $37,650 $ (559) $109,605
========================================================= ========= ============= =========== =================== =================
|
The accompanying notes are an integral part of these consolidated financial statements
Consolidated Statements of Comprehensive Income
(in thousands)
Year Ended December 31,
2003 2002 2001
------------------------------------------------------------------------------------------- ----------- ---------- ------------
Net Income $14,775 $13,419 $12,317
Other Comprehensive (Loss) Income
Unrealized (Losses) Gains on Derivative Instruments:
Unrealized holding (losses) gains arising during the period, net of income tax effects
of $(21) and $85 for the years ended December 31, 2003 and 2002, respectively. (29) 117 -
Unrealized Loss on Minimum Pension Liability Adjustment:
Unrealized loss arising during the period, net of income tax effects of
$(910) and $(531) for the years ended December 31, 2003 and 2002, respectively. (1,257) (731) -
Unrealized (Losses) Gains on Securities:
Unrealized holding (losses) gains arising during the period, net of income tax
effects of $(480), $(117) and $1,492 for the
years ended December 31, 2003, 2002 and 2001, respectively. (662) (266) 2,131
Less: Reclassification adjustment for realized gains
included in net income, net of related income tax effects
of $(320), $(116) and $(37) for the years ended December 31,
2003, 2002 and 2001, respectively. (441) (160) (51)
------------------------------------------------------------------------------------------- ----------- ---------- ------------
Total Other Comprehensive (Loss) Income (2,389) (1,040) 2,080
------------------------------------------------------------------------------------------- ----------- ---------- ------------
Comprehensive Income $12,386 $12,379 $14,397
=========================================================================================== =========== ========== ============
|
The accompanying notes are an integral part of these consolidated financial statements
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
2003 2002 2001
-------------------------------------------------------------------------------- ------------- ------------- -------------
Operating Activities
Net Income $ 14,775 $ 13,419 $ 12,317
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Provision for Loan Losses 625 4,926 1,000
Depreciation and Amortization 1,554 1,584 1,592
Provision for Deferred Income Taxes (727) (836) (38)
Net Amortization of Investment Security Premium & Discounts 1,725 10 (314)
Net Gain on Sale of Investment Securities (935) (276) (88)
Net Increase in Interest Receivable and Other Assets (1,874) (865) (307)
Net (Decrease) Increase in Interest Payable and Other Liabilities (949) (12) 479
-------------------------------------------------------------------------------- ------------- ------------- -------------
Net Cash Provided by Operating Activities 14,194 17,950 14,641
-------------------------------------------------------------------------------- ------------- ------------- -------------
Investing Activities
Securities Available-for-Sale:
Purchased (217,309) (113,687) (26,704)
Sold or Matured 196,640 150,026 66,548
Securities Held-to-Maturity:
Purchased (22,340) (329) (6,460)
Matured 12,328 5,214 15,142
Purchase of Life Insurance Contracts (2,600) (10,080) (18,000)
Net Increase in Loans (110,928) (95,792) (105,526)
Principal Collected on Loans Previously Charged Off 608 335 587
Net Additions to Premises and Equipment (1,421) (1,495) (1,468)
-------------------------------------------------------------------------------- ------------- ------------- -------------
Net Cash Used for Investing Activities (145,022) (65,808) (75,881)
-------------------------------------------------------------------------------- ------------- ------------- -------------
Financing Activities
Net Increase in Demand, Interest-Bearing Transaction,
and Savings Accounts 64,278 34,066 57,351
Net Decrease in Time Deposits (10,154) (3,552) (2,318)
Net (Decrease) Increase in Federal Funds Purchased (15,997) 16,997 -
Net Increase (Decrease) in Federal Home Loan Bank Advances
Advances 71,000 - -
Paydowns (37) (35) (33)
Subordinated Debentures 10,310 - -
Stock Redemption (1,468) (5,006) (488)
Cash Dividends (4,878) (4,544) (4,056)
-------------------------------------------------------------------------------- ------------- ------------- -------------
Net Cash Provided by Financing Activities 113,054 37,926 50,456
-------------------------------------------------------------------------------- ------------- ------------- -------------
Decrease in Cash and Cash Equivalents (17,774) (9,932) (10,784)
Cash and Cash Equivalents at Beginning of Year 53,574 63,506 74,290
-------------------------------------------------------------------------------- ------------- ------------- -------------
Cash and Cash Equivalents at End of Year $35,800 $53,574 $63,506
================================================================================ ============= ============= =============
Supplementary Data
Cash Payments made for Income Taxes $ 8,050 $ 7,200 $ 8,125
Interest Paid $11,475 $14,260 $22,995
================================================================================ ============= ============= =============
|
The accompanying notes are an integral part of these consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES Farmers & Merchants Bancorp (the Company) was organized March 10, 1999. Primary operations are related to traditional banking activities through its subsidiary Farmers & Merchants Bank of Central California (the Bank). The consolidated financial statements of the Company and its subsidiary, the Bank, are prepared in conformity with generally accepted accounting principles and prevailing practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect reported amounts as of the date of the balance sheet and revenues and expenses for the period. These estimates are based on information available as of the date of the financial statements. Therefore, actual results could differ from those estimates. The following is a summary of the significant accounting and reporting policies used in preparing the consolidated financial statements.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company and the Company's wholly owned subsidiaries, F & M Bancorp, Inc. and the
Bank, along with the Bank's wholly owned subsidiaries, Farmers & Merchants
Investment Corporation and Farmers/Merchants Corp. The investment in the Bank is
carried at the Company's equity in the underlying net assets. Significant
intercompany transactions have been eliminated in consolidation. F & M Bancorp,
Inc. was created in March 2002 to protect the name F & M Bank, Farmers &
Merchants Investment Corporation has been dormant since 1991. Farmers/Merchants
Corp. acts as trustee on deeds of trust originated by the Bank. In December
2003, the Company formed a wholly owned subsidiary, FMCB Statutory Trust I. FMCB
Statutory Trust I, is a non-consolidated subsidiary per generally accepted
accounting principals (GAAP), and was formed for the sole purpose of issuing
Trust Preferred Securities.
Certain amounts in the prior years' financial statements and related footnote disclosures have been reclassified to conform to the current-year presentation. These reclassifications have no effect on previously reported income.
Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, the Company has
defined cash and cash equivalents as those amounts included in the balance sheet
captions Cash and Due from Banks and Federal Funds Sold and Securities Purchased
Under Agreements to Resell. Generally, these transactions are for one-day
periods. For these instruments, the carrying amount is a reasonable estimate of
fair value.
Investment Securities
Investment securities are classified at the time of purchase as held-to-maturity
if it is management's intent and the Company has the ability to hold the
securities until maturity. These securities are carried at cost, adjusted for
amortization of premium and accretion of discount using a methodology which
approximates a level yield of interest over the estimated remaining period until
maturity. Losses, reflecting a decline in value judged by the Company to be
other than temporary, are recognized in the period in which they become known.
Securities are classified as available-for-sale if it is management's intent, at the time of purchase, to hold the securities for an indefinite period of time and/or to use the securities as part of the Company's asset/liability management strategy. Securities classified as available-for-sale include securities which may be sold to effectively manage interest rate risk exposure, prepayment risk, satisfy liquidity demands and other factors. These securities are reported at fair value with aggregate, unrealized gains or losses excluded from income and included as a separate component of shareholders' equity, net of related income taxes. Fair values are based on quoted market prices or broker/dealer price quotations on a specific identification basis. Gains or losses on the sale of these securities are computed using the specific identification method. Unrealized losses on these securities, reflecting a decline in value judged by the Company to be other than temporary, are recognized in the period in which they become known.
Trading securities, if any, are acquired for short-term appreciation and are recorded in a trading portfolio and are carried at fair value, with unrealized gains and losses recorded in non-interest income.
Loans
Loans are reported at the principal amount outstanding net of unearned discounts
and deferred loan fees. Interest income on loans is accrued daily on the
outstanding balances using the simple interest method. Loan origination fees are
deferred and recognized over the contractual life of the loan as an adjustment
to the yield. Loans are placed on a non-accrual status when the collection of
principal or interest is in doubt or when they become past due for 90 days or
more unless they are both well-secured and in the process of collection. For this purpose a loan is considered well-secured if it is collateralized by property having a net realizable value in excess of the amount of the loan or is guaranteed by a financially capable party. When a loan is placed on non-accrual status, the accrued and unpaid interest receivable is reversed and charged against current income, thereafter, interest income is recognized only as it is collected in cash. Loans placed on a non-accrual status are returned to accrual status when the loans are paid current as to principal and interest and future payments are expected to be made in accordance with the contractual terms of the loan.
A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the recorded amount of the loan in the Consolidated Balance Sheets is based on the present value of expected future cash flows discounted at the loan's effective interest rate or on the observable or estimated market price of the loan or the fair value of the collateral if the loan is collateral dependent. Impaired loans are placed on a non-accrual status with income reported accordingly. Cash payments are first applied as a reduction of the principal balance until collection of the remaining principal and interest can be reasonably assured. Thereafter, interest income is recognized as it is collected in cash.
Allowance for Loan Losses
As a financial institution which assumes lending and credit risks as a principal
element in its business, the Company anticipates that credit losses will be
experienced in the normal course of business. Accordingly, the allowance for
loan losses is maintained at a level considered adequate by management to
provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs. Management employs a systematic methodology for determining the
allowance for loan losses. On a quarterly basis, management reviews the credit
quality of the loan portfolio and considers problem loans, delinquencies,
internal credit reviews, current economic conditions, loan loss experience and
other factors in determining the adequacy of the allowance balance.
The conditions evaluated in connection with the allowance may include existing general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentration, seasoning of the loan portfolio, specific industry conditions, recent loss experience, duration of the current business cycle, bank regulatory examination results and findings of the Company's internal credit examiners.
The allowance also incorporates the results of measuring impaired loans as provided in Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures". These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans, which are discussed more fully in Note 4.
While the Company utilizes a systematic methodology in determining its allowance, the allowance is based on estimates, and ultimate losses may vary from current estimates. The estimates are reviewed periodically and, as adjustments become necessary, are reported in earnings in the periods in which they become known.
Premises and Equipment
Premises, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is computed principally
by the straight line method over the estimated useful lives of the assets.
Estimated useful lives of buildings range from 30 to 40 years, and for furniture
and equipment from 3 to 8 years. Leasehold improvements are amortized over the
lesser of the terms of the respective leases, or their useful lives, which are
generally 5 to 10 years. Remodeling and capital improvements are capitalized
while maintenance and repairs are charged directly to occupancy expense.
Other Real Estate
Other real estate owned, which is included in other assets, is comprised of
properties acquired through foreclosures in satisfaction of indebtedness. These
properties are recorded at fair value less estimated selling costs upon
acquisition. Revised estimates to the fair value less cost to sell are reported
as adjustments to the carrying amount of the asset, provided that such adjusted
value is not in excess of the carrying amount at acquisition. Initial losses on
properties acquired through full or partial satisfaction of debt are treated as
credit losses and charged to the Allowance for Loan Losses at the time of
acquisition. Subsequent declines in value from the recorded amounts, routine
holding costs, and gains or losses upon disposition, if any, are included in
non-interest income or expense as incurred.
Income Taxes
As required, the Company uses the liability method of accounting for income
taxes. This method results in the recognition of deferred tax assets and
liabilities that are reflected at currently enacted income tax rates applicable
to the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes. The
deferred provision for income taxes is the result of the net change in the
deferred tax asset and deferred tax liability balances during the year. This
amount combined with the current taxes payable or refundable results in the
income tax expense for the current year.
Earnings Per Share
Earnings per share amounts are computed by dividing net income by the weighted
average number of common shares outstanding for the period. The weighted average
number of shares outstanding as of December 31, 2003, 2002 and 2001 were
765,433, 774,066 and 791,125. Prior years have been restated for the 5% stock
dividend paid in each of the years presented.
Segment Reporting
The Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" requires that public
companies report certain information about operating segments. It also requires
that public companies report certain information about their products and
services, the geographic areas in which they operate, and their major customers.
The Company is a community bank which offers a wide array of products and
services to its customers. Pursuant to its banking strategy, emphasis is placed
on building relationships with its customers, as opposed to building specific
lines of business. As a result, the Company is not organized around discernable
lines of business and prefers to work as an integrated unit to customize
solutions for its customers, with business line emphasis and product offerings
changing over time as needs and demands change. Thus, all necessary requirements
of SFAS No. 131 have been met by the Company as of December 31, 2003.
Derivative Instruments and Hedging Activities The Statement of Financial Accounting Standards, No. 133, "Accounting for Derivative Instruments and Certain Hedging Activities" as amended by the Statement of Financial Accounting Standards, No. 138, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. Changes in the fair value of those derivatives are accounted for depending on the intended use of the derivative and the resulting designation under specified criteria. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, designed to minimize interest rate risk, the effective portions of the change in the fair value of the derivative are recorded in other comprehensive income. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. As required, SFAS No. 133 was adopted by the Company effective January 1, 2001.
The Company utilizes derivative financial instruments such as interest rate caps, floors, swaps and collars. These instruments are purchased and/or sold to reduce the Company's exposure to changing interest rates. The Company marks to market the value of its derivative financial instruments and reflects gain or loss in earnings in the period of change or in other comprehensive income.
Comprehensive Income
The Statement of Financial Accounting Standards, "Reporting Comprehensive
Income" establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. Other comprehensive
income refers to revenues, expenses, gains and losses that generally accepted
accounting principles recognize as changes in value to an enterprise but are
excluded from net income. For the Company, comprehensive income includes net
income (loss) and changes in fair value of its available-for-sale investment
securities, minimum pension liability adjustments and cash flow hedges.
2. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL The Company enters into purchases and sales of securities under agreements to resell substantially identical securities. These types of security transactions are generally for one day periods and are primarily whole loan securities rated AA or better. During 2003 and 2002, the underlying securities purchased under resale agreements were delivered into the Bank's account at a third-party custodian that recognizes the Company's rights and interest in these securities.
3. INVESTMENT SECURITIES
The amortized cost, fair values and unrealized gains and losses of the
securities available-for-sale are as follows:
(in thousands)
Amortized Gross Unrealized Fair/Book
--------------------
December 31, 2003 Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------------------
Securities of U.S. Government Agencies $75,842 $ 631 $ 75 $76,398
Obligations of States and Political Subdivisions 27,850 965 21 28,794
Mortgage-Backed Securities 108,661 600 308 108,953
Other 9,296 524 - 9,820
--------------------------------------------------------------------------------------------------------------------
Total $221,649 $2,720 $ 404 $223,965
====================================================================================================================
Amortized Gross Unrealized Fair/Book
--------------------
December 31, 2002 Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------
Securities of U.S. Government Agencies $26,584 $ 400 $ - $26,984
Obligations of States and Political Subdivisions 33,372 1,023 43 34,352
Mortgage-Backed Securities 114,878 2,457 - 117,335
Corporate Bonds 17,579 124 - 17,703
Other 9,432 257 - 9,689
--------------------------------------------------------------------------------------------------------------------
Total $201,845 $4,261 $ 43 $206,063
====================================================================================================================
|
The book values, estimated fair values and unrealized gains and losses of investments classified as held-to-maturity are as follows: (in thousands)
Book Gross Unrealized Fair
---------------------
December 31, 2003 Value Gains Losses Value
--------------------------------------------------------------------------------------------------------------------
Obligations of States and Political Subdivisions $ 37,582 $ 924 $ 167 $38,339
Other 375 25 - 400
--------------------------------------------------------------------------------------------------------------------
Total $ 37,957 $ 949 $ 167 $38,739
====================================================================================================================
Book Gross Unrealized Fair
---------------------
December 31, 2002 Value Gains Losses Value
--------------------------------------------------------------------------------------------------------------------
Obligations of States and Political Subdivisions $ 27,351 $1,230 $ 2 $ 28,579
Other 519 13 - 532
--------------------------------------------------------------------------------------------------------------------
Total $ 27,870 $1,243 $ 2 $ 29,111
====================================================================================================================
|
Fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
The remaining principal maturities of debt securities as of December 31, 2003 and 2002 are shown below. Mortgage-Backed Securities are presented below based on expected maturities. Expected maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
After 1 After 5 Total
Securities Available-for-Sale Within but but Over Fair
December 31, 2003 (in thousands) 1 Year Within 5 Within 10 10 years Value
------------------------------------------------------------------------------------------------------------------
Securities of U.S. Government Agencies $ 15,021 $61,377 $ - $ - $76,398
Obligations of States and Political Subdivisions 6,066 20,577 1,193 958 28,794
Mortgage-Backed Securities 3,212 90,817 14,924 108,953
Other 9,820 - - - 9,820
------------------------------------------------------------------------------------------------------------------
Total $ 34,119 $172,771 $16,117 $ 958 $223,965
==================================================================================================================
After 1 After 5 Total
Securities Held-to-Maturity Within but but Over Book
December 31, 2003 (in thousands) 1 Year Within 5 Within 10 10 years Value
------------------------------------------------------------------------------------------------------------------
Obligations of States and Political Subdivisions $ 6,147 $ 17,784 $ 11,402 $2,249 $ 37,582
Other - - - 375 375
------------------------------------------------------------------------------------------------------------------
Total $ 6,147 $ 17,784 $ 11,402 $2,624 $ 37,957
==================================================================================================================
|
Proceeds from sales of securities available-for-sale were as follows:
(in thousands) Gross Gross Gross
Proceeds Gains Losses
--------------------------------------- ----------- ------------ ---------
2003 $65,406 $1,096 $161
2002 24,862 276 -
2001 5,206 88 -
|
As of December 31, 2003, securities carried at $111,400,000 were pledged to secure public and other deposits as required by law. This amount at December 31, 2002 was $105,949,000.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans as of December 31, consisted of the following:
(in thousands) 2003 2002
-------------------------------------------------------------------------------
Real Estate $386,735 $322,074
Real Estate Construction 77,115 66,467
Home Equity 55,827 45,150
Agricultural 134,862 109,130
Commercial 136,955 135,877
Consumer 17,504 19,995
-------------------------------------------------------------------------------
808,998 698,693
Less: Unearned Income on Loans (2,092) (2,018)
-------------------------------------------------------------------------------
Total Loans $806,906 $696,675
===============================================================================
Non-Accrual Loans $ 2,367 $ 2,897
===============================================================================
|
Changes in the allowance for loan losses consisted of the following:
(in thousands)
2003 2002 2001
--------------------------------------------------------------------------------
Balance, January 1 $16,684 $12,709 $11,876
Provision Charged to Operating Expense 625 4,926 1,000
Recoveries of Loans Previously Charged Off 608 335 587
Loans Charged Off (697) (1,286) (754)
--------------------------------------------------------------------------------
Balance, December 31 $17,220 $16,684 $12,709
================================================================================
|
All impaired loans have been assigned a related allowance for credit losses. As of December 31, 2003 and 2002, the total recorded investment in impaired loans was $2,367,000 and $2,897,000, respectively. The related allowance for impaired loans was $861,000 and $1,289,000 for the years ended 2003 and 2002, respectively. The average balance of impaired loans was $3.0 million, $4.7 million and $1.1 million for the years ended 2003, 2002 and 2001, respectively. There was no interest income reported on impaired loans in 2003, 2002 and 2001. Interest income forgone on loans placed on nonaccrual status was $356,000, $331,000 and $26,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Pledged loans totaling $275,055,000 were used to secure Federal Home Loan Bank advances of $71,000,000 and the unused commitments.
5. PREMISES AND EQUIPMENT Premises and equipment as of December 31, consisted of the following:
(in thousands) 2003 2002
-------------------------------------------------------------------------
Land and Buildings $16,535 $16,023
Furniture, Fixtures and Equipment 14,481 15,464
Leasehold Improvements 1,064 1,062
-------------------------------------------------------------------------
32,080 32,549
Less: Accumulated Depreciation and Amortization 20,871 21,207
-------------------------------------------------------------------------
Total $11,209 $11,342
=========================================================================
|
Depreciation and amortization on premises and equipment included in occupancy and equipment expense amounted to $1,554,000, $1,585,000 and $1,592,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Total rental expense for premises were $255,000, $248,000 and $212,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Rental income was $81,000, $73,000 and $70,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
6. OTHER REAL ESTATE The Bank reported no other real estate at December 31, 2003 and 2002. Other real estate includes property no longer utilized for business operations and property acquired through foreclosure proceedings. These properties are carried at the lower of cost or estimated net realizable value determined at the date acquired. Losses arising from the acquisition of these properties are charged against the allowance for loan losses. Subsequent declines in value, routine holding costs and net gains or losses on disposition are included in other operating expense as incurred.
7. TIME DEPOSITS
Time Deposits of $100,000 or more were as follows:
(in thousands)
December 31,
2003 2002
-----------------------------------------------------------------
Balance $156,586 $148,005
=================================================================
|
At December 31, 2003, the scheduled maturities of time deposits were as follows:
Scheduled
(in thousands) Maturities
-------------------------------------------------------------------------------
2004 $267,942
2005 19,022
2006 21,500
2007 -
2008 -
Thereafter -
-------------------------------------------------------------------------------
Total $308,464
===============================================================================
|
8. INCOME TAXES Current and deferred income tax expense (benefit) provided for the years ended December 31, consisted of the following:
(in thousands) 2003 2002 2001
-----------------------------------------------------------------------
Current
Federal $6,235 $5,506 $5,673
State 2,535 2,384 2,186
-----------------------------------------------------------------------
Total Current 8,770 7,890 7,859
-----------------------------------------------------------------------
Deferred
Federal (493) (503) (33)
State (234) (333) ( 5)
-----------------------------------------------------------------------
Total Deferred (727) (836) (38)
-----------------------------------------------------------------------
Total Provision for Taxes $8,043 $7,054 $7,821
=======================================================================
|
The total provision for income taxes differs from the federal statutory rate as follows: (in thousands)
2003 2002 2001
Amount Rate Amount Rate Amount Rate
-------------------------------------------------------------------------------------------------------------------
Tax Provision at Federal Statutory Rate $7,986 35.0 % $7,165 35.0 % $7,048 35.0 %
Interest on Obligations of States
and Political Subdivisions
Exempt from Federal Taxation (933) (4.0)% (806) (3.9)% (658) (3.3)%
State and Local Income Taxes,
Net of Federal Income Tax Benefit 1,496 6.5 % 1,333 6.5 % 1,418 7.0 %
Bank Owned Life Insurance (576) (2.5)% (523) (2.6)% - -
Other, Net 70 0.0 % (115) (0.6)% 13 0.1 %
-------------------------------------------------------------------------------------------------------------------
Total Provision for Taxes $8,043 35.0 % $7,054 34.4 % $7,821 38.8 %
===================================================================================================================
|
The components of the net deferred tax assets as of December 31 are as follows:
(in thousands) 2003 2002
-------------------------------------------------------------------------------------------------------------------
Deferred Tax Assets
Allowance for Loan Losses $ 7,240 $7,015
Accrued Liabilities 391 507
Deferred Compensation 1,320 1,160
Unrealized Loss on Minimum Pension Liability 1,441 531
State Franchise Tax 887 834
Interest on Non-Accrual Loans 150 80
-------------------------------------------------------------------------------------------------------------------
Total Deferred Tax Assets 11,429 10,127
-------------------------------------------------------------------------------------------------------------------
Deferred Tax Liabilities
Depreciation (401) (214)
Unrealized Gain on Securities Available-for-Sale (974) (1,774)
Securities Accretion (636) (933)
Pension (857) (1,079)
Other (250) (253)
-------------------------------------------------------------------------------------------------------------------
Total Deferred Tax Liabilities (3,118) (4,253)
-------------------------------------------------------------------------------------------------------------------
Net Deferred Tax Assets $8,311 $5,874
===================================================================================================================
|
The net deferred tax assets are reported in Interest Receivable and Other Assets on the Company's Consolidated Balance Sheets.
9. SHORT TERM BORROWINGS As of December 31, 2003 and 2002, the Company had unused lines of credit available for short term liquidity purposes of $370 million and $284 million, respectively. Federal Funds purchased and advances from the Federal Reserve Bank are generally issued on an overnight basis.
10. FEDERAL HOME LOAN BANK ADVANCES The Company's advances from the Federal Home Loan Bank of San Francisco consist of the following as of December 31,
(in thousands) 2003 2002 ------------------------------------------------------------------------------------------------------------------- 5.35% note payable due February 4, 2008 with interest due quarterly, callable February 2, $25,000 $25,000 2003 and quarterly thereafter. 5.38% note payable due August 12, 2008 with interest due quarterly, callable August 12, 15,000 15,000 2003 and quarterly thereafter. 5.60% amortizing note, interest and principal payable monthly with final maturity of 928 965 September 25, 2018. 1.13% fixed rate credit advance, interest payable monthly with a maturity of February 2, 71,000 - 2004. ------------------------------------------------------------------------------------------------------------------- Total $111,928 $40,965 =================================================================================================================== |
In accordance with the Collateral Pledge and Security Agreement, advances are secured by all Federal Home Loan Bank stock held by the Company and by agency and mortgage-backed securities, classified as available-for-sale, with carrying values of $42,278,913. Pledged loans totaling $275,055,000 were used to secure Federal Home Loan Bank advances of $71,000,000 and the unused commitments.
11. SHAREHOLDERS' EQUITY Beginning in 1975 and continuing through 2003, the Company has issued an annual 5% stock dividend. Earnings per share amounts have been restated for each year presented to reflect the stock dividend.
Dividends from the Bank constitute the principal source of cash to the Company. The Company is a legal entity separate and distinct from the Bank. Under regulations controlling California state chartered banks, the Bank is, to some extent, limited in the amount of dividends that can be paid to shareholders without prior approval of the State Department of Financial Institutions. These regulations require approval if total dividends declared by a state chartered bank in any calendar year exceed the bank's net profits for that year combined with its retained net profits for the preceding two calendar years. As of December 31, 2003, the Bank could declare dividends of $20,840,000 without approval of the California State Banking Department. These regulations apply to all California state chartered banks.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios set forth in the table below of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and of Tier I capital (as defined in the regulations) to average assets (as defined in the regulations). Management believes, as of December 31, 2003, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of September 30, 2003, the most recent notification from the Federal Reserve Bank categorized the Company and the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and the Bank must maintain minimum Total risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institutions' categories.
Well Capitalized
Regulatory Capital Under Prompt
(in thousands) Actual Requirements Corrective Action
December 31, 2003 Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------------------------------------------
Total Bank Capital to Risk Weighted Assets $123,825 12.39% $79,966 8.0% $99,958 10.0%
Total Consolidated Capital to Risk Weighted Assets $132,751 13.24% $80,189 8.0% N/A N/A
Tier I Bank Capital to Risk Weighted Assets $111,272 11.13% $39,983 4.0% $59,975 6.0%
Tier I Consolidated Capital to Risk Weighted Assets $120,164 11.99% $40,095 4.0% N/A N/A
Tier I Bank Capital to Average Assets $111,272 9.91% $44,908 4.0% $56,135 5.0%
Tier I Consolidated Capital to Average Assets $120,164 10.67% $45,036 4.0% N/A N/A
December 31, 2002 Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------------------------------------------
Total Bank Capital to Risk Weighted Assets $108,191 11.73% $73,766 8.0% $92,208 10.0%
Total Consolidated Capital to Risk Weighted Assets $113,370 12.25% $74,058 8.0% N/A N/A
Tier I Bank Capital to Risk Weighted Assets $ 96,602 10.48% $36,883 4.0% $55,325 6.0%
Tier I Consolidated Capital to Risk Weighted Assets $101,735 10.99% $37,029 4.0% N/A N/A
Tier I Bank Capital to Average Assets $ 96,602 9.84% $39,259 4.0% $49,074 5.0%
Tier I Consolidated Capital to Average Assets $101,735 10.32% $39,439 4.0% N/A N/A
|
12. EMPLOYEE BENEFIT PLANS The Company, through the Bank, sponsors a defined benefit Pension Plan (the Plan) that covers employees of Farmers & Merchants Bank of Central California. Effective June 9, 2001 the Plan was amended to freeze the benefit accruals in the Plan. With the exception of employees who had reached age 55 and who had accumulated 10 years of Plan service, the effect of the amendment was to freeze the participants' monthly pension benefit. Employees who had reached age 55 and had accumulated 10 years of Plan service as of December 31, 2000 will continue to accrue benefits under the Plan. The Bank uses a December 31 measurement date for the Plan.
The Plan provides benefits, up to a maximum stated in the Plan, based on each
covered employee's years of service and highest five-year average compensation
earned while a participant in the Plan. Plan benefits are fully vested after
five years of Plan service.
The Company's funding policy is to contribute annually an amount that is not
less than the ERISA minimum funding requirement and not in excess of the maximum
tax-deductible contribution as developed in accordance with the aggregate cost
method. The Bank expects to contribute $222 thousand to its Pension Plan in
2004.
The following schedule states the change in benefit obligations for the years ended December 31:
(in thousands) 2003 2002
-------------------------------------------------------------------------------------------------------------------
Benefit Obligation at Beginning of Year $3,541 $3,502
Service Cost 52 33
Interest Cost 224 222
Benefits Paid (920) (695)
Increase Due to Actuarial Loss and Assumption Change 2,472 479
-------------------------------------------------------------------------------------------------------------------
Total Benefit Obligation at End of Year $5,369 $3,541
===================================================================================================================
The Change in Plan Assets are as follows: (in thousands) 2003 2002
-------------------------------------------------------------------------------------------------------------------
Fair Value of Plan Assets at Beginning of Year $3,104 $4,444
Employer Contribution 1,974 -
Benefits Paid (920) (695)
Actual Return on Plan Assets 33 (645)
-------------------------------------------------------------------------------------------------------------------
Total Fair Value of Plan Assets at End of Year $4,191 $3,104
===================================================================================================================
|
During 2003, management changed from using an annuity payout assumption to a lump-sum payout assumption in calculating the projected benefit obligation to more closely mirror the anticipated benefit payment stream. This change in estimate is reflected as an actuarial loss and increased the benefit obligation by approximately $2.0 million in 2003.
The following table sets forth the Plan's funded status along with amounts recognized and not recognized in the Bank's Consolidated Balance Sheets for the years ended December 31:
(in thousands) 2003 2002
-------------------------------------------------------------------------------------------------------------------
Benefit Obligation $ 5,369 $3,541
Fair Value of Plan Assets 4,191 3,104
-------------------------------------------------------------------------------------------------------------------
Funded Status (1,178) (437)
Unrecognized Net Loss 3,524 1,348
Cumulative Adjustment Required to Recognize Minimum Liability (3,429) (1,262)
-------------------------------------------------------------------------------------------------------------------
Net Amounts Recognized $(1,083) $ (351)
===================================================================================================================
Amounts Recognized: (in thousands)
-------------------------------------------------------------------------------------------------------------------
Prepaid Benefit Cost $ - $ -
Accrued Benefit Liability (1,083) (351)
Intangible Asset - -
-------------------------------------------------------------------------------------------------------------------
Net Amounts Recognized $(1,083) $ (351)
===================================================================================================================
|
The accumulated benefit obligation for the defined benefit Pension Plan was $5.3 million and $3.3 million at December 31, 2003 and 2002, respectively.
The components of the net periodic benefit costs are as follows:
(in thousands) 2003 2002 2001 -------------------------------------------------------------------------------------------------------------------- Service Cost $ 52 $ 33 $ 247 Interest Cost 224 222 284 Expected Return on Plan Assets (127) (217) (414) Amortization of Unrecognized Prior Service Cost - (1) (3) Unrecognized Net Loss 377 13 23 -------------------------------------------------------------------------------------------------------------------- Total Net Periodic Benefit Cost $ 526 $ 50 $ 126 ==================================================================================================================== Increase in minimum liability included in other comprehensive income $2,167 $1,262 - ==================================================================================================================== |
Weighted-average assumptions used to determine benefit obligations at December
31,
2003 2002
-------------------------------------------------------------------------------
Assumptions Used in the Accounting were:
Discount Rate (Settlement Rate) 6.25%* 6.75%
Rate of Compensation Increase 4.00% 4.00%
===============================================================================
Weighted-average assumptions used to determine net benefit cost for years ended
December 31,
2003 2002 2001
-------------------------------------------------------------------------------
Assumptions Used in the Accounting were:
Discount Rate (Settlement Rate) 6.75%* 7.25% 7.25%
Expected Return on Plan Assets 3.00% 6.00% 9.00%
Rate of Compensation Increase 4.00% 4.00% 4.00%
===============================================================================
|
* The Discount Rate (Settlement Rate) selected by the Bank as of December 31, 2003 was 6.25% and 6.75% as of December 31, 2002. The value of Benefit Obligations for years after 2002 takes into account the Discount Rate and the 30-Year Treasury Securities Rate used to determine the value of a participant's benefit under the Plan. That rate was 4.96% during 2003 and will change to 5.12% for 2004.
The Bank utilized a 3% Expected Return on Plan assets during 2003 since it had invested the majority of Plan assets in bank accounts or money market funds. Beginning in November 2003, the Bank retained the services of a professional money manager to invest the Plan assets. Both the Bank and the money manager believe that obtaining a long-term expected return of 6% is reasonable given the projected cash flows of the Plan.
The Bank's Pension Plan weighted-average asset allocations at December 31, 2003 and 2002, by asset category are as follows:
(in thousands) 2003 2002
------------------------------------------------------------------------
Savings Deposit 50% 14%
Certificates of Deposit 30% 8%
Money Market Funds 11% 9%
Bonds 4% 0%
Equity Securities 2% 0%
Mutual Funds 3% 69%
------------------------------------------------------------------------
Total 100% 100%
========================================================================
|
As previously discussed, in November 2003 the Bank retained the services of a professional money manager to invest Plan assets. The trustees of the Plan developed an investment strategy that considers projected future cash flow requirements of Plan participants and invests the Plan assets in a mix of equity and debt securities. Only investment grade bonds are considered for investment. As of December 31, 2003 and 2002 the Plan assets are invested as follows:
(in thousands) 2003 2002
---------------------------------------------------------------------------
Corporate Bonds 13% 0%
Government Bonds 43% 0%
Equity Securities 24% 0%
Savings Deposits 0% 18%
Money Market Funds 20% 25%
Mutual Funds 0% 57%
---------------------------------------------------------------------------
Total 100% 100%
===========================================================================
|
This mix may change as projected cash flows or market conditions change.
Substantially all full-time employees of the Bank with one or more years of service also participate in a defined contribution Profit Sharing Plan and a Money Purchase Plan.
Contributions to the Profit Sharing Plan are made at the discretion of the Board of Directors and the Board can terminate the Profit Sharing Plan at any time. The Bank contributed $635,000, $625,000 and $545,000 for the years ended December 31, 2003, 2002 and 2001, respectively. The employees are permitted, within limitations imposed by tax law, to make pretax contributions to the 401(k) feature of the Profit Sharing Plan. The Bank does not match employee contributions within the 401(k) feature of the Profit Sharing Plan.
The Money Purchase Plan was established January 1, 2001 to replace the defined benefit Pension Plan that was frozen effective June 9, 2001. Substantially all full-time employees of the Bank participate in the Money Purchase Plan, with the exception of employees who have reached age 55 and who have accumulated 10 years of service and are continuing to accrue benefits in the defined benefit Pension Plan. Contributions to the Money Purchase Plan are made according to a predetermined set of criteria. The Board can terminate the Money Purchase Plan at any time. The Bank contributed $575,000, $522,000 and $491,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
Effective January 20, 2004 for the plan year beginning January 1, 2004, solely for administrative purposes the Bank combined the Money Purchase and Profit Sharing Plans into one plan, called the Profit Sharing Plan. All benefits remain the same as under the individual plans.
The Bank sponsors a Deferred Bonus Plan for certain employees. Deferred bonuses are granted and benefits accumulate based on the cumulative profits during the employee's participation period. The Bank contributed $213,000, $222,000 and $175,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
Beginning in 2003, the Bank sponsored an Indexed Retirement Plan for certain employees. The plan is designed to provide participants with supplemental non-qualified retirement income. The Bank contributed $270,000 for the year ended December 31, 2003.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosure about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. In some cases, book value is a reasonable estimate of fair value due to the relatively short period of time between origination of the instrument and its expected realization. The following table summarized the book value and estimated fair value of financial instruments as of December 31:
2003 2002
Carrying Estimated Carrying Estimated
ASSETS: (in thousands) Amount Fair Value Amount Fair Value
--------------------------------------------- ------------- ------------- ------------ -------------
Cash and Cash Equivalents $35,800 $35,800 $ 53,574 $ 53,574
Investment Securities Held-to-Maturity 37,957 38,739 27,870 29,111
Investment Securities Available-for-Sale 223,965 223,965 206,063 206,063
Loans, Net of Unearned Income 806,906 812,067 696,675 697,351
Less: Allowance for Loan Losses 17,220 17,220 16,684 16,684
Loans, Net of Allowance 789,686 795,227 679,991 680,667
LIABILITIES:
Deposits:
Noninterest-bearing 223,000 223,000 205,997 205,997
Interest-bearing 681,349 682,880 644,228 647,291
Federal Home Loan Bank Advances 111,928 115,706 40,965 45,671
Subordinated Debentures 10,310 10,348 - -
|
The methods and assumptions used to estimate the fair value of each class of financial instrument listed in the table above are explained below.
Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and due from banks and federal funds sold are a reasonable estimate of fair value.
Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for fixed-rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Commitments to extend credit and standby letters of credit: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.
Deposit liabilities: The fair value of demand deposits, interest bearing transaction accounts and savings accounts is the amount payable on demand as of December 31, 2003 and 2002. The fair value of fixed-maturity certificates of deposit is estimated by discounting expected future cash flows utilizing interest rates currently being offered for deposits of similar remaining maturities.
Borrowings: The fair value of federal funds purchased and other short-term borrowings is approximated by the book value. The fair value for Federal Home Loan Bank borrowings is determined using discounted future cash flows.
Limitations: Fair value estimates presented herein are based on pertinent information available to management as of December 31, 2003 and 2002. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented above.
14. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company uses derivative instruments to limit its exposure to declining interest rates. The Company's current program relative to interest rate protection primarily contemplates fixing the rates on variable rate loans. To do this, the Company has developed a Hedging Policy to provide guidelines that address instruments to be used, authority limits, implementation guidelines, guidelines for evaluating hedge alternatives, reporting requirements, and the credit worthiness of the instruments counterparty.
The Company reviews compliance with these guidelines annually with the ALCO Committee and the Board of Directors. The guidelines may change as the Company's business needs dictate.
In 2003 the Company terminated a no cost collar with a notional amount of $40 million on both an interest rate floor and cap. The no cost collar was accounted for as a cash flow hedge. As a result of this termination, the Company recorded a gain of $48 thousand in 2003. Amortization of the remaining deferred gain will be $132 thousand in 2004.
During November 2003, the Company entered into a $20 million, two year interest rate swap agreement maturing November 4, 2005. During December 2003, the Company entered into a $12 million, three year interest rate swap maturing December 8, 2006. The new interest rate swap agreements effectively convert $32 million of the Company's variable rate loans to a fixed rate in conjunction with its ongoing rate management strategy to limit exposure to declining interest rates. The interest rate swaps receive a fixed rate of 4.98% and 5.76% respectively, and pay a floating rate based on Prime.
As required, the Company records in the balance sheet the interest rate swaps at fair value. Because the transactions meet the criteria for a cash-flow hedge, changes in fair value are reported in other comprehensive income. In the event that a portion of the hedge becomes ineffective, the ineffective portion of the derivative's change in fair value will be immediately recognized in earnings.
15. COMMITMENTS AND CONTINGENCIES In the normal course of business, the Company is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These instruments include commitments to extend credit, letters of credit and financial guarantees that are not reflected in the Consolidated Balance Sheets.
The Company's exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer's creditworthiness are performed on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third party. The Company had standby letters of credit outstanding of $12,218,000 at December 31, 2003, and $15,635,000 at December 31, 2002. Outstanding standby letters of credit had original terms ranging from 4 to 110 months with final expiration in 2007. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition contained in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Undisbursed loan commitments totaled $308,436,000 and $269,211,000 as of December 31, 2003 and 2002, respectively. Since many of these commitments are expected to expire without fully being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company does not anticipate any loss as a result of these transactions.
The Company is obligated under a number of noncancellable operating leases for premises and equipment used for banking purposes. Minimum future rental commitments under noncancellable operating leases as of December 31, 2003 were $251,000, $157,000, $89,000, $47,000, and $47,000 for the years 2004 to 2008 and $54,000 thereafter.
In the ordinary course of business, the Company becomes involved in litigation arising out of its normal business activities. Management, after consultation with legal counsel, is of the opinion that the ultimate liability, if any, resulting from the disposition of such claims would not be material in relation to the financial position of the Company.
The Company may be required to maintain average reserves on deposit with the Federal Reserve Bank primarily based on deposits outstanding. There were no reserve requirements during 2003 or at December 31, 2003 and 2002.
16. TRANSACTIONS WITH RELATED PARTIES The Company, in the ordinary course of business, has had, and expects to have in the future, deposit and loan transactions with Directors, executive officers and their affiliated companies. These transactions were on substantially the same terms, including interest rates, as those prevailing at the time for comparable transactions with unaffiliated parties and do not involve more than normal credit risk or other unfavorable features.
Loan transactions with Directors, executive officers and their affiliated companies during the year ended December 31, 2003, were as follows:
(in thousands)
----------------------------------------------------------------------- Loan Balances December 31, 2002 $2,415 Disbursements During 2003 8,454 Loan Reductions During 2003 8,036 ----------------------------------------------------------------------- Loan Balances December 31, 2003 $2,833 ======================================================================= 17. RECENT ACCOUNTING DEVELOPMENTS Derivative Instruments and Hedging Activities |
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). The provisions of SFAS No.149 that relate to SFAS No. 133 and No. 138 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, provisions of SFAS No. 149 which relate to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003. The changes in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, SFAS No. 149 (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of SFAS No. 133 and No. 138, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FIN 45, and (4) amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments.
SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except as stated above and for hedging relationships designated after June 30, 2003. In addition, except as stated above, all provisions of SFAS No.149 should be applied prospectively.
The adoption of SFAS No. 149 did not have a material impact on the Company's financial condition or operating results.
Certain Financial Instruments with Characteristics of both Liabilities and
Equity
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). This statement requires that an issuer classify financial instruments
that are within its scope as a liability. Many of those instruments were
classified as equity under previous guidance.
Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003.
The adoption of SFAS No. 150 did not have a material impact on the Company's financial condition or operating results.
Consolidation of Variable Interest Entities In January 2003, the FASB issued FIN 46. FIN 46 explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed.
FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period ending after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003.
FIN 46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated.
FIN 46 may have an impact on the treatment of the trust preferred securities we have issued and ability for those instruments to continue to provide the Company with Tier 1 capital. FIN 46 prevents the Company from consolidating the trust entity that issued these trust preferred securities. The Federal Reserve has issued regulations which allow for the inclusion of these instruments in Tier 1 capital regardless of the impact of FIN 46 on the consolidation of the trusts. There remains the potential that this determination by the Federal Reserve may be changed at a later date. We do not expect FIN 46 to have any other material impact on the Company's financial condition or operating results.
18. PARENT COMPANY FINANCIAL INFORMATION The financial information below is presented as of December 31, 2003 and December 31, 2002.
Farmers & Merchants Bancorp Balance Sheet
(in thousands) 2003 2002 ---------------------------------------------------------------------------------------------------- Cash $ 6,905 $ 1,597 Investment in Farmers and Merchants Bank of Central California 111,272 96,601 Investment Securities 1,296 3,104 Loans 335 - Other Assets 1,119 491 ---------------------------------------------------------------------------------------------------- Total Assets $120,927 $101,793 ==================================================================================================== Liabilities $ 10,484 - Shareholders' Equity 110,443 101,793 ---------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $120,927 $101,793 ==================================================================================================== |
Farmers & Merchants Bancorp Income Statement for the period ending December 31,
2003 2002 2001
--------------------------------------------------------------------------------------------------------------------
Equity Earnings in Farmers and Merchants Bank of Central California $ 15,203 $ 13,561 $ 12,538
Interest Income 78 167 42
Other Expenses, Net (506) (309) (263)
--------------------------------------------------------------------------------------------------------------------
Net Income $ 14,775 $ 13,419 $ 12,317
====================================================================================================================
|
Farmers & Merchants Bancorp Statement of Cash Flows for the period ending December 31,
2003 2002 2001
--------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net Income $14,775 $13,419 $12,317
Adjustments to Reconcile Net Income to Net Cash Used in Operating Activities:
Equity in Undistributed Net Earnings from Subsidiary (12,442) (5,460) (2,938)
Net Increase in Interest Receivable and Other Assets (448) (200) (161)
Net Increase in Interest Receivable and Other Liabilities 174 - -
--------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 2,059 7,759 9,218
--------------------------------------------------------------------------------------------------------------------
Investing Activities:
Securities Purchased (393) (47) (4,291)
Securities Sold or Matured 13 1,423 254
Net Loans Originated (335) 87 27
--------------------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Investing Activities (715) 1,463 (4,010)
--------------------------------------------------------------------------------------------------------------------
Financing Activities:
Subordinated Debentures Issued 10,310 - -
Stock Redemption (1,468) (5,006) (488)
Cash Dividends (4,878) (4,544) (4,056)
--------------------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Financing Activities 3,964 (9,550) (4,544)
--------------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 5,308 (328) 664
Cash and Cash Equivalents at Beginning of Year 1,597 1,925 1,261
--------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 6,905 $ 1,597 $ 1,925
====================================================================================================================
|
19. LONG-TERM SUBORDINATED DEBENTURES In December 2003, the Company formed a wholly owned Connecticut statutory business trust, FMCB Statutory Trust I ("Statutory Trust I"), which issued $10,000,000 of guaranteed preferred beneficial interests in the Company's junior subordinated deferrable interest debentures (the "Trust Preferred Securities"). These debentures qualify as Tier 1 capital under Federal Reserve Board guidelines. All of the common securities of Statutory Trust I are owned by the Company. The proceeds from the issuance of the common securities and the Trust Preferred Securities were used by FMCB Statutory Trust to purchase $10,310,000 of junior subordinated debentures of the Company, which carry a floating rate based on three-month LIBOR plus 2.85%. The debentures represent the sole asset of Statutory Trust I. The Trust Preferred Securities accrue and pay distributions at a floating rate of three-month LIBOR plus 2.85% per annum of the stated liquidation value of $1,000 per capital security. The Company has entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment of: (i) accrued and unpaid distributions required to be paid on the Trust Preferred Securities; (ii) the redemption price with respect to any Trust Preferred Securities called for redemption by Statutory Trust I, and (iii) payments due upon a voluntary or involuntary dissolution, winding up or liquidation of Statutory Trust I. The Trust Preferred Securities are mandatorily redeemable upon maturity of the debentures on December 17, 2033, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the debentures purchased by Statutory Trust I, in whole or in part, on or after December 17, 2008. As specified in the indenture, if the debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest.
Five Year Financial Summary of Operations
(in thousands, except per share data)
2003 2002 2001 2000 1999
--------------------------------------------------------------------------------------------------------------------
Total Interest Income $ 54,884 $54,238 $63,530 $66,127 $56,055
Total Interest Expense 11,073 13,596 23,280 24,757 18,862
------------------------------------------------------------------------------------------------------------------
Net Interest Income 43,811 40,642 40,250 41,370 37,193
Provision for Loan Losses 625 4,926 1,000 2,800 1,700
------------------------------------------------------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 43,186 35,716 39,250 38,570 35,493
Total Non-Interest Income 12,918 13,866 8,374 6,648 5,658
Total Non-Interest Expense 33,286 29,109 27,486 27,548 27,021
------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 22,818 20,473 20,138 17,670 14,130
Provision for Income Taxes 8,043 7,054 7,821 6,650 4,914
------------------------------------------------------------------------------------------------------------------
Net Income $ 14,775 $13,419 $12,317 $11,020 $ 9,216
==================================================================================================================
Balance Sheet Data
Total Assets $1,148,565 $1,021,907 $970,883 $905,551 $819,881
Loans 806,906 696,675 602,169 497,397 413,409
Allowance for Loan Losses 17,220 16,684 12,709 11,876 9,787
Investment Securities 261,922 233,933 275,550 320,654 346,855
Deposits 904,349 850,225 819,711 764,678 685,143
Federal Home Loan Bank Advances 111,928 40,965 41,000 41,033 41,064
Shareholders' Equity 109,605 103,565 100,736 90,883 80,201
Selected Ratios
Return on Average Assets 1.36% 1.41% 1.35% 1.29% 1.19%
Return on Average Equity - Net of Accumulated 13.88% 13.51% 13.14% 12.38% 10.95%
Other Comprehensive Income
Dividend Payout Ratio 33.02% 33.86% 32.93% 33.66% 36.30%
Average Loan to Average Deposits 85.29% 79.71% 68.37% 59.96% 52.93%
Average Equity - Net of Accumulated Other 9.83% 10.43% 10.25% 10.40% 10.86%
Comprehensive Income - to Average Assets
Period-end Shareholders' Equity to Total Assets 9.54% 10.13% 10.38% 10.04% 9.78%
Per Share Data
Net Income (1) $19.30 $17.34 $15.57 $13.88 $11.53
Cash Dividends Declared $6.20 $ 6.00 $5.45 $ 5.00 $4.50
|
(1) Net Income per share is based on the weighted average number of shares outstanding of 765,433, 774,066, 791,125, 793,959 and 799,081 for the years ended December 31, 2003, 2002, 2001, 2000 and 1999, respectively. Prior years' per share data has been restated for the 5% stock dividend issued in each of the above years.
Quarterly Financial Data
(in thousands, except for per share data)
First Second Third Fourth
2003 Quarter Quarter Quarter Quarter Total
-----------------------------------------------------------------------------------------------------------------
Total Interest Income $13,199 $13,870 $13,775 $14,040 $54,884
Total Interest Expense 2,878 2,947 2,710 2,538 11,073
-----------------------------------------------------------------------------------------------------------------
Net Interest Income 10,321 10,923 11,065 11,502 43,811
Provision for Loan Losses 200 125 150 150 625
-----------------------------------------------------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 10,121 10,798 10,915 11,352 43,186
Total Non-Interest Income 2,951 3,187 3,210 3,570 12,918
Total Non-Interest Expense 7,749 8,320 8,072 9,145 33,286
-----------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 5,323 5,665 6,053 5,777 22,818
Provision for Income Taxes 1,922 2,021 2,173 1,927 8,043
-----------------------------------------------------------------------------------------------------------------
Net Income $ 3,401 $ 3,644 $ 3,880 $ 3,850 $14,775
=================================================================================================================
Earnings Per Share (1) $ 4.43 $ 4.76 $ 5.08 $ 5.04 $ 19.30
=================================================================================================================
2002
-----------------------------------------------------------------------------------------------------------------
Total Interest Income $13,685 $13,554 $13,564 $13,435 $54,238
Total Interest Expense 3,884 3,423 3,218 3,071 13,596
-----------------------------------------------------------------------------------------------------------------
Net Interest Income 9,801 10,131 10,346 10,364 40,642
Provision for Loan Losses 200 300 500 3,926 4,926
-----------------------------------------------------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 9,601 9,831 9,846 6,438 35,716
Total Non-Interest Income 2,204 2,951 2,731 5,980 13,866
Total Non-Interest Expense 6,946 7,559 7,152 7,452 29,109
-----------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 4,859 5,223 5,425 4,966 20,473
Provision for Income Taxes 1,797 1,903 1,980 1,374 7,054
-----------------------------------------------------------------------------------------------------------------
Net Income $ 3,062 $ 3,320 $ 3,445 $ 3,592 $13,419
=================================================================================================================
Earnings Per Share (1) $ 3.91 $ 4.30 $ 4.47 $ 4.66 $ 17.34
=================================================================================================================
|
Farmers & Merchants Bancorp stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. Dividends declared semiannually during the past three years were for the following amounts: June 2003, 2002 and 2001, $2.10, $2.00 and $1.95 per share, respectively, and for December 2003, 2002, and 2001, $4.10, $4.00 and $3.50 per share, respectively. Based on information from shareholders and from Company stock transfer records, the prices paid in 2003, 2002 and 2001 ranged from $225.00 to $375.00 per share.
(1) Prior years' per share data has been restated for the 5% stock dividend issued in each of the above years.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 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) competitive pressure in the banking industry; (vi) changes in governmental fiscal or monetary policies; (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.
Introduction
Farmers & Merchants Bancorp is a bank holding company formed March 10, 1999. Its subsidiary, Farmers & Merchants Bank of Central California is a California state-chartered bank formed in 1916. The Bank services the northern Central Valley of California with 18 banking offices. The service area includes Sacramento, San Joaquin, Stanislaus and Merced Counties with branches in Sacramento, Elk Grove, Galt, Lodi, Stockton, Linden, Modesto, Turlock and Hilmar.
Substantially all of the Company's business activities are conducted within its market area.
This section should be read in conjunction with the consolidated financial statements and the notes thereto, along with other financial information included in this report.
Overview
The Five Year Period: 1999 through 2003
The following table presents key performance data for the Company over the past
five years.
(in thousands, except per share data)
Financial Performance Indicator 2003 2002 2001 2000 1999 Net Income $ 14,775 $ 13,419 $ 12,317 $ 11,020 $ 9,216 Total Assets $ 1,148,565 $ 1,021,907 $970,883 $905,551 $819,881 Total Loans $ 806,906 $ 696,675 $602,169 $497,397 $413,409 Total Deposits $ 904,349 $ 850,225 $819,711 $764,678 $685,143 Total Shareholders' Equity $ 109,605 $ 103,565 $100,736 $ 90,883 $ 80,201 Total Risk-Based Capital Ratio 13.24% 12.25% 13.76% 15.41% 16.92% Non-Performing Loans as a % of Total Loans 0.32% 0.42% 0.40% 0.30% 0.61% Net Charge-Offs to Average Loans 0.01% 0.15% 0.03% 0.16% 0.14% Loan Loss Allowance as a % of Total Loans 2.13% 2.39% 2.11% 2.39% 2.37% Return on Average Equity (1) 13.88% 13.51% 13.14% 12.38% 10.95% Earnings Per Share (2) $ 19.30 $ 17.34 $ 15.57 $ 13.88 $ 11.53 Cash Dividends Per Share (2) $ 6.20 $ 6.00 $ 5.45 $ 5.00 $ 4.50 Cash Dividends Declared (3) $ 4,736 $ 4,404 $ 3,923 $ 3,609 $ 3,273 # Shares Repurchased During Year 5,732 20,749 2,053 5,994 2,306 Average Share Price of Repurchased Shares $ 256 $ 241 $ 238 $ 210 $ 175 High Stock Price - Fourth Quarter $ 375.00 $ 300.00 $ 250.00 $ 245.00 $ 210.00 Low Stock Price - Fourth Quarter $ 300.00 $ 250.00 $ 250.00 $ 240.00 $ 210.00 ------------------------------------------------------- |
(1) Equity is calculated net of accumulated other comprehensive income.
(2) Prior years' per share data has been restated for the 5% stock dividend
issued in each of the above years.
(3) Not including cash paid in lieu of fractional shares related to the stock
dividend. These payments totaled $587,000 over the five year period.
During the five year period 1999 through 2003, the Company's operating performance improved every year.
o Annual net income increased 61% to $14.8 million from $9.2 million.
o Earnings Per Share increased 67% to $19.30 from $11.53.
o Total assets increased 40% to $1.1 billion.
o Total loans increased 95% to $806.9 million.
Importantly, during this period of asset and earnings growth.
o The Company's risk based capital ratio has remained above the 10% level that federal and state banking regulators require for banks to be considered "well capitalized" (see Financial Condition - Capital).
o The Bank's asset quality has remained strong, as reflected by net charge-offs never exceeding 0.16% of average loans in any year and non-performing loans totaling 0.32% of total loans at December, 31, 2003 (see Financial Condition - Non-Performing Assets).
o The Bank's allowance for loan losses has been maintained at above 2% of total loans, providing a strong reserve for future loan losses (see Results of Operations - Provision and Allowance for Loan Losses).
As a result of this strong earnings performance, capital position and asset quality, shareholders have benefited well in excess of overall stock market returns over the past five years.
o Return on Average Equity has increased every year from 10.95% in 1999 to 13.88% in 2003.
o Cash Dividends per Share have increased 38% since 1999, and totaled $27.15 per share over the five year period.
o The market price of the Company's stock has increased $225 per share from a high of $150 in the fourth quarter of 1998 to a high of $375 in the fourth quarter of 2003. This increase in shareholder value has been further enhanced by the 5% stock dividend declared in each year, resulting in the average shareholder owning approximately 126 shares at December 31, 2003 for every 100 shares they owned at December 31, 1998.
o The combination of cash dividends, stock dividends, cash payments in lieu of fractional shares from stock dividends and increase in market value of the stock has provided investors with a total return exceeding 230% during the five year period. In our opinion, this compares very favorably to overall stock market returns as represented by the AMEX Market Index and the Media General Index of Banks and Bank Holding Companies (see Performance Graph in the Company's definitive proxy statement for the 2004 Annual Meeting of Shareholders).
o The total market capitalization of the Company has increased by $192 million over the five year period.
As part of an overall capital management program, in 1998 the Board approved a stock repurchase program. Since 1999, the Company has repurchased over 36,000 shares for total consideration of $8.6 million. The Company will continue to repurchase shares when it believes it is in the best long-term interest of shareholder value.
The Current Year: 2003
At the completion of our 87th year, management and the Board are pleased to
report the highest net income in the Company's history. As of December 31, 2003,
Farmers & Merchants Bancorp reported net income of $14.8 million, earnings per
share of $19.30, return on average assets of 1.36% and return on average equity
of 13.88% (net of accumulated other comprehensive income).
The Company's continuing strong earnings performance in 2003 was due to a combination of (1) growth in earning assets, (2) improvement in the mix of earning assets as reflected by an increase in loans as a percentage of average earning assets, (3) reduction in the provision for loan losses, and (4) continued strong expense control as reflected in an efficiency ratio of 58%. These factors combined to offset a decline in the Bank's net interest margin as a result of continued declines in interest rates during the first half of 2003.
The following is a summary of the financial accomplishments achieved during 2003.
o Net income increased 10.1% to $14.8 million from $13.4 million.
o Earnings per share increased 11.3% to $19.30 from $17.34.
o Net interest income increased 7.8% to $43.8 million from $40.6 million.
o Total assets increased 12.4% to $1.15 billion from $1.02 billion.
o Investment securities increased 11.9% to $261.9 million from $233.9 million.
o Gross loans increased 15.8% to $806.9 million from $696.7 million.
o Total deposits increased 6.4% to $904.3 million from $850.2 million.
o Total shareholders' equity increased 5.8% to $109.6 million, after dividends of $4.7 million, stock buybacks of $1.5 million and a decline in Accumulated Other Comprehensive Income of $1.3 million.
o Total market capitalization increased $67 million.
RESULTS OF OPERATIONS
The following discussion and analysis is intended to provide a better understanding of Farmers & Merchants Bancorp and its subsidiaries' performance during 2003 and 2002, the material changes in financial condition, operating income and expense of the Company and its subsidiaries as shown in the accompanying financial statements.
Net Interest Income
Net interest income is the amount by which the interest and fees on loans and
other interest earning assets exceed the interest paid on interest bearing
sources of funds. For the purpose of analysis, the interest earned on tax-exempt
investments and municipal loans is adjusted to an amount comparable to interest
subject to normal income taxes. This adjustment is referred to as "taxable
equivalent" adjustment and is noted wherever applicable. Interest income and
expense are affected by changes in the volume and mix of average interest
earning assets and average interest bearing liabilities, as well as fluctuations
in interest rates. Therefore, increases or decreases in net interest income are
analyzed as changes in volume, changes in rate and changes in the mix of assets
and liabilities.
The Company's earning assets and rate sensitive liabilities are subject to repricing at different times, which exposes the Company to income fluctuations when interest rates change. In order to minimize income fluctuations, the Company attempts to match asset and liability maturities. However, some maturity mismatch is inherent in the asset and liability mix. See Market Risk-Interest Rate Risk.
Net interest income increased 7.8% to $43.8 million during 2003. During 2002, net interest income was $40.6 million, representing an increase of 1.0% from 2001. On a taxable equivalent basis, net interest income increased 8.1% and totaled $45.4 million during 2003, compared to $42.0 million for 2002. In 2001, on a taxable equivalent basis, net interest income decreased 2.9% or $1.2 million from that of 2000. The primary reason for the increase in net interest income during 2003 was an improvement in the volume and mix (as reflected by an increase in loans as a percentage of average earning assets) of earning assets. These factors combined to offset the negative impact on the Bank's net interest income as a result of a continuing decline in market interest rates during the first half of the year. During 2003, the Federal Reserve Bank dropped their Discount Rate by 25 basis points, following a drop of 50 basis points during 2002. This resulted in an equivalent drop in the Bank's prime rate, the index on which many of its loans are priced.
Net interest income on a taxable equivalent basis, expressed as a percentage of average total earning assets, is referred to as the net interest margin. For 2003, the Company's net interest margin was 4.50% compared to 4.76% in 2002. The decrease in the net interest margin during 2003 was due primarily to a continuing decline in market interest rates through the first half of 2003. The Bank's earning assets, particularly loans, generally reprice more quickly than its interest bearing liabilities, causing a decrease in net interest margin as market interest rates decline. This continuing decline in market interest rates offset the positive impact on the 2003 net interest margin that occurred as a result of the previously discussed improvement in the mix of earning assets. As market interest rates stabilize or begin to rise, the net interest margin is expected to improve.
Loans, generally the Company's highest earning assets, increased $110.2 million as of December 31, 2003 compared to December 31, 2002. On an average balance basis, loans increased by $100.1 million for the year ended December 31, 2003. As a result of this loan growth, the mix of the Company's earning assets improved as loans increased from 72.4% of average earning assets during 2002 to 73.1% in 2003. Due to the decline in market interest rates during 2002 and the first half of 2003, the year-to-date yield on the loan portfolio decreased 49 basis points to 6.08% for the year ended December 31, 2003 compared to 6.57% for the year ended December 31, 2002. This decrease in yield was offset by the growth in loan balances, which resulted in interest revenue from loans increasing 7.1% to $44.9 million for 2003.
The investment portfolio is the other main component of the Company's earning assets. The Company invests primarily in mortgage-backed securities, U.S. Government Agencies, and high-grade municipals. Since the risk factor for these types of investments is significantly lower than that of loans, the yield earned on investments is generally less than that of loans.
Average investment securities increased $45.0 million in 2003 compared to the average balance during 2002. Even with the increase in the average balance of investment securities there was a decrease in interest income of $1.7 million for the year ended December 31, 2003, due to the declining market interest rate environment and the fact that rates have remained low for a substantial time resulting in maturities in the portfolio being reinvested at rates significantly below prior years. The average yield, on a taxable equivalent basis, in the investment portfolio was 4.5% in 2003 compared to 6.2% in 2002. Net interest income on the Schedule of Year-to-Date Average Balances and Interest Rates in the Company's Form 10-K is shown on a taxable equivalent basis, which is higher than net interest income as reflected on the Consolidated Statements of Income because of adjustments that relate to income on securities that are exempt from federal income taxes.
Average interest-bearing sources of funds increased $106.5 million or 16.1% during 2003. Of that increase, average borrowed funds (primarily FHLB Advances) increased $59.5 million and interest-bearing deposits increased $46.6 million.
During 2003, the Bank was able to grow average interest bearing deposits by $46.6 million. The increase was primarily in savings deposits, which grew $44.1 million, as higher cost time deposits were reduced by $10.2 million. Total interest expense on deposit accounts for 2003 was $8.1 million as compared to $11.4 million in 2002. Even as deposits increased, due to a continuing decline in market interest rates throughout the first half of 2003, interest expense on deposits decreased 28.6% or $3.3 million in 2003. The average rate paid on interest-bearing deposits was 1.2% in 2003 and 1.8% in 2002. The percentage decline in interest expense did not match the decline in loan yields due to the fact that deposit products generally do not reprice as quickly as loan products.
During March and April, 2003, the Bank implemented an asset/liability strategy designed to both increase its net interest income and reduce the overall maturity mismatch in its asset and liability mix. This strategy involved borrowing $80 million of short-term advances from the Federal Home Loan Bank (FHLB) and investing primarily in mortgage-backed securities and high-grade municipals. As a result of this strategy, FHLB advances increased from $41.0 million as of December 31, 2002 to $111.9 million as of December 31, 2003. Total interest expense on FHLB advances for 2003 was $2.9 million. In 2002, interest expense on FHLB Advances was $2.2 million. The average rate paid on FHLB Advances was 3.0% in 2003 down from 5.4% in 2002.
Provision and Allowance for Loan Losses
As a financial institution that assumes lending and credit risks as a principal
element of its business, credit losses will be experienced in the normal course
of business. The allowance for loan losses is established to absorb losses
inherent in the loan portfolio. The allowance for loan losses is maintained at a
level considered by management to be adequate to provide for risks inherent in
the loan portfolio. The allowance is increased by provisions charged to
operating expense and reduced by net charge-offs. In determining the adequacy of
the allowance for loan losses, management takes into consideration examinations
by the Company's supervisory authorities, results of internal credit reviews,
financial condition of borrowers, loan concentrations, prior loan loss
experience, and general economic conditions. The allowance is based on estimates
and ultimate losses may vary from the current estimates. Management reviews
these estimates periodically and, when adjustments are necessary, they are
reported in the period in which they become known.
After reviewing all factors, management concluded that the allowance for loan losses as of December 31, 2003 was adequate.
The provision for loan losses totaled $625,000 in 2003, compared to $4.9 million in 2002. The decrease in the provision was the result of management's evaluation of the adequacy of the allowance for loan losses relative to factors such as the credit quality of the loan portfolio, loan growth, current loan losses, the prevailing economic climate, and its effect on borrowers' ability to repay loans in accordance with the terms of the notes.
As of December 31, 2003, the allowance for loan losses was $17.2 million, which represented 2.1% of the total loan balance. At December 31, 2002 the allowance for loan losses was $16.7 million or 2.4% of the total loan balance.
The table below illustrates the change in the allowance for loan losses for the years 2003 and 2002.
Allowance for Loan Losses (dollar amounts in thousands) Balance, December 31, 2002 $ 16,684 Provision Charged to Expense 625 Recoveries of Loans Previously Charged Off 608 Loans Charged Off (697) ======================================================================= Balance, December 31, 2003 $ 17,220 ======================================================================= Balance, December 31, 2001 $ 12,709 Provision Charged to Expense 4,926 Recoveries of Loans Previously Charged Off 335 Loans Charged Off (1,286) ======================================================================= Balance, December 31, 2002 $ 16,684 ======================================================================= |
Non-Interest Income
Non-interest income for the Company includes income derived from services
offered by the Bank, such as merchant bankcard, investment services and other
miscellaneous business services; it also includes service charges and fees from
deposit accounts, net gains and losses from the sale of investment securities,
increases in the cash surrender value of bank owned life insurance and gains and
losses from the sale of assets and other real estate owned.
Non-interest income totaled $12.9 million for 2003. This represents a decrease of $948,000 or 6.8%, from non-interest income of $13.8 million for 2002. During 2002, non-interest income increased $5.5 million or 65.6% over non-interest income of $8.4 million for 2001. The decrease in non-interest income between 2002 and 2003 was primarily due to the fact that during 2002 the Bank recorded a gain of $2.8 million from the sale of preferred stock previously acquired through a troubled debt restructuring. After adjusting for this non-recurring transaction, non-interest income increased $1.8 million or 16.7% in 2003 over 2002.
Service charges on deposit accounts totaled $4.9 million in 2003. This represents an increase of $132,000 or 2.8% over service charges on deposit accounts of $4.8 million in 2002. Service charges on demand deposit accounts for business customers are generally charged based on an analysis of their activity. The activity charges for a given month may be offset by an earnings credit. The lower interest rate environment resulted in a lower account earnings credit thus generally increasing service charges on business deposit accounts. Service charges in 2002 increased $581,000 or 13.9% over service charges on deposit accounts of $4.2 million in 2001.
Gain on Sale of Investment Securities totaled $935,000 in 2003. This represents an increase of $659,000 or 238.8% over 2002. During 2003 the Bank took advantage of historically low interest rates to restructure its investment portfolio by selling certain securities at a gain.
The Bank provides merchant bankcard services to business customers in its service area. Fee income of $1.7 million was generated in 2003. This represents an increase of $243,000 or 17.2% over fee income of $1.4 million in 2002. Fee income of $1.2 million was generated in 2001. The increase during 2003 was due to an increase in merchant volume during the year.
During 2002 the Bank purchased life insurance on its key executives. The increase in the cash surrender value of such policies for 2003 was $1.5 million, an increase of $107,000 or 7.5% over 2002.
Other non-interest income totaled $3.9 million in 2003, an increase of $711,000 or 22.3% over 2002. In 2002, other non-interest income totaled $3.2 million compared to $2.9 million in 2001. Fees from these services include ATM fees, wire transfer fees, gain on sale of mortgage loans and other miscellaneous charges
Non-Interest Expense
Non-interest expense for the Company includes expenses for salaries and employee
benefits, occupancy, equipment, supplies, legal fees, professional services,
data processing, marketing, deposit insurance, merchant bankcard operations, and
other miscellaneous expenses.
Overall, non-interest expense increased $4.2 million or 14.3% for the year ended December 31, 2003, primarily as a result of a $3.3 million increase in Salaries and Employee Benefits. This increase was due to: (1) 18 month cycle salary merit increases which occurred in October, 2002, (2) increased contributions to the Bank's Supplemental Retirement Plan and (3) increased expense recognition associated with the Bank's Defined Benefit Pension Plan (see Note 12 of Notes to Consolidated Financial Statements). At the end of 2003, the Company had 291 full time equivalent employees compared to 292 at the end of 2002 and 304 at the end of 2001.
Occupancy and equipment expenses represent the cost of operating and maintaining branch and administrative facilities, including the purchase and maintenance of furniture, fixtures, and office equipment and data processing equipment. Occupancy expense in 2003 totaled $1.6 million, a decrease of $118,000 or 6.9% over 2002. During 2002, occupancy expense increased $29,000 or 1.7% over 2001. Equipment expense in 2003 totaled $2.4 million, an increase of $269,000 or 12.5% over 2002. During 2002, equipment expense increased 5.9% or $120,000 over 2001.
Other operating expense totaled $8.2 million, a 10.2% increase from the prior year. This increase in other operating expense during 2003 was due primarily to an increase in professional services associated with ongoing projects to either improve operating efficiency or enhance risk management. During 2002, other operating expense was $7.5 million compared to $6.8 million in 2001.
Income Taxes
The provision for income taxes increased $989,000 during 2003. The provision for
income taxes decreased $767,000 in 2002 as a result of the purchase of bank
owned life insurance on which the increase in cash surrender value is tax
exempt. The effective tax rate in 2003 was 35.2% compared to 34.5% in 2002 and
38.8% in 2001. The effective rates were lower than the statutory rate of 42% due
primarily to benefits regarding the cash surrender value of life insurance; the
California bad debt deduction; California enterprise zone interest income
exclusion; and tax exempt interest income on municipal securities and loans.
Current tax law causes the Company's current taxes payable to approximate or exceed the current provision for taxes on the income statement. Two provisions have had a significant effect on the Company's current income tax liability; the restrictions on the deductibility of loan losses and the mandatory use of accrual accounting for taxes rather than the cash basis method of accounting.
FINANCIAL CONDITION
Investment Securities
The Financial Accounting Standards Board statement, Accounting for Certain
Investments in Debt and Equity Securities, requires the Company to classify its
investments as held-to-maturity, trading or available-for-sale. Securities are
classified as held-to-maturity and are carried at amortized cost when the
Company has the positive intent and ability to hold the securities to maturity.
Trading securities are securities acquired for short-term appreciation and are carried at fair value, with unrealized gains and losses recorded in non-interest income. As of December 31, there were no securities in the trading portfolio. Securities classified as available-for-sale include securities, which may be sold to effectively manage interest rate risk exposure, prepayment risk, satisfy liquidity demands and other factors. These securities are reported at fair value with aggregate, unrealized gains or losses excluded from income and included as a separate component of shareholders' equity, net of related income taxes.
The investment portfolio provides the Company with an income alternative to loans. The Company's total investment portfolio represented 22.8% of the Company's total assets during 2003 and 22.9% of the Company's total assets during 2002. Not included in the investment portfolio are overnight investments in Federal Funds Sold. In 2003, average Federal Funds Sold on a year to date basis was $15.9 million compared to $33.0 million in 2002.
The Company's investment portfolio at the end of 2003 was $261.9 million, an increase of $28.0 million from 2002. As previously discussed (see "Net Interest Income"), the Bank implemented an asset/liability strategy involving FHLB borrowings invested in investment securities. This strategy offset the runoff in the Bank's investment portfolio that was used to fund the Company's loan growth during 2003. On an average balance basis, the Company's investments in non-taxable "qualified issues" of states and political subdivisions were $70.0 million in 2003 and $51.0 million for 2002. Qualified issues are municipal obligations that are considered "small issues" and meet Internal Revenue Service requirements. By meeting these requirements, the interest earned from qualified issues is exempt from federal income taxes.
Note 3 in the Notes to Consolidated Financial Statements displays the
classifications of the Company's investment portfolio, the market value of the
Company's investment portfolio and the maturity distribution.
Loans
The Company has established credit management policies and procedures that
govern both the approval of new loans and the monitoring of the existing
portfolio. The Company manages and controls credit risk through comprehensive
underwriting and approved standards, portfolio diversification guidelines,
dollar limits on loans to one borrower and by restricting loans made primarily
to its principal market area where management believes it is better able to
assess the applicable risk. Management reports regularly to the Board of
Directors regarding trends and conditions in the loan portfolio and regularly
conducts credit reviews of individual loans. Loans that are performing but have
shown some signs of weakness are subjected to more stringent reporting and
oversight.
The Company's loan portfolio at December 31, 2003 increased $110.2 million from December 31, 2002. The increase was due to strong loan demand in the Company's market area, along with an aggressive calling program on high quality loan prospects. Additionally, on an average balance basis, loans have increased $100.1 million or 15.7%. In 2002, average balances increased from the prior year by 21.5% or $112.7 million. The table following sets forth the distribution of the loan portfolio by type as of the dates indicated.
Loan Portfolio As Of:
(in thousands) December 31, 2003 December 31, 2002 ---------------------------- ------------------------- ---------------------- Real Estate $386,735 $322,074 Real Estate Construction 77,115 66,467 Home Equity 55,827 45,150 Agricultural 134,862 109,130 Commercial 136,955 135,877 Consumer 17,504 19,995 ---------------------------- ------------------------- ---------------------- Gross Loans 808,998 698,693 Less: Unearned Income 2,092 2,018 Allowance for Loan Losses 17,220 16,684 ---------------------------- ------------------------- ---------------------- Net Loans $789,686 $ 679,991 ============================ ========================= ====================== |
In the ordinary course of business, the Company enters into commitments to extend credit to its customers. These commitments are not reflected in the accompanying consolidated financial statements. As of December 31, 2003, the Company had entered into loan commitments amounting to $308.4 million compared to $269.2 million at December 31, 2002. Letters of credit issued by the Company at December 31, 2003, and December 31, 2002, were $12.2 million and $15.6 million, respectively.
Non-Performing Assets
Non-performing assets are comprised of non-performing loans (defined as
non-accrual loans plus accruing loans past due 90 days or more) and other real
estate owned. As set forth in the table below, non-performing loans as of
December 31, 2003 were $2.6 million compared to $2.9 million at December 31,
2002. The Company reported no other real estate owned for both December 31, 2003
and December 31, 2002.
The Company's policy is to place loans on non-accrual status when, for any reason, principal or interest is past due for ninety days or more unless it is both well secured and in the process of collection. Any interest accrued, but unpaid, is reversed against current income. Thereafter, interest is recognized as income only as it is collected in cash. Accrued interest reversed from income on loans placed on a non-accrual status totaled $356,000 at December 31, 2003 compared to $331,000 at December 31, 2002. Non-accrual loans to total loans for the year ended 2003 was 0.3%. For the year ended 2002 the percentage was 0.4%.
Non-Performing Assets (dollar amounts in thousands) December 31, 2003 December 31, 2002 --------------------------------------- ------------------ -------------------- Non-performing Loans $2,584 $2,907 Other Real Estate Owned - - ======================================= ================== ==================== Total $2,584 $2,907 ======================================= ================= ===================== Non-Performing Assets as a % of Total Loans 0.32% 0.42% Allowance for Loan Losses as a % of Non-Performing Loans 666.4% 573.9% |
Except for non-performing loans shown in the table above, the Bank's management is not aware of any loans as of December 31, 2003 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present loan repayment terms, or any known events that would result in the loan being designated as non-performing at some future date. The Bank's management cannot, however, predict the extent to which any deterioration in general economic conditions, real estate values, increase in general rates of interest, change in the financial conditions or business of a borrower may adversely affect a borrower's ability to pay.
Although management believes that non-performing loans are generally well secured and that potential losses are provided for in the Company's allowance for loan losses, there can be no assurance that future deterioration in economic conditions or collateral values will not result in future credit losses.
Deposits
One of the key sources of funds to support earning assets is the generation of
deposits from the Company's customer base. The ability to expand the customer
base and subsequently deposits is a significant element in the performance of
the Company.
At December 31, 2003, deposits totaled $904.3 million. This represents an increase of 6.4% or $54.1 million from December 31, 2002. The increase was focused in savings and demand deposit accounts, which increased $44.1 million and $17.0 million, respectively. Time deposit accounts decreased $10.1 million or 3.2% from December 31, 2002 as customers transferred balances to more liquid savings and demand deposit accounts in anticipation of rising rates at some time in the future. The Bank's calling efforts for prospective customers includes acquiring both loan and deposit relationships which results in new demand, interest bearing transaction and savings accounts. In addition, the opening of a new branch in Stockton in September 2002 and Modesto in September 2003 provided additional deposit growth.
The change in the mix of deposits occurs as interest rates change. The expectations our customers have of future interest rates, dictates their maturity and account selections. As rates decreased during 2002 and the first half of 2003, some customers moved from time deposits to demand and savings accounts because they anticipated rates would rise and were unwilling to commit their deposits to long term investments at the current rates.
The most volatile deposits in any financial institution are certificates of deposit over $100,000. The Company has not found its certificates of deposit over $100,000 to be as volatile as some other financial institutions as it does not solicit these types of deposits from brokers nor does it offer interest rate premiums. It has been the Company's experience that large depositors have placed their funds with the Company due to its strong reputation for safety, security and liquidity. Management believes that this is supported by the fact that the $10.1 million decrease in time deposit accounts during 2003 referenced above occurred only in certificates of deposit under $100,000. Certificates of deposit over $100,000 increased $5.7 million or 4.8% during 2003.
Federal Home Loan Bank Advances
Advances from the Federal Home Loan Bank (FHLB) are another key source of funds
to support earning assets. These advances are also used to manage the Bank's
interest rate risk exposure, and as opportunities exist to borrow and invest the
proceeds at a positive spread through the investment portfolio. FHLB advances as
of December 31, 2003 were $111.9 million compared to $41.0 million as of
December 31, 2002. As previously discussed (see Net Interest Income), the Bank
implemented an asset/liability strategy involving FHLB borrowings invested in
investment securities. The average rate paid for FHLB advances was 3.0% in 2003
compared to 5.4% in 2002.
Long-term Subordinated Debentures
On December 17, 2003 the Company raised $10 million through an offering of trust
preferred securities. See Note 19 of Notes to Consolidated Financial Statements.
Although this amount is reflected as subordinated debt on the Company's balance
sheet, under applicable regulatory guidelines, trust preferred securities
qualify as regulatory capital (see Capital). These securities accrue interest at
a variable rate based upon 3-month Libor plus 2.85%. Interest rates reset
quarterly (beginning March 17, 2004) and were 4.02% as of December 31, 2003.
Since these securities were outstanding for only 15 days during 2003, their
impact on interest expense was immaterial.
Capital
The Company relies primarily on capital generated through the retention of
earnings to satisfy its capital requirements. The Company engages in an ongoing
assessment of its capital needs in order to support business growth and to
insure depositor protection. Shareholders' Equity totaled $109.6 million at
December 31, 2003 and $103.6 million at the end of 2002.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios set forth in the table below of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and of Tier I capital (as defined in the regulations) to average assets (as defined in the regulations). Management believes, as of December 31, 2003, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of September 30, 2003, the most recent notification from the Federal Reserve Bank categorized the Company and the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and the Bank must maintain minimum Total risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institutions' categories.
To Be Well
Capitalized Under
Regulatory Capital Prompt Corrective
(in thousands) Actual Requirements Action Provisions
------------------------------------------------------------------------------------------------------------------
The Company: Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------------------------------
As of December 31, 2003
Total Capital to Risk Weighted Assets $132,751 13.24% $ 80,189 8.0% N/A N/A
Tier I Capital to Risk Weighted Assets $120,164 11.99% $ 40,095 4.0% N/A N/A
Tier I Capital to Average Assets $120,164 10.67% $ 45,036 4.0% N/A N/A
To Be Well
Capitalized Under
Regulatory Capital Prompt Corrective
(in thousands) Actual Requirements Action Provisions
------------------------------------------------------------------------------------------------------------------
The Bank: Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------------------------------
As of December 31, 2003
Total Capital to Risk Weighted Assets $123,825 12.39% $ 79,966 8.0% $ 99,958 10.0%
Tier I Capital to Risk Weighted Assets $111,272 11.13% $ 39,983 4.0% $ 59,975 6.0%
Tier I Capital to Average Assets $111,272 9.91% $ 44,908 4.0% $ 56,135 5.0%
|
As previously discussed (see Long-term Subordinated Debentures), in order to supplement its regulatory capital base, during December, 2003 the Company raised $10 million of trust preferred securities. See Note 19 of Notes to Consolidated Financial Statements. Under applicable regulatory guidelines, trust preferred securities qualify as Tier 1 capital up to a maximum of 25% of Tier 1 capital. Any additional portion of trust preferred securities would qualify as Tier 2 capital. The Company has received notification from the Federal Reserve Bank of San Francisco that all of the Company's trust preferred securities currently qualify as Tier 1 capital.
During 2003, the Company repurchased 5,732 shares at an average share price of $256 per share. In 2002, the Company repurchased 20,749 shares at an average share price of $241.
OFF-BALANCE-SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Off-balance-sheet arrangements are any contractual arrangement to which an unconsolidated entity is a party, under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or engages in leasing, hedging or research and development services with the Company.
Our most significant off-balance-sheet arrangements are limited to: (1) the full and unconditional payment guarantee of accrued distributions relating to $10 million of Trust Preferred Securities issued by FMCB Statutory Trust (See Note 19 of the Consolidated Financial Statements); (2) derivative instruments indexed to the Prime Rate (See Note 14 of the Consolidated Financial Statements); (3) obligations under guarantee contracts such as financial and performance standby letters of credit for our credit customers (See Note 15 of the Consolidated Financial Statements); (4) commercial letters of credit (See Note 15 of the Consolidated Financial Statements); (5) unfunded commitments to lend (See Note 15of the Consolidated Financial Statements); and (6) property lease contracts (See Note 15 of the Consolidated Financial Statements). It is our belief that none of these arrangements expose us to any greater risk of loss than is already reflected on our balance sheet. We do not have any off-balance-sheet arrangements in which we have any retained or contingent interest (as we do not transfer or sell our assets to entities in which we have a continuing involvement), any exposure to derivative instruments that are indexed to stock indices nor any variable interests in any unconsolidated entity to which we may be a party.
The following table presents, as of December 31, 2003, our significant and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discount, hedge basis adjustment or other similar carrying value adjustments. For further information on the nature of each obligation type, see applicable note disclosure in "Notes to Consolidated Financial Statements".
Payments Due By Period
(in thousands)
---------------------------------------------------- ------------ ------------ ------------- ----------- ------------- Contractual Total Less than 1-3 Years 3-5 years More than Obligations 1 Year 5 Years ---------------------------------------------------- ------------ ------------ ------------- ----------- ------------- Operating Lease Obligations $ 644 $ 251 $ 246 $ 93 $ 54 ---------------------------------------------------- ------------ ------------ ------------- ----------- ------------- Other Long-Term Liabilities Reflected On the 10,310 - - - 10,310 Company's Balance Sheet under GAAP ---------------------------------------------------- ------------ ------------ ------------- ----------- ------------- Total $ 10,954 $ 251 $ 246 $ 93 $ 10,364 ---------------------------------------------------- ------------ ------------ ------------- ----------- ------------- |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management
The Company has adopted a Risk Management Plan which aims to ensure the proper
control and management of all risk factors inherent in the operation of the
Company and the Bank. Specifically, credit risk, interest rate risk, liquidity
risk, compliance risk, strategic risk, reputation risk and price risk can all
affect the market risk of the Company. These specific risk factors are not
mutually exclusive. It is recognized that any product or service offered by the
Company may expose the Company and the Bank to one or more of these risk
factors.
Credit Risk
Credit risk is the risk to earnings or capital arising from an obligor's failure
to meet the terms of any contract or otherwise fail to perform as agreed. Credit
risk is found in all activities where success depends on counterparty, issuer or
borrower performance.
Credit risk in the investment portfolio and correspondent bank accounts is addressed through defined limits in the Bank's policy statements. In addition, certain securities carry insurance to enhance credit quality of the bond.
Credit risk in the loan portfolio is controlled by limits on industry concentration, aggregate customer borrowings and geographic boundaries. Standards on loan quality also are designed to reduce loan credit risk. Senior Management, Directors' Committees, and the Board of Directors are regularly provided with information intended to identify, measure, control and monitor the credit risk of the Bank.
The Company's methodology for assessing the appropriateness of the allowance is applied on a regular basis and considers all loans. The systematic methodology consists of two major elements. The first major element includes a detailed analysis of the loan portfolio in two phases. The first phase is conducted in accordance with SFAS No. 114, "Accounting by Creditors for the Impairment of a Loan" as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures." Individual loans are reviewed to identify loans for impairment. A loan is impaired when principal and interest are deemed uncollectable in accordance with the original contractual terms of the loan. Impairment is measured as either the expected future cash flows discounted at each loan's effective interest rate, the fair value of the loan's collateral if the loan is collateral dependent, or an observable market price of the loan (if one exists). Upon measuring the impairment, the Company will ensure an appropriate level of allowance is present or established.
Central to the first phase and the Company's credit risk management is its loan risk rating system. The originating credit officer assigns borrowers an initial risk rating, which is based primarily on a thorough analysis of each borrower's financial position in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior credit administration personnel. Credits are monitored by credit administration personnel for deterioration in a borrower's financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary.
Based on the risk rating system specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates the possibility of loss. Management performs a detailed analysis of these loans, including, but not limited to, cash flows, appraisals of the collateral, conditions of the marketplace for liquidating the collateral and assessment of the guarantors. Management then determines the inherent loss potential and allocates a portion of the allowance for losses as a specific allowance for each of these credits.
The second phase is conducted by segmenting the loan portfolio by risk rating and into groups of loans with similar characteristics in accordance with SFAS No. 5, "Accounting for Contingencies". In this second phase, groups of loans are reviewed and applied the appropriate allowance percentage to determine a portfolio formula allowance.
The second major element in the Company's methodology for assessing the appropriateness of the allowance consists of management's considerations of all known relevant internal and external factors that may affect a loan's collectibility. This includes management's estimates of the amounts necessary for concentrations, economic uncertainties, the volatility of the market value of collateral and other relevant factors. The relationship of the two major elements of the allowance to the total allowance may fluctuate from period to period.
The second major element of the analysis, which considers all known relevant internal and external factors that may affect a loan's collectibility, is based upon management's evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the second element of the analysis of the allowance include, but are not limited to the following conditions that existed as of the balance sheet date:
|X| then-existing general economic and business conditions affecting the key
lending areas of the Company;
|X| credit quality trends (including trends in non-performing loans expected to
result from existing conditions);
|X| collateral values;
|X| loan volumes and concentrations;
|X| seasoning of the loan portfolio;
|X| specific industry conditions within portfolio segments;
|X| recent loss experience in particular segments of the portfolio;
|X| duration of the current business cycle;
|X| bank regulatory examination results; and
|X| findings of the Company's internal credit examiners.
Management reviews these conditions in discussion with the Company's senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's evaluation of the inherent loss related to such condition is reflected in the second major element allowance.
Implicit in lending activities is the risk that losses will and do occur and that the amount of such losses will vary over time. Consequently, the Company maintains an allowance for loan losses by charging a provision for loan losses to earnings. Loans determined to be losses are charged against the allowance for loan losses. The Company's allowance for loan losses is maintained at a level considered by management to be adequate to provide for estimated losses inherent in the existing portfolio along with unused commitments to provide financing including commitments under commercial and standby letters of credit.
Management believes that the allowance for loan losses at December 31, 2003 was adequate to provide for both recognized losses and estimated inherent losses in the portfolio. No assurances can be given that future events may not result in increases in delinquencies, non-performing loans or net loan chargeoffs that would increase the provision for loan losses and thereby adversely affect the results of operations.
Market Risk - Interest Rate Risk
The mismatch between maturities of interest sensitive assets and liabilities
results in uncertainty in the Company's earnings and economic value and is
referred to as interest rate risk. The Company's primary objective in managing
interest rate risk is to minimize the potential for significant loss as a result
of changes in interest rates.
The Company measures interest rate risk in terms of potential impact on both its economic value and earnings. The methods for governing the amount of interest rate risk include: analysis of asset and liability mismatches (GAP analysis), the utilization of a simulation model and limits on maturities of investment, loan and deposit products which reduces the market volatility of those instruments.
The Gap analysis measures, at specific time intervals, the divergence between earning assets and interest bearing liabilities for which repricing opportunities will occur. A positive difference, or Gap, indicates that earning assets will reprice faster than interest-bearing liabilities. This will generally produce a greater net interest margin during periods of rising interest rates and a lower net interest margin during periods of declining interest rates. Conversely, a negative gap will generally produce a lower net interest margin during periods of rising interest rates and a greater net interest margin during periods of decreasing interest rates.
The interest rates paid on deposit accounts do not always move in unison with the rates charged on loans. In addition, the magnitude of changes in the rates charged on loans is not always proportionate to the magnitude of changes in the rate paid for deposits. Consequently, changes in interest rates do not necessarily result in an increase or decrease in the net interest margin solely as a result of the differences between repricing opportunities of earning assets or interest bearing liabilities.
The Company also utilizes the results of a dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. The sensitivity of the Company's net interest income is measured over a rolling one-year horizon.
The simulation model estimates the impact of changing interest rates on interest income from all interest earning assets and the interest expense paid on all interest bearing liabilities reflected on the Company's balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given a 200 basis point upward and a 100 basis point downward shift in interest rates. A shift in rates over a 12-month period is assumed. Results that exceed policy limits, if any, are analyzed for risk tolerance and reported to the Board with appropriate recommendations. At December 31, 2003, the Company's estimated net interest income sensitivity to changes in interest rates, as a percent of net interest income was an increase in net interest income of 2.43% if rates increase by 200 basis points and a decrease in net interest income of 1.11% if rates decline 100 basis points.
The estimated sensitivity does not necessarily represent a Company forecast and the results may not be indicative of actual changes to the Company's net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, pricing strategies on loans and deposits, replacement of asset and liability cashflows, and other assumptions. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change. See Note 13 of the Notes to the Consolidated Financial Statements.
Liquidity Risk
Liquidity risk is the risk to earnings or capital resulting from the Bank's
inability to meet its obligations when they come due without incurring
unacceptable losses. It includes the ability to manage unplanned decreases or
changes in funding sources and to recognize or address changes in market
conditions that affect the Bank's ability to liquidate assets or acquire funds
quickly and with minimum loss of value. The Company endeavors to maintain a cash
flow adequate to fund operations, handle fluctuations in deposit levels, respond
to the credit needs of borrowers and to take advantage of investment
opportunities as they arise. The principal sources of liquidity include credit
facilities from correspondent banks, brokerage firms and the Federal Home Loan
Bank, as well as, interest and principal payments on loans and investments,
proceeds from the maturity or sale of investments, and growth in deposits.
In general, liquidity risk is managed daily by controlling the level of Federal Funds and the use of funds provided by the cash flow from the investment portfolio. The Company maintains overnight investments in Federal Funds as a cushion for temporary liquidity needs. During 2003, Federal Funds averaged $15.9 million. The Company maintains Federal Fund credit lines of $50 million with major banks subject to the customary terms and conditions for such arrangements and $175 million in repurchase lines with major brokers. In addition the Company has additional borrowing capacity of $145 million from the Federal Home Loan Bank.
At December 31, 2003, the Company had available liquid assets, which included cash and cash equivalents and unpledged investment securities of approximately $186 million, which represents 16.2% of total assets.
CONTROLS AND PROCEDURES
The Company maintains controls and procedures designed to ensure that all
relevant information is recorded and reported in all filings of financial
reports. Such information is reported to the Company's management, including its
Chief Executive Officer and its Chief Financial Officer to allow timely and
accurate disclosure based on the definition of "disclosure controls and
procedures" in Rule 13a-14(c). In designing these controls and procedures,
management recognizes that they can only provide reasonable assurance of
achieving the desired control objectives. Management also evaluated the
cost-benefit relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried out an evaluation of the effectiveness of Company's controls and disclosure procedures under the supervision and with the participation of the Chief Executive Officer, the Chief Financial Officer and other senior management of the Company. Based on the foregoing, the Company's Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.
Available Information
Company reports filed with the Securities and Exchange Commission (the
"Commission") including the annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, proxy statements and other information
can be accessed through the Company's web site. The Company web address is
http://www.fmbonline.com. The link to the Securities and Exchange Commission is
on the About F & M Bank page.
Exhibit 14
FARMERS & MERCHANTS BANCORP
FARMERS & MERCHANTS BANK
EMPLOYEE CODE OF CONDUCT
GENERAL
This policy applies to all employees of Farmers & Merchants Bank of Central California and Farmers & Merchants Bancorp, hereafter collectively referred to as "the Company". The Company recognizes the importance of establishing policy governing the conduct of its employees. This Code of Conduct directs all employees (officers and non officers) to apply the following fundamental principles during the daily performance of duties.
1. Employees are expected to treat customers and their coworkers with courtesy and respect.
NOTE: Included but not limited to this expectation is employee compliance with the Company's Prohibited Harassment Policy. The Company maintains a strict policy prohibiting sexual harassment and harassment because of race, religious creed, color, national origin, ancestry, disability, medical condition, marital status, age or any other basis made unlawful by applicable federal, state, or local law or ordinance or regulation. All employees are required to read and be familiar with the Company's policy regarding prohibited harassment - PPM 011.9.
2. Employees must perform their duties in a manner consistent with commonly accepted principles of business ethics which promote compliance with applicable laws, statutes, regulations and rulings.
3. Employees have a responsibility to ensure that the Company operates in a safe and sound manner. Full compliance with the Company's Injury and Illness Prevention Plan is required. All employees are expected to report any unsafe or potentially unsafe conditions immediately. This includes having a duty to avoid conduct which would or could create an unsafe and unsound condition for the Company.
4. Employees have a duty to refrain from enriching themselves at the expense of the Company or its customers.
5. Employees must not process transactions for their own or any family member's accounts. All such transactions must be processed by other employees.
FINANCIAL DISCLOSURE, INSIDER TRADING, AND EXECUTIVE CONDUCT
1. All disclosures made by employees in public communications and reports or documents filed or submitted to the Securities Exchange Commission must be full, fair, accurate, timely and understandable.
2. In accordance with SEC regulations, Farmers & Merchants Bancorp's principal executive officer, principal performing financial officer, principal accounting officer or controller, and/or persons performing similar functions are required to perform their duties in a manner consistent with commonly accepted principles of business ethics which promote compliance with applicable laws, statutes, regulations and rulings.
3. Designated employees covered by the Insider Trading Policy are prohibited from trading in the Farmers & Merchants Bancorp's stock while in possession of material, non-public information and during certain periods of time designated as "blackout periods"
USE OF EQUIPMENT & COMMUNICATIONS
1. Employees may not use the Company's equipment, supplies, books, records, files (written or electronic) for their own interests or the interest of any person or entity other than the Company. This includes but is not limited to computers, computer software, FAX machines, copy machines, bank stationary and postage.
2. Restraint should be used to limit personal telephone calls. Calls should be limited to emergencies and infrequent, essential personal business. Long distance charges should normally be made at the expense of the employee.
3. The Internet, FMB Intranet and interoffice mail and e-mail is to be used for Company related communications only. Personal messages, non-bank related correspondence, bulletins, jokes, etc. are not considered proper use of these resources. The Company also reserves the right to review, audit, intercept access and disclose all messages created, sent or received for any purposes.
OUTSIDE BUSINESS ACTIVITIES & AFFILIATIONS
1. Employees must not make statements or create the impression that their outside employment or outside activities are supported by the Company.
2. All employees have a duty of loyalty to the Company and should act accordingly.
3. Employees must refrain from dealing with competitors in a manner which would violate anti-trust requirements and must not use any materials in violation of copyright and trademark protection laws.
4. Employees presented with a business opportunity related to their employment with the Company have a duty to determine whether that opportunity would or could be advantageous to the Company and present that opportunity to the Company.
5. Employees are prohibited from using their position with the Company to take advantage of business opportunities from customers or potential customers which are not generally available to other persons or are made available to the employee because of the employee's position with the Company.
EMPLOYEE FINANCES
1. Employees must manage and maintain any accounts that they may have with the Company in a responsible manner in accordance with the Company's policy PPM 011.5, Employee Personal Finances.
2. Employees should not borrow from each other or from customers, unless they are family members or recognized lending institutions.
3. Employees must not purchase any Company asset unless the Company is paid the fair market value. (Financial Code 3350)
4. Employees shall not participate in any gambling activity while on property owned or leased by the Company or while conducting their duties as an employee. (This provision shall not apply to a state authorized lottery or "chances" sponsored by a bona fide charity or nonprofit organization if state law permits such activity.)
GIFTS & ENTERTAINMENT (Accepting/Giving)
1. Employees must not accept anything of value (other than bonafide salary, wages or fees) from anyone in connection with the business of the Company.
An employee will violate the law and this Code if he/she corruptly solicits or demands for the benefit of any person, or corruptly accepts or agrees to accept, anything of value from any person, intending to be influenced or required in connection with any business or transaction of the Company.
Note: The penalties that could result in the receipt of "Gifts" under the Comprehensive Crime Control Act of 1984 are as follows:
- If the value is $100 or less, the crime is a misdemeanor, with a fine of up to $1,000 and/or up to 1 year in prison.
- If the value exceeds $100, the crime is a felony, with a fine up to $5,000 or 3 times the value involved and/or up to 5 years in prison.
The following are exceptions to the general prohibition regarding the acceptance of things of value in connection with Company business.
Examples of Exceptions Allowed:
o Benefit is based on obvious and clear family or personal relationships rather than the business of the Company.
o Meals, refreshments, travel arrangements, travel accommodations, or entertainment of reasonable value (under $250 per meeting) in the course of a bona fide business meeting if expenses would have been paid for by the Company itself as reasonable business expenses had the expenses not been paid for by the third party.
o Loans, unless prohibited by law, from other financial institutions, on customary terms to finance proper and usual activities (such as a home mortgage loan)
o Advertising or promotional material of reasonable value such as pens, pencils, note pads, key chains, calendars, and similar items.
o Discounts or rebates on merchandise or services available to other customers at the same or less value.
o Gifts of reasonable value (under $150 per customer per year) related to commonly recognized events or occasions, such as a promotion, new job, wedding, retirement, Christmas, or bar mitzvah.
o Awards for recognition of service or accomplishments related to civic, charitable, educational, or religious organizations.
o Business luncheons.
2. Employees will violate the law and this Code if they corruptly give, offer or promise anything of value to any person with intent to influence or reward an Officer, Director, employee, agent or attorney of the Company in connection with any business or transaction of the Company.
Gifts and entertainment are provided for customers only when they are appropriate under the circumstances, meet the standards of ethical business conduct, and involve no element of concealment.
REPORTING VIOLATIONS
1. Employees have a duty to promptly report violations of this Code, any crime, suspected crime, or unexplained losses to the Company's Director of Human Resources and the Company's Compliance Officer.
Remedies and penalties for violations of this code will be determined by the Board of Directors as the nature and circumstances of the violations warrant and as appropriate.
Exhibit 21
LIST OF SUBSIDIARIES OF FARMERS & MERCHANTS BANCORP
Farmers & Merchants Bank of Central California (incorporated in California)
F & M Bancorp, Inc. (incorporated in California)
FMCB Statutory Trust I (incorporated in Connecticut)
Farmers & Merchants Investment Corporation (incorporated in California), a subsidiary of Farmers & Merchants Bank of Central California.
Farmers/Merchants Corp. (incorporated in California), a subsidiary of Farmers & Merchants Bank of Central California.
Exhibit 31
Certification
I, Kent A. Steinwert, certify that:
1. I have reviewed this annual report on Form 10-K of Farmers & Merchants
Bancorp;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared; (b) Evaluated the effectiveness of
the registrant's disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this
report based on such evaluation; and (c) Disclosed in this report any
change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and (b)
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 10, 2004
/s/ Kent A. Steinwert
--------------------------------
Kent A. Steinwert
President & Chief Executive Officer
|
Exhibit 31
Certification
I, Stephen W. Haley, certify that:
1. I have reviewed this annual report on Form 10-K of Farmers & Merchants
Bancorp;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared; (b) Evaluated the effectiveness of
the registrant's disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this
report based on such evaluation; and (c) Disclosed in this report any
change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and (b)
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 10, 2004
/s/ Stephen W. Haley
------------------------------------
Stephen W. Haley
Executive Vice President
& Chief Financial Officer
|
Exhibit 32
STATEMENT OF CHIEF EXECUTIVE OFFICER UNDER 10 U.S.C. SECTION 1350
In connection with the filing of the Annual Report of Farmers & Merchants Bancorp (the "Company") on Form 10-K for the period ending December 31, 2003 (the "Report"), I, Kent A. Steinwert, the chief executive officer of the Company, certify pursuant to section 1350 of chapter 63 of title 18 of the United States Code that, to my knowledge,
(i) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Kent A. Steinwert --------------------------- Kent A. Steinwert President & Chief Executive Officer March 10, 2004 |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32
STATEMENT OF CHIEF FINANCIAL OFFICER UNDER 10 U.S.C. SECTION 1350
In connection with the filing of the Annual Report of Farmers & Merchants Bancorp (the "Company") on Form 10-K for the period ending December 31, 2003 (the "Report"), I, Stephen W. Haley, the chief financial officer of the Company, certify pursuant to section 1350 of chapter 63 of title 18 of the United States Code that, to my knowledge,
(i) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Stephen W. Haley --------------------------- Stephen W. Haley Executive Vice President & Chief Financial Officer March 10, 2004 |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.