10-Q 1 brhc10043593_10q.htm 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

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 of incorporation or organization)
 
(I.R.S. Employer Identification No.)

111 W. Pine Street, Lodi, California
 
95240
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code (209) 367-2300

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
None
Not Applicable
Not Applicable

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $0.01 Par Value Per Share

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
Accelerated filer 
Non-accelerated filer
Smaller reporting company
Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 

As of October 31, 2022, the registrant had 769,357 shares of common stock $0.01 par value per share, outstanding.



FARMERS & MERCHANTS BANCORP
FORM 10-Q

TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
Page
 
 
 
 
 
Item 1 - Financial Statements
 
 
 
  4
 
 
5
 
 
6
 
 
7
 
 
8
 
 
  9
 
 
       
 
 
31
 
 
32
 
 
37
 
 
44
 
 
 
 
 
57
 
 
 
 
 
57
 
 
 
 
PART II. - OTHER INFORMATION
 
 
 
 
 
 
           57
 
57
 
58
 
58
 
58
 
58
 
58
 
59

Special Note Regarding Forward-Looking Statements

Certain matters in this Quarterly Report on Form 10-Q contains various forward-looking statements, usually containing the words “estimate,” “project,” “expect,” “objective,” “goal,” or similar expressions and includes assumptions concerning Farmers & Merchants Bancorp’s (together with its subsidiaries, the “Company”, “FMCB”, or “we”) operations, future results, and prospects. These forward-looking statements are based upon current expectations and are subject to risks and uncertainties. In connection with the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important factors which could cause the actual results of events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.

Such factors include, but are not limited to, the following: (1) economic conditions in the mid Central Valley or the East Bay region of San Francisco in California; (2) significant changes in interest rates and loan prepayment speeds; (3) credit risks of lending and investment activities; (4) changes in federal and state banking laws or regulations; (5) competitive pressure in the banking industry; (6) changes in governmental fiscal or monetary policies; (7) the possible adverse impacts on the banking industry and our business from a period of significant, prolonged inflation; (8) 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; (9) water availability and management issues in California and the resulting impact on the Company’s agricultural and industrial customers; (10) expansion into new geographic markets and new lines of business; (11) the impact of COVID-19 (Coronavirus) on the Company and its customers (see “Note 2 – Risks and Uncertainties”); (12) the impact of changes in Federal and State taxation policies and rates; and (13) other factors discussed in “Item 1A. Risk Factors” on our Annual Report on Form 10-K filed with the SEC on March 15, 2022.

Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made.

PART 1. FINANCIAL INFORMATION

Item 1.
Financial Statements

FARMERS & MERCHANTS BANCORP 
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands, except share and per share amounts)
 
September 30,
2022
   
December 31,
2021
 
ASSETS
           
Cash and due from banks
 
$
82,932
   
$
52,499
 
Interest bearing deposits with banks
   
799,951
     
662,961
 
Total cash and cash equivalents
   
882,883
     
715,460
 
Securities available-for-sale, at fair value
   
177,454
     
270,454
 
Securities held-to-maturity, fair value $690,922 and $725,841, respectively
   
852,665
     
737,052
 
Allowance for credit losses
    (393 )     -  
Total investment securities
   
1,029,726
     
1,007,506
 
Non-marketable securities
   
15,549
     
15,549
 
Loans and leases held for investment
   
3,323,862
     
3,237,177
 
Allowance for credit losses
   
(63,617
)
   
(61,007
)
Loans held for investment, net
   
3,260,245
     
3,176,170
 
Bank-owned life insurance
   
72,566
     
71,411
 
Premises and equipment, net
   
49,183
     
47,730
 
Deferred income tax assets
   
34,411
     
25,542
 
Accrued interest receivable
   
20,069
     
18,098
 
Goodwill
   
11,183
     
11,183
 
Other intangibles
   
2,957
     
3,402
 
Other real estate owned
   
873
     
873
 
Other assets
   
87,136
     
84,796
 
TOTAL ASSETS
 
$
5,466,781
   
$
5,177,720
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Deposits:
               
Non-interest bearing
 
$
1,802,623
   
$
1,750,330
 
Interest bearing:
               
Demand
   
1,158,588
     
1,097,337
 
Savings and money market
   
1,587,662
     
1,400,000
 
Certificates of deposit
   
360,384
     
392,485
 
Total interest bearing
   
3,106,634
     
2,889,822
 
Total deposits
   
4,909,257
     
4,640,152
 
Subordinated debentures
   
10,310
     
10,310
 
Interest payable and other liabilities
   
79,036
     
64,122
 
TOTAL LIABILITIES
   
4,998,603
     
4,714,584
 
                 
SHAREHOLDERS’ EQUITY
               
Preferred shares, no par value, 1,000,000 shares authorized and, none issued or outstanding
   
-
     
-
 
Common shares, $0.01 par value, 7,500,000 authorized 770,822 and 789,646 outstanding at September 30, 2022 and December 31, 2021, respectively
   
8
     
8
 
Additional paid-in capital
   
59,611
     
77,516
 
Retained earnings
   
436,258
     
387,331
 
Accumulated other comprehensive (loss) / income, net of taxes
   
(27,699
)
   
(1,719
)
TOTAL SHAREHOLDERS’ EQUITY
   
468,178
     
463,136
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
5,466,781
   
$
5,177,720
 

FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME


 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(Dollars in thousands, except share and per share amounts)  
2022
   
2021
   
2022
   
2021
 
Interest income
                       
Interest and fees on loans and leases
 
$
41,868
   
$
36,088
   
$
117,871
   
$
109,839
 
Interest and dividends on investments
   
5,686
     
3,925
     
16,697
     
12,664
 
Interest on deposits with others
    4,159       328       5,934       595  
Total interest income
   
51,713
     
40,341
     
140,502
     
123,098
 
Interest expense
                               
Deposits
   
1,122
     
929
     
2,798
     
3,200
 
Subordinated debentures
   
134
     
78
     
319
     
236
 
Total interest expense
   
1,256
     
1,007
     
3,117
     
3,436
 
Net interest income
   
50,457
     
39,334
     
137,385
     
119,662
 
Provision for credit losses
   
1,500
     
-
     
3,000
     
1,250
 
Net interest income after provision for credit losses
   
48,957
     
39,334
     
134,385
     
118,412
 
Non-interest income
                               
Card processing
    1,791       1,788       5,375       5,173  
Service charges on deposit accounts
   
638
     
808
     
2,318
     
2,125
 
Increase in cash surrender value of BOLI
   
566
     
549
     
1,668
     
1,616
 
Net (loss)/gain on sale of investment securities available-for-sale
   
(2,987
)
   
-
     
(2,985
)
   
2,554
 
Net gain/(loss) on deferred compensation benefits
   
352
     
615
     
(227
)
   
1,828
 
Other
   
1,199
     
857
     
3,234
     
2,996
 
Total non-interest income
   
1,559
     
4,617
     
9,383
     
16,292
 
Non-interest expense
                               
Salaries and employee benefits
   
15,994
     
14,453
     
49,181
     
47,375
 
Net gain/(loss) on deferred compensation benefits
   
352
     
615
     
(227
)
   
1,828
 
Occupancy
   
1,196
     
1,145
     
3,500
     
3,554
 
Data Processing
    1,250       1,251       3,698       3,688  
FDIC insurance
    366       317       1,076       902  
Marketing
   
303
     
63
     
959
     
669
 
Legal
   
49
     
85
     
733
     
485
 
Other
   
4,865
     
2,656
     
12,274
     
9,231
 
Total non-interest expense
   
24,375
     
20,585
     
71,194
     
67,732
 
INCOME BEFORE INCOME TAXES
   
26,141
     
23,366
     
72,574
     
66,972
 
Income tax expense
   
6,605
     
5,864
     
17,537
     
16,604
 
NET INCOME
 
$
19,536
   
$
17,502
   
$
55,037
   
$
50,368
 
                                 
Earnings per common share:
                               
Basic
  $ 25.20     $ 22.16     $ 70.47     $ 63.79  
Diluted
  $ 25.20     $ 22.16     $ 70.47     $ 63.79  
                                 
Weighted average number of common shares                                
Basic
    775,109       789,646       780,988       789,646  
Diluted
    775,109       789,646       780,988       789,646  

FARMERS & MERCHANTS BANCORP 
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(Dollars in thousands)  
2022
   
2021
   
2022
   
2021
 
Net income
 
$
19,536
   
$
17,502
   
$
55,037
   
$
50,368
 
Other comprehensive income
                               
Unrealized holding (losses)/gains on securities available-for-sale
   
(12,378
)
   
(2,237
)
   
(39,677
)
   
(16,846
)
Reclassification adjustment for (gains)/losses on available-for-sale securities
   
2,987
     
-
     
2,985
     
(2,554
)
Amortization of unrealized loss on securities transferred to held-to-maturity
   
(52
)
   
(135
)
   
(193
)
   
(373
)
Net unrealized holding (losses)/gains on securities available-for-sale
    (9,443 )     (2,372 )     (36,885 )     (19,773 )
Income tax benefit/(expense)
   
2,792
     
702
     
10,905
     
5,846
 
Other comprehensive (loss)/income, net of tax
   
(6,651
)
   
(1,670
)
   
(25,980
)
   
(13,927
)
Total comprehensive income
 
$
12,885
   
$
15,832
   
$
29,057
   
$
36,441
 

FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the three and nine months ended September 30, 2022 and 2021


 

(Dollars in thousands, except share and per share amounts)
 
Common
Shares
    Amount
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
(Loss)/Income
   
Total
 
Balance as of July 1, 2022
   
777,190
   
$
8
   
$
65,671
   
$
416,722
   
$
(21,048
)
 
$
461,353
 
Net income
    -       -      
-
     
19,536
     
-
     
19,536
 
Other comprehensive loss, net of tax
    -      
-
     
-
     
-
     
(6,651
)
   
(6,651
)
Repurchase of common stock     (6,368 )     -       (6,060 )     -       -       (6,060 )
Balance as of September 30, 2022
   
770,822
   
$
8
   
$
59,611
   
$
436,258
   
$
(27,699
)
 
$
468,178
 
                                                 
Balance as of July 1, 2021
   
789,646
   
$
8
   
$
77,516
   
$
360,021
   
$
814
   
$
438,359
 
Net income
    -       -      
-
     
17,502
     
-
     
17,502
 
Other comprehensive loss, net of tax
    -      
-
     
-
     
-
     
(1,670
)
   
(1,670
)
Balance as of September 30, 2021
   
789,646
   
$
8
   
$
77,516
   
$
377,523
   
$
(856
)
 
$
454,191
 


 

(Dollars in thousands, except share and per share amounts)
 
Common
Shares
    Amount
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
(Loss)/Income
   
Total
 
Balance as of January 1, 2022
   
789,646
   
$
8
   
$
77,516
   
$
387,331
   
$
(1,719
)
 
$
463,136
 
Net income
    -       -      
-
     
55,037
     
-
     
55,037
 
Other comprehensive loss, net of tax
    -      
-
     
-
     
-
     
(25,980
)
   
(25,980
)
Cash dividends declared ($7.85 per share)
    -       -       -       (6,110 )     -       (6,110 )
Repurchase of common stock     (18,824 )     -       (17,905 )     -       -       (17,905 )
Balance as of September 30, 2022
   
770,822
   
$
8
   
$
59,611
   
$
436,258
   
$
(27,699
)
 
$
468,178
 
                                                 
Balance as of January 1, 2021
   
789,646
   
$
8
   
$
77,516
   
$
333,070
   
$
13,071
   
$
423,665
 
Net income
    -       -      
-
     
50,368
     
-
     
50,368
 
Other comprehensive loss, net of tax
    -      
-
     
-
     
-
     
(13,927
)
   
(13,927
)
Cash dividends declared ($7.50 per share)
    -       -       -       (5,922 )     -       (5,922 )
Cash dividends returned
    -       -       -       7       -       7  
Balance as of September 30, 2021
   
789,646
   
$
8
   
$
77,516
   
$
377,523
   
$
(856
)
 
$
454,191
 

FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Nine Months Ended
September 30,
 
(Dollars in thousands)
 
2022
   
2021
 
Cash flows from operating activities:
           
Net income
 
$
55,037
   
$
50,368
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for credit losses
   
3,000
     
1,250
 
Depreciation and amortization
   
1,849
     
1,971
 
Net amortization of securities premiums and discounts
   
341
     
1,133
 
Increase in cash surrender value of BOLI
   
(1,666
)
   
(1,616
)
Decrease /(increase) in deferred income taxes, net
   
2,356
     
(456
)
Loss/(gains) on sale of securities available-for-sale
   
2,985
     
(2,554
)
Net changes in:
               
Other assets
   
(2,362
)
   
(8,772
)
Other liabilities
   
18,134
     
10,738
 
Net cash provided by operating activities
   
79,674
     
52,062
 
Cash flows from investing activities:
               
Net change in loans held for investment
   
(86,401
)
   
(39,956
)
Purchase of available-for-sale securities
   
(10,135
)
   
(257,228
)
Purchase of held-to-maturity securities
   
(168,634
)
   
(194,332
)
Proceeds from sales, maturities, calls and pay downs of available-for-sale securities
   
62,979
     
397,454
 
Proceeds from maturities, calls and pay downs of held-to-maturity securities
   
52,884
     
29,042
 
Purchase of premises and equipment
   
(3,318
)
   
(1,001
)
Purchase of other investments
   
(5,300
)
   
(4,516
)
Redemption of other investments     -       2,556  
Proceeds from bank-owned life insurance     511       -  
Proceeds from sale of assets
   
73
     
635
 
Net cash used in investing activities
   
(157,341
)
   
(67,346
)
Cash flows from financing activities:
               
Net increase in deposits
   
269,105
     
508,127
 
Cash dividends paid
   
(6,110
)
   
(5,915
)
Net cash used in share repurchase of common stock
   
(17,905
)
   
-
 
Net provided by financing activities
   
245,090
     
502,212
 
Net change in cash and cash equivalents
   
167,423
     
486,928
 
Cash and cash equivalents, beginning of period
   
715,460
     
383,837
 
Cash and cash equivalents, end of period
 
$
882,883
   
$
870,765
 
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
 
$
3,832
   
$
4,369
 
Income taxes paid
  $ 11,451     $ 22,530  
                 
Supplemental disclosures of non-cash transactions:
               
Investment securities available-for-sale transferred to held-to-maturity
 
$
-
   
$
316,925
 
Lease Liabilities Arising from Obtaining Right-of-Use Assets   $ -     $ 302  

FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS


Note 1—Basis of Presentation and Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements include the accounts of Farmers & Merchants Bancorp (“FMCB” or “Bancorp”), a bank holding company incorporated in the State of Delaware and its wholly owned subsidiary, Farmers & Merchants Bank of Central California (“FMB” or “Bank”) collectively (the “Company”).

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In preparing these financial statements, the Company has evaluated events and transactions subsequent to September 30, 2022 for potential recognition or disclosure. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and note disclosures have been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements. Certain reclassifications have been made to the 2021 Consolidated Financial Statements and/or schedules to conform to the 2022 presentation. All significant intercompany transactions and balances have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are significant to an understanding of Bank’s financial statements. These policies relate to: (i) the methodology for the recognition of interest income; (ii) the determination of the provision and allowance for credit losses; (iii) the valuation of financial assets and liabilities recorded at fair value; (iv) the valuation of intangibles, such as goodwill and core deposit intangibles (“CDI”); (v) the valuation of other real estate owned (“OREO”); and (vi) the valuation or recognition of deferred tax assets and liabilities. These policies and judgments, estimates and assumptions are described in greater detail in subsequent notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, Summary of Critical Accounting Policies and Estimates, in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 15, 2022 and Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations Summary of Critical Accounting Policies and Estimates included in this Quarterly Report on Form 10-Q.

The information included in this Form 10-Q should be read in conjunction with our 2021 Form 10-K. Interim results are not necessarily indicative of results for a full year or any other interim period.

Accounting Standards Pending Adoption — The following paragraphs provide descriptions of newly issued but not yet effective accounting standards that could have a material effect on the Company’s financial position or results of operations.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The amendments in this ASU are elective and provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Since the issuance of this guidance, the publication cessation of the U.S. dollar LIBOR has been extended to June 30, 2023.  We have not elected to apply these amendments. However, we will assess the applicability of the ASU to us and continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations.

9

FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)
Note 1—Basis of Presentation and Significant Accounting Policies—Continued

In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). The main amendments in this ASU are intended to clarify certain optional expedients and scope of derivative instruments. The amendments are elective and effective immediately upon issuance of this ASU. Amendments may be elected through December 31, 2022. We have not elected to apply amendments at this time, however, will assess the applicability of this ASU to us as we continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations.

In March 2022, the FASB issued guidance within ASU 2022-02, Financial Instruments  Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments in this ASU eliminate the current troubled debt restructuring (TDR) recognition and measurement guidance and, instead, require that a creditor evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.

These amendments require vintage disclosures including current-period gross write-offs by year of origination for financing receivables. Gross write-off information must be included in the vintage disclosures in accordance with ASC 326-20-50-6, which requires disclosure of the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination.

The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years since the Company previously adopted the amendments in ASU 2016-13, which is commonly referred to as the current expected credit loss methodology, on January 1, 2020. These amendments should be applied prospectively, though for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption.

Early adoption is permitted, incl