Shareholders' Equity

12 Months Ended

Dec. 31, 2020

14. Shareholders’ Equity

In 1998, the Board approved the Company’s first common stock repurchase program. This program has been extended and expanded several times since then, and most recently, on November 6, 2018, the Board of Directors approved an extension of the $20 million stock repurchase program to December 31, 2021.

Repurchases under the program may be made from time to time on the open market or through private transactions. The repurchase program also requires that no repurchases may be made if the Bank would not remain “well-capitalized” after the repurchase. There were no stock repurchases made in 2020 or 2019 under the Common Stock Repurchase Plan.

On November 23, 2020, the Board of Directors of Farmers & Merchants Bancorp approved, and all applicable regulators provided statements of non-objection regarding, the Company’s repurchase and retirement of up to $8.5 million of its outstanding common stock during the fourth quarter of 2020 and the first half of 2021. These repurchases will be done outside of the Company’s current repurchase plan. All repurchases will be made at the then prevailing market prices. In the fourth quarter of 2020 the Company repurchased $2.8 million of shares from shareholders.

On August 5, 2008, the Board of Directors approved a Share Purchase Rights Plan (the “Rights Plan”), pursuant to which the Company entered into a Rights Agreement dated August 5, 2008, with Computershare as Rights Agent, and the Company declared a dividend of a right to acquire one preferred share purchase right (a “Right”) for each outstanding share of the Company’s common stock, $0.01 par value per share, to stockholders of record at the close of business on August 15, 2008. Generally, the Rights are only triggered and become exercisable if a person or group (the “Acquiring Person”) acquires beneficial ownership of 10 percent or more of the Company’s common stock or announces a tender offer for 10 percent or more of the Company’s common stock.

The Rights Plan is similar to plans adopted by many other publicly traded companies. The effect of the Rights Plan is to discourage any potential acquirer from triggering the Rights without first convincing the Company’s Board of Directors that the proposed acquisition is fair to, and in the best interest of, all of the stockholders of the Company. The provisions of the Plan, if triggered by the Acquiring Person, will substantially dilute the equity and voting interest of any potential acquirer unless the Board of Directors approves of the proposed acquisition (under Article XV of the Company’s Certificate of Incorporation, the Board of Directors has the authority to consider any and all factors in determining whether an acquisition is in the best interests of the Company and its stockholders). Each Right, if and when exercisable, will entitle the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, no par value, at a purchase price of $1,600 for each one one-hundredth of a share, subject to adjustment. Each holder of a Right (except for the Acquiring Person, whose Rights will be null and void upon such event) shall thereafter have the right to receive, upon exercise, that number of Common Shares of the Company having a market value of two times the exercise price of the Right. At any time before a person becomes an Acquiring Person, the Rights can be redeemed, in whole, but not in part, by Farmers and Merchants Bancorp’s Board of Directors at a price of $0.001 per Right.

The Rights Plan was set to expire on August 5, 2018. On November 19, 2015, the Board of Directors approved a seven-year extension of the term of the Rights Plan. Pursuant to an Amendment to the Rights Agreement dated February 18, 2016, the term of the Rights Plan was extended from August 5, 2018 to August 5, 2025. The extension of the term of the Rights Plan was intended as a means to continue to guard against abusive takeover tactics and was not in response to any particular proposal. The Board also increased the purchase price under the Rights Plan to $1,600 per one one-hundredth of a preferred share from $1,200, to reflect the increase in the market price of the Company’s common stock over the past several years.

Dividends from the Bank constitute the principal source of cash to the Company. The Company is a legal entity separate and distinct from the Bank. Under regulations controlling California state chartered banks, the Bank is, to some extent, limited in the amount of dividends that can be paid to the Company without prior approval of the California DFPI. These regulations require approval if total dividends declared by a state chartered bank in any calendar year exceed the Bank’s net profits for that year combined with its retained net profits for the preceding two calendar years.

During 2020, the Company issued a combined total 523 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans. All of the shares were issued at a price of $770.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital.

During 2019, the Company issued a combined total 9,312 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans. All of the shares were issued at prices ranging from $715.00 to $770.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital.

During 2018, the Company issued a combined total 13,520 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans. There were also 2,400 shares issued to individuals during 2018. All of the shares were issued at prices ranging from $635.00 to $690.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital.

The Company and the Bank are subject to various federal regulatory capital requirements under the Basel III Capital Rules. 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’s 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.

The implementation of Basel III requirements increased the required capital levels that the Company and the Bank must maintain. The final rules included new minimum risk-based capital and leverage ratios, which have been fully phased in. The new minimum capital level requirements applicable to the Company and the Bank under the final rules are: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets (“RWA”); (ii) a Tier 1 capital ratio of 6% of RWA; (iii) a total capital ratio of 8% of RWA; and (iv) a Tier 1 leverage ratio of 4% of total assets. The final rules also established a “capital conservation buffer” of 2.5% above each of the new regulatory minimum capital ratios, which resulted in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0% of RWA; (ii) a Tier 1 capital ratio of 8.5% of RWA; and (iii) a total capital ratio of 10.5% of RWA. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. The final rules also permit the Company’s subordinated debentures issued in 2003 to continue to be counted as Tier 1 capital.

The Company believes that it is currently in compliance with all of these capital requirements and that they will not result in any restrictions on the Company’s business activity.

In addition, the most recent notification from the FDIC categorized the Bank 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 and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since that notification that management believes have changed the Bank’s category.

(in thousands)	Actual					Minimum Regulatory Capital Requirements					Well Capitalized Under Prompt Corrective Action
December 31, 2020	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Bank Capital to Risk Weighted Assets	$	446,251		12.46	%	$	286,462		8.00	%	$	358,077		10.00	%
Total Consolidated Capital to Risk Weighted Assets	$	450,890		12.59	%	$	286,539		8.00	%		N/A		N/A
Total Bank Common Equity Tier 1 Capital Ratio	$	401,313		11.21	%	$	161,135		4.50	%	$	232,750		6.50	%
Total Consolidated Common Equity Tier 1 Capital Ratio	$	395,941		11.05	%	$	161,178		4.50	%		N/A		N/A
Tier 1 Bank Capital to Risk Weighted Assets	$	401,313		11.21	%	$	214,846		6.00	%	$	286,462		8.00	%
Tier 1 Consolidated Capital to Risk Weighted Assets	$	405,941		11.33	%	$	214,904		6.00	%		N/A		N/A
Tier 1 Bank Capital to Average Assets	$	401,313		9.04	%	$	177,605		4.00	%	$	222,006		5.00	%
Tier 1 Consolidated Capital to Average Assets	$	405,941		9.13	%	$	177,820		4.00	%		N/A		N/A

(in thousands)	Actual					Minimum Regulatory Capital Requirements					Well Capitalized Under Prompt Corrective Action
December 31, 2019	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Bank Capital to Risk Weighted Assets	$	399,230		12.33	%	$	259,012		8.00	%	$	323,765		10.00	%
Total Consolidated Capital to Risk Weighted Assets	$	400,258		12.36	%	$	259,028		8.00	%		N/A		N/A
Total Bank Common Equity Tier 1 Capital Ratio	$	358,576		11.08	%	$	145,694		4.50	%	$	210,447		6.50	%
Total Consolidated Common Equity Tier 1 Capital Ratio	$	349,601		10.80	%	$	145,703		4.50	%		N/A		N/A
Tier 1 Bank Capital to Risk Weighted Assets	$	358,576		11.08	%	$	194,259		6.00	%	$	259,012		8.00	%
Tier 1 Consolidated Capital to Risk Weighted Assets	$	359,601		11.11	%	$	194,271		6.00	%		N/A		N/A
Tier 1 Bank Capital to Average Assets	$	358,576		9.89	%	$	145,079		3.00	%	$	181,349		5.00	%
Tier 1 Consolidated Capital to Average Assets	$	359,601		9.90	%	$	145,255		3.00	%		N/A		N/A