Farmers & Merchants Bank of Long Beach Repositions $1 Billion Securities Portfolio to Strengthen Earnings and Support Future Loan Growth
Farmers & Merchants Bank of Long Beach (F&M), a community-focused financial institution with more than a century of operating history, has completed a strategic repositioning of its investment securities portfolio as part of a broader effort to improve earnings potential, increase balance sheet flexibility and prepare for continued growth in customer lending.
The bank, which trades on the OTCQX market under the ticker FMBL, said the balance sheet transaction was designed to replace a portion of its lower-yielding legacy securities with assets capable of generating stronger returns in the current interest-rate environment.
F&M said the repositioning was completed from a position of financial strength and is intended to improve the efficiency of its balance sheet while maintaining its longstanding approach to credit quality and risk management.
The transaction comes as banks continue to evaluate the impact of changing interest rates, funding costs and loan demand on profitability. For community banks in particular, the ability to efficiently deploy capital and liquidity toward higher-yielding assets can be important for maintaining earnings performance and supporting customers.
Strategic Repositioning of Approximately $1 Billion in Securities
As part of the transaction, F&M sold approximately $1 billion of municipal bonds that had previously been classified as held-to-maturity securities.
The bonds carried a weighted average yield of approximately 1.43%. These securities were acquired during a period when interest rates were historically low, meaning their yields were significantly below the rates available on many newly originated loans and investment securities in today’s market.
F&M said a portion of the proceeds generated from the sale has already been reinvested in securities with an average yield of approximately 5.13%.
The bank expects this shift toward higher-yielding assets to improve its future net interest margin and enhance the earning power of its balance sheet.
Another portion of the proceeds was used to repay higher-cost borrowings. F&M said it paid down approximately $300 million of borrowings as part of the restructuring.
The remaining proceeds will provide additional liquidity that can be deployed toward loans as customer borrowing demand develops.
The strategy gives F&M greater flexibility to respond to lending opportunities while reducing the amount of capital tied up in securities with comparatively low yields.
Improving Long-Term Earnings Power
W. Henry Walker, Chief Executive Officer of Farmers & Merchants Bank of Long Beach, said the transaction reflects the disciplined financial approach that has characterized the bank throughout its long history.
According to Walker, the repositioning was undertaken from a position of strength and was intended to improve earning-asset yields, expand net interest margin and strengthen the bank’s ability to support customers.
The bank expects the repositioning to improve its long-term earnings profile by shifting assets from securities yielding 1.43% toward investments and potential loans generating substantially higher returns.
Net interest margin is a key profitability measure for banks because it reflects the difference between the interest income generated from assets and the interest expense paid on deposits and other funding sources.
When a bank holds significant amounts of low-yielding assets, those assets can weigh on overall earning-asset yields. Replacing them with higher-yielding securities and loans can potentially improve the spread between asset yields and funding costs.
F&M’s strategy is therefore aimed at increasing the productivity of its balance sheet while maintaining appropriate risk controls.
Supporting Future Customer Loan Demand
One of the primary objectives of the repositioning is to increase F&M’s capacity to respond to customer borrowing needs.
The bank serves families, businesses and communities and expects loan demand to increase over time.
By converting a portion of its low-yielding municipal securities into liquidity and higher-yielding assets, F&M can create additional capacity to fund new loans.
Loan growth can provide banks with an important source of recurring interest income, provided that loans are originated according to appropriate underwriting standards.
F&M said it intends to maintain its disciplined credit approach as it deploys additional liquidity.
This is particularly important as banks balance opportunities for loan growth against the need to manage credit risk in changing economic conditions.
The repositioning therefore does not represent a shift away from F&M’s traditional approach to banking. Instead, the company views the transaction as a way to make its balance sheet more efficient while continuing to serve its existing customer base.
Reducing Funding Costs
The repayment of approximately $300 million in higher-rate borrowings is another significant component of the strategy.
Borrowing costs can have a direct effect on a bank’s profitability. When funding costs rise, the spread between interest earned on assets and interest paid on liabilities can narrow.
By paying down higher-cost debt, F&M expects to reduce future interest expenses.
The combination of higher-yielding assets and lower funding costs could provide a dual benefit to the bank’s earnings profile.
The securities portfolio repositioning is therefore not limited to increasing asset yields. It also addresses the liability side of the balance sheet.
This creates a more balanced approach to improving net interest margin and overall profitability.
Greater Balance Sheet Flexibility
F&M said the transaction will also improve the flexibility of its investment securities portfolio.
The repositioning reduces the portfolio’s overall average life and decreases concentration in certain securities.
A shorter average life can provide the bank with greater flexibility when interest-rate conditions change.
Long-duration securities can become more sensitive to changes in market interest rates, potentially creating challenges when rates rise or when a bank needs to reposition its balance sheet.
By reducing the overall average life of its securities portfolio, F&M expects to be better positioned to respond to future changes in interest rates.
The additional liquidity generated by the transaction also provides the bank with greater flexibility to respond to future lending opportunities.
One-Time Financial Impact
Although the transaction is expected to produce long-term financial benefits, F&M will recognize a significant one-time accounting impact from the sale of the municipal bonds.
The bank expects the transaction to result in a pre-tax loss of approximately $85 million.
Because of the loss associated with the securities sale, F&M expects to report a net loss for the third quarter of 2026.
However, the bank said it expects to remain profitable for the full 2026 fiscal year.
The one-time loss must therefore be viewed separately from the expected ongoing benefits of the balance sheet restructuring.
F&M also noted that the loss will offset certain one-time gains recognized during 2026.
The bank had already recognized approximately $14 million in one-time gains during the second quarter of 2026.
By offsetting these gains with the securities-sale loss, F&M expects to improve the after-tax economics of the restructuring and enhance the overall tax efficiency of the balance sheet.
Maintaining Financial Strength
Daniel K. Walker, Executive Chairman of F&M, emphasized the importance of the bank’s strong capital position in allowing it to undertake the repositioning.
He said financial strength has been a fundamental part of the institution’s operating philosophy and has provided management with the flexibility to determine when and how to make strategic balance sheet changes.
The bank’s capital position remains a key factor in its ability to pursue growth opportunities while maintaining financial resilience.
Walker noted that F&M entered the current period with significant capital strength, giving management the flexibility to take action while continuing to support customers.
A strong capital position can be particularly valuable for community banks because it provides a cushion against unexpected economic pressures while supporting future loan growth.
F&M believes the repositioning will leave its balance sheet stronger and more efficient.
Preserving the Bank’s Community Banking Model
Despite the scale of the securities transaction, F&M emphasized that its underlying business strategy remains focused on serving its communities.
The bank has been operating since 1907 and has developed its franchise around long-term relationships with customers.
Its lending activities serve families, businesses and communities, creating a connection between balance sheet management and local economic activity.
Additional lending capacity can allow the bank to respond to customers seeking financing for business expansion, real estate purchases, investment and other purposes.
F&M’s decision to redeploy liquidity toward potential loans is therefore closely aligned with its traditional community banking model.
Rather than simply holding low-yielding assets, the bank intends to use its financial resources more efficiently to support customer needs and generate stronger returns.
Strategic Positioning for the Interest-Rate Environment
The repositioning also reflects the challenges banks face as interest-rate conditions evolve.
Securities purchased during periods of very low interest rates can continue generating relatively modest income even when market yields rise.
At the same time, banks must manage funding expenses, deposit competition and changing loan demand.
F&M’s transaction seeks to address these dynamics by moving capital toward assets with stronger current yields and reducing higher-cost liabilities.
The bank’s management believes the strategy will allow it to respond more effectively to future market conditions while maintaining its conservative approach to credit and balance sheet management.
Shareholders Approve Annual Meeting Proposals
In addition to announcing the balance sheet repositioning, F&M said shareholders approved all proposals presented at its 2026 annual meeting.
The proposals included the election of directors and ratification of KPMG LLP as the bank’s independent public accounting firm.
Shareholders also approved additional future share repurchases by the bank.
Another approved proposal involved an amendment to F&M’s Restated Articles of Incorporation.
The amendment updates the supermajority shareholder voting requirement for certain significant corporate actions, reducing the required approval threshold from a legacy 80% to 60%.
The approval of all proposals represents shareholder support for the bank’s current strategic direction and governance framework.
Management Thanks Shareholders
Daniel K. Walker thanked shareholders for their continued support and participation in the annual meeting.
He said the successful approval of all proposals reflected confidence in the bank’s strategic path and management team’s efforts to expand the organization.
Strong shareholder participation can provide an important foundation for management as the bank executes strategic initiatives, including the balance sheet repositioning.
The combination of shareholder support and financial strength provides F&M with a stronger platform from which to pursue future growth.
Positioning for Future Growth
The completion of the securities portfolio repositioning marks an important step in F&M’s broader financial strategy.
By selling approximately $1 billion of low-yielding municipal securities, reinvesting a portion of the proceeds into securities yielding approximately 5.13%, repaying $300 million of higher-cost borrowings and retaining liquidity for future lending, the bank has significantly altered the composition of its balance sheet.
The transaction is expected to create several potential benefits.
First, higher-yielding securities and loans should improve the earning potential of the bank’s assets.
Second, debt repayment should reduce future funding costs.
Third, additional liquidity should provide greater capacity to respond to customer loan demand.
Fourth, a shorter average life and reduced concentration in the securities portfolio should improve balance sheet flexibility.
Finally, the transaction is expected to strengthen F&M’s ability to navigate future changes in the interest-rate environment.
F&M expects to absorb the one-time loss associated with the securities sale during the third quarter of 2026 while maintaining its expectation of full-year profitability.
The bank’s management views the short-term accounting impact as part of a broader restructuring designed to produce longer-term financial benefits.
The strategy reflects a common challenge facing financial institutions: balancing the performance of legacy assets with the need to position the balance sheet for current market conditions and future opportunities.
For F&M, the repositioning provides an opportunity to replace low-yielding securities with assets that can potentially generate stronger returns while simultaneously reducing expensive borrowings.
The bank also expects to maintain its focus on serving customers and supporting borrowing demand across the communities it has served for more than a century.
As loan demand evolves and interest-rate conditions continue to change, F&M will have greater liquidity and balance sheet flexibility to respond.
The bank’s leadership believes its strong capital position, disciplined credit culture and community-focused business model provide a solid foundation for future growth.
Ultimately, the repositioning represents more than a securities transaction. It is a strategic effort to improve the efficiency of F&M’s balance sheet, strengthen its future earnings capacity and create additional flexibility to support customers.
While the $85 million pre-tax loss associated with the transaction will affect near-term results, management expects the benefits of higher asset yields, lower funding expenses and greater lending capacity to strengthen the bank’s earnings profile over the longer term.
With the restructuring completed and shareholders having approved all annual meeting proposals, Farmers & Merchants Bank of Long Beach enters the next phase of its strategy with a balance sheet designed to provide greater flexibility, stronger earning potential and additional capacity to support its customers and communities.
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