$1500.78
$2480.38
bear $1500.78
base $2154.55
bull $2480.38
margin of safety $1150.00
market price* $1445.32
Farmers & Merchants Bancorp owns Farmers & Merchants Bank of Central California, a community bank based in Lodi, California. It operates 30 full-service branches in the mid Central Valley (Sacramento, San Joaquin, Solano, Stanislaus and Merced counties) and the East San Francisco Bay Area (Napa, Alameda and Contra Costa counties). It makes commercial real estate, agricultural, agricultural real estate, commercial and industrial, construction and residential loans and equipment leases, and has paid a cash dividend for 90 consecutive years. At June 30, 2026 it had $5.84 billion of assets, $5.09 billion of deposits and $679 million of shareholders' equity, on 691,944 shares outstanding. How it makes money: the spread between what it earns on about $3.67 billion of loans plus its securities and what it pays depositors. Net interest income was $219.2 million in 2025. Credit has been very clean recently, with net charge-offs of 0.05% of average loans in 2025. The main concentration is farming: agricultural real estate loans of $705.7 million and agricultural operating loans of $264.1 million together make up about 26% of the loan book. How we measure earnings: we start from the cash the bank's operations generate. We remove short-term swings in other assets and liabilities, and we subtract stock compensation, the spending needed to maintain branches and equipment, and the provision for credit losses. The provision is a bookkeeping charge, but for a lender it is the real, ongoing cost of the loans that go bad, so we treat it as a cost. Stock compensation became material in 2025, when the bank replaced its cash retirement plans for executives and directors with a restricted stock plan ($11.6 million of expense in 2025 and $6.6 million in the first half of 2026). Because deposits and borrowings are the bank's raw material, we value earnings after all interest and do not subtract deposits as if they were debt. For that reason, in every case below the business value and the value to shareholders are the same. On that basis owner earnings were $82.9 million in 2023, $92.6 million in 2024 and $75.1 million in 2025. The 2025 drop came from stock compensation, a $10.0 million deferred-tax swing and higher equipment spending, not from weaker lending. We use the median of 2023-2025, $82.9 million, as the normal level. That is about $119.85 per share on today's shares. We start in 2023 because that was the first year deposit costs had reset to today's rate environment. The near-zero-rate years of 2020-2021 are carried in the bear case instead. Growth check: owner earnings fell 18.9% in 2025, while the base case has 1.75% growth in year one measured from the $82.9 million normal level. That puts year one at about $84.4 million. The first half of 2026 supports this: owner earnings annualize to about $89.5 million ($129.31 per share), after the new stock compensation. Growth we credit: only the deposit growth the bank has been producing recently. Deposits went from $4.64 billion at the end of 2021 to $4.98 billion at the end of 2025, about 1.8% a year. Faster growth in earlier years included acquisitions and the pandemic deposit surge, so we do not credit it. We also give no credit for margin expansion or for buybacks. New assets must be backed by capital (equity is 11.6% of assets today), so in each case we deduct that retained capital from what owners receive. Base case, $2,154.55 per share: earnings start at the normal level and grow 1.75% a year for ten years, to about $142.55 per share by year ten. After retaining capital for that growth, owners receive about $104.77 per share in year one, and the ten years are worth $827.87 per share. After year ten earnings stay flat with no further growth, worth $1,326.67 per share today. We allow that permanence because the franchise has kept its depositors through more than a century of rate and farm cycles. Business value about $1,491 million, no debt subtracted, $2,154.55 per share. Bear case, $1,500.78 per share: two things go wrong together. First, rates return to near zero, as they did in 2020-2021, and earnings settle at 1.22% of today's $5.84 billion of assets. That is what the bank earned in 2021, and it works out to about $103.08 per share, flat forever. Second, a farm-credit downturn of the kind the bank itself describes in its annual report (commodity prices, and retaliatory tariffs on U.S. agricultural exports) causes net loan losses of 2.0%, 2.8% and 1.5% of the loan book over three years. That is about $168 million after tax, close to the 2.84% annualized charge-off rate across all FDIC-insured banks at the worst of the 2009-2010 credit cycle. The bank makes a small loss in year two. Its $679 million of equity absorbs the losses without new shares being issued. The ten years are worth $541.46 per share and the years after $959.32. Business value about $1,039 million, nothing further owed, $1,500.78 per share. That is above tangible book value of roughly $963 per share. The gap reflects what remains after the downturn: a deposit franchise with a 1.22% average deposit cost in 2025 that keeps earning on the same capital base. Bull case, $2,480.38 per share: the level the bank reached in the first half of 2026 ($129.31 per share annualized) holds, and the balance sheet grows 3% a year for ten years. That is still below the bank's own 2016-2025 deposit growth, and earnings reach about $173.78 per share by year ten. The ten years are worth $863.07 per share and the flat years after $1,617.31. Business value about $1,716 million, nothing further owed, $2,480.38 per share. What could make this wrong: held-to-maturity bonds with an amortized cost of $718.6 million were worth $127.0 million less than book at December 31, 2025. That loss only becomes real if the bank has to sell them to meet withdrawals, and deposits have kept growing. A longer farm downturn, or losses concentrated in a few large agricultural real estate borrowers, would push value below the bear case. If the normal level is really the weak 2025 figure of $75.1 million, held flat forever with no growth, the shares would be worth about $1,808. Our previous estimate counted net income as the owners' cash and did not carry a full credit cycle in its downside case. Those figures are not comparable with these. The business itself has continued to perform well, with stronger first-half 2026 results. Margin-of-safety price: we are fairly confident in the earnings level, since three different years and the current run rate all sit between $107 and $129 per share. The realistic worst case is a farm-credit cycle combined with near-zero rates, and the balance sheet survives that without new shares. At $1,150 the price is about 1.2 times tangible book. From that price, reaching the base value within about four years, counting the cash the business distributes along the way, the base case implies about 23.6% a year. If only the bear value is reached, the bear case implies a first-year return of about 38%. The bank pays a dividend ($19.35 per share in 2025) during the holding period. The margin-of-safety price is $1,150.