- Key insight: Family-controlled Farmers & Merchants played a long game, waiting until a number of factors aligned before selling an underperforming block of municipal bonds.
- Supporting data: The company's core capital ratio has gone from sub-11% to just under 14% over the past three-and-a-half years.
- Expert quote: "I'm working with the fourth generation of the Walker family. We do not want an annual loss on our watch." — Farmers & Merchants President Kevin Tiber
Farmers & Merchants Bank of Long Beach could afford to be patient.
The privately held California bank waited nearly four-and-a-half years from the start of the Federal Reserve's aggressive rate-hiking cycle to sell off a $1 billion block of low-yielding municipal bonds.
The bonds carried a weighted average yield of 1.43%, and Farmers & Merchants sold them at an $85 million loss. But the $11.8 billion-asset bank's decision to sell came after a long stretch of capital accretion. Its core capital ratio rose from 10.91% at year-end 2022 to 13.95% on June 30, according to the Federal Deposit Insurance Corp.
"Because we entered this period with exceptional capital, we had the luxury of choosing when and how to act," Executive Chairman Daniel Walker said in a press release.
C.J. Walker, a former Long Beach mayor, founded Farmers & Merchants in 1907. The Walker family has managed the company throughout its 119-year history.
On Tuesday, Farmers & Merchants President Kevin Tiber said the company has been considering a balance-sheet-repositioning move for some time, but held off until a number of factors — including improved capital rations — came into alignment.
Farmers & Merchants took into consideration the spreads between the municipal bonds going off the books and the assets replacing them, as well as increased loan demand in recent months, Tiber said.
The fourth and final piece to the puzzle came when the company reported $14 million in one-time gains during the second quarter. The loss generated by the bond sale will offset the tax impact of the gains.
"I call it a grand slam of economics," Tiber told American Banker. "We're a very disciplined group. We've been monitoring it with frequency, but we were really waiting for those four to coalesce, and they did."
Between March 2022 and July 2023, the Fed raised interest rates 11 times. The rising rates resulted in underwater bond portfolios at hundreds of community banks, and they were a key contributor to the mini-banking crisis sparked by the abrupt failure Silicon Valley Bank in early 2023.
Farmers & Merchants, which reported net income of $35.5 million for the quarter ended June 30, said the bond sale will trigger a third-quarter loss.
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But proceeds from the sale will be reinvested into higher-yielding securities and loans, and used to retire high-cost debt, thus setting the table for enhanced profitability going forward, according to the bank.
Farmers & Merchants plans to use the proceeds from the bond sale to buy securities with an average yield of 5.13%. It also expects to book more loans at an even higher rate.
"Organic loan generation has been very robust for us," Tiber said. Indeed, Farmers & Merchants' loans, which totaled $6 billion at the end of 2025, grew 9% during the first six months of 2026.
Farmers & Merchants has strong relationships with its customers and shareholders, Tiber said. So he isn't unduly concerned about reporting a third-quarter loss.
"All those compelling factors that went into making this decision align with both shareholders and customers," he said.
At the same time, Farmers & Merchants is determined to finish 2026 with a full-year profit.
"We have a longstanding tradition of annual profitability," Tiber said. "I'm working with the fourth generation of the Walker family. We do not want an annual loss on our watch."
