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 June 30, 2021

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

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, if any, 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 or 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 ☒

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	FMCB	OTCQX

Number of shares of common stock of the registrant 789,646 outstanding as of July 31, 2021.

FARMERS & MERCHANTS BANCORP

10-Q

TABLE OF CONTENTS

PART I. - FINANCIAL INFORMATION			Page
	ITEM 1 - Financial Statements
		Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2021, December 31, 2020 and June 30, 2020	3
		Condensed Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June 30, 2021 and 2020	4
		Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2021 and 2020	5
		Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the Three and Six Months Ended June 30, 2021 and 2020	6
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2021 and 2020	7
		Notes to the Consolidated Financial Statements (Unaudited)	8
	ITEM 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		37
	ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk		58
	ITEM 4 - Controls and Procedures		61
PART II. - OTHER INFORMATION
	ITEM 1 - Legal Proceedings		62
	ITEM 1A – Risk Factors		62
	ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds		62
	ITEM 3 - Defaults Upon Senior Securities		62
	ITEM 4 – Mine Safety Disclosures		62
	ITEM 5 - Other Information		62
	ITEM 6 - Exhibits		63
Signatures			63

2

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

FARMERS & MERCHANTS BANCORP

Condensed Consolidated Balance Sheets

(in thousands except share data)

Assets	June 30, 2021 (Unaudited)		December 31, 2020		June 30, 2020 (Unaudited)
Cash and Cash Equivalents:
Cash and Due from Banks	$	80,646	$	66,327	$	67,560
Interest Bearing Deposits with Banks		754,064		317,510		303,879
Total Cash and Cash Equivalents		834,710		383,837		371,439
Investment Securities:
Available-for-Sale, at Fair Value		351,661		807,732		569,407
Held-to-Maturity, fair value $490,185, $70,049 and $70,194, respectively		496,470		68,933		69,036
Total Investment Securities		848,131		876,665		638,443
Loans & Leases:		3,033,196		3,099,592		3,064,512
Less: Allowance for Credit Losses		60,229		58,862		55,058
Loans & Leases, Net		2,972,967		3,040,730		3,009,454
Premises and Equipment, Net		49,181		50,147		47,715
Bank Owned Life Insurance, Net		70,303		69,235		68,177
Interest Receivable and Other Assets		149,276		129,839		120,730
Total Assets	$	4,924,568	$	4,550,453	$	4,255,958
Liabilities
Deposits:
Demand	$	1,646,768	$	1,475,425	$	1,283,182
Interest Bearing Transaction		1,000,168		902,487		808,991
Savings and Money Market		1,363,589		1,260,487		1,158,138
Time		401,539		421,868		531,722
Total Deposits		4,412,064		4,060,267		3,782,033
Subordinated Debentures		10,310		10,310		10,310
Interest Payable and Other Liabilities		63,835		56,211		59,887
Total Liabilities		4,486,209		4,126,788		3,852,230
Shareholders’ Equity
Preferred Stock:  No Par Value,  1,000,000 Shares Authorized, None Issued or Outstanding		-		-		-
Common Stock: Par Value $0.01, 7,500,000 Shares Authorized, 789,646, 789,646 and 793,556,
Shares Issued and Outstanding at June 30, 2021, December 31, 2020 and June 30, 2020, Respectively		8		8		8
Additional Paid-In Capital		77,516		77,516		80,350
Retained Earnings		360,021		333,070		308,714
Accumulated Other Comprehensive Income, Net of Taxes		814		13,071		14,656
Total Shareholders’ Equity		438,359		423,665		403,728
Total Liabilities and Shareholders’ Equity	$	4,924,568	$	4,550,453	$	4,255,958

The accompanying notes are an integral part of these unaudited consolidated financial statements

3

FARMERS & MERCHANTS BANCORP

Condensed Consolidated Statements of Income (Unaudited)

(in thousands except per share data)	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Interest Income
Interest and Fees on Loans & Leases	$	36,664	$	34,311	$	73,751	$	68,471
Interest on Deposits with Banks		164		65		267		1,012
Interest on Investment Securities:
Taxable		3,694		3,175		7,498		6,327
Exempt from Federal Tax		416		416		839		846
Total Interest Income		40,938		37,967		82,355		76,656
Interest Expense
Deposits		1,034		2,458		2,271		5,602
Subordinated Debentures		79		94		158		213
Total Interest Expense		1,113		2,552		2,429		5,815
Net Interest Income		39,825		35,415		79,926		70,841
Provision for Credit Losses		-		300		1,250		300
Net Interest Income After Provision for Credit Losses		39,825		35,115		78,676		70,541
Non-Interest Income
Service Charges on Deposit Accounts		679		374		1,317		1,294
Net Gain on Sale of Investment Securities		714		-		2,554		13
Increase in Cash Surrender Value of Bank Owned Life Insurance		541		520		1,067		1,029
Debit Card and ATM Fees		1,806		1,302		3,385		2,579
Net Gain (Loss) on Deferred Compensation Investments		11,746		523		15,286		(139	)
Other		939		795		2,541		1,665
Total Non-Interest Income		16,425		3,514		26,150		6,441
Non-Interest Expense
Salaries and Employee Benefits		16,182		13,783		32,922		28,663
Net Gain (Loss) on Deferred Compensation Investments		11,746		523		15,286		(139	)
Occupancy		1,178		1,137		2,409		2,243
Equipment		1,213		1,286		2,437		2,454
Marketing		418		25		606		270
Legal		289		47		400		77
FDIC Insurance		298		7		585		7
Other		3,533		2,979		6,575		6,002
Total Non-Interest Expense		34,857		19,787		61,220		39,577
Income Before Provision for Income Taxes		21,393		18,842		43,606		37,405
Provision for Income Taxes		5,240		4,533		10,740		8,974
Net Income	$	16,153	$	14,309	$	32,866	$	28,431
Basic and Diluted Earnings Per Common Share	$	20.45	$	18.03	$	41.62	$	35.83

The accompanying notes are an integral part of these unaudited consolidated financial statements

4

FARMERS & MERCHANTS BANCORP

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(in thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Net Income	$	16,153		$	14,309		$	32,866		$	28,431
Other Comprehensive Income
Increase in Net Unrealized (Loss) Gain on Available-for-Sale Securities		3,957			1,338			(14,609	)		16,128
Deferred Tax Benefit Related to Unrealized (Loss) Gains		(1,170	)		(396	)		4,319			(4,768	)
Reclassification Adjustment for Realized Gains on Available-for-Sale Securities Included in Net Income		(714	)		-			(2,554	)		(13	)
Deferred Tax Related to Reclassification Adjustment		211			-			755			4
Amortization of Unrealized Loss on Securitites Transferred from Available-for-Sale to Held to Maturity		(180	)		-			(238	)		-
Deferred Tax Benefit Related to loss on Securtities Transferred		54			-			70			-
Total Other Comprehensive Income		2,158			942			(12,257	)		11,351
Comprehensive Income	$	18,311		$	15,251		$	20,609		$	39,782

The accompanying notes are an integral part of these unaudited consolidated financial statements

5

FARMERS & MERCHANTS BANCORP

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

For the three and six months ended June 30, 2021 and 2020
(in thousands except share data)	Common Shares Outstanding		Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive (Loss) Income, net			Total Shareholders’ Equity
Three Months Ended June 30, 2021
Balance, March 31, 2021		789,646	$	8	$	77,516	$	349,790		$	(1,344	)	$	425,970
Net Income						-		16,153			-			16,153
Cash Dividends Declared on Common Stock ($7.50 per share)				-		-		(5,922	)		-			(5,922	)
Other Compreshensive Income				-		-		-			2,158			2,158
Balance, June 30, 2021		789,646	$	8	$	77,516	$	360,021		$	814		$	438,359
Three Months Ended June 30, 2020
Balance, March 31, 2020		793,556	$	8	$	80,350	$	300,158		$	13,714		$	394,230
Net Income						-		14,309			-			14,309
Cash Dividends Declared on Common Stock ($7.25 per share)				-		-		(5,753	)		-			(5,753	)
Other Compreshensive Income				-		-		-			942			942
Balance, June 30, 2020		793,556	$	8	$	80,350	$	308,714		$	14,656		$	403,728

Six Months Ended June 30, 2021
Balance, December 31, 2020	789,646	$	8	$	77,516	$	333,070		$	13,071		$	423,665
Net Income			-		-		32,866			-			32,866
Cash Dividends Declared on Common Stock ($7.50 per share)			-		-		(5,922	)		-			(5,922	)
Cash Dividends Returned			-		-		7			-			7
Other Compreshensive Loss			-		-		-			(12,257	)		(12,257	)
Balance, June 30, 2021	789,646	$	8	$	77,516	$	360,021		$	814		$	438,359
Six Months Ended June 30, 2020
Balance, December 31, 2019	793,033	$	8	$	79,947	$	286,036		$	3,305		$	369,296
Net Income			-		-		28,431			-			28,431
Cash Dividends Declared on Common Stock ($7.25 per share)			-		-		(5,753	)		-			(5,753	)
Issuance of Common Stock	523		-		403		-			-			403
Other Compreshensive Income			-		-		-			11,351			11,351
Balance, June 30, 2020	793,556	$	8	$	80,350	$	308,714		$	14,656		$	403,728

The accompanying notes are an integral part of these unaudited consolidated financial statements

6

FARMERS & MERCHANTS BANCORP

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended
(in thousands)	June 30, 2021			June 30, 2020
Operating Activities:
Net Income	$	32,866		$	28,431
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses		1,250			300
Depreciation and Amortization		1,318			1,414
Net Amortization of Investment Security Premiums & Discounts		797			397
Amortization of Core Deposit Intangible		306			313
Accretion of Discount on Acquired Loans		(37	)		(117	)
Net Gain on Sale of Investment Securities		(2,554	)		(13	)
Net Gain on Sale of Property & Equipment		(36	)		(62	)
Net Change in Operating Assets & Liabilities:
Net (Increase) Decrease in Interest Receivable and Other Assets		(20,752	)		1,953
Net Increase (Decrease) in Interest Payable and Other Liabilities		14,280			(3,217	)
Net Cash Provided by Operating Activities		27,438			29,399
Investing Activities:
Purchase of Investment Securities Available-for-Sale		(257,225	)		(150,342	)
Proceeds from Sold, Matured or Called Securities Available-for-Sale		381,117			106,840
Purchase of Investment Securities Held-to-Maturity		(124,070	)		(15,068	)
Proceeds from Matured or Called Securities Held-to-Maturity		13,140			6,243
Net Loans & Leases Paid, Originated or Acquired		66,550			(391,622	)
Additions to Premises and Equipment, Net		(377	)		(3,877	)
Purchase of Other Investments		(1,656	)		(3,230	)
Proceeds from Sale of Property & Equipment		74			77
Net Cash Provided by (Used in) Investing Activities		77,553			(450,979	)
Financing Activities:
Net Increase in Deposits		351,797			504,014
Cash Dividends		(5,922	)		(5,753	)
Cash Dividends Returned		7			-
Net Cash Provided by Financing Activities		345,882			498,261
Net Change in Cash and Cash Equivalents		450,873			76,681
Cash and Cash Equivalents at Beginning of Period		383,837			294,758
Cash and Cash Equivalents at End of Period	$	834,710		$	371,439
Supplementary Data
Cash Payments Made for Income Taxes	$	19,181		$	17
Issuance of Common Stock to the Bank’s Non-Qualified Retirement Plans	$	-		$	403
Interest Paid	$	3,220		$	6,427
Supplementary Noncash Disclosure
Investment Securities Available-for-Sale Transferred to Held-to-Maturity	$	316,925		$	-
Security Purchase Settled in Subsequent Period	$	-		$	(2,507	)

The accompanying notes are an integral part of these unaudited consolidated financial statements

7

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 wholly owned 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, for the sole purpose of issuing Trust Preferred Securities and related subordinated debentures, in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). FMCB Statutory Trust I is a non-consolidated subsidiary.

The accounting and reporting policies of the Company conform to U.S. GAAP 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 and notes thereto have been prepared in accordance with accounting principles generally accepted in the United States of America for financial information.

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 unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for quarterly reports on Form 10-Q. These unaudited consolidated financial statements do not include all disclosures associated with the Company’s consolidated annual financial statements included in its Annual Report on Form 10-K, as amended (“2020 Annual Report on Form 10-K”), for the year ended December 31, 2020 and, accordingly, should be read in conjunction with such audited consolidated financial statements. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

The preparation of consolidated financial statements in conformity with U.S. GAAP 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.

Accounting Guidance Pending Adoption at June 30, 2021

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 June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU will require the earlier recognition of credit losses on loans and other financial instruments based on an expected loss model, replacing the incurred loss model that is currently in use. Under the new guidance, an entity will measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The expected loss model will apply to loans and leases, unfunded lending commitments, held-to-maturity debt securities and other debt instruments measured at amortized cost. The impairment model for available-for-sale debt securities will require the recognition of credit losses through a valuation allowance when fair value is less than amortized cost, regardless of whether the impairment is considered to be other-than-temporary. During 2019, the Company completed an assessment of its current expected credit losses (CECL) data and system needs, and engaged a third-party vendor to assist in developing a CECL model. The Company, in conjunction with this vendor, researched and analyzed modeling standards, loan segmentation, as well as potential external inputs to supplement our historical loss history. Model validation began in the third quarter of 2019, enabling the Company to complete parallel runs using data beginning with the second quarter of 2019.

8

The new guidance had been effective on January 1, 2020. However, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) and H.R. 133, resulted in federal banking regulators issuing an interim final rule allowing banks the option of delaying the implementation of CECL until January 1, 2022. In addition, the national banking regulators have issued a joint statement allowing financial institutions to mitigate the effects of CECL in their regulatory capital calculations for up to two years. The Company has elected to delay CECL adoption, but continues to run its CECL model quarterly to accumulate data for the ultimate implementation. Management is currently evaluating the impact that the standard will have on its consolidated financial statements.

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, Interest-Bearing Deposits with Banks, and Federal Funds Sold, which have original maturity dates of three months or less. 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 (“HTM”) 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 to earliest call date 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 (“AFS”) 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.

Transfers of debt securities from the available-for-sale category to the held-to-maturity category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer remains in accumulated other comprehensive income and in the carrying value of the held-to-maturity investment security. Premiums or discounts on investment securities are amortized or accreted using the effective interest method over the life of the security as an adjustment of yield. Unrealized holding gains or losses that remain in accumulated other comprehensive income are amortized or accreted over the remaining life of the security as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount.

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