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Basis of Presentation and Significant Accounting Policies
 3 Months Ended
Mar. 31, 2022
Basis of Presentation and Significant Accounting Policies [Abstract]  
Basis of Presentation and Significant Accounting Policies

Note 1—Basis of Presentation and Significant Accounting Policies
The accompanying unaudited consolidated financial statements include the accounts 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 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 March 31, 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.
Impact of recent authoritative accounting guidance — The Accounting Standards Codification™ (“ASC”) is the FASB officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities.  Periodically, the FASB will issue Accounting Standard updates (“ASU”) to its ASC.  Rules and interpretive releases of the SEC under the authority of the federal securities laws are also sources of authoritative GAAP for the Company as an SEC registrant. All other accounting literature is non-authoritative.

On January 1, 2022, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology that delays recognition until it is probable a loss has been incurred with an expected loss methodology that is referred to as CECL.


In adopting ASU 2016-13 (Topic 326) Management determined that the Weighted Average Remaining Maturity (“WARM”) method was most appropriate given the Company’s current size and complexity.



The implementation of the WARM method did not result in any material change in the calculation of the Company’s December 31, 2021 Allowance for Credit Losses, therefore, no adjustment to Shareholders’ Equity was made as of January 1, 2022.
The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The ASU affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial asset not excluded from the scope that have the contractual right to receive cash. The ASU replaces the incurred loss impairment methodology in previous GAAP with CECL, a methodology that reflects current expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This ASU broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements.
The following table illustrates the pre-tax impact of the adoption of this ASU:
 
  
January-2022
  
 
  
Reported
    
Reported
    
Impact of
  
 
  
under
    
Pre-
    
ASC 326
  
(Dollars in thousands)
  
ASC 326
    
Adoption
    
Adoption
  
Allowance for credit losses:
                  
Real estate:
                  
Commercial
  
$
(17,379
)
  
$
(28,536
)
  
$
11,157
  
Agricultural
    
(14,580
)
    
(9,613
)
    
(4,967
)
Residential and home equity
    
(5,879
)
    
(2,847
)
    
(3,032
)
Construction
    
(3,311
)
    
(1,456
)
    
(1,855
)
Total real estate
    
(41,149
)
    
(42,452
)
    
1,303
  
Commercial & industrial
    
(11,417
)
    
(11,489
)
    
72
  
Agricultural
    
(6,363
)
    
(5,465
)
    
(898
)
Commercial leases
    
(1,567
)
    
(938
)
    
(629
)
Consumer and other
    
(511
)
    
(663
)
    
152
  
Total allowance for credit losses
  
$
(61,007
)
  
$
(61,007
)
  
$
-
  

Subsequent events — The Company has evaluated events occurring subsequent to March 31, 2022 for disclosure in the consolidated financial statements.