UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
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: 000-26099
FARMERS & MERCHANTS BANCORP
(Exact name of registrant as specified in its charter)
DELAWARE 94-3327828
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
111 W. Pine Street, Lodi, California 95240
(Address of principal Executive offices) (Zip Code)
Registrant's telephone number, including area code (209) 367-2300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act: (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Number of shares of common stock of the registrant: Par value $0.01, authorized
2,000,000 shares; issued and outstanding 819,485 as of May 1, 2006.
FARMERS & MERCHANTS BANCORP
FORM 10-Q
TABLE OF CONTENTS
-----------------------
PART I. - FINANCIAL INFORMATION PAGE
--------------------- ----
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2006 (Unaudited),
December 31, 2005 and March 31, 2005 (Unaudited). 4
Consolidated Statements of Income (Unaudited) for the Three Months
Ended March 31, 2006 and 2005. 5
Consolidated Statements of Comprehensive Income (Unaudited) for the Three
Months Ended March 31, 2006 and 2005. 6
Consolidated Statements of Changes in Shareholders' Equity (Unaudited) for the
Three Months Ended March 31, 2006 and 2005. 7
Consolidated Statements of Cash Flows (Unaudited) for the Three Months
Ended March 31, 2006 and 2005 8
Notes to the Consolidated Financial Statements 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 13
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25
ITEM 4 - CONTROLS AND PROCEDURES 29
PART II. - OTHER INFORMATION
-----------------
ITEM 1 - LEGAL PROCEEDINGS 29
ITEM 1A - RISK FACTORS 29
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 30
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 30
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 30
2
ITEM 5 - OTHER INFORMATION 30
ITEM 6 - EXHIBITS 30
SIGNATURES 31
INDEX TO EXHIBITS 31
3
PART I. - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FARMERS & MERCHANTS BANCORP
CONSOLIDATED BALANCE SHEETS
===========================================================================================
(in thousands) March 31, December 31, March 31,
2006 2005 2005
ASSETS (Unaudited) (Unaudited)
-------------------------------------------------------------------------------------------
Cash and Cash Equivalents:
Cash and Due From Banks $ 38,846 $ 50,669 $ 32,566
Federal Funds Sold 10,125 - 2,700
-------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 48,971 50,669 35,266
Investment Securities:
Available-for Sale 152,249 158,029 162,763
Held-to-Maturity 109,329 109,911 113,145
-------------------------------------------------------------------------------------------
Total Investment Securities 261,578 267,940 275,908
-------------------------------------------------------------------------------------------
Loans 958,227 973,257 856,832
Less: Allowance for Loan Losses 18,258 17,860 17,758
-------------------------------------------------------------------------------------------
Loans, Net 939,969 955,397 839,074
-------------------------------------------------------------------------------------------
Premises and Equipment, Net 18,491 17,522 14,913
Bank Owned Life Insurance 37,195 36,799 35,606
Interest Receivable and Other Assets 20,979 24,662 20,811
-------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,327,183 $ 1,352,989 $ 1,221,578
===========================================================================================
LIABILITIES
-------------------------------------------------------------------------------------------
Deposits:
Demand $ 277,028 $ 325,745 $ 247,812
Interest Bearing Transaction 130,644 138,321 114,049
Savings 279,162 283,226 313,099
Time 396,984 356,048 355,049
-------------------------------------------------------------------------------------------
Total Deposits 1,083,818 1,103,340 1,030,009
-------------------------------------------------------------------------------------------
Fed Funds Purchased - 650 -
Federal Home Loan Bank Advances 90,835 98,847 40,878
Subordinated Debentures 10,310 10,310 10,310
Interest Payable and Other Liabilities 14,805 16,194 20,936
-------------------------------------------------------------------------------------------
Total Liabilities 1,199,768 1,229,341 1,102,133
-------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common Stock 8 8 8
Additional Paid-In Capital 94,821 95,862 82,231
Retained Earnings 34,400 29,463 39,763
Accumulated Other Comprehensive Loss (1,814) (1,685) (2,557)
-------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 127,415 123,648 119,445
-------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,327,183 $ 1,352,989 $ 1,221,578
===========================================================================================
The accompanying notes are an integral part of these unaudited consolidated financial
statements
4
FARMERS & MERCHANTS BANCORP
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
====================================================================================
(in thousands except per share data) Three Months
Ended March 31,
2006 2005
------------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $ 17,882 $ 13,436
Interest on Federal Funds Sold and Securities Purchased
Under Agreements to Resell 13 42
Interest on Investment Securities:
Taxable 1,997 1,895
Tax-Exempt 811 720
------------------------------------------------------------------------------------
Total Interest Income 20,703 16,093
------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 3,393 2,000
Borrowed Funds 1,172 589
Subordinated Debentures 189 140
------------------------------------------------------------------------------------
Total Interest Expense 4,754 2,729
------------------------------------------------------------------------------------
NET INTEREST INCOME 15,949 13,364
Provision for Loan Losses 275 -
------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,674 13,364
------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service Charges on Deposit Accounts 1,045 1,034
Net (Loss) Gain on Sale of Investment Securities (419) 161
Credit Card Merchant Fees 518 460
Increase in Cash Surrender Value of Life Insurance 396 371
ATM Fees 279 204
Other 785 672
------------------------------------------------------------------------------------
Total Non-Interest Income 2,604 2,902
------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 7,286 6,305
Occupancy 609 530
Equipment 675 475
Credit Card Merchant Expense 378 319
Marketing 147 320
Other 1,439 1,350
------------------------------------------------------------------------------------
Total Non-Interest Expense 10,534 9,299
------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 7,744 6,967
Provision for Income Taxes 2,807 2,536
------------------------------------------------------------------------------------
NET INCOME $ 4,937 $ 4,431
====================================================================================
EARNINGS PER SHARE $ 6.00 $ 5.33
====================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements
5
FARMERS & MERCHANTS BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
===========================================================================================================
(in thousands) Three Months
Ended March 31,
2006 2005
-----------------------------------------------------------------------------------------------------------
NET INCOME $ 4,937 $ 4,431
OTHER COMPREHENSIVE LOSS -
UNREALIZED GAINS ON DERIVATIVE INSTRUMENTS:
Unrealized holding gains arising during the period, net
of income tax effects of $0 and $0 for the quarters ended
March 31, 2006 and 2005, respectively. - -
Less: Reclassification adjustment for realized losses (gains) included in net
income, net of related income tax effects of $0 and $(3) for the
quarters ended March 31, 2006 and 2005, respectively. 1 (4)
UNREALIZED LOSSES ON SECURITIES:
Unrealized holding losses arising during the period, net of income tax
benefits of $271 and $1,037 for the quarters ended March 31, 2006 and
2005, respectively. (373) (1,430)
Less: Reclassification adjustment for realized losses (gains) included in net
income, net of related income tax effects of $176 and $(68) for the
quarters ended March 31, 2006 and 2005, respectively. 243 (93)
-----------------------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE LOSS (129) (1,527)
-----------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 4,808 $ 2,904
===========================================================================================================
The accompanying notes are an integral part of these unaudited consolidated financial statements
6
FARMERS & MERCHANTS BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
============================================================================================================================
(in thousands except share data) ACCUMULATED
COMMON ADDITIONAL OTHER TOTAL
SHARES COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
OUTSTANDING STOCK CAPITAL EARNINGS INCOME EQUITY
----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004 831,717 $ 8 $ 82,237 $ 35,332 $ (1,030) $ 116,547
============================================================================================================================
Net Income - - 4,431 - 4,431
Repurchase of Stock (13) - (6) - - (6)
Change in Net Unrealized Gains on
Derivitive Instruments (4) (4)
Change in Net Unrealized Loss
on Securities Available for Sale - - - (1,523) (1,523)
----------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2005 831,704 $ 8 $ 82,231 $ 39,763 $ (2,557) $ 119,445
============================================================================================================================
----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2005 823,651 $ 8 $ 95,862 $ 29,463 $ (1,685) $ 123,648
============================================================================================================================
Net Income - - 4,937 - 4,937
Repurchase of Stock (2,101) - (1,041) - - (1,041)
Change in Net Unrealized Gains on
Derivitive Instruments 1 1
Change in Net Unrealized Loss
on Securities Available for Sale - - - (130) (130)
----------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2006 821,550 $ 8 $ 94,821 $ 34,400 $ (1,814) $ 127,415
============================================================================================================================
The accompanying notes are an integral part of these unaudited consolidated financial statements
7
FARMERS & MERCHANTS BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED) Three Months Ended
================================================================================================
(in thousands) March 31 March 31
2006 2005
------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net Income $ 4,937 $ 4,431
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Provision for Loan Losses 275 -
Depreciation and Amortization 458 365
Provision for Deferred Income Taxes - -
Net Amortization of Investment Security Premium & Discounts 24 158
Net Loss (Gain) on Sale of Investment Securities 419 (161)
Net Change in Operating Assets & Liabilities:
Net Decrease (Increase) in Interest Receivable and Other Assets 3,384 (9,410)
Net (Decrease) Increase in Interest Payable and Other Liabilities (1,389) 4,497
------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities 8,108 (120)
INVESTING ACTIVITIES:
Securities Available-for-Sale:
Purchased (10,331) (10,398)
Sold, Matured or Called 15,457 30,796
Securities Held-to-Maturity:
Purchased (3) (18,258)
Matured or Called 570 3,394
Net Loans Originated or Acquired 14,895 10,031
Principal Collected on Loans Previously Charged Off 258 76
Net Additions to Premises and Equipment (1,427) (307)
------------------------------------------------------------------------------------------------
Net Cash Provided by Investing Activities 19,419 15,334
FINANCING ACTIVITIES:
Net Decrease in Demand, Interest-Bearing Transaction,
and Savings Accounts (60,458) (8,277)
Increase in Time Deposits 40,936 36,176
Net Decrease in Federal Funds Purchased (650) -
Net Decrease in Federal Home Loan Bank Advances (8,012) (40,011)
Stock Repurchases (1,041) (6)
------------------------------------------------------------------------------------------------
Net Cash Used by Financing Activities (29,225) (12,118)
Increase (Decrease) in Cash and Cash Equivalents (1,698) 3,096
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 50,669 32,170
------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AS OF MARCH 31, 2006 AND MARCH 31, 2005 $ 48,971 $ 35,266
================================================================================================
The accompanying notes are an integral part of these unaudited consolidated financial statements
8
FARMERS & MERCHANTS BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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) which was established
in 1916. The Bank's wholly owned subsidiaries include Farmers & Merchants
Investment Corporation and Farmers/Merchants Corp. Farmers & Merchants
Investment Corporation has been dormant since 1991. Farmers/Merchants Corp. acts
as trustee on deeds of trust originated by the Bank.
The Company's other subsidiaries include F & M Bancorp, Inc. and FMCB Statutory
Trust I. F & M Bancorp, Inc. was created in March 2002 to protect the name F & M
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. 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 principles (GAAP), and was formed for the sole purpose of issuing
Trust Preferred Securities. The accounting and reporting policies of the Company
conform with accounting principles generally accepted in the United States of
America and prevailing practice within the banking industry. 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 of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States of America for financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all
adjustments (which consist solely of normal recurring accruals) considered
necessary for a fair presentation of the results for the interim periods
presented have been included. These interim consolidated financial statements
should be read in conjunction with the financial statements and related notes
contained in the Company's 2005 Annual Report to Shareholders on Form 10-K.
The accompanying consolidated financial statements include the accounts of the
Company and the Company's wholly owned subsidiaries, F & M Bancorp, Inc. and the
Bank, along with the Bank's wholly owned subsidiaries, Farmers & Merchants
Investment Corporation and Farmers/Merchants Corp. Significant inter-company
transactions have been eliminated in consolidation. The results of operations
for the three-month period ended March 31, 2006 may not necessarily be
indicative of the operating results for the full year 2006.
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
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.
9
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, 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 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 occur.
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. 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.
Trading securities, if any, are acquired for short-term appreciation and are
recorded in a trading portfolio 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 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 the observable or estimated market price of the loan or on the fair
value of the collateral if the loan is collateral dependent. Impaired loans are
placed on 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.
10
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 are inherent in the portfolio. The allowance is reduced
by charge-offs and increased by provisions charged to operating expense and by
recoveries on loans previously charged-off. 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 many
factors in determining the adequacy of the allowance at the balance sheet date.
The factors evaluated in connection with the allowance may include existing
general economic and business conditions affecting the key lending areas of the
Company, current levels of problem loans and delinquencies, credit quality
trends, collateral values, loan volumes and concentrations, 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
to the Consolidated Financial Statements in the Company's 2005 Annual Report to
Shareholders.
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 probable.
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, which is included in other assets, is comprised of properties
no longer utilized for business operations and property acquired through
foreclosure 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.
11
INCOME TAXES
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.
DIVIDENDS AND EARNINGS PER SHARE
Farmers & Merchants Bancorp common stock is not traded on any exchange. The
shares are primarily held by local residents and are not actively traded. No
dividends were declared during the first quarter of 2005 or 2004.
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 for the three month periods ended March 31, 2006
and 2005 were 822,275 and 831,705, respectively. Prior periods have been
restated for applicable 5% stock dividends paid.
SEGMENT REPORTING
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 holding company for 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. Therefore, we only
report one segment.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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 (loss), net
of related income taxes. Ineffective portions of changes in the fair value of
cash flow hedges are recognized in earnings.
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
12
gain or loss in earnings in the period of change or in other comprehensive
income (loss). The Company was not utilizing any derivative instruments as of
March 31, 2006.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. Other comprehensive
income refers to revenues, expenses, gains and losses that generally accepted
accounting principles recognize as changes in value to an enterprise but are
excluded from net income. For the Company, comprehensive income (loss) includes
net income and changes in fair value of its available-for-sale investment
securities, minimum pension liability adjustments and cash flow hedges.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the major factors that
influenced our financial performance for the three months ended March 31, 2006.
This analysis should be read in conjunction with our 2005 Annual Report, filed
as exhibit 13 on Form 10-K, and with the unaudited financial statements and
notes as set forth in this report.
FORWARD-LOOKING STATEMENTS
This quarterly 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, agricultural, 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; and (viii) other factors
discussed in the Company's Form 10-K filing for the year-ended December 31, 2005
with the Securities and Exchange Commission.
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, or the Company, is a bank holding company formed
March 10, 1999. Its subsidiary, Farmers & Merchants Bank of Central California,
or the Bank, is a California state-chartered bank formed in 1916. The Bank
serves the northern Central Valley of California with 19 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.
13
Substantially all of the Company's business activities are conducted within its
market area.
As a bank holding company, the Company is subject to regulation and examination
by the Board of Governors of the Federal Reserve System ("FRB"). The Bank is a
California state-chartered non-FED member bank subject to the regulation and
examination of the California Department of Financial Institutions and the
Federal Deposit Insurance Corporation.
OVERVIEW
The Company's primary service area encompasses the northern Central Valley of
California, a region that is impacted by the seasonal needs of the agricultural
industry. Accordingly, discussion of the Company's Financial Condition and
Results of Operations is influenced by the seasonal banking needs of its
agricultural customers (e.g., during the spring and summer customers draw down
their deposit balances and increase loan borrowing to fund the purchase of
equipment and planting of crops. Correspondingly, deposit balances are
replenished and loans repaid in fall and winter as crops are harvested and
sold).
For the three months ended March 31, 2006, Farmers & Merchants Bancorp reported
net income of $4,937,000, earnings per share of $6.00 and return on average
assets of 1.48%. Return on average shareholders' equity was 15.82% for the
three months ended March 31, 2006.
For the three months ended March 31, 2005, Farmers & Merchants Bancorp reported
net income of $4,431,000, earnings per share of $5.33 and return on average
assets of 1.46%. Return on average shareholders' equity was 15.04% for the
three months ended March 31, 2005.
The Company's improved earnings performance in the first quarter of 2006 when
compared to the same period last year was due to a combination of (1) growth in
earning assets; and (2) continued improvement in the net interest margin due to
rising interest rates.
The following is a summary of the financial results for the three-month period
ended March 31, 2006 compared to March 31, 2005.
- Net income increased 11.4% to $4.9 million from $4.4 million.
- Earnings per share increased 12.6% to $6.00 from $5.33.
- Net interest income increased 19.3% to $15.9 million from $13.4 million.
- Net interest margin on a tax-equivalent basis increased 44 basis points
from 4.93% to 5.37%.
- Total assets increased 8.6% to $1.3 billion.
- Total loans increased 11.8% to $958.2 million.
RESULTS OF OPERATIONS
NET INTEREST INCOME / NET INTEREST MARGIN
The tables on the following pages reflect the Company's average balance sheets
and volume and rate analysis for the three month periods ended March 31, 2006
and 2005.
14
The average yields on earning assets and average rates paid on interest-bearing
liabilities have been computed on an annualized basis for purposes of
comparability with full year data. Average balance amounts for assets and
liabilities are the computed average of daily balances.
Net interest income is the amount by which the interest and fees on loans and
other interest earning assets exceed the interest paid on interest bearing
sources of funds. For the purpose of analysis, the interest earned on
tax-exempt investments and municipal loans is adjusted to an amount comparable
to interest subject to normal income taxes. This adjustment is referred to as
"taxable equivalent" and is noted wherever applicable.
The Volume and Rate Analysis of Net Interest Income summarizes the changes in
interest income and interest expense based on changes in average asset and
liability balances (volume) and changes in average rates (rate). For each
category of interest-earning assets and interest-bearing liabilities,
information is provided with respect to changes attributable to (1) changes in
volume (change in volume multiplied by initial rate), (2) changes in rate
(change in rate multiplied by initial volume) and (3) changes in rate/volume
(allocated in proportion to the respective volume and rate components).
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 Item 3.
"Quantitative and Qualitative Disclosures about Market Risk - Market Risk -
Interest Rate Risk")
15
FARMERS & MERCHANTS BANCORP
YEAR-TO-DATE AVERAGE BALANCES AND INTEREST RATES
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
Three Months Ended March 31, Three Months Ended March 31,
2006 2005
ASSETS Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------------------------------------------------
Federal Funds Sold and Securities
Purchased Under Agreements to Resell $ 1,361 $ 13 3.87% $ 6,837 $ 42 2.49%
Investment Securities Available-for-Sale
U.S. Treasuries 0 0 0.00% 0 0 0.00%
U.S. Agencies 30,859 309 4.06% 68,979 620 3.65%
Municipals - Taxable - - 0.00% 327 5 6.20%
Municipals - Non-Taxable 15,433 237 6.23% 16,532 259 6.35%
Mortgage Backed Securities 105,912 1,184 4.53% 84,223 832 4.01%
Other 4,105 70 6.92% 5,068 64 5.12%
------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 156,309 1,800 4.67% 175,129 1,780 4.12%
------------------------------------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries - - 0.00% - - 0.00%
U.S. Agencies 30,633 317 4.20% 20,782 243 4.74%
Municipals - Taxable - - 0.00% - - 0.00%
Municipals - Non-Taxable 66,266 988 6.05% 56,408 876 6.30%
Mortgage Backed Securities 10,644 102 3.89% 13,180 126 3.88%
Other 2,125 15 2.86% 294 6 8.28%
------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 109,668 1,422 5.26% 90,664 1,251 5.60%
------------------------------------------------------------------------------------------------------------------------------
Loans
Real Estate 550,124 9,742 7.18% 494,307 7,713 6.33%
Home Equity 67,500 1,272 7.64% 63,301 881 5.64%
Agricultural 152,552 2,969 7.89% 128,835 1,971 6.20%
Commercial 178,118 3,469 7.90% 155,550 2,470 6.44%
Consumer 13,083 286 8.87% 12,248 266 8.81%
Credit Card 5,341 133 10.10% 4,896 124 10.27%
Municipal 1,013 11 4.40% 982 11 4.54%
------------------------------------------------------------------------------------------------------------------------------
Total Loans 967,731 17,882 7.49% 860,119 13,436 6.34%
------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 1,235,069 $ 21,117 6.93% 1,132,749 $ 16,509 5.91%
==================== ====================
Unrealized Gain (Loss) on Securities Available-for-Sale (2,615) (602)
Allowance for Loan Losses (18,217) (17,793)
Cash and Due From Banks 38,376 33,253
All Other Assets 77,310 68,348
--------------------------------------------------------------------- -----------
TOTAL ASSETS $1,329,923 $1,215,955
===================================================================== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Interest Bearing Deposits
Interest Bearing DDA $ 130,519 $ 22 0.07% $ 112,691 $ 19 0.07%
Savings 283,132 355 0.51% 308,034 326 0.43%
Time Deposits 381,186 3,016 3.21% 349,749 1,655 1.92%
------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 794,837 3,393 1.73% 770,474 2,000 1.05%
Other Borrowed Funds 95,982 1,172 4.95% 47,718 589 5.01%
Subordinated Debentures 10,310 189 7.43% 10,310 140 5.51%
------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 901,129 $ 4,754 2.14% 828,502 $ 2,729 1.34%
==================== ====================
Interest Rate Spread 4.79% 4.57%
Demand Deposits (Non-Interest Bearing) 289,840 256,695
All Other Liabilities 14,121 12,933
--------------------------------------------------------------------- -----------
TOTAL LIABILITIES 1,205,090 1,098,130
Shareholders' Equity 124,833 117,825
--------------------------------------------------------------------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $1,329,923 $1,215,955
===================================================================== ===========
Impact of Non-Interest Bearing
Deposits and Other Liabilities 0.58% 0.36%
Net Interest Income and
Margin on Total Earning Assets 16,363 5.37% 13,780 4.93%
Tax Equivalent Adjustment (414) (416)
------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 15,949 5.24% $ 13,364 4.78%
==============================================================================================================================
Notes: Yields on municipal securities have been calculated on a fully taxable equivalent basis. Loan interest income
includes fee income and unearned discount in the amount of $877,000 and $676,000 for the quarters ended March 31, 2006 and
2005, respectively. Yields on securities available-for-sale are based on historical cost.
16
FARMERS & MERCHANTS BANCORP
VOLUME AND RATE ANALYSIS OF NET INTEREST REVENUE
(Rates on a Taxable Equivalent Basis)
(in thousands) Three Months Ended
Mar. 31, 2006 compared to Mar. 31, 2005
INTEREST EARNING ASSETS Volume Rate Net Chg.
--------------------------------------------------------------------------------------------------
Federal Funds Sold $ (128) $ 99 $ (29)
Investment Securities Available-for-Sale
U.S. Treasuries 0 0 0
U.S. Agencies (734) 423 (311)
Municipals - Taxable (2) (3) (5)
Municipals - Non-Taxable (17) (5) (22)
Mortgage Backed Securities 233 119 352
Other (62) 68 6
--------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale (582) 602 20
--------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries - - -
U.S. Agencies 242 (168) 74
Municipals - Taxable - - -
Municipals - Non-Taxable 324 (212) 112
Mortgage Backed Securities (26) 2 (24)
Other 37 (28) 9
--------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 577 (406) 171
--------------------------------------------------------------------------------------------------
Loans
Real Estate 924 1,105 2,029
Home Equity 62 329 391
Agricultural 403 595 998
Commercial 390 609 999
Installment 19 1 20
Credit Card 22 (13) 9
Other 1 (1) -
--------------------------------------------------------------------------------------------------
Total Loans 1,821 2,625 4,446
--------------------------------------------------------------------------------------------------
Total Earning Assets 1,688 2,920 4,608
--------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Interest Bearing Deposits
Transaction 3 - 3
Savings (140) 169 29
Time Deposits 160 1,201 1,361
--------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 23 1,370 1,393
Other Borrowed Funds 628 (45) 583
Subordinated Debentures - 49 49
--------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 651 1,374 2,025
--------------------------------------------------------------------------------------------------
TOTAL CHANGE $ 1,037 $ 1,546 $ 2,583
==================================================================================================
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.
17
Net interest income for the first quarter of 2006 increased 19.3% to $15.9
million, compared to $13.4 million for the first quarter of 2005. On a fully
taxable equivalent basis, net interest income increased 18.7% and totaled $16.4
million for the first quarter of 2006, compared to $13.7 million for the first
quarter of 2005.
One reason for the increase in net interest income during the first three months
of 2006 when compared to the same period last year 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. Additionally, the Company's net interest
income has also benefited substantially as a result of the Federal Reserve Bank
having increased short-term market interest rates by 200 basis points since
March 2005.
For the three months ended March 31, 2006, the Company's net interest margin on
a fully taxable equivalent basis was 5.37% compared to 4.93% for the same period
in 2005. The Company's yield on earning assets has improved over the last twelve
months as a result of increases in short-term market interest rates. For further
discussion see Market Risk - Interest Rate Risk under Item 3. Quantitative and
Qualitative Disclosures About Market Risk.
Loans, generally the Company's highest earning asset, increased $101.4 million
as of March 31, 2006 compared to March 31, 2005. On an average balance basis,
loans increased by $107.6 million for the three months ended March 31, 2006
compared to the three months ended March 31, 2005. The average yield on the
loan portfolio increased 115 basis points to 7.49% for the three months ended
March 31, 2006 compared to 6.34% for the three months ended March 31, 2005.
This increase in yield and volume resulted in interest revenue from loans
increasing 33.1% to $17.9 million for the first quarter of 2006 compared to
$13.4 million for the first quarter of 2005.
The investment portfolio is the other main component of the Company's earning
assets. Management believes the Company's investment policy is conservative.
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 were $266.0 million for the first quarter of 2006
compared to $265.8 million for the first quarter of 2005. The average yield, on
a taxable equivalent basis (TE), in the investment portfolio was 4.91% for the
first quarter of 2006 compared to 4.63% for the first quarter of 2005. The
increase in the volume and yield on investment securities resulted in an
increase in interest income of $191,000, or 6.3%, for the three months ended
March 31, 2006. Net interest income on the Schedule of Year-to-Date Average
Balances and Interest Rates is shown on a taxable equivalent basis (TE), which
is higher than net interest income on the Consolidated Statements of Income
because of adjustments that relate to income on certain securities that are
exempt from federal income taxes.
Compared to the first quarter of 2005, the Company has grown average
interest-bearing sources of funds by $72.6 million or 8.8%. Interest bearing
deposits grew $24.3 million while all other interest bearing sources of funds
(including FHLB Advances) increased by $48.3 million (see "Deposits and Federal
Home Loan Bank Advances and Other Borrowings"). Overall, the average interest
rate on interest-bearing sources of funds was 2.14% for the three months ended
March 31, 2006 and 1.34% for the three months ended March 31, 2005. The increase
in the volume and rate on interest-bearing sources of funds resulted in an
increase in interest expense of $2.0 million, or 74.2%, for the three months
ended March 31, 2006 over the same period in 2005.
18
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.
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 approval standards, 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.
Additionally, management has established guidelines to ensure the
diversification of the Company's credit portfolio such that even within key
portfolio sectors such as real estate or agriculture, the portfolio is
diversified across factors such as location, building type, crop type, etc.
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 provision for loan losses totaled $275,000 for the first quarter of 2006,
compared to $0 for the first quarter of 2005. Changes in the provision between
the first quarter of 2006 and 2005 were 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 and the
prevailing economic climate and its effect on borrowers' ability to repay loans
in accordance with the terms of the notes (see "Note 1. Critical Accounting
Policies and Estimates - Allowance for Loan Losses" and "Item 3. Quantitative
and Qualitative Disclosures About Market Risk-Credit Risk").
The allowance for loan losses was $18.3 million or 1.9% of the total loan
balance and $17.7 million or 2.1% of the total loan balance at March 31, 2006
and March 31, 2005, respectively. As of December 31, 2005, the allowance for
loan losses was $17.9 million, which represented 1.8% of the total loan balance.
After reviewing all factors above, management concluded that the allowance for
loan losses as of March 31, 2006 was adequate. See the table below for allowance
for loan loss activity for the periods indicated.
Three Months Ended
March 31,
Allowance for Loan Losses (in thousands) 2006 2005
---------------------------------------------------------------
Balance at Beginning of Period $17,860 $17,727
Provision Charged to Expense 275 0
Recoveries of Loans Previously Charged Off 258 76
Loans Charged Off (135) (45)
---------------------------------------------------------------
Balance at End of Period $18,258 $17,758
===============================================================
19
NON-INTEREST INCOME
Non-interest income includes (1) service charges and fees from deposit accounts;
(2) net gains and losses from the sale of investment securities; (3) credit card
merchant fees; (4) ATM fees; (5) increases in the cash surrender value of bank
owned life insurance and (6) fees from other miscellaneous business services.
Overall, non-interest income decreased $298,000 or 10.3% for the three months
ended March 31, 2006 compared to the same period of 2005.
Service charges on deposit accounts remained unchanged from the first quarter of
2005 due to: (1) the conversion of certain deposit customers to a newly offered
high performance checking product that does not have a monthly service charge;
and (2) increasing interest rates which reduced service charges for those
commercial customers on business account analysis.
Gain (loss) on sale of investment securities was a loss of $419,000 for the
first quarter of 2006 as compared to a gain of $161,000 for the first quarter of
2005. During the latter half of 2005 and continuing through March 31, 2006, the
Company made the decision to sell some of its investment portfolio at a loss in
order to better align the portfolio with its evolving asset/liability management
objectives (see "Financial Condition-Investment Securities").
Offsetting, in part, the loss on sale of investment securities for the quarter
was an increase in other non-interest income which consisted primarily of
increased income on invested funds associated with non-qualified deferred
compensation plans.
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.
Non-interest expense increased $1.2 million or 13.3% over the first quarter of
2005, primarily as a result of a $981,000 increase in Salaries and Employee
Benefits due to a 4% increase in staffing levels, increased employee medical
insurance premiums paid by the Company and increased contributions to employee
bonus and retirement plans.
The other factors impacting non-interest expense were: (1) increased branch
maintenance and equipment expense; and (2) increased furniture & equipment
depreciation related to remodeling and adding branch locations.
INCOME TAXES
The provision for income taxes increased $271,000 for the first three months of
2006. The effective tax rate for the first quarter of 2006 was 36.2% compared
to 36.4% for the first quarter of 2005. The decrease in the effective tax rate
from 2005 was due primarily to increased municipal security income that is tax
exempt for federal tax purposes. The effective rates were lower than the
statutory rate of 42% due primarily to benefits regarding the cash surrender
value of life insurance; California enterprise zone interest income exclusion;
and tax exempt interest income on municipal securities and loans.
FINANCIAL CONDITION
This section presents a comparison of the Company's balance sheet for the three
month period ending March 31, 2006 and the same period in 2005. As previously
discussed (see "Overview") the seasonality of the Company's business due to its
agricultural customer base makes a comparison of the March 31st balance sheet to
the preceding December 31st not meaningful.
20
INVESTMENT SECURITIES
The Company classifies its investments as held-to-maturity, trading or
available-for-sale. Securities are classified as held-to-maturity and are
carried at amortized cost when the Company has the positive intent and ability
to hold the securities to maturity. Trading securities are securities acquired
for short-term appreciation and are carried at fair value, with unrealized gains
and losses recorded in non-interest income. Securities classified as
available-for-sale include securities, which may be sold to effectively manage
interest rate risk exposure, prepayment risk, satisfy liquidity demand and other
factors. These securities are reported at fair value with aggregate, unrealized
gains or losses excluded from income and included as a separate component of
shareholders' equity, net of related income taxes.
The investment portfolio provides the Company with an income alternative to
loans as well as a tool to better manage its liquidity and interest rate risk.
As of March 31, 2006 the investment portfolio represented 19.7% of the Company's
total assets. Total investment securities decreased $14.3 million or 5.2% from
a year ago and now total $261.6 million. Reductions in the securities portfolio
were used to fund higher yielding loans. For further discussion see Market Risk
- Interest Rate Risk under Item 3. Quantitative and Qualitative Disclosures
About Market Risk.
Not included in the investment portfolio are overnight investments in Federal
Funds Sold. For the three months ended March 31, 2006, average Federal Funds
Sold was $1.4 million compared to $6.8 million at March 31, 2005.
LOANS
The Company's loan portfolio at March 31, 2006 increased $101.4 million or 11.8%
from March 31, 2005. The increase was due to strong loan demand in the Company's
market area, along with a focused calling program on high quality loan
prospects. Most of this growth occurred in Real Estate Construction,
Agricultural and Commercial loans. These are market segments the Company has
actively pursued based upon management's belief that current market rates are
more reasonable than those that can be obtained in the highly competitive areas
of Consumer, Home Equity and Real Estate loans. Additionally, on an average
balance basis loans have increased $107.6 million or 12.5% from the same period
in the prior year. The table following sets forth the distribution of the loan
portfolio by type as of the dates indicated.
Loan Portfolio As Of:
---------------------
(in thousands) March 31, 2006 Dec. 31, 2005 March 31, 2005
------------------------------------------------------------------------------
Real Estate $ 453,559 $ 432,378 $ 444,529
Real Estate Construction 100,200 110,235 54,468
Home Equity 66,017 69,013 61,720
Agricultural 154,025 170,657 125,115
Commercial 167,310 174,530 154,756
Consumer 19,546 18,958 18,478
------------------------------------------------------------------------------
Gross Loans 960,657 975,771 859,066
Less:
Unearned Income 2,430 2,514 2,234
Allowance for Loan Losses 18,258 17,860 17,758
------------------------------------------------------------------------------
Net Loans $ 939,969 $ 955,397 $ 839,074
==============================================================================
21
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 March
31, 2006 were $406,000 compared to $510,000 at March 31, 2005.
Accrued interest reversed from income on loans placed on a non-accrual status
totaled $65,000 at March 31, 2006 compared to $42,000 at March 31, 2005. The
Company reported no real estate owned at either March 31, 2006 or March 31,
2005.
Non-Performing Assets
---------------------
(in thousands) March 31, 2006 Dec. 31, 2005 March 31, 2005
---------------------------------------------------------------------------------------------------------------
Non-performing Loans $ 406 $ 694 $ 510
Other Real Estate Owned - - -
===============================================================================================================
Total $ 406 $ 694 $ 510
===============================================================================================================
---------------------------------------------------------------------------------------------------------------
Non-Performing Assets
as a % of Total Loans 0.04% 0.07% 0.06%
---------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses as a
% of Non-Performing Assets 4,497.0% 2,573.5% 3,482.0%
---------------------------------------------------------------------------------------------------------------
Except for non-performing loans shown in the table above, the Bank's management
is not aware of any loans as of March 31, 2006 for which known credit problems
of the borrower would cause serious doubts as to the ability of these 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 Company's management cannot, however, predict the extent to which the
following or other factors may affect a borrower's ability to pay: 1)
deterioration in general economic conditions, real estate values or agricultural
commodity prices; 2) increases in interest rates; or 3) changes in the overall
financial condition or business of a borrower.
DEPOSITS
One of the key sources of funds to support earning assets (loans and
investments) is the generation of deposits from the Company's customer base.
The ability to grow the customer base and subsequently deposits is a significant
element in the performance of the Company.
At March 31, 2006, deposits totaled $1.1 billion. This represents an increase
of 5.2% or $53.8 million from March 31, 2005. Core deposits (exclusive of
Public Deposits) increased 8.0% over the same period. Public Deposits have
decreased $21.8 million since March 31, 2005 as a result of the Company's
decision to reduce its use of State of California time deposits for short-term
funding needs and instead use FHLB Advances (see "Federal Home Loan Bank
Advances").
Demand, interest bearing transaction and time deposit accounts increased $87.7
million or 12.2% from March 31, 2005. The Company's calling efforts for
prospective customers includes acquiring both loan and deposit relationships
which results in new demand, interest bearing transaction accounts and time
deposits. Savings deposits decreased $33.9 million or 10.8% from March 31, 2005.
Savings deposits have declined as customers have transferred their funds to
higher yielding time deposit accounts with the Bank.
22
FEDERAL HOME LOAN BANK ADVANCES
Advances from the Federal Home Loan Bank are another key source of funds to
support earning assets (see "Item 3. Quantitative and Qualitative Disclosures
about Market Risk and Liquidity Risk"). These advances are also used to manage
the Company'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 March 31, 2006 were $90.8 million compared to $40.9 million
of FHLB Advances as of March 31, 2005. This increase of $50.0 million in
borrowings occurred as a result of the Company's growth in average earning
assets exceeding its growth in average deposits by $77.9 million over the last
twelve months. See "Deposits" for a discussion of the Company's use of Public
Deposits from the State of California vs. FHLB Advances.
LONG-TERM SUBORDINATED DEBENTURES
On December 17, 2003 the Company raised $10 million through an offering of trust
preferred securities. 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 and were 7.77% as of March 31, 2006,
7.35% at December 31, 2005 and 5.88% at March 31, 2005.
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 $127.4 million at
March 31, 2006 and $119.4 million at March 31, 2005.
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 1 capital to risk-weighted assets and
of Tier 1 capital to average assets (all terms as defined in the regulations).
Management believes, as of March 31, 2006, that the Company and the Bank meet
all capital adequacy requirements to which it is subject.
In its most recent notification from the Federal Deposit Insurance Corporation
the Bank was categorized as "well capitalized" under the regulatory framework
for prompt corrective action. To be categorized as "well capitalized", the Bank
must maintain minimum Total risk-based, Tier 1 risk-based, Tier 1 leverage
ratios as set forth in the table below. There are no conditions or events since
that notification that management believes have changed the institution's
categories.
23
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 March 31, 2006
Total Capital to Risk Weighted Assets $ 154,329 12.81% $ 96,377 8.0% N/A N/A
Tier 1 Capital to Risk Weighted Assets $ 139,229 11.56% $ 48,188 4.0% N/A N/A
Tier 1 Capital to Average Assets $ 139,229 10.55% $ 52,806 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 March 31, 2006
Total Capital to Risk Weighted Assets $ 151,108 12.57% $ 96,137 8.0% $ 120,171 10.0%
Tier 1 Capital to Risk Weighted Assets $ 136,045 11.32% $ 48,068 4.0% $ 72,102 6.0%
Tier 1 Capital to Average Assets $ 136,045 10.32% $ 52,736 4.0% $ 65,921 5.0%
As previously discussed (see Long-term Subordinated Debentures), in order to
supplement its regulatory capital base, during December 2003 the Company issued
$10 million of trust preferred securities. On March 1, 2005 the Federal Reserve
Board issued its final rule effective April 11, 2005, concerning the regulatory
capital treatment of trust preferred securities ("TPS") by bank holding
companies ("BHCs"). Under the final rule BHCs may include TPS in Tier 1 capital
in an amount equal to 25% of the sum of core capital net of goodwill. The
quantitative limitation concerning goodwill will not be effective until March
31, 2009. Any portion of trust preferred securities not qualifying as Tier 1
capital would qualify as Tier 2 capital subject to certain limitations. 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.
In accordance with the provisions of Financial Accounting Standard Board
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"),
the Company does not consolidate the subsidiary trust which has issued the trust
preferred securities.
In 1998, the Board approved the Company's first stock repurchase program which
expired on May 1, 2001. During the second quarter of 2004, the Board approved a
second stock repurchase program because it concluded that the Company continues
to have more capital than it needs to meet present and anticipated regulatory
guidelines for the Bank to be classified as "well capitalized".
Repurchases under the second program will be made on the open market or through
private transactions. The aggregate price to be paid by the Company for all
repurchased stock will not exceed $10,000,000 and the program will expire on May
31, 2007. The repurchase program also requires that no purchases may be made if
the Bank would not remain "well-capitalized" after the repurchase. All shares
repurchased under the repurchase program will be retired (see the Company's 2005
Form 10-K, Part II, Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities).
24
During the first quarter of 2006, the Company repurchased 2,101 shares at an
average share price of $495 per share. During the first quarter of 2005, the
Company repurchased 13 shares at an average share price of $425. Since the
second share repurchase program was approved in 2004, the Company has
repurchased over 15,000 shares for total consideration of $7.2 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This "Management's Discussion and Analysis of Financial Condition and Results of
Operations," is based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. In preparing the Company's financial statements
management makes estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. These judgments govern areas such as
the allowance for loan losses, the fair value of financial instruments,
accounting for income taxes and pension accounting. For a full discussion of the
Company's critical accounting policies and estimates see "Management's
Discussion and Analysis" in the Company's Annual Report to Shareholders for the
year ended December 31, 2005.
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 the Company 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.
In the ordinary course of business, the Company enters into commitments to
extend credit to its customers. As of March 31, 2006, the Company had entered
into commitments with certain customers amounting to $459.9 million compared to
$447.7 million at December 31, 2005 and $395.6 million at March 31, 2005.
Letters of credit at March 31, 2006, December 31, 2005 and March 31, 2005, were
$10.9 million, $11.5 million and $16.1 million, respectively. These commitments
are not reflected in the accompanying consolidated financial statements and do
not significantly impact operating results.
ITEM 3. 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. 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 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.
25
Credit risk in the investment portfolio and correspondent bank accounts is
addressed through defined limits in the Company'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 Company.
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 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:
26
- then-existing general economic and business conditions affecting the key
lending areas of the Company;
- credit quality trends (including trends in non-performing loans expected to
result from existing conditions);
- collateral values;
- loan volumes and concentrations;
- seasoning of the loan portfolio;
- specific industry conditions within portfolio segments;
- recent loss experience within portfolio segments;
- duration of the current business cycle;
- bank regulatory examination results; and
- 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.
Management believes that the allowance for loan losses at March 31, 2006 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 charge-offs 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 does not attempt to predict
interest rates and positions the balance sheet in a manner which seeks to
minimize, to the extent possible, the effects of changing 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.
27
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 200 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 March
31, 2006, 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 0.04% if rates increase by 200 basis points and a decrease in
net interest income of 2.88% if rates decline 200 basis points. Comparatively,
at December 31, 2005, the Company's estimated net interest income sensitivity
was an increase in net interest income of 0.54% if rates increase by 200 basis
points and a decrease in net interest income of 3.11% if rates decrease 200
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 Company'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 Company'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. At March 31, 2006, the Company
maintained Federal Funds credit lines of $40 million with major banks subject to
the customary terms
28
and conditions for such arrangements and $150 million in repurchase lines with
major brokers. In addition, the Company has additional borrowing capacity of
$137.2 million from the Federal Home Loan Bank.
At March 31, 2006, the Company had available sources of liquidity, which
included cash and cash equivalents and unpledged investment securities of
approximately $144.6 million, which represents 10.9% of total assets.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that
information is recorded and reported in all filings of financial reports. Such
information is reported to the Company's management, including its Chief
Executive Officer and its Chief Financial Officer to allow timely and accurate
disclosure based on the definition of "disclosure controls and procedures" in
Rule 13a-15(e). In designing these controls and procedures, management
recognizes that they can only provide reasonable assurance of achieving the
desired control objectives. Management also evaluated the cost-benefit
relationship of possible controls and procedures.
As of the end of the period covered by this report, the Company carried out an
evaluation of the effectiveness of Company's disclosure controls and procedures
under the supervision and with the participation of the Chief Executive Officer,
the Chief Financial Officer and other senior management of the Company. The
evaluation was based, in part, upon reports and affidavits provided by a number
of executives. 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 over
financial reporting subsequent to the date the Company completed its evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-------------------------
Certain lawsuits and claims arising in the ordinary course of business have been
filed or are pending against the Company or its subsidiaries. Based upon
information available to the Company, its review of such lawsuits and claims and
consultation with its counsel, the Company believes the liability relating to
these actions, if any, would not have a material adverse effect on its
consolidated financial statements.
There are no material proceedings adverse to the Company to which any director,
officer or affiliate of the Company is a party.
ITEM 1A. RISK FACTORS
---------------------
See Item 1A. Risk Factors in the Company's 2005 Form 10-K. In management's
opinion there have been no material changes in risk factors since the filing of
the 2005 Form 10-K.
29
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table indicates the number of shares repurchased by Farmers &
Merchants Bancorp during the first quarter of 2006.
NUMBER OF SHARES APPROXIMATE DOLLAR
PURCHASED AS PART VALUE OF SHARES THAT
AVERAGE OF A PUBLICLY MAY YET BE
NUMBER OF PRICE PER ANNOUNCED PLAN OR PURCHASED UNDER THE
FIRST QUARTER 2006 SHARES SHARE PROGRAM PLAN OR PROGRAM
----------------------------------------------------------------------------------------
01/01/2006 - 01/31/2006 1,020 $ 490 1,020 $ 3,384,470
02/01/2006 - 02/28/2006 1,031 500 1,031 2,868,970
03/01/2006 - 03/31/2006 50 510 50 2,843,470
----------------------------------------------------------------------------------------
Total 2,101 $ 495 2,101 $ 2,843,470
All of the above shares were repurchased in private transactions.
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". Additionally, management is aware that there
are private transactions in the Company's common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
---------------------------------------
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
None
ITEM 5. OTHER INFORMATION
-------------------------
None
ITEM 6. EXHIBITS
----------------
See Exhibit Index on Page 31.
30
SIGNATURES
----------
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FARMERS & MERCHANTS BANCORP
Date: May 8, 2006 /s/ Kent A. Steinwert
__________________________
Kent A. Steinwert
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 8, 2006 /s/ Stephen W. Haley
__________________________
Stephen W. Haley
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
INDEX TO EXHIBITS
-----------------
Exhibit No. Description
----------- -----------
31(a) Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31(b) Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32 Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
31