UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K


ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 20192021


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


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


Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockNone
FMCBNot Applicable
OTCQXNot Applicable


Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $0.01 Par Value Per Share


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes Yes   No 


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   No 


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 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, 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)   Yes   No


The aggregate market value of the Registrant’s common stock held by non-affiliates on June 30, 20192021 (based on the last reported trade on June 30, 2019)2021) was $625,909,000.$605,182,616.


The number of shares of Common Stock outstanding as of February 29, 2020: 793,55628, 2022: 785,146


Documents Incorporated by Reference:

Portions of the definitive Proxy Statement for the 20202022 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A are incorporated by reference in Part III, Items 10 through 14.





FARMERS & MERCHANTS BANCORP
FORM 10-K


TABLE OF CONTENTS



Page
  Page
PART I
  
 3
Item 1.
3
   
  176
   
  2824
   
  2839
   
  2839
   
39
  2839
  
PART II
 
   
 2839


43
   
Item 6.
  32
Item 7.
 3343


68
   
Item 7A.
  62
Item 8.
  6571
   
110121


121
   
110123
   
110123
  
PART III
 
   
111124
   
112
124
   
 112124
 


112124
   
112125
  
PART IV
 
   
113126
   
114127
   
115128


2

Introduction – Forward Looking Statements


This Annual Report on Form 10-K contains various forward-looking statements, usually containing the words “estimate,” “project,” “expect,” “objective,” “goal,” or similar expressions and includes assumptions concerning Farmers & Merchants Bancorp’s (together with its subsidiaries, the “Company”, “FMCB”, or “we”) operations, future results, and prospects. These forward-looking statements are based upon current expectations and are subject to risks and uncertainties. In connection with the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important factors which could cause the actual results of events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.


Such factors include, but are not limited to, the following: (1) economic conditions in the mid Central Valley or the East Bay region of San Francisco in California; (2) significant changes in interest rates and loan prepayment speeds; (3) credit risks of lending and investment activities; (4) changes in federal and state banking laws or regulations; (5) competitive pressure in the banking industry; (6) changes in governmental fiscal or monetary policies; (7) the possible adverse impacts on the banking industry and our business from a period of significant, prolonged inflation; (8) uncertainty regarding the economic outlook resulting from the continuing war on terrorism, as well as actions taken or to be taken by the U.S. or other governments as a result of further acts or threats of terrorism; (8)(9) water management issues in California and the resulting impact on the Company’s agricultural and industrial customers; (9)(10) expansion into new geographic markets and new lines of business; (11) the impact of COVID-19 (Coronavirus) on the Company and (10)its customers (see COVID-19 Disclosure below); (12) the impact of changes in Federal and State taxation policies and rates; and (13) other factors discussed in Item 1A. Risk Factors.Factors of this Annual Report on Form 10-K.


Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made.

COVID-19 (Coronavirus) Disclosure
In an attempt to slow the accelerating spread of COVID-19, the first cities and counties in Northern California were placed under “shelter-in-place” orders on March 16, 2020. By March 19, 2020, the Governor had placed the entire state under these orders. Since that time, most California counties, including those in which the Company operates, have been in various levels of lockdown. The Governor has developed guidelines as to when a given county can re-open certain business and other activities, but all counties in which the Company operates remain under some level of restrictions. Businesses have been designated as either “essential” or “non-essential” with restrictions on non-essential businesses being greater than on essential businesses. During 2021, economic activities have improved for our clients as vaccination rates increased and governmental restrictions were eased across the markets we serve. However, the COVID-19 virus continues to develop new strains, such as the Delta variant and the Omicron variant, which have increased infection rates, especially among unvaccinated persons. These variants led to governmental agencies re-imposing restrictions, which again affected economic activities. The State of California announced a relaxation of most of these restrictions in February 2022. However, no assurances can be given as to whether such restrictions might be re-imposed at a later time and what the continuing economic impact will be on the markets we serve.

Designated as an “essential business”, Farmers & Merchants Bank of Central California (the “Bank” or “FMB”) has kept all branches open and maintained regular business hours during all of 2020 and 2021. Staffing levels have remained stable during the pandemic.

Impact on the Banking Industry

On March 27, 2020, Congress signed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) into law, and on December 21, 2020 this original legislation was amended and extended by the passage of the Consolidated Appropriations Act of 2021 (“H.R. 133”). The primary impact of this collective legislation, as well as related federal and state regulatory actions, is as follows:

Paycheck Protection Program (“PPP”)—The Small Business Administration (“SBA”) was directed by Congress to provide loans to small businesses with less than 500 employees to assist these businesses in meeting their payroll and other financial obligations over the next several months (H.R. 133 reduced the number of employees to 300 for “second draw” PPP loans). These government-guaranteed loans are made with an interest rate of 1%, a risk weight of 0% under risk-based capital rules, have a term of 2 to 5 years, and under certain conditions the SBA can forgive them after eight or twenty-four weeks. In January 2021, the SBA introduced a second round of PPP loans as directed by Congress.  Although these loans carry a nominal interest rate of 1%, the SBA will pay the banks an origination fee of 1-5% depending on the size of the loan. All fees have been capitalized and are being accreted over the life of the loans. The Bank has received $17.9 million in fees from the SBA and has accreted $15.3 million of these fees into interest income as of December 31, 2021.  The Company expects to accrete the remaining $2.6 million in fees over the first half of 2022.  The PPP ended as to new loans on May 31, 2021.
Main Street Lending Program (“MSLP”)—The Federal Reserve Bank is administering a program to provide up to $600 billion of credit to small and medium-sized eligible businesses that were in sound financial condition before COVID-19 and that were either unable to access the PPP or that required additional financial support after receiving a PPP loan. These loans are not forgivable. The MSLP offers loans up to $300 million for businesses with up to 15,000 employees or $5 billion in annual revenues. Loans have five-year terms, bear an interest rate of the London Interbank Offered Rate (“LIBOR”) plus 3%, and provide for deferral of principal for two years and interest for one year. If sold, lenders are required to retain 5% of each loan with the remaining 95% sold to the Federal Reserve Bank. The MSLP ended as to new loans on January 8, 2021. The Company registered as an eligible lender under the MSLP, but did not make any loans under the program.
Temporary Relief from Troubled Debt Restructurings—The CARES Act and H.R. 133 provide financial institutions, under specific circumstances, the opportunity to temporarily suspend certain requirements under generally accepted accounting principles related to troubled debt restructurings (“TDRs”) to account for the effects of COVID-19. The Bank actively worked with existing borrowers to restructure loans generally for up to six months, moving to either interest-only payments or full deferral of principal and interest payments. After the deferral period ended, any deferred amounts were added to the final principal balance. We believe that these actions assisted our clients as they navigated the negative economic impact of the pandemic, but no assurances can be given that at some time in the future these loans will not be required to be accounted for as a TDR.  This provision of the CARES Act expired on January 1, 2022.  See Note 5, located in “Item 8. Financial Statements and Supplementary Data.”
Foreclosure Actions—The CARES Act and H.R. 133 restricted the ability of financial institutions to exercise their foreclosure rights on residential and multi-family properties backed by federally guaranteed mortgage loans. The State of California went further and temporarily suspended all residential and commercial foreclosures through December 31, 2021. The Company actively worked with its clients to provide payment relief during the suspension period.
CECL Implementation Deferral—The Company was originally scheduled to implement ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (“CECL”) as of January 1, 2020. The CARES Act and H.R. 133 provided the election to defer CECL implementation 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 elected to delay CECL implementation until January 1, 2022 and adopted it accordingly.
Impact on Farmers & Merchants Bancorp and Farmers & Merchants Bank of Central California
The Company is exposed to risks and uncertainties associated with the COVID-19 disease and any such variants, including but not necessarily limited to the following:
Our ability to maintain staff levels to operate key activities of our business;
Our earnings may be affected by borrowers that cannot make payments on their loans. We have credit exposure to industries that have been impacted by either: (1) the public’s changing habits in response to the risks of COVID-19 and such variants (e.g., hotels, movie theaters, health clubs and restaurants); or (2) continuing levels of restrictions imposed by local, state and federal officials (e.g., small businesses previously determined to be “non-essential”).
Our liquidity position may be affected by a significant and unusual outflow of deposits or drawdown of loans.
The Company believes that it is well positioned to respond to risks associated with the COVID-19 disease and such variants from a financial position as of December 31, 2021, including but not necessarily limited to the following:

Held a strong liquidity position of $1.72 billion in cash and investment securities;
Maintained strong asset quality with only $516,000 of non-performing loans, and a negligible delinquency ratio of 0.03% of total loans;
Increased our total risk-based capital ratio to 13.19%;
Increased the allowance for credit losses to $61 million or 1.88% total loans and leases (1.92% exclusive of government fully-guaranteed loans issued under the SBA’s PPP); and
Achieved a return on average assets of 1.35% and a return on average equity of 15.00% for all of 2021.

Our credit exposure to the “Hospitality” (primarily hotels) and “Entertainment” (primarily restaurants, health clubs and movie theaters) industries totals $183.1 million in loans and leases outstanding at December 31, 2021. This represents 5.7% of total loans and leases outstanding and 39.5% of total shareholders’ equity, both measures that are thought to be reasonable when compared to our peers. Most of these loans were underwritten with an original LTV of 50-70% on the underlying real estate, providing us adequate collateral coverage, and have financially strong guarantors with liquidity that provides additional protection. Over and above the impact on the Hospitality and Entertainment industries, during 2020 and 2021, there has been a general economic slowdown because of the continuing levels of restrictions on economic activity. The Central Valley of California may be in a better position than other areas to weather this impact because agricultural activity has substantially continued at the level existing before the pandemic.

We continue to monitor and work closely with our borrowers to best position them to address potential negative effects the COVID-19 disease and such variants might have on economic activities generally and their business activities specifically.  We believe that these actions, including participation in restructurings as allowed under the CARES Act and H.R. 133 guidelines, have assisted these borrowers to address such negative economic effects, but no assurances can be given that these borrowers will be able to continue to perform according to the terms and conditions of their loans to the extent that the economy continues to be negatively impacted by the pandemic.

PART I


Item 1.Business


Organizational Structure
General Development of the Business

August 1, 1916, marked the first day of business for Farmers & Merchants Bank (the “Bank”). The Bank was incorporated under the laws of the State of California and licensed asBancorp is a state-chartered bank. Farmers & Merchants’ first venture out of Lodi occurred when the Galt office opened in 1948. Since then the Bank has opened full-service branches in Linden, Manteca, Riverbank, Modesto, Sacramento, Elk Grove, Turlock, Hilmar, Stockton, Merced, Walnut Creek, Concord, Napa and Lockeford.

During 2018, the Company completed the acquisition of Bank of Rio Vista, headquartered in Rio Vista, California. This provided the Company entry into both Rio Vista and Walnut Grove, enhancing the Bank’s market share in Lodi.

In addition to 29 full-service branches, the Bank serves the needs of its customers through three stand-alone ATMs located on the grounds of the Lodi Grape Festival, in the Trilogy Residential Community clubhouse in Rio Vista and the Shadelands business center in Walnut Creek. In 2007, the Bank began offering certain banking products over the internet at www.fmbonline.com.

On March 10, 1999, the Company, pursuant to a reorganization, acquired all of the voting stock of the Bank. The Company is aDelaware registered bank holding company incorporatedorganized in the State of Delaware1999.  As a registered bank holding company, FMCB is subject to regulation, supervision, and registered under the Bank Holding Company Act of 1956, as amended. The Company’s outstanding securities as of December 31, 2019, consisted of 793,033 shares of common stock, $0.01 par value and no shares of preferred stock issued. The Bank is the Company’s principal asset.

The Bank’s two wholly owned subsidiaries are Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Farmers & Merchants Investment Corporation is currently dormant and Farmers/Merchants Corp. acts as trustee on deeds of trust originatedexamination by the Bank.

F & M Bancorp, Inc. was created in March 2002 to protectGovernors of the name “F & M Bank.” During 2002,Federal Reserve System (“FRB”) and by the Company completed a fictitious name filing in California to begin using the streamlined name, “F & M Bank,” as partDepartment of a larger effort to enhance the Company’s imageFinancial Protection and build brand name recognition. Since 2002, the Company has converted all of its daily operating and image advertising to the “F & M Bank” name and the Company’s logo, slogan and signage were redesigned to incorporate the trade name, “F & M Bank.”

During 2003, the Company formed a wholly owned Connecticut statutory business trust, FMCB Statutory Trust I, for the sole purpose of issuing trust-preferred securities. See Note 12, located in “Item 8. Financial Statements and Supplementary Data.”

Innovation (“DFPI”).  The Company’s principal business is to serve as a holding company for the Bank and for other banking or banking related subsidiaries, which the Company may establish or acquire. As a legal entity separate and distinct from its subsidiary, the Company’s principal source of funds is, and will continue to be, dividends paid by and other funds received from the Bank. Legal limitations are imposed on the amount of dividends that may be paid and loans that may be made by the Bank to the Company. See “Supervision and Regulation - Dividends and Other Transfer of Funds.”  The Company’s outstanding common stock as of December 31, 2021, consisted of 789,646 shares of common stock, $0.01 par value and no shares of preferred stock were issued or outstanding.


During 2003, the Company formed a wholly-owned Connecticut statutory business trust, FMCB Statutory Trust I, for the sole purpose of issuing trust-preferred securities. See Note 10 “Long-Term Subordinated Debentures” located in Item 8. “Financial Statements and Supplementary Data” in this Annual Report of Form 10-K.

The Company operates all financial service activities through its wholly-owned banking subsidiary, Farmers & Merchants Bank of Central California, which was organized in 1916.  The Bank was incorporated under the laws of the State of California as a non-FRB member, California state-chartered bank subject to primary regulation, supervision and examination by the Federal Deposit Insurance Corporation (“FDIC”) and by the DFPI. The Bank’s two wholly-owned subsidiaries are Farmers & Merchants Investment Corporation and Farmers/Merchants Corporation. Farmers & Merchants Investment Corporation is currently dormant and Farmers/Merchants Corporation acts as trustee on deeds of trust originated by the Bank.  The Bank’s deposit accounts are insured under the Federal Deposit Insurance Act, as amended (“FDIA”), up to applicable limits. See “Supervision and Regulation – Deposit Insurance.”

As a bank holding company, the Company is subject to regulation and examination by the Board of Governors of the Federal Reserve System (“FRB”). The Bank is a California state-chartered non-FRB member bank subject to the regulation and examination of the California Department of Business Oversight (“DBO”) and the Federal Deposit Insurance Corporation (“FDIC”)Insurance”.


Acquisition of Bank of Rio Vista (“BRV”)

On October 10, 2018,F & M Bancorp, Inc. was created in March 2002 to protect the name “F & M Bank.” During 2002, the Company completed its acquisitiona fictitious name filing in California to begin using the streamlined name, “F & M Bank,” as part of Bank of Rio Vista, which occurred through a series of stock purchases beginning in April 2017.  The total consideration paid forlarger effort to enhance the acquisition was $40.73 million. The Company engaged in this transaction with the expectation it would be accretive to incomeCompany’s image and add a new market area with a demographic profile consistent with many of the Central Valley markets served by the Company.

Service Area

build brand name recognition. Since 2014,2002, the Company has broadenedconverted all of its geographic footprint by opening offices in Walnut Creek, Concord, Napa, Rio Vistadaily operating and Walnut Grove. The Company continuesimage advertising to look for opportunitiesthe “F & M Bank” name and the Company’s logo, slogan and signage were redesigned to further expand its branch network inincorporate the East Bay area of San Francisco, and over the past two years has purchased buildings in Walnut Creek, Lafayette and Montclair that will become future branch locations.trade name, “F & M Bank”.


Despite the recent expansion of our geographic footprint, theMarket Area

The Company’s primary service area remainsis the mid Central Valley of California, including Sacramento, San Joaquin, Solano, Stanislaus and Merced counties, where we operate 24and the east region of the San Francisco Bay Area including Napa, Alameda, and Contra Costa counties.  The Company operates 29 full-service branches and 13 stand-alone ATM. This area encompasses:

SacramentoATMs. The Company’s market areas include the following Metropolitan Statistical AreaAreas (“MSA”), which most recent data as of January 18, 2022:

The Sacramento MSA (Sacramento County Only), with branches in Sacramento, Elk Grove, Galt and Walnut Grove.  This MSA hascounty had a Population of 2.31.6 million and a Per Capita Income of approximately $56,278.$58,307. The MSA includes significant employment in the following sectors: stategovernment, education & health trade, and local government; agriculture; and trade, transportation and& utilities. Unemployment currently standswas at 3.2%4.8%.


StocktonThe Stockton-Lodi MSA, with branches in Lodi, Linden, Stockton, Lockeford and Manteca. This MSA hashad a Population of 0.750.77 million and a Per Capita Income of approximately $44,995.$51,816. The MSA includes significant employment in the following sectors: state and local government; agriculture; trade, transportation and utilities;& utilities, government, and education and& health services. Unemployment currently standswas at 5.7%6.6%.

The Vallejo-Fairfield MSA (Rio Vista Only, census tract 2535.00), with branches in Rio Vista. This census tract had a Population of 9,221 and a Weighted Average of Median Family Income of $64,022. The city includes significant employment in the following industries: agriculture, manufacturing, tourism and other services. Unemployment was at 6.7%.


The Modesto MSA, with branches in Modesto, Riverbank and Turlock.  This MSA hashad a Population of 0.55 million and a Per Capita Income of approximately $44,120.$48,954. The MSA includes significant employment in the following sectors: agriculture; trade, transportation & utilities, educational & health services, and utilities; state and local government; and education and health services.government. Unemployment currently standswas at 5.6%6.2%.


The Merced MSA, with branches in Hilmar and Merced.  This MSA hashad a Population of 0.270.28 million and a Per Capita Income of approximately $38,519.$43,914. The MSA includes significant employment in the following sectors: agriculture; state and local government; andgovernment, trade, transportation & utilities, and farming. Unemployment was at 7.6%.

The Oakland-Hayward-Berkeley MD, with branches in Concord, Walnut Creek, and Oakland.  This MSA had a Population of 2.8 million and a Per Capita Income of approximately $89,201. The MSA includes significant employment in the following sectors: professional & business services, educational & health services, trade, and transportation & utilities. Unemployment currently standswas at 7.9%4.4%.


AllThe Napa MSA, with a branch in Napa.  This MSA had a Population of the Company’s Central Valley service areas are heavily influenced by the agricultural industry, however, with the exception0.14 million and a Per Capita Income of the State of Californiaapproximately $82,408. The MSA includes significant employment in the Sacramento MSA, no single employer represents a material concentration of jobs in any of our service areas.following sectors: manufacturing, leisure & hospitality, trade, and transportation & utilities. Unemployment was at 4.2%.

See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview” and “Financial Condition – Loans & Leases” for additional discussion regarding the Company’s market conditions.


Through its network of banking offices, the Company emphasizes personalized service along with a broad range of banking services to businesses and individuals located in the service areas of its offices. Although the Company focuses on marketing its services to small and medium sizedmedium-sized businesses, a broad range of retail banking services are also made available to the local consumer market.


The Company offers a wide range of deposit instruments. These include checking, savings, money market, time certificates of deposit, individual retirement accounts and online banking services for both business and personal accounts.


The Company provides a broad complement of lending products, including commercial, commercial real estate, real estate construction, agribusiness, consumer, credit card, residential real estate loans, and equipment leases. Commercial products include term loans, leases, lines of credit and other working capital financing and letters of credit. Financing products for individuals include automobile financing, lines of credit, residential real estate, home improvement and home equity lines of credit.


The Company also offers a wide range of specialized services designed for the needs of its commercial accounts. These services include a credit card program for merchants, lockbox and other collection services, account reconciliation, investment sweep, on-line account access, and electronic funds transfers by way of domestic and international wire and automated clearinghouse.


The Company makes investment products available to customers, including mutual funds and annuities. These investment products are offered through a third party, which employs investment advisors to meet with and provide investment advice to the Company’s customers.


Employees
7


At December 31, 2019, the Company employed 365 full time equivalent employees. The Company believes that its employee relations are satisfactory.
Competition

The banking and financial services industry in California generally, and in the Company’s market areas specifically, is highly competitive. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial service providers. The Company competes with other major commercial banks, diversified financial institutions, credit unions, savings institutions, money market and other mutual funds, mortgage companies, and a variety of other non-banking financial services and advisory companies. Federal legislation encourages competition between different types of financial service providers and has fostered new entrants into the financial services market. It is anticipated that this trend will continue. Using the financial holding company structure, insurance companies and securities firms may compete more directly with banks and bank holding companies.


Many of our competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader range of financial services than the Company. In order to compete with other financial service providers, the Company relies upon personal contact by its officers, directors, employees, and stockholders, along with various promotional activities and specialized services. In those instances where the Company is unable to accommodate a customer’s needs, the Company may arrange for those services to be provided through its correspondents.

The market shares of the Bank and its largest competitors in the eight counties in California in which we operate, ranked by deposit market share at June 30, 2021 (the most recent data available), as reported by S&P Global Market Intelligence, are as follows:

Largest
Competitor

Number
of
Branches


Deposit
Market
Share

Wells Fargo Bank 102   20.54%
Bank of the West 52   15.42%
Bank of America 82   14.01%
JPMorgan Chase Bank 90   10.46%
U.S Bank 45   8.91%
F&M Bank 28   2.85%
Union Bank 12   2.83%

Human Capital Resources

As of December 31, 2021, we employed 373 full-time equivalent employees. The Company believes that its employee relations are satisfactory. For the year ended December 31, 2021, salaries and employee benefits expense totaled $64 million, representing 70% of our total non-interest expense. Expenses related to education, training, recruiting and placement exceeded $300,000 for the three-year period ended December 31, 2021.

We are led by an experienced management team with substantial experience in the markets that we serve and the financial products that we offer. Our business strategy focuses on providing products and services through long-term relationship managers. As a result, our success depends heavily on the performance of our employees, as well as on our ability to attract, motivate and retain highly qualified employees at all levels of the Company. We believe that our work environment contributes to employee satisfaction and retention.

We are committed to maintaining a work environment where every employee is treated with dignity and respect, free from the threat of discrimination and harassment. As stated in our Board approved (i) Code of Conduct and (ii) Prohibited Harassment Policy, we expect these same standards apply to all stakeholders, to our interactions with customers, vendors and independent contractors.

We are firmly committed to providing equal employment and advancement opportunities to all qualified individuals and will not tolerate any discrimination or harassment of any kind. Team members are encouraged to immediately report any discrimination or harassment to their supervisor and human resources.

Policies and Planning
We are proud to be an Equal Opportunity Employer and enforce those values throughout all of our operations. We prohibit discrimination in hiring or advancement against any individual on the basis of race, color, religion, gender, sex, national origin, age, marital status, pregnancy, physical or mental disability, genetics, veteran status, sexual orientation, or any other characteristic protected by applicable law.

We strive to ensure our team members have access to working conditions that provide a safe and healthy environment, free from work-related injuries and illnesses. Many of our locations employ badges and keypads to enter or to enter restricted areas of locations that have a public presence. As a company having been designated as an “essential industry” during the COVID-19 pandemic, we focused on safety and health regimens that are designed to protect our employees who have reported to work during this difficult time. This has resulted in our ability to keep all of our branches open for business while providing a safe work environment for our employees.

Each year our annual planning and budgeting process involves an assessment of staffing levels and skills and results in the development of targets for recruitment and training. In addition, our Board of Directors reviews all succession plans in place for key personnel.

Recruitment
We strive to recruit talent from both local educational institutions and the banking industry. The Company has full-time staff dedicated to our recruitment efforts and we utilize many of the major recruitment firms and websites. Annually we visit local colleges and universities for job fairs and other recruitment events, which we believe allows us to identify those students who have the skills and aptitudes we need in the Company. The results of these efforts has been a consistent flow of candidates to fill our staffing needs as we grow.

Compensation

Salary and Bonuses
We have job descriptions and salary grade ranges for all of our positions. Annually we use outside survey firms to provide information on market pay. We also pay performance-based bonuses to our employees. During 2021, total bonus compensation amounted to over 30% of base salaries. We believe that this “pay-for-performance” approach allows us to effectively recruit and retain key employees.


Retirement Plans
All employees are eligible to participate in our Profit Sharing Plan after 1 year of service and having worked at least 1,000 hours. The Company makes contributions equal to 5% of the employee’s eligible compensation and discretionary contributions determined annually by the Board of Directors. This is not a matching based program; employees receive these contributions regardless of whether they make individual contributions to our 401(K) program. During 2021 total expenses for the profit sharing plan amounted to over 10% of base salaries, a level that we believe helps us in recruitment and retention.

Medical and Other Benefits
In addition to competitive salaries, incentives and retirement benefits, we provide comprehensive medical, dental, and vision plans, health savings accounts, paid sick time, long-term disability, basic life and AD&D insurance, flexible spending accounts, and employee assistance and wellness programs.

Training

Job Related
We support team members, should they wish to continue their education in subjects and fields that are directly related to our operations, activities, and objectives. We encourage our team members to pursue educational opportunities that will help improve job performance and professional development. To further this goal, we reimburse tuition and certain fees for satisfactory completion of approved educational courses and certain certifications. Included are college credit courses at accredited colleges and universities, continuing education courses and certification exams.

Diversity and Inclusion
To foster a deeper understanding regarding diversity and inclusion, the Company assigns all employees diversity and inclusion training - Diversity Made Simple. The diversity course is mandatory for all staff. As of December 31, 2021, all employees have met their diversity and inclusion training obligations.

Harassment Prevention
The Company assigns all employees prohibitive harassment training. Every two years nonsupervisory employees receive one hour of harassment preventiontraining while supervisors receive two hours of harassment prevention training. Newly hired employees are assigned harassment prevention and must complete the training within six months of hire or promotion.  Following the initial training, all employees must complete training every two years, at minimum. As of December 31, 2021, all employees have met their harassment prevention training requirements.

Performance Evaluation
The Company has implemented a Performance Planning, Coaching and Evaluation (“PPC&E”) system that requires each year that employees and their managers establish detailed goals and objectives. Annually, employees are reviewed relative to their progress in achieving those goals, with the objective of reducing performance surprises and encouraging behavior that is consistent with Company objectives. We believe that this PPC&E discipline is important in retaining and growing our employees.

Government Policies


The Company’s profitability, like most financial institutions, is primarily dependent on interest rate differentials. The difference between the interest rates paid by the Company on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by the Company on its interest-earning assets, such as loans &and leases extended to its customers and securities held in its investment portfolio, comprise the major portion of the Company’s earnings. These rates are highly sensitive to many factors that are beyond the control of the Company and the Bank, such as inflation, recession, unemployment, and unemployment.the monetary policy of the FRB. The impact that changes in economic conditions might have on the Company and the Bank cannot be predicted.


The business of the Company is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the FRB. The FRB implements national monetary policies (with objectives such as curbing inflation and combating recession)such as maximum employment, stable prices, and moderate long-term interest rates) through its open-market operations in U.S. Government securities by adjusting the required level of reserves for depository institutions subject to its reserve requirements, and by varying the target federal funds and discount rates applicable to borrowings by depository institutions.

The actions of the FRB in these areas influence the growth of bank loans &and leases, investments, and deposits and also affect interest rates earned on interest-earning assets and paid on interest-bearing liabilities. The nature and impact on the Company of any future changes in monetary and fiscal policies cannot be predicted.


From time to time, legislative acts, as well as regulations, are enacted which have the effect of increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies, and other financial institutions and financial services providers are frequently made in the U.S. Congress, in the state legislatures, and before various regulatory agencies. This legislation may change banking statutes and the operating environment of the Company and the Bank in substantial and unpredictable ways. If enacted, such legislation or regulations could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings institutions, credit unions, and other financial institutions. The Company cannot predict whether any of this potential legislation will be enacted, and if enacted, the effect that it, or any implemented regulations, would have on the financial condition or results of operations of the Company or any of its subsidiaries.


Supervision and Regulation


General
Bank holding companies and banks are extensively regulated under both federal and state law. The regulation is intended primarily for the protection of the banking system and the deposit insurance fundDeposit Insurance Fund and clients of insured depository institutions and not for the benefit of stockholders of the Company. This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that, while not publicly available, can affect the conduct and growth of their businesses. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.


Set forth below is a summary description of the material laws and regulations, which relate to the operations of the Company and the Bank. This description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.

The Company
The Company is a registered bank holding company and is subject to regulation under the Bank Holding Company Act of 1956, as amended (“BHCA”), as amended.. Accordingly, the Company’s operations are subject to extensive regulation and examination by the FRB. The Company is required to file with the FRB quarterly and annual reports and such additional information as the FRB may require pursuant to the BHCA. The FRB conducts periodic examinations of the Company.


The FRB may require that the Company terminate an activity, or terminate control of, or liquidate, or divest certain subsidiaries ofor affiliates when the FRB believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The FRB also has the authority to regulate provisions of certain bank holding company debt. Under certain circumstances, the Company must file written notice and obtain approval from the FRB prior to purchasing or redeeming its equity securities.


Under the BHCA and regulations adopted by the FRB, a bank holding company and its non-banking subsidiaries are prohibited from requiring certain tie-in arrangements in connection with an extension of credit, lease or sale of property, or furnishing of services. For example, with certain exceptions, a bank may not condition an extension of credit on a promise by its customer to obtain other services provided by it, its holding company or other subsidiaries, or on a promise by its customer not to obtain other services from a competitor. In addition, federal law imposes certain restrictions on transactions between Farmers & Merchants Bancorp and its subsidiaries. Further, the Company is required by the FRB to maintain certain levels of capital. See “Capital Standards.”Standards”.


The Company is prohibited by the BHCA, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to its subsidiaries. However, the Company, subject to the prior notice and/or approval of the FRB, may engage in any, or acquire shares of companies engaged in, activities that are deemed by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.


A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the FRB’s policy, that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. This support may be required at times when a bank holding company may not be able to provide such support. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound banking practice or a violation of the FRB’s regulations or both.


The Company is not a financial holding company for purposes of the FRB.BHCA.


The Company is also a bank holding company within the meaning of the California Financial Code. As such, the Company and its subsidiaries are subject to examination by, and may be required to file reports with, the DBO.DFPI.


The Company’s securitiescommon stock are registered with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, the Company is subject to the reporting, proxy solicitation and other requirements and restrictions of the Exchange Act.


The Bank
The Bank, as a California charteredCalifornia-chartered non-FRB member bank, is subject to primary supervision, periodic examination and regulation by the DBODFPI and the FDIC. If, as a result of an examination of the Bank, the FDIC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory, or that the Bank or its management is violating or has violated any law or regulation, various remedies are available to the FDIC.

Such remedies include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove officers and directors, and ultimately to terminate the Bank’s deposit insurance, which for a California charteredCalifornia-chartered bank would result in a revocation of the Bank’s charter. The DBODFPI has many of the same remedial powers.

Various requirements and restrictions under the laws of the State of California and the United States affect the operations of the Bank. State and federal statutes and regulations relate to many aspects of the Bank’s operations, including reserves against deposits, ownership of deposit accounts, interest rates payable on deposits, loans &and leases, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, and capital requirements. Further, the Bank is required to maintain certain levels of capital. See “Capital Standards.”Standards”.


The Dodd Frank Wall Street Reform and Consumer Protection Act (the “Dodd Frank Act”) - The Dodd-Frank Act implemented sweeping reform across the U.S. financial regulatory framework, including, among other changes:


creating a Financial Stability Oversight Council tasked with identifying and monitoring systemic risks in the financial system;
 
creating the Consumer Financial Protection Bureau (“CFPB”), which is responsible for implementing, examining and enforcing compliance with federal consumer financial protection laws;
 
requiring the FDIC to make its capital requirements for insured depository institutions countercyclical, so that capital requirements increase in times of economic expansion and decrease in times of economic contraction;
 
imposing more stringent capital requirements on bank holding companies and subjecting certain activities, including interstate mergers and acquisitions, to heightened capital conditions;
 
changing the assessment base for federal deposit insurance from the amount of the insured deposits held by the depository institution to the depository institution’s average total consolidated assets less tangible equity, eliminating the ceiling on the size of the FDIC’s Deposit Insurance Fund and increasing the floor ofon the size of the FDIC’s Deposit Insurance Fund;


eliminating all remaining restrictions on interstate banking by authorizing state banks to establish de novo banking offices in any state that would permit a bank chartered in that state to open a banking office at that location;


repealing the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts; and
 
in the so-called “Volcker Rule,” subject to numerous exceptions, prohibiting depository institutions and affiliates from certain investments in, and sponsorship of, hedge funds and private equity funds and from engaging in proprietary trading.
 
On February 3, 2017,May 24, 2018 President Trump signed an executive order calling for his administration to review existing U.S. financial laws and regulations, including the Dodd-Frank Act, in order to determine their consistency with a set of “core principles” of financial policy.
President Trump recently signed the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic(“Economic Growth Act”), which repeals or modifies certain provisions of the Dodd-Frank Act and eases regulations on all but the largest banks.
The Economic Growth Act’s highlights include improving consumer access to mortgage credit that, among other things,things: (i) exempt banks with less than $10 billion in assets from the ability-to-repay requirements for certain qualified residential mortgage loans; (ii) do not require appraisals for certain transactions valued at less than $400,000 in rural areas; (iii) exempt banks and credit unions that originate fewer than 500 open-end and 500 closed-end mortgages from the Home Mortgage Disclosure Act’s (“HMDA”) expanded data disclosures (the provision would not apply to nonbanks and would not exempt institutions from HMDA reporting altogether); (iv) amend the SAFE Mortgage Licensing Act by providing registered mortgage loan originators in good standing with 120 days of transitional authority to originate loans when moving from a federal depository institution to a non-depository institution or across state lines; (v) require the CFPB to clarify how TRID appliesTruth in Lending Disclosure (“TRID”) rules apply to mortgage assumption transactions and construction-to-permanent home loans as well as outline certain liabilities related to model disclosure use,use; and (vi) provide that federal banking regulators may not impose higher capital standards on High Volatility Commercial Real Estate exposures unless they are for acquisition, development or construction (“ADC”), and clarifies ADC status. In addition, the Economic Growth Act’s highlights also include regulatory relief for certain institutions, wherebyincluding among other things, it simplifiessimplifying capital calculations by requiring regulators to adopt a threshold for a community bank leverage ratio of between 8% to 10%.
Institutions under $10 billion in assets that meet such community bank leverage ratio will automatically be deemed to be well-capitalized, although regulators retain the flexibility to determine that a depository institution may not qualify for the community bank leverage ratio test based on the institution’s risk profile, and exempts community banks from Section 13 of the Bank Holding Company ActBHCA if they have less than $10 billion in total consolidated assets; and exempts banks with less than $10 billion in assets, and total trading assets and liabilities not exceeding more than five percent of their total assets, from the Volcker Rule restrictions on trading with their own capital.
The Economic Growth Act also addsadded certain protections for consumers, including veterans and active duty military personnel, expanded credit freezes and creation ofcreated an identity theft protection database. The Economic Growth Act also makesmade changes forapplicable to bank holding companies, as it raises the threshold for automatic designation as a systemically important financial institution from $50 billion to $250 billion in assets, subjects banks with $100 billion to $250 billion in total assets to periodic stress tests, exempts from stress test requirements entirely banks with under $100 billion in assets, and requiresrequired the federal banking regulators to,, within 180 days of passage, to raise the asset threshold under the Small Bank Holding Company Policy Statement from $1 billion to $3 billion. The Economic Growth Act also addsadded certain protections for student borrowers.
 
On June 17, 2019, the federal bank regulatory agencies jointly issued a final rule to streamline regulatory reporting requirements and committed to further review of reporting burdens for smaller institutions. The rule permits insured depository institutions with total assets of less than $5 billion that do not engage in certain complex or international activities to file the most streamlined version of the call report, the FFIEC 051 Call Report. This streamlined reporting reduces the data items required to be reported in the first and third quarters by approximately 37% and became effective July 22, 2019. The Bank elected not to adopt the new streamlined version FFIEC 051 Call Report.

ManySome aspects of the Dodd-Frank Act areremain subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us. In addition, the Economic Growth Act modifiesmodified several provisions in the Dodd-Frank Act, but arethese remain subject to implementing regulations. Although the reforms primarily target systemically important financial service providers (which the Bank is not), the Dodd-Frank Act’s influence has and is expected to continue to filter down in varying degrees to smaller institutions over time. We will continue to evaluate the effect of the Dodd-Frank Act; however, in many respects, the ultimate impact of the Dodd-Frank Act will not be fully known for years, and no current assurance may be given that the Dodd-Frank Act, or any other new legislative changes, will not have a negative impact on the results of operations and financial condition of the Company and the Bank.


Capital Standards
The federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations, both for transactions reported on the balance sheet as assets and for transactions, such as letters of credit and recourse arrangements, that are recorded as off-balance sheet items. In 2013, the FRB, FDIC, and Office of the Comptroller of the Currency issued final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations.
The rules implement the Basel Committee’s December 2010 framework, commonly referred to as Basel III, for strengthening international capital standards, as well as implementing certain provisions of the Dodd-Frank Act.
 
The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015 (subject to phase-in periods for some of their components). The Basel III Capital Rules: (i) introduce a new capital measure called Common Equity Tier 1 (“CET1”), and a related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments, which are instruments treated as Tier 1 instruments under the prior capital rules that meet certain revised requirements; (iii) mandate that most deductions or adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital, as compared to existing regulations. Under the Basel III Capital Rules, for most banking organizations, the most common form of additional Tier 1 capital is noncumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for loan and leasecredit losses, in each case, subject to the Basel III Capital Rules’ specific requirements.
 
Under the Basel III Capital Rules, the following are the initial minimum capital ratios applicable to the Company and the Bank:
 
4.0% Tier 1 leverage ratio;
 
4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; and
8.0% total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets.
The Basel III Capital Rules also introduced a “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The implementation of the capital conservation buffer began on January 1, 2016 and was phased in over a three-year period (increasing by that amount on each subsequent January 1, until it reached 2.5% on January 1, 2019). The Company and the Bank must now maintain the following minimum capital ratios:
4.0% Tier 1 leverage ratio;
4.5% CET1 to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7%;
 
6.0% Tier 1 capital to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum Tier 1 capital ratio of at least 8.5%; and
 
8.0% total capital to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum total capital ratio of at least 10.5%.

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8.0% total capital to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum total capital ratio of at least 10.5%.
 
The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement thatthat: (i) mortgage servicing rights, (ii) deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks, and (iii) significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and were phased-in over a four-year period ended on January 1, 2019 (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income or loss items are not excluded for the purposes of determining regulatory capital ratios; however, non-advanced approaches banking organizations (i.e., banking organizations with less than $250 billion in total consolidated assets or with less than $10 billion of on-balance sheet foreign exposures), including the Company and the Bank, may make a one-time permanent election to exclude these items. The Company and the Bank made this election in the first quarter of 2015’s call reports2015 in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of its available-for-sale investment securities portfolio.portfolio, changes of which are included in accumulated other comprehensive income or loss.

The Basel III Capital Rules prescribe a new standardized approach for risk weightings that expands the risk weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, generally ranging from 0% for U.S. Government and agency securities, to 600% for certain equity exposures, depending on the nature of the assets. The newBasel III capital rules generally result in higher risk weights for a variety of asset classes. Additional aspects of the Basel III Capital Rules that are relevant to the Company and the Bank include:
 
consistent with the Basel I risk-based capital rules, assigning exposures secured by single-family residential properties to either a 50% risk weight for first-lien mortgages that meet prudent underwriting standards or a 100% risk weight category for all other mortgages;
 

providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (set at 0% under the Basel I risk-based capital rules);
 
assigning a 150% risk weight to all exposures that are nonaccrual or 90 days or more past due (set at 100% under the Basel I risk-based capital rules), except for those secured by single-family residential properties, which will be assigned a 100% risk weight, consistent with the Basel I risk-based capital rules;

applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction loans; and
 
applying a 250% risk weight to the portion of mortgage servicing rights and deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks that are not deducted from CET1 capital (set at 100% under the Basel I risk-based capital rules).

As of December 31, 2019,2021, the Company’s and the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements of the federal banking agencies for a “well capitalized” institutionsinstitution under the Basel III capital rules on a fully phased-in basis.
With respect to the Bank, the Basel III capital rules also revise the prompt corrective action regulations pursuant to Section 38 of the Federal Deposit Insurance Act.FDIA.
 
In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms, which standards are commonly referred to as Basel IV. Among other things, these standards revise the Basel Committee’s standardized approach for credit risk (including the recalibration of the risk weights and the introduction of new capital requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and provides a new standardized approach for operational risk capital.
Under the Basel framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S. capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Bank. The impact of Basel IV on us will depend on how it is implemented by the federal bank regulators.

Prompt Corrective Action (“PCA”)
The Federal Deposit Insurance Act, as amended (“FDIA”),FDIA requires federal banking agencies to take PCA in respect of depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The Basel III Capital Rules revised the PCA requirements effective January 1, 2015. Under the revised PCA provisions of the FDIA, an insured depository institution generally will be classified in the following categories based on the capital measures indicated:
 
Capital CategoryWell
Capitalized
 
TotalAdequately
Risk-BasedCapitalized
Under-
Capital Ratiocapitalized
  
Tier 1Significantly
Risk-BasedUnder-
Capital Ratiocapitalized
  
Common EquityCritically
Tier 1 (CET1)Under-
Capital Ratiocapitalized
 
Leverage RatioRisk-based capital to risk-weighted assets  
Tangible Equity
to Assets10.00%+
  
Supplemental
Leverage Ratio8.00%+
 
Well Capitalized10% or greater< 8.00%  8% or greater6.5% or greater5% or greater< 6.00%   n/a
N/A
Tier 1 capital to risk-weighted assets
8.00%+
6.00%+
< 6.00%< 4.00%   n/a
N/A
 
Adequately Capitalized8% or greaterCET1 capital to risk-weighted assets  6% or greater
6.50%+
  4.5% or greater
4.50%+
< 4.50%  4% or greater< 3.00%   n/a
N/A
Tier 1 leverage capital ratio  3% or greater
UndercapitalizedLess than 8%
5.00%+
  Less than 6%
4.00%+
< 4.00%  Less than 4.5%Less than 4%< 3.00%   n/a
N/A
Tangible equity to assets  Less than 3%
Significantly UndercapitalizedLess than 6%
N/A
  Less than 4%
N/A
  Less than 3%Less than 3%
N/A
   n/a
N/A
< 2.00%
Supplemental leverage ratio
N/A
3.00%+
< 3.00%   n/a
Critically Undercapitalizedn/a
N/A
   n/an/an/aLess than 2%n/a
N/A
 


An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios, if it is determined to be operating in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying PCA regulations and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.
 
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company, if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit capital restoration plans. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.conservator by the bank regulators.
 
The capital classification of a bank holding company and a bank affects the frequency of regulatory examinations, the bank holding company’s and the bank’s ability to engage in certain activities and the deposit insurance premium paid by the bank.bank to the FDIC. As of December 31, 2019,2021, we met the requirements to be classified as a “well-capitalized” based upon the aforementioned ratios for purposes of the prompt corrective action regulations, as currently in effect.

The Community Bank Leverage Ratio
On November 4, 2019, the federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of capital adequacy, known as the community bank leverage ratio (“CBLR”) framework, for qualifying community banking organizations consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The CBLR framework is designed to reduce the capital burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community bankingcommunity-banking organizations that opt into the framework. The final rule iswas effective on January 1, 2020.
 
In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, off-balance-sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations. Such a community banking organization would not be subject to other risk-based and leverage capital requirements (including the Basel III and Basel IV requirements). The CBLR is determined by dividing a financial institution’s tangible equity capital by its average total consolidated assets. The rule describes what is included in tangible equity capital and average total consolidated assets. The CBLR framework will bewas available for banks to use in their March 31, 2020, call report. A CBLR bank that ceases to meet any of the qualifying criteria in a future period but maintains a leverage ratio greater than 8% will be allowed a grace period of two reporting periods to satisfy the CBLR qualifying criteria or to otherwise comply with the generally applicable capital requirements. Further, a CBLR bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable capital requirements. The Company and Bank dodid not intend to opt into the CBLR framework at this time.framework.
 
Anti-Money Laundering and Office of Foreign Assets Control Regulation
Title III of the United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”), is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money.

The Patriot Act mandates financial services companies to have policies and procedures with respect to measures designed to address any or all of the following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation between financial institutions and law enforcement authorities. Regulatory authorities routinely examine financial institutions for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.


The U.S. Treasury’s Office of Foreign Assets Control (“OFAC”), administers and enforces economic and trade sanctions against targeted foreign countries and regimes under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. Financial institutions are responsible for, among other things, blocking accounts of and transactions with such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Banking regulators examine banks for compliance with the economic sanctions regulations administered by OFAC and failure of a financial institution to maintain and implement adequate OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.


Privacy Restrictions
The Gramm-Leach-Bliley Act (“GLBA”) requires financial institutions in the U.S. to provide certain privacy disclosures to customers and consumers, to comply with certain restrictions on the sharing and usage of personally identifiable information, and to implement and maintain commercially reasonable customer information safeguarding standards.


The Company believes that it complies with all provisions of the GLBA and all implementing regulations and the Bank has developed appropriate policies and procedures to meet its responsibilities in connection with the privacy provisions of GLBA.


Dividends and Other Transfer of Funds
Dividends from the Bank constitute the principal source of cash to the Company. The Company is a legal entity separate and distinct from the Bank. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Company. Under such restrictions, the amount available for payment of dividends to the Company by the Bank totaled $38.4$143.2 million at December 31, 2019.2021. During 2019,2021, the Bank paid $13.2$9.9 million in dividends to the Company.


The FDIC and the DBODFPI also have authority to prohibit the Bank from engaging in activities that, in their opinion, constitute unsafe or unsound practices in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the FDIC or the DBODFPI could assert that the payment of dividends or other payments might, under some circumstances, be an unsafe or unsound practice. Further, the FRB and the FDIC have established guidelines with respect to the maintenance of appropriate levels of capital by banks orand bank holding companies under their jurisdiction. Compliance with the standards set forth in such guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of federal law could limit the amount of dividends that the Bank or the Company may pay. An insured depository institution is prohibited from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized. The DBODFPI may impose similar limitations on the Bank. See “Prompt Corrective Action” and “Capital Standards”, above, for a discussion of these additional restrictions on capital distributions.

Transactions with Affiliates
The Bank is subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of the Company or other affiliates, the purchase of, or investments in stock or other securities thereof,of the Company or other affiliates, the taking of such securities as collateral for loans &and leases, and the purchase of assets of the Company or other affiliates. Such restrictions prevent the Company and other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by the Bank to or in the Company or to or in any other affiliates are limited, individually, to 10% of the Bank’s capital and surplus (as defined by federal regulations), and such secured loans and investments are limited, in the aggregate as to all affiliates, to 20% of the Bank’s capital and surplus (as defined by federal regulations).


In addition, the Company and its operating subsidiaries generally may not purchase a low-quality asset from an affiliate, and other specified transactions between the Company or its operating subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices.


Also, the Company and its operating subsidiaries may engage in transactions with affiliates only on terms and under conditions that are substantially the same, or at least as favorable to the Company or its subsidiaries, as those prevailing at the time for comparable transactions with (or that in good faith would be offered to) non-affiliated companies.

California law also imposes certain restrictions with respect to transactions with affiliates. Additionally, limitations involving the transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of federal law. See “Prompt Corrective Action.”Action”.


Safety and Soundness Standards
The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation,documentation; credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.


In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the financial institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If a financial institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the financial institution’s rate of growth, require the financial institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.


DuringSince the past decade,financial crisis of 2008-2009, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the financial institutions they supervise. Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of banking markets. The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal, and reputational risk.

In particular, recent regulatory pronouncements have focused on operational risk, which arises from the potential that inadequate information systems,system, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses. New products and services, third-party risk management and cyber-security are critical sources of operational risk that financial institutions are expected to address in the current environment. The Bank is expected to have active board and senior management oversight; adequate policies, procedures, and limits; adequate risk measurement, monitoring, and management information systems; and comprehensive internal controls.

Deposit Insurance
As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The premiums fund the Deposit Insurance Fund (“DIF”). The FDIC assesses a quarterly deposit insurance premium on each insured institution based on risk characteristics of the institution and may also impose special assessments in emergency situations. Effective July 1, 2016, the FDIC changed the deposit insurance assessment system for banks, such as the Bank, with less than $10 billion in assets that have been federally insured for at least five years. Among other changes, the FDIC eliminated risk categories for such banks and now uses the “financial ratios method” to determine assessment rates for all such banks. Under the financial ratios method, the FDIC determines assessment rates based on a combination of financial data and supervisory ratings that estimate a bank’s probability of failure within three years. The assessment rate determined by considering such information is then applied to the amount of the institution’s average assets minus average tangible equity to determine the institution’s insurance premium.


The Dodd-Frank Act requiresrequired the FDIC to ensure that the DIF reserve ratio, which is the amount in the DIF as a percentage of all DIF-insured deposits, reachesreached 1.35% by September 3, 2020. The Dodd-Frank Act also altered the minimum designated reserve ratio for the DIF, increasing the minimum from 1.15% to 1.35%, and eliminated the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, may increase or decrease the assessment rates, following notice and comment on proposed rulemaking if required. As a result, the Bank’s FDIC deposit insurance premiums could increase.


The Bank’s FDIC premiums were $1.2 million, $517,000, and $624,000 for the three years ended December 31, 2021, 2020, and 2019, respectively. In 2020 and 2019, the Bank’s FDIC premiums were reduced by a one-time small bank assessment credit applied by the FDIC.  This assessment credit was not available in 2019 and $912,000 in 2018.2021.  Future increases in insurance premiums could have adverse effects on the operating expenses and results of operations of the Company. Management cannot predict what insurance assessment rates will be in the future.


Insurance of a bank’s deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or the Bank’s primary regulator. Management of the Company is not aware of any practice, condition or violation that might lead to termination of the Company’s deposit insurance.


Community Reinvestment Act (“CRA”) and Fair Lending
The Bank is subject to certain fair lending requirements involving lending, investing, and other CRA activities. CRA requires each insured depository institution to identify the communities served by the institution’s offices and to identify the types of credit and investments the institution is prepared to extend within such communities including low and moderate-income neighborhoods. It also requires the institution’s regulators to assess the institution’s performance in meeting the credit needs of its community and to takeconsider such assessment into consideration in reviewing applications for mergers, acquisitions, relocation of existing branches, opening of new branches, and other transactions. A bank may be subject to substantial penalties and corrective measures for a violation of certain fair lending laws.


A bank’s compliance with the Community Reinvestment Act is assessed using an evaluation system, which bases CRA ratings on an institution’s lending, service and investment performance. An unsatisfactory rating may be the basis for denying a merger application. The Bank’s latest CRA examination was completed by the Federal Deposit Insurance CorporationFDIC in May 2019 and the Bank received an overall Outstanding rating in complying with its CRA obligations.

On December 12, 2019, the FDIC and the OCCOffice of the Comptroller of the Currency (“OCC”) announced a proposal to modernize the agencies’ regulations under the CRA that have not been substantively updated for nearly 25 years. The proposal will clarify what qualifiesOn May 20, 2020, the OCC issued a final rule for credit underCRA modernization; however, the CRA, enabling banksFDIC did not join the OCC and their partners to better implement reinvestment and other activities that can benefit communities. The agencies will also create an additional definition of “assessment areas” tied to where deposits are located, in part to address changes that have occurred due tofinalize the rise in digital banking, ensuring that banks continue to provide loans and other services to low- and moderate-income persons in those areas.rule.

Consumer Protection Regulations
Banks and other financial institutions are subject to numerous laws and regulations intended to protect consumers in their transactions with banks. These laws include, among others, laws regarding unfair and deceptive acts and practices and usury laws, as well as the following consumer protection statutes: Truth in Lending Act, Truth in Savings Act, Electronic Fund Transfer Act, Expedited Funds Availability Act, Equal Credit Opportunity Act, Fair and Accurate Credit Transactions Act, Fair Housing Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, Gramm-Leach-Bliley Act, Home Mortgage Disclosure Act, Right to Financial Privacy Act, Servicemembers Civil Relief Act, Military Lending Act and Real Estate Settlement Procedures Act.
 
Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those listed above. These federal, state and local laws regulate the manner in which financial institutions deal with customers when taking deposits, making loans or conducting other types of transactions. Failure to comply with these laws and regulations could give rise to regulatory sanctions, customer rescission rights, action by state and local attorneys general and civil or criminal liability. Failure to comply with consumer protection requirements may also result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions we may wish to pursue or our prohibition from engaging in such transactions even if approval is not required.

The structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB commenced operations to supervise and enforce consumer protection laws. The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a more intense and complex environment for consumer finance regulation. The CFPB has significant authority to implement and enforce federal consumer protection laws and new requirements for financial services products provided for in the Dodd-Frank Act, as well as the authority to identify and prohibit unfair, deceptive or abusive acts and practices. The review of products and practices to prevent such acts and practices is a continuing focus of the CFPB, and of banking regulators more broadly. The ultimate impact of this heightened scrutiny is uncertain but could result in changes to pricing, practices, products and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination, additional remediation efforts and possible penalties. In addition, the Dodd-Frank Act provides the CFPB with broad supervisory, examination and enforcement authority over various consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices. The CFPB also has the authority to obtain cease and desist orders providing for affirmative relief or monetary penalties. The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards. State regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition or results of operations.
 
The CFPB is authorized to issue rules for both bank and nonbank companies that offer consumer financial products and services, subject to consultation with the prudential banking regulators. In general, however, banks with assets of $10 billion or less, such as the Bank, will continue to be examined for consumer compliance by their primary bank regulator.
 
Notice and Approval Requirements Related to Control
Banking laws impose notice, approval and ongoing regulatory requirements on any stockholder or other party that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution. These laws include the BHCA and the Change in Bank Control Act. Among other things, these laws require regulatory filings by a stockholder or other party that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution or bank holding company. The determination whether an investor “controls” a depository institution is based on all of the facts and circumstances surrounding the investment. As a general matter, a party is deemed to control a depository institution or other company if the party owns or controls 25% or more of any class of voting stock. Subject to rebuttal, a party may be presumed to control a depository institution or other company if the investor owns or controls 10% or more of any class of voting stock. Ownership by family members, affiliated parties, or parties acting in concert, is typically aggregated for these purposes. If a party’s ownership of the Company were to exceed certain thresholds, the investor could be deemed to “control” the Company for regulatory purposes. This could subject the investor to regulatory filings or other regulatory consequences.

In addition, except under limited circumstances, bank holding companies are prohibited from acquiring, without prior approval:


control of any other bank or bank holding company or all or substantially all the assets thereof; or
more than 5% of the voting shares of a bank or bank holding company which is not already a subsidiary.

22

Incentive Compensation
In 2010, the federal bank regulatory agencies issued comprehensive guidance intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of those organizations by encouraging excessive risk-taking. The incentive compensation guidance sets expectations for banking organizations concerning their incentive compensation arrangements and related risk-management, control and governance processes. The incentive compensation guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon three primary principles: (1) balanced risk-taking incentives; (2) compatibility with effective controls and risk management; and (3) strong corporate governance. Any deficiencies in compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or take other actions. In addition, under the incentive compensation guidance, a banking organization’s federal supervisor may initiate enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the organization.
 
In 2016, several federal financial agencies (including the FRB and FDIC) re-proposed restrictions on incentive-based compensation pursuant to Section 956 of the Dodd-Frank Act for financial institutions with $1 billion or more in total consolidated assets.
For institutions with at least $1 billion but less than $50 billion in total consolidated assets, the proposal would impose principles-based restrictions that are broadly consistent with existing interagency guidance on incentive-based compensation. Such institutions would be prohibited from entering into incentive compensation arrangements that encourage inappropriate risks by the institutioninstitution: (i) by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits,benefits; or (ii) that could lead to material financial loss to the institution. The comment period for these proposed regulations has closed, but a final rule has not been published. Depending upon the outcome of the rule making process, the application of this rule to us could require us to revise our compensation strategy, increase our administrative costs and adversely affect our ability to recruit and retain qualified employees. Further, as discussed above, the Basel III Capital Rules limit discretionary bonus payments to bank executives if the institution’s regulatory capital ratios fail to exceed certain thresholds that started being phased in on January 1, 2016.
 
Available Information


Company reports filed with the SEC including the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and ownership reports filed by directors, executive officers and principal stockholders can be accessed through the Company’s website at http://www.fmbonline.com. The link to the SEC is on the About Us page. The Company’s reports may also be accessed at the SEC’s Internet website (http://www.sec.gov).


Item 1A.
Risk Factors


An investment in our common stock is subject to risks inherent in our business. The material risks and uncertainties that management believes may affect our business are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this 10-K Report. The risks and uncertainties described below are not the only ones facing our business. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This 10-K Report is qualified in its entirety by these risk factors.

If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment.

Risks Associated With Our BusinessRelated to COVID-19 Pandemic

Economic Conditions Nationally And In Our Service Areas Could Adversely Affect Our Operations And/Or Cause Us To Sustain Losses- The national economy and the economy of other portions of California have, for the most part, experienced solid improvements since the recession of 2007-2012. However, the economyoutbreak of the Central Valley of California,COVID-19 pandemic has caused a significant global economic downturn which remains the Company’s primary market area, despite having improved, continueshas, and is expected to, experience challenges. This is reflected in:

continuing public sector financial stress, both at the localcontinue to adversely affect our business and statewide level. See “Item 1. Business – Service Area.” For example, the State of California, a large employer in one of the Company’s market territories, continues to experience financial challenges, particularly relating to the funding of pension and other financial commitments made to retired employees; and
levels of unemployment that remain above statewide and nationwide averages and home prices that have improved but remain below peak levels in many market segments.

Although we have initiated efforts to broaden our geographic footprint to include Contra Costa, Solano and Napa counties, our retail and commercial banking operations remain primarily concentrated in Sacramento, San Joaquin, Stanislaus and Merced counties. See “Item 1. Business – Service Area.” As a result of this geographic concentration, our results of operations, depend largely upon economic conditions in these areas. Whereas much of this area has improved, real estate values remain below peak prices and unemployment remains above most other areas in the state and country. As a result, risk still remains from the possibility that losses will be sustained if a significant number of our borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans or leases. We have adopted underwriting and credit monitoring procedures and credit policies, including the establishment and reviewfuture impacts of the allowance for credit losses, that management believes are appropriate to minimize this risk by assessingpandemic on the likelihood of nonperformance, tracking loan & lease performanceglobal economy and diversifying our credit portfolio. These policies and procedures; however, may not prevent unexpected losses that could materially and adversely affect ourbusiness, results of operations, in generalliquidity and the market value of our stock. See “Item 7. Management’s Discussionfinancial condition remain uncertain. The COVID-19 continues to cause economic disruption both worldwide and Analysis of Financial Condition and Results of Operations – Overview - Looking Forward: 2020 and Beyond.”

Additionally, despite the stability of our earnings over the last several years, economic uncertainties could return and the full extent of the repercussions on our local economies in general and our business in particular are still not fully known at this time. Such events may have a negative effect on: (i) our ability to service our existing customers and attract new customers; (ii) the ability of our borrowers to operate their business as successfully as in the past; (iii) the financial securitymarkets we serve. The ultimate impacts of COVID-19 are uncertain and net worth of our customers; and (iv) the ability of our customers to repay their loans or leases with us in accordance with the terms thereof.

Our Allowance For Credit Losses May Not Be Adequate To Cover Actual Losses - A significant source of risk arises from the possibility that losses could be sustained because borrowers, guarantors, and related parties may fail to perform in accordance with the terms of their loans & leases. The underwriting and credit monitoring policies and procedures that we have adopted to address this risk may not prevent unexpected losses that could have a material adverse effect on our business, financial condition, results of operations and cash flows. Unexpected losses may arise from a wide variety of specific or systemic factors, many of which are beyond our ability to predict, influence, or control.

Like all financial institutions, we maintain an allowance for credit losses to provide for loan & lease defaults and non-performance. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Provision and Allowance for Credit Losses.” The allowance is funded from a provision for credit losses, which is a charge to our income statement. Our allowance for credit losses may not be adequate to cover actual loan & lease losses, and future provisions for credit losses could materially and adversely affect our business, financial condition, results of operations and cash flows. The allowance for credit losses reflects our estimate of the probable losses in our loan & lease portfolio at the relevant balance sheet date. Our allowance for credit losses is based on prior experience, as well as an evaluation of the known risks in the current portfolio, composition and growth of the loan & lease portfolio and other economic factors. The determination of an appropriate level of credit loss allowance is an inherently difficult process and is based on numerous assumptions. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond our control and these losses may exceed current estimates.

The process we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex judgments.

While we believe that our allowance for credit losses is adequate to cover our estimate of the current probable losses, we cannot assure you that we will not increase the allowance for credit losses further or that regulators will not require us to increase this allowance. Either of these occurrences could materially adversely affect our business, financial condition, results of operations and cash flows.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update, Financial Instruments: Credit Losses (“CECL”), which establishes a new impairment framework also known as the “current expected credit loss model.” In contrast to the incurred loss model currently used by financial entities like us, the current expected credit loss model requires an allowance be recognized based on the expected credit losses (i.e. all contractual cash flows that the entity does not expect to collect from financial assets or commitments to extend credit). It requires the consideration of more forward-looking information than is permitted under current U.S. generally accepted accounting principles. In addition to relevant information about past events and current conditions, such as borrowers’ current creditworthiness, quantitative and qualitative factors specific to borrowers, and the economic environment in which the entity operates, the new model requires consideration of reasonable and supportable forecasts that affect the expected collectability of the financial assets’ remaining contractual cash flows, and evaluation of the forecasted direction of the economic cycle, as well as time value of money. This proposed impairment framework is expected to have wide reaching implications to financial institutions such as us. The CECL model will become effective for the Bank for fiscal year 2020. See Note 20, located in “Item 8. Financial Statements and Supplementary Data.”

We Are Dependent On Real Estate And Downturns In The Real Estate Market Could Hurt Our Business - A significant portion of our loan portfolio is dependent on real estate. See “Item 1. Business – Supervision and Regulation - Prompt Corrective Action.” At December 31, 2019, real estate served as the principal source of collateral with respect to approximately 70% of our loans outstanding. Stresses in economic conditions in our local markets or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans and the value of real estate owned by us, as well as our financial condition and results of operations in general and the market value of our common stock.

Acts of nature, including earthquakes, floods and fires, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact our financial condition.

Our Real Estate Lending Also Exposes Us To The Risk Of Environmental Liabilities - In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third persons for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity, and results of operations. The extent of these impacts will depend on future developments, including among others, governmental, regulatory, and private sector actions and responses, new information that may emerge concerning the severity of COVID-19, and actions taken to contain or prevent further spread, none of which can be predicted. COVID-19 has and continues to disrupt the business, activities, and operations of our clients, which may result in a significant decrease in our business, negatively impacting our liquidity position and financial results and cause increased risk of delinquencies, defaults, foreclosures, declining collateral values, and other losses.
Our workforce has been, is, and may continue to be, impacted by COVID-19. We are taking precautions to protect the safety and well-being of our employees and clients, but no assurance can be given that our actions will be adequate. The spread of COVID-19 could also negatively affect availability of key personnel and employee productivity, as well as the business and operations of third-party service providers who perform critical services for us.
During 2021, as vaccination rates increased across the markets we serve and governmental restrictions were eased, economic activity has improved. However, the COVID-19 virus continues to develop new strains, such as the Delta and Omicron variants, which have increased infection rates, especially among unvaccinated persons. No assurance can be given that these or other variants of the virus will not lead to stricter governmental restrictions on economic activity or have other materially adverse effects on business and the economy.
Even if the COVID-19 outbreak subsides, we may continue to experience materially adverse impacts to our business as a result of the national and global economic impact of the virus, including the availability of credit, adverse impacts on our liquidity, and any recession that has occurred or may occur in the future.
The governmental stimulus measures introduced in response to the COVID-19 pandemic have increased, and can be expected to continue to increase, federal budget deficits and the national debt level.  These events can be expected to adversely affect the long-term sovereign credit rating of United States debt, and downgrades by the credit rating agencies with respect to the obligations of the U.S. federal government could occur, which could increase the U.S. government’s borrowing costs, and worsen its fiscal challenges, as well as generate upward pressure on interest rates.  This could, in turn, have adverse consequences for our borrowers and the level of business activity. For additional information regarding the pandemic and its consequences for our business, see “COVID-19 (Coronavirus) Disclosure” above in this Annual Report on Form 10-K.
Risks Relating to the Industry and Geographic Area in Which We Operate
As a financial services company, our business and operations may be adversely affected by weak economic conditions. Our business operations, which primarily consist of lending money to clients in the form of loans, borrowing money from clients in the form of deposits and investing in securities, are sensitive to general business and economic conditions in the United States. If the U.S. economy weakens, our growth and profitability from our lending, deposit and investment operations could be materially and adversely affected.

constrained. In addition, economic conditions in foreign countries could affect the stability of global financial markets, which could hinder U.S. economic growth. Our Business Is Subject To Interest Rate Risk And Changes In Interest Rates May Adversely Affect Our Performance And Financial Condition - Our earnings are impacted by changing interest rates. Changes in interest rates impact the demand for new loans & leases, the credit profile of our borrowers, the rates received on loans & leases and securities and rates paid on deposits and borrowings. The difference between the rates received on loans & leases and securities and the rates paid on deposits and borrowingsbusiness is known as the net interest margin. Although the FRB decreased short-term interest rates by .75% during 2019, the Company’s net interest margin improved slightly over the prior year. However, looking forward, if short-term rates continue to drop, when combined with aggressive competitor pricing strategies, particularly for deposits, our net interest margin could be adversely impacted in 2020.

Future levels of market interest rates could adversely affect our earnings. Our CRE and commercial loans carry interest rates that, in general, adjust in accordance with changes in the prime rate. We are also significantly affected by monetary and related policies of the levelU.S. federal government and its agencies. Changes in any of loan & lease demand available in our market. The inability to make sufficient loans & leases directly affects the interest income we earn. Lower loan & lease demand will generally result in lower interest income realized as we place funds in lower yielding investments. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview - Looking Forward: 2020 and Beyond.”

Although we believe our current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates and increasing competition may have an adverse effect on our business, financial condition and results of operations. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Net Interest Income/Net Interest Margin” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk.”

Our Accounting Estimates and Risk Management Processes Rely On Analytical and Forecasting Models - The processes we use to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest ratesthese policies are influenced by macroeconomic conditions and other market measures onfactors that are beyond our financial conditioncontrol. Adverse economic conditions and results of operations, depends upon the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may provegovernment policy responses to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models we use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models we use to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments. Any such failure in our analytical or forecasting modelsconditions could have a material adverse effect on our business,financial condition and operations.
A large portion of our loan portfolio is tied to the real estate market where we operate and we may be negatively impacted by downturns in that market.  A significant percentage of our loans are real estate related, consisting of loans for construction and land development projects, and for the purchase, improvement or refinancing of residential and commercial real estate. A downturn in the real estate market could increase loan delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Real estate collateral provides an alternate source of repayment in the event of default by the client and may deteriorate in value during the time the credit is extended. If values decline, it is also more likely that we would be required to increase our allowance for credit losses. If during a period of reduced real estate values we are required to liquidate the property collateralizing a loan to satisfy the debt or to increase our allowance for credit losses, it could materially reduce our profitability and adversely affect our financial condition.
Although only 5.5% of our loan portfolio consisted of real estate construction, and acquisition and land development loans as of December 31, 2021, such loans generally have a higher degree of risk than long-term financing of existing properties because repayment depends on the completion of the project and usually on the sale or long term financing of the property. The pandemic has had, and may continue to have, an impact on the ability of our clients to complete these projects on time and within budget, particularly with respect to access to materials and labor and costs of the same.  In addition, these loans are often “interest-only loans,” which normally require only the payment of interest accrued prior to maturity. Interest-only loans carry greater risk than other loans because no principal is paid prior to maturity. This risk is particularly apparent during periods of rising interest rates and declining real estate values. If there is a significant decline in the real estate market due to a material increase in interest rates or for other reasons, many of these loans could default and result in foreclosure. If we are forced to foreclose on a project prior to completion, we may not be able to recover the entire unpaid portion of the loan or we may be required to fund additional money to complete the project or hold the property for an indeterminate period. In addition, real estate exposes us to incurring costs and liabilities for environmental contamination and remediation.  Any of these outcomes may result in losses and reduce our earnings.
The FDIC has given guidance recommending that if the sum of (i) certain categories of CRE loans and (ii) acquisition, development and construction loans (“ADC loans”) exceeds 300% of total risk-based capital, or if ADC loans exceed 100% of total risk- based capital, heightened risk management practices should be employed to mitigate risk. As of December 31, 2021, our ratio for the sum of CRE and ADC loans was 170% and our ratio for ADC loans was 35%.  Our concentration in ADC loans is cyclical and tends to increase in the second and third quarters of each year as demand for ADC loans increases. An increase in ADC loan concentration could cause our ratio for ADC loans to increase and even exceed the FDIC’s guideline. We have exceeded these guidance ratios at times in the past and may do so in the future.  We actively monitor and believe that we effectively manage our CRE and ADC loan concentrations.  If we exceed the FDIC’s guidelines and do not effectively manage the risk of our CRE and ADC loans, we may be subject to regulatory scrutiny, including a requirement to raise additional capital, reduce our loan concentrations, or undertake other remedial actions.
We could suffer material credit losses if we do not appropriately manage our credit risk.  There are risks inherent in making any loan, including risks in dealing with individual clients, risks of non-payment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. Changes in the economy may cause the assumptions that we made at origination to change and may cause clients to be unable to make payments on their loans. There is no assurance that our credit risk monitoring and loan approval procedures are or will be adequate to address the inherent risks associated with lending. Any failure to manage such risks may materially adversely affect our financial condition and results of operations.

Failure To Successfully Execute The small- to medium-sized businesses that we lend to may have fewer resources to weather adverse business and economic developments, which may impair their ability to repay a loan, and such impairment could adversely affect our operations and financial condition.Our Strategy Could Adversely Affect Our Performance - Ourbusiness strategy targets primarily small- to medium-sized businesses, which frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete, and may experience substantial volatility in operating results, any of which may impair a client’s ability to repay a loan.
Small- to medium-sized businesses have been, and likely will continue to be, impacted by the COVID-19 pandemic, which may, in turn, affect the risk rating and collectability of our loans .  Due to “stay at home” orders and other pandemic management measures, many small- to medium-sized businesses were shut down for portions of 2020 and 2021.  While many received SBA PPP loans or deferrals from the Bank , the long-term impact of the COVID-19 pandemic on such businesses is not yet known.  In addition, the success of a small- to medium-sized business often depends on the management skills, talents and efforts of one or a small number of people, and the death, disability or resignation of one or more of these people could have a material adverse impact on the business and its ability to repay its loan. If general economic conditions negatively affect California and small- to medium-sized businesses are adversely affected or our clients are otherwise affected by adverse business conditions or developments, our business, financial performancecondition and operations could be adversely affected.
Our profitability depends on interest rates generally, and we may be adversely affected by changes in market interest rates. Our profitability depends in substantial part on our net interest income. Our net interest income depends on many factors that are partly or completely outside of our control, including competition, federal, monetary and fiscal policies, and economic conditions generally. Our net interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments. In addition, an increase in interest rates could adversely affect clients’ ability to pay the principal or interest on existing loans or reduce their borrowings. This may lead to an increase in our non-performing assets, a decrease in loan originations, or a reduction in the value of and income from our loans, any of which could have a material and negative effect on our operations. Fluctuations in market rates and other market disruptions are neither predictable nor controllable and may adversely affect our financial condition and earnings.
During 2021, inflationary pressures have begun to affect many aspects of the U.S. economy, including gasoline and fuel prices, and global and domestic supply-chain issues have also had a disruptive effect on many industries, including the agricultural industry. In response, the Federal Reserve Board has signaled an end to its quantitative easing program and the expectation of interest rate increases. The impact of these developments on the business of our clients and on our business cannot be predicted with certainty but could present challenges in 2022 and beyond.
During 2021, the U.S. economy began to reflect relatively rapid rates of increase in the consumer price index and other economic indices; a prolonged elevated rate of inflation could present risks for the U.S. banking industry and our business.  During the latter part of 2021, the U.S. economy exhibited relatively rapid rates of increase in the consumer price index and other economic indices. Pandemic-related supply chain disruptions may be contributing to this development.   If the U.S. economy encounters a significant, prolonged rate of inflation, this could pose higher relative risks to the banking industry and our business.  Such inflationary periods have historically corresponded with relatively weaker earnings and higher loan losses for banks.
In the past, inflationary environments have caused financing conditions to tighten and have increased borrowing costs for some marginal borrowers, which, in turn, has impacted bank credit quality and loan growth.
Additionally, a sustained period of inflation could prompt broad-based selling of longer-duration, fixed-rate debt, which could have negative implications for equity and real estate markets.  Small businesses and leveraged loan borrowers can be challenged in a materially higher-rate environment.  Higher interest rates can also present challenges for commercial real estate projects, pressuring valuations and loan-to-value ratios.  The FRB has signaled that it will be exiting quantitative easing in 2022 and expects over time to raise interest rates in response to the recent economic developments.  Whether such actions by the FRB, if taken, will result in market volatility and adverse impacts on asset prices and economic growth cannot be predicted with any certainty.
In addition, the recent outbreak of hostilities between Russia and Ukraine and global reactions thereto have increased U.S. domestic and global energy prices.  Oil supply disruptions related to the Russia-Ukraine conflict, and sanctions and other measures taken by the U.S. or its allies, could lead to higher costs for gas, food and goods in the U.S. and exacerbate the inflationary pressures on the economy, with potentially adverse impacts on our customers and on our business, results of operations and financial condition.
We face strong competition from banks, credit unions and other financial services providers that offer banking services, which may limit our ability to attract and retain banking clients.  Competition in the banking industry generally, and in our geographic market specifically, is strong. Competitors include banks, as well as other financial services providers, such as savings and loan institutions, consumer finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. Our competitors include several larger national and regional financial institutions whose greater resources may afford them a marketplace advantage inasmuch as they may offer a wider array of banking services at better rates and be able to target a broader client base through more extensive promotional and advertising campaigns. Moreover, larger competitors may not be as vulnerable as we are to downturns in the local economy and real estate market since they have a broader geographic area and their loan portfolio is more diversified. While our deposit base has increased, several banks have grown their deposit market share in our markets faster than we have resulting in a declining relative deposit market share for us in our existing markets. We believe our declining relative market share in deposits has resulted primarily from aggressive marketing and advertising, in-migration of more competitors, expanded delivery channels and more attractive rates offered by larger bank competitors. We also compete against community banks, credit unions and non-bank financial services companies that have strong local ties. These smaller institutions are likely to cater to the same small to medium-sized businesses that we target. Additionally, financial technology companies allow clients to obtain loans via the Internet in an expeditious manner and have become competitors.  If we are unable to attract and retain customers, we may be unable to continue to grow our loan and deposit portfolios and our operations and financial condition may otherwise be adversely affected. Ultimately, we may be unable to compete successfully against current and future competitors.
Our financial results may be impacted by the cyclicality and seasonality of our agricultural lending business.  The Company has provided financing to agricultural customers in the mid Central Valley of California throughout its history. We recognize the cyclical nature of the industry, often caused by fluctuating commodity prices, changing climatic conditions and the availability of seasonal labor, and manage these risks accordingly. The Company remains committed to providing credit to agricultural customers and will always have a material exposure to this industry. Although the Company’s loan portfolio is believed to be well-diversified, at various times during 2021 a significant portion of the Company’s loans (as much as 29%) were outstanding to agricultural borrowers. Commitments are well diversified across various commodities, including dairy, grapes, walnuts, almonds, cherries, apples, pears, and various row crops. Additionally, many individual borrowers are themselves diversified across commodity types, reducing their exposure, and therefore the Company’s, to cyclical downturns in any one commodity.
The Company’s service areas can also be significantly impacted by the seasonal operations of the agricultural industry. As a result, the Company’s financial results can be influenced by the banking needs of its agricultural customers. Generally speaking during the spring and summer customers draw down their deposit balances and increase loan borrowings to fund the purchase of equipment and the planting of crops. Deposit balances are replenished and loans repaid in late fall and winter as crops are harvested and sold. Disruptions in the global supply chain arising from the pandemic may adversely affect the ability of some of our agricultural customers to efficiently export their agricultural products and in turn may adversely affect their results of operations or financial condition and their ability to repay loans we have made to them.
The impact of climate change and changes in governmental regulations may affect the availability of water that could in turn affect our clients’ businesses.  The State of California has experienced severe drought conditions at times over the past several years.  These weather patterns reinforce the fact that the long-term risks associated with the availability of water are significant.  The farming belt of the Central Valley is often cited as an example of an area that experienced extreme drought. However, not all areas of the state are impacted equally, and this is particularly true in the Central Valley, which stretches some 450 miles from Bakersfield in the south to Redding in the north. The vast majority of the Company’s agricultural customers are located in the mid Central Valley, an area that benefits from the drainage of the Sacramento, American, Mokelumne and Stanislaus rivers.
In addition to the impact of climate has on the availability of water, State and Federal regulators ultimately manage this resource, which may also impact that access of our customers water. For example, in 2014, the State of California passed the Sustainable Groundwater Management Act. All Water Districts must develop plans to comply with the Act, including groundwater recharge programs. Although the exact impact of compliance is not currently known, and even prior to 2014 most of the water districts in the Bank’s service area had been developing and implementing management plans, it is possible that some water districts will have to ultimately fallow some ground to achieve compliance with the Act.
Changes to LIBOR may adversely affect the value of, and the return on, our financial instruments that are indexed to LIBOR. In July 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”) which regulates LIBOR announced that it would stop compelling banks to submit rates for the calculation of LIBOR after 2021. In March 2021, the FCA and LIBOR’s administrator, ICE Benchmarks Administration, announced that LIBOR would no longer be provided (i) for the one-week and two-month U.S. dollar settings and for various foreign currency settings after December 31, 2021, and (ii) for the remaining U.S. dollar settings after June 30, 2023. In addition, the FRB has issued guidance urging market participants in the U.S. to cease using LIBOR as a reference rate for new contracts entered into after December 31, 2021. There are on-going efforts to establish an alternative reference rate to LIBOR. The Secured Overnight Financing Rate (or SOFR) published by the Federal Reserve Bank of New York (the “FRBNY”) is considered a likely alternative reference rate suitable for replacing LIBOR. SOFR is a broad measure of the cost of overnight borrowings collateralized by U.S. Treasury securities. The Alternative Reference Rates Committee, a group of private-market participants convened by the FRBNY to help ensure a successful transition from U.S. dollar LIBOR to a new reference rate, has recommended adoption of SOFR as the alternative reference rate. The scope of the acceptance of SOFR and the consequent impact on rates, pricing, the value and liquidity of our financial instruments and liquidity of such instruments and the ability to manage risk, including through derivatives, remain uncertain at this time. While some of our existing products or contracts include fallback provisions to alternative reference rates, other products or contracts may not include adequate fallback provisions and may require consent of all parties to any modification. The market transition from LIBOR and similar benchmarks could adversely affect the return on and pricing, liquidity and value of our outstanding products and contracts, cause market dislocations, increase the cost of and access to capital and increase the risk of disputes and litigation in connection with the interpretation and enforceability of our outstanding products and contracts.
Risks Related to Our Growth
If we are not able to maintain our past levels of growth, our future prospects and competitive position could be diminished and our profitability could be reduced. We may not be able to sustain our deposit, loan, and asset growth at the rate we have attained during the past several years, including the significant deposit growth experienced since the onset of the COVID-19 pandemic.  Our growth over the past several years has been driven primarily by agricultural and commercial real estate growth in our market areas, growth in non-real estate agricultural and commercial loans, commercial leasing, and residential real estate. A failure to attract and retain high performing employees, heightened competition from other financial services providers, and an inability to attract additional core deposits and lending clients, among other factors, could limit our ability to grow as rapidly as we have in the past and as such could have a negative effect on our financial condition and operations.
If we are unable to manage our growth effectively, we may incur higher than anticipated costs, and our ability to execute our corporate growth strategy. Continuedstrategy could be impaired.  It is our objective to continue to grow our assets and deposits by increasing our product and service offerings and expanding our operations organically. Our ability to manage growth however,successfully will depend on our ability to (i) identify suitable markets for expansion; (ii) attract and retain qualified management; (iii) attract funding to support additional growth; (iv) maintain asset quality and cost controls; (v) maintain adequate regulatory capital and profitability to support our lending activities; and (vi) may present operatinginclude finding attractive acquisition targets and other problemssuccessfully acquire and integrate the acquisitions in an efficient manner. If we do not manage our growth effectively, we may be unable to realize the benefit from our investments in technology, infrastructure, and personnel that we have made to support our expansion. In addition, we may incur higher costs and realize less revenue growth, which would reduce our earnings and diminish our future prospects. Failing to maintain effective financial and operational controls, as we grow, such as appropriate loan underwriting procedures, adequate allowances for credit losses and compliance with regulatory requirements could adversely affecthave a negative effect on our business, financial condition and results of operations. Accordingly, there can be no assurance that we will be able to execute our growth strategy or maintain the level of profitability that we have recently experienced. Factors that may adversely affect our ability to attain our long-term financial performance goals include those stated elsewhere in this section,operations, such as well as the:

inability to maintain or increase net interest margin;

inability to control non-interest expense, including, but not limited to, rising employeeincreased credit losses, reduced earnings and healthcare costs and the costs ofpotential regulatory compliance;
restrictions on growth.
 
inability to maintainEntering new market areas, new lines of business, or increase non-interest income;
the need to raise additional capital to support growthnew products and regulatory requirements; and
continuing ability to expand through de novo branching or otherwise.

Growth May Produce Unfavorable Outcomes - We seek to expand our franchise safely and consistently. A successful growth strategy requiresservices may subject us to additional risks. A failure to successfully manage multiple aspects of the business simultaneously, such as following adequate loan underwriting standards, balancing loan and deposit growth without increasing interest rate risk or compressingthese risks may have a material adverse effect on our net interest margin, maintaining sufficient capital, and recruiting, training and retaining qualified professionals.

Our growth strategy also includes acquisition possibilities (such as Delta National Bancorp & Bank of Rio Vista) that either enhance our market presence or have potential for improved profitability through financial management, economies of scale or expanded services. We may be exposed to difficulties in combining the operations of acquired institutions into our own operations, which may prevent us from achieving the expected benefits from our acquisition activities. Inherent uncertainties exist in integrating the operations of an acquired institution and there is no assurance that we will be able to do so successfully. Among the issues that we could face are:

unexpected problems with operations, personnel, technology or credit;
loss of customers and employees of the acquiree;
difficulty in working with the acquiree’s employees and customers;
the assimilation of the acquiree’s operations, culture and personnel;
instituting and maintaining uniform standards, controls, procedures and policies; and
litigation risk not discovered during the due diligence period.
Undiscovered factors as a result of an acquisition could bring liabilities against us, our management and the management of the institutions we acquire. These factors could contribute to our not achieving the expected benefits from our acquisitions within desired time frames, if at all. Further, although we anticipate cost savings as a result of mergers, we may not be able to fully realize those savings. Any cost savings that are realized may be offset by losses in revenues or other charges to earnings.

New Market Areas And New Lines Of Business Or New Products And Services May Subject Us To Additional Risks. A Failure To Successfully Manage These Risks May Have A Material Adverse Effect On Our Business - business. As part of our growth strategy, we have implemented and may continue to implemententer new market areas and new lines of business. We recently have begun to (i) expandexpanded into the East Bay area of San Francisco and Napa, which are relatively new market areas for us, and (ii) introduceus.  We introduced commercial equipment leasing as a new product line.line a few years ago. There are risks and uncertainties associated with these efforts, particularly in instances where such product lines are not fully mature. In developing and marketing new lines of business and/or new products and services and/or shifting the focus of our asset mix and/or expanding into new markets, we may invest significant time and resources. Initial timetables may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives in these markets and shifting market preferences, may also impactaffect the successful implementation. Failure to successfully manage these risks could have an adverse effect on our business, financial condition and results of operations.

Our Financial Results Can Be Impacted By The Cyclicality and Seasonality Of Our Agricultural Business And The Risks Related Thereto - The Company has provided financing to agricultural customersOur Personnel
We may have difficulty attracting additional necessary personnel, which may divert resources and limit our ability to successfully expand our operations. Our business plan includes, and is dependent upon, our hiring and retaining highly qualified and motivated associates at every level. We have experienced, and expect to continue to experience, substantial competition in the Central Valley throughout its history. We recognize the cyclical nature of the industry, often caused by fluctuating commodity prices, changing climatic conditionsidentifying, hiring and the availability of seasonal labor,retaining top-quality associates due to low unemployment rate and new financial institutions entering our markets.  If we are unable to hire and retain qualified personnel, we may be unable to successfully execute our business strategy and manage these risks accordingly. The Company remains committed to providing credit to agricultural customers and will always have a material exposure to this industry. Although the Company’s loan portfolio is believed to be well diversified, at various times during 2019 approximately 35% of the Company’s loan balances were outstanding to agricultural borrowers. Commitments are well diversified across various commodities, including dairy, grapes, walnuts, almonds, cherries, apples, pears, and various row crops. Additionally, many individual borrowers are themselves diversified across commodity types, reducing their exposure, and therefore the Company’s, to cyclical downturns in any one commodity.our growth.

The Company’s service areas can also be significantly impacted by the seasonal operations of the agricultural industry. As a result, the Company’s financial results can be influenced by the banking needs of its agricultural customers (e.g., generally speaking during the spring and summer customers draw down their deposit balances and increase loan borrowing to fund the purchase of equipment and the planting of crops. Correspondingly, deposit balances are replenished and loans repaid in late fall and winter as crops are harvested and sold).

The Impact of Climate and Government on The Availability of Water is a Long Term Risk That Could Affect Our Customers’ Businesses - The State of California experienced drought conditions from 2013 through most of 2016. Since 2016, reasonable levels of rain and snow have alleviated drought conditions in many areas of California, including those in the Company’s primary service area. As a result, reservoir levels are normal and the availability of water in our primary service area should not be an issue. However, the weather patterns over the past 5 years further reinforce the fact that the long-term risks associated with the availability of water are significant.

The farming belt of the Central Valley was often cited as an example of an area that experienced extreme drought during 2013 - 2016. However, it is important to understand that not all areas of the state were impacted equally, and this is particularly true in the Central Valley, which stretches some 450 miles from Bakersfield in the south to Redding in the north. The vast majority of the Company’s agricultural customers are located in the more northern portion of the Central Valley, an area that benefits from the drainage of the Sacramento, American, Mokelumne and Stanislaus rivers. As a result, even during the worst of the drought farmers in this area still had access to reasonable ground water sources that were economical to pump.

Importantly, the Company has minimal credit exposureThe unexpected loss of key officers would materially and adversely affect our ability to execute our business strategy, and diminish our future prospects. Our success to date and our prospects for success in the more southern portionfuture depend substantially on our senior management team. The loss of the Central Valley, defined broadly as an area south of Highway 152, but more importantly the Fresno area and south (including the Westlands Water District). In most of these areas ground water levels were depleted, making farmers increasingly dependent on the delivery of surface water from the Central Valley Project, which cut back deliveries to many farmers during the worst of the drought.

In addition to the impact of climate on the availability of water, the “politics” of water, and how the state and federal governments ultimately manage this resource, could also impact how much water our customers have access to. For example:

Manykey members of our agricultural customers have senior riparian water rights, which provide them the legal rightmanagement team could materially and adversely affect our ability to access surface water from the rivers that abut their property. In the spring of 2015, the State of California took the extreme step of threatening to curtail certain riparian water rights for those farmers taking water from the Delta,successfully implement our business plan and, as a result, affected growers agreed to voluntarily cutback 25%our future prospects. The loss of their normal water usage as opposed to undertaking a protracted legal fight. Even with these cutbacks,senior management without qualified successors who can execute our agricultural customers still had access to sufficient levels of water to satisfy their needs.
strategy would also have an adverse impact on us.
 
In 2014,As a community bank, our ability to maintain our positive reputation is critical to the Statesuccess of California passed the Sustainable Groundwater Management Act. All Water Districts must develop plansour business.  The failure to comply with the Act, including groundwater recharge programs. Although the exact impact of compliancemaintain that reputation may materially and adversely affect our financial performance.  Our reputation is not currently known, and even prior to 2014 mostone of the Water Districts in the Bank’s service area had been developing and implementing management plans, it is possible that some Water Districts will have to ultimately fallow some ground to achieve compliance with the Act.

These situations point out how the “politics” of water can also affect the availability of water.

The Company monitors the water situation through: (i) regularly reviewing ground water level reports provided by California’s Department of Water Resources; (ii) requiring water budgets and plans from allmost valuable components of our agricultural borrowers that detail the sources of their irrigation water and the irrigation requirementsbusiness. As such, we strive to achieve their crop plan; and (iii) in the case of new permanent crop development projects, requiring well tests.

We Face Strong Competition From Financial Service Companies And Other Companies That Offer Banking Services That Could Adversely Impact Our Business - The financial servicesconduct our business in a manner that enhances our market areasreputation. This is highly competitive. Itdone, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our clients. If our reputation is becoming increasingly competitivenegatively affected by the actions of our employees or otherwise, our business and, therefore, our operating results may be materially and adversely affected.
Risks Related to Our Financial Practices
Our allowance for credit losses may not be adequate to cover actual losses. A significant source of risk arises from the possibility that we could sustain losses due to loan defaults and non-performance on loans. We maintain an allowance for credit losses in accordance with U.S. generally accepted accounting principles to provide for such defaults and other non-performance. The determination of the appropriate level of this allowance is an inherently difficult process and is based on numerous assumptions. The amount of future losses is susceptible to changes in regulation, technological advances,economic, operating and the accelerating pace of consolidation among financial services providers. We face competition bothother conditions, including changes in attracting deposits and in making loans & leases. We compete for loans & leases principally through the interest rates, which may be beyond our control. In addition, our underwriting policies, adherence to credit monitoring processes, and loan & lease fees we chargerisk management systems and controls may not prevent unexpected losses. Our allowance for credit losses may not be adequate to cover actual credit losses. Moreover, any increase in our allowance for credit losses will adversely affect our earnings.
In June 2016, the efficiencyFASB issued Accounting Standards Update 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).  ASU 2016-13 became effective January 1, 2020, and qualitysubstantially changed the accounting for credit losses on loans and other financial assets held by banks, financial institutions and other organizations. The standard replaced existing incurred loss impairment guidance and established a single allowance framework for financial assets carried at amortized cost. Upon adoption of services we provide. Increasing levelsASU 2016-13, companies must recognize credit losses on these assets equal to management’s estimate of competition incredit losses over the full remaining expected life. Companies must consider all relevant information when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts. We adopted and implemented this accounting standard fully effective January 1, 2022.  The adoption of ASU 2016-13 did not have a material negative effect on the level of allowance for credit loss held by us or on our reported earnings.  The potential negative effect that the adoption of this new accounting pronouncement may have on future lending by us or the banking industry in general is still not well known.  We believe that our allowance for credit losses as of December 31, 2021 was adequate to absorb credit losses inherent in our loan portfolio; however, we cannot assure that such levels will be sufficient to cover actual or future losses.
Our financial and accounting estimates and risk management framework rely on analytical forecasting and models. The processes we use to estimate our inherent credit losses and to measure the fair value of financial services business may reduce our market share, decrease loan & lease demand, cause the prices we charge for our services to fall, or decrease our net interest margin by forcing us to offer lower lending interest rates and pay higher deposit interest rates. Therefore, our results may differ in future periods depending upon the nature or level of competition.

Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income,instruments, as well as the lossprocesses used to estimate the effects of customer depositschanging interest rates and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effectother market measures on our financial condition and resultsoperations, depend upon the use of operations.analytical and forecasting models. Some of our tools and metrics for managing risk are based upon our use of observed historical market behavior. We rely on quantitative models to measure risks and to estimate certain financial values. Models may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring interest rate and other market risks, predicting losses, assessing capital adequacy and calculating regulatory capital levels, as well as estimating the value of financial instruments and balance sheet items.

ManyPoorly designed or implemented models present the risk that our business decisions based on information incorporating such models will be adversely affected due to the inadequacy of that information. Moreover, our competitors offer productsmodels may fail to predict future risk exposures if the information used in the model is incorrect, obsolete or not sufficiently comparable to actual events as they occur.
We seek to incorporate appropriate historical data in our models, but the range of market values and services thatbehaviors reflected in any period of historical data is not at all times predictive of future developments in any particular period and the period of data we do not offer,incorporate into our models may prove to be inappropriate for the period being modeled. In such case, our ability to manage risk would be limited and many have substantiallyour risk exposure and losses could be significantly greater resources, suchthan our models indicated. This could harm our reputation as greater capital resourceswell as our revenues and more accessprofits. Finally, information we provide to longer term, lower cost funding sources. Manyour regulators based on poorly designed or implemented models could also have greater name recognition and market presence that benefit them in attracting business. In addition, larger competitors may be able to price loans & lease and deposits more aggressively than we do. Our larger competitors generally have easier access to capital, and often on better terms.inaccurate or misleading. Some of the financial services organizations with which we compete are not subjectdecisions that our regulators make, including those related to capital distributions to our stockholders, could be affected adversely due to their perception that the same degree of regulation as is imposed on bank holding companies and federally insured state-chartered banks, national banks and federal savings institutions. As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services. Other competitors are subject to similar regulation but have the advantages of larger established customer bases, higher lending limits, extensive branch networks, numerous automated teller machines, greater advertising and marketing budgets or other factors. Some of our competitors have other advantages, such as tax exemption in the case of credit unions, and lesser regulation in the case of mortgage companies and specialty finance companies.

Deposit Insurance Assessments Could Increase At Any Time, Which Will Adversely Affect Profits - FDIC deposit insurance expense for the years 2019, 2018, and 2017 was $624,000, $912,000, and $932,000, respectively. During 2016 the FDIC changed its methodology for calculating deposit premiums, See “Item 1. Business – Supervision and Regulation – Deposit Insurance.” Any increases could have adverse effects on the operating expenses and results of operationsquality of the Company.models used to generate the relevant information is insufficient.

We May Not Be Able To Attract And Retain Skilled People - Our success depends, in large part, onImpairment of investment securities could require charges to earnings, which would negatively affect our ability to attract and retain key people. Competition for the best people in most of our activities can be intense and we may not be able to hire people or to retain them. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

Our Internal Operations Are Subject To A Number Of Risks - We are subject to certain operations risks, including, but not limited to, information system failures and errors, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters. operations. We maintain a systemsignificant amount of internal controlsour assets in investment securities, and must periodically evaluate investment securities for impairment under previously adopted accounting guidance during 2021 or for current expected credit losses after the adoption of ASU 2016-13.  We evaluate our investment securities portfolio for other than temporary impairment as of each reporting date.  At December 31, 2021, we had no investment securities that were other-than-temporarily impaired.
Changes in accounting standards could materially affect our financial statements. The Company’s consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America, called GAAP. The financial information contained within our consolidated financial statements is, to mitigate against such occurrences and maintain insurance coverage for such risks that are insurable, but should such an event occura significant extent, financial information that is not prevented or detected by our internal controls, uninsured or in excess of applicable insurance limits, it could have a significant adverse impactbased on our business, financial condition or results of operations.

We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan & leases and other systems. While we have policies and procedures designed to prevent or limit the effectapproximate measures of the failure, interruption or security breachfinancial effects of our information systems, there can be no assurancetransactions and events that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrencehave already occurred. A variety of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

Natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. Such eventsfactors could affect the stabilityultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. Other estimates that we use are fair value of our deposit base, impair the ability of borrowers to repay outstanding loanssecurities and lessees to make lease payments, impair the value of collateral securing loans & leases, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Operations in severalexpected useful lives of our markets could be disrupted by bothdepreciable assets. From time to time, the evacuationFASB and the SEC change the financial accounting and reporting standards that govern the preparation of large portions of the population as well as damage and or lack of access to our banking and operation facilities. While we have not experienced such an occurrence to date, other natural disasters, acts of war or terrorism or other adverse external events may occur in the future. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial conditionstatements or new interpretations of existing standards emerge. These changes can be difficult to predict and results of operations.

The Value of Goodwilloperationally complex to implement and Other Intangible Assets May Decline in the Future - As of December 31, 2019,can materially affect how we had goodwill totaling $11.2 millionrecord and a core deposit intangible asset totaling $4.6 million from business acquisitions. A significant decline in expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of our common stock could necessitate taking charges in the future related to the impairment of goodwill or other intangible assets. If we were to conclude that a future write-down of goodwill or other intangible assets is necessary, we would record the appropriate charge, which could have a material adverse effect on our business, financial condition and results of operations.

We Depend On Cash Dividends From The Bank To Meet Our Cash Obligations - As a holding company, dividends from the Bank provide a substantial portion of our cash flow used to service the interest payments on our subordinated debentures issued in 2003 and our other obligations, including cash dividends. See “Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.” Various statutory provisions restrict the amount of dividends our subsidiary bank can pay to us without regulatory approval.

A Lack Of Liquidity Could Adversely Affect Our Operations And Jeopardize Our Business, Financial Condition And Results Of Operations - Liquidity is essential to our business. We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and investment securities, respectively, to ensure that we have adequate liquidity to fund our operations. An inability to raise funds through deposits, borrowings, the sale of our investment securities, Federal Home Loan Bank advances, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our most important source of funds consists of deposits. Deposit balances can decrease when customers perceive alternative investments as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments, we would lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income.

Other primary sources of funds consist of cash flows from operations, investment maturities and sales of investment securities and proceeds from the issuance and sale of any equity and debt securities to investors. Additional liquidity is provided by the ability to borrow from the Federal Reserve Bank and the Federal Home Loan Bank and our ability to raise brokered deposits. We also may borrow funds from third-party lenders, such as other financial institutions. Our access to funding sources in amounts adequate to finance or capitalize our activities, or on terms that are acceptable to us, could be impaired by factors that affect us directly or the bank or non-bank financial services industries or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the bank or non-bank financial services industries.

As of December 31, 2019, approximately $1.7 billion, or 51.6%, of our deposits consisted of interest-bearing demand deposits, savings and money market accounts. Based on past experience, we believe that our deposit accounts are relatively stable sources of funds. If we increase interest rates paid to retain deposits, our earnings may be adversely affected, which could have an adverse effect on our business, financial condition and results of operations. Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, pay dividends to our stockholders or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.

System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities - The computer systems and network infrastructure we use could be vulnerable to hardware and cyber-security issues. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. We could also experience a breach by intentional or negligent conduct on the part of employees or other internal or external sources, including our third-party vendors. Any damage or failure that causes an interruption in our operations could have an adverse effect onreport our financial condition and results of operations. In addition,some cases, we could be required to apply a new or revised standard retrospectively, resulting in our operations are dependent uponrestating prior period financial statements.
Risks Related to Our Access to Capital
We may be unable to, or choose not to, pay dividends on our common shares. We have consistently declared an annual cash dividend for over 86 years. Our ability to protectcontinue to pay dividends depends on various factors.  FMCB is a legal entity separate and distinct from the computer systemsBank, and network infrastructure utilized by us, including our internetdoes not conduct stand-alone operations, which means that the Bank must first pay dividend(s) to the Company.  The FDIC, the DFPI and California corporate and banking activities, against damage from physical break-ins, cyber-security breacheslaws may, under certain circumstances, prohibit the Bank’s payment of dividends to FMCB.  FRB policy requires bank holding companies to pay cash dividends on common shares only out of net income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition.  FMCB’s Board of Directors may determine that, even though funds are available for dividend payments, retaining the funds for other disruptive problems caused by the internet or other users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability, damage our reputation and inhibit the use of our internet banking services by current and potential customers.

We rely heavily on communications, information systems (both internal and provided by third-parties) and the internet to conduct our business. Our business is dependent on our ability to process and monitor large numbers of daily transactions in compliance with legal, regulatory and internal standards and specifications. In addition, a significant portionuses, such as expansion of our operations, relies heavily on the secure processing, storage and transmission of personal and confidential information, such as the personal informationis necessary or appropriate in light of our customersbusiness plan and clients. In recent periods, several governmental agencies and large corporations, including financial service organizations and retail companies, have suffered major data breaches, in some cases exposing not only their confidential and proprietary corporate information, but also sensitive financial and other personal information of their clients  and their employees or other third-parties, and subjecting those agencies and corporationsobjectives.  A failure to potential fraudulent activity and their clients and other third-parties to identity theft and fraudulent activity in their credit card and banking accounts. Therefore, security breaches and cyber-attacks can cause significant increases in operating costs, including the costs of compensating clients and customers for any resulting losses theypay dividends may incur and the costs and capital expenditures required to correct the deficiencies in and strengthen the security of data processing and storage systems. These risks may increase in the future as we continue to increase mobile payments and other internet-based product offerings and expand our internal usage of web-based products and applications.negatively affect your investment.

In addition to well-known risks related to fraudulent activity, which take many forms, such as check “kiting” or fraud, wire fraud, and other dishonest acts, information security breaches and cyber-security related incidents have become a material risk in the financial services industry. For example, U.S. financial institutions have experienced significant distributed denial-of-service attacks, some of which involve sophisticated and targeted attacks intended to disable or degrade service, or sabotage systems. Other potential attacks attempt to obtain unauthorized access to confidential information, steal money, or manipulate or destroy data, often through the introduction of computer viruses or malware, cyber-attacks and other means. Other threats of this type may include fraudulent or unauthorized access to data processing or data storage systems used by us or by our clients, electronic identity theft, “phishing,” account takeover, and malware or other cyber-attacks. To date, none of these types of attacks have had a material effect on our business or operations. Such security attacks can originate from a wide variety of sources, including persons who are involved with organized crime or who may be linked to terrorist organizations or hostile foreign governments. Those same parties may also attempt to fraudulently induce employees, customers or other usersThe price of our systems to disclose sensitive information in order to gain access to our data or that of our customers or clients.

We are also subject to the risk that our employeescommon shares may intercept and transmit unauthorized confidential or proprietary information. An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer or third-party could result in legal liabilities, remediation costs, regulatory actions and reputational harm.

Unfortunately, it is not always possible to anticipate, detect, or recognize these threats to our systems, or to implement effective preventative measures against all breaches, whether those breaches are malicious or accidental. Cyber-security risks for banking organizations havefluctuate significantly increased in recent years and have been difficult to detect before they occur because of the following, among other reasons:

the proliferation of new technologies, and the use of the Internet and telecommunications technologies to conduct financial transactions;

these threats arise from numerous sources, not all of which are in our control, including among others human error, fraud or malice on the part of employees or third-parties, accidental technological failure, electrical or telecommunication outages, failures of computer servers or other damage to our property or assets, natural disasters or severe weather conditions, or terrorist acts;

the techniques used in cyber-attacks change frequently and may not be recognized until launched or until well after the breach has occurred;

the increased sophistication and activities of organized crime groups, hackers, terrorist organizations, hostile foreign governments, disgruntled employees or vendors, activists and other external parties, including those involved in corporate espionage;


the vulnerability of systems to third-parties seeking to gain access to such systems either directly or using equipment or security passwords belonging to employees, customers, third-party service providers or other users of our systems; and


our frequent transmission of sensitive information to, and storage of such information by, third-parties, including our vendors and regulators, and possible weaknesses that go undetected in our data systems notwithstanding the testing we conduct of those systems.


Our investments in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and our conduct of periodic tests of our security systems and processes,stock may not succeed in anticipating or adequately protecting against or preventing all security breaches and cyber-attacks from occurring. Even the most advanced internal control environment may be vulnerable to compromise. Targeted social engineering attacks are becoming more sophisticated and are extremely difficult to prevent. Additionally, the existence of cyber-attacks or security breaches at third-parties with access to our data, such as vendors, may not be disclosed to us in a timely manner. As cyber-threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents. We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.

As is the case with non-electronic fraudulent activity, cyber-attacks or other information or security breaches, whether directed at us or third-parties, may result in a material loss or have material consequences. Furthermore, the public perception that a cyber-attack on our systems has been successful, whether or not this perception is correct, may damage our reputation with customers and third-parties with whom we do business. A successful penetration or circumvention of system security could cause us negative consequences, including loss of customers and business opportunities, disruption to our operations and business, misappropriation or destruction of our confidential information and/or that of our customers, or damage to our customers’ and/or third-parties’ computers or systems, and could expose us to additional regulatory scrutiny and result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs, and could adversely impact our results of operations, liquidity and financial condition.

We Rely On Third-Party Vendors For Important Aspects Of Our Operation - We depend on the accuracy and completeness of information and systems provided by certain key vendors, including but not limited to data processing, payroll processing, technology support, investment safekeeping and accounting. Our ability to operate, as well as our financial condition and results of operations, could be negatively affected in the event of an interruption of an information system, an undetected error, a cyber breach, or in the event of a natural disaster whereby certain vendors are unable to maintain business continuity.

We May Be Adversely Affected By The Soundness Of Other Financial Institutions - Financial services institutions are interrelated as a result oflow trading clearing, counterparty and other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, broker-dealers, investment banks and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated if our collateral cannot be foreclosed upon or is liquidated at prices not sufficient to recover the full amount of the credit or cover the derivative exposure due. Any such losses could have a material adverse effect on our business, financial condition and results of operations.

Deterioration Of Credit Quality Or Insolvency Of Insurance Companies May Impede Our Ability To Recover Losses - The financial crisis led certain major insurance companies to be downgraded by rating agencies. We have property, casualty and financial institution risk coverage underwritten by several insurance companies. In addition, some of our investments in obligations of state and political subdivisions are insured by insurance companies. While we closely monitor credit ratings of our insurers and insurers of our municipality securities, and we are poised to make quick changes if needed, we cannot predict an unexpected inability to honor commitments. We also invest in bank-owned life insurance policies on certain members of senior Management,volumes, which may lose value in the event of the carriers’ insolvency. In the event that our bank-owned life insurance policy carriers’ credit ratings fall below investment grade, we may exchange policies underwritten by them to another carrier at a cost charged by the original carrier, or we may terminate the policies that may result in adverse tax consequences.

Our loan portfolio is also primarily secured by properties located in earthquake or fire-prone zones. In the event of a disaster that causes pervasive damage to the region in which we operate, not only the Bank, but also the loan collateral may suffer losses not recovered by insurance.

Risks Associated With Our Industry

We Are Subject To Government Regulation That Could Limit Or Restrict Our Activities, Which In Turn Could Adversely Impact Our Financial Performance - The financial services industry is regulated extensively and we are subject to examination, supervision and comprehensive regulations by various regulatory agencies. Federal and state regulations are designed primarily to protect the deposit insurance funds and consumers, and not to benefit our stockholders. These regulations can sometimes impose significant limitations on our operations and increase our cost of doing business.

Further, federal monetary policy, particularly as implemented by the FRB, significantly affects economic conditions for us.

Proposals to change the laws and regulations governing the operations and taxation of, and federal insurance premiums paid by, banks and other financial institutions and companies that control such institutions are frequently raised in the U.S. Congress, the California legislature and before bank regulatory authorities. The likelihood of any major changes in the future and the impact such changes, including the Dodd-Frank Act, might have on us or the Bank are impossible to determine. Similarly, proposals to change the accounting treatment applicable to banks and other depository institutions are frequently raised by the SEC, the federal banking agencies, the IRS and other appropriate authorities. The likelihood and impact of any additional future changes in law or regulation and the impact such changes might have on us or the Bank are impossible to determine at this time.

Risks Associated With Our Stock

Our Stock Trades Less Frequently Than Others - The Company’s common stock is not widely held or listed on any exchange. However, trades are reported on the OTCQX under the symbol “FMCB”. Management is aware that there are private transactions in the Company’s common stock. However, the limited trading market for the Company’s common stock may make it difficult for stockholdersyou to dispose of their shares.

Our Stock Price Is Affected By A Variety Of Factors - Stockresell common shares owned by you at times or prices you find attractive. The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility.  The markets may produce downward pressure on stock prices for certain issuers without regard to those issuers’ underlying financial strength.  As a result, the trading volume in our common shares may fluctuate and cause significant price volatilityvariations to occur.  This may make it more difficult for you to resell your common stock whenshares owned by you want andat times or at prices you find attractive.
The low trading volume in our common shares on the OTCQX means that our shares may have less liquidity than other companies, who shares are more broadly traded.  We cannot ensure that the volume of trading in our common shares or the price of our common shares will be maintained or will increase in the future. Our stock price can fluctuate significantly in response to a variety of factors discussed in this section, including, among other things:

actual or anticipated variations in quarterly results of operations;

operating and stock price performance of other companies that investors deem comparable to our Company;

news reports relating to trends, concerns and other issues in the financial services industry;

available investment liquidity in our market area since our stock is not listed on any exchange; and

perceptions in the marketplace regarding our Company and/or its competitors.

If we need additional capital in the future to continue our growth, we may not be able to obtain it on terms that are favorable. We may need to raise additional capital in the future to support our continued growth and to maintain our capital levels. Our ability to raise capital through the sale of additional securities will depend primarily upon our financial condition and the condition of financial markets at that time. Accordingly, we may not be able to obtain additional capital in the amounts or on terms satisfactory to us. Our growth may be constrained if we are unable to generate or raise additional capital as needed.
Our funding sources may prove insufficient to provide liquidity, replace deposits and support our future growth. We rely on customer deposits, advances from the Federal Home Loan Bank of San Francisco (“FHLB”), lines of credit at other financial institutions and the Federal Reserve Bank to fund our operations. Although we have historically been able to replace maturing deposits and advances if desired, we may not be able to replace such funds in the future if our financial condition, the financial condition of the FHLB or market conditions were to change. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our profitability would be adversely affected. FHLB borrowings and other current sources of liquidity may not be available or, if available, not sufficient to provide adequate funding for operations. Furthermore, our own actions could result in a loss of adequate funding. For example, our borrowing capacity at the FHLB could be reduced if we are deemed to have poor documentation or processes. Accordingly, we may be required to seek additional higher-cost debt in the future to achieve our long-term business objectives. Additional borrowings, if sought, may not be available to us or, if available, may not be available on favorable terms. If additional financing sources are unavailable or are not available on reasonable terms, our growth and future prospects could be adversely affected.
We may be adversely affected by the lack of soundness of other financial institutions or financial market utilities. Our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial institutions are interrelated because of trading, clearing, counterparty or other relationships. Defaults by, or even rumors or questions about, one or more financial institutions or financial market utilities, or the financial services industry generally, may lead to market-wide liquidity problems and losses of client, creditor and counterparty confidence and could lead to losses or defaults by us or by other financial institutions.
Risks Related to Cyber-security and Information Technology

Cyber-attacks or other security breaches could have a material adverse effect on our business.  In the normal course of business, we collect, process, and retain sensitive and confidential information regarding our clients. We also have arrangements in place with other third parties through which we share and receive information about their clients who are or may become our clients. Although we devote significant resources and management focus to ensuring the integrity of our systems through information security and business continuity programs, our facilities and systems, and those of third-party service providers, are vulnerable to external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors or other similar events.
Information security risks for financial institutions have increased recently in part because of new technologies, the use of the Internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions, particularly during the pendency of the COVID-19 pandemic, and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks against large financial institutions, particularly denial of service attacks that are designed to disrupt key business services, such as client-facing websites. We are not able to anticipate or implement effective preventive measures against all potential security breaches, because the techniques used change frequently and because attacks can originate from a wide variety of sources. We employ detection and response mechanisms designed to contain and mitigate security incidents, but early detection may be thwarted by sophisticated attacks and malware designed to avoid detection.
We also face risks related to cyber-attacks and other security breaches in connection with credit and debit card transactions that typically involve the transmission of sensitive information regarding our clients through various third parties, including merchant acquiring banks, payment processors, payment card networks and our core processors. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments such as the point of sale that we do not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them. We also rely on numerous other third-party service providers to conduct other aspects of our business operations and face similar risks relating to them. While we regularly conduct security assessments on these third parties, we cannot be sure that their information security protocols are sufficient at all times to withstand a cyber-attack or other security breach.
The access by unauthorized persons to, or the improper disclosure by us of, confidential information regarding our clients or our own proprietary information, software, methodologies, and business secrets could result in significant legal and financial exposure, supervisory liability, damage to our reputation or a loss of confidence in the security of our systems, products and services, which could have a material adverse effect on our financial condition or operations. Recently, there have been a number of well-publicized attacks or breaches affecting others in our industry that have heightened concern by consumers and have resulted in increased regulatory focus. Furthermore, cyber-attacks or other breaches in the future, whether affecting others or us, could intensify consumer concern and regulatory focus and result in reduced use of our cards and increased costs, all of which could have a material adverse effect on our business. To the extent we are involved in any future cyber-attacks or other breaches, our brand and reputation could be affected, and this could have a material adverse effect on our financial condition and operations.  If we experience a cyber-attack, our insurance coverage may not cover all losses, and furthermore, we may experience a loss of reputation.
We rely on our information technology and telecommunications systems and third-party servicers, and the failure of these systems could adversely affect our business. Our Common Stock Is Not An Insuredbusiness is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers. We rely on these systems to process new and renewal loans, provide client service, facilitate collections and share data across our organization. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to process new and renewal loans and provide client service or compromise our ability to collect loan payments in a timely manner.  Our ability to adopt new information technology and technological products needed to meet our clients’ banking needs may be limited if our third-party servicers are slow to adopt or choose not to adopt such new technology and products. Such a failure to provide this technology and products to our clients could result in a loss of clients, which would negatively affect our financial condition and operations.
Other Operational Risks
Our risk management framework may not be effective in mitigating risks and losses to us. Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our framework also includes financial or other modeling methodologies that involve management assumptions and judgment. Our risk management framework may not be effective under all circumstances and may not adequately mitigate any risk of loss to us. If our framework is not effective, we could suffer unexpected losses and our financial condition, operations or business prospects could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.
We are subject to certain operating risks, related to client or employee fraud, which could harm our reputation and business. Employee error, or employee or client misconduct, could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our clients or improper use of confidential information. It is not always possible to prevent employee error and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee error could also subject us to financial claims for negligence.  If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured, excess insurance coverage is denied or not available, it could have a material adverse effect on our financial condition and operations.
We depend on the accuracy and completeness of information about clients and counterparties. In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. In deciding whether to extend credit, we may rely upon our clients’ representations that their financial statements conform to U.S. generally accepted accounting principles, or GAAP, and present fairly, in all material respects, the financial condition, operations and cash flows of the client. We also may rely on client representations and certifications, or other auditors’ reports, with respect to the business and financial condition of our clients. Our financial condition, operations, financial reporting and reputation could be negatively affected if we rely on materially misleading, false, inaccurate or fraudulent information provided by or about clients and counterparties.
Catastrophic events including, but not limited to, hurricanes, tornadoes, earthquakes, fires, floods, prolonged drought, and pandemics may adversely affect the general economy, financial and capital markets, specific industries, and the Bank. The Bank has significant operations and a significant customer base in regions where natural and other disasters may occur. These regions are known for being vulnerable to natural disasters and other risks, such as earthquakes, fires, floods, and prolonged drought. These types of natural catastrophic events at times have disrupted the local economy, the Bank’s business and clients, and could pose physical risks to the Bank’s property. In addition, catastrophic events, such as natural disasters or global pandemics, occurring in other regions of the world may have an impact on the Bank’s clients and in turn on the Bank. Although we have business continuity and disaster recovery programs in place, a significant catastrophic event could materially adversely affect the Bank’s operating results.
The physical effects of climate change, as well as governmental and societal responses to climate change could materially adversely affect our operations, businesses and customers. There is increasing concern over the risks of climate change and related environmental sustainability matters. The physical effects of climate change include rising average global temperatures, rising sea levels and an increase in the frequency and severity of extreme weather events and natural disasters, including droughts, wildfires, floods, hurricanes and tornados. Most of the Company’s operations and customers are located in California, which could be adversely impacted by severe weather events. Agriculture is especially dependent on climate, and climate impacts could include shifting average growing conditions, increased climate and weather variability, decreases in available water sources, and more uncertainty in predicting climate and weather conditions, any or all of which could have a particularly adverse impact on our agricultural customers.
Additional legislation and regulatory requirements and changes in consumer preferences, including those associated with the transition to a low-carbon economy, could increase expenses of, or otherwise adversely affect, the Company, its businesses or its customers.  Our customers and we may face cost increases, asset value reductions, operating process changes, reduced availability of insurance, and the like, because of governmental actions or societal responses to climate change.
New and/or more stringent regulatory requirements relating to climate change or environmental sustainability could materially affect the Company’s results of operations by increasing our compliance costs. Regulatory changes or market shifts to low-carbon products could also affect the creditworthiness of some of our customers or reduce the value of assets securing loans, which may require the Company to adjust our lending portfolios and business strategies.
Risks Related to Our Regulatory Environment
We are subject to regulation, which increases the cost and expense of regulatory compliance, and may restrict our growth and our ability to acquire other financial institutions. Supervision, regulation, and examination of the Company and the Bank by the bank regulatory agencies are intended primarily for the protection of consumers, bank clients and the Deposit - Our Insurance Fund of the FDIC, rather than holders of our common stockshares. As a bank holding company under federal law, we are subject to regulation under the BHCA, and the examination and reporting requirements of the FRB. In addition to supervising and examining us, the FRB, through its adoption of regulations implementing the BHCA, places certain restrictions on the permissible activities for bank holding companies. Changes in the number or scope of permissible activities could have an adverse effect on our ability to realize our strategic goals. As a California state-chartered bank that is not a member of the Federal Reserve System, the Bank is separately subject to regulation by both the FDIC and the DFPI. The FDIC and DFPI regulate numerous aspects of the Bank’s operations, including adequate capital and financial condition, permissible types and amounts of extensions of credit and investments, permissible non-banking activities and restrictions on dividend payments. We may be required to invest significant management attention and resources to evaluate and make any changes necessary to comply with applicable laws and regulations. This allocation of resources, as well as any failure to comply with applicable requirements, may negatively affect our operations and financial condition.
Banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any regulatory actions to which we become subject because such examinations could materially and adversely affect us. The DFPI, the FDIC, and the FRB periodically conduct examinations of our business, including compliance with laws and regulations. Accommodating such examinations may require management to reallocate resources that would otherwise be used in the day-to-day operation of other aspects of our business. If, as a result of an examination, the DFPI or a federal banking agency were to determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of our operations had become unsatisfactory, or that we or our management were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions could include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against us, our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to clients, to terminate our deposit insurance. FDIC deposit insurance is critical to the continued operation of the Bank. If we become subject to such regulatory actions, our business operations could be materially and adversely affected.
Changes in laws, government regulation and monetary policy may have a material adverse effect on our operations. Financial institutions have been the subject of significant legislative and regulatory changes (including the continuing enactment and potential amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010) and may be the subject of further significant legislation or regulation in the future, none of which is within our control. This may result in repeals of or amendments to, existing laws, treaties, regulations, guidance, reporting, recordkeeping requirements, and other government policies.  Significant new laws or regulations or changes in, or repeals of, existing laws or regulations, including those with respect to federal and state taxation, may cause our results of operations to differ materially. In addition, the costs and burden of compliance could adversely affect our ability to operate profitably. Further, federal monetary policy significantly affects the Bank’s credit conditions, as well as the Bank’s clients, particularly as implemented through the FRB, primarily through open market operations in U.S. government securities, the discount rate for bank depositborrowings and reserve requirements. A material change in any of these conditions could have a material impact on us, the Bank and the Bank’s clients, and therefore is not insured against losson our financial condition and operations.

New and future rulemaking by the FDIC, anyCFPB and other deposit insurance fundregulators, as well as enforcement of existing consumer protection laws, may have a material effect on our operations and operating costs. The CFPB has the authority to implement and enforce a variety of existing federal consumer protection statutes and to issue new regulations.  However, with respect to institutions of our size, it does not have primary examination and enforcement authority. The authority to examine depository institutions with $10 billion or less in assets, such as the Bank, for compliance with federal consumer laws remains largely with our primary federal regulator, the FDIC. However, the CFPB may participate in examinations of smaller institutions on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators. In some cases, regulators such as the Federal Trade Commission, or FTC, and the Department of Justice also retain certain rulemaking or enforcement authority, and we remain subject to certain state consumer protection laws. The CFPB has placed significant emphasis on consumer complaint management and has established a public consumer complaint database to encourage consumers to file complaints they may have against financial institutions. We are expected to monitor and respond to these complaints, including those that we deem frivolous, and doing so may require management to reallocate resources away from more profitable endeavors.
The CFPB has adopted a number of significant rules that affect nearly every aspect of the lifecycle of a residential mortgage. These rules implement the Dodd-Frank Act amendments to the Equal Credit Opportunity Act, the Truth in Lending Act and the Real Estate Settlement Procedures Act. The rules require banks to, among other things: (i) develop and implement procedures to ensure compliance with a new “reasonable ability to repay” test and identify whether a loan meets a new definition for a “qualified mortgage”; (ii) implement new or revised disclosures, policies and procedures for servicing mortgages including, but not limited to, early intervention with delinquent clients and specific loss mitigation procedures for loans secured by any other publica client’s principal residence; (iii) comply with additional restrictions on mortgage loan originator compensation; and (iv) comply with new disclosure requirements and standards for appraisals and escrow accounts maintained for “higher priced mortgage loans.” These rules create operational and strategic challenges for us, as we are both a mortgage originator and a servicer.
We are subject to stringent capital requirements.
Pursuant to the Dodd-Frank Act, the federal banking agencies adopted final rules, or private entity. Investmentthe U.S. Basel III Capital Rules, to update their general risk-based capital and leverage capital requirements to incorporate agreements reflected in our common stock is inherently risky for the reasonsThird Basel Accord adopted by the Basel Committee on Banking Supervision, or Basel III Capital Standards, as well as the requirements of the Dodd-Frank Act. The U.S. Basel III Capital Rules are described in this “Risk Factors” sectionmore detail in “Supervision and elsewhereRegulation — Capital Standards” in this report and ison Form 10-K
The failure to meet the established capital requirements could result in one or more of our regulators placing limitations or conditions on our activities or restricting the commencement of new activities.  Such failure could subject us to a variety of enforcement remedies available to the same market forcesfederal regulatory authorities, including limiting our ability to pay dividends, issuing a directive to increase our capital and terminating our FDIC deposit insurance. FDIC deposit insurance is critical to the continued operation of the Bank. Our failure to meet applicable regulatory capital requirements, or to maintain appropriate capital levels in general, could affect client and investor confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common shares, our ability to make acquisitions, and our operations and financial condition, generally.
We may be required to contribute capital or assets to the Bank that affectcould otherwise be invested or deployed more profitably elsewhere. Federal law and regulatory policy impose a number of obligations on bank holding companies designed to reduce potential loss exposure to the clients of insured depository subsidiaries and to the FDIC’s DIF. For example, a bank holding company is required to serve as a source of financial strength to its FDIC-insured depository subsidiaries and to commit financial resources to support such institutions where it might not do so otherwise. These situations include guaranteeing the compliance of an “undercapitalized” bank with its obligations under a capital restoration plan.
A capital injection into the Bank may be required at times when we do not have the resources to provide it at the holding company level; therefore, we may be required to issue common shares or debt to obtain the required capital. Issuing additional common shares would dilute our current stockholders’ percentage of ownership and could cause the price of common stock in any company. As a result, if you acquire our common stock, youshares to decline. Any debt would be entitled to a priority of payment over the claims of the Company’s general unsecured creditors or equity holdings. Thus, any Company borrowing to make the required capital injection may losebe expensive and adversely affect our cash flows, financial condition, operations, and business prospects.
We face a risk of non-compliance and enforcement actions with respect to the Bank Secrecy Act (“BSA”) and other anti-money laundering statutes and regulations. Like all U.S. financial institutions, we are subject to monitoring requirements under federal law, including anti-money laundering, or AML, and BSA matters. Since September 11, 2001, banking regulators have intensified their focus on AML and BSA compliance requirements, particularly the AML provisions of the USA PATRIOT Act. There is also increased scrutiny of compliance with the rules enforced by the U.S. Treasury Department’s OFAC, which involve sanctions for dealing with certain persons or countries. While the Bank has adopted policies, procedures and controls to comply with the BSA, other AML statutes and regulations and OFAC regulations, this aggressive supervision and examination and increased likelihood of enforcement actions may increase our operating costs, which could negatively affect our operations and reputation.
We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties. Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose non-discrimination lending requirements on financial institutions. The FDIC, the Department of Justice, the CFPB and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair lending laws and regulations could adversely impact our rating under the CRA, and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, financial condition and operations.
Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities. We are subject to various privacy, information security and data protection laws, including requirements concerning security breach notification, and these laws could negatively affect us. Federal law imposes requirements for the safeguarding of certain client information.  Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Moreover, legislators and regulators in the United States are increasingly adopting or revising privacy, information security and data protection laws that potentially could have a significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of consumer or employee information, and some of our current or allplanned business activities. This could also increase our costs of your investment.compliance and business operations and could reduce income from certain business initiatives.

Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting client or employee data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have a material adverse effect on our financial conditions or operations.
Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory or governmental investigations or actions, litigation, fines, sanctions and damage to our reputation, which could have a material adverse effect on our financial condition or operations.
Possible changes in the U.S. tax laws could adversely affect our business and result of operations in a variety of ways.
The Tax Cuts and Jobs Act (“TCJA”), signed into law on December 22, 2017, enacted sweeping changes to the U.S. federal tax laws generally, effective January 1, 2018. The TCJA reduced the corporate tax rate to 21% from 35%, which resulted in a net reduction in our annual income tax expense and which benefitted many of our corporate and other small business borrowers. However, our ability to utilize tax credits, such as those arising from low-income housing and alternative energy investments, was constrained by the lower tax rate. There are presently pending in the U.S. Congress measures which would substantially increase the U.S. corporate tax rate. If enacted, such measures could adversely affect our profitability and that of our customers.
Item 1B.
Unresolved Staff Comments


None.
The Company has no unresolved comments received from staff at the SEC.

Item 2.Properties


Farmers & Merchants Bancorp and its subsidiaries are headquartered in Lodi, California. Executive offices are located at 111 W. Pine Street. Banking services are provided in twenty-nine branches29 branch locations in the Company’s service area. Of the twenty-nine29 branches, nineteen20 are owned and ten9 are leased. The expiration of these leases occurs between the years 20202022 and 2028. See Note 19,20, located in “Item 8. Financial Statements and Supplementary Data.”Data” in this Annual Report on Form 10-K.


Item 3.Legal Proceedings


Certain lawsuits and claims arising in the ordinary course of business have been filed or are pending against the Company or its subsidiaries. Based upon information available to the Company, its review of such lawsuits and claims and consultation with its counsel, the Company believes the liability relating to these actions, if any, would not have a material adverse effect on its consolidated financial statements.


There are no material proceedings adverse to the Company to which any director, officer or affiliate of the Company is a party.


Item 4.Mine Safety Disclosures


Not Applicable


PART II


Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


The common stock of Farmers & Merchants Bancorp is not widely held or listed on any exchange. However, trades are reported on the OTCQX under the symbol “FMCB”. Additionally, management is aware that there are private transactions in the Company’s common stock.


The following tables summarize the actual high, low, and close sale prices for the Company’s common stock since the first quarter of 2018.2020. These figures are based on activity posted on the OTCQX and on private transactions between individual stockholders that are reported to the Company. Since there is limited trading in our stock, (See “Item 1A. Risk Factors – Risks Associated With Our Stock”) the “Close” sale prices represent the volume weighted average close prices for the last month of the quarter.OTCQX:

  Year Ended December 31, 2021 
  High  Low  Close  Dividend Declared 
First quarter
 
$
788
  
$
731
  
$
778
  
$
-
 
Second quarter
 
$
925
  
$
773
  
$
862
   
7.50
 
Third quarter
 
$
920
  
$
862
  
$
897
   
-
 
Fourth quarter
 
$
1,156
  
$
897
  
$
960
   
7.80
 

  Year Ended December 31, 2020 
  High  Low  Close  Dividend Declared 
First quarter
 
$
800
  
$
650
  
$
685
  
$
-
 
Second quarter
 
$
800
  
$
626
  
$
706
   
7.25
 
Third quarter
 
$
770
  
$
695
  
$
725
   
-
 
Fourth quarter
 
$
770
  
$
701
  
$
760
   
7.50
 


 
Calendar Quarter
 High  Low  Close  
Cash Dividends
Declared (Per Share)
 
               
2019Fourth quarter $804  $755  $768  $7.50 
 Third quarter  850   757   780   - 
 Second quarter  950   700   795   7.05 
 First quarter  788   695   725   -
 

2839

 
Calendar Quarter
 High  Low  Close  
Cash Dividends
Declared (Per Share)
 
                   
2018Fourth quarter $725  $665  $700  $7.00 
 Third quarter  735   650   719   - 
 Second quarter  727   650
   712   6.90 
 First quarter  679   641   645
   - 

As of January 31, 2020,February 28, 2022, there were approximately 1,6501,334 stockholders of record of the Company’s common stock.  However, since approximately 30% of our common stock shares are held by brokers on behalf of stockholders, we are unable to determine the exact total number of stockholders.

The Company and, before the Company was formed, the Bank, has paid cash dividends for the past 8586 consecutive years. There are limitations under Delaware corporate law as to the amounts of cash dividends that may be paid by the Company. Additionally, if we decided to defer interest on our 2003 subordinated debentures, we would be prohibited from paying cash dividends on the Company’s common stock. The Company is dependent on cash dividends paid by the Bank to fund its cash dividend payments to its stockholders. There are regulatory limitations on cash dividends that may be paid by the Bank. See “ItemItem 1. Business“Business – Supervision and Regulation.”Regulation”.


In 1998, the Board approved the Company’s first common stock repurchase program. This program has been extended and expanded several times since then, and most recently, onOn November 6, 2018,15, 2021, the Board of Directors approved an extensionhas reauthorized its share repurchase program for up to $20.0 million of the $20 millionCompany’s common stock repurchase program over(“Repurchase Plan”), which represents approximately 4% of outstanding shareholders’ equity.  Repurchases by the three-year period ending December 31, 2021.

RepurchasesCompany under the programRepurchase Plan may be made from time to time on thethrough open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or through private transactions. by other means.

The repurchase program also requires that no purchasesactual means and timing of any repurchases, the quantity of purchased shares and prices will be subject to certain limitations, including, without limitation, market prices of the Company’s common shares, general market and economic conditions, the Company’s financial performance, capital position, and applicable legal and regulatory requirements, and at the discretion of the Chief Executive Officer and Chief Financial Officer.

Repurchases under the Repurchase Plan may be made ifinitiated, discontinued, suspended, or restarted at any time in the Bank wouldCompany’s discretion.  The Company is not remain “well-capitalized” after the repurchase.

There were no stock repurchases in 2019 or 2018obligated to repurchase any shares under the Stock Repurchase Plan.  However,No shares may be repurchased pursuant to the authority granted in the third quarter of 2018 the Company did repurchase $31.2 million ofRepurchase Plan after December 31, 2022.  Repurchased shares at $700 per share, in a single transaction from the estate of a large shareholder. The remaining dollar value of shares that may yetare to be purchased underused to fund the Company’s Common Stock Repurchase Plan is approximately $20 million.non-qualified retirement plans or may be returned to the status of authorized but unissued common shares of the Company.


On May 24, 2018, stockholders approved a proposal to increase our authorized shares of common stock from 7,500,000 to 40,000,000. In approving this proposal the stockholders also granted the Board discretionary authority (i.e., without further stockholder action) to determine whether to delay the proposed amendment. The Company has no immediate plans to effect the increase in the authorized shares of common stock.


On August 5, 2008, the Board of Directors approved a Share Purchase Rights Plan (the “Rights Plan”), pursuant to which the Company entered into a Rights Agreement dated August 5, 2008, with Computershare as Rights Agent, and the Company declared a dividend of a right to acquire one preferred share purchase right (a “Right”) for each outstanding share of the Company’s common stock, $0.01 par value per share, to stockholders of record at the close of business on August 15, 2008. Generally, the Rights are only triggered and become exercisable if a person or group (the “Acquiring Person”) acquires beneficial ownership of 10 percent or more of the Company’s common stock or announces a tender offer for 10 percent or more of the Company’s common stock.


The Rights Plan is similar to plans adopted by many other publicly traded companies. The effect of the Rights Plan is to discourage any potential acquirer from triggering the Rights without first convincing the Company’s Board of Directors that the proposed acquisition is fair to, and in the best interest of, all of the stockholders of the Company. The provisions of the Plan, if triggered by the Acquiring Person, will substantially dilute the equity and voting interest of any potential acquirer unless the Board of Directors approves of the proposed acquisition (under Article XV of the Company’s Certificate of Incorporation, the Board of Directors has the authority to consider any and all factors in determining whether an acquisition is in the best interests of the Company and its stockholders). Each Right, if and when exercisable, will entitle the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, no par value, at a purchase price of $1,200$1,600 for each one one-hundredth of a share, subject to adjustment.

Each holder of a Right (except for the Acquiring Person, whose Rights will be null and void upon such event) shall thereafter have the right to receive, upon exercise, that number of Common Shares of the Company having a market value of two times the exercise price of the Right. At any time before a person becomes an Acquiring Person, the Rights can be redeemed, in whole, but not in part, by Farmers and Merchants Bancorp’sthe Company’s Board of Directors at a price of $0.001 per Right.

The Rights Plan was set to expire on August 5, 2018. On November 19, 2015, the Board of Directors approved a seven-year extension of the term of the Rights Plan.  Pursuant to an Amendment to the Rights Agreement dated February 18, 2016, the term of the Rights Plan was extended from August 5, 2018 to August 5, 2025. The extension of the term of the Rights Plan was intended as a means to continue to guard against abusive takeover tactics and was not in response to any particular proposal. The Board also increased the purchase price under the Rights Plan to $1,600 per one one-hundredth of a preferred share from $1,200, to reflect the increase in the market price of the Company’s common stock over the past several years.


The Company did not issue or purchase any shares of common stock during 2021.

During 2019,2020, the Company issued a combined total 9,312of 523 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans. All of the shares were issued at prices ranging from $715.00 toa price of $770.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital. See Note 13,12, “Employees Benefit Plans” located in “ItemItem 8. Financial“Financial Statements and Supplementary Data.”Data in this Annual Report on Form 10-K”.

During 2018, the Company issued a combined total 13,520 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans. There were also 2,400 shares issued to individuals during the third quarter of 2018. All of the shares were issued at prices ranging from $635.00 to $690.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital.


Performance Graphs


The following graph compares the Company’s cumulative total stockholder return on common stock from December 31, 20142016 to December 31, 20192021 to that of: (i) the S&P 600 Regional Banks (Sub Ind) (TR) Index (which replaces the Morningstar Banks Index - Regional (US) Industry Group;Group going forward through 2020, since the data is no longer accessible); and (ii) the cumulative total return of the New York Stock Exchange market index. The graph assumes an initial investment of $100 on December 31, 20142016 and reinvestment of dividends. The stock price performance set forth in the following graph is not necessarily indicative of future price performance. The Company’s stock price data is based on activity posted on the OTCQX and on private transactions between individual stockholders that are reported to the Company. This data was furnished by Zacks SEC Compliance Services Group.
 
 graphic


This graph shall not be deemed filed or incorporated by reference into any filing under the Securities Act of 1933.Act.


3142

Item 6.
Selected Financial DataReserved


Farmers & Merchants Bancorp
Five Year Financial Summary of Operations
(in thousands except per share data)

Summary of Income: 2019  2018  2017  2016  2015 
Total Interest Income 
$
153,708
  
$
133,453
  
$
114,612
  
$
99,266
  
$
90,075
 
Total Interest Expense  
13,194
   
7,950
   
6,289
   
4,196
   
3,325
 
Net Interest Income  
140,514
   
125,503
   
108,323
   
95,070
   
86,750
 
Provision for Credit Losses  
200
   
5,533
   
2,850
   
6,335
   
750
 
Net Interest Income After Provision for Credit Losses  
140,314
   
119,970
   
105,473
   
88,735
   
86,000
 
Total Non-Interest Income  
17,241
   
15,219
   
16,762
   
15,257
   
14,575
 
Total Non-Interest Expense  
82,242
   
75,459
   
67,754
   
58,172
   
56,259
 
Income Before Income Taxes  
75,313
   
59,730
   
54,481
   
45,820
   
44,316
 
Provision for Income Taxes  
19,277
   
14,203
   
26,111
   
16,097
   
16,924
 
Net Income 
$
56,036
  
$
45,527
  
$
28,370
  
$
29,723
  
$
27,392
 
Balance Sheet Data:                    
Total Assets 
$
3,721,830
  
$
3,434,243
  
$
3,075,452
  
$
2,922,121
  
$
2,615,345
 
Loans & Leases  
2,673,027
   
2,571,241
   
2,215,295
   
2,177,601
   
1,996,359
 
Allowance for Credit Losses  
55,012
   
55,266
   
50,342
   
47,919
   
41,523
 
Investment Securities  
570,727
   
548,962
   
536,056
   
506,372
   
430,533
 
Goodwill  
11,183
   
11,183
   
-
   
-
   
-
 
Core Deposit Intangible  
4,640
   
5,278
   
836
   
946
   
-
 
Deposits  
3,278,019
   
3,062,832
   
2,723,228
   
2,581,711
   
2,277,532
 
Shareholders’ Equity  
369,296
   
311,215
   
299,660
   
279,981
   
251,835
 
                     
Selected Ratios:                    
Return on Average Assets  
1.61
%
  
1.45
%
  
0.94
%
  
1.12
%
  
1.12
%
Return on Average Equity  
16.77
%
  
14.80
%
  
9.66
%
  
11.17
%
  
11.21
%
Dividend Payout Ratio  
20.02
%
  
24.49
%
  
38.71
%
  
35.25
%
  
37.08
%
Average Loans & Leases to Average Deposits  
84.38
%
  
84.36
%
  
82.18
%
  
88.63
%
  
84.44
%
Average Equity to Average Assets  
9.61
%
  
9.66
%
  
9.77
%
  
10.05
%
  
10.02
%
Period-end Shareholders’ Equity to Total Assets  
9.92
%
  
9.06
%
  
9.74
%
  
9.58
%
  
9.63
%
                     
Basic and Diluted Per Share Data:                    
Earnings (1)
 
$
71.18
  
$
56.82
  
$
35.03
  
$
37.44
  
$
34.82
 
Cash Dividends Per Share 
$
14.20
  
$
13.90
  
$
13.55
  
$
13.10
  
$
12.90
 
Book Value Per Share at Year End (2)
 
$
465.68
  
$
397.10
  
$
368.90
  
$
346.80
  
$
318.46
 

(1)
Based on the weighted average number of shares outstanding of 787,227, 801,229, 809,834, 793,970, and 786,582 for the years ended December 31, 2019, 2018, 2017, 2016, and 2015, respectively.
(2)
Based on the year-end number of shares outstanding of 793,033, 783,721, 812,304, 807,329, and 790,787 for the years ended December 31, 2019, 2018, 2017, 2016, and 2015, respectively.

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations


The following discussion and analysis is intended to provide a comprehensive review of the Company’s operating results and financial condition. The information contained in this section should be read in conjunction with the Audited Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements in this Annual Report on Form 10-K. Information related to the comparison of the results of operations for the years December 31, 2020 to 2019 is found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2020 Annual Report on Form 10-K filed with the SEC on March 15, 2021.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Exchange Act. These forward-looking statements reflect our current views and are not historical facts. These statements may include statements regarding projected performance for periods following the date of this report. These statements can generally be identified by use of phrases such as “believe,” “expect,” “will,” “seek,” “should,” “anticipate,” “estimate,” “intend,” “plan,” “target,” “project,” “commit” or other words of similar import. Similarly, statements that describe our future financial condition, results of operations, objectives, strategies, plans, goals or future performance and business are also forward-looking statements. Statements that project future financial conditions, results of operations and shareholder value are not guarantees of performance and many of the factors that will determine these results and values are beyond our ability to control or predict. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and other parts of this Annual Report on Form 10-K that could cause our actual results to differ materially from those anticipated in these forward-looking statements. The following is a non-exclusive list of factors, that could cause our actual results to differ materially from our forward-looking statements in this Annual Report on Form 10-K:
the pendency, duration, and impact of the COVID-19 pandemic;
changes in general economic conditions, either nationally, in California, or in our local markets;
inflation, changes in interest rates, securities market volatility and monetary fluctuations;
increases in competitive pressures among financial institutions and businesses offering similar products and services;
higher defaults in our loan portfolio than we expect;
changes in management’s estimate of the adequacy of the allowance for credit losses;
risks associated with our growth and expansion strategy and related costs;
increased lending risks associated with our high concentration of real estate loans;
legislative or regulatory changes or changes in accounting principles, policies or guidelines;
technological changes;
regulatory or judicial proceedings; and
other factors and risks including those described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K.
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed.  Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in Item 1A. “Risk Factors” in this Annual Report on Form 10-K. Please take into account that forward-looking statements speak only as of the date of this Annual Report on Form 10-K (or documents incorporated by reference, if applicable).
The Company does not undertake any obligation to publicly correct or update any forward-looking statement if it later becomes aware that actual results are likely to differ materially from those expressed in such forward-looking statement, except as required by law.
Overview

AlthoughFarmers & Merchants Bancorp (the “Company”, “FMCB”, or “we”) is the Companyholding company for Farmers & Merchants Bank of Central California (the “Bank” or “FMB).  The Bank is a full-service community bank providing loans, deposit and cash management services to individuals and businesses. Our primary clients are small- to medium-sized businesses that require highly personalized commercial banking products and services.  The Bank has initiated efforts to expand its geographic footprint into the East Bay area of San Francisco29 branch locations and Napa, California (see Item 1: Business – Service Area), the Company’s primary service area remains3 ATMs that have been serving communities in the mid Central Valley of California for over 100 years.
The primary source of funding for our asset growth has been the generation of core deposits, which we raise through our existing branch locations, newly opened branch locations, or through acquisitions.  Our recent loan growth is primarily the result of organic growth generated by our seasoned relationship managers and supporting associates who provide outstanding service and responsiveness to our clients or through acquisitions.
Our results of operations are largely dependent on net interest income. Net interest income is the difference between interest income we earn on interest earning assets, which are comprised of loans, investment securities and short-term investments, and the interest we pay on our interest bearing liabilities, which are primarily deposits, and, to a region that can be significantly impactedlesser extent, other borrowings. Management strives to match the re-pricing characteristics of the interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve.
We measure our performance by calculating our net interest margin, return on average assets, and return on average equity. Net interest margin is calculated by dividing net interest income, which is the difference between interest income on interest earning assets and interest expense on interest bearing liabilities, by average interest earning assets. Net interest income is our largest source of revenue. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to affect net interest income. We also measure our performance by our efficiency ratio, which is calculated by dividing non-interest expense by the seasonal needssum of net interest income and non-interest income.
Selected Financial Data
The following condensed consolidated statements of financial condition and operations and selected performance ratios as of December 31, 2021, 2020, and 2019 and for the agricultural industry. Accordingly, discussionyears then ended have been derived from our audited consolidated financial statements.  The information below is qualified in its entirety by the detailed information included elsewhere herein and should be read along with this “Item 7. Management’s Discussion and Analysis of the Company’s Financial Condition and Results of Operations is influenced by the seasonal banking needs of its agricultural customers (e.g., during the springOperations” and summer customers draw down their deposit balances“Item 8, Financial Statement and increase loan borrowing to fund the purchase of equipment and planting of crops. Correspondingly, deposit balances are replenished and loans repaid in late fall and winter as crops are harvested and sold)Supplementary Data”.

The Five-Year Period: 2015 through 2019
Through much of 2007 the economy in our primary service area was strong, the stock market rising and individuals and businesses doing well. Then in October 2007 the financial markets started what would become a major adjustment and an economic recession began, the impact of which is still being felt today in the Central Valley of California. The Central Valley was one of the hardest hit areas in the country during the recession. In many areas, housing prices declined as much as 60% and unemployment reached 15% or more. Although the economy has improved throughout most of the Central Valley, in many of the Company’s market segments housing prices remain below peak levels and unemployment levels remain above those in other areas of the state and country.

Despite this challenging economic environment, in management’s opinion, the Company’s operating performance over the past five years has been exceptionally strong.


  Years Ended December 31 
(Dollars in thousands, except per share data) 2021  2020  2019 
Selected Income Statement Information:         
Interest income 
$
165,268
  
$
159,294
  
$
154,622
 
Interest expense  
4,332
   
9,491
   
13,194
 
Net interest income  
160,936
   
149,803
   
141,428
 
Provision for credit losses  
1,910
   
4,500
   
200
 
Net interest income after provision for credit losses  
159,026
   
145,303
   
141,228
 
Non-interest income  
21,056
   
15,054
   
16,327
 
Non-interest expense  
91,761
   
82,406
   
82,242
 
Income before income tax expense  
88,321
   
77,951
   
75,313
 
Income tax expense  
21,985
   
19,217
   
19,277
 
Net income 
$
66,336
  
$
58,734
  
$
56,036
 
             
Selected financial ratios:            
Basic and diluted earnings per share 
$
84.01
  
$
74.03
  
$
71.18
 
Cash dividends per common share  
15.30
   
14.75
   
14.20
 
Dividend ratio  
18.21
%
  
19.92
%
  
19.95
%
Net interest margin  
3.46
%
  
3.88
%
  
4.34
%
Non-interest income to average assets  
0.43
%
  
0.37
%
  
0.47
%
Non-interest expense to average assets  
1.87
%
  
2.00
%
  
2.37
%
Efficiency ratio  
50.42
%
  
49.99
%
  
52.13
%
Return on average assets  
1.35
%
  
1.43
%
  
1.61
%
Return on average equity  
15.00
%
  
14.60
%
  
16.77
%
Net charge-offs (recoveries) to average loans  
-0.01
%
  
0.02
%
  
0.02
%

  As of December 31, 
(Dollars in thousands, except per share data) 2021  2020  2019 
Selected Balance Sheet Information:         
Cash and cash equivalents 
$
715,460
  
$
383,837
  
$
294,758
 
Investment securities  
1,007,506
   
876,665
   
567,615
 
Gross loans held for investment  
3,237,177
   
3,099,592
   
2,673,027
 
Total assets  
5,177,720
   
4,550,453
   
3,721,830
 
Total deposits  
4,640,152
   
4,060,267
   
3,278,019
 
Shareholders’ equity  
463,136
   
423,665
   
369,296
 
             
Average Balances:            
Average earning assets  
4,656,337
   
3,861,070
   
3,261,957
 
Average assets  
4,913,999
   
4,112,537
   
3,477,457
 
Average shareholders’ equity  
442,246
   
402,329
   
334,121
 
             
Selected financial ratios:            
Book value per share 
$
586.51
  
$
536.53
  
$
465.68
 
Tangible book value per share 
$
568.04
  
$
517.28
  
$
445.72
 
Allowance for credit losses to total loans  
1.88
%
  
1.89
%
  
2.05
%
Non-performing assets to total assets  
0.03
%
  
0.03
%
  
0.02
%
Loans held for investment to deposits  
69.76
%
  
76.34
%
  
81.54
%
             
Capital ratios:            
Tier 1 leverage capital  
8.92
%
  
9.13
%
  
9.90
%
Total risk-based capital  
13.19
%
  
12.59
%
  
12.36
%
Average equity to average assets  
9.00
%
  
9.78
%
  
9.61
%
Tangible common equity to tangible assets  
8.69
%
  
9.01
%
  
9.54
%

Summary of Critical Accounting Policies and Estimates
In the opinion of management, the accompanying Consolidated Statements of Financial Condition and related Consolidated Statements of Income, Comprehensive Income, Changes in Shareholders’ Equity and Cash Flows. 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 our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified certain accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our financial statements. Management believes the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate based on the factual circumstances at the time. However, given the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition. Further, subsequent changes in economic or market conditions could have a material impact on these estimates and our financial condition and operating results in future periods. For additional information concerning critical accounting policies, see the Selected Notes to the Consolidated Financial Statements and the following:
Use of Estimates — The preparation of our financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis, management evaluates the estimates used. Estimates are based upon historical experience, current economic conditions and other factors that management considers reasonable under the circumstances and the actual results may differ from these estimates under different assumptions. The allowance for credit losses, deferred income taxes, and fair values of financial instruments are estimates, which are particularly subject to change.
Allowance for Credit Losses — The Company recognizes there is risk of credit losses with financial instruments, to include loans, and unfunded loan commitments, where the Company advances funds to a counterparty.  The risk of credit losses varies with, among other things, the type of financial instrument, the creditworthiness and cash flows of the counterparty, any guarantees from government agencies, and the collateral, if any, used to secure the financial instrument.  The Company maintains an allowance for credit losses on loans and unfunded commitments held in accordance with GAAP.  The allowance for credit losses represents our estimate of probable losses inherent in our existing loan portfolio.  The allowance for credit losses is increased by charging a provision for credit losses against income and reduced by charge-offs, net of recoveries.

We used certain non-GAAP financial measuresevaluate our allowance for credit losses quarterly based on a number of quantitative and qualitative factors, including levels and trends of past due and non-accrual loans, asset classifications, loan grades and internal loan reviews, change in volume and mix of loans, collateral value, historical loss experience, size and complexity of individual credits, loan concentrations and economic conditions. Allowance for credit losses is provided on both a specific and general basis. Specific allowances are provided for impaired credits for which the expected/anticipated loss is measurable. General valuation allowances are based on a portfolio segmentation based on risk grading, with a further evaluation of various quantitative and qualitative factors.

The Company begins its determination of credit losses by evaluating historical credit loss experience by loan segment.  Historical loss information may be adjusted based on specific risk characteristics by loan segment.  Such risk characteristics may include, but are not necessarily limited to, provide supplementalchanges in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; changes in national and local economic conditions and forecasts; changes in the nature and volume of the loans and in the terms of such instruments; changes in the experience, ability, and depth of lending management and other relevant staff; changes in the volume and severity of past due status, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans; changes in the quality of the institution’s loan review system; changes in the value of underlying collateral for collateral-dependent loans; the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses.

While the Company utilizes a systematic methodology in determining its allowance, the allowance is based on estimates, and ultimate losses may vary from current estimates. The estimates are reviewed periodically and, as adjustments become necessary, are reported in earnings in the periods in which they become known. For additional information, regardingsee Note 5, located in Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

The allowance for credit losses on unfunded loan commitments is classified in other liabilities on the Consolidated Balance Sheet.  The allowance for credit losses on unfunded loan commitments is increased by charging a provision for credit losses on unfunded commitments, which was reported in other non-interest expenses for 2021 and prior.

We believe that our performanceallowance for credit losses was adequate to absorb probable losses inherent in 2017. Income Tax Expensethe loan portfolio as of December 31, 2021 and 2020.

Investment Securities — GAAP requires that investment securities available for sale be carried at fair value which is based on quoted market prices or if quoted market prices are not available, fair values are extrapolated from the year ended 2017 includedquoted prices of similar instruments. Management utilizes the services of a one-time, non-cash $6.3 millionreputable third-party vendor to assist with the determination of estimated fair values. Unrealized holding gains and losses on securities classified as available for sale are excluded from earnings and are reported net of tax as accumulated other comprehensive income (“AOCI”), a component of shareholders’ equity, until realized.  Investment securities held to maturity are carried at the amortized costs of such securities.

Investment securities are evaluated for impairment on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and our intent and ability to retain our investment in the securities for a period sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is permanent but indicates that the prospect for a near-term recovery of value is not favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary and we do not intend to sell the security or it is more likely than not that we will not be required to sell the security before recovery, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income. If management intends to sell the security or it is more likely than not that, we will be required to sell the security before recovering its forecasted cost; the entire impairment loss is recognized as a charge to earnings.

At December 31, 2021, we had no investment securities that were other-than-temporarily impaired.

Goodwill — Goodwill represents the excess of the purchase considerations paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination it is not amortized but is reviewed annually, or more frequently as current circumstances and conditions warrant, for impairment. An assessment of qualitative factors is completed to determine if it is more likely than not that, the fair value of a reporting unit is less than its carrying amount. If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed. The quantitative goodwill impairment compares the reporting unit’s estimated fair values, including goodwill, to its carrying amount. If the carrying amount exceeds its reporting unit’s fair value, then an impairment loss would be recognized as a charge to earnings, but is limited by the amount of goodwill allocated to that reporting unit.

Other Intangible Assets — Other intangible assets consists primarily of core deposit intangibles (“CDI”), which are amounts recorded in business combinations or deposit purchase transactions related to the re-measurementvalue of transaction-related deposits and the value of the Company’s Deferred Tax Asset (“DTA”) as a resultclient relationships associated with the deposits. Core deposit intangibles are amortized over the estimated useful lives of such deposits. These assets are reviewed at least annually for events or circumstances that could affect their recoverability. These events could include loss of the passageunderlying core deposits, increased competition or adverse changes in the economy. The amortization of our CDI is recorded in other non-interest expense. To the extent other identifiable intangible assets are deemed unrecoverable; impairment losses are recorded in other non-interest expense to reduce the carrying amount of the Tax Cutsassets.

Fair Value Measurements – The Company discloses the fair value of financial instruments and Jobs Act in 2017. We believed that presenting Adjusted Net Income, excluding the impactmethods and significant assumptions used to estimate those fair values. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. In some cases, book value is a reasonable estimate of fair value due to the relatively short period between origination of the DTA re-measurement charge, providesinstrument and its expected realization.

For additional clarity toinformation, see Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” and Note 13 located in Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

Income Taxes — Income taxes are filed on a consolidated basis with our subsidiaries and allocate income tax expense (benefit) based on each entity’s proportionate share of the usersconsolidated provision for income taxes. Deferred income tax assets and liabilities are recognized for the tax consequences of financial statements regarding core financial performancetemporary differences between the reported amounts of assets and allowsliabilities and their respective tax bases. Deferred income tax assets and liabilities are adjusted for a better year-over-year comparisonthe effects of trendschanges in core profitability.

(in thousands, except per share data)
Financial Performance Indicator 2019  2018  2017  2016  2015 
                
Pre Tax Income 
$
75,313
  
$
59,730
  
$
54,481
  
$
45,820
  
$
44,316
 
Income Tax Expense  
19,277
   
14,203
   
26,111
   
16,097
   
16,924
 
Effect of Income Tax Rate Change                    
DTA Re-measurement  
-
   
-
   
(6,300
)
  
-
   
-
 
Adjusted Income Tax Expense  
19,277
   
14,203
   
19,811
   
16,097
   
16,924
 
Non-GAAP Adjusted Net Income  
56,036
   
45,527
   
34,670
   
29,723
   
27,392
 
Effect of Income Tax Rate Change                    
DTA Re-measurement  
-
   
-
   
(6,300
)
  
-
   
-
 
Net Income (See Note 1) 
$
56,036
  
$
45,527
  
$
28,370
  
$
29,723
  
$
27,392
 
Total Assets  
3,721,830
   
3,434,243
   
3,075,452
   
2,922,121
   
2,615,345
 
Total Loans & Leases  
2,673,027
   
2,571,241
   
2,215,295
   
2,177,601
   
1,996,359
 
Total Deposits  
3,278,019
   
3,062,832
   
2,723,228
   
2,581,711
   
2,277,532
 
Total Shareholders’ Equity  
369,296
   
311,215
   
299,660
   
279,981
   
251,835
 
Total Risk-Based Capital Ratio  
12.40
%
  
11.40
%
  
13.07
%
  
12.80
%
  
12.23
%
Non-Performing Loans as a % of Total Loans  
0.00
%
  
0.00
%
  
0.00
%
  
0.14
%
  
0.11
%
Substandard Loans as a % of Total Loans  
0.61
%
  
0.57
%
  
0.40
%
  
0.29
%
  
0.31
%
Net Charge-Offs (Recoveries) to Average Loans  
0.20
%
  
0.03
%
  
0.02
%
  
0.00
%
  
(0.30
%)
Loan Loss Allowance as a % of Total Loans  
2.05
%
  
2.14
%
  
2.27
%
  
2.19
%
  
2.07
%
Return on Average Assets  
1.61
%
  
1.45
%
  
0.94
%
  
1.12
%
  
1.12
%
Adjusted Return on Average Assets  
1.61
%
  
1.45
%
  
1.15
%
  
1.12
%
  
1.12
%
Return on Average Equity  
16.77
%
  
14.80
%
  
9.66
%
  
11.17
%
  
11.21
%
Adjusted Return on Average Equity  
16.77
%
  
14.80
%
  
11.79
%
  
11.17
%
  
11.21
%
Earnings Per Share  
71.18
   
56.82
   
35.03
   
37.44
   
34.82
 
Adjusted Earnings Per Share  
71.18
   
56.82
   
42.81
   
37.44
   
34.82
 
Cash Dividends Per Share  
14.20
   
13.90
   
13.55
   
13.10
   
12.90
 
Cash Dividends Declared  
11,221
   
11,151
   
10,982
   
10,478
   
10,157
 

Note 1 – On December 22, 2017, the Tax Cutstax laws and Jobs Act was signed into law by the President. Among other things, this legislation reduced the corporate tax rate from 35% to 21% beginning January 1, 2018. Although the Company believes that this reduction in the corporate tax rate will continue to have a significant positive impactrates on future financial performance, U.S. generally accepted accounting principles require that all companies re-measure their DTA’s using the new lower tax rate as of the date of enactmentenactment. The determination of the legislation. Asamount of deferred income tax assets, that are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. The realization of deferred income tax assets is assessed and a resultvaluation allowance is recorded if it is “more likely than not” that all or a portion of the Company’s netdeferred income for 2017 includedtax asset will not be realized. “More likely than not” is defined as greater than a $6.3 million re-measurement50% probability. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed.

Only tax positions that meet the more-likely-than-not recognition threshold are recognized. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a one-time, non-cash increaseliability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest expense and penalties associated with unrecognized tax benefits are classified as income tax expense in the 4th quarter. Our situation is not unique in that the majorityconsolidated statements of all financial institutions reported significant DTA re-measurements in the 4th quarterincome.

Impact of 2017. Excluding the impactRecently Issued Accounting Standards

See Note 1 “Summary of the $6.3 million DTA re-measurement, non-GAAP adjusted net income for the year totaled $34.6 million, an increase of $5.0 million or 16.8% over the prior year, which would have resulted in an adjusted return on average assets of 1.15% and adjusted return on average equity of 11.79%.

Management believes that the Company’s performance compared very favorably to its peer banks during the five-year period ended December 31, 2019:

Net income over the five-year period totaled $187 million.

Return on Average Assets averaged 1.25% over the five-year period.

Total assets increased 57.7% from $2.4 billion at December 31, 2014 to $3.7 billion at December 31, 2019.

Total loans & leases increased 56.1% from $1.7 billion at December 31, 2014 to $2.7 billion at December 31, 2019.

Total deposits increased 58.8% from $2.1 billion at December 31, 2014 to $3.3 billion at December 31, 2019.

More recently:

In 2019, the Company earned $56.0 million for a return on average assets of 1.61%.

In 2019, the Company increased its cash dividend per share by 2.2% over 2018 levels, and our strong financial performance has allowed us to increase dividends every year during this five-year period.

The Company’s total risk based capital ratio was 12.40% at December 31, 2019, and the Bank achieved the highest regulatory classification of “well capitalized” in each of the previous five years. See “Financial Condition – Capital.”

The Company continued to diversify its geographic footprint by acquiring (1) Delta National Bancorp with branches in Turlock, Manteca and Riverbank; and (2) Bank of Rio Vista with branches in Rio Vista and Walnut Grove.

The Company’s asset quality remains very strong at the present time, when measured by: (1) net charge-offs at 0.20% of average loans & leases during 2019; (2) no non-accrual loans at December 31, 2019; and (3) substandard loans & leases totaling 0.61% of total loans & leases at December 31, 2019. See “Results of Operations – Provision and Allowance for Credit Losses” and “Financial Condition – Classified Loans & Leases and Non-Performing Assets.”

Because of our strong earnings performance, capital position, and asset quality, stockholders have benefited from the fact that cash dividends per share have increased 11.8% since 2014, and totaled $67.65 per share over the five-year period. The 2019 dividend of $14.20 per share represents a 1.81% yield based upon the December 31, 2019 closing stock price of $768 per share (See “Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”).

Looking Forward: 2020 and Beyond
In management’s opinion, the following key issues will continue to influence the financial results of the Company in 2020 and future years:

The Company’s earnings are heavily dependent on its net interest margin, which is sensitive to such factors as: (1) market interest rates; (2) the mix of our earning assets and interest-bearing liabilities; and (3) competitor pricing strategies.


-
Between December 2015 and December 2018, the FRB increased short-term market rates by 2.25%. However, beginning in August 2019 the FRB then dropped rates by .75%. Although short-term rates may continue to drop in 2020, Management does not expect them to change significantly.

-
Loans & Leases increased $1.0 billion, or 56.1% over the past five years, partially as a result of our expansion into Walnut Creek, Concord, Napa and equipment leasing, as well as our acquisitions of Delta Bank and Bank of Rio Vista. However, we still face a very competitive business environment, and no assurances can be given that this recent growth in the loan & lease portfolio will continue.


-
Aggressive competitor pricing for loans, leases and deposits continues to require the Company to respond in order to retain key customers.

As a result of increases in short-term market interest rates, which began in 2015, the Company’s net interest margin increased from 3.87% for the year ended December 31, 2015 to 4.34% for the year ended December 31, 2019. However, because of the decreases in short-term rates that began in August 2019, Management believes that the net interest margin will be lower in 2020. Additionally, competitor pricing pressures may adversely affect the net interest margin in 2020. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk.”

The Company’s results are impacted by changes in the credit quality of its borrowers. Substandard loans & leases totaled $16.2 million or 0.61% of total loans & leases at December 31, 2019 vs. $15.1 million or 0.59% of total loans & leases at December 31, 2018. Management believes, based on information currently available, that these levels are adequately covered by the Company’s $55.0 million allowance for credit losses as of December 31, 2019. See “Results of Operations - Provision and Allowance for Credit Losses” and “Financial Condition – Classified Loans & Leases and Non-Performing Assets.” The Company’s provision for credit losses was $200,000 in 2019, compared to $5.5 million in 2018 and $2.9 million in 2017. See “Item 1A. Risk Factors.”

Since the passage of the Dodd-Frank Act in 2010, Congress has implemented broad changesSignificant Accounting Policies” to the regulation of consumer financial productsConsolidated Financial Statements in Item 8. “Financial Statements and the financial services industry as a whole. These changes have, and will continue to have, a significant effectSupplementary Data” in this Annual Report on the Company’s product offerings, pricing and profitability in areas such as debit and credit cards, home mortgages and deposit service charges.
Form 10-K.

The Company has (i) expanded its geographic footprint through denovo branch expansion in Walnut Creek, Napa, Lockeford and Concord, CA and through acquisition in Manteca, Riverbank, Rio Vista, and Walnut Grove, CA and (ii) established equipment leasing as a new line of business. Although Management believes that these initiatives will result in increased asset growth and earnings, along with reduced concentration risks, the start-up costs related to staff and facilities are significant and will take time to recoup.

The Company benefited significantly in 2018 and 2019, and should continue to benefit in future years, from the reduction of the federal corporate tax rate from 35% to 21% pursuant to the recently enacted Tax Cuts and Jobs Act.


Results of Operations


The following discussion and analysis is intended to provide a better understanding of Farmers & Merchants Bancorp and its subsidiaries’ performance during each of the years in the three-yeartwo-year period ended December 31, 20192021 and the material changes in financial condition, operating income, and expense of the Company and its subsidiaries as shown in the accompanying consolidated financial statements.

Impact Information related to the comparison of Bankthe results of Rio Vista Acquisition onoperations for the years December 31, 2020 and 2019 can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations
On October 10, 2018, Farmers & Merchants Bancorp completed the acquisition of Bank of Rio Vista. Since the acquisition took place late in the year, and Bank of Rio Vista had only $217.5 million in assets (less than 6% of Farmers & Merchants Bancorp’s total assets), the impact2020 Annual Report on the Company’s 2018 Results of Operations was limitedForm 10-K filed with the exception of legal fees, contract termination costs and systems conversion costsSEC on March 15, 2021.

Factors that were booked as non-interest expense bydetermine the Company in 2018. The gross amount of such expenses were $2.93 million.

Net Interest Income/Net Interest Margin
The tables on the following pages reflect the Company’s average balance sheets and volume and rate analysis for the years ended 2019, 2018 and 2017. Average balance amounts for assets and liabilities are the computed average of daily balances.

Net interest income is the amount by which the interest and fees on loans & leases and other interest-earning assets exceed the interest paid on interest-bearing sources of funds. For the purpose of analysis, the interest earned on tax-exempt investments and municipal loans is adjusted to an amount comparable to interest subject to normal income taxes. This adjustment is referred to as “tax equivalent” adjustment and is noted wherever applicable. The presentationlevel of net interest income and net interest margin on a tax equivalent basis is a common practice withininclude the banking industry.

The Volume and Rate Analysisvolume of Net Interest Income summarizes the changes in interest income and interest expense based on changes in average asset and liability balances (volume) and changes in average rates (rate). For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to: (1) changes in volume (change in volume multiplied by initial rate); (2) changes in rate (change in rate multiplied by initial volume); and (3) changes in rate/volume, also called “changes in mix” (allocated in proportion to the respective volume and rate components).

The Company’s earning assets and interest bearing liabilities, are subject to repricing at different times, which exposesyields earned and rates paid, fee income, non-interest expense, the Company tolevel of non-performing loans and other non-earning assets, and the amount of non-interest bearing liabilities supporting earning assets. Non-interest income fluctuations when interest rates change. In order to minimizeincludes card processing fees, service charges on deposit accounts, bank-owned life insurance income, fluctuations,gains/losses on the Company attempts to match assetsale of investment securities, and liability maturities. However, some maturity mismatch is inherent in the assetgains/losses on deferred compensation investments. Non-interest expense consists primarily of salaries and liability mix. See “Item 7A. Quantitativeemployee benefits, cost of deferred compensation benefits, occupancy, data processing, FDIC insurance, marketing, legal and Qualitative Disclosures About Market Risk - Interest Rate Risk.”other expenses.


3749

Farmers & Merchants Bancorp
Year-to-Date Average BalancesBalance and Interest Rates
(Interest and Rates onYields. The following table sets forth a Taxable Equivalent Basis)
(in thousands)

  Year Ended December 31, 2019 
Assets Balance  Interest  Rate 
Interest Bearing Deposits with Banks 
$
232,623
  
$
4,909
   
2.11
%
Investment Securities:            
U.S. Treasuries  
27,096
   
537
   
1.98
%
U.S. Govt SBA  
13,372
   
329
   
2.46
%
Government Agency & Government-Sponsored Entities  
2,108
   
62
   
2.94
%
Municipals - Taxable  
6,545
   
344
   
5.26
%
Obligations of States and Political Subdivisions - Non-Taxable  
51,872
   
2,079
   
4.01
%
Mortgage Backed Securities  
321,240
   
8,466
   
2.64
%
Other  
4,850
   
173
   
3.57
%
Total Investment Securities  
427,083
   
11,990
   
2.81
%
             
Loans & Leases:            
Real Estate  
1,736,406
   
93,227
   
5.37
%
Home Equity Lines and Loans  
90,423
   
2,316
   
2.56
%
Agricultural  
275,472
   
15,423
   
5.60
%
Commercial  
364,676
   
19,335
   
5.30
%
Consumer  
16,634
   
1,194
   
7.18
%
Other  
1,051
   
24
   
2.28
%
Leases  
104,896
   
5,718
   
5.45
%
Total Loans & Leases  
2,589,558
   
137,237
   
5.30
%
Total Earning Assets  
3,249,264
  
$
154,136
   
4.74
%
             
Unrealized Gain on Securities Available-for-Sale  
938
         
Allowance for Credit Losses  
(55,165
)
        
Cash and Due From Banks  
56,855
         
All Other Assets  
225,565
         
Total Assets 
$
3,477,457
         
             
Liabilities & Shareholders’ Equity            
Interest Bearing Deposits:            
Interest Bearing DDA 
$
668,818
  
$
2,360
   
0.35
%
Savings and Money Market  
930,390
   
3,340
   
0.36
%
Time Deposits  
519,848
   
6,940
   
1.34
%
Total Interest Bearing Deposits  
2,119,056
   
12,640
   
0.60
%
Federal Home Loan Bank Advances  
1
   
-
   
0.00
%
Subordinated Debt  
10,310
   
554
   
5.37
%
Total Interest Bearing Liabilities  
2,129,367
  
$
13,194
   
0.62
%
Interest Rate Spread          
4.12
%
Demand Deposits  
949,695
         
All Other Liabilities  
64,274
         
Total Liabilities  
3,143,336
         
Shareholders’ Equity  
334,121
         
Total Liabilities & Shareholders’ Equity 
$
3,477,457
         
Impact of Non-Interest Bearing Deposits and Other Liabilities          
0.21
%
Net Interest Income and Margin on Total Earning Assets      
140,942
   
4.34
%
Tax Equivalent Adjustment      
(428
)
    
Net Interest Income     
$
140,514
   
4.32
%

Notes:  Yields on municipal securities have been calculated on a fully taxable equivalent basis.  Loansummary of average balances with corresponding interest income includes fee income and unearned discount ininterest expense as well as average yield, cost and net interest margin information for the amountperiods presented. Average balances are derived from daily balances.

  Year ended December 31, 
  2021  2020 
(Dollars in thousands) 
Average
Balance
  
Interest
Income / Expense
  
Average
Yield /
Rate
  
Average
Balance
  
Interest
Income / Expense
  
Average
Yield /
Rate
 
ASSETS                  
Interest earnings deposits in other banks 
$
666,167
  
$
902
   
0.14
%
 
$
326,247
  
$
1,207
   
0.37
%
Securities:(1)
                        
Taxable securities  
838,710
   
14,646
   
1.75
%
  
530,910
   
12,391
   
2.33
%
Non-taxable securities(2)
  
52,384
   
1,648
   
3.15
%
  
52,736
   
1,671
   
3.17
%
Total securities  
891,094
   
16,294
   
1.83
%
  
583,646
   
14,062
   
2.41
%
Loans:(3)
                        
Real estate:                        
Commercial  
1,037,554
   
53,298
   
5.14
%
  
868,486
   
46,946
   
5.41
%
Agricultural  
641,086
   
29,544
   
4.61
%
  
622,239
   
29,983
   
4.82
%
Residential and home equity  
339,345
   
12,717
   
3.75
%
  
312,138
   
12,563
   
4.02
%
Construction  
182,722
   
7,965
   
4.36
%
  
156,574
   
7,530
   
4.81
%
Total real estate  
2,200,707
   
103,524
   
4.70
%
  
1,959,437
   
97,022
   
4.95
%
Commercial & industrial  
373,497
   
16,935
   
4.53
%
  
372,344
   
17,941
   
4.82
%
Agricultural  
233,544
   
10,385
   
4.45
%
  
259,132
   
13,049
   
5.04
%
Commercial leases  
98,056
   
5,485
   
5.59
%
  
106,293
   
5,750
   
5.41
%
Consumer and other  
178,535
   
10,879
   
6.09
%
  
241,278
   
9,621
   
3.99
%
Total loans and leases  
3,084,339
   
147,208
   
4.77
%
  
2,938,484
   
143,383
   
4.88
%
Non-marketable securities  
14,737
   
864
   
5.86
%
  
12,693
   
642
   
5.06
%
Total interest earning assets  
4,656,337
   
165,268
   
3.55
%
  
3,861,070
   
159,294
   
4.13
%
Allowance for credit losses  
(60,059
)
          
(55,804
)
        
Non-interest earning assets  
317,721
           
307,271
         
Total average assets 
$
4,913,999
          
$
4,112,537
         
                         
LIABILITIES AND SHAREHOLDERS’ EQUITY                        
Interest-bearing deposits:                        
Demand 
$
1,024,009
   
1,128
   
0.11
%
 
$
787,306
   
1,618
   
0.21
%
Savings and money market accounts  
1,352,258
   
1,458
   
0.11
%
  
1,128,623
   
2,724
   
0.24
%
Certificates of deposit greater than $250,000  
170,040
   
701
   
0.41
%
  
220,952
   
2,535
   
1.15
%
Certificates of deposit less than $250,000  
235,746
   
730
   
0.31
%
  
268,294
   
2,236
   
0.83
%
Total interest bearing deposits  
2,782,053
   
4,017
   
0.14
%
  
2,405,175
   
9,113
   
0.38
%
Short-term borrowings  
1
   
-
   
0.00
%
  
1
   
-
   
0.00
%
Subordinated debentures  
10,310
   
315
   
3.06
%
  
10,310
   
378
   
3.67
%
Total interest bearing liabilities  
2,792,364
   
4,332
   
0.16
%
  
2,415,486
   
9,491
   
0.39
%
Non-interest bearing deposits  
1,610,611
           
1,232,874
         
Total funding  
4,402,975
   
4,332
   
0.10
%
  
3,648,360
   
9,491
   
0.26
%
Other non-interest bearing liabilities  
68,778
           
61,848
         
Shareholders’ equity  
442,246
           
402,329
         
Total average liabilities and shareholders’ equity 
$
4,913,999
          
$
4,112,537
         
                         
Net interest income     
$
160,936
          
$
149,803
     
Interest rate spread          
3.39
%
          
3.73
%
Net interest margin(4)
          
3.46
%
          
3.88
%

(1)
Excludes average unrealized gains of $3.4 million and $16.3 million for the years ended December 31, 2021, and 2020, respectively, which are included in non-interest earning assets.
(2)
The average yield does not include the federal tax benefits at an assumed effective yield of 25% related to income earned on tax-exempt municipal securities totaling $436,000 and $438,000 for the years ended December 31, 2021, and 2020, respectively.
(3)
Loan interest income includes loan fees of $17.0 million and $13.7 million for the years ended December 31, 2021 and 2020, respectively.
(4)
Net interest margin is computed by dividing net interest income by average interest earning assets.
Interest-bearing deposits with banks and Federal Reserve balances are additional earning assets available to the Company. Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 0.14% and 0.37% for the years ended December 31, 2021 and 2020, respectively.  Average interest-bearing deposits was $666 million and $326 million for the yearyears ended December 31, 2019. Non-accrual loans2021 and lease financing receivables have been included in the average balances. Yields2020, respectively.  Interest income on securities available-for-sale are based on historical cost.

Farmers & Merchants Bancorp
Year-to-Date Average Balancesinterest-bearing deposits with banks was $902,000 and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)

  Year Ended December 31, 2018 
Assets Balance  Interest  Rate 
Interest Bearing Deposits with Banks 
$
147,700
  
$
2,755
   
1.87
%
Investment Securities:            
U.S. Treasuries  
64,630
   
939
   
1.45
%
U.S. Govt SBA  
22,537
   
445
   
1.97
%
Government Agency & Government-Sponsored Entities  
3,057
   
88
   
2.88
%
Municipals - Taxable  
665
   
5
   
0.75
%
Obligations of States and Political Subdivisions - Non-Taxable  
53,143
   
2,024
   
3.81
%
Mortgage Backed Securities  
314,937
   
7,682
   
2.44
%
Other  
3,707
   
98
   
2.64
%
Total Investment Securities  
462,676
   
11,281
   
2.44
%
             
Loans & Leases            
Real Estate  
1,642,005
   
83,131
   
5.06
%
Home Equity Lines and Loans  
37,086
   
2,041
   
5.50
%
Agricultural  
273,178
   
14,067
   
5.15
%
Commercial  
291,209
   
15,158
   
5.21
%
Consumer  
9,014
   
503
   
5.58
%
Other  
1,356
   
31
   
2.29
%
Leases  
95,968
   
4,906
   
5.11
%
Total Loans & Leases  
2,349,816
   
119,837
   
5.10
%
Total Earning Assets  
2,960,192
  
$
133,873
   
4.52
%
             
Unrealized Loss on Securities Available-for-Sale  
(8,151
)
        
Allowance for Credit Losses  
(52,012
)
        
Cash and Due From Banks  
49,292
         
All Other Assets  
199,526
         
Total Assets 
$
3,148,847
         
             
Liabilities & Shareholders’ Equity            
Interest Bearing Deposits            
Interest Bearing DDA 
$
618,674
  
$
1,683
   
0.27
%
Savings and Money Market  
844,729
   
1,798
   
0.21
%
Time Deposits  
476,756
   
3,944
   
0.83
%
Total Interest Bearing Deposits  
1,940,159
   
7,425
   
0.38
%
Federal Home Loan Bank Advances  
36
   
1
   
2.78
%
Subordinated Debt  
10,310
   
524
   
5.08
%
Total Interest Bearing Liabilities  
1,950,505
  
$
7,950
   
0.41
%
Interest Rate Spread          
4.11
%
Demand Deposits  
845,165
         
All Other Liabilities  
45,516
         
Total Liabilities  
2,841,186
         
Shareholders’ Equity  
307,661
         
Total Liabilities & Shareholders’ Equity 
$
3,148,847
         
Impact of Non-Interest Bearing Deposits and Other Liabilities          
0.14
%
Net Interest Income and Margin on Total Earning Assets      
125,923
   
4.25
%
Tax Equivalent Adjustment      
(420
)
    
Net Interest Income     
$
125,503
   
4.24
%

Notes:  Yields on municipal securities have been calculated on a fully taxable equivalent basis.  Loan interest income includes fee income and unearned discount in the amount of $5.5$1.2 million for the yearyears ended December 31, 2018. Non-accrual loans2021 and lease financing receivables have been included in the average balances. Yields on securities available-for-sale are based on historical cost. 2020, respectively.

Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)

  Year Ended December 31, 2017 
Assets Balance  Interest  Rate 
Interest Bearing Deposits with Banks 
$
176,283
  
$
2,060
   
1.17
%
Investment Securities:            
U.S. Treasuries  
81,833
   
891
   
1.09
%
U.S. Govt SBA  
33,255
   
522
   
1.57
%
Government Agency & Government-Sponsored Entities  
3,104
   
88
   
2.84
%
Obligations of States and Political Subdivisions - Non-Taxable  
56,484
   
2,676
   
4.74
%
Mortgage Backed Securities  
287,114
   
6,595
   
2.30
%
Other  
1,170
   
27
   
2.31
%
Total Investment Securities  
462,960
   
10,799
   
2.33
%
             
Loans & Leases:            
Real Estate  
1,556,122
   
73,710
   
4.74
%
Home Equity Lines and Loans  
32,606
   
1,658
   
5.08
%
Agricultural  
263,711
   
12,059
   
4.57
%
Commercial  
238,650
   
11,117
   
4.66
%
Consumer  
5,557
   
289
   
5.20
%
Other  
1,653
   
37
   
2.24
%
Leases  
80,389
   
3,812
   
4.74
%
Total Loans & Leases  
2,178,688
   
102,682
   
4.71
%
Total Earning Assets  
2,817,931
  
$
115,541
   
4.10
%
             
Unrealized Gain on Securities Available-for-Sale  
674
         
Allowance for Credit Losses  
(49,439
)
        
Cash and Due From Banks  
45,063
         
All Other Assets  
192,978
         
Total Assets 
$
3,007,207
         
             
Liabilities & Shareholders’ Equity            
Interest Bearing Deposits:            
Interest Bearing DDA 
$
533,480
  
$
1,053
   
0.20
%
Savings and Money Market  
812,127
   
1,303
   
0.16
%
Time Deposits  
565,412
   
3,509
   
0.62
%
Total Interest Bearing Deposits  
1,911,019
   
5,865
   
0.31
%
Federal Home Loan Bank Advances  
1
   
-
   
0.00
%
Subordinated Debt  
10,310
   
424
   
4.11
%
Total Interest Bearing Liabilities  
1,921,330
  
$
6,289
   
0.33
%
Interest Rate Spread          
3.77
%
Demand Deposits  
740,088
         
All Other Liabilities  
51,979
         
Total Liabilities  
2,713,397
         
Shareholders’ Equity  
293,810
         
Total Liabilities & Shareholders’ Equity 
$
3,007,207
         
Impact of Non-Interest Bearing Deposits and Other Liabilities          
0.10
%
Net Interest Income and Margin on Total Earning Assets      
109,252
   
3.88
%
Tax Equivalent Adjustment      
(929
)
    
Net Interest Income     
$
108,323
   
3.84
%

Notes:  Yields on municipal securities have been calculated on a fully taxable equivalent basis.  Loan interest income includes fee income and unearned discount in the amount of $4.9 million for the year ended December 31, 2017. Non-accrual loans and lease financing receivables have been included in the average balances. Yields on securities available-for-sale are based on historical cost.

Farmers & Merchants Bancorp
Volume and Rate Analysis of Net Interest Revenue
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)

  
2019 versus 2018
Amount of Increase
(Decrease) Due to Change in:
 
Interest Earning Assets Volume  Rate  Net Chg. 
Interest Bearing Deposits with Banks 
$
1,753
  
$
401
  
$
2,154
 
Investment Securities:            
U.S. Treasuries  
(1,078
)
  
676
   
(402
)
U.S. Govt SBA  
(294
)
  
178
   
(116
)
Government Agency & Government-Sponsored Entities  
(28
)
  
2
   
(26
)
Municipals - Taxable  
306

  
33

  
339

Obligations of States and Political Subdivisions - Non-Taxable  
(66
)
  
121
   55 
Mortgage Backed Securities  
156
   
628
   
784
 
Other  
35
   
41
   
76
 
Total Investment Securities  
(969
)
  
1,679
   710 
             
Loans & Leases:            
Real Estate  
4,920
   
5,176
   
10,096
 
Home Equity Lines and Loans  
438
   
(163
)
  
275
 
Agricultural  
119
   
1,237
   
1,356
 
Commercial  
3,890
   
287
   
4,177
 
Consumer  
516
   
175
   
691
 
Other  
(7
)
  
-
   
(7
)
Leases  
474
   
337
   
811
 
Total Loans & Leases  
10,350
   
7,049
   
17,399
 
Total Earning Assets  
11,134
   
9,129
   
20,263
 
             
Interest Bearing Liabilities            
Interest Bearing Deposits:            
Interest Bearing DDA  
145
   
532
   
677
 
Savings and Money Market  
198
   
1,344
   
1,542
 
Time Deposits  
384
   
2,612
   
2,996
 
Total Interest Bearing Deposits  
727
   
4,488
   
5,215
 
Other Borrowed Funds  
(1
)
  
-
   
(1
)
Subordinated Debt  
-
   
30
   
30
 
Total Interest Bearing Liabilities  
726
   
4,518
   
5,244
 
Total Change 
$
10,408
  
$
4,611
  
$
15,019
 

Notes:  Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total “net change.”  The above figures have been rounded to the nearest whole number.

Farmers & Merchants Bancorp
Volume and Rate Analysis of Net Interest Revenue
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)

  
2018 versus 2017
Amount of Increase
(Decrease) Due to Change in:
 
Interest Earning Assets Volume  Rate  Net Chg. 
Interest Bearing Deposits with Banks 
$
(377
)
 
$
1,072
  
$
695
 
Investment Securities:            
U.S. Treasuries  
(211
)
  
260
   
49
 
U.S. Govt SBA  
(192
)
  
115
   
(77
)
Government Agency & Government-Sponsored Entities  
(1
)
  
1
   
-
 
Municipals - Taxable  
5
   
-
   
5
 
Obligations of States and Political Subdivisions - Non-Taxable  
(151
)
  
(501
)
  
(652
)
Mortgage Backed Securities  
663
   
423
   
1,086
 
Other  
66
   
5
   
71
 
Total Investment Securities  
179
   
303
   
482
 
             
Loans & Leases:            
Real Estate  
4,193
   
5,228
   
9,421
 
Home Equity Lines and Loans  
240
   
143
   
383
 
Agricultural  
445
   
1,563
   
2,008
 
Commercial  
2,636
   
1,405
   
4,041
 
Consumer  
192
   
22
   
214
 
Other  
(7
)
  
1
   
(6
)
Leases  
780
   
314
   
1,094
 
Total Loans & Leases  
8,479
   
8,676
   
17,155
 
Total Earning Assets  
8,281
   
10,051
   
18,332
 
             
Interest Bearing Liabilities            
Interest Bearing Deposits:            
Interest Bearing DDA  
187
   
443
   
630
 
Savings and Money Market  
54
   
442
   
496
 
Time Deposits  
(609
)
  
1,044
   
435
 
Total Interest Bearing Deposits  
(368
)
  
1,929
   
1,561
 
Subordinated Debt  
-
   
100
   
100
 
Total Interest Bearing Liabilities  
(368
)
  
2,029
   
1,661
 
Total Change 
$
8,649
  
$
8,022
  
$
16,671
 

Notes:  Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total “net change.”  The above figures have been rounded to the nearest whole number.

2019 Compared to 2018
Net interest income increased 12.0% to $140.5 million during 2019. On a fully tax equivalent basis, net interest income increased 12.0% and totaled $141.0 million during 2019 compared to $125.9 million for 2018. As more fully discussed below, the increase in net interest income was due primarily to a $289.1 million increase in average earning assets, and a 9 basis point increase in the net interest margin.

Net interest income on a tax equivalent basis, expressed as a percentage of average total earning assets, is referred to as the net interest margin. For 2019, the Company’s net interest margin was 4.34% compared to 4.25% in 2018 This increase in net interest margin was due primarily to an increase of 0.22% in the yield received on earning assets, offset somewhat by a 0.21% increase in the rates paid on interest bearing liabilities.

Average loans & leases totaled $2.6 billion for the year ended December 31, 2019; an increase of $239.7 million compared to the year ended December 31, 2018. Loans & leases increased from 79.4% of average earning assets during 2018 to 79.7% in 2019. The year-to-date yield on the loan & lease portfolio increased to 5.30% for the year ended December 31, 2019, compared to 5.10% for the year ended December 31, 2018. This higher yield combined with the impact of increased average loan & lease balances resulted in interest revenue from loans & leases increasing 14.5% to $137.2 million for 2019. The Company continues to experience aggressive competitor pricing for loans & leases to which it may need to respond in order to retain key customers. This could place negative pressure on future loan & lease yields and net interest margin.


The investment portfolio is the otheranother main component of the Company’s earning assets. Historically, the Company invested primarily in: (1) mortgage-backed securities issued by government-sponsored entities; (2) debt securities issued by the U.S. Treasury, government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, at certain times the Company selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 5 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity. Since the risk factor for these types of investments is generally lower than that of loans &and leases, the yield earned on investments is generally less than that of loans &and leases.


Average total investment securities decreased $35.6were $891 million in 2019 compared toand $584 million for the average balance during 2018.years ended December 31, 2021 and 2020, respectively.  The average yield on a tax equivalent basis, in thetotal investment portfolio was 2.81% in 2019 compared to 2.44% in 2018. This overall increase in yield was caused primarily by an increase in the mix of mortgage-backed securities as a percentage of total securitieswere 1.83% and an increase in market interest rates. As a result of the combined impact of these mix, balance and yield changes, tax equivalent interest income on securities increased slightly by $710,000 to $12.0 million2.41% for the yearyears ended December 31, 2019, compared to $11.3 million for the year ended December 31, 2018.2021 and 2020, respectively.  See “Financial Condition – Investment Securities”“Investment Securities and Federal Reserve balances” for a discussion of the Company’s investment strategy in 2019. Net interest income on the Schedule of Year-to-Date 2021.

Average Balancesloans and Interest Rates is shown on a tax equivalent basis, which is higher than net interest income as reflected on the Consolidated Statements of Income because of adjustments that relate to income on securities that are exempt from federal income taxes.

Interest-bearing deposits with banksleases held for investment were $3.1 billion and overnight investments in Federal Funds Sold are additional earning assets available to the Company. Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earn interest at the Fed Funds rate, which decreased to 1.55% in December 2019. Average interest-bearing deposits with banks$2.9 billion for the yearyears ended December 31, 2019, was $232.6 million, a increase of $84.9 million compared to the average balance for the year ended December 31, 2018. Interest income on interest-bearing deposits with banks for the year ended December 31, 2019, increased $2.2 million to $4.9 million from the year ended December 31, 2018.

Average interest-bearing liabilities increased $178.9 million or 9.2% during the year ended December 31, 2019 compared to the average balance during 2018. Of that increase: (1) interest-bearing transaction deposits increased $50.1 million; (2) savings2021 and money market deposits increased $85.7 million; and (3) time deposits increased $43.1 million. See “Financial Condition – Deposits” for a discussion of trends in the Company’s deposit base. Total interest expense on deposits was $12.6 million for 2019 and $7.4 million for 2018. As a result of increasing short-term market interest rates and competition, the average rate paid on interest-bearing deposits was 0.60% in 2019 and 0.38% in 2018. See “Overview – Looking Forward: 2020, and Beyond” for a discussion of factors influencing the Company’s future deposit rates and their impact on net interest margin.

2018 Compared to 2017
Net interest income increased 15.9% to $125.5 million during 2018. On a fully tax equivalent basis, net interest income increased 15.3% and totaled $125.9 million during 2018 compared to $109.3 million for 2017. As more fully discussed below, the increase in net interest income was due primarily to a $142.3 million increase in average earning assets, and a 37 basis point increase in the net interest margin.

Net interest income on a tax equivalent basis, expressed as a percentage of average total earning assets, is referred to as the net interest margin. For 2018, the Company’s net interest margin was 4.25% compared to 3.88% in 2017. This increase in net interest margin was due primarily to rising market interest rates that resulted in an increase in the yield on earning assets that exceeded the increase in the cost of interest-bearing liabilities.

Average loans & leases totaled $2.3 billion for the year ended December 31, 2018; an increase of $171.1 million compared to the year ended December 31, 2017. Loans & leases increased from 77.3% of average earning assets during 2017 to 79.4% in 2018.respectively.  The year-to-date yield on the loan & lease portfolio increased to 5.10%was 4.77% and 4.88% for the yearyears ended December 31, 2018, compared to 4.71% for the year ended December 31, 2017. This higher yield combined with the impact of increased average loan & lease balances resulted in interest revenue from loans & leases increasing 16.7% to $119.8 million for 2018.2021 and 2020, respectively. The Company continues to experience aggressive competitor pricing for loans &and leases to which it may need to respond in order to retain key customers. This could continue to place negative pressure on future loan & lease yields and net interest margin.


Average investment securities decreased $284,000 in 2018 compared tointerest-bearing liabilities was $2.8 billion and $2.4 billion for the average balance during 2017.years ended December 31, 2021 and 2020, respectively.  Total interest expense on interest-bearing deposits was $4.3 million, $9.5 million for the years ended December 31, 2021 and 2020, respectively. The average yield,rate paid on a tax equivalent basis, ininterest-bearing liabilities was 0.16% and 0.39% for the investment portfolioyears ended December 31, 2021 and 2020, respectively.  The decline was 2.44% in 2018 compared to 2.33% in 2017. This overall increase in yield was caused primarily by an increase in the mix of mortgage-backed securities as a percentage of total securities and a decrease in the balance of lower yielding Government Agency & Government-Sponsored Entities investments. As a result of the combined impact of these balance and yield changes, tax equivalentFRB lowering rates to near zero due to the pandemic.

Rate/Volume Analysis. The following table shows the change in interest income and interest expense and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on securitiesthe relative changes of volume and rates. For purposes of this table, the change in interest due to both volume and rate has been allocated to change due to volume and rate in proportion to the relationship of absolute dollar amounts of change in each.

  Year Ended December 31, 2021 compared with 2020 
  Increase (Decrease) Due to: 
(Dollars in thousands) Volume  Rate  Net 
Interest income:         
Interest earnings deposits in other banks 
$
762
  
$
(1,067
)
 
$
(305
)
Securities:            
Taxable securities  
5,923
   
(3,668
)
  
2,255
 
Non-taxable securities  
(11
)
  
(12
)
  
(23
)
Total securities  
5,912
   
(3,680
)
  
2,232
 
Loans:            
Real estate:            
Commercial  
8,777
   
(2,425
)
  
6,352
 
Agricultural  
892
   
(1,331
)
  
(439
)
Residential and home equity  
1,053
   
(899
)
  
154
 
Construction  
1,182
   
(747
)
  
435
 
Total real estate  
11,904
   
(5,402
)
  
6,502
 
Commercial & industrial  
55
   
(1,061
)
  
(1,006
)
Agricultural  
(1,220
)
  
(1,444
)
  
(2,664
)
Commercial leases  
(456
)
  
191
   
(265
)
Consumer and other  
(2,938
)
  
4,196
   
1,258
 
Total loans  
7,346
   
(3,521
)
  
3,825
 
Non-marketable securities  
112
   
110
   
222
 
Total interest income  
14,131
   
(8,157
)
  
5,974
 
 
            
Interest expense:            
Interest-bearing deposits:            
Demand  
398
   
(888
)
  
(490
)
Savings and money market accounts  
461
   
(1,727
)
  
(1,266
)
Certificates of deposit greater than $250,000  
(485
)
  
(1,349
)
  
(1,834
)
Certificates of deposit less than $250,000  
(244
)
  
(1,262
)
  
(1,506
)
Total interest bearing deposits  
130
   
(5,226
)
  
(5,096
)
Subordinated debentures  
-
   
(63
)
  
(63
)
Total interest expense  
130
   
(5,289
)
  
(5,159
)
Net interest income 
$
14,001
  
$
(2,868
)
 
$
11,133
 

Net interest income was $161 million and $150 million for the two years ended December 31, 2021 and 2020, respectively. The increase in net interest income was driven by primarily by strong deposit growth, which we were able to partially deploy into growing our loan portfolio.  The remaining increase in deposits was held in interest earning deposits and investment securities.
Comparison of Results of Operations for the Years Ended December 31, 2021 and 2020

  
Years Ended
December 31
       
(Dollars in thousands) 2021  2020  $ Better / (Worse)  % Better / (Worse) 
Selected Income Statement Information:            
Interest income $165,268  $159,294  $5,974   3.75%
Interest expense  4,332   9,491   5,159   54.36%
Net interest income  160,936   149,803   11,133   7.43%
Provision for credit losses  1,910   4,500   2,590   57.56%
Net interest income after provision for credit losses  159,026   145,303   13,723   9.44%
Non-interest income  21,056   15,054   6,002   39.87%
Non-interest expense  91,761   82,406   (9,355)  -11.35%
Income before income tax expense  88,321   77,951   10,370   13.30%
Income tax expense  21,985   19,217   (2,768)  -14.40%
Net income $66,336  $58,734  $7,602   12.94%
Net Income. For the years ended December 31, 2021 and 2020, net income was $66.3 million compared with $58.7 million, respectively.  The increase in net income was primarily the result of higher net interest income of $11.1 million, higher non-interest income of $6.0 million, and lower provision for credit losses of $2.6 million.  These increases were offset by higher non-interest expense of $9.4 million and higher income tax expense of $2.8 million.
Net Interest Income and Net Interest Margin. For the year ended December 31, 2021, net interest income increased slightly$11.1 million, or 7.4%, to $161 million compared with $150 million for the same period a year earlier.  The increase is primarily the result of average interest earning assets increasing $795 million, or 20.60%, to $4.7 billion compared with $3.9 billion for the same period a year earlier.  Higher interest earning assets was driven by $482,000strong growth in the Company’s total deposits.  Total deposits grew $755 million, or 20.68%, to $11.3 million$4.4 billion compared with $3.6 billion for the same a year ago.  The strong growth in the Company’s balance sheet was offset by narrowing net interest margins.  Net interest margins narrowed 42 basis points to 3.46% for all of 2021 compared with 3.88% for the same period a year earlier.  Narrow net interest margins was primarily the result of the FRB lowering interest rates to near zero over the past two years.
Provision for Credit Losses. The provision for credit losses in each period is a charge against earnings in that period. The provision is the amount required to maintain the allowance for credit losses at a level that, in management’s judgment, is adequate to absorb probable losses inherent in the loan portfolio.
The provision for credit losses for the year ended December 31, 2018,2021, was $1.9 million compared to $10.8with $4.5 million for the same period a year ago.  For the year ended December 31, 2017. See “Financial Condition – Investment Securities” for a discussion2021, the Company incurred net recoveries of the Company’s investment strategy in 2018. Net interest income on the Schedule$0.2 million compared with net charge-offs of Year-to-Date Average Balances and Interest Rates is shown on a tax equivalent basis, which is higher than net interest income as reflected on the Consolidated Statements of Income because of adjustments that relate to income on securities that are exempt from federal income taxes.

Interest-bearing deposits with banks and overnight investments in Federal Funds Sold are additional earning assets available to the Company. Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earn interest at the Fed Funds rate, which increased to 2.40% in December 2018. Average interest-bearing deposits with banks$0.7 million for the same period a year ended December 31, 2018, was $147.7 million, a decrease of $28.6 million compared to the average balance for the year ended December 31, 2017. Interest income on interest-bearing deposits with banks for the year ended December 31, 2018, increased $695,000 to $2.8 million from the year ended December 31, 2017.earlier.

Average interest-bearing liabilities increased $29.2 million or 1.5% during the twelve months ended December 31, 2018, primarily in lower cost interest-bearing DDA, and savings and money market deposits. See “Financial Condition – Deposits” for a discussion of trends in the Company’s deposit base. Total interest expense on deposits was $7.4 million for 2018 and $5.9 million for 2017. The average rate paid on interest-bearing deposits was 0.38% in 2018 and 0.31% in 2017.


Provision and AllowanceNon-interest Income. Non-interest income increased $6.0 million, or 40.0%, to $21.1 million for Credit Losses
As a financial institution that assumes lending and credit risks as a principal element of its business, credit losses will be experienced in the normal course of business. The Company has established credit management policies and procedures that govern both the approval of new loans & leases and the monitoring of the existing portfolio. The Company manages and controls credit risk through comprehensive underwriting and approval standards, dollar limits on loans & leases to one borrower (the term “borrower” is used herein to describe a customer who has entered into either a loan or lease transaction), and by restricting loans & leases made primarily to its principal market area where management believes it is best able to assess the applicable risk. Additionally, management has established guidelines to ensure the diversification of the Company’s credit portfolio such that even within key portfolio sectors such as real estate or agriculture, the portfolio is diversified across factors such as location, building type, crop type, etc. Management reports regularly to the Board of Directors regarding trends and conditions in the loan & lease portfolio and regularly conducts credit reviews of individual loans & leases. Loans & leases that are performing but have shown some signs of weakness are subject to more stringent reporting and oversight.

Allowance for Credit Losses
The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company’s loan & lease portfolio as of the balance sheet date. The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan & lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of three primary components: specific reserves related to impaired loans & leases; general reserves for inherent losses related to loans & leases that are not impaired; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated2021 compared with macro factors.

A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Loans & leases determined to be impaired are individually evaluated for impairment. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s or lease’s effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s or lease’s observable market price, or the fair value of the collateral if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral.

A restructuring of a loan or lease constitutes a troubled debt restructuring (“TDR”) under ASC 310-40, if the Company for economic or legal reasons related to the borrower’s financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured loans or leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans & leases that are on nonaccrual status at the time they become TDR, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms. However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment.

The determination of the general reserve for loans or leases that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors that include economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan & lease portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer & other; and (9) equipment leases. See “Financial Condition – Loans & Leases” for examples of loans & leases made by the Company. The allowance for credit losses attributable to each portfolio segment, which includes both impaired loans & leases and loans & leases that are not impaired, is combined to determine the Company’s overall allowance, which is included on the consolidated balance sheet.

The Company assigns a risk rating to all loans & leases and periodically performs detailed reviews of all such loans & leases over a certain threshold to identify credit risks and assess overall collectability. For smaller balance loans & leases, such as consumer and residential real estate, a credit grade is established at inception, and then updated only when the loan or lease becomes contractually delinquent or when the borrower requests a modification. For larger balance loans, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans & leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into five major categories, defined as follows:

Pass – A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management’s close attention.

Special Mention – A special mention loan or lease has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects$15.1 million for the loan or lease position at some future date. Special mention loans & leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard – A substandard loan or lease is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans or leases classified as substandard havesame period a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well-defined weaknesses include a project’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project’s failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans or leases classified doubtful have all the weaknesses inherentyear earlier.  The year-over-year increase in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable or improbable.

Loss – Loans or leases classified as loss are considered uncollectible. Once a loan or lease becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Bank will estimate its probable loss and immediately charge-off some or all of the balance.

The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk; (2) historical losses; and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below:

Commercial Real Estate – Commercial real estate mortgage loans are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.

Real Estate Construction – Real estate construction loans, including land loans, are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.

Commercial – These loans are generally considered to possess a moderate inherent risk of loss because they are shorter-term; typically made to relationship customers; generally underwritten to existing cash flows of operating businesses; and may be collateralized by fixed assets, inventory and/or accounts receivable. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

Agricultural Real Estate and Agricultural – These loans are generally considered to possess a moderate inherent risk of loss since they are typically made to relationship customers and are secured by crop production, livestock and related real estate. These loans are vulnerable to two risk factors that are outside the control of Company and borrowers: commodity prices and weather conditions.

Leases – Equipment leases are generally considered to possess a moderate inherent risk of loss. As lessor, the Company is subject to both the credit risk of the borrower and the residual value risk of the equipment. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

Residential 1st Mortgages and Home Equity Lines and Loans – These loans are generally considered to possess a low inherent risk of loss, although this is not always true as evidenced by the correction in residential real estate values that occurred between 2007 and 2012. The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.

Consumer & Other – A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.

In addition, the Company’s and Bank’s regulators, including the FRB, DBO and FDIC, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.

See Note 20, located in “Item 8. Financial Statements and Supplementary Data” for a discussion of CECL and the accounting change which will impact our allowance for credit losses in 2020.

Provision for Credit Losses
Changes in the provision for credit losses between years are the result of management’s evaluation, based upon information currently available, of the adequacy of the allowance for credit losses relative to factors such as the credit quality of the loan & lease portfolio, loan & lease growth, current credit losses, and the prevailing economic climate and its effect on borrowers’ ability to repay loans & leases in accordance with the terms of the notes.

The Central Valley of California was one of the hardest hit areas in the country during the recession. In many areas, housing prices declined as much as 60% and unemployment reached 15% or more. Although the economy has improved throughout the Central Valley, in many of the Company’s market segments housing prices remain below peak levels and unemployment rates remain above those in other areas of the state and country. While, in management’s opinion, the Company’s levels of net charge-offs and non-performing assets as of December 31, 2019, compare very favorably to our peers at the present time, carefully managing credit risk remains a key focus of the Company.

The State of California experienced drought conditions from 2013 through most of 2016. Since 2016, reasonable levels of rain and snow have alleviated drought conditions in many areas of California, including those in the Company’s primary service area. As a result, reservoir levels are normal and the availability of water in our primary service area should not be an issue. However, the weather patterns over the past 5 years further reinforce the fact that the long-term risks associated with the availability of water are significant. See “Item 1A. Risk Factors” for additional information.

The provision for credit losses totaled $200,000 in 2019 compared to $5.5 million in 2018. Net charge offs during 2019 were $454,000 compared to net charge offs of $609,000 during 2018 and net charge offs of $427,000 in 2017. The allowance for credit losses as a percentage of total loans and leases declined slightly in 2019 from 2.14% to 2.05%. The Company determined that additional provisions in 2019 were not warranted given the continued strong credit quality of the overall loan portfolio at December 31, 2019. See “Critical Accounting Policies and Estimates – Allowance for Credit Losses” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk-Credit Risk.”

The following table summarizes the activity and the allocation of the allowance for credit losses for the years indicated. (in thousands)

  2019  2018  2017  2016  2015 
Allowance for Credit Losses Beginning of Year $55,266  $50,342  $47,919  $41,523  $35,401 
Provision Charged to Expense  200   5,533   2,850   6,335   750 
Charge-Offs:                    
Commercial Real Estate  592   -   109   -   - 
Agricultural Real Estate  -   -   -   -   - 
Real Estate Construction  -   -   -   -   - 
Residential 1st Mortgages  -   31   53   21   - 
Home Equity Lines and Loans  -   8   3   46   - 
Agricultural  -   -   374   -   - 
Commercial  -   613   -   -   12 
Consumer & Other  83   115   146   105   84 
Total Charge-Offs  675   767   685   172   96 
Recoveries:                    
Commercial Real Estate  90   2   109   2   2,939 
Agricultural Real Estate  38   -   -   -   - 
Real Estate Construction  -   -   -   -   2,225 
Residential 1st Mortgages  13   15   40   26   8 
Home Equity Lines and Loans  28   6   8   103   87 
Agricultural  -   61   17   -   4 
Commercial  -   20   8   47   136 
Consumer & Other  52   54   76   55   69 
Total Recoveries  221   158   258   233   5,468 
Net (Charge-Offs) Recoveries  (454)  (609)  (427)  61   5,372 
Total Allowance for Credit Losses, End of Year $55,012  $55,266  $50,342  $47,919  $41,523 
Ratios:                    
Allowance for Credit Losses to:                    
Total Loans & Leases at Year End  2.05%  2.14%  2.27%  2.19%  2.07%
Average Loans & Leases  2.12%  2.35%  2.31%  2.34%  2.30%
Consolidated Net (Charge-Offs) Recoveries  to:                    
Total Loans & Leases at Year End  (0.02%)  (0.02%)  (0.02%)  0.00%  0.27%
Average Loans & Leases  (0.02%)  (0.03%)  (0.02%)  0.00%  0.30%

The table below breaks out year-to-date activity by portfolio segment (in thousands):

December 31, 2019 
Commercial
Real Estate
  
Agricultural
Real Estate
  Real Estate
Construction
  Residential 1st
Mortgages
  
Home Equity Lines
& Loans
  Agricultural  Commercial  
Consumer &
Other
  Leases  Unallocated  Total 
                                  
Year-To-Date Allowance for Credit Losses:                               
Beginning Balance- January 1, 2019 
$
11,609
  
$
14,092
  
$
1,249
  
$
880
  
$
2,761
  
$
8,242
  
$
11,656
  
$
494
  
$
4,022
  
$
261
  $55,266 
Charge-Offs  
-
   
-
   
-
   
-
   
-
   
-
   
(592
)
  
(83
)
  
-
   
-
   (675)
Recoveries  
-
   
38
   
-
   
13
   
28
   
-
   
90
   
52
   
-
   
-
   221 
Provision  
(556
)
  
998
   
700
   
(38
)
  
(114
)
  
(166
)
  
312
   
(7
)
  
(860
)
  
(69
)
  200 
Ending Balance- December 31, 2019 
$
11,053
  
$
15,128
  
$
1,949
  
$
855
  
$
2,675
  
$
8,076
  
$
11,466
  
$
456
  
$
3,162
  
$
192
  $55,012 

Overall, the Allowance for Credit Losses as of December 31, 2019 decreased $254,000 from December 31, 2018. In 2019 there were no significant credit quality events or other impacts that caused changes in the allowance allocated to individual categories of loans.

  Allowance Allocation at December 31, 
(in thousands) 
2019
Amount
  
Percent of
Loans in
Each
Category to
Total Loans
  
2018
Amount
  
Percent of
Loans in
Each
Category to
Total Loans
  
2017
Amount
  
Percent of
Loans in
Each
Category to
Total Loans
  
2016
Amount
  
Percent of
Loans in
Each
Category to
Total Loans
  
2015
Amount
  
Percent of
Loans in
Each
Category to
Total Loans
 
Commercial Real Estate $11,053   31.6% $11,609   32.4% $10,922   31.1% $11,110   30.9% $10,063   30.4%
Agricultural Real Estate  15,128   23.3%  14,092   22.7%  12,085   22.5%  9,450   21.4%  6,881   21.2%
Real Estate Construction  1,949   4.3%  1,249   3.8%  1,846   4.5%  3,223   8.1%  2,485   7.6%
Residential 1st Mortgages  855   9.5%  880   10.1%  815   11.7%  865   11.1%  789   10.3%
Home Equity Lines and Loans  2,675   1.5%  2,761   1.6%  2,324   1.6%  2,140   1.4%  2,146   1.7%
Agricultural  8,076   10.9%  8,242   11.3%  8,159   12.3%  7,381   13.5%  6,308   14.7%
Commercial  11,466   14.4%  11,656   13.3%  9,197   12.0%  8,515   10.0%  7,836   10.5%
Consumer & Other  456   0.6%  494   0.8%  209   0.3%  200   0.3%  175   0.3%
Leases  3,162   3.9%  4,022   4.0%  3,363   4.0%  3,586   3.3%  3,294   3.3%
Unallocated  192       261       1,422       1,449       1,546     
Total $55,012   100.0% $55,266   100.0% $50,342   100.0% $47,919   100.0% $41,523   100.0%

As of December 31, 2019, the allowance for credit losses was $55.0 million, which represented 2.05% of the total loan & lease balance. At December 31, 2018, the allowance for credit losses was $55.3 million or 2.14% of the total loan & lease balance. The allowance for credit losses as a percentage of total loans and leases declined slightly in 2019 from 2.14% to 2.05%. The Company determined that additional provisions in 2019 were not warranted given the continued strong credit quality of the overall loan portfolio at December 31, 2019. After reviewing all factors above, based upon information currently available, management concluded that the allowance for credit losses as of December 31, 2019, is adequate.

Non-Interest Income
Non-interest income includes: (1) service charges and fees from deposit accounts; (2) net gains and losses from investment securities; (3) increases in the cash surrender value of bank owned life insurance; (4) debit card and ATM fees; (5) net gains and losses on non-qualified deferred compensation plan investments; and (6) fees from other miscellaneous business services. See “Overview – Looking Forward: 2020 and Beyond.”

2019 Compared to 2018
Non‑interest income totaled $17.2 million for 2019, an increase of $2.0 million or 13.3% from non-interest income of $15.2 million for 2018.

Net (loss) gain on investment securities was a net gain of $1,000 in 2019 compared to a net loss of $1.3 million for 2018. See “Financial Condition-Investment Securities” for a discussion of the Company’s investment strategy.

Debit card and ATM fees totaled $5.1 million in 2019, an increase of 17.3% or $755,000 from $4.4 million in 2018. This was primarily due to increased numbersa $2.5 million increase in gain on the sale of cardholdersinvestment securities, $1.4 million increase in card processing fees, and increased account activity.$0.8 million increase in gains on deferred compensation investments.


Net gains on deferred compensation plan investments were $2.6 million in 20192021 compared to net gains of $1.1$1.8 million in 2018.2020. See Note 15,12, located in “Item 8. Financial Statements and Supplementary Data” for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although Generally Accepted Accounting PrinciplesGAAP require these investment gains/losses be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no effect on the Company’s net income.


Other non-interest income was $3.8 million, a decrease of $1.9Non-interest expense. Non-interest expense increased $9.4 million, or 33.2% from 2018. This decrease11.35%, to $91.8 million for 2021 compared with $82.4 million for the same period a year ago.  The year-over-year increase was primarily due to a $2.0 million decrease related to non-recurring income received in 2018 from: (1) the purchase of Bank of Rio Vista; and (2) the gain on sale of fixed assets.

2018 Compared to 2017
Non‑interest income totaled $15.2 million for 2018, a decrease of $1.5 million or 9.2% from non-interest income of $16.8 million for 2017.

Net (loss) gain on investment securities was a net loss of $1.3$6.9 million in 2018 comparedhigher salaries and employee benefits resulting primarily from higher payroll taxes, the need to hire additional regulatory staff to meet our compliance requirements, the opening of a net gain of $131,000new branch in the Oakland area, expansion in the Napa branch, and higher incentives paid for 2017. See “Financial Condition-Investment Securities” for a discussionthe Company’s strong financial performance in 2021.  The Company experienced higher costs on deferred compensation benefits as the Company’s stock price increased in 2021, which is an evaluative component of the Company’s investment strategy.non-qualified deferred compensation plans.  The Company also experienced higher FDIC insurance premiums as small bank assessment credits were discontinued by the FDIC in 2020. For the year ended December 31, 2021, the Company’s efficiency ratio was 50.42% compared with 49.99% for the same period a year ago.

Debit card and ATM fees totaled $4.4 million in 2018, an increase of 12.7% or $492,000 from $3.9 million in 2017. This was primarily due to increased numbers of cardholders and increased account activity.


Net gains on deferred compensation plan investmentsobligations were $1.1$2.6 million in 20182021 compared to net gains of $2.6$1.8 million in 2017.2020. See Note 15,12, located in “Item 8. Financial Statements and Supplementary Data” for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although Generally Accepted Accounting PrinciplesGAAP require these investment gains/losses be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no effect on the Company’s net income.

Other non-interest income was $5.6 million, an increase of $727,000 or 14.9% from 2017. This increase was primarily due to: (1) $997,000 of income as a result of the remeasurement of the initial investment in Bank of Rio Vista stock; (2) FHLB dividend increases of $208,000; (3) Check Order Income increases of $116,000; and (4) increases in gain on sale of Leases of $76,000; offset by a drop in the gain on sale of fixed assets by $900,000.

Non-Interest Expense
Non-interest expense for the Company includes expenses for: (1) salaries and employee benefits; (2) net gains and losses on non-qualified deferred compensation plan investments; (3) occupancy; (4) equipment; (5) supplies; (6) legal fees; (7) professional services; (8) data processing; (9) marketing; (10) deposit insurance; and (11) other miscellaneous expenses.

2019 Compared to 2018
Overall, non-interest expense totaled $82.2 million for 2019, an increase of $6.8 million or 9.0% from the year ended December 31, 2018.

Salaries and employee benefits increased $5.2 million or 10.3% in 2019, primarily related to: (1) new staff from the acquisition of the Bank of Rio Vista; (2) general salary increases; and (3) increased contributions to retirement and profit sharing plans.

Net gains on deferred compensation plan investments were $2.6 million in 2019 comparedobligations to net gains of $1.1 million in 2018. See Note 15, located in “Item 8. Financial Statements and Supplementary Data” for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although Generally Accepted Accounting Principles require these investment gains/losses be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no effect on the Company’s net income.

Occupancy expense in 2019 totaled $4.3 million, an increase of $390,000 or 10.0% from 2018 and equipment expense in 2019 totaled $4.9 million, an increase of $618,000 or 14.4% from 2018. Both of these increases were primarily related to operating expenses associated with remodeling existing branch offices and adding new branches.

Legal expenses increased $1.4 million from 2018 and totaled $2.3 million.

Other non-interest expense increased $862,000, or 8.6%, to $10.9 million in 2019 compared to $10.1 million in 2018.

The preceding increases in non-interest expense were offset somewhat by non-recurring expenses from the acquisition of Bank of Rio Vista that totaled $3.0 million in 2018.

2018 Compared to 2017
Overall, non-interest expense totaled $75.5 million for 2018, an increase of $7.4 million or 11.4% fromIncome Tax Expense. For the year ended December 31, 2017.

Salaries and employee benefits increased $4.3 million or 9.4% in 2018, primarily related to: (1) new staff from the acquisition of the Bank of Rio Vista; (2) general salary increases; and (3) increased contributions to retirement and profit sharing plans.

Net gains on deferred compensation plan investments were $1.1 million in 2018 compared to net gains of $2.6 million in 2017. See Note 15, located in “Item 8. Financial Statements and Supplementary Data” for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although Generally Accepted Accounting Principles require these investment gains/losses be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest2021, income resulting in no effect on the Company’s net income.

Occupancy expense in 2018 totaled $3.9 million, an increase of $362,000 or 10.2% from 2017 and equipment expense in 2018 totaled $4.3 million, an increase of $309,000 or 7.7% from 2017. Both of these increases were primarily related to operating expenses associated with remodeling existing branch offices.

Legal expenses increased $544,000 from 2017 and totaled $968,000. This increase was primarily due to legal fees associated with the repurchase of stock and other operating matters.

Acquisition expenses related to the Bank of Rio Vista totaled $2.93 million. A majority of thistax expense was comprised of: (1) legal and other professional fees; (2) contract termination costs; and (3) conversion expenses related to$22.0 million, compared with $19.2 million for the core processing systems for both Bank of Rio Vista and F&M Bank.

Income Taxes
The provision for income taxes increased $5.1 million forsame period a year earlier.  For the year ended December 31, 2019. The Company’s2021, the effective tax rate for 2019 was 25.6%24.89% compared to 23.8%with 24.65% for the same period a year ended December 2018. The Company’s effective tax rate fluctuates from year to year due primarily to changes in the mix of taxable and tax-exempt earning sources. The effective rates were lower than the combined Federal and State statutory rate of 32% due primarily to benefits regarding the cash surrender value of life insurance; credits associated with low income housing tax credit investments (LIHTC); and tax-exempt interest income on municipal securities and loans.ago.

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law changing the Company’s Federal corporate tax rate from 35% to 21%. The Company’s provision for income taxes decreased 45.61% to $14.0 million during 2018 compared to 2017 primarily as a result of: (1) the Federal corporate tax rate change and (2) the Company having amended and planning to amend tax returns in open tax years resulting in a reduction of $990,000 in the Company’s tax provision for 2018. See “Note 1. Significant Accounting Policies – Out of Period Adjustment.” The effective tax rate for 2018 was 23.8% compared to 47.9% during 2017.

Also due to the signing of the Tax Cuts and Jobs Act, during the 4th quarter of 2017, all companies were required to re-measure their deferred tax assets (DTA) and deferred tax liabilities (DTL) at the new corporate tax rate of 21%. This one-time re-measurement resulted in a $6.3 million increase to the Company’s income tax provision in 2017. This DTA re-measurement accompanied by an 8.7% increase in pre-tax earnings resulted in the tax provision increase in 2017.

With the exception of the one-time DTA re-measurement that took place in 2017, tax law causes the Company’s taxes payable to approximate or exceed the current provision for taxes on the income statement. Three provisions have had a significant effect on the Company’s current income tax liability: (1) the restrictions on the deductibility of credit losses; (2) deductibility of pension and other long-term employee benefits only when paid; and (3) the statutory deferral of deductibility of California franchise taxes on the Company’s federal return.


Financial Condition

Total assets grew $627 million, or 13.78%, to $5.2 billion at December 31, 2021 compared with $4.6 billion at December 31, 2020.  Loans held for investment grew $138 million or 4.44% to $3.2 billion at December 31, 2021, compared with $3.1 billion at December 31, 2020.  Total deposits increased $580 million, or 14.28%, to $4.6 billion at December 31, 2021 compared with $4.1 billion at December 31, 2020. The increase in total assets and deposits was primarily the result of strong organic deposit growth.

Investment Securities and Federal Funds SoldReserve Balances
The investment portfolio provides the Company with an income alternative to loans & leases. The debt securities in the Company’s investment portfolio have historically been comprised primarily of: (1) mortgage-backed securities issued by federal government-sponsored entities; (2) debt securities issued by US Treasury, government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, at certain times, the Company has selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 5 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity without subjecting the Company to the interest rate risk associated with mortgage-backed securities.


The Company’s investment portfolio increased $130.8 million, or 14.92%, to $1.0 billion at December 31, 2019 was $567.6 million2021 compared to $549.0$877 million at December 31, 2018, an increase of $18.7 million or 3.40%.2020. The Company uses its investment portfolio to help balance its overallmanage interest rate risk.and liquidity risks. Accordingly, when market rates are increasing it invests most of its funds in shorter termshorter-term Treasury and Agency securities or shorter termshorter-term (10, 15 and 20 year) mortgage backedmortgage-backed securities. Conversely, when rates are falling, 30 year mortgage backed30-year mortgage-backed securities or longer term Treasury and Agency securities may be increased.

The Company’s total investment portfolio currently represents 15.3%19.45% of the Company’s total assets as compared to 16.0%19.26% at December 31, 2018.2020.


54
As
Not included in the investment portfolio are interest bearing deposits with banks and overnight investments in Federal Funds Sold.Reserve balances. Interest bearing deposits with banks consisted primarily of FRB deposits. The FRB currently pays interest on the deposits that banks maintain in their FRB accounts, whereas historically banks had to sell these Federal Funds to other banks in order to earn interest. Since balances at the FRB are effectively risk free, the Company elected to maintain its excess cash at the FRB. Interest bearing deposits with banks totaled $223.2$663 million at December 31, 20192021 and $84.5$318 million at December 31, 2018.2020.

The Company classifies its investmentsinvestment securities as either held-to-maturity trading,(“HTM”) or available-for-sale (“AFS”). Securities are classified as held-to-maturity and are carried at amortized cost when the Company has the intent and ability to hold the securities to maturity. Trading securities are securities acquired for short-term appreciation and are carried at fair value, with unrealized gains and losses recorded in non-interest income. As of December 31, 2019 and December 31, 2018, there were no securities in the trading portfolio. Securities classified as available-for-saleAFS include securities, which may be sold to effectively manage interest rate risk exposure, prepayment risk, satisfy liquidity demands and other factors. 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.  As of December 31, 2021, we held no investment securities from any issuer that totaled over 10% of our shareholders’ equity.


The carrying value of our portfolio of investment securities was as follows:
  As of December 31, 
(Dollars in thousands) 2021  2020 
Available-for-Sale Securities      
U.S. Treasury notes 
$
10,089
  
$
15,288
 
U.S. Government-sponsored securities  
6,374
   
8,160
 
Mortgage-backed securities(1)
  
251,120
   
732,720
 
Collateralized Mortgage Obligations  
2,436
   
5,153
 
Corporate securities  
-
   
45,919
 
Other  
435
   
492
 
Total available-for-sale securities 
$
270,454
  
$
807,732
 

(1) All mortgage-backed securities were issued by an agency or government sponsored entity of the U.S. Government.
  As of December 31, 
(Dollars in thousands) 2021  2020 
Held-to-Maturity Securities      
Mortgage-backed securities(1)
 
$
596,775
  
$
-
 
Collateralized Mortgage Obligations  
73,781
   
-
 
Municipal securities  
66,496
   
68,933
 
Total held-to-maturity securities 
$
737,052
  
$
68,933
 

(1) All mortgage-backed securities were issued by an agency or government sponsored entity of the U.S. Government.
Investment Portfolio55

The following table summarizesshows the balancescarrying value for maturities of investment securities and distributionsthe weighted average yields of such securities, including the benefit of tax-exempt securities:

Investment Securities As of December 31, 2021 
  Within One Year  After One but Within Five Years  After Five but Within Ten Years  After Ten Years  Total 
(Dollars in thousands) Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield 
Securities available for sale                              
U.S. Treasury notes 
$
5,028
   
2.33
%
 
$
5,061
   
2.38
%
 
$
-
   
0.00
%
 
$
-
   
0.00
%
 
$
10,089
   
2.36
%
U.S. Government-sponsored securities  
2
   
1.80
%
  
148
   
2.29
%
  
512
   
1.55
%
  
5,712
   
1.26
%
  
6,374
   
1.30
%
Mortgage-backed securities(1)
  
13
   
1.50
%
  
21,155
   
2.36
%
  
50,554
   
2.36
%
  
179,398
   
1.61
%
  
251,120
   
1.83
%
Collateralized Mortgage Obligations  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
2,436
   
2.30
%
  
2,436
   
2.30
%
Other  
435
   
3.31
%
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
435
   
3.31
%
Total securities available for sale 
$
5,478
   
2.41
%
 
$
26,364
   
2.36
%
 
$
51,066
   
2.35
%
 
$
187,546
   
1.61
%
 
$
270,454
   
1.84
%

(1) All mortgage-backed securities were issued by an agency or government sponsored entity of the investmentU.S. Government.

  As of December 31, 2021 
  Within One Year  After One but Within Five Years  After Five but Within Ten Years  After Ten Years  Total 
(Dollars in thousands) Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield 
Securities held to maturity                              
Mortgage-backed securities(1)
 
$
-
   
0.00
%
 
$
-
   
0.00
%
 
$
10,641
   
0.41
%
 
$
586,134
   
1.72
%
 
$
596,775
   
1.70
%
Collateralized Mortgage Obligations  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
73,781
   
1.71
%
  
73,781
   
1.71
%
Municipal securities  
308
   
1.10
%
  
8,487
   
2.19
%
  
18,433
   
3.42
%
  
39,268
   
4.52
%
  
66,496
   
3.90
%
Total securities held to maturity 
$
308
   
1.10
%
 
$
8,487
   
2.19
%
 
$
29,074
   
2.32
%
 
$
699,183
   
1.88
%
 
$
737,052
   
1.90
%

(1) All mortgage-backed securities held on the dates indicated.

  
Available
for Sale
  
Held to
Maturity
  
Available
for Sale
  
Held to
Maturity
  
Available
for Sale
  
Held to
Maturity
 
December 31:  (in thousands)
 2019     2018     2017    
U.S. Treasury Notes 
$
54,995
  
$
-
  
$
164,514
  
$
-
  
$
144,164
  
$
-
 
U.S. Government SBA  
10,798
   
-
   
15,447
   
-
   
29,380
   
-
 
Government Agency & Government Sponsored Entities  
-
   
-
   
3,039
   
-
   
3,128
   
-
 
Obligations of States and Political Subdivisions
  
-
   
60,229
   
-
   
53,566
   
-
   
54,460
 
Mortgage Backed Securities  
441,078
   
-
   
307,045
   
-
   
301,914
   
-
 
Other  
515
   
-
   
5,351
   
-
   
3,010
   
-
 
Total Book Value 
$
507,386
  
$
60,229
  
$
495,396
  
$
53,566
  
$
481,596
  
$
54,460
 
Fair Value 
$
507,386
  
$
61,097
  
$
495,396
  
$
53,738
  
$
481,596
  
$
58,408
 

Analysis of Investment Securities Available-for-Sale
The following table is a summarywere issued by an agency or government sponsored entity of the relative maturities and yieldsU.S. Government.

Investment Securities As of December 31, 2020 
  Within One Year  After One but Within Five Years  After Five but Within Ten Years  After Ten Years  Total 
(Dollars in thousands) Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield 
Securities available for sale                              
U.S. Treasury notes 
$
5,020
   
2.19
%
 
$
10,268
   
2.36
%
 
$
-
   
0.00
%
 
$
-
   
0.00
%
 
$
15,288
   
2.30
%
U.S. Government-sponsored securities  
-
   
0.00
%
  
333
   
2.12
%
  
488
   
1.34
%
  
7,339
   
1.27
%
  
8,160
   
1.31
%
Mortgage-backed securities(1)
  
511
   
2.01
%
  
11,141
   
2.54
%
  
54,929
   
2.29
%
  
666,139
   
1.86
%
  
732,720
   
1.90
%
Collateralized Mortgage Obligations  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
5,153
   
2.33
%
  
5,153
   
2.33
%
Corporate securities  
-
   
0.00
%
  
15,495
   
1.51
%
  
30,424
   
2.12
%
  
-
   
0.00
%
  
45,919
   
1.92
%
Other  
492
   
2.86
%
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
492
   
2.86
%
Total securities available for sale 
$
6,023
   
2.23
%
 
$
37,237
   
2.06
%
 
$
85,841
   
2.23
%
 
$
678,631
   
1.86
%
 
$
807,732
   
1.91
%

(1) All mortgage-backed securities were issued by an agency or government sponsored entity of the Company’s investmentU.S. Government.

  As of December 31, 2020 
  Within One Year  After One but Within Five Years  After Five but Within Ten Years  After Ten Years  Total 
(Dollars in thousands) Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield 
Securities held to maturity                              
Municipal securities  
8,309
   
3.99
%
  
5,137
   
3.55
%
  
23,493
   
3.49
%
  
31,994
   
4.74
%
  
68,933
   
4.14
%
Total securities held to maturity 
$
8,309
   
3.99
%
 
$
5,137
   
3.55
%
 
$
23,493
   
3.49
%
 
$
31,994
   
4.74
%
 
$
68,933
   
4.14
%
Expected maturities may differ from contractual maturities because issuers may have the right to call obligations with or without penalties.
We evaluate securities Available-for-Sale as of December 31, 2019.

December 31, 2019 (in thousands)
 
Fair
Value
  
Average
Yield
 
U.S. Treasury      
One year or less 
$
39,996
   
1.46
%
After one year through five years  
14,999
   
2.32
%
Total U.S. Treasury Securities  
54,995
   
1.70
%
U.S. Government SBA        
After one year through five years  
393
   
3.19
%
After five years through ten years  
955
   
3.14
%
After ten years  
9,450
   
2.93
%
Total U.S. Government Securities  
10,798
   
2.96
%
Other        
One year or less  
515
   
2.55
%
Total Other Securities  
515
   
2.55
%
Mortgage Backed Securities  
441,078
   
2.69
%
Total Investment Securities Available-for-Sale 
$
507,386
   
2.59
%

Note: The average yield for floating rate securities is calculated using the current stated yield.

Analysis of Investment Securities Held-to-Maturity
The following table is a summary of the relative maturities and yields of the Company’s investment securities Held-to-Maturity as of December 31, 2019. Non-taxable Obligations of States and Political Subdivisions have been calculatedimpairment at least on a fully taxable equivalent basis.
quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

December 31, 2019 (in thousands)
 
Book
Value
  
Average
Yield
 
Obligations of States and Political Subdivisions      
One year or less 
$
2,446
   
4.76
%
After one year through five years  
5,902
   
5.39
%
After five years through ten years  
23,980
   
3.48
%
After ten years  
27,901
   
4.67
%
Total Obligations of States and Political Subdivisions  
60,229
   
4.27
%
Total Investment Securities Held-to-Maturity 
$
60,229
   
4.27
%


5356

Loans & Leases
Loans &and Leases
Loans and leases can be categorized by borrowing purpose and use of funds. Common examples of loans &and leases made by the Company include:
 
Commercial and Agricultural Real Estate - These are loans secured by farmland, commercialowner-occupied real estate, non-owner-occupied real estate, farmland, and multifamily residential properties, and other non-farm, non-residential properties generally within our market area.properties. Commercial mortgage term loans can be made if the property is either income producing or scheduled to become income producing based upon acceptable pre-leasing, andor the income will be the Bank’s primary source of repayment for the loan. Loans are made both on owner occupied and investor properties; generally do not exceed 15 years (and may have pricing adjustments on a shorter timeframe); have debt service coverage ratios of 1.00 or better with a target of greater than 1.25; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.
 
Real Estate Construction - These are loans for acquisition, development and construction (the Company generally requires the borrower to fund the land acquisition) and are secured by commercial or residential real estate. These loans are generally made only to experienced local developers with whom the Bank has a successful track record; for projects in our service area; with Loan Toto Value (LTV) below 75%; and where the property can be developed and sold within 2 years. Commercial construction loans are made only when there is a written take-out commitment from the Bank or an acceptable financial institution or government agency. Most acquisition, development and construction loans are tied to the prime rate or LIBOR with an appropriate spread based on the amount of perceived risk in the loan.
 
Single Family Residential 1st Mortgages -Real Estate These are loans primarily made on owner occupied residences; generally underwritten to income and LTV guidelines similar to those used by FNMA and FHLMC; however,FHLMC.  However, we will make loans on rural residential properties up to 40 acres. Most residential loans have terms from ten to twenty years and carry fixed rates priced off ofto treasury rates. The Company has always underwritten mortgage loans based upon traditional underwriting criteria and does not make loans that are known in the industry as “subprime,” “no or low doc,” or “stated income.”income” loans.
 
Home Equity Lines and Loans - These are loans made to individuals for home improvements and other personal needs. Generally, amounts do not exceed $250,000; Combined Loan To Value (CLTV) does not exceed 80%; FICO scores are at or above 670; Total Debt Ratios do not exceed 43%; and in some situations the Company is in a 1st lien position.


Agricultural - These are non-real estate loans and lines of credit made to farmers to finance agricultural production. Lines of credit are extended to finance the seasonal needs of farmers during peak growing periods; are usually established for periods no longer than 12 to 2436 months; are often secured by general filing liens on livestock, crops, crop proceeds and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a processing plant, or orchard/vineyard development; have maturities from five to seven years; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.


Commercial - These are non-real estate loans and lines of credit to businesses that are sole proprietorships, partnerships, LLC’s and corporations. Lines of credit are extended to finance the seasonal working capital needs of customers during peak business periods; are usually established for periods no longer than 12 to 24 months; are often secured by general filing liens on accounts receivable, inventory and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a plant or purchase of a business; have maturities from five to seven years; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.

Consumer - These are loans to individuals for personal use, and primarily include loans to purchase automobiles or recreational vehicles, and unsecured lines of credit. The Company has a minimal consumer loan portfolio, and loans are primarily made as an accommodation to deposit customers.


Commercial Leases –These – These are leases primarily to businesses or individuals, for the purpose of financing the acquisition of equipment. They can be either “finance leases” where the lessee retains the tax benefits of ownership but obtains 100% financing on their equipment purchases; or “true tax leases” where the Company, as lessor, places reliance on equipment residual value and in doing so obtains the tax benefits of ownership. Leases typically have a maturity of three to ten years, and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use ofwith qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

The Company accounts for leases with Investment Tax Credits (ITC)(“ITC”) under the deferred method as established in ASC 740-10. ITCITCs are viewed and accounted for as a reduction of the cost of the related assets and presented as deferred income on the Company’s financial statement.

See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk-Credit Risk” for a discussion about the credit risks the Company assumes and its overall credit risk management practices.


Each loan or lease type involves risks specific to the: (1) borrower; (2) collateral; and (3) loan & lease structure. See “Results of Operations - Provision and Allowance for Credit Losses” for a more detailed discussion of risks by loan & lease type. The Company’s current underwriting policies and standards are designed to mitigate the risks involved in each loan & lease type. The Company’s policies require that loans &and leases arebe approved only to those borrowers exhibiting a clear source of repayment and the ability to service existing and proposed debt. The Company’s underwriting procedures for all loan & lease types require careful consideration of the borrower, the borrower’s financial condition, the borrower’s management capability, the borrower’s industry, and the economic environment affecting the loan or lease.


Most loans &and leases made by the Company are secured, but collateral is the secondary or tertiary source of repayment; cash flow is our primary source of repayment. The quality and liquidity of collateral are important and must be confirmed before the loan is made.


In order to be responsive to borrower needs, the Company prices loans &and leases: (1) on both a fixed rate and adjustable rate basis; (2) over different terms; and (3) based upon different rate indices;indices as long as these structures are consistent with the Company’s interest rate risk management policies and procedures. See “ItemItem 7A. Quantitative“Quantitative and Qualitative Disclosures Aboutabout Market Risk-Interest Rate Risk” in this Annual Report on Form 10-K for further details.


Overall, the Company’s loan & lease portfolio at December 31, 20192021 totaled $2.7$3.2 billion, an increase of $101.8$137.6 million or 4.0%4.44% over December 31, 2018.2020. Exclusive of SBA PPP loans, the loan portfolio grew $290.0 million, or 10.04%, over December 31, 2020. This increase in the non-PPP loans occurred as a result of: (1) the Company’s business development efforts directed toward credit-qualified borrowers; and (2) expansion of our service area into the East Bay of San Francisco and Napa. No assurances can be madeThis data constitutes non-GAAP financial data.  The Company believes that this growth inexcluding the loan & lease portfolio will continue.temporary effect of the PPP loans furnishes useful information regarding the Company’s growth.


The following table sets forth the distribution of the loan & lease portfolio by type and percent asat the end of December 31 of the years indicated.
each period presented:


  December 31, 
  2021  2020 
(Dollars in thousands) Dollars  Percent of Total  Dollars  Percent of Total 
Gross Loans and Leases            
Real estate:            
Commercial real estate 
$
1,167,516
   
35.95
%
 
$
971,326
   
31.22
%
Agricultural  
672,830
   
20.72
%
  
643,014
   
20.67
%
Residential and home equity  
350,581
   
10.79
%
  
333,618
   
10.72
%
Construction  
177,163
   
5.45
%
  
185,741
   
5.97
%
Total real estate  
2,368,090
   
72.91
%
  
2,133,699
   
68.57
%
Commercial & Industrial  
427,799
   
13.17
%
  
374,816
   
12.05
%
Agricultural  
276,684
   
8.52
%
  
264,372
   
8.50
%
Commercial leases  
96,971
   
2.99
%
  
103,117
   
3.31
%
Consumer and other(1)
  
78,367
   
2.41
%
  
235,529
   
7.57
%
Total gross loans and leases 
$
3,247,911
   
100.00
%
 
$
3,111,533
   
100.00
%

  2019  2018  2017  2016  2015 
(in thousands) Amount  Percent  Amount  Percent  Amount  Percent  Amount  Percent  Amount  Percent 
Commercial Real Estate $846,486   31.6% $834,476   32.4% $691,639   31.1% $674,445   30.9% $609,602   30.4%
Agricultural Real Estate  625,767   23.3%  584,625   22.7%  499,231   22.5%  467,685   21.4%  424,034   21.2%
Real Estate Construction  115,644   4.3%  98,568   3.8%  100,206   4.5%  176,462   8.1%  151,974   7.6%
Residential 1st Mortgages  255,253   9.5%  259,736   10.1%  260,751   11.7%  242,247   11.1%  206,405   10.3%
Home Equity Lines and Loans  39,270   1.5%  40,789   1.6%  34,525   1.6%  31,625   1.4%  33,056   1.7%
Agricultural  292,904   10.9%  290,463   11.3%  273,582   12.3%  295,325   13.5%  293,966   14.7%
Commercial  384,795   14.4%  343,834   13.3%  265,703   12.0%  217,577   10.0%  210,804   10.5%
Consumer & Other  15,422   0.6%  19,412   0.8%  6,656   0.3%  6,913   0.3%  6,592   0.3%
Leases  104,470   3.9%  106,217   4.0%  88,957   4.0%  70,986   3.3%  65,054   3.3%
Total Gross Loans & Leases  2,680,011   100.0%  2,578,120   100.0%  2,221,250   100.0%  2,183,265   100.0%  2,001,487   100.0%
Less: Unearned Income  6,984       6,879       5,955       5,664       5,128     
Subtotal  2,673,027       2,571,241       2,215,295       2,177,601       1,996,359     
Less: Allowance for Credit Losses  55,012       55,266       50,342       47,919       41,523     
Loans & Leases, Net $2,618,015      $2,515,975      $2,164,953      $2,129,682      $1,954,836     

(1) Includes SBA PPP  loans.
There were no concentrations of loans exceeding 10% of total loans which were not otherwise disclosed as a category of loans in the above table.

The following table shows the maturity distribution and interest rate sensitivity of the loan portfolio of the Company on December 31, 2019.

(in thousands) 
One Year
or Less
  
Over One
Year to
Five
Years
  
Over
Five
Years
  Total 
Commercial Real Estate
 
$
32,190
  
$
253,749
  
$
552,631
  
$
838,570
 
Agricultural Real Estate
  
19,409
   
138,126
   
468,232
   
625,767
 
Real Estate Construction
  
80,236
   
30,585
   
4,823
   
115,644
 
Residential 1st Mortgages
  
303
   
6,843
   
248,107
   
255,253
 
Home Equity Lines and Loans
  
15
   
524
   
38,731
   
39,270
 
Agricultural
  
198,105
   
81,712
   
13,087
   
292,904
 
Commercial
  
179,223
   
151,414
   
54,158
   
384,795
 
Consumer & Other
  
643
   
7,370
   
7,409
   
15,422
 
Leases
  
450
   
58,647
   
46,305
   
105,402
 
Total 
$
510,574
  
$
728,970
  
$
1,433,483
  
$
2,673,027
 
Rate Sensitivity:
                
Fixed Rate 
$
61,562
  
$
391,130
  
$
820,540
  
$
1,273,232
 
Variable Rate  
449,012
   
337,840
   
612,943
   
1,399,795
 
Total 
$
510,574
  
$
728,970
  
$
1,433,483
  
$
2,673,027
 
Percent  
19.10
%
  
27.27
%
  
53.63
%
  
100.00
%

Classified Loans & Leases and Non-Performing Assets
All loans & leases are assigned a credit risk grade using grading standards developed by bank regulatory agencies. See “Results of Operations - Provision and Allowance for Credit Losses” for more detail on risk grades. The Company utilizes the services of a third-party independent loan & lease review firm to perform evaluations of individual loans & leases and review the credit risk grades the Company places on loans & leases. Loans & leases that are judged to exhibit a higher risk profile are referred to as “classified” and these loans & leases receive increased management attention. As of December 31, 2019, classified loans & leases totaled $16.2 million compared to $15.1 million at December 31, 2018.2021.


  Loan Contractual Maturity 
(Dollars in thousands) 
One Year or
Less
  
After One
But Within
Five Years
  
After Five
Years But
Within
Fifteen Years
  After Fifteen Years  Total 
Gross loan and leases:               
Real estate:               
Commercial real estate 
$
118,784
  
$
267,094
  
$
749,151
  
$
32,487
  
$
1,167,516
 
Agricultural  
39,019
   
164,289
   
401,798
   
67,724
   
672,830
 
Residential and home equity  
304
   
3,446
   
116,978
   
229,853
   
350,581
 
Construction  
120,621
   
55,740
   
802
   
-
   
177,163
 
Total real estate  
278,728
   
490,569
   
1,268,729
   
330,064
   
2,368,090
 
Commercial & Industrial  
154,508
   
219,617
   
48,034
   
5,640
   
427,799
 
Agricultural  
167,042
   
99,902
   
9,740
   
-
   
276,684
 
Commercial leases  
6,199
   
38,340
   
52,432
   
-
   
96,971
 
Consumer and other(1)
  
2,259
   
73,791
   
2,317
   
-
   
78,367
 
Total gross loans and leases 
$
608,736
  
$
922,219
  
$
1,381,252
  
$
335,704
  
$
3,247,911
 
Rate Structure for Loans                    
Fixed Rate 
$
127,898
  
$
427,964
  
$
1,085,020
  
$
221,438
  
$
1,862,320
 
Adjustable Rate  
480,836
   
494,257
   
296,232
   
114,266
   
1,385,591
 
Total gross loans and leases 
$
608,734
  
$
922,221
  
$
1,381,252
  
$
335,704
  
$
3,247,911
 

Classified loans & leases with higher levels(1) Includes SBA PPP  loans.


Non-Accrual Loans & Leasesand leases - Accrual of interest on loans &and leases is generally discontinued when a loan or lease becomes contractually past due by 90 days or more with respect to interest or principal. When loans &and leases are 90 days past due, but in management’s judgment are well secured and in the process of collection, they may not be classified as non-accrual. When a loan or lease is placed on non-accrual status, all interest previously accrued but not collected is reversed. Income on such loans &and leases is then recognized only to the extent that cash is received and where the future collection of principal is probable. There were no nonaccrualNon-accrual loans &and leases attotaled $516,000 and $495,000 for the two years ended December 31, 20192021 and 2018.2020, respectively. The one non-accrual loan outstanding as of December 31, 2021 of $516,000 paid-off in January 2022.


Restructured Loans & Leasesand leases - A restructuring of a loan or lease constitutes a TDR under ASC 310-40, if the Company for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtorborrower that it would not otherwise consider.consider, except when subject to the CARES Act and H.R. 133. Restructured loans or leases typically present an elevated level of credit risk, as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans &and leases that are on nonaccrual status at the time they become TDR loans or leases, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms. However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment.

At December 31, 2019,2021, restructured loans totaled $12.1$8.3 million all of which were performing andcompared with $7.9 million at December 31, 2018, restructured loans totaled $13.6 million2020, all of which were performing.  See Note 5 “Loans and Leases” to the Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.


Other Real Estate - Loans where the collateral has been repossessed are classified as other – Other real estate (“ORE”) represents real property taken either through foreclosure or ifthrough a deed in lieu thereof from the collateral is personal property,borrower. We record all “ORE” properties at amounts equal to or less than the loan is classifiedfair market value of the properties based on current independent appraisals reduced by estimated selling costs. The Company reported $873,000 of foreclosed assets at December 31, 2021, and at December 31, 2020.

Not included in the table below, but relevant to a discussion of asset quality are loans that were granted some form of relief because of COVID-19 and are not considered TDRs because of the CARES Act and H.R. 133. Since April 2020, we have restructured $278.1 million of loans under the CARES Act and H.R. 133 guidelines (see “Part I, Introduction - COVID-19 (Coronavirus) Disclosure”).  At December 31, 2021, all loans that were restructured as other assets onpart of the Company’s financial statements.CARES Act, have returned to the contractual terms and conditions of the loans, without exception.


The following table sets forthsummarizes the amountloans for which the accrual of the Company’s non-performinginterest has been discontinued and loans & leasesmore than 90 days past due and ORE as of December 31 of the years indicated.still accruing interest, including those non-accrual loans that are troubled debt restructured loans, and OREO (as hereinafter defined):


  December 31, 
(in thousands) 2019  2018  2017  2016  2015 
Non-Accrual Loans & Leases               
Commercial Real Estate 
$
-
  
$
-
  
$
-
  
$
-
  
$
19
 
Agricultural Real Estate  
-
   
-
   
-
   
1,304
   
-
 
Real Estate Construction  
-
   
-
   
-
   
-
   
-
 
Residential 1st Mortgages  
-
   
-
   
-
   
95
   
65
 
Home Equity Lines and Loans  
-
   
-
   
-
   
-
   
538
 
Agricultural  
-
   
-
   
-
   
243
   
-
 
Commercial  
-
   
-
   
-
   
1,426
   
1,524
 
Consumer & Other  
-
   
-
   
-
   
6
   
10
 
Total Non-Accrual Loans & Leases  
-
   
-
   
-
   
3,074
   
2,156
 
Accruing Loans & Leases Past Due 90 Days or More                    
Commercial Real Estate  
-
   
-
   
-
   
-
   
-
 
Agricultural Real Estate  
-
   
-
   
-
   
-
   
-
 
Real Estate Construction  
-
   
-
   
-
   
-
   
-
 
Residential 1st Mortgages  
-
   
-
   
-
   
-
   
-
 
Home Equity Lines and Loans  
-
   
-
   
-
   
-
   
-
 
Agricultural  
-
   
-
   
-
   
-
   
-
 
Commercial  
-
   
-
   
-
   
-
   
-
 
Consumer & Other  
-
   
-
   
-
   
-
   
-
 
Total Accruing Loans & Leases Past Due 90 Days or More  
-
   
-
   
-
   
-
   
-
 
Total Non-Performing Loans & Leases 
$
-
  
$
-
  
$
-
  
$
3,074
  
$
2,156
 
Other Real Estate Owned 
$
873
  
$
873
  
$
873
  
$
3,745
  
$
2,441
 
Total Non-Performing Assets 
$
873
  
$
873
  
$
873
  
$
6,819
  
$
4,597
 
Restructured Loans & Leases (Performing) 
$
12,105
  
$
13,577
  
$
6,301
  
$
4,462
  
$
4,953
 
Non-Performing Loans & Leases as a Percent of Total Loans & Leases  
0.00
%
  
0.00
%
  
0.00
%
  
0.14
%
  
0.11
%
  December 31, 
(Dollars in thousands) 2021  2020 
Non-performing assets:      
Non-accrual loans and leases, not TDRs      
Real estate:      
Commercial real estate 
$
-
  
$
-
 
Agricultural  
18
   
-
 
Residential and home equity  
-
   
-
 
Construction  
-
   
-
 
Total real estate  
18
   
-
 
Commercial & Industrial  
-
   
-
 
Agricultural  
-
   
-
 
Commercial leases  
-
   
-
 
Consumer and other  
-
   
-
 
Subtotal  
18
   
-
 
Non-accrual loans and leases, are TDRs        
Real estate:        
Commercial real estate  
-
   
-
 
Agricultural  
-
   
-
 
Residential and home equity  
-
   
-
 
Construction  
-
   
-
 
Total real estate  
-
   
-
 
Commercial & Industrial  
-
   
-
 
Agricultural  
498
   
495
 
Commercial leases  
-
   
-
 
Consumer and other  
-
   
-
 
Subtotal  
498
   
495
 
Total non-performing loans and leases 
$
516
  
$
495
 
Other real estate owned (“OREO”) 
$
873
  
$
873
 
Total non-performing assets 
$
1,389
  
$
1,368
 
Performing TDRs 
$
1,824
  
$
7,867
 
         
Selected ratios:        
Non-performing loans to total loans and leases  
0.02
%
  
0.02
%
Non-performing assets to total assets  
0.03
%
  
0.03
%


Although management believes that non-performing loans &and leases are generally well-secured and that potential losses are provided for in the Company’s allowance for credit losses, there can be no assurance that future deterioration in economic conditions and/or collateral values will not result in future credit losses. See Note 5,5. “Loans and Leases”, located in “ItemItem 8. Financial“Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for an allocation of the allowance classified to impaired loans &and leases.



Except for those classified and non-performing loans &and leases discussed above,above; and (ii) those loans modified under the COVID-19 guidelines of the CARES Act and H.R. 133, the Company’s management is not aware of any loans &and leases as of December 31, 2019,2021, for which known financial problems of the borrower would cause serious doubts as to the ability of these borrowers to materially comply with their present loan or lease repayment terms, or any known events that would result in the loan or lease being designated as non-performing at some future date. However:


The Central Valley was one of the hardest hit areas in the country during the recession. In many areas, housing prices declined as much as 60% and unemployment reached 15% or more. Although the economy has strengthened throughout the Central Valley, in many of the Company’s market segments housing prices remain below peak levels and unemployment levels remain above those in other areas of the state and country.
The State of California experienced drought conditions from 2013 through most of 2016. SinceAfter 2016, reasonable levels of rain and snow have alleviated drought conditions in many areas of California, including those in the Company’sour primary service area. As a result, reservoir levels are normal andarea, but the winter of 2020-2021 was once again dry. Despite this, the availability of water in our primary service area shouldwas not be an issue.issue for the 2021 growing season. However, the weather patterns over the past 5eight years further reinforce the fact that the long-term risks associated with the availability of water are significant.


While tremendous strides have been made in fighting the COVID-19 virus, particularly with the development of a vaccine, the lingering effects of COVID-19 are still with us, and it is impossible to predict the ultimate impact on classified and non-performing loans and leases (see Part I. “Introduction - COVID-19 (Coronavirus) Disclosure”).

Allowance for Credit Losses—Loans and Leases

The Company maintains an allowance for credit losses (“ACL”) on loans based on probable credit losses inherent in the Company’s loan & lease portfolio as of the balance sheet date. The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan & lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of three primary components: specific reserves related to impaired loans and leases; general reserves for inherent losses related to loans and leases that are not impaired; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors. See Note 5, located in “Item 8. Financial Statements and Supplementary Data” for a detailed discussion on the Company’s allowance for credit losses.

62

The agricultural industry is facing challenges associated with: (1) weakness in export markets due to a stronger dollar and uncertainty in trade policies; (2) tight labor markets and higher wages due to legislative changes at the state and federal levels; and (3) proposed changes in immigration policy and the resulting impact on the labor pool.
Table of Contents

Deposits
One of the key sources of funds to support earning assets is the generation of deposits from the Company’s customer base. The ability to grow the customer base and subsequently deposits is a significant element in the performance of the Company.

The following table sets forth the activity in our ACL for the periods indicated:

  Year Ended December 31, 2021 
(Dollars in thousands) 2021  2020 
Allowance for credit losses:      
Balance at beginning of year 
$
58,862
  
$
55,012
 
Provision for credit losses  
1,910
   
4,500
 
Charge-offs:        
Real estate:        
Commercial real estate  
-
   
-
 
Agricultural  
-
   
-
 
Residential and home equity  
-
   
(7
)
Construction  
-
   
-
 
Total real estate  
-
   
(7
)
Commercial & Industrial  
-
   
(1,101
)
Agricultural  
-
   
-
 
Commercial leases  
-
   
-
 
Consumer and other  
(44
)
  
(66
)
Total charge-offs  
(44
)
  
(1,174
)
Recoveries:        
Real estate:        
Commercial real estate  
-
   
-
 
Agricultural  
-
   
81
 
Residential and home equity  
98
   
130
 
Construction  
-
   
-
 
Total real estate  
98
   
211
 
Commercial & Industrial  
99
   
280
 
Agricultural   
55
   
-
 
Commercial leases  
-
   
-
 
Consumer and other  
27
   
33
 
Total recoveries  
279
   
524
 
Net recoveries / (charge-offs)  
235
   
(650
)
         
Balance at end of year 
$
61,007
  
$
58,862
 
         
Selected financial information:        
Gross loans and leases held for investment 
$
3,237,177
  
$
3,099,592
 
Average loans and leases  
3,084,339
   
2,938,484
 
Non-performing loans and leases  
516
   
495
 
Allowance for credit losses to non-performing loans and leases  
11823.06
%
  
11891.31
%
Net recoveries/(charge-offs) to average loans and leases  
-0.01
%
  
0.02
%
Provision for credit losses to average loans and leases  
0.06
%
  
0.15
%
Allowance for credit losses to loans and leases held for investment  
1.88
%
  
1.90
%
Non-performing loans and leases to loans and leases held for investment  
0.02
%
  
0.02
%

The increase in ACL in both 2020 and 2021 is primarily related to higher expected probable losses inherent in the loan portfolio that is directly related to management’s judgement of impacts associated with negative economic effects of the COVID-19 pandemic and overall growth in the loan portfolio.  The decrease in ACL to total loans in both 2020 and 2021 is primarily related to the funding of SBA PPP loans, which management does not believe the Company will experience credit losses.
The following table indicates management’s allocation of the ACL by time remaining to maturity,loan type as of each of the Company’s timefollowing dates:

  December 31, 
  2021  2020 
(Dollars in thousands) Dollars  Percent of Total  Dollars  Percent of Total 
Allowance for credit losses:            
Real estate:            
Commercial real estate 
$
28,536
   
35.95
%
 
$
27,679
   
31.20
%
Agricultural  
9,613
   
20.72
%
  
8,633
   
20.70
%
Residential and home equity  
2,847
   
10.79
%
  
2,984
   
10.70
%
Construction  
1,456
   
5.45
%
  
1,643
   
6.00
%
Total real estate  
42,452
   
72.91
%
  
40,939
   
68.60
%
Commercial & Industrial  
11,489
   
13.17
%
  
9,961
   
12.00
%
Agricultural  
5,465
   
8.52
%
  
4,814
   
8.50
%
Commercial leases  
938
   
2.99
%
  
1,731
   
3.30
%
Consumer and other  
263
   
2.41
%
  
333
   
7.60
%
Unallocated  
400
   
-
   
1,084
   
-
 
Total allowance for credit losses 
$
61,007
   
100.00
%
 
$
58,862
   
100.00
%

Deposits
Total deposits in amountswere $4.64 billion and $4.06 billion as of $250,000 or more at December 31, 2019.

(in thousands)   
Time Deposits of $250,000 or More   
Three Months or Less 
$
123,582
 
Over Three Months Through Six Months  
47,723
 
Over Six Months Through Twelve Months  
66,022
 
Over Twelve Months  
20,065
 
Total Time Deposits of $250,000 or More 
$
257,392
 

Refer to the Year-To-Date Average Balances2021 and Rate Schedules located in this “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information on separate deposit categories.

At December 31, 2019, deposits totaled $3.28 billion. This represents an increase of 7.0% or $215.2 million from December 31, 2018.2020, respectively. In addition to the Company’s ongoing business development activities for deposits, in management’s opinion the following factors positively impacted year-over-year deposit growth: (1) the Company’s strong financial results and position and F&M Bank’s reputation as one of the most safe and sound banks in its market area; and (2) the Company’s expansion of its service area into Walnut Creek, Concord and Napa. The company continuesNapa; and (3) borrowers under the SBA PPP depositing loan proceeds into their deposit accounts with the Bank until those funds are used for operating expenses.
Non-interest bearing demand deposits increased to experience significant competitive pressures on deposit rates. The Company remains selective in how they respond to competitor rates, which may impact future deposit growth.$1.75 billion, or 37.72% of total deposits, as of December 31, 2021 from $1.48 billion, or 36.34% of total deposits, as of December 31, 2020. Interest bearing deposits are comprised of interest-bearing transaction accounts, money market accounts, regular savings accounts, and certificates of deposit.


Although total deposits have increased 7.0%14.28% since December 31, 2018,2020, more importantly, low cost transaction accounts have grown at a strong pace:pace as well as:


Demand and interest-bearing transaction accounts increased $96.0totaled $2.85 billion at December 31, 2021, an increase of $470 million, or 5.8% since19.75% from $2.38 billion held at December 31, 2018.2020.
Savings and money market accounts have increased $91.3$140 million, or 10.1% since11.07%, to $1.40 billion at December 31, 2018.2021 compared with $1.26 billion at December 31, 2020.
Time deposit accounts have increased $27.9decreased $29.4 million, or 5.7% since6.96%, to $392 million at December 31, 2018.2021 compared with $422 million at December 31, 2020.


The following table shows the average amount and average rate paid on the categories of deposits for each of the periods presented:

  As of December 31, 
  2021  2020  2019 
(Dollars in thousands) Average Balance  Interest Expense  Average Rate  Average Balance  Interest Expense  Average Rate  Average Balance  Interest Expense  Average Rate 
Total deposits:                           
Interest-bearing deposits:                           
Demand 
$
1,024,009
   
1,128
   
0.11
%
 
$
787,306
   
1,618
   
0.21
%
 
$
668,818
   
2,360
   
0.35
%
Savings and Money Market  
1,352,258
   
1,458
   
0.11
%
  
1,128,623
   
2,724
   
0.24
%
  
930,390
   
3,340
   
0.36
%
Certificates of deposit greater than $250,000  
170,040
   
701
   
0.41
%
  
220,952
   
2,535
   
1.15
%
  
243,389
   
4,268
   
1.75
%
Certificates of deposit less than $250,000  
235,746
   
730
   
0.31
%
  
268,294
   
2,236
   
0.83
%
  
276,459
   
2,672
   
0.97
%
Total interest bearing deposits  
2,782,053
   
4,017
   
0.14
%
  
2,405,175
   
9,113
   
0.38
%
  
2,119,056
   
12,640
   
0.60
%
Non-interest bearing deposits  
1,610,611
           
1,232,874
           
949,695
         
Total deposits 
$
4,392,664
  
$
4,017
   
0.09
%
 
$
3,638,049
  
$
9,113
   
0.25
%
 
$
3,068,751
  
$
12,640
   
0.41
%
Deposits are gathered from individuals and businesses in our market areas. The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements. We will continue to manage interest expense through deposit pricing.  The average cost of deposits, including non-interest bearing deposits, declined to 0.09% for all of 2021 compared with 0.25% for all of 2020, as overall interest rates were lowered to near zero by the Federal Reserve.

The following table shows deposit with a balance greater than $250,000 at December 31, 2021 and 2020:

  December 31 
(Dollars in thousands) 2021  2020 
Deposits greater than $250,000 
$
2,708,576
  
$
1,619,372
 
Certificates of deposit greater $250,000, by maturity:        
Less than 3 months  
59,591
   
63,183
 
3 months to 6 months  
37,182
   
50,761
 
6 months to 12 months  
59,945
   
51,854
 
More than 12 months  
12,147
   
20,146
 
Total Time Deposits greater than $250,000 
$
168,865
  
$
185,944
 
Total deposits greater than $250,000 
$
2,877,441
  
$
1,805,316
 

Refer to the Year-To-Date Average Balances and Rate Schedules located in this “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information on separate deposit categories.

The Bank participates in a program wherein the State of California places time deposits with the Bank at the Bank’s option.  At December 31, 2021 and 2020, the Bank had $3.0 million, of these deposits.
Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings
Lines of Credit with the Federal Reserve Bank and Federal Home Loan Bank are other key sources of funds to support earning assets. These sources of funds are also used to manage the Bank’sCompany’s interest rate risk exposure; and, as opportunities arise, to borrow and invest the proceeds at a positive spread through the investment portfolio. There were no FHLB advances at December 31, 20192021 or 2018.2020. There were no Federal Funds purchased or advances from the FRB at December 31, 20192021 or 2018.2020.

Long-Term Subordinated Debentures
On December 17, 2003, the Company raised $10.0 million through the sale of subordinated debentures to an off-balance sheet trust and its sale of trust-preferred securities. See Note 12,10. “Long-Term Subordinated Debentures” located in “ItemItem 8. Financial“Financial Statements and Supplementary Data.”Data” in this Annual Report on Form 10-K.  Although this amount is reflected as subordinated debt on the Company’s balance sheet, under current regulatory guidelines, our TPSTrust Preferred Securities will continue to qualify as regulatory capital. These securities accrue interest at a variable rate based upon 3-month London InterBank Offered Rate (“LIBOR”)LIBOR plus 2.85%. Interest rates reset quarterly (the next reset is March 17, 2020)2022) and the rate was 4.75%3.07% as of December 31, 2019.2021. The average rate paid for these securities was 5.37%3.06% in 20192021 and 5.08%3.67% in 2018.2020. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on the Company’s common stock.


Capital Resources
The Company relies primarily on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to insure depositor protection. Shareholders’ Equity totaled $369.3$463 million at December 31, 2019,2021, and $311.2$424 million at the end of 2018.2020.

The Company and the BankWe are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain actions by regulators that, if undertaken, could have a material effect on the Company and the Bank’s financial statements. Underrisk-based capital adequacy guidelines andrelated to the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measuresadoption of the Company’s and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The implementation ofU.S. Basel III requirements increased the required capital levels that the Company and the Bank must maintain. The final rules included new minimumCapital Rules, which impose higher risk-based capital and leverage ratios which were phasedrequirements than those previously in over time. The newplace. Specifically, the rules impose, among other requirements, minimum capital level requirements applicable to the Company and the Bank under the final rules are: (i)including a Tier 1 leverage capital ratio of 4.0%, common equity Tier 1 risk-based capital ratio of 4.5% of risk-weighted assets (“RWA”); (ii), a Tier 1 risk-based capital ratio of 6% of RWA; (iii)6.0% and a total risk-based capital ratio of 8% of RWA; and (iv) a Tier 1 leverage ratio of 4% of total assets. The final rules also established a “capital conservation buffer” of 2.5% above each of the new regulatory minimum capital ratios, which resulted in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0% of RWA; (ii) a Tier 1 capital ratio of 8.5% of RWA; and (iii) a total capital ratio of 10.5% of RWA. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. The final rules also permit the Company’s subordinated debentures issued in 2003 to continue to be counted as Tier 1 capital.8.0%.

The final rules became effective as applied tofollowing table sets forth our capital ratios:

(Dollars in thousands)  Basel III Regulatory Well Capitalized Requirement

As of December
31,
 
2021  2020 
Farmers & Merchants Bancorp          
CET1 capital to risk-weighted assets  
N/A
   
11.68
%
  
11.05
%
Tier 1 capital to risk-weighted assets  
N/A
   
11.94
%
  
11.33
%
Risk-based capital to risk-weighted assets  
N/A
   
13.19
%
  
12.59
%
Tier 1 leverage capital ratio  
N/A
   
8.92
%
  
9.13
%
             
Farmers & Merchants Bank             
CET1 capital to risk-weighted assets  
6.50
%
  
11.91
%
  
11.21
%
Tier 1 capital to risk-weighted assets  
8.00
%
  
11.91
%
  
11.21
%
Risk-based capital to risk-weighted assets  
10.00
%
  
13.17
%
  
12.46
%
Tier 1 leverage capital ratio  
5.00
%
  
8.91
%
  
9.04
%
FMCB and FMB met the Company and the Bank on January 1, 2015, with a phase in period through January 1, 2019. The Company believes that it is currently in compliance with all of these capital requirements and that they will not result in any restrictions on the Company’s business activity.

In addition, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category. For further information on the Company’s and the Bank’s risk-based capital ratios, see Note 13, located in “Item 8. Financial Statements and Supplementary Data”. At this time, neither the Company nor the Bank intend to opt into the new CBLR framework.

As previously discussed, in order to supplement its regulatory capital base, during December 2003, the Company issued $10.0 million of trust preferred securities. In accordance with the provisions of the “Consolidation�� topic of the FASB Accounting Standards Codification (“ASC”), the Company does not consolidate the subsidiary trust, which has issued the trust-preferred securities.

In 1998, the Board approved the Company’s first common stock repurchase program. This program has been extended and expanded several times since then, and most recently, on November 6, 2018, the Board of Directors approved an extension of the $20 million stock repurchase program over the three-year period ending December 31, 2021. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

There were no stock repurchases in 2019 or 2018 under the Common Stock Repurchase Plan.  However, in the third quarter of 2018 the Company did repurchase $31.2 million of shares, at $700 per share, in a single transaction from the estatedefinition of a large shareholder. The remaining dollar value of shares that may yet be purchased under the Company’s Common Stock Repurchase Plan is approximately $20 million.

On August 5, 2008, the Board of Directors approved a Share Purchase Rights Plan (the “Rights Plan”), pursuant to which the Company entered into a Rights Agreement dated August 5, 2008, with Computershare as Rights Agent. The Rights Plan was set to expire on August 5, 2018. On November 19, 2015, the Board of Directors approved a seven-year extension of the term of the Rights Plan. Pursuant to an Amendment to the Rights Agreement dated February 18, 2016, the term of the Rights Plan was extended from August 5, 2018 to August 5, 2025. The extension of the term of the Rights Plan was intended as a means to continue to guard against abusive takeover tactics and was not in response to any particular proposal. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for further explanation.

During 2019, the Company issued a combined total 9,312 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans. All of the shares were issued at prices ranging from $715.00 to $770.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital. See Note 13, located in “Item 8. Financial Statements and Supplementary Data.”

During 2018, the Company issued a combined total 13,520 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans. There were also 2,400 shares issued to individuals during 2018. All of the shares were issued at prices ranging from $635.00 to $690.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital.

During 2017, the Company issued 4,975 shares of common stock, which were contributed to the Bank’s non-qualified deferred compensation retirement plans. The shares issued had prices ranging from $590 per share to $595 per share. These share prices were based upon valuations completed by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds from these issuances were contributed to the Bank as equity capital.

Critical Accounting Policies and Estimates
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In preparing the Company’s financial statements management makes estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Management believes that the most significant subjective judgments that it makes include the following:

Allowance for Credit Losses - As a financial“well-capitalized” institution which assumes lending and credit risks as a principal element in its business, the Company anticipates that credit losses will be experienced in the normal course of business. Accordingly, the allowance for credit losses is maintained at a level considered adequate by management to provide for losses that are inherent in the portfolio. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. Management employs a systematic methodology for determining the allowance for credit losses. On a quarterly basis, management reviews the credit quality of the loan & lease portfolio and considers problem loans & leases, delinquencies, internal credit reviews, current economic conditions, loan & lease loss experience, and other factors in determining the adequacy of the allowance balance.

While the Company utilizes a systematic methodology in determining its allowance, the allowance is based on estimates, and ultimate losses may vary from current estimates. The estimates are reviewed periodically and, as adjustments become necessary, are reported in earnings in the periods in which they become known. For additional information, see Note 5, located in “Item 8. Financial Statements and Supplementary Data.”

See Note 20, located in “Item 8. Financial Statements and Supplementary Data” for a discussion of CECL and the accounting change which will impact our allowance for credit losses in 2020.

Fair Value - The Company discloses the fair value of financial instruments and the methods and significant assumptions used to estimate those fair values. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. In some cases, book value is a reasonable estimate of fair value due to the relatively short period of time between origination of the instrument and its expected realization. For additional information, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Credit Risk” and Notes 16 and 17 located in “Item 8. Financial Statements and Supplementary Data.”

Income Taxes - The Company uses the liability method of accounting for income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount combined with the current taxes payable or refundable results in the income tax expense for the current year. For additional information, see Note 1, located in “Item 8. Financial Statements and Supplementary Data.”

Valuation of Goodwill - Goodwill is not amortized but instead is periodically tested for impairment. Management performs this impairment analysis on an annual basis as of December 31.  Additionally, events or circumstances are analyzed on an interim basis to determine if there is an indication of a potential impairment.  The impairment analysis requires management to make subjective judgments. Events31, 2021 and factors that may significantly affect the estimates include, among others, a significant decline in expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of our common stock, changes in discount rates and specific industry and market conditions. There can be no assurance that changes in circumstances, estimates or assumptions may result in additional impairment of all, or some portion of, goodwill.2020 for federal regulatory purposes.

Off-Balance-Sheet Arrangements
Off-balance-sheet arrangements are any contractual arrangement to which an unconsolidatedentity is a party, under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity, or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to the Company, or engages in leasing, hedging, or research and development services with the Company. The Company had the following off balance sheet commitments as of the dates indicated.


(in thousands) December 31, 2019  December 31, 2018 
Commitments to Extend Credit 
$
919,982
  
$
828,539
 
Letters of Credit  
20,346
   
19,108
 
Performance Guarantees Under Interest Rate Swap Contracts Entered Into Between Our Borrowing Customers and Third Parties  
1,513
   
-
 
The following table sets forth our off-balance sheet lending commitments as of December 31, 2021:
     Amount of Commitment Expiration per Period 
(Dollars in thousands) Total
Committed Amount
  Less than
One Year
  
One to
Three
Years
  

Three to
Five Years
  
After Five
Years
 
Off-balance sheet commitments               
Commitments to extend credit 
$
937,009
  
$
411,072
  
$
364,229
  
$
13,010
  
$
148,698
 
Standby letters of credit  
17,880
   
6,761
   
8,143
   
1,900
   
1,076
 
                     
Performance guarantees  
1,433
   
20
   
740
   
201
   
472
 
Total off-balance sheet commitments 
$
956,322
  
$
417,853
  
$
373,112
  
$
15,111
  
$
150,246
 
The Company’s exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer’s creditworthiness are performed on a case-by-case basis.

Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third party.third-party. Most standby letters of credit are issued for 12 months or less. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Additionally, the Company maintains a reserve for off balance sheet commitments, which totaled $315,000 at December 31, 20192021 and 2018.2020. We do not anticipate any material losses asbecause of these transactions.
Liquidity
The ability to have readily available funds sufficient to repay fully maturing liabilities is of primary importance to depositors, creditors and regulators. Our liquidity, represented by cash borrowing lines, federal funds and available for sale securities, is a result of these transactions.our operating, investing and financing activities and related cash flows. In order to ensure funds are available at all times, we devote resources to projecting on a monthly basis the amount of funds that will be required and we maintain relationships with a diversified client base so funds are accessible. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets. We had the following borrowing lines available at December 31, 2021:

  As of December 31, 2021 
(Dollars in thousands) 
Total Credit
Line Limit
  
Current
Credit Line Available
  Outstanding Amount  Remaining Credit Line Available  Value of Collateral Pledged 
Additional liquidity sources:               
Federal Home Loan Bank 
$
840,030
  
$
840,030
  
$
-
  
$
840,030
  
$
1,147,132
 
Federal Reserve BIC 
$
480,373
  
$
480,373
  
$
-
  
$
480,373
  
$
766,914
 
FHLB Fed Funds 
$
18,000
  
$
18,000
  
$
-
  
$
18,000
  
$
-
 
US Bank Fed Funds 
$
35,000
  
$
35,000
  
$
-
  
$
35,000
  
$
-
 
MUFG Union Bank Fed Funds 
$
15,000
  
$
15,000
  
$
-
  
$
15,000
  
$
-
 
PCBB Fed Funds 
$
50,000
  
$
50,000
  
$
-
  
$
50,000
  
$
-
 
Total additional liquidity sources $1,438,403  $1,438,403  $-  $1,438,403  $1,914,046 
Aggregate Contractual Obligations
67

We believe our liquid assets and Commitments
The following table presents, asshort-term borrowing credit lines are adequate to meet our cash flow needs for loan funding and deposit cash withdrawal for the next 60 to 90 days.  As of December 31, 2019,2021, we had $1.3 billion in cash and unencumbered investment securities; $3.1 million in investment securities and $1.9 billion in loans pledged as collateral on short-term borrowing credit lines. We have the option of either borrowing on our significantcredit lines or selling these investment securities for cash flow needs.
On a long-term basis, our liquidity will be met by changing the relative distribution of our asset portfolios by reducing our investment or loan volumes, or selling or encumbering assets. Further, we will increase liquidity by soliciting higher levels of deposit accounts through promotional activities and/or borrowing from our correspondent banks as well as the FHLB. At the current time, our long-term liquidity needs primarily relate to funds required to support loan originations and determinable contractual obligationscommitments and deposit withdrawals.
We believe we can meet all of these needs by payment date. The payment amounts represent those amounts contractually due tocash flows from investment payments and maturities, and investment sales, if the recipientneed arises.
Our liquidity is comprised of three primary classifications: cash flows from or used in operating activities; cash flows from or used in investing activities; and do not include any unamortized premiumscash flows from or discounts,used in financing activities.  Net cash provided by or used in operating activities has consisted primarily of net income adjusted for certain non-cash income and expense items such as the credit loss provision, investment and other similar carrying value adjustments. For further information onamortization and depreciation.
Our primary investing activities are the natureorigination of each obligation type, see applicable note disclosures located in “Item 8. Financial Statementsreal estate, commercial & industrial, consumer loans, and Supplementary Data.”

(in thousands) Total  
1 Year or
Less
  2-3 Years  4-5 Years  
More Than 5
Years
 
Long-Term Subordinated Debentures  
10,310
   
-
   
-
   
-
   
10,310
 
Deferred Compensation (1)
  
66,672
   
1,235
   
1,234
   
617
   
63,586
 
Total 
$
76,982
  
$
1,235
  
$
1,234
  
$
617
  
$
73,896
 

(1) These amounts represent obligations to participants under the Company’s various non-qualified deferred compensation plans. All amounts have been fully funded in to a Rabbi Trust aspurchases and sales of investment securities. As of December 31, 2019. See Note 15 located in “Item 8. Financial Statements2021, we had outstanding loan commitments of $937 million and Supplementary Data.”outstanding letters of credit of $17.9 million. We anticipate that we will have sufficient funds available to meet current loan commitments.

Net cash provided by financing activities has been impacted significantly by higher deposit levels. During the years ended December 31, 2021 and 2020, deposits increased $580 million and $782 million, respectively.

Item 7A.Quantitative and Qualitative Disclosures Aboutabout Market Risk

Risk Management
The Company has adopted risk management policies and procedures, which aim to ensure the proper control and management of all risk factors inherent in the operation of the Company, most importantly credit risk, interest rate risk and liquidity risk. These risk factors are not mutually exclusive. It is recognized that any product or service offered by the Company may expose the Company to one or more of these risk factors.

Credit Risk
CreditMarket risk is the risk to earnings or capitalof loss in a financial instrument arising from an obligor’s failureadverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Our market risk arises primarily from interest rate risk inherent in our lending and deposit taking activities. Management actively monitors and manages our interest rate risk exposure. We do not have any market-risk sensitive instruments entered into for trading purposes. We manage our interest-rate sensitivity by matching the re-pricing opportunities on our earning assets to meetthose on our funding liabilities.
Management uses various asset/liability strategies to manage the re-pricing characteristics of our assets and liabilities designed to ensure that exposure to interest rate fluctuations is limited within our guidelines of acceptable levels of risk-taking. Hedging strategies, including the terms and pricing of any contractloans and deposits, and managing the deployment of our securities, are used to reduce mismatches in interest rate re-pricing opportunities of portfolio assets and their funding sources.
Our Asset Liability Management Committee (“ALCO”), which is comprised of members of the Board of Directors and executive officers, manages market risk. ALCO monitors interest rate risk by analyzing the potential impact on net interest income from potential changes in interest rates, and considers the impact of alternative strategies or otherwise failchanges in balance sheet structure. ALCO manages our balance sheet in part to perform as agreed. Creditmaintain the potential impact of changes in interest rates on net interest income within acceptable ranges despite changes in interest rates.

Our exposure to interest rate risk is foundreviewed on at least a quarterly basis by ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in all activities where success depends on counterparty, issuer, or borrower performance.

Credit risknet interest income in the investment portfolioevent of hypothetical changes in interest rates. If potential changes to net interest income resulting from hypothetical interest rate changes are not within risk tolerances determined by ALCO, and correspondent bank accounts is addressed through defined limits inapproved by the full Board of Directors, Management may make adjustments to the Company’s policy statements. In addition, certain securities carry insuranceasset and liability mix to enhance credit quality ofbring interest rate risk levels within the bond.board approved limits.

Net Interest Income Simulation.In order to control creditmeasure interest rate risk, we used a simulation model to project changes in net interest income that result from forecasted changes in interest rates. This analysis calculates the loan & lease portfoliodifference between net interest income forecasted using a rising and a falling interest rate scenario and a net interest income forecast using a base market interest rate derived from the Company has established credit management policiescurrent treasury yield curve. The income simulation model includes various assumptions regarding the re-pricing relationships for each of our products. Many of our assets are floating rate loans, which are assumed to re-price immediately, and procedures that govern bothto the approvalsame extent as the change in market rates according to their contracted index.
Some loans and investment vehicles include the opportunity of new loans & leasesprepayment (embedded options), and accordingly the monitoringsimulation model uses national indexes to estimate these prepayments and assumes the reinvestment of the existing portfolio. The Company managesproceeds at current yields. Our non-term deposit products re-price more slowly, usually changing less than the change in market rates and controls credit risk through comprehensive underwritingat our discretion.
This analysis indicates the impact of changes in net interest income for the given set of rate changes and approval standards, dollar limits on loans & leasesassumptions. It assumes the balance sheet grows modestly, but that its structure will remain similar to one borrower, and by restricting loans & leases made primarily to its principal market area where management believes it is best able to assess the applicable risk. Additionally, management has established guidelines to ensure the diversificationstructure as of the Company’s credit portfolio suchperiod presented. It does not account for all factors that even within key portfolio sectors such as real estate or agriculture, the portfolio is diversified across factors such as location, building type, crop type, etc. However, as a financial institution that assumes credit risks as a principal element of its business, credit losses will be experienced in the normal course of business. The allowance for credit losses is maintained at a level consideredaffect this analysis, including changes by management to be adequatemitigate the effect of interest rate changes or secondary impacts such as changes to provideour credit risk profile as interest rates change.

Furthermore, loan prepayment-rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in this analysis. Changes that vary significantly from the assumptions may have significant effects on our net interest income.
For the rising and falling interest rate scenarios, the base market interest rate forecast was increased or decreased, on an instantaneous and sustained basis, by 100 basis points. As of the periods presented, our net interest margin exposure related to these hypothetical changes in market interest rates was within the current guidelines established by us.  Our simulation model highlights the fact that our balance sheet is asset sensitive, which means that our net interest income rises in a rising interest rate environment.
The ratio of variable to fixed-rate loans in our loan portfolio, the ratio of short-term (maturing at a given time within 12 months) to long-term loans, and the ratio of our demand, money market and savings deposits to CDs (and their time periods), are the primary factors affecting the sensitivity of our net interest income to changes in market interest rates. Our short-term loans are typically priced at prime plus a margin, and our long-term loans are typically priced based on a FHLB index for risks inherentcomparable maturities, plus a margin. The composition of our rate-sensitive assets or liabilities is subject to change and could result in the loan & lease portfolio. The allowance is increased by provisions chargeda more unbalanced position that would cause market rate changes to operating expense and reduced byhave a greater impact on our net charge-offs.interest margin.


The Company’s methodology for assessingGap Analysis. Another way to measure the appropriateness of the allowance is applied on a regular basis and considers all loans & leases. The systematic methodology consists of three parts.

Part 1 - includes a detailed analysis of the loan & lease portfolio in two phases. The first phase is conducted in accordance with the “Receivables” topic of the FASB ASC. Individual loans & leases are reviewed to identify them for impairment. A loan or lease is impaired when principal and interest are deemed uncollectible in accordance with the original contractual terms of the loan or lease. Impairment is measured as either the expected future cash flows discounted at each loan’s or lease’s effective interest rate, the fair value of the loan’s or lease’s collateral if the loan or lease is collateral dependent, or an observable market price of the loan or lease, if one exists. Upon measuring the impairment, the Company will ensure an appropriate level of allowance is present or established.

Central to the first phase of the analysis of the loan & lease portfolio is the risk rating system. The originating credit officer assigns each borrower an initial risk rating, which is based primarily on a thorough analysis of that borrower’s financial position in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior credit administration personnel. Credits are monitored by credit administration personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary. Risk ratings are reviewed by both the Company’s independent third-party credit examiners and bank examiners from the DBO and FDIC.

Based on the risk rating system, specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates that the loan or lease is impaired and there is a probability of loss. Management performs a detailed analysis of these loans & leases, including, but not limited to, cash flows, appraisals of the collateral, conditions of the marketplace for liquidating the collateral, and assessment of the guarantors. Management then determines the inherent loss potential and allocates a portion of the allowance for losses as a specific allowance for each of these credits.

The second phase is conducted by segmenting the loan & lease portfolio by risk rating and into groups of loans & leases with similar characteristics in accordance with the “Contingency” topic of the FASB ASC. In this second phase, groups of loans & leases with similar characteristics are reviewed and the appropriate allowance factor is applied based on the historical average charge-off rate for each particular group of loans or leases.

Part 2 - considers qualitative internal and external factors that may affect a loan or lease’s collectability, is based upon management’s evaluation of various conditions, the effects of which are not directly measured in the determination of the historical and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the second element of the analysis of the allowance include, but are not limited to the following conditions that existed as of the balance sheet date:

general economic and business conditions affecting the key service areas of the Company;
credit quality trends (including trends in collateral values, delinquencies and non-performing loans & leases);
loan & lease volumes, growth rates and concentrations;
loan & lease portfolio seasoning;
specific industry and crop conditions;
recent loss experience; and
duration of the current business cycle.

Part 3 - An unallocated allowance generally occurs due to the imprecision in estimating and allocating allowance balances associated with macro factors such as: (1) economic conditions in the Central Valley; and (2) the long-term risks associated with the availability of water in the Central Valley.

Management reviews all of these conditions in discussion with the Company’s senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable impaired credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable impaired credit or portfolio segment as of the evaluation date, management’s evaluation of the inherent loss related to such condition is reflected in the second element of the allowance or in the unallocated allowance.

Management believes, that based upon the preceding methodology, and using information currently available, the allowance for credit losses at December 31, 2019 was adequate. No assurances can be given that future events may not resultchanges in increases in delinquencies, non-performing loans & leases, orinterest rates will have on net loan & lease charge-offs that would require increases ininterest income is through a cumulative gap measure. The gap represents the provision for credit losses and thereby adversely affect the resultsnet position of operations.

Interest Rate Risk
The mismatch between maturities of interest sensitive assets and liabilities resultssubject to re-pricing in uncertainty inspecified periods.  A gap analysis highlights the Company’s earningsdistribution of re-pricing opportunities of our interest earning assets and economic value and is referred to asinterest-bearing liabilities, the interest rate risk. The Company does not attempt to predict interest rates and positions the balance sheet in a manner, which seeks to minimize, to the extent possible, the effects of changing interest rates.

The Company measuressensitivity gap (that is, interest rate risk in terms of potential impact on both its economic value and earnings. The methods for governing the amount ofsensitive assets less interest rate risk include: (1) analysis of asset and liability mismatches (Gap analysis); (2) the utilization of a simulation model; and (3) limits on maturities of investment, loan & lease, and deposit products, which reduces the market volatility of those instruments.

The Gap analysis measures, at specific time intervals, the divergence betweensensitive liabilities), cumulative interest earning assets and interest bearing liabilities, for which repricing opportunities will occur. A positive difference, or Gap, indicates thatthe cumulative interest rate sensitivity gap, the ratio of cumulative interest earning assets to cumulative interest-bearing liabilities and the cumulative gap as a percentage of total assets and total interest earning assets as of the periods presented. The analysis also sets forth the time periods during which interest earning assets and interest bearing liabilities will reprice faster than interest-bearing liabilities. This will generally produce a greater netmature or may re-price in accordance with their contractual terms. The interest margin during periodsrate relationships between the re-priceable assets and re-priceable liabilities are not necessarily constant and may be affected by many factors, including the behavior of rising interest rates and a lower net interest margin during periods of decliningclients in response to changes in interest rates. Conversely,This table should, therefore, be used only as a negative Gap will generally produce a lower net interest margin during periods of rising interest rates and a greater net interest margin during periods of decreasing interest rates.

The interest rates paid on deposit accounts do not always move in unison with the rates charged on loans & leases. In addition, the magnitude of changes in the rates charged on loans & leases is not always proportionateguide as to the magnitude of changes in the rate paid for deposits. Consequently,possible effect changes in interest rates domight have on our net interest margins.  Our gap analysis also highlights the asset sensitivity of our balance sheet.
Gap analysis has certain limitations. Measuring the volume of re-pricing or maturing assets and liabilities does not necessarily resultalways measure the full impact on the portfolio value of equity or net interest income. Gap analysis does not account for rate caps on products, dynamic changes such as increasing prepayment speeds as interest rates decrease, basis risk, embedded options or the benefit of no-rate funding sources. The relation between product rate re-pricing and market rate changes (basis risk) is not the same for all products. The majority of interest earning assets generally re-price along with a movement in an increase or decreasemarket rates, while non-term deposit rates in general move more slowly and usually incorporate only a fraction of the change in market rates.
Products categorized as non-rate sensitive, such as our non-interest bearing demand deposits, in the net interest margin solely as a result of the differences between repricing opportunities of earning assets or interest bearing liabilities.

The Company also utilizes the results of a dynamicgap analysis behave like long-term fixed rate funding sources. Management uses income simulation, model to quantify the estimated exposure of net interest income to sustainedrate shocks and market value of portfolio equity as its primary interest rate changes. The sensitivity of the Company’s net interest income is measured over a rolling one-year horizon.risk management tools.


The simulation model estimates the impact of changing interest rates on interest income from all interest earning assets and the interest expense paid on all interest bearing liabilities reflected on the Company’s balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given a 200 basis point upward and a 100 basis point downward shift in interest rates. A shift in rates over a 12-month period is assumed. Results that exceed policy limits, if any, are analyzed for risk tolerance and reported to the Board with appropriate recommendations. At December 31, 2019, the Company’s estimated net interest income sensitivity to changes in interest rates, as a percent of net interest income was an increase in net interest income of 2.0% if rates increase by 200 basis points and a decrease in net interest income of 2.0% if rates decline 100 basis points.

The estimated sensitivity does not necessarily represent a Company forecast and the results may not be indicative of actual changes to the Company’s net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape; prepayments on loans & leases and securities; pricing strategies on loans & leases and deposits; replacement of asset and liability cash flows; and other assumptions. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change.

6470

Liquidity Risk
Liquidity risk is the risk to earnings or capital resulting from the Company’s inability to meet its obligations when they come due without incurring unacceptable losses. It includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect the Company’s ability to liquidate assets or acquire funds quickly and with minimum loss of value. The Company endeavors to maintain a cash flow adequate to fund operations, handle fluctuations in deposit levels, respond to the credit needs of borrowers, and to take advantage of investment opportunities as they arise.

The Company’s principal operating sources of liquidity include (see “Item 8. Financial Statements and Supplementary Data – Consolidated Statements of Cash Flows”) cash and cash equivalents, cash provided by operating activities, principal payments on loans & leases, proceeds from the maturity or sale of investments, and growth in deposits. To supplement these operating sources of funds the Company maintains Federal Funds credit lines of $78 million and repurchase lines of $112 million with major banks. As of December 31, 2019, the Company has additional borrowing capacity of $674.9 million with the Federal Home Loan Bank and $441.3 million with the Federal Reserve Bank. Borrowings under these lines are collateralized with loans or securities that have been accepted for pledging at the FHLB and FRB.

At December 31, 2019, the Company had available sources of liquidity, which included cash and cash equivalents and unpledged investment securities available-for-sale of approximately $407.9 million, which represents 11% of total assets.

Item 8.
Financial Statements and Supplementary Data


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES


  
Page
   
Report of Management on Internal Control Over Financial Reporting
66
Report of Independent Registered Public Accounting Firm (Moss Adams LLP, San Francisco, California, PCAOB ID: 659)
6772
Consolidated Financial Statements

 
Consolidated Balance Sheets as of December 31, 2019,2021, and 201820206975
Consolidated Statements of Income – Yearsfor the three years ended December 31, 2019, 20182021, 2020 and 201720197076
Consolidated Statements of Comprehensive Income – Years Endedfor the three years ended December 31, 2019, 20182021, 2020 and 20172019 7177
Consolidated Statements of Changes in Shareholders’ Equity – Yearsfor the three years ended December 31, 2019, 20182021, 2020 and 201720197278
Consolidated Statements of Cash Flows - Years Endedfor the three years ended December 31, 2019, 20182021, 2020 and 20172019 7379
Notes to the Consolidated Financial Statements
 7480


6571

Farmers & Merchants Bancorp

Report of Management on Internal Control Over Financial Reporting

Management of Farmers & Merchants Bancorp and Subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2019. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

The Company’s system of internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Management recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and fair presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 as described in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2019.

Moss Adams LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report, was engaged to express an opinion as to the fairness of presentation of such financial statements. Moss Adams LLP was also engaged to audit the effectiveness of the Company’s internal control over financial reporting. The report of Moss Adams LLP follows this report.

Kent A. SteinwertStephen W. Haley
Chairman, President & Chief Executive OfficerExecutive Vice President & Chief Financial Officer



Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of
Farmers & Merchants Bancorp


Opinions on the Financial Statements and Internal Control over Financial Reporting


We have audited the accompanying consolidated balance sheets of Farmers & Merchants Bancorp and subsidiaries (the “Company”) as of December 31, 20192021 and 2018,2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019,2021, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019,2021, based on criteria established in Internal Control - Integrated Framework 2013(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”).


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 20192021 and 2018,2020, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2021, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2021, based on criteria established in Internal Control - Integrated Framework 2013 (2013)issued by COSO.


Basis for Opinions


The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting included in Item 8.9A. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.


Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting


A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the company;Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and (1) relates to accounts or disclosures that are material to the consolidated financial statements; and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses

As described in Notes 1 and 5 to the consolidated financial statements, the Companys allowance for credit losses balance was $61 million at December 31, 2021. The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company’s loan & lease portfolio as of the balance sheet date. The overall allowance consists of three primary components: specific reserves related to impaired loans & leases; general reserves for inherent losses related to loans & leases that are not impaired; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors. The determination of the general reserve for loans & leases that are collectively evaluated for impairment is based on estimates made by management including, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors that include economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan & lease portfolio, and probable losses inherent in the portfolio taken as a whole.

We identified management’s risk ratings of loans and the estimation of qualitative factors, both of which are used in the allowance for credit losses calculation and require significant management judgment as critical audit matters. The Company assigns a risk rating to all loans & leases and periodically performs detailed reviews of all such loans & leases over a certain threshold to identify credit risks and assess overall collectability. The qualitative factors are used to estimate losses related to factors that are not captured in the historical loss rates such as economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, and the character of the loan & lease portfolio, and are based on management’s evaluation of available internal and external data and involves significant management judgement. Auditing management’s judgments regarding the determination of risk ratings and qualitative factors applied to the allowance for credit losses involved a high degree of subjectivity and judgement.

The following are the primary procedures we performed to address these critical audit matters. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s calculation of the allowance for credit losses, including:


Determination of the accuracy of risk ratings of loans

Determination of the appropriateness of the changes in risk ratings of loans

Evaluating the appropriate approval of the changes in risk ratings of loans

Identification and determination of the significant assumptions used in the measurement of the qualitative factors

Evaluation of the appropriateness of the changes made to the qualitative factors

We also tested management’s process to develop the risk ratings of loans and the estimation of qualitative factors which involved the following:


Testing a risk-based targeted selection of loans to gain substantive evidence that the Company is appropriately rating these loans in accordance with its policies, and that the risk ratings for the loans are reasonable

Performing a loan grade analysis by loan type to determine whether any large fluctuations occurred that could not be reasonably explained

Obtaining management’s analysis and supporting documentation related to the qualitative factors and testing whether the qualitative factors used in the calculation of the allowance for credit losses are reasonable

Performing an independent analysis to evaluate the reasonableness of the qualitative factors used by management to account for inherent losses that are not captured in the calculation of the allowance for credit losses based on historical loss rates alone


/s/ Moss Adams LLP

San Francisco, California
March 13, 202016, 2022


We have served as the Company’s auditor since 2013.


Farmers & Merchants Bancorp
Consolidated Balance Sheets


 December 31, 
(Dollars in thousands, except share and per share amounts) 2021  2020 
ASSETS      
Cash and due from banks $52,499  $66,327 
Interest bearing deposits with banks  662,961   317,510 
Total cash and cash equivalents  715,460   383,837 
Securities available for sale, at fair value  270,454   807,732 
Securities held to maturity, at amortized cost  737,052   68,933 
Total investment securities  1,007,506   876,665 
Non-marketable securities  15,549   12,693 
Loans and leases held for investment  3,237,177   3,099,592 
Allowance for credit losses  (61,007)  (58,862)
Loans held for investment, net  3,176,170   3,040,730 
Bank-owned life insurance  71,411   69,235 
Premises and equipment, net  47,730   50,147 
Deferred income tax assets, net
  25,542   17,093 
Accrued interest receivable  18,098   20,333 
Goodwill  11,183   11,183 
Other intangibles  3,402   4,013 
Other real estate owned  873   873 
Other assets  84,796   63,651 
TOTAL ASSETS $5,177,720  $4,550,453 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Deposits:        
Noninterest bearing $1,750,330  $1,475,425 
Interest bearing:
        
Demand
  1,097,337   902,487 
Savings and money market
  1,400,000   1,260,487 
Certificate of deposits
  392,485   421,868 
Total interest bearing
  2,889,822   2,584,842 
Total deposits  4,640,152   4,060,267 
Subordinated debentures  10,310   10,310 
Other liabilities  64,122   56,211 
TOTAL LIABILITIES  4,714,584   4,126,788 
         
SHAREHOLDERS’ EQUITY        
Preferred shares, 0 par value, 1,000,000 shares authorized and, 0ne issued or outstanding
  0   0 
Common shares, $0.01 par value, 7,500,000 authorized, 789,646 issued and outstanding at December 31, 2021 and 2020, respectively
  8
   8
 
Additional paid in capital  77,516   77,516 
Retained earnings  387,331   333,070 
Accumulated other comprehensive (loss) / income  (1,719)  13,071 
TOTAL SHAREHOLDERS’ EQUITY  463,136   423,665 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $5,177,720  $4,550,453 

See accompanying notes to the consolidated financial statements.

Farmers & Merchants Bancorp
Consolidated Balance Sheets
(in thousands except share and per share data)

  December 31, 
Assets 2019  2018 
Cash and Cash Equivalents:      
Cash and Due from Banks 
$
71,564
  
$
61,058
 
Interest Bearing Deposits with Banks  
223,194
   
84,506
 
Total Cash and Cash Equivalents  
294,758
   
145,564
 
         
Investment Securities:        
Available-for-Sale  
507,386
   
495,396
 
Held-to-Maturity  
60,229
   
53,566
 
Total Investment Securities  
567,615
   
548,962
 
         
Loans & Leases:  
2,673,027
   
2,571,241
 
Less: Allowance for Credit Losses  
55,012
   
55,266
 
Loans& Leases, Net  
2,618,015
   
2,515,975
 
         
Premises and Equipment, Net  
45,271
   
32,623
 
Bank Owned Life Insurance, Net  
67,148
   
65,117
 
Interest Receivable and Other Assets  
129,023
   
126,002
 
Total Assets 
$
3,721,830
  
$
3,434,243
 
         
         
Liabilities        
Deposits:        
Demand 
$
1,067,187
  
$
974,756
 
Interest-Bearing Transaction  
697,952
   
694,384
 
Savings and Money Market  
994,958
   
903,665
 
Time  
517,922
   
490,027
 
Total Deposits  
3,278,019
   
3,062,832
 
         
Subordinated Debentures  
10,310
   
10,310
 
Interest Payable and Other Liabilities  
64,205
   
49,886
 
Total Liabilities  
3,352,534
   
3,123,028
 
         
Commitments & Contingencies (See Note 18)        
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, 793,033 and 783,721        
Shares Issued and Outstanding at December 31, 2019 and 2018, respectively.  
8
   
8
 
Additional Paid-In Capital  
79,947
   
72,974
 
Retained Earnings  
286,036
   
241,221
 
Accumulated Other Comprehensive Income (Loss)  
3,305
   
(2,988
)
Total Shareholders’ Equity  
369,296
   
311,215
 
Total Liabilities and Shareholders’ Equity 
$
3,721,830
  
$
3,434,243
 
The accompanying notes are an integral part of these consolidated financial statements

Farmers & Merchants Bancorp
Consolidated Statements of Income
(in thousands except per share data)

  Year Ended December 31, 
  2019  2018  2017 
Interest Income         
Interest and Fees on Loans & Leases 
$
137,237
  
$
119,837
  
$
102,682
 
Interest on Deposits with Banks  
4,909
   
2,755
   
2,060
 
Interest on Investment Securities:            
Taxable  
9,911
   
9,257
   
8,123
 
Exempt from Federal Tax  
1,651
   
1,604
   
1,747
 
Total Interest Income  
153,708
   
133,453
   
114,612
 
             
Interest Expense            
Deposits  
12,640
   
7,425
   
5,865
 
Borrowed Funds  
-
  ��
1
   
-
 
Subordinated Debentures  
554
   
524
   
424
 
Total Interest Expense  
13,194
   
7,950
   
6,289
 
             
Net Interest Income  
140,514
   
125,503
   
108,323
 
Provision for Credit Losses  
200
   
5,533
   
2,850
 
Net Interest Income After Provision for Credit Losses  
140,314
   
119,970
   
105,473
 
             
Non-Interest Income            
Service Charges on Deposit Accounts  
3,673
   
3,479
   
3,453
 
Net Gain (Loss) on Investment Securities  
1
   
(1,260
)
  
131
 
Increase in Cash Surrender Value of Life Insurance  
2,031
   
1,900
   
1,822
 
Debit Card and ATM Fees  
5,120
   
4,365
   
3,873
 
Net Gain on Deferred Compensation Investments  
2,625
   
1,088
   
2,563
 
Other  
3,791
   
5,647
   
4,920
 
Total Non-Interest Income  
17,241
   
15,219
   
16,762
 
             
Non-Interest Expense            
Salaries and Employee Benefits  
55,250
   
50,054
   
45,746
 
Net Gain on Deferred Compensation Investments  
2,625
   
1,088
   
2,563
 
Occupancy  
4,295
   
3,905
   
3,543
 
Equipment  
4,921
   
4,303
   
3,994
 
Marketing  
1,254
   
1,232
   
1,027
 
Legal  
2,347
   
968
   
424
 
FDIC Insurance  
624
   
912
   
932
 
Gain on Sale of ORE  
-
   
-
   
(414
)
Acquisition Expenses  
-
   
2,933
   
-
 
Other  
10,926
   
10,064
   
9,939
 
Total Non-Interest Expense  
82,242
   
75,459
   
67,754
 
             
Income Before Income Taxes  
75,313
   
59,730
   
54,481
 
Provision for Income Taxes  
19,277
   
14,203
   
26,111
 
Net Income 
$
56,036
  
$
45,527
  
$
28,370
 
Basic and Diluted Earnings Per Common Share 
$
71.18
  
$
56.82
  
$
35.03
 
The accompanying notes are an integral part of these consolidated financial statements

FARMERS & MERCHANTS BANCORP
Consolidated Statements of Comprehensive Income
(in thousands)

  Year Ended December 31, 
  2019  2018  2017 
Net Income 
$
56,036
  
$
45,527
  
$
28,370
 
             
Other Comprehensive Loss            
Net Unrealized Gain (Loss) on Available-for-Sale Securities  
8,936
   
(4,343
)
  
(1,011
)
Deferred Tax Benefit Related to Unrealized (Gain) Losses  
(2,642
)
  
1,284
   
281
 
             
Reclassification Adjustment for Realized (Gain) Loss  on Available-for-Sale Securities Included in Net Income  
(1
)
  
1,260
   
(131
)
Tax  (Benefit) Expense Related to Reclassification Adjustment  
-
   
(372
)
  
55
 
Change in Net Unrealized Gain (Loss) on Available-for-Sale Securities, Net of Tax  
6,293
   
(2,171
)
  
(806
)
             
Total Other Comprehensive Income (Loss)  
6,293
   
(2,171
)
  
(806
)
             
Comprehensive Income 
$
62,329
  
$
43,356
  
$
27,564
 
The accompanying notes are an integral part of these consolidated financial statements

Farmers & Merchants Bancorp
Consolidated Statements of Changes in Shareholders’ Equity
(in thousands except share and per share data)

  
Common
Shares
Outstanding
  
Common
Stock
  
Additional
Paid-In
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
(Loss) Income
  
Total
Shareholders’
Equity
 
Balance, January 1, 2017  
807,329
  
$
8
  
$
90,671
  
$
189,313
  
$
(11
)
 
$
279,981
 
Net Income              
28,370
       
28,370
 
Cash Dividends Declared on Common Stock ($13.55 per share)              
(10,982
)
      
(10,982
)
Issuance of Common Stock  
4,975
       
2,953
           
2,953
 
Tax Adjustment of Available-for-Sale Securities Reclassed from AOCI              
144
   
(144
)
  
-
 
Change in Net Unrealized Loss on Securities Available-for-Sale                  
(662
)
  
(662
)
Balance, December 31, 2017  
812,304
  
$
8
  
$
93,624
  
$
206,845
  
$
(817
)
 
$
299,660
 
Net Income              
45,527
       
45,527
 
Cash Dividends Declared on Common Stock ($13.90 per share)              
(11,151
)
      
(11,151
)
Repurchase of Common Stock  
(44,503
)
      
(31,152
)
          
(31,152
)
Issuance of Common Stock  
15,920
       
10,502
           
10,502
 
Change in Net Unrealized Loss on Securities Available-for-Sale                  
(2,171
)
  
(2,171
)
Balance, December 31, 2018  
783,721
   
8
   
72,974
   
241,221
   
(2,988
)
  
311,215
 
Net Income              
56,036
       
56,036
 
Cash Dividends Declared on Common Stock ($14.20 per share)              
(11,221
)
      
(11,221
)
Issuance of Common Stock  
9,312
       
6,973
           
6,973
 
Change in Net Unrealized Gain on Securities Available-for-Sale                  
6,293
   
6,293
 
Balance, December 31, 2019  
793,033
  
$
8
  
$
79,947
  
$
286,036
  
$
3,305
  
$
369,296
 
The accompanying notes are an integral part of these consolidated financial statements

Farmers & Merchants Bancorp
Consolidated Statements of Cash Flows
(in thousands)

  Year Ended December 31, 
  2019  2018  2017 
Operating Activities         
Net Income 
$
56,036
  
$
45,527
  
$
28,370
 
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:            
Provision for Credit Losses  
200
   
5,533
   
2,850
 
Depreciation and Amortization  
2,756
   
2,421
   
2,186
 
(Benefit) Provision for Deferred Income Taxes  
(3,254
)
  
5,462
   
12,605
 
Net Amortization of Investment Security Premium & Discounts  
510
   
861
   
1,430
 
Amortization of Core Deposit Intangible  
639
   
228
   
110
 
Accretion of Discount on Acquired Loans  
(47
)
  
(153
)
  
(202
)
Net (Gain) Loss on Investment Securities  
(1
)
  
1,260
   
(131
)
Net Loss (Gain) on Sale of Property & Equipment  
87
   
(273
)
  
(1,189
)
Net Gain on sale of ORE  
-
   
-
   
(414
)
Earnings from Equity Investment  
-
   
(66
)
  
-
 
Dividends from Equity Investment  
-
   
63
   
-
 
Gain on Remeasurement of Previously Held Equity Investment  
-
   
(997
)
  
-
 
Net Change in Operating Assets & Liabilities:            
Net Decrease (Increase) in Interest Receivable and Other Assets  
18,949
   
(2,098
)
  
(275
)
Net Increase (Decrease) in Interest Payable and Other Liabilities  
4,983
   
6
   
(5,396
)
Net Cash Provided by Operating Activities  
80,858
   
57,774
   
39,944
 
Investing Activities            
Purchase of Investment Securities Available-for-Sale  
(652,280
)
  
(465,414
)
  
(325,573
)
Proceeds from Sold, Matured, or Called Securities Available-for-Sale  
644,244
   
550,727
   
289,857
 
Purchase of Investment Securities Held-to-Maturity  
(16,376
)
  
(9,813
)
  
(1,205
)
Proceeds from Matured, or Called Securities Held-to-Maturity  
10,871
   
10,647
   
4,794
 
Net Loans & Leases Paid, Originated or Acquired  
(102,413
)
  
(276,066
)
  
(38,178
)
Principal Collected on Loans & Leases Previously Charged Off  
220
   
158
   
259
 
Cash Paid for Acquisition, Net  
-
   
(5,987
)
  
-
 
Additions to Premises and Equipment  
(15,537
)
  
(4,577
)
  
(4,254
)
Purchase of Other Investment  
(4,400
)
  
(5,750
)
  
(14,380
)
Proceeds from Sale of Property & Equipment  
41
   
986
   
3,304
 
Proceeds from Sale of ORE  
-
   
-
   
3,186
 
Net Cash Used in Investing Activities  
(135,630
)
  
(205,089
)
  
(82,190
)
Financing Activities            
Net Increase in Deposits  
215,187
   
148,033
   
141,517
 
Stock Repurchases  
-
   
(31,152
)
  
-
 
Cash Dividends  
(11,221
)
  
(11,151
)
  
(10,982
)
Net Cash Provided by Financing Activities  
203,966
   
105,730
   
130,535
 
Net Change in Cash and Cash Equivalents  
149,194
   
(41,585
)
  
88,289
 
Cash and Cash Equivalents at Beginning of Year  
145,564
   
187,149
   
98,860
 
Cash and Cash Equivalents at End of Year 
$
294,758
  
$
145,564
  
$
187,149
 
Supplementary Data            
Cash Payments Made for Income Taxes 
$
7,342
  
$
7,971
  
$
13,942
 
Issuance of Common Stock to the Bank’s Non-Qualified Retirement Plans 
$
6,973
  
$
10,502
  
$
2,953
 
Interest Paid 
$
11,755
  
$
7,731
  
$
6,005
 
Supplementary Noncash Disclosure            
Lease Liabilities Arising from Obtaining Right-of-Use Assets 
$
5,645
   
-
   
-
 
             
Acquisitions:            
Fair Value of Assets Acquired 
$
-
  
$
234,456
  
$
-
 
Fair Value of Liabilities Acquired 
$
-
  
$
192,809
  
$
-
 
The accompanying notes are an integral part of these consolidated financial statements

Notes to Consolidated Financial Statements

1. Significant Accounting Policies

Farmers & Merchants Bancorp (the “Company”
Consolidated Statements of Income


 Year Ended December 31, 
(Dollars in thousands, except share and per share amounts) 2021  2020  2019 
Interest income         
Interest and fees on loans and leases $147,208  $143,383  $137,237 
Interest and dividends on investments  17,158   14,704   12,476 
Interest on deposits with others  902   1,207   4,909 
Total interest income  165,268   159,294   154,622 
             
Interest expense            
Deposits  4,017   9,113   12,640 
Borrowed funds  0   0   0 
Subordinated debentures  315   378   554 
Total interest expense  4,332   9,491   13,194 
Net interest income  160,936   149,803   141,428 
Provision for credit losses  1,910   4,500   200 
Net interest income after provision for credit losses  159,026   145,303   141,228 
Noninterest income            
Card processing  6,959   5,536   5,120 
Service charges on deposit accounts  2,972   2,637   3,673 
Increase in cash surrender value of BOLI  2,175   2,088   2,031

Gain on sale of investment securities  2,554   40   1 
Net gain on deferred compensation investments  2,614   1,777   2,625 
Other  3,782   2,976   2,877 
Total noninterest income  21,056   15,054   16,327 
Noninterest expense            
Salaries and employee benefits  63,860   56,950   55,250 
Net gain on deferred compensation benefits
  2,614   1,777   2,625 
Occupancy  4,675   4,640   4,295 
Data Processing  4,967   4,994   4,921 
FDIC insurance  1,237   517   624 
Marketing  1,097   922   1,254 
Legal  140   128   2,347 
Other  13,171   12,478   10,926 
Total noninterest expense  91,761   82,406   82,242 
INCOME BEFORE INCOME TAXES  88,321   77,951   75,313 
Income tax expense
  21,985   19,217   19,277 
NET INCOME
 $66,336  $58,734  $56,036 
             
Earnings per common share:
            
Basic
 $
84.01  $
74.03  $
71.18 
Diluted $84.01  $
74.03  $
71.18 

See accompanying notes to the consolidated financial statements.

FARMERS & MERCHANTS BANCORP
Consolidated Statements of Comprehensive Income


 Year Ended December 31, 
(Dollars in thousands) 2021  2020  2019 
Net income $66,336  $58,734  $56,036 
Other comprehensive income
            
Unrealized holding (losses)/gains on securities available for sale  (17,986)  13,905   8,936 
Reclassification adjustment for (gains)/losses on available for sale securities  (2,554)  (40)  (1)
Amortization of unrealized loss on securities transferred to held to maturity  (457)  0   0 
Net unrealized holding (losses)/gains on securities available for sale  (20,997)  13,865   8,935 
Income tax income/(expense)  6,207   (4,099)  (2,642)
Other comprehensive (loss)/income, net of tax  (14,790)  9,766   6,293 
Total comprehensive income $51,546  $68,500  $62,329 

See accompanying notes to the consolidated financial statements.

Farmers & Merchants Bancorp
Consolidated Statements of Changes in Shareholders’ Equity
For the Three Years Ended December 31, 2021

(Dollars in thousands, except share amounts) 
Common
Shares
  Amount  
Additional
Paid-In
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
(Loss)/Income
  Total 
Balance as of January 1, 2019
  783,721  $8  $72,974  $241,221  $(2,988) $311,215 
Net income  -
   0   0   56,036   0   56,036 
Other comprehensive income, net of tax  -
   0   0   0   6,293   6,293 
Cash dividends declared ($14.20 per share)
  -
   0   0   (11,221)  0   (11,221)
Issuance of common stock  9,312   0   6,973   0   0   6,973 
Balance as of December 31, 2019
  793,033  $8  $79,947  $286,036  $3,305  $369,296 
Net income  -
   0   0   58,734   0   58,734 
Other comprehensive income, net of tax  -
   0   0   0   9,766   9,766 
Cash dividends declared ($14.75 per share)
  -
   0   0   (11,700)  0   (11,700)
Issuance of common stock  523   0   403   0   0   403 
Repurchase of common stock  (3,910)  0   (2,834)  0   0   (2,834)
Balance as of December 31, 2020
  789,646  $8  $77,516  $333,070  $13,071  $423,665 
Net income  -
   0   0   66,336   0   66,336 
Other comprehensive loss, net of tax  -
   0   0   0   (14,790)  (14,790)
Cash dividends declared ($15.30 per share)
  -
   0   0   (12,075)  0   (12,075)
Balance as of December 31, 2021
  789,646  $8  $77,516  $387,331  $(1,719) $463,136 

See accompanying notes to the consolidated financial statements.

Farmers & Merchants Bancorp
Consolidated Statements of Cash Flows


 Year Ended December 31, 
(Dollars in thousands) 2021  2020  2019 
Cash flows from operating activities:         
Net income $66,336  $58,734  $56,036 
Adjustments to reconcile net income to net cash provided by operating activities:            
Provision for credit losses  1,910   4,500   200 
Depreciation and amortization  2,632   2,769   2,756 
Net amortization of securities premiums and discounts  1,446   1,159   510 
Increase in cash surrender value of BOLI  (2,176)  (2,087)  (2,031)
Decrease/(increase) in deferred income taxes, net  (880)  (1,962)  (3,254)
(Gains)/losses on sale of securities available for sale  (2,554)  (40)  (1)
Net changes in:            
Other assets
  (12,432)  (818)  21,659 
Other liabilities
  5,681   (4,136)  4,983 
Net cash provided by operating activities  59,963   58,119   80,858 
Cash flows from investing activities:            
Net change in loans held for investment  (137,216)  (427,049)  (102,193)
Purchase of available for sale securities  (257,231)  (670,550)  (652,280)
Purchase of held to maturity securities  (395,176)  (22,020)  (16,376)
Purchase of non-marketable securities  (2,856)  0   0 
Maturities/sales of available for sale securities  458,855   383,257   644,244 
Maturities of held to maturity securities  43,287   13,299   10,871 
Purchase of premises and equipment  (2,069)  (7,709)  (15,537)
Purchase of other investments  (8,192)  (6,063)  (4,400)
Redemption of other investments  2,752   0   0 
Proceeds from sale of assets  1,696   81   41 
Net cash used in investing activities  (296,150)  (736,754)  (135,630)
Cash flows from financing activities:            
Net increase in deposits  579,885   782,248   215,187 
Cash dividends paid  (12,075)  (11,700)  (11,221)
Net cash used in share repurchase program  0   (2,834)  0 
Net provided by financing activities  567,810   767,714   203,966 
Net change in cash and cash equivalents  331,623   89,079   149,194 
Cash and cash equivalents, beginning of year  383,837   294,758   145,564 
Cash and cash equivalents, end of year $715,460  $383,837  $294,758 
             
Supplemental disclosures of cash flow information:            
Cash paid for interest $4,369  $10,903  $11,755 
Income taxes paid $29,941  $9,581  $7,342 
Issuance of common stock
 $0  $403  $6,973 
             
Supplemental disclosures of non-cash transactions:            
Investment securities available for sale transferred to held to maturity
 $
316,925  $
0  $
0 
Unrealized (losses)/gains on securities available for sale $20,540  $(13,865) $8,935 
Lease liabilities from obtaining right-of-use assets $295  $0  $5,645 

See accompanying notes to the consolidated financial statements.

FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS


Note 1—Summary of Significant Accounting Policies

Nature of Operations and basis of consolidation — Farmers & Merchants Bancorp (“FMCB”) was organized March 10, 1999. Primary operations are related to traditional banking activities through its subsidiaryis a Delaware corporation headquartered in Lodi, California and is the bank holding company for Farmers & Merchants Bank of Central California (the “Bank” or “F&M Bank” and together with FMCB, the “Company”). The Company operates all business activities through the Bank, which was establishedorganized in 1916. The Bank’s wholly owned subsidiaries include Farmers & Merchants Investment CorporationF&M Bank is a California state-chartered bank. F&M Bank operates under the supervision of the California Department of Financial Protection and Farmers/Merchants Corp. Farmers & Merchants Investment Corporation has been dormant since 1991. Farmers/Merchants Corp. acts as trustee on deeds of trust originatedInnovation (“DFPI”), and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). F&M Bank is not a member of the Federal Reserve System; however, FMCB operates as a bank holding company under the Federal Bank Holding Company Act of 1956, subject to and under the supervision of and examination by the Board of Governors of the Federal Reserve System (“FRB”) and is the sole shareholder of F&M Bank. Both FMCB and F&M Bank are subject to periodic examination by these applicable federal and state regulatory agencies and file periodic reports and other information with the agencies. The Company considers F&M Bank to be its sole operating segment.


The Company’s other wholly ownedwholly-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.


On October 10, 2018, Farmers & Merchants Bancorp completed
Through its network of 29 banking offices and 3 ATMs, F&M Bank emphasizes personalized service along with a broad range of banking services to businesses and individuals located in the acquisitionservice areas of its offices. Although the Company focuses on marketing its services to small and medium-sized businesses, a broad range of retail banking services are also made available to the local consumer market. F&M Bank branches are located through the mid Central Valley of California, including Sacramento, San Joaquin, Solano, Stanislaus and Merced counties and the east region of the San Francisco Bay Area including Napa and Contra Costa counties.

F&M Bank provides a broad complement of Rio Vista, headquartered in Rio Vista, California,lending products, including commercial, commercial real estate, real estate construction, agribusiness, consumer, credit card, residential real estate loans, and equipment leases. Commercial products include term loans, leases, lines of credit and other working capital financing and letters of credit. Financing products for individuals include automobile financing, lines of credit, residential real estate, home improvement and home equity lines of credit.

F&M Bank also offers a locally ownedwide range of deposit instruments. These include checking, savings, money market, time certificates of deposit, individual retirement accounts and operated community bank established in 1904. Asonline banking services for both business and personal accounts.

F&M Bank offers a wide range of specialized services designed for the acquisition date,needs of its commercial accounts. These services include a credit card program for merchants, lockbox and other collection services, account reconciliation, investment sweep, on-line account access, and electronic funds transfers by way of domestic and international wire and automated clearinghouse.

80

Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Note 1—Summary of Significant Accounting Policies—Continued


F&M Bank of Rio Vista had approximately $217.5 million in assetsmakes investment products available to customers, including mutual funds and three branch locations in the communities of Rio Vista, Walnut Grove,annuities. These investment products are offered through a third-party, which employs investment advisors to meet with and Lodi. Since the Company had a 39.65% interest in Bank of Rio Vista priorprovide investment advice to the acquisition of the remaining interest, the transaction was accounted for as a business combination achieved in stages or a step acquisition. The Company, through an independent valuation, remeasured its previously held equity interest in Bank of Rio Vista at fair value, which resulted in a gain for the excess of the acquisition-date fair value over its carrying value of $997,000 which is included in other non-interest income in the consolidated statements of income. At the effective time of the acquisition, Bank of Rio Vista was merged into Farmers & Merchants Bank of Central California.Company’s customers.




The accounting and reporting policiesconsolidated financial statements of the Company conform to U.S. GAAPinclude the accounts of FMCB together with the Bank. All intercompany transactions and prevailing practice within the banking industry.balances have been eliminated.

Use of estimates The following is a summarypreparation 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 accordanceconformity 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 preparation of consolidated financial statements in conformity with U.S. GAAP(“GAAP”) requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reportingreported period. Actual results could differ from thesethose estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses (“ACL”),the determination of the fair value of certain financial instruments, and deferred income tax assets.


Reclassifications — Certain amounts in the prior years’ financial statements and related footnote disclosures have been reclassified to conform to the current-yearcurrent year’s presentation.  These reclassifications hadThere was no effectimpact on previously reported net income or totalretained earnings as a result of any reclassification.

Cash and cash equivalents — Cash and cash equivalents consist of cash on hand, amounts due from banks, interest bearing deposits, and federal funds sold, all of which have original maturities of three months or less. The Company places its cash with high credit quality institutions. The amounts on deposit fluctuate and, at times, exceed the insured limit by the FDIC, which potentially subjects the Company to credit risk.  For these instruments, the carrying amount is a reasonable estimate of fair value.

Investment securities — Investment securities are classified as held to maturity (“HTM”) when the Company has the positive intent and ability to hold the securities to maturity. Investment securities are classified as available for sale (“AFS”) when the Company has the intent of holding the security for an indefinite period of time, but not necessarily to maturity. The Company determines the appropriate classification at the time of purchase, and periodically thereafter.  Investment securities classified at HTM are carried at amortized cost. Investment securities classified at AFS are reported at fair value. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Debt securities classified as held to maturity are carried at cost. Debt securities classified as available for sale are measured at fair value. Unrealized holding gains and losses on debt securities classified as available for sale are excluded from earnings and are reported net of tax as accumulated other comprehensive income (AOCI), a component of shareholders’ equity.

equity, until realized. When AFS securities, specifically identified, are sold, the unrealized gain or loss is reclassified from AOCI to non-interest income.
74
When the estimated fair value of a security is lower than the book value, a security is considered impaired and the Company evaluates it for other-than-temporary impairment (“OTTI”).  If there is intent to sell the security, or if the Company will be required to sell the security, or if the Company believes it will not recover the entire cost basis of the security, the security is other-than-temporarily impaired and impairment is recognized.  The amount of impairment resulting from credit loss is recognized in earnings and impairment related to all other factors, such as general market conditions, is recognized in AOCI.

81

Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
New
Note 1—Summary of Significant Accounting ChangesPolicies—Continued
The FASB issued guidance
Management considers a number of factors in February 2016, with amendmentsits analysis of whether a decline in 2018a security’s estimated fair value is OTTI. Certain factors considered include, but are not limited to: (a) the length of time and 2019,the extent to which changed the accounting for leases. The guidance requires lessees to recognize right-of-use (ROU) assets and lease liabilities for most leases where we are the lesseesecurity has been in an unrealized loss position, (b) changes in the financial condition of the issuer, (c) the payment structure of debt securities, (d) adverse changes in ratings issued by rating agencies, (e) and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

Interest income is recognized based on the coupon rate, and is increased by the accretion of discounts earned or decreased by the amortization of premiums paid. The amortization of premiums or the accretion of discounts are recognized in interest income using the effective interest method over the period of maturity.

Non-marketable equity securities — Non-marketable equity securities primarily consist of Federal Home Loan Bank (“FHLB”) stock. FHLB stock is restricted because such stock may only be sold to FHLB at its par value. Due to the restrictive terms, and the lack of a readily determinable market value, FHLB stock is carried at cost. The investments in FHLB stock are required investments related to the Bank’s borrowings from FHLB. FHLB obtains its funding primarily through issuance of consolidated obligations of the FHLB system. The U.S. government does not guarantee these obligations, and each of the regional FHLBs are jointly and severally liable for repayment of each other’s debt.

Loans and leases held for investment — Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on acquired loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the effective interest method.

Loans are placed on non-accrual status when they become 90 days or more past due or at such earlier time as management determines timely recognition of interest to be in doubt. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, collection efforts, and the borrower’s financial condition, that the borrower will be unable to make payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received, or payment is considered certain. Loans may be returned to accrual status when all delinquent interest and principal amounts contractually due are brought current and future payments are reasonably assured.

Impaired loan and leases — The Company considers loans impaired when, based on current information and events, it is probable the Company will be unable to collect all principal and interest payments due according to the contractual terms of the loan agreement. Such loans are generally classified as Substandard or Doubtful loans. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral, if the loan is collateral dependent. Changes in these values are recorded to provision for loan losses and as adjustments to the ACL.


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Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.

Restructured loan and leases— A restructuring of a loan or lease constitutes a troubled debt restructuring (“TDR”) if the Company for economic or legal reasons related to the borrower’s (the term “borrower” is used herein to describe a customer who has entered into either a loan or lease transaction) financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured loans and leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans and leases that are on nonaccrual status at the time they become TDR, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms. However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment as described above.

Generally, the Company will not restructure loans or leases for borrowers unless: (1) the existing loan or lease is brought current as to principal and interest payments; and (2) the restructured loan or lease can be underwritten to reasonable underwriting standards. If these standards are not met other actions will be pursued (e.g., foreclosure) to collect outstanding loan or lease amounts. After restructure, a determination is made whether the loan or lease will be kept on accrual status based upon the underwriting and historical performance of the restructured credit.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law and was amended and extended by the Consolidated Balance Sheets.Appropriations Act of 2021 (“H.R. 133”) on December 21, 2020. The CARES Act and H.R. 133 provide financial institutions, under specific circumstances, the opportunity to temporarily suspend certain requirements under generally accepted accounting principles related to modifications for a limited period to account for the effects of COVID-19. In March 2020, a joint statement was issued by federal and state regulatory agencies, after consultation with the FASB, to clarify that short-term loan modifications are not TDRs if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to any relief. Under this guidance, six months is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification program is implemented. The guidance also made some changes to lessor accounting, includingprovides that these modified loans generally will not be classified as nonaccrual during the eliminationterm of the usemodification. See “Note 2 – Risks and Uncertainties” for additional information on the CARES Act, H.R. 133 and the impact of third-party residual value guarantee insuranceCOVID-19 on the Company.

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Allowance for credit losses — The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company’s loan & lease classification test,portfolio as of the balance sheet date. The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan & lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall alignsallowance consists of 3 primary components: specific reserves related to impaired loans and leases; general reserves for inherent losses related to loans and leases that are not impaired; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors.

The determination of the new revenue recognition guidance. general reserve for loans and leases that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, qualitative factors that include economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan & lease portfolio, and probable losses inherent in the portfolio taken as a whole.

The guidance also requires qualitativeCompany maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and quantitative disclosuresdevelopment loans); (4) residential 1st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer and other; and (9) equipment leases. The allowance for credit losses attributable to assesseach portfolio segment, which includes both individually evaluated impaired loans and leases and loans and leases that are collectively evaluated for impairment, is combined to determine the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leasesCompany’s overall allowance, which is included on the consolidated balance sheetsheet.

The Company assigns a risk rating to all loans and leases and periodically performs detailed reviews of all such loans and leases over a certain threshold to identify credit risks and assess overall collectability. For smaller balance loans and leases, such as consumer and residential real estate, a credit grade is established at inception, and then updated only when the beginningloan or lease becomes contractually delinquent or when the borrower requests a modification. For larger balance loans, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans and leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into 5 major categories, defined as follows:

Pass and watch – A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management’s close attention. This category also includes “Watch” loans, which is a loan with an emerging weakness in either the earliest period presentedindividual credit or industry that requires additional attention. A credit may also be classified Watch if cash flows have not yet stabilized, such as in the case of a development project. Included in this category are all loans in which the Bank entered into a CARES Act modification.

Special mention – A special mention loan or lease has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the beginning ofrepayment prospects for the period of adoption with the option to elect certain practical expedients. The Company elected the package of practical expedients not to reassess prior conclusions related to contracts containing leases,loan or lease classification and initial direct costs (IDC’s). From a lessor perspective, the changes in lease termination guidance, IDC and removal of third-party residual value guarantee insuranceor in the lease classification test didCompany’s credit position at some future date. Special mention loans and leases are not have a material impact on the consolidated financial results. We adopted ASU No. 2016-02 Leases (Topic 842), as of January 1, 2019, using the cumulative effect transition approach. The cumulative effect transition approach provides a method for recording existing leases at adoptionadversely classified and do not restated comparative periods; rather the effect of the change is recorded at the beginning of the year of adoption.  The Company elected the ASU’s package of three practical expedients, which allowedexpose the Company to foregosufficient risk to warrant adverse classification.

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Substandard – A substandard loan or lease is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans or leases classified as substandard have a reassessmentwell-defined weakness or weaknesses that jeopardize the liquidation of (i) whether any expiredthe debt. Well-defined weaknesses include a project’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project’s failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans or leases classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable or improbable.

Loss – Loans or leases classified as loss are considered uncollectible. Once a loan or lease becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Company will estimate its probable loss and immediately charge-off some or all of the balance.

The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk; (2) historical losses; and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below:

Commercial real estate – Commercial real estate mortgage loans are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties affect the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.

Real estate construction – Real estate construction loans, including land loans, are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly affect the credit quality of these loans, as property values determine the economic viability of construction projects.

Commercial – These loans are generally considered to possess a moderate inherent risk of loss because they are shorter-term; typically made to relationship customers; generally underwritten to existing contracts containcash flows of operating businesses; and may be collateralized by fixed assets, inventory and/or accounts receivable. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

Agricultural real estate and agricultural – These loans are generally considered to possess a moderate inherent risk of loss since they are typically made to relationship customers and are secured by crop production, livestock and related real estate. These loans are vulnerable to 2 risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.

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Commercial leases (ii) – Equipment leases are generally considered to possess a moderate inherent risk of loss. As lessor, the lease classificationCompany is subject to both the credit risk of the borrower and the residual value risk of the equipment. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed with qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

Residential 1st mortgages and home equity lines and loans – These loans are generally considered to possess a lower inherent risk of loss. The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.

Consumer & other – A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made for any expired or existing leasesconsumer purchases. Economic trends determined by unemployment rates and (iii)other key economic indicators are closely correlated to the initial direct costs for any existing leases. credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.

At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company’s and Bank’s regulators, including the Federal Reserve Board (“FRB”), the California Department of Financial Protection and Innovation (“DFPI”) and the Federal Deposit Insurance Corporation (“FDIC”), as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.

Premises and equipment — Land is carried at cost. Premises and equipment are carried at cost, net of accumulated depreciation and amortization. Depreciation and amortization expense is computed using the straight-line method based on the estimated useful lives of the related assets below:

Building and building improvements30 to 40 years
Leasehold improvementsterm of lease
Furniture and equipment3 to 7 years
Computers, software and equipment3 to 7 years

Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized.

Bank-owned life insurance (“BOLI”)The Company electedBank has purchased life insurance policies. These policies provide protection against the option notadverse financial effects that could result from the death of a key employee and provide tax-exempt income to separate lease and non-lease components and insteadoffset expenses associated with the plans. It is the Bank’s intent to account for themhold these policies as a single lease componentlong-term investment; however, there may be an income tax impact if the Bank chooses to surrender certain policies. Although the lives of individual current or former management-level employees are insured, the Bank is the owner and sole or partial beneficiary. BOLI is carried at the hindsight practical expedient, which allows entitiescash surrender value (“CSV”) of the underlying insurance contract. Changes in the CSV and any death benefits received in excess of the CSV are recognized as non-interest income.

Goodwill — Goodwill represents the excess of the purchase considerations paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination and is not amortized but is reviewed annually, as of December 31, or more frequently as current circumstances and conditions warrant, for impairment. An assessment of qualitative factors is completed to use hindsight when determining lease term anddetermine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative analysis concludes that further analysis is required, then a quantitative impairment of right-of-use assets.

test would be completed. The Company has several lease agreements, such as branch locations, which are considered operating leases, and therefore, were not previously recognized onquantitative goodwill impairment compares the Company’s consolidated statements of condition. The new guidance requires these lease agreementsreporting unit’s estimated fair values, including goodwill, to its carrying amount. If the carrying amount exceeds its reporting unit’s fair value, then an impairment loss would be recognized as a right-of-use assetcharge to earnings but is limited by the amount of goodwill allocated to that reporting unit.

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Other intangible assets — Other intangible assets consist primarily of core deposit intangibles (“CDI”), which are amounts recorded in business combinations or deposit purchase transactions related to the value of transaction-related deposits and corresponding lease liability.the value of the client relationships associated with the deposits. Core deposit intangibles are amortized over the estimated useful life of such deposits. These assets are reviewed at least annually for events or circumstances that could affect their recoverability. These events could include loss of the underlying core deposits, increased competition or adverse changes in the economy. To the extent other identifiable intangible assets are deemed unrecoverable; impairment losses are recorded in other non-interest expense to reduce the carrying amount of the assets.

Transfers of financial assets — Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
 
Our operatingRight of use lease asset & lease liability — The Company leases relate primarily toretail space and office space under operating leases. Most leases require the Company to pay real estate taxes, maintenance, insurance and bank branches. As a result of implementing ASU 2016-02, weother similar costs in addition to the base rent. Certain leases also contain lease incentives, such as tenant improvement allowances and rent abatement. Variable lease payments are recognized as lease expense as they are incurred.

We record an operating lease right-of-useright of use (“ROU”) asset of $4.73 million and an operating lease liability of $4.73 million on January 1, 2019,(lease liability) for operating leases with no impact on our consolidated statement of income or consolidated statement of cash flows compared to the priora lease accounting model.term greater than 12 months. The ROU asset and operating lease liability are recorded in other assets and other liabilities, respectively, in the consolidated balance sheets. See Note 19 – “Leases”ROU assets represent our right to use an underlying asset for additional information.

Outthe lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of Period Adjustment
Duringlease payments over the quarter ended September 30, 2018, while preparing 2017 tax returns,lease term. Accordingly, ROU assets are reduced by tenant improvement allowances from property owners plus any prepaid rent. We do not separate lease and non-lease components of contracts. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. Many of our leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule, which are factored into our determination of lease payments when appropriate. A majority of the leases provide the Company identifiedwith the option to extend the lease term one or more times following expiration of the initial term. The ROU asset and lease liability terms may include options to extend or terminate the lease when it is reasonably certain itemsthat we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Off-balance sheet credit related financial instruments — In the ordinary course of business, the Company has entered into commitments to IRS Code Section 162(m)extend credit, including commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.

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Allowance for credit losses - unfunded loan commitments — An allowance for credit losses - unfunded loan commitments is maintained at a level that, were not appropriately reflected in the 2014 through 2017 Provisionopinion of management, is adequate to absorb current expected credit losses associated with the contractual life of the Banks’ commitments to lend funds under existing agreements such as letters or lines of credit. The Banks use a methodology for Income Taxes. To reflect this change,determining the cumulative impactallowance for credit losses - unfunded loan commitments that applies the same segmentation and loss rate to each pool as the funded exposure adjusted for probability of $990,000 wasfunding. Draws on unfunded loan commitments that are considered uncollectible at the time funds are advanced are charged to the allowance for credit losses on off-balance sheet exposures. Provisions for credit losses - unfunded loan commitments are recognized by reducingin non-interest expense and added to the Company’s Provisionallowance for Income Taxescredit losses - unfunded loan commitments, which is included in other liabilities in the third quarter of 2018.  After evaluating the quantitative and qualitative aspects of the adjustment, the Company concluded that its 2017 financial statements were not materially misstated and, therefore, no restatement was required.consolidated balance sheets.


Revenue from Contractscontracts with Customers
customers The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods. The Company elected to use the modified retrospective transition method which requires application of ASU 2014-09 to uncompleted contracts at the date of adoption however, periods prior to the date of adoption will not be retrospectively revised, as the impact of the ASU on uncompleted contracts at the date of adoption was not material.

 
The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is limited judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.


Cashtemporary differences between financial reporting and Cash Equivalents
For purposes oftax reporting measured at enacted tax rates in effect for 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 3 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 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 periodyear in which they occur.

Securitiesthe differences are classified as available-for-sale (“AFS”) if it is management’s intent, atexpected to reverse.  The Company recognizes only the timeimpact 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 aretax positions that, based on quoted market prices or broker/dealer price quotations on a specific identification basis. Gains or losses on the sale of these securitiestheir technical merits, are computed using the specific identification method.

Trading securities, if any, are acquired for short-term appreciation and are recorded in a trading portfolio and are carried at fair value, with unrealized gains and losses recorded in non-interest income.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement; and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

For equity securities, the entire amount of a market adjustment is recognized through earnings.

Loans & Leases
Loans & leases are reported at the principal amount outstanding net of unearned discounts and deferred loan & lease fees and costs. Interest income on loans & leases is accrued daily on the outstanding balances using the simple interest method. Loan & lease origination fees are deferred and recognized over the contractual life of the loan or lease as an adjustment to the yield. Loans & leases are placed on non-accrual status when the collection of principal or interest is in doubt or when they become past due for 90 days or more unless they are both well-secured and in the process of collection. For this purpose, a loan or lease is considered well-secured if it is collateralized by property having a net realizable value in excess of the amount of the loan or lease or is guaranteed by a financially capable party. When a loan or lease is placed on non-accrual status, the accrued and unpaid interest receivable is reversed and charged against current income; thereafter, interest income is recognized only as it is collected in cash. Additionally, cash would be applied to principal if all principal was not expected to be collected. Loans & leases placed on non-accrual status are returned to accrual status when the loans or leases are paid current as to principal and interest and future payments are expected to be made in accordance with the contractual terms of the loan or lease.

A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Impaired loans & leases are either: (1) non-accrual loans & leases; or (2) restructured loans & leases that are still accruing interest. Loans or leases determined to be impaired are individually evaluated for impairment. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan or lease’s effective interest rate, except that as a practical expedient, it may measure impairment based on a loan or lease’s observable market price, or the fair value of the collateral if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral.

A restructuring of a loan or lease constitutes a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the borrower’s (the term “borrower” is used herein to describe a customer who has entered into either a loan or lease transaction) financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured loans & leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans & leases that are on nonaccrual status at the time they become TDR, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms. However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment as described above.

Generally, the Company will not restructure loans or leases for borrowers unless: (1) the existing loan or lease is brought current as to principal and interest payments; and (2) the restructured loan or lease can be underwritten to reasonable underwriting standards. If these standards are not met other actions will be pursued (e.g., foreclosure) to collect outstanding loan or lease amounts. After restructure, a determination is made whether the loan or lease will be kept on accrual status based upon the underwriting and historical performance of the restructured credit.

Allowance for Credit Losses
The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company’s loan & lease portfolio as of the balance sheet date. The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan & lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of three primary components: specific reserves related to impaired loans & leases; general reserves for inherent losses related to loans & leases that are not impaired; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors.

The determination of the general reserve for loans & leases that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, qualitative factors that include economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan & lease portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer and other; and (9) equipment leases. The allowance for credit losses attributable to each portfolio segment, which includes both individually evaluated impaired loans & leases and loans & leases that are collectively evaluated for impairment, is combined to determine the Company’s overall allowance, which is included on the consolidated balance sheet.

The Company assigns a risk rating to all loans & leases and periodically performs detailed reviews of all such loans & leases over a certain threshold to identify credit risks and assess overall collectability. For smaller balance loans & leases, such as consumer and residential real estate, a credit grade is established at inception, and then updated only when the loan or lease becomes contractually delinquent or when the borrower requests a modification. For larger balance loans, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans & leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into five major categories, defined as follows:

Pass – A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management’s close attention.

Special Mention – A special mention loan or lease has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in the Company’s credit position at some future date. Special mention loans & leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard – A substandard loan or lease is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans or leases classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well-defined weaknesses include a project’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project’s failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans or leases classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable or improbable.

Loss – Loans or leases classified as loss are considered uncollectible. Once a loan or lease becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Company will estimate its probable loss and immediately charge-off some or all of the balance.

The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk; (2) historical losses; and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below:

Commercial Real Estate – Commercial real estate mortgage loans are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.

Real Estate Construction – Real estate construction loans, including land loans, are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.

Commercial – These loans are generally considered to possess a moderate inherent risk of loss because they are shorter-term; typically made to relationship customers; generally underwritten to existing cash flows of operating businesses; and may be collateralized by fixed assets, inventory and/or accounts receivable. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

Agricultural Real Estate and Agricultural – These loans are generally considered to possess a moderate inherent risk of loss since they are typically made to relationship customers and are secured by crop production, livestock and related real estate. These loans are vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.

Leases – Equipment leases are generally considered to possess a moderate inherent risk of loss. As lessor, the Company is subject to both the credit risk of the borrower and the residual value risk of the equipment. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

Residential 1st Mortgages and Home Equity Lines and Loans – These loans are generally considered to possess a lower inherent risk of loss. The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.

Consumer & Other – A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.

At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company’s and Bank’s regulators, including the Federal Reserve Board (“FRB”), the California Department of Business Oversight (“DBO”) and the Federal Deposit Insurance Corporation (“FDIC”), as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.

Acquired Loans
Loans acquired through purchase or through a business combination are recorded at their fair value at the acquisition date. Credit discounts, which reflect estimates of credit losses, expected to be incurred over the life of the loan, are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date.

Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures
The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off-balance-sheet commitments is included in Interest Payable and Other Liabilities on the Company’s Consolidated Balance Sheet.

Premises and Equipment
Premises, equipment, and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. Estimated useful lives of buildings range from 30 to 40 years, and for furniture and equipment from 3 to 7 years. Leasehold improvements are amortized over the lesser of the terms of the respective leases, or their useful lives, which are generally 5 to 10 years. Remodeling and capital improvements are capitalized while maintenance and repairs are charged directly to occupancy expense.

Other Real Estate
Other real estate, which is included in other assets, is expected to be sold and is comprised of properties no longer utilized for business operations and property acquired through foreclosure in satisfaction of indebtedness. These properties are recorded at fair value less estimated selling costs upon acquisition. Revised estimates to the fair value less cost to sell are reported as adjustments to the carrying amount of the asset, provided that such adjusted value is not in excess of the carrying amount at acquisition. Initial losses on properties acquired through full or partial satisfaction of debt are treated as credit losses and charged to the allowance for credit losses at the time of acquisition. Subsequent declines in value from the recorded amounts, routine holding costs, and gains or losses upon disposition, if any, are included in non-interest expense as incurred.

Income Taxes
The Company uses the liability method of accounting for income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount combined with the current taxes payable or refundable results in the income tax expense for the current year.

The Company follows the standards set forth in the “Income Taxes” topic of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This standard prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

The Company accounts for leases with Investment Tax Credits (ITC) under the deferred method as established in ASC 740-10. ITC are viewed and accounted for as a reduction of the cost of the related assets and presented as deferred income on the Company’s financial statement.

The Company accounts for its interest in LIHTC using the cost method as established in ASC 323-740. As an investor, the Company obtains income tax credits and deductions from the operating losses of these tax credit entities. The income tax credits and deductions are allocated to the investors based on their ownership percentages and are recorded as a reduction of income tax expense (or an increase to income tax benefit) and a reduction of federal income taxes payable.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examinationan audit by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.


At December 31, 2019 and 2018, the Company has no material uncertain tax positions and recognized no interest or penalties.  The Company’s policy is to recognize interest and penalties related to income taxes in
Developing the provision for income taxes, including the effective tax rate and analysis of potential tax exposure items, if any, requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred income tax assets and liabilities and any estimated valuation allowances deemed necessary to value deferred income tax assets.  Judgments and tax strategies are subject to audit by various taxing authorities.  While the Company believes it has no significant uncertain income tax positions in the Consolidated Statementconsolidated financial statements, adverse determinations by these taxing authorities could have a material adverse effect on the consolidated financial positions, result of Income.operations, or cash flows.


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NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Note 1—Summary of Significant Accounting Policies—Continued

Basic and Diluted Earnings Per Common Share
diluted earnings per common share The Company’s common stock is not traded on any exchange. However, trades are reported on the OTCQX under the symbol “FMCB”. The shares are primarily held by local residents and are not actively traded. Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. There are no0 common stock equivalent shares. Therefore, there is no difference between presentation of diluted and basic earnings per common share. See Note 14 - “Dividends

Comprehensive income — The “Comprehensive Income” topic of the FASB ASC establishes standards for the reporting and Basic Earnings Per Common Share” for additional information.display of comprehensive income and its components in the financial statements. Other comprehensive income refers to revenues, expenses, gains, and losses that U.S. GAAP recognize as changes in value to an enterprise but are excluded from net income. For the Company, comprehensive income includes net income and changes in fair value of its available-for-sale investment securities and amortization of net unrealized gains or losses on securities transferred from available-for-sale to held-to-maturity, net of related taxes.


Segment Reporting
reporting The “Segment Reporting” topic of the FASB ASC requires that public companies report certain information about operating segments. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is a holding company for a community bank, which offers a wide array of products and services to its customers. Pursuant to its banking strategy, emphasis is placed on building relationships with its customers, as opposed to building specific lines of business. As a result, the Company is not organized around discernible lines of business and prefers to work as an integrated unit to customize solutions for its customers, with business line emphasis and product offerings changing over time as needs and demands change.

Comprehensive Income
The “Comprehensive Income” topic of the FASB ASC establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Other comprehensive income refers to revenues, expenses, gains, and losses that U.S. GAAP recognize as changes in value to an enterprise but are excluded from net income. For the Company, comprehensive income includes net income and changes in fair value of its available-for-sale investment securities.

Loss Contingencies
contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the consolidated financial statements.


Business Combinations And Related MattersAdvertising costs — Advertising costs are expensed when incurred and totaled $1.1 million in 2021, $0.9 million in 2020, and $1.3 million in 2019.
Business combinations are accounted for 
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NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Note 1—Summary of Significant Accounting Policies—Continued

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 acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method, the acquiring entity in a business combination recognizes 100 percentauthority of the acquired assetsfederal securities laws are also sources of authoritative GAAP for the Company as an SEC registrant. All other accounting literature is non-authoritative.

In June 2016, FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. 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 assumed liabilities, regardlessother 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 replaced the incurred loss impairment methodology in current GAAP with a methodology that reflects 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 percentage owned,financial asset(s) to present the net carrying value at their estimated fair values asthe amount expected to be collected on the financial asset. The measurement of expected credit losses will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the datereported amount. This ASU broadens the information that an organization must use to develop its expected credit loss estimate for assets measured either collectively or individually.
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 acquisition. Any excessdelaying 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 elected to delay CECL adoption, but continued to run its CECL model quarterly to accumulate data for the ultimate implementation.

The Company adopted this ASU effective January 1, 2022. The Company formed an internal committee to oversee the project and engaged a third-party software vendor in the development of its model.  The Company developed a reasonable and supportable forecast based upon economic forecast scenarios and incorporated the reasonable and supportable forecast into the models. The Company also developed a qualitative factor methodology and incorporated the qualitative factors into the models.

The Company expects greater volatility in its earnings after adoption due to the nature and time horizon used to calculate CECL, the mode sensitivity to changes in economic forecasts, and other factors. Lastly, the Company expects a lack of comparability with financial performance to its peers as it adopts this ASU, due to delayed adoption for some public companies and the varying methodologies utilized by its peers.

The Company is in the process of finalizing its review of the fair value overmodel results related to the purchase priceadoption of net assetsthis ASU. Based on our most recently determined model results, we expect the combined adjustment to our Allowance for Credit Loss and other identifiable intangible assets acquiredReserve for Unfunded Loan Commitments could be within (5.00%) to 5.00% upon the adoption. Based on the credit quality of debt securities held-to-maturity, the allowance for credit losses recorded at adoption on this portfolio is recordedexpected to be nominal. In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available-for-sale will be replaced with an allowance approach.

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NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Note 1—Summary of Significant Accounting Policies—Continued

Subsequent events — The Company has evaluated events occurring subsequent to December 31, 2021 for disclosure in the consolidated financial statements. The Company repurchased 4,500 shares of common stock in February 2022.  The Company originated $497 million in SBA PPP loans, which has declined to $32.4 million at February 28, 2022.

Note 2—Risks and Uncertainties

The COVID-19 pandemic has affected the economy and businesses throughout the U.S., in California and in the markets served by the Company.  Designated as bargain purchase gain. Assets acquiredan “essential business”, the Company’s subsidiary, Farmers & Merchants Bank of Central California, has kept all branches open and liabilities assumed from contingencies must also be recognized at fair value, if the fair value can be determinedmaintained regular business hours during the measurement period. Results of operations of an acquired business are included inCOVID-19 pandemic. Our staffing levels have remained stable during the statement of operations fromCOVID-19 pandemic.

Through the date of acquisition. Acquisition-related costs, including conversion charges, are expensed as incurred.

GoodwillCARES Act and Other Intangible Assets: Goodwill is determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill that arises from a business combination is periodically evaluated for impairment at the reporting unit level, at least annually. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Core deposit intangible (“CDI”) represents the estimated future benefit of deposits related to an acquisition and is booked separately from the related deposits and evaluated periodically for impairment. The CDI asset is amortized on a straight-line method over its estimated useful life of ten years. At December 31, 2019, the future estimated amortization expense for the CDI arising from our past acquisitions is as follows:

(in thousands) 2020  2021  2022  2023  2024  Thereafter  Total 
Core Deposit Intangible Amortization $626  $611  $593  $573  $549  $1,688  $4,640 

We make a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit where goodwill is assigned is less than its carrying amount. If we conclude that it is more likely than not that the fair value is more than its carrying amount, no impairment is recorded. Goodwill is tested for impairment on an interim basis if circumstances change or an event occurs between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The qualitative assessment includes adverse events or circumstances identified that could negatively affect the reporting units’ fair valueH.R. 133, as well as positiverelated federal and mitigating events. Such indicatorsstate regulatory actions, the federal government has taken extraordinary efforts to provide financial assistance to individuals and companies to help them move through these difficult times. However, there are no guarantees how long the COVID-19 virus may include, among others, a significant change in legal factorscontinue to impact our economy, and therefore, the Company.

While we expect the effects of COVID-19 could have an adverse future impact on our business, financial condition and results of operations, we are unable to predict the full extent or innature of these impacts at the general business climate, significant change in our stock price and market capitalization, unanticipated competition, and an action or assessment by a regulator. If the fair value of a reporting unit is less than its carrying amount, an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value is recognized. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.current time.


2. Note 3Investment Securities


The amortized cost, fair values, and unrealized gains and losses of the securities available-for-sale are as follows:
(in thousands)
Available-for-Sale Securities 
  Gross Unrealized  
 
(Dollars in thousands) 
Amortized
Cost
  Gains  Losses  
Fair
Value
 
As of December 31, 2021                
U.S. Treasury notes $9,938  $151  $0  $10,089 
U.S. Government-sponsored securities
  6,351   62   39   6,374 
Mortgage-backed securities(1)
  253,300   3,200   5,380   251,120 
Collateralized Mortgage Obligations  2,412   24   0   2,436 
Other  435   0   0   435 
Total available-for-sale securities
 $272,436  $3,437  $5,419  $270,454 


 Amortized  Gross Unrealized  Fair/Book 
December 31, 2019 Cost  Gains  Losses  Value 
US Treasury Notes 
$
54,745
  
$
250
  
$
-
  
$
54,995
 
US Govt SBA  
10,902
   
9
   
113
   
10,798
 
Mortgage Backed Securities (1)
  
436,531
   
4,646
   
99
   
441,078
 
Other  
515
   
-
   
-
   
515
 
Total 
$
502,693
  
$
4,905
  
$
212
  
$
507,386
 


 Amortized  Gross Unrealized  Fair/Book 
December 31, 2018 
Cost
  Gains  Losses  Value 
Government Agency & Government-Sponsored Entities 
$
3,033
  
$
6
  
$
-
  
$
3,039
 
US Treasury Notes  
164,672
   
-
   
158
   
164,514
 
US Govt SBA  
15,601
   
6
   
160
   
15,447
 
Mortgage Backed Securities (1)
  
310,982
   
1,196
   
5,133
   
307,045
 
Other  
5,351
   
-
   
-
   
5,351
 
Total 
$
499,639
  
$
1,208
  
$
5,451
  
$
495,396
 


(1)All Mortgage Backed Securitiesmortgage-backed securities were issued by an agency or government sponsored entity of the U.S. government.Government.


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NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Note 3—Investment Securities—Continued

Available-for-Sale Securities 
  Gross Unrealized  
 
(Dollars in thousands) 
Amortized
Cost
  Gains  Losses  
Fair
Value
 
As of December 31, 2020            
U.S. Treasury notes $14,859  $429  $0  $15,288 
U.S. Government-sponsored securities
  8,252   1   93   8,160 
Mortgage-backed securities(1)
  715,523   17,245   48   732,720 
Collateralized Mortgage Obligations  5,039   114   0   5,153 
Corporate securities  45,010
   927
   18
   45,919
 
Other  492   0   0   492 
Total available-for-sale securities
 $789,175  $18,716  $159  $807,732 

(1)All mortgage-backed securities were issued by an agency or government sponsored entity of the U.S. Government.

The book values, estimated fair values and unrealized gains and losses of investments classified as held-to-maturity are as follows:(in thousands)


 Book  Gross Unrealized  Fair 
December 31, 2019 
Value
  Gains  Losses  Value 
Obligations of States and Political Subdivisions 
$
60,229
  
$
880
  
$
12
  
$
61,097
 
Total 
$
60,229
  
$
880
  
$
12
  
$
61,097
 



 Book  Gross Unrealized  Fair 
December 31, 2018 Value  Gains  Losses  
Value
 
Obligations of States and Political Subdivisions 
$
53,566
  
$
211
  
$
39
  
$
53,738
 
Total 
$
53,566
  
$
211
  
$
39
  
$
53,738
 


Held-to-Maturity Securities    Gross Unrealized    
(Dollars in thousands) 
Amortized
Cost
  Gains  Losses  
Fair
Value
 
As of December 31, 2021            
Municipal securities $66,496  $701  $0  $67,197 
Mortgage-backed securities(1)
  596,775   45   11,764   585,056 
Collateralized Mortgage Obligations  73,781   36   229   73,588 
Total held-to-maturity securities $737,052  $782  $11,993  $725,841 


(1)All mortgage-backed securities were issued by an agency or government sponsored entity of the U.S. Government.


Held-to-Maturity Securities    Gross Unrealized    
(Dollars in thousands) 
Amortized
Cost
  Gains  Losses  
Fair
Value
 
As of December 31, 2020            
Municipal securities $68,933  $1,116  $0  $70,049 
Total held-to-maturity securities $68,933  $1,116  $0  $70,049 
Fair values are based on quoted market prices or dealer quotes. If a quoted market price or dealer quote is not available, fair value is estimated using quoted market prices for similar securities.


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NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
The amortized cost and estimated fair values of investment securities at December 31, 2019 by contractual maturity are shown in the following tables. (in thousands)Note 3—Investment Securities—Continued

  Available-for-Sale  Held-to-Maturity 
December 31, 2019 
Amortized
Cost
  
Fair/Book
Value
  
Book
Value
  
Fair
Value
 
Within One Year 
$
40,509
  
$
40,510
  
$
2,446
  
$
2,446
 
After One Year Through Five Years  
15,146
   
15,393
   
5,902
   
5,905
 
After Five Years Through Ten Years  
955
   
955
   
23,980
   
24,689
 
After Ten Years  
9,552
   
9,450
   
27,901
   
28,057
 
   
66,162
   
66,308
   
60,229
   
61,097
 

Investment Securities Not Due at a Single Maturity Date:            
Mortgage Backed Securities  
436,531
   
441,078
   
-
   
-
 
Total 
$
502,693
  
$
507,386
  
$
60,229
  
$
61,097
 

Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.


The following tables show thosethe gross unrealized losses for available-for-sale securities that are less than 12 months and 12 months or more:

Available-for-Sale Securities December 31, 2021 
  Less Than 12 Months  12 Months or More  Total 
(Dollars in thousands) Fair Value  Unrealized Losses  Fair Value  Unrealized Losses  Fair Value  Unrealized Losses 
As of December 31, 2021                  
U.S. Government-sponsored securities $183  $0  $2,007  $39  $2,190  $39 
Mortgage-backed securities(1)
  61,469   1,192   104,489   4,188   165,958   5,380 
Total available-for-sale securities $61,652  $1,192  $106,496  $4,227  $168,148  $5,419

(1)All mortgage-backed securities were issued by an agency or government sponsored entity of the U.S. Government.



Available-for-Sale Securities 
December 31, 2020
 
  Less Than 12 Months  12 Months or More  Total 
(Dollars in thousands) Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
  Fair Value  Unrealized
Losses
 
As of December 31, 2020                  
U.S. Government-sponsored securities $1,741  $3  $6,126  $90  $7,867  $93 
Mortgage-backed securities(1)
  20,142   45   177   3   20,319   48 
Corporate securities  4,041   18   0   0   4,041   18 
Total available-for-sale securities $25,924  $66  $6,303  $93  $32,227  $159 

(1)All mortgage-backed securities were issued by an agency or government sponsored entity of the U.S. Government.

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NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Note 3—Investment Securities—Continued

The following tables show the gross unrealized losses for held-to-maturity securities that are less than 12 months and 12 months or more:


Held-to-Maturity Securities December 31, 2021 
(Dollars in thousands) Less Than 12 Months  12 Months or More  Total 
  Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
 
As of December 31, 2021                  
Mortgage-backed securities(1)
 
$
570,119
  
$
11,764
  
$
0
  
$
0
  
$
570,119
  
$
11,764
 
Collateralized Mortgage Obligations  
58,977
   
229
   
0
   
0
   
58,977
   
229
 
Total held-to-maturity securities 
$
629,096
  
$
11,993
  
$
0
  
$
0
  
$
629,096
  
$
11,993 

(1)All mortgage-backed securities were issued by an agency or government sponsored entity of the U.S. Government.

There were 0 HTM investments with gross unrealized losses and their market value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at the dates indicated. (in thousands)December 31, 2020.

  Less Than 12 Months  12 Months or More  Total 
December 31, 2019 
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
 
                   
Securities Available-for-Sale
                  
US Govt SBA 
$
2,693
  
$
6
  
$
5,198
  
$
107
  
$
7,891
  
$
113
 
Mortgage Backed Securities  
131,005
   
88
   
713
   
11
   
131,718
   
99
 
Total 
$
133,698
  
$
94
  
$
5,911
  
$
118
  
$
139,609
  
$
212
 
                         
Securities Held-to-Maturity
                        
Obligations of States and Political Subdivisions 
$
355
  
$
12
  
$
-
  
$
-
  
$
355
  
$
12
 
Total 
$
355
  
$
12
  
$
-
  
$
-
  
$
355
  
$
12
 

  Less Than 12 Months  12 Months or More  Total 
December 31, 2018 
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
 
                   
Securities Available-for-Sale                  
US Treasury Notes $124,985  $7  $39,529  $151  $164,514  $158 
US Govt SBA  3,250   28   8,618   132   11,868   160 
Mortgage Backed Securities  52,289   528   207,271   4,605   259,560   5,133 
Total $180,524  $563  $255,418  $4,888  $435,942  $5,451 
                         
Securities Held-to-Maturity                        
Obligations of States and Political Subdivisions $6,052  $23  $849  $16  $6,901  $39 
Total $6,052  $23  $849  $16  $6,901  $39 

As of December 31, 2019,2021, the Company held 595654 investment securities of which 2982 were in an unrealized loss position for less than twelve months and 7471 securities were in an unrealized loss position for twelve months or more. Management periodically evaluates each investment security for other-than-temporary impairment relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations. ManagementThe Company does not intend to sell the securities and believes it will beis able to more likely than not collect all amounts due according to the contractual terms of the underlying investment securities.

Securities of Government Agency and Government Sponsored Entities – At December 31, 2019 and December 31, 2018, no securities of government agency and government sponsored entities were in a loss position.

U.S. Treasury Notes – At December 31, 2019, no U.S. Treasury Note security investments were in a loss position for less than 12 months and none were in a loss position for 12 months or more. The unrealized losses on the Company’s investment in US treasury notes were $0 at December 31, 2019 and $158,000 at December 31, 2018. The unrealized losses were caused by interest rate fluctuations. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2019 and December 31, 2018.

U.S. Government SBA – At December 31, 2019, 18 U.S. Government SBA security investments were in a loss position for less than 12 months and 53 were in a loss position for 12 months or more. The unrealized losses on the Company’s investment in U.S. Government SBA were $113,000 at December 31, 2019 and $160,000 at December 31, 2018. The unrealized losses were caused by interest rate fluctuations. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2019 and December 31, 2018.

Mortgage Backed Securities - At December 31, 2019, 9 mortgage backed security investments were in a loss position for less than 12 months and 21 was in a loss position for 12 months or more. The unrealized losses on the Company’s investment in mortgage-backed securities were $99,000 at December 31, 2019 and $5.1 million at December 31, 2018. The unrealized losses were caused by interest rate fluctuations. The contractual cash flows of these investments are guaranteed by an agency or government sponsored entity of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2019 or 2018.

Obligations of States and Political Subdivisions - At December 31, 2019, 2 obligations of states and political subdivisions were in a loss position for less than 12 months. None were in a loss position for 12 months or more. As of December 31, 2019, one-hundred percent of the Company’s bank-qualified municipal bond portfolio is rated at either the issue or the issuer level, and all of these ratings are “investment grade.” The Company monitors the status of all municipal investments in the portfolio, and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security.

The unrealized losses on the Company’s investment in obligation of states and political subdivisions were $12,000 at December 31, 2019 and $39,000 at December 31, 2018. Management believes that any unrealized losses on the Company’s investments in obligations of states and political subdivisions were caused by interest rate fluctuations. The contractual terms of these investments doits debt securities are not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company does not intend to sell the securities and it is more likely than not that the Company would not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2019 and December 31, 2018.OTTI.

Proceeds from sales and calls of these securities were as follows:


(in thousands) Gross Proceeds  Gross Gains  Gross Losses 
2019 
$
5,300
  
$
1
  
$
-
 
2018 
$
99,323
  
$
78
  
$
1,338
 
2017 
$
7,831
  
$
143
  
$
12
 
(Dollars in thousands) 
Gross
Proceeds
  
Gross
Gains
  
Gross
Losses
 
2021 
$
301,320
  
$
5,570
  
$
3,016
 
2020 
$
5,080
  
$
40
  
$
0
 
2019 
$
5,300
  
$
1
  
$
0
 


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FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Note 3—Investment Securities—Continued
The amortized cost and estimated fair values of investment securities at December 31, 2021 by contractual maturity are shown in the following tables:

 Available-for-Sale  Held-to-Maturity 
(Dollars in thousands)
 
Amortized
Cost
  
Fair
Value
  
Amortized
Cost
  
Fair
Value
 
Securities maturing in:
            
One year or less
 $5,430  $5,465  $308  $308 
After one year through five years  5,094   5,209   8,487   8,528 
After five years through ten years  510   512   18,433   19,072 
After ten years  5,690   5,711   39,268   39,288 
  $16,724  $16,897  $66,496  $67,196 
                 
Securities not due at a single maturity date:                
Mortgage-backed securities  253,300   251,120   596,775   585,056 
Collateralized mortgage obligations  2,412   2,437   73,781   73,589 
Total $272,436  $270,454  $737,052  $725,841 

Expected maturities of mortgage-backed and CMO securities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

Pledged Securities

As of December 31, 2019,2021, securities carried at $352.5$426 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) borrowings, and other government agency deposits as required by law. This amount was $268.8$439.7 million at December 31, 2018.2020.


3.
Note 4—Federal Home Loan Bank Stock and Other EquityNon-Marketable Securities at Cost


The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock and other equity securities are carried at cost, classified as restricted securities, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. FHLB stock and other equity securities are reported in Interest Receivable and Other AssetsNon-Marketable Securities on the Company’s Consolidated Balance Sheets and totaled $12.7$15.5 million and $12.9 at December 31, 20192021 and $12.6 million at December 31, 2018.2020, respectively.


4.

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FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Note 5—Loans &and Leases


Loans &and leases as of December 31the dates indicated consisted of the following:

(in thousands) 2019  2018 
Commercial Real Estate 
$
846,486
  
$
834,476
 
Agricultural Real Estate  
625,767
   
584,625
 
Real Estate Construction  
115,644
   
98,568
 
Residential 1st Mortgages  
255,253
   
259,736
 
Home Equity Lines and Loans  
39,270
   
40,789
 
Agricultural  
292,904
   
290,463
 
Commercial  
384,795
   
343,834
 
Consumer & Other  
15,422
   
19,412
 
Leases  
104,470
   
106,217
 
Total Gross Loans & Leases  
2,680,011
   
2,578,120
 
Less: Unearned Income  
6,984
   
6,879
 
Subtotal  
2,673,027
   
2,571,241
 
Less: Allowance for Credit Losses  
55,012
   
55,266
 
Loans & Leases, Net 
$
2,618,015
  
$
2,515,975
 


  December 31, 
(Dollars in thousands) 2021
  2020
 
Loans and leases held-for-investment, net      
Real estate:      
Commercial real estate $1,167,516  $971,326 
Agricultural  672,830   643,014 
Residential and home equity  350,581   333,618 
Construction  177,163   185,741 
Total real estate  2,368,090   2,133,699 
Commercial & Industrial
  427,799   374,816 
Agricultural  276,684   264,372 
Commercial leases  96,971   103,117 
Consumer and other(1)
  78,367   235,529 
Total gross loans and leases  3,247,911   3,111,533 
Unearned income  (10,734
)
  (11,941
)
Total net loans and leases  3,237,177   3,099,592 
Allowance for credit losses  (61,007
)
  (58,862
)
Total loans and leases held-for-investment, net $3,176,170  $3,040,730 

(1) Includes SBA PPP loans.

Paycheck Protection Program (“PPP”) … Under the CARES Act and H.R. 133 (see “Note 2 – Risks and Uncertainties”) the Small Business Administration (“SBA”) was directed by Congress to provide loans to small businesses with less than 500 employees to assist these businesses in meeting their payroll and other financial obligations during the COVID-19 pandemic. These government guaranteed loans are made with an interest rate of 1%, a risk weight of 0% under risk-based capital rules, have a term of 2 to 5 years, and under certain conditions the SBA will forgive them. The Bank actively participated in the PPP, and since April 2020, the Bank has funded $494.39 million of loans for 2,680 small business customers. As of December 2021 and 2020, PPP loans outstanding were $70.8 million and $224.3 million, respectively.

At December 31, 2019,2021, the portion of loans that were approved for pledging as collateral on borrowing lines with the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“FRB”) were $793.5 million$1.1 billion and $696.5$767 million, respectively. The borrowing capacity on these loans was $668.4$837.1 million from FHLB and $441.3$480.4 million from the FRB.


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FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
5. Allowance for Credit Losses

The following tables show the allocation of the allowance for credit losses at December 31, 2019 and December 31, 2018 by portfolio segment and by impairment methodology (in thousands):

December 31, 2019
 
Commercial
Real Estate
  
Agricultural
Real Estate
  
Real Estate
Construction
  
Residential 1st
Mortgages
  
Home Equity
Lines & Loans
  Agricultural  Commercial  
Consumer
& Other
  Leases  Unallocated  Total 
                                  
Year-To-Date Allowance for Credit Losses:                            
Beginning Balance- January 1, 2019 
$
11,609
  
$
14,092
  
$
1,249
  
$
880
  
$
2,761
  
$
8,242
  
$
11,656
  
$
494
  
$
4,022
  
$
261
  $55,266 
Charge-Offs  
-
   
-
   
-
   
-
   
-
   
-
   
(592
)
  
(83
)
  
-
   
-
   (675)
Recoveries  
-
   
38
   
-
   
13
   
28
   
-
   
90
   
52
   
-
   
-
   221 
Provision  
(556
)
  
998
   
700
   
(38
)
  
(114
)
  
(166
)
  
312
   
(7
)
  
(860
)
  
(69
)
  200 
Ending Balance- December 31, 2019 
$
11,053
  
$
15,128
  
$
1,949
  
$
855
  
$
2,675
  
$
8,076
  
$
11,466
  
$
456
  
$
3,162
  
$
192
  $55,012 
Ending Balance Individually Evaluated for Impairment  
234
   
-
   
-
   
118
   
12
   
99
   
137
   
61
   
-
   
-
   661 
Ending Balance Collectively Evaluated for Impairment  
10,819
   
15,128
   
1,949
   
737
   
2,663
   
7,977
   
11,329
   
395
   
3,162
   
192
   54,351 
Loans & Leases:                                            
Ending Balance 
$
838,570
  
$
625,767
  
$
115,644
  
$
255,253
  
$
39,270
  
$
292,904
  
$
384,795
  
$
15,422
  
$
105,402
  
$
-
  $2,673,027 
Ending Balance Individually Evaluated for Impairment  
4,524
   
5,654
   
-
   
2,368
   
229
   
188
   
1,528
   
200
   
-
   
-
   14,691 
Ending Balance Collectively Evaluated for Impairment  
834,046
   
620,113
   
115,644
   
252,885
   
39,041
   
292,716
   
383,267
   
15,222
   
105,402
   
-
   2,658,336 

December 31, 2018 
Commercial
Real Estate
  
Agricultural
Real Estate
  
Real Estate
Construction
  
Residential 1st
Mortgages
  
Home Equity
Lines & Loans
  Agricultural  Commercial  
Consumer
& Other
  Leases  Unallocated  Total 
                                  
Year-To-Date Allowance for Credit Losses:                            
Beginning Balance- January 1, 2018 
$
10,922
  
$
12,085
  
$
1,846
  
$
815
  
$
2,324
  
$
8,159
  
$
9,197
  
$
209
  
$
3,363
  
$
1,422
  $50,342 
Charge-Offs  
-
   
-
   
-
   
(31
)
  
(8
)
  
-
   
(613
)
  
(115
)
  
-
   
-
   (767)
Recoveries  
2
   
-
   
-
   
15
   
6
   
61
   
20
   
54
   
-
   
-
   158 
Provision  
685
   
2,007
   
(597
)
  
81
   
439
   
22
   
3,052
   
346
   
659
   
(1,161
)
  5,533 
Ending Balance- December 31, 2018 
$
11,609
  
$
14,092
  
$
1,249
  
$
880
  
$
2,761
  
$
8,242
  
$
11,656
  
$
494
  
$
4,022
  
$
261
  $55,266 
Ending Balance Individually Evaluated for Impairment  
234
   
-
   
-
   
125
   
15
   
-
   
185
   
6
   
-
   
-
   565 
Ending Balance Collectively Evaluated for Impairment  
11,375
   
14,092
   
1,249
   
755
   
2,746
   
8,242
   
11,471
   
488
   
4,022
   
261
   54,701 
Loans & Leases:                                            
Ending Balance 
$
826,549
  
$
584,625
  
$
98,568
  
$
259,736
  
$
40,789
  
$
290,463
  
$
343,834
  
$
19,412
  
$
107,265
  
$
-
  $2,571,241 
Ending Balance Individually Evaluated for Impairment  
4,676
   
7,238
   
-
   
2,491
   
297
   
-
   
1,639
   
6
   
-
   
-
   16,347 
Ending Balance Collectively Evaluated for Impairment  
821,873
   
577,387
   
98,568
   
257,245
   
40,492
   
290,463
   
342,195
   
19,406
   
107,265
   
-
   2,554,894 
Note 5—Loans and Leases—Continued
 

The ending balance of loans individually evaluated for impairment includes restructured loans in the amount of $2.6 million and $2.8 million at December 31, 2019 and 2018, respectively, which are no longer disclosed or classified as TDR’s.

The following tables show the loan & lease portfolio allocated by management’s internal risk ratings at December 31, 2019 and December 31, 2018 (in thousands):

December 31, 2019 Pass  
Special
Mention
  Substandard  Total Loans 
Loans & Leases:            
Commercial Real Estate $831,941  $6,629  $-  $838,570 
Agricultural Real Estate  611,792   1,136   12,839   625,767 
Real Estate Construction  115,644   -   -   115,644 
Residential 1st Mortgages  254,459   -   794   255,253 
Home Equity Lines and Loans  39,092   -   178   39,270 
Agricultural  289,276   2,617   1,011   292,904 
Commercial  380,650   3,239   906   384,795 
Consumer & Other  14,934   -   488   15,422 
Leases  
105,402
   -   -   105,402 
Total $2,643,190  $13,621  $16,216  $2,673,027 

December 31, 2018 Pass  
Special
Mention
  Substandard  Total Loans 
Loans & Leases:            
Commercial Real Estate $823,983  $2,566  $-  $826,549 
Agricultural Real Estate  566,612   4,703   13,310   584,625 
Real Estate Construction  98,568   -   -   98,568 
Residential 1st Mortgages  259,208   -   528   259,736 
Home Equity Lines and Loans  40,744   -   45   40,789 
Agricultural  284,561   5,433   469   290,463 
Commercial  343,085   163   586   343,834 
Consumer & Other  19,229   -   183   19,412 
Leases  
107,265
   -   -   107,265 
Total $2,543,255  $12,865  $15,121  $2,571,241 

See Note 1. Significant Accounting Policies – Allowance for Credit Losses for a description of the internal risk ratings used by the Company. There were no loans & leases outstanding at December 31, 2019 and 2018 rated doubtful or loss.

The following tables show an aging analysis of the loan & lease portfolio, including unearned income, by the time past due at December 31, 20192021 and December 31, 2018 (in thousands):2020:


December 31, 2019 
30-59 Days
Past Due
  
60-89 Days
Past Due
  
90 Days and
Still Accruing
  Nonaccrual  
Total Past
Due
  Current  
Total
Loans & Leases
 
Loans & Leases:                     
Commercial Real Estate $-  $-  $-  $-  $-  $838,570  $838,570 
Agricultural Real Estate  -   -   -   -   -   625,767   625,767 
Real Estate Construction  240   -   -   -   240   115,404   115,644 
Residential 1st Mortgages  -   -   -   -   -   255,253   255,253 
Home Equity Lines and Loans  -   -   -   -   -   39,270   39,270 
Agricultural  -   -   -   -   -   292,904   292,904 
Commercial  77   -   -   -   77   384,718   384,795 
Consumer & Other  
35
   
-
   
-
   
-
   
35
   
15,387
   
15,422
 
Leases  
-
   
-
   
-
   
-
   
-
   
105,402
   
105,402
 
Total 
$
352
  
$
-
  
$
-
  
$
-
  
$
352
  
$
2,672,675
  
$
2,673,027
 

  December 31, 2021 
(Dollars in thousands) Current  30-89 Days Past Due  90+ Days Past Due  Non-accrual  
Total
Past Due
  Total 
Loans and leases held-for-investment, net                  
Real estate:                  
Commercial real estate $1,156,879  $459  $0  $0  $459  $1,157,338 
Agricultural  672,812   0   0   18   18   672,830 
Residential and home equity  350,492   89   0   0   89   350,581 
Construction  177,163   0   0   0   0   177,163 
Total real estate  2,357,346   548   0   18   566   2,357,912 
Commercial & Industrial  427,799   0   0   0   0   427,799 
Agricultural  276,186   0   0   498   498   276,684 
Commercial leases  96,415   0   0   0   0   96,415 
Consumer and other  78,363   4   0   0   4   78,367 
Total loans and leases, net $3,236,109  $552  $0  $516  $1,068  $3,237,177 


December 31, 2018 
30-59 Days
Past Due
  
60-89 Days
Past Due
  
90 Days and
Still Accruing
  Nonaccrual  
Total Past
Due
  Current  
Total
Loans & Leases
 
Loans & Leases:                     
Commercial Real Estate $-  $731  $-  $-  $731  $825,818  $826,549 
Agricultural Real Estate  -   -   -   -   -   584,625   584,625 
Real Estate Construction  327   -   -   -   327   98,241   98,568 
Residential 1st Mortgages  367   -   -   -   367   259,369   259,736 
Home Equity Lines and Loans  -   -   -   -   -   40,789   40,789 
Agricultural  -   -   -   -   -   290,463   290,463 
Commercial  -   -   -   -   -   343,834   343,834 
Consumer & Other  
13
   
-
   
-
   
-
   
13
   
19,399
   
19,412
 
Leases  
-
   
-
   
-
   
-
   
-
   
107,265
   
107,265
 
Total 
$
707
  
$
731
  
$
-
  
$
-
  
$
1,438
  
$
2,569,803
  
$
2,571,241
 

  December 31, 2020 
(Dollars in thousands) Current  30-89 Days Past Due  90+ Days Past Due  Non-accrual  Total Past Due  Total 
Loans and leases held-for-investment, net                  
Real estate:                  
Commercial real estate $958,980  $0  $0  $0  $0  $958,980 
Agricultural  643,014   0   0   0   0   643,014 
Residential and home equity  333,618   0   0   0   0   333,618 
Construction  185,741   0   0   0   0   185,741 
Total real estate  2,121,353   0   0   0   0   2,121,353 
Commercial & Industrial  374,816   0   0   0   0   374,816 
Agricultural  263,877   0   0   495   495   264,372 
Commercial leases  103,522   0   0   0   0   103,522 
Consumer and other  235,518   11   0   0   11   235,529 
Total loans and leases, net $3,099,086  $11  $0  $495  $506  $3,099,592 

There were no non-accrual loans & leases at December 31, 2019 or at December 31, 2018. There was no interest income forgone on loans & leases placed on non-accrual status for the years ended December 31, 2019, 2018, and 2017, respectively.

 
8897

Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Note 5—Loans and Leases—Continued
The following tables show information related to impaired
 

Non-accrual loans are summarized as follows:


  December 31, 
(Dollars in thousands) 2021  2020 
Non-accrual loans and leases:      
Non-accrual loans and leases, not TDRs      
Real estate:      
Commercial real estate $0  $0 
Agricultural  18   0 
Residential and home equity  0   0 
Construction  0   0 
Total real estate  18   0 
Commercial & Industrial  0   0 
Agricultural  0   0 
Commercial leases  0   0 
Consumer and other  0   0 
Subtotal  18   0 
Non-accrual loans and leases, are TDRs        
Real estate:        
Commercial real estate $0  $0 
Agricultural  0   0 
Residential and home equity  0   0 
Construction  0   0 
Total real estate  0   0 
Commercial & Industrial  0   0 
Agricultural  498   495 
Commercial leases  0   0 
Consumer and other  0   0 
Subtotal  498   495 
Total non-accrual loans and leases $516  $495 
 
98

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FARMERS & leases at and for the year ended December 31, 2019 and December 31, 2018 (in thousands):MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
December 31, 2019 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance recorded:               
Commercial Real Estate $86  $86  $-  $90  $8 
Agricultural Real Estate  5,654   5,654   -   6,069   379 
Commercial  -   -   -   8   1 
  $5,740  $5,740  $-  $6,167  $388 
With an allowance recorded:                    
Commercial Real Estate $2,822  $2,822  $234  $2,853  $94 
Residential 1st Mortgages  1,562   1,770   74   1,601   73 
Home Equity Lines and Loans  68   79   7   71   4 
Agricultural  188   188   99   195   6 
Commercial  1,528   1,528   137   1,554   53 
Consumer & Other  200   200   61   54   - 
  $6,368  $6,587  $612  $6,328  $230 
Total $12,108  $12,327  $612  $12,495  $618 

December 31, 2018 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance recorded:               
Commercial Real Estate $95  $96  $-  $99  $8 
Agricultural Real Estate  7,239   7,238   -   3,620   119 
Residential 1st Mortgages  -   -   -   226   8 
  $7,334  $7,334  $-  $3,945  $135 
With an allowance recorded:                    
Commercial Real Estate $2,902  $2,892  $234  $2,929  $96 
Residential 1st Mortgages  1,640   1,838   82   1,371   48 
Home Equity Lines and Loans  74   84   4   76   4 
Commercial  1,644   1,639   185   1,834   58 
Consumer & Other  6   7   6   7   - 
  $6,266  $6,460  $511  $6,217  $206 
Total $13,600  $13,794  $511  $10,162  $341 

Total recorded investment shownNote 5—Loans and Leases—Continued
 

Not included in the prior table will not equal the total ending balancebelow, but relevant to a discussion of loans & leases individually evaluated for impairment on the allocation of allowance table. This is because this table does not include impairedasset quality are loans that were previously modified in a troubled debt restructuring, are currently performinggranted some form of relief because of COVID-19 and are no longer disclosed or classified as TDR’s.

Atnot considered TDRs because of the CARES Act and H.R. 133. Since April 2020, we have restructured $278.1 million of loans under the CARES Act and H.R. 133 guidelines. As of December 31, 2019, there2021, all loans that were no formal foreclosure proceedings in process for consumer mortgagerestructured as part of the CARES Act and H.R. 133 have returned to the contractual terms and conditions of the loans, secured by residential real estate properties.without exception.

At December 31, 2019, the Company allocated $612,000 of specific reserves to $12.1 million of

The following table lists total troubled debt restructured loans all of which were performing. At December 31, 2018,that the Company allocated $511,000 of specific reserves to $13.6 million of troubled debt restructured loans, all of which were performing. The Company had no commitments at December 31, 2019 and December 31, 2018 to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.is either accruing or not accruing interest by loan category:



  December 31, 
(Dollars in thousands) 2021  2020 
Troubled debt restructured loans and leases:      
Accruing TDR loans and leases      
Real estate:      
Commercial real estate $
41  $
84 
Agricultural  0   5,629 
Residential and home equity  1,522   1,731 
Construction  0   0
 
Total real estate  1,563   7,444 
Commercial & Industrial  260   233 
Agricultural  0   0 
Commercial leases  0   0 
Consumer and other  1   190 
Subtotal  1,824   7,867 
Non-accruing TDR loans and leases        
Real estate:        
Commercial real estate $0  $0 
Agricultural  0   0 
Residential and home equity  0   0 
Construction  0   0 
Total real estate  0   0 
Commercial & Industrial  0   0 
Agricultural  498   495 
Commercial leases  0   0 
Consumer and other  0   0 
Subtotal  498   495 
Total TDR loans and leases $2,322  $8,362 
89 
99

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FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
During the year ended December 31, 2019, the termsNote 5—Loans and Leases—Continued
 

Outstanding loan balances (accruing and non-accruing) categorized by these credit quality indicators are summarized as follows:


  December 31, 2021 
(Dollars in thousands) Pass  
Special
Mention
  
Sub-
standard
  Doubtful  Total Loans & Leases  Total Allowance for Credit Losses 
Loans and leases held-for-investment, net                  
Real estate:                  
Commercial real estate $1,142,175  $6,903  $8,260  $0  $1,157,338  $28,536 
Agricultural  663,157   3,292   6,381   0   672,830   9,613 
Residential and home equity  350,148   0   433   0   350,581   2,847 
Construction  177,163   0   0   0   177,163   1,456 
Total real estate  2,332,643   10,195   15,074   0   2,357,912   42,452 
Commercial & Industrial  417,806   9,321   672   0   427,799   11,489 
Agricultural  275,206   958   520   0   276,684   5,465 
Commercial leases  96,415   0   0   0   96,415   938 
Consumer and other  78,181   0   186   0   78,367   263 
Unallocated
  0   0   0   0   0   400 
Total loans and leases, net
 $3,200,251  $20,474  $16,452  $0  $3,237,177  $61,007 


  December 31, 2020 
(Dollars in thousands) Pass
  
Special
Mention
  
Sub-
standard
  Doubtful  Total Loans & Leases
  
Total
Allowance
for Credit Losses
 
Loans and leases held-for-investment, net                  
Real estate:                  
Commercial real estate $946,621  $7,849  $4,510  $0  $958,980  $27,679 
Agricultural  631,043   400   11,571   0   643,014   8,633 
Residential and home equity  332,747   0   871   0   333,618   2,984 
Construction  185,741   0   0   0   185,741   1,643 
Total real estate  2,096,152   8,249   16,952   0   2,121,353   40,939 
Commercial & Industrial  373,038   1,060   718   0   374,816   9,961 
Agricultural  263,781   96   495   0   264,372   4,814 
Commercial leases  103,522   0   0   0   103,522   1,731 
Consumer and other  235,063   0   466   0   235,529   333 
Unallocated
  0   0   0   0   0   1,084 
Total loans and leases, net
 $3,071,556  $9,405  $18,631  $0  $3,099,592  $58,862 
 
Note 5—Loans and Leases—Continued
 

Changes in the loan.

There were no modifications involving a reduction of the stated interest rate. Modifications involving an extension of the maturity date ranged from 3 months to 6 years.

The following table presents loans by class modified as troubled debt restructured loans for the year ended December 31, 2019 (in thousands):

  December 31, 2019 
Troubled Debt Restructurings 
Number of
Loans
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
 
Agricultural  1  $201  $201 
Consumer & Other  1   195   195 
Total  
2
  
$
396
  
$
396
 

The troubled debt restructurings described above increased the allowance for credit losses by $101,000. There were no charge-offs for the twelve months ended December 31, 2019.are as follows:


During the year ended December 31, 2019, there were no payment defaults on loans modified as troubled debt restructurings within twelve months following the modification. The Company considers a loan to be in payment default once it is greater than 90 days contractually past due under the modified terms.
  Year Ended December 31, 2021 
(Dollars in thousands) Commercial & Agricultural R/E  Construction  Residential & Home Equity  
Commercial
&
Agricultural
  Commercial Leases  Consumer & Other  Unallocated  Total 
Allowance for credit losses:                        
Balance at beginning of year $36,312  $1,643  $2,984  $14,775  $1,731  $333  $1,084  $58,862 
Provision / (recapture) for credit losses  1,837   (187
)
  (235
)
  2,025   (793
)
  (53
)
  (684)  1,910 
Charge-offs  0   0   0   0   0   (44
)
  0   (44
)
Recoveries  0   0   98   154   0   27   0   279 
Net (charge-offs) / recoveries  0   0   98   154   0   (17
)
  0   235 
                                 
Balance at end of year $38,149  $1,456  $2,847  $16,954  $938  $263  $400  $61,007 



  Year Ended December 31, 2020 
(Dollars in thousands) Commercial & Agricultural R/E  Construction  Residential & Home Equity  
Commercial
&
Agricultural
  Commercial Leases  Consumer & Other  Unallocated  Total 
Allowance for credit losses:                        
Balance at beginning of year $26,181  $1,949  $3,530  $19,542  $3,162  $456  $192  $55,012 
Provision / (recapture) for credit losses  10,050   (306
)
  (669
)
  (3,946
)
  (1,431
)
  (90
)
  892   4,500 
Charge-offs  0   0   (7
)
  (1,101
)
  0   (66
)
  0   (1,174
)
Recoveries  81   0   130   280   0   33   0   524 
Net (charge-offs) / recoveries  81   0   123   (821
)
  0   (33
)
  0   (650
)
                                 
Balance at end of year $36,312  $1,643  $2,984  $14,775  $1,731  $333  $1,084  $58,862 

During the year ended December 31, 2018, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.
  Year Ended December 31, 2019 
(Dollars in thousands) Commercial & Agricultural R/E  Construction  Residential & Home Equity  
Commercial
&
Agricultural
  Commercial Leases  Consumer & Other  Unallocated  Total 
Allowance for credit losses:                        
Balance at beginning of year $25,701  $1,249  $3,641  $19,898  $4,022  $494  $261  $55,266 
Provision / (recapture) for credit losses  442   700   (152
)
  146   (860
)
  (7
)
  (69)  200 
Charge-offs  0   0   0   (592
)
  0   (83
)
  0   (675
)
Recoveries  38   0   41   90   0   52   0   221 
Net (charge-offs) / recoveries  38   0   41   (502
)
  0   (31
)
  0   (454
)
                                 
Balance at end of year $26,181  $1,949  $3,530  $19,542  $3,162  $456  $192  $55,012 

Modifications involving a reduction of the stated interest rate of the loan were for 5 years. Modifications involving an extension of the maturity date were for 10 years.

The following table presents loans by class modified as troubled debt restructured loans for the year ended December 31, 2018 (in thousands):

  December 31, 2018 
Troubled Debt Restructurings Number of Loans  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
 
Agricultural Real Estate  1  $7,239  $7,239 
Residential 1st Mortgages  2   286   255 
Total  
3
  
$
7,525
  
$
7,494
 

The troubled debt restructurings described above had minimal impact on the allowance for credit losses and resulted in charge-offs of $31,000 for the twelve months ended December 31, 2018.

During the year ended December 31, 2018, there were no payment defaults on loans modified as troubled debt restructurings within twelve months following the modification. The Company considers a loan to be in payment default once it is greater than 90 days contractually past due under the modified terms.

 
90101

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FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
6.
Note 5—Loans and Leases—Continued
 

The ACL and outstanding loan balances reviewed according to the Company’s estimated credit loss methods were summarized as follows:


    December 31, 2021 
(Dollars in thousands) Commercial & Agricultural R/E  Construction  Residential & Home Equity  
Commercial
&
Agricultural
  Commercial Leases  Consumer & Other  Unallocated  Total 
Allowance for credit losses:                        
Total loans and leases                        
Collectively evaluated for impairment $1,824,517  $177,163  $348,729  $703,725  $96,415  $78,193  $0  $3,228,742 
Individually evaluated for impairment  5,651   0   1,852   758   0   174   0   8,435 
Total loans and leases $1,830,168  $177,163  $350,581  $704,483  $96,415  $78,367  $0  $3,237,177 
                                 
Allowance for credit losses:                                
Collectively evaluated for impairment $38,149  $1,456  $2,755  $16,937  $938  $227  $400  $60,862 
Individually evaluated for impairment  0   0   92   17   0   36   0   145 
Total allowance for credit losses $38,149  $1,456  $2,847  $16,954  $938  $263  $400  $61,007 


    December 31, 2020 
(Dollars in thousands) Commercial & Agricultural R/E  Construction  Residential & Home Equity  
Commercial
&
Agricultural
  Commercial Leases  Consumer & Other  Unallocated  Total 
Allowance for credit losses:                        
Total loans and leases                        
Collectively evaluated for impairment $1,596,261  $185,741  $331,095  $638,460  $103,522  $235,275  $0  $3,090,354 
Individually evaluated for impairment  5,733   0   2,523   728   0   254   0   9,238 
Total loans and leases $1,601,994  $185,741  $333,618  $639,188  $103,522  $235,529  $0  $3,099,592 
                                 
Allowance for credit losses:                                
Collectively evaluated for impairment $36,312  $1,643  $2,859  $14,663  $1,731  $281  $1,084  $58,573 
Individually evaluated for impairment  0   0   125   112   0   52   0   289 
Total allowance for credit losses $36,312  $1,643  $2,984  $14,775  $1,731  $333  $1,084  $58,862 

 
102

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FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Note 5—Loans and Leases—Continued


Information on individually evaluated loans was summarized as follows:


  December 31, 2021 
(Dollars in thousands) Unpaid Principal Balance  With no Allowance  With Allowance  Total Recorded Investment  Related Allowance 
Loans and leases individually evaluated:               
Real estate:               
Commercial real estate $45  $45  $0  $45  $0 
Agricultural  5,606   5,606   0   5,606   0 
Residential and home equity  1,852   0   1,852   1,663   92 
Construction  0   0   0   0   0 
Total real estate  7,503   5,651   1,852   7,314   92 
Commercial & Industrial  260   0   260   260   17 
Agricultural  498   498   0   456   0 
Commercial leases  0   0   0   0   0 
Consumer and other  174   0   174   173   36 
Total gross loans and leases $8,435  $6,149  $2,286  $8,203  $145 


  December 31, 2020 
(Dollars in thousands) Unpaid Principal Balance  With no Allowance  With Allowance  Total Recorded Investment  Related Allowance 
Loans and leases individually evaluated:               
Real estate:               
Commercial real estate $104  $104  $0  $104  $0 
Agricultural  5,629   5,629   0   5,629   0 
Residential and home equity  2,523   0   2,523   2,288   125 
Construction  0   0   0   0   0 
Total real estate  8,256   5,733   2,523   8,021   125 
Commercial & Industrial  233   0   233   233   20 
Agricultural  495   3   492   453   92 
Commercial leases  0   0   0   0   0 
Consumer and other  254   63   191   253   52 
Total gross loans and leases $9,238  $5,799  $3,439  $8,960  $289 
 
103

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FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Note 5—Loans and Leases—Continued
 

Interest income recognized on the average recorded investment of individually evaluated loans was as follows:


  Year Ended December 31, 
  2021  2020  2019
 
(Dollars in thousands) Average Recorded Investment  Interest Income Recognized  Average Recorded Investment  Interest Income Recognized  Average Recorded Investment  
Interest Income
Recognized
 
Loans and leases individually evaluated:                  
Real estate:                  
Commercial real estate $80  $7  $812  $38  $4,595  $182 
Agricultural  5,588   735   5,766   352   6,069   379 
Residential and home equity  1,978   93   2,543   135   2,679   144 
Construction  0   0   0   0   0   0 
Total real estate  7,646   835   9,121   525   13,343   705 
Commercial & Industrial  232   20   500   34   1,562   54 
Agricultural  585   58   907   102   195   6 
Commercial leases  0   0   0   0   0   0 
Consumer and other  310   21   257   13   54   0 
Total loans and leases individually evaluated $8,773  $934  $10,785  $674  $
15,154  $
765 

104

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FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Note 6—Premises and Equipment


Premises and equipment as of December 31st, consisted of the following:

(in thousands)
 2019  2018 
Land and Buildings
 
$
53,997
  
$
39,329
 
Furniture, Fixtures and Equipment
  
21,058
   
21,136
 
Leasehold Improvement
  
3,745
   
3,606
 
Subtotal
  
78,800
   
64,071
 
Less: Accumulated Depreciation and Amortization
  
33,529
   
31,448
 
Total
 
$
45,271  
$
32,623 

  December 31, 
(Dollars in thousands) 2021  2020 
Premises and equipment:
      
Buildings and land
 $59,325  $60,512 
Furniture, fixtures, and equipment  21,775   21,011 
Leasehold improvements  3,658   3,752 
Other
  527   474 
Subtotal  85,285   85,749 
Accumulated depreciation and amortization  (37,555)  (35,602)
Total premises and equipment
 $47,730  $50,147 


Depreciation and amortization on premises and equipment included in occupancy and equipment expense amounted to $2,756,000, $2,421,000,$2,632,000, $2,769,000, and $2,186,000$2,756,000 for the years ended December 31, 2019, 20182021, 2020 and 2017,2019, respectively. Rental income was $183,000, $173,000,$491,000, $434,000, and $169,000$183,000 for the years ended December 31, 2021, 2020, and 2019, 2018,respectively and 2017, respectively.is recorded in other income.

7.
Note 7—Other Real Estate


The Bank reported $873,000 in other real estate at December 31, 2019,2021 and December 31, 2018. Other real estate2020, which includes property no longer utilized for business operations and property acquired through foreclosure proceedings. These properties are carried at fair value less selling costs determined at the date acquired. Losses, if any, arising from properties acquired through foreclosure are charged against the allowance for loan losses at the time of foreclosure. Subsequent declines in value, periodic holding costs, and net gains or losses on disposition are included in other operating expense as incurred. Other real estate is reported in Interest Receivable

105

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FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Note 8 — Deposits

Certificate of deposits greater than and Other Assets onless than or equal to the Company’s Consolidated Balance Sheets.FDIC insurance limit are summarized as follows:

8. Time Deposits

  December 31,
 
(Dollars in thousands) 2021  2020 
Certificate of deposits:
      
Certificates of deposits less than or equal to $250,000
 $223,620  $235,924 
Certificates of deposits greater than $250,000
  168,865   185,944 
Total certificate of deposits
 $
392,485  $
421,868 
Time Deposits
Scheduled maturities for certificates of $250,000 or moredeposit are as follows for the years ending December 31:

(Dollars in thousands) Amount 
2022 $354,754 
2023  29,502 
2024  5,171 
2025  1,648 
2026 and beyond  1,410 
Total time deposits $392,485 

Note 9 — Short-term borrowings

As of December 31, 2021 and 2020, committed lines of credit arrangements totaling $1.4 billion and $1.3 billion were available to the Company from unaffiliated banks, respectively. The average Federal Funds interest rate as of December 31, were as follows:2021 was 0.25%.

(in thousands) 2019  2018 
Balance 
$
257,392
  
$
219,022
 

At December 31, 2019, the scheduled maturities of time deposits were as follows:

(in thousands) Scheduled Maturities 
2020 
$
462,263
 
2021  
46,150
 
2022  
6,839
 
2023  
1,676
 
2024  
994
 
Total 
$
517,922
 

9. Income Taxes

Current and deferred income tax expense (benefit) provided for the years ended December 31 consistedThe Company is a member of the following:

(in thousands) 2019  2018  2017 
Current         
Federal $14,798  $2,517  $9,460 
State  7,733   6,224   4,046 
Total Current  22,531   8,741   13,506 
Deferred            
Federal  (3,500)  5,622   11,154 
State  246   (160)  1,451 
Total Deferred  (3,254)  5,462   12,605 
Total Provision for Taxes $19,277  $14,203  $26,111 

The total provisionFHLB of San Francisco and has a committed credit line of $837.1 million, which is secured by $1.14 billion in various real estate loans and investment securities pledged as collateral. Borrowings generally provide for income taxes differs frominterest at the federal statutorythen current published rate, as follows:

  2019  2018  2017 
(in thousands) Amount  Rate  Amount  Rate  Amount  Rate 
Tax  Provision at Federal Statutory Rate $15,816   21.0% $12,543   21.0% $19,068   35.0%
Interest on Obligations of States and Political                        
Subdivisions exempt from Federal Taxation  (358)  (0.5%)  (338)  (0.6%)  (617)  (1.1%)
State and Local Income Taxes, Net of Federal Income                        
Tax Benefit  6,304   8.4%  4,791   7.9%  3,573   6.5%
Bank Owned Life Insurance  (460)  (0.6%)  (434)  (0.7%)  (696)  (1.3%)
Low-Income Housing Tax Credit  (2,078)  (2.8%)  (1,624)  (2.7%)  (1,546)  (2.8%)
Out of Period Adjustment  -   0.0%  (802)  (1.3%)  -   0.0%
Deferred Tax Asset Remeasurement  -   0.0%  -   0.0%  6,256   11.5%
Other, Net  53   0.1%  67   0.1%  73   0.1%
Total Provision for Taxes $19,277   25.6% $14,203   23.8% $26,111   47.9%

The components of net deferred tax assetswhich was 0.17% as of December 31, are as follows: The net deferred tax assets are reported in Interest Receivable and Other Assets on the Company’s Consolidated Balance Sheet.2021.


(in thousands) 2019  2018 
Deferred Tax  Assets      
Allowance for Credit Losses $15,925  $15,877 
Accrued Liabilities  8,452   7,444 
Deferred Compensation  14,200   11,207 
State Franchise Tax  1,624   1,307 
Tax Credit Carry Forward  1,266   - 
Lease Liability  1,487   - 
Acquired Net Operating Loss  673   715 
Fair Value Adjustment on Loans Acquired  286   300 
Fair Value Adjustment on ORE Acquired  108   108 
Unrealized Loss on Securities Available-for-Sale  -   1,800 
Low-Income Housing Investment  286   412 
Other  2   7 
Total Deferred Tax Assets $44,309  $39,177 
Deferred Tax  Liabilities        
Premises and Equipment  (1,974)  (2,226)
Securities Accretion  (370)  (229)
Unrealized Gain on Securities Available-for-Sale  (935)  - 
Leasing Activities  (19,226)  (17,215)
Core Deposit Intangible Asset  (1,372)  (1,560)
ROU Lease Asset  (1,471)  - 
Prepaid  (66)  (116)
Other  (898)  (1,000)
Total Deferred Tax Liabilities  (26,312)  (22,346)
Net Deferred Tax Assets $17,997  $16,831 

The Tax Cuts and Jobs Act of 2017, which lowers the Company’s previous 35% federal corporate tax rate to 21%, was signed into law by President Trump on December 22, 2017. In accordanceCompany has $767 million in pledged loans with the ASC Topic 740, Income Taxes, companies must recognize the effect of tax law changes in the period of enactment. As a result, the Company was required to re-measure its deferred tax assets (DTA) and deferred tax liabilities (DTL) at the new tax rate of 21%Federal Reserve Bank (the “Fed”). This onetime re-measurement resulted in a $6.3 million increase in the Company’s income tax provision in 2017. Based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred tax assets are expected to be deductible, Management believes it is more likely than not we will realize the benefit of the remaining deferred tax assets. The net deferred tax assets are reported in Interest Receivable and Other Assets on the Company’s Consolidated Balance Sheet.

The Company and its subsidiaries file income tax returns in the U.S. federal and California jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by the tax authorities for the years before 2015.

10. Short Term Borrowings

As of December 31, 2019 and 2018,2021, the Company had unused lines ofCompany’s overnight borrowing capacity using the primary credit available for short-term liquidity purposes of $1.3 billion and $1.2 billion, respectively. Federal Funds purchased and advances are generally issued on an overnight basis.facilities from the Fed account was $480.4 million. The borrowing rate is 25 basis points. There were no0 outstanding advances fromon the FHLB atabove borrowing facilities as of December 31, 2019 or 2018. There were no Federal Funds purchased or advances from the FRB at December 31, 2019 or 2018.2021 and 2020.


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11. Federal Home Loan Bank Advances

The Company had no short-term or long-term advances from the Federal Home Loan Bank of San Francisco at December 31, 2019 or 2018.

In accordance with the Collateral Pledge and Security Agreement, advances are secured by all FHLB stock held by the Company. At December 31, 2019, $793.5 million in loans were approved for pledging as collateral on borrowing lines with the FHLB. The borrowing capacity on these loans was $668.4 million.

12. Note 10—Long-term Subordinated Debentures


In December 2003, the Company formed a wholly owned Connecticut statutory business trust, FMCB Statutory Trust I (“Statutory Trust I”), which issued $10.0 million of guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures (the “Trust Preferred Securities”). The Company is not considered the primary beneficiary of the trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. These debentures qualify as Tier 1 capital under current regulatory guidelines. All of the common securities of Statutory Trust I are owned by the Company. The proceeds from the issuance of the common securities and the Trust Preferred Securities were used by FMCB Statutory Trust to purchase $10.3 million of junior subordinated debentures of the Company, which carry a floating rate based on three-month LIBOR plus 2.85%. The debentures represent the sole asset of Statutory Trust I. The Trust Preferred Securities accrue and pay distributions at a floating rate of three-month LIBOR plus 2.85% per annum of the stated liquidation value of $1,000 per capital security. The Company has entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment to the extent that Statutory Trust I has funds available therefore of: (i) accrued and unpaid distributions required to be paid on the Trust Preferred Securities; (ii) the redemption price with respect to any Trust Preferred Securities called for redemption by Statutory Trust I; and (iii) payments due upon a voluntary or involuntary dissolution, winding up, or liquidation of Statutory Trust I.

The Trust Preferred Securities are mandatorily redeemable upon maturity of the subordinated debentures on December 17, 2033, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the subordinated debentures purchased by Statutory Trust I, in whole or in part, on or after December 17, 2008. As specified in the indenture, if the subordinated debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on the Company’s common stock.

13. Shareholders’ Equity

In 1998, the Board approved the Company’s first common stock repurchase program. This program has been extended and expanded several times since then, and most recently, on November 6, 2018, the Board of Directors approved an extension of the $20 million stock repurchase program to December 31, 2021.

Repurchases under the program may be made from time to time on the open market or through private transactions. The repurchase program also requires that no repurchases may be made if the Bank would not remain “well-capitalized” after the repurchase. There were no stock repurchases made in 2019 or 2018 under the Common Stock Repurchase Plan. However, in the third quarter of 2018 the Company did repurchase $31.2 million of shares, at $700 per share, in a single transaction from the estate of a large shareholder.

Dividends from the Bank constitute the principal source of cash to the Company. The Company is a legal entity separate and distinct from the Bank. Under regulations controlling California state chartered banks, the Bank is, to some extent, limited in the amount of dividends that can be paid to the Company without prior approval of the California DBO. These regulations require approval if total dividends declared by a state chartered bank in any calendar year exceed the bank’s net profits for that year combined with its retained net profits for the preceding two calendar years.

During 2019, the Company issued a combined total 9,312 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans. All of the shares were issued at prices ranging from $715.00 to $770.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital.


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During 2018, the Company issued a combined total 13,520 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans. There were also 2,400 shares issued to individuals during 2018. All of the shares were issued at prices ranging from $635.00 to $690.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital.

Note 11—Shareholders’ Equity

The Company and the Bank are subject to various federal regulatory capital requirements under the Basel III Capital Rules. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.


The implementation of Basel III requirements increased the required capital levels that the Company and the Bank must maintain. The final rules included new minimum risk-based capital and leverage ratios, which were phased in over time. The new minimum capital level requirements applicable to the Company and the Bank under the final rules are: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets (“RWA”); (ii) a Tier 1 capital ratio of 6% of RWA; (iii) a total capital ratio of 8% of RWA; and (iv) a Tier 1 leverage ratio of 4% of total assets. The final rules also established a “capital conservation buffer” of 2.5% above each of the new regulatory minimum capital ratios, which resulted in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0% of RWA; (ii) a Tier 1 capital ratio of 8.5% of RWA; and (iii) a total capital ratio of 10.5% of RWA. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. The final rules also permit the Company’s subordinated debentures issued in 2003 to continue to be counted as Tier 1 capital.

The final rules became effective as applied to the Company and the Bank on January 1, 2015, with a phase in period through January 1, 2019. The Company believes that it is currently in compliance with all of these capital requirements and that they will not result in any restrictions on the Company’s business activity.


In addition,Management believes that the most recent notification from the FDIC categorizedCompany and the Bank meet the requirements to be categorized as “well capitalized” under the FDIC regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There

The Company’s actual and required capital amounts and ratios are no conditions or events since that notification that management believes have changed the Bank’s category.as follows:


(in thousands) Actual  
Current
Regulatory Capital
Requirements
  
Well Capitalized
Under Prompt
Corrective Action
 
December 31, 2019 Amount  Ratio  Amount  Ratio  Amount  Ratio 
Total Bank Capital to Risk Weighted Assets $399,230   12.33% $259,012   8.00% $323,765   10.00%
Total Consolidated Capital to Risk Weighted Assets $400,258   12.36% $259,028   8.00%  N/A   N/A 
Total Bank Common Equity Tier 1 Capital Ratio $358,576   11.08% $145,694   4.50% $210,447   6.50%
Total Consolidated Common Equity Tier 1 Capital Ratio $349,601   10.80% $145,703   4.50%  N/A   N/A 
Tier 1 Bank Capital to Risk Weighted Assets $358,576   11.08% $194,259   6.00% $259,012   8.00%
Tier 1 Consolidated Capital to Risk Weighted Assets $359,601   11.11% $194,271   6.00%  N/A   N/A 
Tier 1 Bank Capital to Average Assets $358,576   9.89% $145,079   3.00% $181,349   5.00%
Tier 1 Consolidated Capital to Average Assets $359,601   9.90% $145,255   3.00%  N/A   N/A 
  December 31, 2021 
   Actual  Minimum Capital Requirement  
Well Capitalized
Requirment
 
(Dollars in thousands) Amount  Ratio  Amount  Ratio  Amount  Ratio 
Farmers & Merchants Bancorp                  
CET1 capital to risk-weighted assets $450,687   11.68
%
 $173,674   4.50
%
 N/A   N/A
Tier 1 capital to risk-weighted assets  460,687   11.94
%
  231,566   6.00
%
  N/A   N/A
Risk-based capital to risk-weighted assets  509,091   13.19
%
  308,755   8.00
%
  N/A   N/A
Tier 1 leverage capital ratio  460,687   8.92
%
  206,606   4.00
%
  N/A   N/A 
                         
Farmers & Merchants Bank                        
CET1 capital to risk-weighted assets $459,813   11.91
%
 $173,664   4.50
%
 $250,847   6.50
%
Tier 1 capital to risk-weighted assets  459,813   11.91
%
  231,551   6.00
%
  308,735   8.00
%
Risk-based capital to risk-weighted assets  508,215   13.17
%
  308,735   8.00
%
  385,919   10.00
%
Tier 1 leverage capital ratio  459,813   8.91
%
  206,426   4.00
%
  258,033   5.00
%


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(in thousands) Actual  
Current
Regulatory Capital
Requirements
  
Well Capitalized
Under Prompt
Corrective Action
 
December 31, 2018 Amount  Ratio  Amount  Ratio  Amount  Ratio 
Total Bank Capital to Risk Weighted Assets $346,763   11.39% $243,455   8.00% $304,319   10.00%
Total Consolidated Capital to Risk Weighted Assets $346,845   11.40% $243,459   8.00%  N/A   N/A 
Total Bank Common Equity Tier 1 Capital Ratio $308,507   10.14% $136,944   4.50% $197,807   6.50%
Total Consolidated Common Equity Tier 1 Capital Ratio $298,588   9.81% $136,945   4.50%  N/A   N/A 
Tier 1 Bank Capital to Risk Weighted Assets $308,507   10.14% $182,591   6.00% $243,455   8.00%
Tier 1 Consolidated Capital to Risk Weighted Assets $308,588   10.14% $182,594   6.00%  N/A   N/A 
Tier 1 Bank Capital to Average Assets $308,507   9.15% $134,822   3.00% $168,527   5.00%
Tier 1 Consolidated Capital to Average Assets $308,588   9.08% $135,949   3.00%  N/A   N/A 

Note 11—Shareholders’ Equity—Continued
14. Dividends
 
   December 31, 2020 
   Actual  Minimum Capital Requirement  
Well Capitalized
Requirment
 
(Dollars in thousands) Amount  Ratio  Amount  Ratio  Amount  Ratio 
Farmers & Merchants Bancorp                  
CET1 capital to risk-weighted assets $395,941   11.05
%
 $161,178   4.50
%
 
N/A   N/A
Tier 1 capital to risk-weighted assets  405,941   11.33
%
  214,904   6.00
%
  N/A   N/A
Risk-based capital to risk-weighted assets  450,890   12.59
%
  286,539   8.00
%
  N/A   N/A
Tier 1 leverage capital ratio  405,941   9.13
%
  177,820   4.00
%
  N/A   N/A 
                         
Farmers & Merchants Bank                        
CET1 capital to risk-weighted assets $401,313   11.21
%
 $161,135   4.50
%
 $232,750   6.50
%
Tier 1 capital to risk-weighted assets  401,313   11.21
%
  214,846   6.00
%
  286,462   8.00
%
Risk-based capital to risk-weighted assets  446,251   12.46
%
  286,462   8.00
%
  358,077   10.00
%
Tier 1 leverage capital ratio  401,313   9.04
%
  177,605   4.00
%
  222,006   5.00
%

Basic and Basic Earnings Per Common Share

Total cash dividends during 2019 were $11,221,000 or $14.20 per share of common stock, an increase of 2.2% per share from $11,151,000 or $13.90 per share in 2018. In 2017, cash dividends totaled $10,982,000 or $13.55 per share.

Basicdilluted earnings per common share amounts are computed by dividing netrepresents income available to common shareholders divided by the weighted averageweighted-average number of common shares outstanding forduring the period. The Company has no securities or other contracts, such as stock options, that could require the issuance of common stock.  Accordingly, diluted earnings per share are not presented. The following table calculates the basic earnings

Earnings per common share forhave been computed based on the periods indicated.following:


(net income in thousands)
 2019  2018  2017 
Net Income $56,036  $45,527  $28,370 
Weighted Average Number of Common Shares Outstanding  787,227   801,229   809,834 
Basic Earnings Per Common Share $71.18  $56.82  $35.03 

 Year Ended December 31, 
(Dollars in thousands, except share and per share amounts) 2021
  2020
  2019
 
Numerator         
Net income $66,336  $58,734  $56,036 
             
Denominator            
Weighted average number of common shares outstanding  789,646   793,337   787,227 
Weighted average number of dilutive shares outstanding  789,646   793,337   787,227 
             
Basic earnings per common share $84.01  $74.03  $71.18 
Diluted earning per commons share $84.01  $74.03  $71.18 


The Company’s Board of Directors may declare cash or stock dividends out of retained earnings provided the regulatory minimum capital ratios are met. The Company plans to maintain capital ratios that meet the well-capitalized standards per the regulations.
15.
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Note 12—Employee Benefit Plans

 
Profit Sharing Plan
The Company, through the Bank, sponsors a Profit Sharing Plan for substantially all full-time employees of the Company with one or more years of service. The plan assets reported at fair value are primarily invested in mutual funds and other investments, which are primarily Level 2 inputs. Participants receive up to two2 annual employer contributions, one is discretionary and the other is mandatory. The discretionary contributions to the Profit Sharing Plan are determined annually by the Board of Directors. The discretionary contributions totaled $1.4$1.6 million, $1.2$1.5 million, and $1.0$1.4 million for the years ended December 31, 2019, 2018,2021, 2020, and 2017,2019, respectively. The mandatory contributions to the Profit Sharing Plan are made according to a predetermined set of criteria. Mandatory contributions totaled $1.6$1.7 million, $1.4$1.7 million, and $1.2$1.6 million for the years ended December 31, 2019, 2018,2021, 2020, and 2017,2019, respectively. Company employees are permitted, within limitations imposed by tax law, to make pretax contributions and after tax (Roth) contributions to the 401(k) feature of the Profit Sharing Plan. The Company does not match employee contributions within the 401(k) feature of the Profit Sharing Plan and the Company can terminate the Profit Sharing Plan at any time. Benefits pursuant to the Profit Sharing Plan vest 0% during the first year of participation, 25% per full year thereafter and after five years such benefits are fully vested.


Executive Retirement Plan and Life Insurance Arrangements
The Company, through the Bank, sponsors an Executive Retirement Plan (“ERP”) for certain executive level employees. The Executive Retirement PlanERP is a non-qualified deferred compensation plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by the Internal Revenue Service. The PlanERP is comprised of: (1) a Performance Component which makes contributions based upon long-term cumulative profitability and increase in market value of the Company; (2) a Salary Component which makes contributions based upon participant salary levels; and (3) an Equity Component for which contributions are discretionary and subject to Board of Directors approval. Executive Retirement PlanThe Company maintains a Rabbi Trust to fund, in part, the ERP. The Rabbi Trust is an irrevocable grantor trust to which the Company may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. The Company may not use the assets of the Rabbi Trust for any purpose other than meeting its obligations under the ERP; however, the assets of the Rabbi Trust remain subject to the claims of its creditors and are included in the consolidated financial statements. The Company contributes cash to the Rabbi Trust from time to time for the sole purpose of funding the ERP. The Rabbi Trust will use any cash the Company contributes to purchase shares of common stock of the Company, and other financial instruments, on the open market. ERP contributions are invested in a mix of financial instruments; however, the Equity Component contributions are invested primarily in common stock of the Company.

The Company expensed $6.6$9.0 million to the Executive Retirement PlanERP during the year ended December 31, 2019, $6.22021, $6.8 million during the year ended December 31, 20182020 and $4.3$6.6 million during the year ended December 31, 2017.2019. The Company’s total accruedcarrying value of the liability under the Executive Retirement PlanERP was $58.6$63.9 million as of December 31, 20192021 and $48.5$56.7 million as of December 31, 2018.2020. The Company’s shares of common stock held as investments in the Rabbi Trust of the ERP as of December 31, 2021 and 2020 totaled 55,436 and 52,980 with an historical cost basis of $33.2 million and $31.2 million, respectively. All amounts have been fully funded into athe Rabbi Trust as of December 31, 2019.2021 and 2020. The consolidated investments held in the Rabbi Trust are recorded at fair value with changes in unrealized gains or losses recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income.


Net gains on deferred compensationERP plan investments were $2.6$2.5 million in 20192021 compared to net gains of $1.1$1.8 million in 2018.2020 and $2.6 million in 2019. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices.

The Company has purchased single premium life insurance policies on the lives
The Company earned tax-exempt interest on the life insurance policies of $2.0 million for the year ended December 31, 2019, $1.9 million for the year ended December 31, 2018, and $1.8 million for the year ended December 31, 2017. As of December 31, 2019 and 2018, the total cash surrender value of the insurance policies was $67.1 million and $65.1 million, respectively.

Note 12—Employee Benefit Plans—Continued
  
Senior Management Retention Plan
The Company, through the Bank, sponsors a Senior Management Retention Plan (“SMRP”) for certain senior level employees. The SMRP is a non-qualified deferred compensation plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by the Internal Revenue Service. All contributions are discretionary and subject to the Board of Directors approval. The Company maintains a Rabbi Trust to fund, in part, the SMRP. The Rabbi Trust is an irrevocable grantor trust to which the Company may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. The Company may not use the assets of the Rabbi Trust for any purpose other than meeting its obligations under the SMRP; however, the assets of the Rabbi Trust remain subject to the claims of its creditors and are included in the consolidated financial statements. The Company contributes cash to the Rabbi Trust from time to time for the sole purpose of funding the SMRP. The Rabbi Trust will use any cash the Company contributes to purchase shares of common stock of the Company, and other financial instruments, on the open market. Contributions to the SMRP are invested primarily in common stock of the Company.

The Company expensed $1.3$2.7 million to the SMRP during the year ended December 31, 2019, $1.52021, $2.3 million during the year ended December 31, 20182020 and $765,000$1.3 million during the year ended December 31, 2017.2019. The Company’s total accruedcarrying value of the liability under the SMRP was $8.1$11.1 million as of December 31, 20192021 and $5.7$8.6 million as of December 31, 2018.2020. The Company’s shares of stock held as investments in the Rabbi Trust of the SMRP as of December 31, 2021 and December 31, 2020 totaled 14,192 and 12,548 shares with an historical cost basis of $9.5 million and $7.9 million, respectively. All amounts have been fully funded into athe Rabbi Trust as of December 31, 2019.2021 and 2020. The consolidated investments held in the Rabbi Trust are recorded at fair value with changes in unrealized gains or losses recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income.

16.
Net gains on SMRP plan investments were $0.1 million in 2021, $0.1 million in 2020 and 0 in 2019. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices.

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NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Note 13—Fair Value Measurements


The Company follows the “Fair Value Measurement and Disclosures” topic of the FASB ASC, which establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. This standard applies whenever other standards require, or permit assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, this standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:


Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2 inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.


Level 3 inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.


Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.


Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.



Securities classified as available-for-sale are reported at fair value on a recurring basis utilizing Level 1, 2 and 3 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.




The Company does not record all loans &and leases at fair value on a recurring basis. However, from time to time, a loan or lease is considered impaired and an allowance for credit losses is established. Once a loan or lease is identified as individually impaired, management measures impairment in accordance with the “Receivable” topic of the FASB ASC. The fair value of impaired loans or leases is estimated using one of several methods, including collateral value when the loan is collateral dependent, market value of similar debt, enterprise value, and discounted cash flows. Impaired loans &and leases not requiring an allowance represent loans &and leases for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans &and leases. Impaired loans &and leases where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The fair value of collateral dependent impaired loans is generally based on recent real estate appraisals.

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NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Note 13—Fair Value Measurements—Continued

  

These appraisals may utilize a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take in to account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring impaired loans is primarily the sales comparison approach less selling costs of 10%.




Other Real Estate (“ORE”) is reported at fair value on a non-recurring basis. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take in to account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring ORE is primarily the sales comparison approach less selling costs of 10%.


The following tablestables’ present information about the Company’s assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated.

     
Fair Value Measurements
At December 31, 2019, Using
 
(in thousands) 
Fair
Value
Total
  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Available-for-Sale Securities:            
US Treasury Notes $54,995  $54,995  $-  $- 
US Govt SBA  10,798   -   10,798   - 
Mortgage Backed Securities  441,078   -   441,078   - 
Other  515   205   310   - 
Total Assets Measured at Fair Value On a Recurring Basis $507,386  $55,200  $452,186  $- 

     
Fair Value Measurements
At December 31, 2018, Using
 
(in thousands) 
Fair Value
Total
  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Available-for-Sale Securities:            
Government Agency & Government-Sponsored Entities $3,039  $-  $3,039  $- 
US Treasury Notes  164,514   164,514   -   - 
US Govt SBA  15,447   -   15,447   - 
Mortgage Backed Securities  307,045   -   307,045   - 
Other  5,351   202   310   4,839 
Total Assets Measured at Fair Value On a Recurring Basis $495,396  $164,716  $325,841  $4,839 


Fair values for Level 2 available-for-sale investment securities are based on quoted market prices for similar securities. During the year ended December 31, 2019, there were no transfers in or out of level 1, 2, or 3.
December 31, 2021    Fair Value Measurements 
(Dollars in thousands) Carrying Amount  Level 1  Level 2  Level 3  Total Fair Value 
Financial Assets:               
Cash and cash equivalents $715,460  $715,460  $0  $0  $715,460 
Investment securities available-for-sale  270,454   10,214   260,240   0   270,454 
Investment securities held-to-maturity  737,052   0   681,588   44,446   726,034 
Non-marketable securities  15,549   0   0   15,549   15,549 
Loans and leases, net  3,176,170   0   0   3,179,857   3,179,857 
Bank-owned life insurance
  71,411   71,411   0   0   71,411 
                     
Financial Liabilities:                    
Total deposits $4,640,152  $
4,247,666  $0  $391,732  $4,639,398 
Subordinated debentures  10,310   0   6,890   0   6,890 



December 31, 2020    Fair Value Measurements 
(Dollars in thousands) Carrying Amount  Level 1  Level 2  Level 3  Total Fair Value 
Financial Assets:               
Cash and cash equivalents $383,837  $383,837  $0  $0  $383,837 
Investment securities available-for-sale  807,732   15,470   792,262   0   807,732 
Investment securities held-to-maturity  68,933   0   26,262   43,787   70,049 
Non-marketable securities  12,693   0   0   12,693   12,693 
Loans and leases, net  3,040,730   0   0   3,045,911   3,045,911 
Bank-owned life insurance  69,235   69,235   0   0   69,235 
                     
Financial Liabilities:                    
Total deposits
 $4,060,267  $3,638,400  $0  $422,840  $4,061,240 
Subordinated debentures  10,310   0   6,888   0   6,888 

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FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Note 13—Fair Value Measurements—Continued

  

Non-recurring Measurements:  Impaired loans are classified with Level 3 of the fair value hierarchy.  The estimated fair value of impaired loans is based on the fair value of the collateral, less estimated costs to sell.  The Company receives an appraisal or performs an evaluation for each impaired loan.  The key inputs used to determine the fair value of impaired loans include selling costs, and adjustment to comparable collateral.  Valuations and significant inputs obtained by independent sources are reviewed by the Company for accuracy and reasonableness.  Appraisals are typically obtained at least on an annual basis.  The Company also considers other factors and events that may affect the fair value.  The appraisals or evaluations are reviewed at least on a quarterly basis to determine if any adjustments are needed.  After review and acceptance of the appraisal or evaluation, adjustments to impaired loans may occur.



The following tables present information about the Company’s impaired loans & leasesBank’s assets and other real estate, classes of assets or liabilities that the Company carriesmeasured at fair value on a recurring and non-recurring basis and indicatesindicate the fair value hierarchy of the valuation techniques utilized by the CompanyBank to determine such fair value for the periods indicated. Not all impaired loans & leases are carried at fair value. Impaired loans & leases are only included in the following tables when their fair value is based upon an appraisal of the collateral, and if that appraisal results in a partial charge-off or the establishment of a specific reserve.


     
Fair Value Measurements
At December 31, 2019, Using
 
(in thousands) 
Fair Value
Total
  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Impaired Loans:            
Commercial Real Estate $2,588  $-  $-  $2,588 
Residential 1st Mortgage  1,403   -   -   1,403 
Home Equity Lines and Loans  142   -   -   142 
Agricultural  88   -   -   88 
Commercial  1,391   -   -   1,391 
Consumer  139   -   -   139 
Total Impaired Loans  5,751   -   -   5,751 
Other Real Estate:                
Real Estate Construction  873   -   -   873 
Total Other Real Estate  873   -   -   873 
Total Assets Measured at Fair Value On a Non-Recurring Basis $6,624  $-  $-  $6,624 


     
Fair Value Measurements
At December 31, 2018, Using
 
(in thousands) 
Fair Value
Total
  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Impaired Loans:            
Commercial Real Estate $2,658  $-  $-  $2,658 
Residential 1st Mortgage  1,550   -   -   1,550 
Home Equity Lines and Loans  70   -   -   70 
Commercial  1,454   -   -   1,454 
Total Impaired Loans  5,732   -   -   5,732 
Other Real Estate:                
Real Estate Construction  873   -   -   873 
Total Other Real Estate  873   -   -   873 
Total Assets Measured at Fair Value On a Non-Recurring Basis $6,605  $-  $-  $6,605 
December 31, 2021    Fair Value Measurements 
(Dollars in thousands) Carrying Amount  Level 1  Level 2  Level 3  Total Fair Value 
Fair valued on a recurring basis:               
Investment securities available-for-sale               
U.S. Treasury notes
 $10,089  $10,089  $0  $0  $10,089 
U.S. Government-sponsored securities
  6,374   0   6,374   0   6,374 
Mortgage-backed securities
  251,120   0   251,120   0   251,120 
Collateralized Mortgage Obligations
  2,436   0   2,436   0   2,436 
Other
  435   125   310   0   435 
                     
Fair valued on a non-recurring basis:                    
Individually evaluated loans $2,562  $0  $0  $2,562  $2,562 
Other Real Estate
  873   0   0   873   873 



December 31, 2020    Fair Value Measurements 
(Dollars in thousands) Carrying Amount  Level 1  Level 2  Level 3  Total Fair Value 
Fair valued on a recurring basis:               
Investment securities available-for-sale               
U.S. Treasury notes
 $15,288  $15,288  $0  $0  $15,288 
U.S. Government-sponsored securities
  8,160   0   8,160   0   8,160 
Mortgage-backed securities
  732,720   0   732,720   0   732,720 
Collateralized Mortgage Obligations
  5,153   0   5,153   0   5,153 
Corporate securities
  45,919   0   45,919   0   45,919 
Other
  492   182   310   0   492 
                     
Fair valued on a non-recurring basis:                    
Individually evaluated loans $3,269  $0  $0  $3,269  $3,269 
Other Real Estate
  873   0   0   873   873 


100

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FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
The Company’s property appraisals are primarily based on the sales comparison approach and the income approach methodologies, which consider recent sales of comparable properties, including their income generating characteristics, and then make adjustments to reflect the general assumptions that a market participant would make when analyzing the property for purchase. These adjustments may increase or decrease an appraised value and can vary significantly depending on the location, physical characteristics and income producing potential of each property. Additionally, the quality and volume of market information available at the time of the appraisal can vary from period to period and cause significant changes to the nature and magnitude of comparable sale adjustments. Given these variations, comparable sale adjustments are generally not a reliable indicator for how fair value will increase or decrease from period to period. Under certain circumstances, management discounts are applied based on specific characteristics of an individual property.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2019 and 2018:

December 31, 2019
(in thousands)
 Fair Value Valuation TechniqueUnobservable InputsRange, Weighted Avg. 
Impaired Loans:       
Commercial Real Estate $2,588 Income ApproachCapitalization Rate3.3%
Residential 1st Mortgages $1,403       Sales Comparison ApproachAdjustment for Difference Between Comparable Sales0.8% - 6.4%, 3%
Home Equity Lines and Loans $142       Sales Comparison ApproachAdjustment for Difference Between Comparable Sales1% - 2%, 1.3%
Agricultural $88 Income ApproachCapitalization Rate4.3%
Commercial $1,391 Income ApproachCapitalization Rate3.3%
Consumer $139       Sales Comparison ApproachAdjustment for Difference Between Comparable Sales40.6%
         
Other Real Estate:        
Real Estate Construction $873       Sales Comparison ApproachAdjustment for Difference Between Comparable Sales10%

December 31, 2018
(in thousands)
 Fair Value Valuation TechniqueUnobservable InputsRange, Weighted Avg. 
Impaired Loans:       
Commercial Real Estate $2,658 Income ApproachCapitalization Rate3.25%
Residential 1st Mortgages $1,550       Sales Comparison ApproachAdjustment for Difference Between Comparable Sales1% - 4%, 3%
Home Equity Lines and Loans $70       Sales Comparison ApproachAdjustment for Difference Between Comparable Sales1% - 2%, 2%
Commercial $1,454 Income ApproachCapitalization Rate2.95% - 8.70%, 3.40%
         
Other Real Estate:        
Real Estate Construction $873       Sales Comparison ApproachAdjustment for Difference Between Comparable Sales10%

17. Fair Value of Financial Instruments

U.S. GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. In some cases, book value is a reasonable estimate of fair value due to the relatively short period of time between origination of the instrument and its expected realization. The valuation of loans held for investment was impacted by the adoption of ASU 2016-01. In accordance with ASU 2016-01, the fair value of loans held for investment, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans. Loans are considered a Level 3 classification.

The following tables summarize the book value and estimated fair value of financial instruments for the periods indicated:

     Fair Value of Financial Instruments Using    
December 31, 2019 (in thousands)
 
Carrying
Amount
  
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Total
Estimated
Fair Value
 
Assets:               
Cash and Cash Equivalents $294,758  $294,758  $-  $-  $294,758 
                     
Investment Securities Available-for-Sale  507,386   55,200   452,186   -   507,386 
                     
Investment Securities Held-to-Maturity  
60,229
   -   31,253   29,844   61,097 
                     
Loans & Leases, Net of Deferred Fees & Allowance  2,618,015   -   -   2,584,805   2,584,805 
Accrued Interest Receivable  16,733   -   16,733   -   16,733 
                     
Liabilities:                    
Deposits  3,278,019   2,760,097   517,172   -   3,277,269 
Subordinated Debentures  10,310   -   7,325   -   7,325 
Accrued Interest Payable  2,795   -   2,795   -   2,795 

     Fair Value of Financial Instruments Using    
December 31, 2018  (in thousands)
 
Carrying
Amount
  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Total
Estimated
Fair Value
 
Assets:               
Cash and Cash Equivalents $145,564  $145,564  $-  $-  $145,564 
                     
Investment Securities Available-for-Sale  495,396   164,716   325,841   4,839   495,396 
                     
Investment Securities Held-to-Maturity  
53,566
   -   35,083   18,655   53,738 
                     
Loans & Leases, Net of Deferred Fees & Allowance  2,515,975   -   -   2,485,182   2,485,182 
Accrued Interest Receivable  14,098   -   14,098   -   14,098 
                     
Liabilities:                    
Deposits  3,062,832   2,572,805   485,766   -   3,058,571 
Subordinated Debentures  10,310   -   7,745   -   7,745 
Accrued Interest Payable  1,365   -   1,365   -   1,365 

18.Note 14. Commitments and Contingencies


In the normal course of business, the Company enters into financial instruments with off balance sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These instruments include commitments to extend credit, letters of credit, and other types of financial guarantees. The Company had the following off balance sheet commitments as of the dates indicated.

(in thousands) December 31, 2019  December 31, 2018 
Commitments to Extend Credit 
$
919,982
  
$
828,539
 
Letters of Credit  
20,346
   
19,108
 
Performance Guarantees Under Interest Rate Swap Contracts Entered Into Between Our Borrowing Customers and Third Parties
  
1,513
   
-
 


  December 31,
 
(Dollars in thousands) 2021
  2020
 
       
Commitments to extend credit, including unsecured commitments of $21,036 and $21,057 as of December 31, 2021 and 2020, respectively
 $937,009  $957,443 
         
Stand-by letters of credit, including unsecured commitments of $9,091 and $10,945 as of December 31, 2021 and 2020, respectively
  17,880   18,846 
         
Performance guarantees under interest rate swap contracts entered into our clients and third-parties  1,433   2,786 

The Company’s exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer’s creditworthiness are performed on a case-by-case basis.


Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third party.third-party. Outstanding standby letters of credit have maturity dates ranging from 1 to 2560 months with final expiration in January 2022.2027. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.


In the ordinary course of business, the Company becomes involved in litigation arising out of its normal business activities. Management, after consultation with legal counsel, believes that the ultimate liability, if any, resulting from the disposition of such claims would not be material in relation to the financial position of the Company.


The Company may be required to maintain average reserves on deposit with the Federal Reserve Bank primarily based on deposits outstanding. Reserve requirements are offset by the Company’s vault cash and deposit balances maintained with the Federal Reserve Bank.


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FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
19.
Note 15Leases


Lessee – Operating Leases
Effective January 1, 2019, the Company adopted the provisions of Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842),” for all open leases with a term greater than one year as of the adoption date, using the modified retrospective approach. Prior comparable periods are presented in accordance with previous guidance under Accounting Standards Codification ASC 840.

Operating leases in which we are the lessee are recorded as operating lease right-of-use (“ROU”) assets and operating lease liabilities, included in other assets and other liabilities, respectively, on our consolidated balance sheets. We do not currently have any significant finance leases in which we are the lessee.


Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded net in occupancy expense in the consolidated statements of income.


Our leases relate primarily to office space and bank branches with remaining lease terms of generally 1 to 10 years. Certain lease arrangements contain extension options whichthat typically range from 5 to 10 years at the then fair market rental rates. ASC 842 requires lessees to evaluate whether option periods, if available, will be exercised in order to determine the full life of the lease. The Company used the first option period, unless it is a relatively new lease that has a long initial lease term or other extenuating circumstances.


As of December 31, 2019,2021, operating lease ROU assets and liabilities were $4.98$4.05 million and $5.03$4.13 million, respectively. Operating lease expenses that were in scope of ASU 2016-02 totaled $836,000$739,000 for the year ended December 31, 2019.2021. As of December 31, 2020, operating lease ROU assets and liabilities were $4.80 million and $4.92 million, respectively. Operating lease expenses totaled $833,000 and $836,000 for the years ended December 31, 2020 and 2019, respectively.

The table below summarizes the information related to our operating leases:

(in thousands except for percent and period data) 
Year Ended
December 31, 2019
 
Cash Paid for Amounts Included in the Measurement of Lease Liabilities   
Operating Cash Flow from Operating Leases 
$
783
 
Right-of-Use Assets Obtained in Exchange for New Operating Lease Liabilities 
$
5,645
 
Weighted-Average Remaining Lease Term - Operating Leases, in Years  
7.88
 
Weighted-Average Discount Rate - Operating Leases  
3.2
%

The table below summarizes the maturity of remaining lease liability:


(in thousands) December 31, 2019 
2020  
795
 
2021  
719
 
2022  
686
 
2023  
697
 
2024  
707
 
2025 and thereafter  
2,105
 
Total Lease Payments  
5,709
 
Less: Interest  
(679
)
Present Value of Lease Liabilities 
$
5,030
 
(Dollars in thousands) Amount 
2022
 $701 
2023
  712 
2024
  728 
2025
  740 
2026 and beyond
  1,601 
Total lease payments  4,482 
Discount
  (349)
Net present value of lease liabilities $4,133 


As of December 31, 2019,2021, we have no0 additional operating leases for office space that have not yet commenced or that are anticipated to commence during the first quarter of 2020.2022.


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FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Note 15—LeasesContinued
  
Lessor - Direct Financing Leases
The Company is the lessor in direct finance lease arrangements. Leases are recorded at the principal balance outstanding, net of unearned income and charge-offs.  Interest income is recognized using the interest method. Leases typically have a maturity of three to ten years, and fixed rates that are most often tied to treasuryTreasury indices with an appropriate spread based on the amount of perceived risk. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use ofwith qualified, independent appraisers that establish the residual values the Company uses in structuring a lease. The impact of adopting Topic 842 for lessor accounting was not significant.


Lease payments due to the Company are typically fixed and paid in equal installments over the lease term. Variable lease payments that do not depend on an index or a rate (e.g., property taxes) that are paid directly by the Company are minimal. The majority of property taxes are paid directly by the client to a third partythird-parties and are not considered part of variable payments and therefore are not recorded by the Company.


As a lessor, the Company leases certain types of agriculture equipment, solar equipment, construction equipment and other equipment to its customers. The Company’s net investment in direct financing leases was $105.4$96.4 million at December 31, 20192021 and $107.3$103.5 million at December 31, 2018.2020.

20. Recent Accounting Pronouncements

Note 16 — Income Taxes
Recently Adopted Accounting Guidance
The following paragraphs provide descriptionscomponents of recently adopted accounting standards that may have had a material effect on the Company’s financial position or results of operations.income tax expense (benefit) are as follows:


  Year Ended December 31,
 
(Dollars in thousands) 2021  2020  2019 
Income tax expense / (benefit)         
Current:         
Federal $12,595  $12,174  $14,798 
State  10,270   9,005   7,733 
Total current expense
  22,865   21,179   22,531 
             
Deferred:            
Federal  59  (1,115)  (3,500)
State  (939)  (847)  246 
Total current deferred benefit
  (880)  (1,962)  (3,254)
Provision for income tax expense
 $21,985  $19,217  $19,277 
The FASB issued guidance in February 2016, with amendments in 2018 and 2019, which changed the accounting for leases. The guidance requires lessees to recognize right-of-use (ROU) assets and lease liabilities for most leases where we are the lessee in the Consolidated Statement of Financial Position. The guidance also made some changes to lessor accounting, including the elimination of the use of third-party residual value guarantee insurance in the lease classification test, and overall aligns with the new revenue recognition guidance. The guidance also requires qualitative and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the consolidated balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients. The Company elected the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs (IDC’s). From a lessor perspective, the changes in lease termination guidance, IDC and removal of third-party residual value guarantee insurance in the lease classification test did not have a material impact on the consolidated financial results. We adopted ASU No. 2016-02 Leases (Topic 842), as of January 1, 2019, using the cumulative effect transition approach. The cumulative effect transition approach provides a method for recording existing leases at adoption and not restated comparative periods; rather the effect of the change is recorded at the beginning of the year of adoption.  The Company elected the ASU’s package of three practical expedients, which allowed the Company to forego a reassessment of (i) whether any expired or existing contracts contain leases, (ii) the lease classification for any expired or existing leases and (iii) the initial direct costs for any existing leases. The Company elected the option not to separate lease and non-lease components and instead to account for them as a single lease component and the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of right-of-use assets.

The Company has several lease agreements, such as branch locations, which are considered operating leases, and therefore, were not previously recognized on the Company’s consolidated statements of condition. The new guidance requires these lease agreements to be recognized as a right-of-use asset and corresponding lease liability.

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FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Our operating leases relate primarily to office spaceNote 16 — Income Taxes—Continued
  

The combined federal and bank branches.state income tax expense differs from that computed at the federal statutory corporate tax rate as follows:

   Year Ended December 31, 
  2021
  2020
  2019
 
(Dollars in thousands) Amount  Rate  Amount  Rate  Amount  Rate 
Effective income tax rate                  
Federal statutory rate $18,548   21.00
%
 $16,370   21.00
%
 $15,816   21.00
%
State taxes, net of Federal income tax benefit  7,370   8.34
%
  6,445   8.27
%
  6,304   8.40
%
Low-income housing tax credits  (3,116
)
  (3.53
%)
  (2,655
)
  (3.41
%)
  (2,078
)
  (2.80
%)
Bank owned life insurance  (471
)
  (0.53
%)
  (444
)
  (0.57
%)
  (460
)
  (0.60
%)
Tax-exempt interest income  (347
)
  (0.39
%)
  (350
)
  (0.45
%)
  (358
)
  (0.50
%)
Other, net  1   (0.00
%)
  (149
)
  (0.19
%)
  53   0.10
%
Total provision for income tax expense and effective tax rate $21,985   24.89
%
 $19,217   24.65
%
 $19,277   25.60
%

118

Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Note 16 — Income Taxes—Continued


The nature and components of the Company’s net deferred income tax assets are as follows:


  December 31, 
(Dollars in thousands) 2021
  2020
 
Deferred income tax assets:      
Allowance for credit losses $18,129  $17,248 
Deferred compensation  15,339   13,707 
Accrued liabilities  9,415   8,526 
State income taxes  2,157   1,891 
Lease liabilities  1,222   1,454 
Unrealized losses on debt securities
  945   0 
SBA PPP loan fee income  764   1,367 
Acquired net operating losses  614   643 
Low-income housing tax investments  503   384 
Acquired loans fair valuation  197   237 
Acquired OREO fair valuation  108   108 
Other  19   7 
Total deferred income tax assets  49,412   45,572 
         
Deferred income tax liabilities:        
Commercial leasing $(17,892
)
 $(17,183
)
Unrealized gains on debt securities  0   (5,156
)
Premises and equipment  (1,860
)
  (1,684
)
Right of use leasing asset  (1,197
)
  (1,428
)
Core deposit intangible asset  (1,006
)
  (1,186
)
Deferred loan and lease costs  (869
)
  (692
)
Accretion on investment securities
  (523
)
  (588
)
FHLB dividends  (348)  (348)
Prepaid assets
  (43)  (45)
Other  (132
)
  (169
)
Total deferred income tax liabilities  (23,870
)
  (28,479
)
Net deferred income tax assets $25,542  $17,093 
 

The Company believes, based on available information, that more likely than not, the net deferred income tax asset will be realized in the normal course of operations. Accordingly, 0 valuation allowance has been recorded at December 31, 2021 and 2020.



The impact of a tax position is recognized in the financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. As of December 31, 2021 and 2020, the Company did 0t have any significant uncertain tax positions.  The Company includes any interest and penalties associated with unrecognized tax benefits within the provision for income taxes.  The Company does not expect a result of implementing ASU 2016-02, we recognized an operating lease right-of-use (“ROU”) asset of $4.73 million and an operating lease liability of $4.73 million on January 1, 2019, with no impact on our consolidated statement of income or consolidated statement of cash flows comparedmaterial change to the prior lease accounting model. The ROU asset and operating lease liability are recorded in other assets and other liabilities, respectively,total amount of unrecognized tax benefits in the consolidated balance sheets. See Note 19 – “Leases” for additional information.next twelve months.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most notably, the ASU changes the income statement impact of equity investments held by the Company and the requirement for the Company to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.


The Company adopted the ASU provisions on January 1, 2018. The adoption of the ASU resulted in the use of an exit price rather than an entrance price to determine the fair value of loans not measured at fair value on a non-recurring basis in the consolidated balance sheets. See Note 17 – Fair Value of Financial Instruments for further information regarding the valuation of these loans.

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the newly enacted Tax Cutsfiles U.S. and Jobs Act (“Tax Act”). The amount of the reclassification consists of the difference between the historical corporatestate income tax rates and the newly enacted 21 percent corporate federal incomereturns in jurisdictions with various statutes of limitations. The 2017 through 2021 tax rate. The amendments are effectiveyears remain subject to selection for all entities for the interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted, including interim periods in those years. The Company adopted the amendmentsexamination as of December 31, 2017, which resulted in a net reclassification2021. The Company’s California income tax returns for the years 2018, 2019 and 2020 are currently under audit. As of $144,000 between AOCI and retained earnings.

Accounting Guidance Pending Adoption at December 31, 20192021 and 2020, the Company has net operating loss of $2.0 million and $2.1 million carry-forwards and 0 tax credit carry-forwards.
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. The new guidance is effective on January 1, 2020. During 2109 Company completed an assessment of its 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, enabling us to complete a parallel run using second, third and fourth quarter 2019 data. The ultimate impact of adopting the standard on January 1, 2020 will depend on the characteristics of the Company’s portfolios, macroeconomic conditions and forecasts, the ultimate validation of models and methodologies, and other management judgments.

106Note 17 — Condensed Financial Statements of Parent Company

Financial information pertaining only to Farmers and Merchants Bancorp (“FMCB”), on a parent-only basis, is as follows:

  December 31,
 
(Dollars in thousands) 2021  2020 
Balance Sheets
      
Assets      
Cash and cash equivalents
 $1,535  $4,551 
Investment in subsidiaries
  472,573   429,347 
Other assets  241   956 
Total assets $474,349  $434,854 
Liabilities and shareholders’ equity
        
Subordinated debentures $10,310  $10,310 
Other liabilities  903   879 
Shareholders’ equity  463,136   423,665 
Total liabilities and shareholders’ equity $474,349  $434,854 

119

Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
21.Note 17 — Condensed Financial Statements of Parent Company Financial Information—Continued

  

 Year Ended December 31, 
(Dollars in thousands) 2021  2020  2019 
Statements of Income
         
Dividend and other income from subsidiaries $9,900  $19,874  $13,166 
Interest and dividends
  9   11   17 
Total income
  9,909   19,885   13,183 

            
Reimbursement of expenses from subsidiaries
  780   821   800 
Other expenses
  1,469   1,656   1,616 
Total expense
  2,249   2,477   2,416 
Income before income taxes
  7,660   17,408   10,767 
Income tax benefit  660   729   698 

  8,320   18,137   11,465 
Equity in undistributed net income of subsidiaries
  58,016   40,597   44,571 
Net income $66,336  $58,734  $56,036 
The following financial information is presented as of December 31 for the periods indicated.
(Dollars in thousands) Year Ended December 31, 
Statements of Cash Flows 2021  2020  2019 
Cash flows from operating activities:         
Net income $66,336  $58,734  $56,036 
Adjustments to reconcile net income to net cash provided by operating activities:            
Equity in undistributed net income of the Bank
  (58,016)  (40,597)  (44,571)
Change in other assets and liabilities
  739   (393)  62 
Net cash provided by operating activities  9,059   17,744   11,527 
Cash flows from investing activities:            
Payments for investments in non-qualified retirement plans  0   (403)  (6,273)
Net cash used in investing activities  0   (403)  (6,273)
Cash flows from financing activities:            
Common stock repurchases  0   (2,834)  0 
Issuance of common stock  0   403   6,973 
Cash dividends paid
  (12,075)  (11,700)  (11,221)
Net used in financing activities  (12,075)  (14,131)  (4,248)
Net change in cash and cash equivalents  (3,016)  3,210   1,006 
Cash and cash equivalents, beginning of year  4,551   1,341   335 
Cash and cash equivalents, end of year $1,535  $4,551  $1,341 


Farmers & Merchants Bancorp
Condensed Balance Sheets

(in thousands) 2019  2018 
Cash 
$
1,341
  
$
335
 
Investment in Farmers & Merchants Bank of Central California  
378,271
   
321,134
 
Investment Securities  
411
   
409
 
Other Assets  
102
   
(57
)
Total Assets 
$
380,125
  
$
321,821
 
         
Subordinated Debentures 
$
10,310
  
$
10,310
 
Liabilities  
519
   
296
 
Shareholders’ Equity  
369,296
   
311,215
 
Total Liabilities and Shareholders’ Equity 
$
380,125
  
$
321,821
 

Farmers & Merchants Bancorp
Condensed Statements of Income

  Year Ended December 31, 
(in thousands) 2019  2018  2017 
Equity (Loss) in Undistributed Earnings in Farmers & Merchants Bank of Central California 
$
44,571
  
$
(26,488
)
 
$
5,575
 
Dividends from Subsidiary  
13,166
   
73,010
   
23,575
 
Interest Income  
17
   
16
   
13
 
Other Expenses, Net  
(2,416
)
  
(1,527
)
  
(1,552
)
Tax Benefit  
698
   
516
   
759
 
Net Income 
$
56,036
  
$
45,527
  
$
28,370
 

107120

Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Farmers & Merchants Bancorp
Condensed Statements of Cash Flows

  Year Ended December 31, 
(in thousands) 2019  2018  2017 
Cash Flows from Operating Activities:         
Net Income 
$
56,036
  
$
45,527
  
$
28,370
 
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:            
(Equity) Loss in Undistributed Net Earnings from Subsidiary  
(44,571
)
  
26,488
   
(5,575
)
Net (Increase) in Other Assets  
(160
)
  
(125
)
  
(11,822
)
Net Increase (Decrease) in Liabilities  
222
   
(942
)
  
112
 
Net Cash Provided by Operating Activities  
11,527
   
70,948
   
11,085
 
Investing Activities:            
Securities Sold or Matured  
-
   
-
   
1
 
Payments for Business Acquisition  
-
   
(28,642
)
  
-
 
Payments for Investments in Subsidiaries  
(6,273
)
  
(10,503
)
  
(2,953
)
Net Cash Used by Investing Activities  
(6,273
)
  
(39,145
)
  
(2,952
)
Financing Activities:            
Stock Repurchased  
-
   
(31,152
)
  
-
 
Issuance of Common Stock  
6,973
   
10,503
   
2,953
 
Cash Dividends  
(11,221
)
  
(11,151
)
  
(10,982
)
Net Cash Used by Financing Activities  
(4,248
)
  
(31,800
)
  
(8,029
)
Increase in Cash and Cash Equivalents  
1,006
   
3
   
104
 
Cash and Cash Equivalents at Beginning of Year  
335
   
332
   
228
 
Cash and Cash Equivalents at End of Year 
$
1,341
  
$
335
  
$
332
 

22. Quarterly Unaudited Financial Data

The following tables set forth certain unaudited historical quarterly financial data for each of the eight consecutive quarters in 2019 and 2018. This information is derived from unaudited consolidated financial statements that include, in management’s opinion, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation when read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-K.

2019
(in thousands except per share data)
 
First
Quarter
  
Second
Quarter
  
Third
Quarter
  
Fourth
Quarter
  Total 
Total Interest Income 
$
37,173
  
$
38,626
  
$
38,810
  
$
39,099
  
$
153,708
 
Total Interest Expense  
2,966
   
3,253
   
3,530
   
3,445
   
13,194
 
Net Interest Income  
34,207
   
35,373
   
35,280
   
35,654
   
140,514
 
Provision for Credit Losses  
-
   
200
   
-
   
-
   
200
 
Net Interest Income After                    
Provision for Credit Losses  
34,207
   
35,173
   
35,280
   
35,654
   
140,314
 
Total Non-Interest Income  
4,464
   
4,400
   
3,974
   
4,403
   
17,241
 
Total Non-Interest Expense  
20,445
   
20,565
   
20,856
   
20,376
   
82,242
 
Income Before Income Taxes  
18,226
   
19,008
   
18,398
   
19,681
   
75,313
 
Provision for Income Taxes  
4,677
   
4,903
   
4,660
   
5,037
   
19,277
 
Net Income 
$
13,549
  
$
14,105
  
$
13,738
  
$
14,644
  
$
56,036
 
Basic Earnings Per Common Share 
$
17.27
  
$
17.92
  
$
17.45
  
$
18.54
  
$
71.18
 


2018
(in thousands except per share data)
 
First
Quarter
  
Second
Quarter
  
Third
Quarter
  
Fourth
Quarter
  Total 
Total Interest Income 
$
30,428
  
$
32,161
  
$
34,065
  
$
36,799
  
$
133,453
 
Total Interest Expense  
1,522
   
1,660
   
2,157
   
2,611
   
7,950
 
Net Interest Income  
28,906
   
30,501
   
31,908
   
34,188
   
125,503
 
Provision for Credit Losses  
333
   
500
   
2,500
   
2,200
   
5,533
 
Net Interest Income After                    
Provision for Credit Losses  
28,573
   
30,001
   
29,408
   
31,988
   
119,970
 
Total Non-Interest Income  
4,665
   
2,283
   
4,208
   
4,063
   
15,219
 
Total Non-Interest Expense  
19,936
   
18,145
   
18,621
   
18,757
   
75,459
 
Income Before Income Taxes  
13,302
   
14,139
   
14,995
   
17,294
   
59,730
 
Provision for Income Taxes  
3,361
   
3,589
   
2,995
   
4,258
   
14,203
 
Net Income 
$
9,941
  
$
10,550
  
$
12,000
  
$
13,036
  
$
45,527
 
Basic Earnings Per Common Share 
$
12.24
  
$
12.90
  
$
15.12
  
$
16.56
  
$
56.82
 

23. Subsequent Events

On January 10, 2020, the Company issued 523 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans at a price of $770 per share based upon a valuation completed by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds will be contributed to the Bank as equity capital.

Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


None


Item 9A.
Controls and Procedures


Evaluation of Disclosure Controls and Procedures
The Company maintains controls and procedures designed to ensure that all relevant information is recorded and reported in all filings of financial reports. Such information is reported to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer to allow timely and accurate disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e). In accordance with Rule 13a-15(b) of the Exchange Act, we
An evaluation was carried out an evaluation as of December 31, 2019, under the supervision and with the participation of ourthe Company’s management, including ourthe Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(a)). Based on that evaluation, the CEO and CFO have concluded that as of the end of the period covered by this Report, the disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in reports that are filed or submitted under the Exchange Act are recorded, processed, summarized and timely reported as provided in the SEC’s rules and forms.

REPORT OF MANAGEMENT
To the Board of Directors and Shareholders of Farmers & Merchants Bancorp

The management of Farmers & Merchants Bancorp (the “Company”) is responsible for the preparation, integrity, and fair presentation of its published financial statements and all other information presented in this annual report. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, as such, include amounts based on informed judgments and estimates made by management. In the opinion of management, the financial statements and other information herein present fairly the financial condition and operations of the Company at the dates indicated in conformity with accounting principles generally accepted in the United States of America.
Management is responsible for establishing and maintaining an effective system of internal control over financial reporting. The internal control system is augmented by written policies and procedures and by audits performed by an internal audit staff (assisted in certain instances by contracted external audit resources other than the independent registered public accounting firm), which reports to the Audit Committee of the Board of Directors. Internal auditors monitor the operation of the internal and external control system and report findings to management and the Audit Committee. When appropriate, corrective actions are taken to address identified control deficiencies and other opportunities for improving the system. The Audit Committee provides oversight to the financial reporting process. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time.
The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of the Company’s management. The Audit Committee is responsible for the selection of the independent registered public accounting firm. It meets periodically with management, the independent auditors and the internal auditors to ensure that they are carrying out their responsibilities.
The Audit Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting, and auditing procedures of the Company in addition to reviewing the Company’s financial reports. The independent auditors and the internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the adequacy of the internal control structure for financial reporting and any other matters, which they believe should be brought to the attention of the Committee.
/s/ Kent A. Steinwert/s/ Mark K. Olson
Kent A. SteinwertMark K. Olson
Chairman, President, and Chief Executive OfficerExecutive Vice President and Chief Financial Officer

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Farmers & Merchants Bancorp management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended.  The Company’s internal control over financial reporting is designed by, or under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer and effected by Management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  The Company’s internal control over financial reporting includes those policies and procedures that:


(1)
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(2)
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

(3)
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
There are inherent limitations in any internal control, no matter how well designed and misstatements due to error or fraud may occur and not be detected, including the possibility of circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time.

Management assessed the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effectiveinternal control structure over financial reporting as of December 31, 2019.

There have been no significant changes in2021. This assessment was based on criteria for effective internal control over financial reporting set forth by the Company’s internal controls or in other factorsCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management believes that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.

Management’s report onCompany’s internal control over financial reporting is set forth in “Item 8. Financial Statements and Supplementary Data,” and is incorporated herein by reference. Moss Adams LLP, theeffective as of December 31, 2021.

The Company’s independent registered public accounting firm thathas audited the consolidated financial statements included in this Annual Report, was engaged tofor the year ended December 31, 2021, has issued an audit report on the Company’s internal control over financial reporting. Such audit report expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Thereporting in accordance with the standards of the Public Company Accounting Oversight Board as of December 31, 2021 that appears on page 72.
Changes in Internal Controls
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the year ended December 31, 2021, to which this report of Moss Adams LLP, which is set forth in “Item 8. Financial Statements and Supplementary Data,” is incorporated herein by reference.relates that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Item 9B.Other Information


None


Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not Applicable

PART III


Item 10.
Directors, Executive Officers and Corporate Governance

SetInformation regarding “Directors and Executive Officers” is set forth below is certain information regardingunder the Executive Officers of the Company and/or Bank:

Name and Position(s)
Age
Principal Occupation during the Past Five Years
Kent A. Steinwert
Chairman, President
& Chief Executive Officer
of the Company and Bank
67
Chairman, President & Chief Executive Officer of the Company and Bank.
Deborah E. Skinner
Executive Vice President & Chief Administrative Officer of the Bank
57Executive Vice President & Chief Administrative Officer of the Bank.
Stephen W. Haley
Executive Vice President
& Chief Financial Officer & Secretary of the Company and Bank
66
Executive Vice President & Chief Financial Officer of the Company and Bank.
Kenneth W. Smith
Executive Vice President
& Senior Credit Officer
of the Company and Bank
60
Executive Vice President & Senior Credit Officer of the Company and Bank.
David M. Zitterow
Executive Vice President,
Wholesale Banking Division of the Bank
47
Executive Vice President, Wholesale Banking Division of the Bank since May 2017.
Senior Vice President – Northern California Regional Executive – Umpqua Bank, April 2014 – May 2017.
Jay J. Colombini
Executive Vice President,
Wholesale Banking Division of the Bank
57
Executive Vice President, Wholesale Banking Division of the Bank.
Ryan J. Misasi
Executive Vice President,
Retail Banking Division of the Bank
43
Executive Vice President, Retail Banking Division of the Bank.

Also, seeheadings “Election of Directors” and “Compliance with Section 16(a)“Management – Executive Officers who are not Directors” of the Exchange Act” in the Company’s definitive proxy statement for the 20202022 Annual Meeting of Stockholders which will be filed with the SECProxy Statement (“Proxy Statement”) and which is incorporated herein by reference. During 2019, there were no changes
Information regarding “Delinquent Section 16(a) Reports” is set forth under the section “Delinquent Section 16(a) Reports” of the Company’s Proxy Statement and is incorporated herein by reference.
Information regarding the Company’s corporate governance and board committees is set forth under the heading “Meetings and Committees of the Board of Directors – Committee Membership” in procedures for the election of directors.Company’s Proxy Statement and is incorporated by reference.

The Company has adopted a Code of Conduct, which compliesConsistent with the Code of Ethics requirements of the SEC. A copy ofSarbanes-Oxley Act, the Code of Conduct is posted on the Company’s website. The Company intends to disclose promptly any amendment to, or waiver from any provision of, thehas a Code of Conduct applicable to senior financial officers including the principal executive officer, principal financial officer and any waiver from any provisionprincipal accounting officer. The Code of Conduct can be accessed electronically by visiting the Company’s website at www.fmbonline.com.  The Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to and waivers of the Code of Conduct applicable to directors,by porting such information on its website, onat the About Us page. The Company’s website address is www.fmbonline.com. This website address is for information only and is not intended to be an active link, or to incorporate any website information into this document.location specified above.

Item 11.
Executive Compensation

The information required by Item 11Information regarding “Executive Compensation” is set forth under the headings “Director Compensation” and “Executive Compensation” of Form 10-Kthe Company’s Proxy Statement and is incorporated herein by reference from the information contained inreference.
Information regarding “Compensation Committee Interlocks and Insider Participation” is set forth under such heading of the Company’s definitive proxy statement forProxy Statement and is incorporated herein by reference.
Information regarding the 2020 Annual Meeting“Compensation Committee Report” is set forth under the heading “Report of Stockholders, which will be filed pursuant to Regulation 14A.the Personnel Committee of the Board of Directors on Executive Compensation” of the Company’s Proxy Statement and is incorporated herein by reference.

Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by Item 12Information regarding “Security Ownership of Form 10-KCertain Beneficial Owners and Management” is set forth under such heading of the Company’s Proxy Statement and is incorporated herein by reference fromreference.
Information regarding “Equity Compensation Plan Information” is set forth under the information contained inheading “Equity Compensation Plan Information” of the Company’s definitive proxy statement for the 2020 Annual Meeting of Stockholders, which will be filed pursuant to Regulation 14A. The Company does not have any equity compensation plans, which require disclosure under Item 201(d) of Regulation S-K.Proxy Statement and is incorporated herein by reference.

Item 13.
Certain Relationships and Related Transactions, and Director Independence

The information required by Item 13Information regarding “Certain Relationships and Related Transactions, and Director Independence” is set forth under the heading “Certain Relationships and Related Person Transactions” and “Corporate Governance – Director Independence” of Form 10-Kthe Company’s Proxy Statement and is incorporated herein by reference from the information contained in the Company’s definitive proxy statement for the 2020 Annual Meetingreference.

124


Item 14.
Principal Accounting Fees and Services

The information required by Item 14Information regarding “Principal Accounting Fees and Services” is set forth under the heading “Auditors – Fees Paid to Independent Registered Public Accounting Firm” of Form 10-Kthe Company’s Proxy Statement and is incorporated herein by reference from the information contained in the Company’s definitive proxy statement for the 2020 Annual Meeting of Stockholders, which will be filed pursuant to Regulation 14A.reference.


PART IV

Item 15.
Exhibits
List of Financial Statements and Financial Statement Schedules

(a) (1)
Financial Statements. Incorporated herein by reference, are listed in Item 8 hereof.

(2)
Financial Statement Schedules. Not applicable.

(3)
Exhibits.
 
(a) The following documents are filed as a part of this Annual Report on Form 10-K:
(1) Financial Statements and
(2) Financial Statement schedules required to be filed by Item 8 of this Annual Report on Form 10-K.
(3) The following exhibits are required by Item 601 of Regulation S-K and are included as part of this Annual Report on Form 10-K:

Exhibit
Number
Description
3.1
3.2
3.3
Certificate of Designation for the Series A Junior Participating Preferred Stock (included as Exhibit A to the Rights Agreement between Farmers & Merchants Bancorp and Registrar and Transfer Company, dated as of August 5, 2008, filed as Exhibit 4.1 below), filed on the Registrant’s Form 10-Q for the quarter ended June 30, 2008, is incorporated herein by reference.
4.1
Rights Agreement between Farmers & Merchants Bancorp and Registrar and Transfer Company, dated as of August 5, 2008, including Form of Right Certificate attached thereto as Exhibit B, filed on the Registrant’s Form 10-Q for the quarter ended June 30, 2008,  is incorporated herein by reference.
4.2
Amendment No. 1 to Rights Agreement between Farmers & Merchants Bancorp and Computershare Trust, N.A., as Rights Agent, dated as of February 18, 2016, incorporated herein by reference to Exhibit 4.2 of the Registrant’s Form 8-A/A filed on February 19, 2016.
4.3Description of F&M Bancorp Capital Stock, filed on Registrant’s Form 10-K for the year ended December 31, 2019.
10.1
Amended and Restated Employment Agreement effective August 1, 2019, between Farmers & Merchants Bank of Central California and Kent A. Steinwert, filed on Registrant’s Form 10-Q for the quarter ended June 30,  2019, is incorporated herein by reference.
10.3
Amended and Restated Employment Agreement effective August 1, 2019, between Farmers & Merchants Bank of Central California and Deborah E. Skinner, filed on Registrant’s Form 10-Q for the quarter ended June 30,  2019, is incorporated herein by reference.
10.4
Amended and Restated Employment Agreement effective August 1, 2019, between Farmers & Merchants Bank of Central California and Kenneth W. Smith, filed on Registrant’s Form 10-Q for the quarter ended June 30,  2019, is incorporated herein by reference.

10.6
Amended and Restated Employment Agreement effective August 1, 2019, between Farmers & Merchants Bank of Central California and Stephen W. Haley, filed on Registrant’s Form 10-Q for the quarter ended June 30,  2019, is incorporated herein by reference.
10.8
Amended and Restated Employment Agreement effective August 1, 2019, between Farmers & Merchants Bank of Central California and Jay J. Colombini, filed on Registrant’s Form 10-Q for the quarter ended June 30,  2019, is incorporated herein by reference.
10.10
Amended and Restated Employment Agreement effective August 1, 2019, between Farmers & Merchants Bank of Central California and Ryan J. Misasi, filed on Registrant’s Form 10-Q for the quarter ended June 30,  2019, is incorporated herein by reference.

10.11
Employment Agreement effective May 1, 2017, between Farmers & Merchants Bank of Central California and David M. Zitterow, filed on the Registrant’s Current Report on Form 8-K dated June 30, 2017, is incorporated herein by reference.
10.15
Executive Retirement Plan – Performance Componentas amended on November 5, 2010, filed on Registrant’s Form 10-Q for the period ended September 30, 2010, is incorporated herein by reference.
10.16
Executive Retirement Plan – Retention Component as amended on November 5, 2010, filed on Registrant’s Form 10-Q for the period ended September 30, 2010, is incorporated herein by reference.
10.17
Executive Retirement Plan – Salary Component, amended and restated on November 29, 2014, filed on Registrant’s Form 10-K for the year ended December 31, 2014, is incorporated herein by reference.
10.19
Executive Retirement Plan – Equity Component, amended and restated on November 29, 2014, filed on Registrant’s Form 10-K for the year ended December 31, 2014, is incorporated herein by reference.
10.20
Senior Management Retention Plan, amended and restated on November 29, 2014, filed on Registrant’s Form 10-K for the year ended December 31, 2014, is incorporated herein by reference.
14
Code of Conduct of Farmers & Merchants Bancorp, filed on Registrant’s Form 10-K for the year ended December 31, 2003, is incorporated herein by reference.
21
Subsidiaries of the Registrant, filed on Registrant’s Form 10-K for the year ended December 31, 2003, is incorporated herein by reference.
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

101.INS
Inline XBRL Instance Document
(the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH
Inline XBRL Taxonomy Extension Schema Document
Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Document.
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Document.
101.DEF104
Cover Page Interactive Data File (formatted as inline XBRL Definition Linkbase Document
and contained in Exhibit 101)


*Filed herewith


Item 16.Form 10-K Summary


None


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.authorized on March 16, 2022.



 
FarmersFARMERS & Merchants BancorpMERCHANTS BANCORP

(Registrant)
  
 
By/s/ Kent A. Steinwert
/s/ Stephen W. HaleyKent A. Steinwert
Director, Chairman, President and Chief Executive Officer
(Principal Executive Officer)

FARMERS & MERCHANTS BANCORP
 
Dated:  March 13, 2020

Stephen W. Haley/s/ Mark K. Olson
 
Mark K. Olson
 
Executive Vice President &
and Chief Financial Officer
(Principal Financial Officer)


POWER OF ATTORNEY

 KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kent A. Steinwert and Mark K. Olson, jointly and severally, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 16, 2022, by the following persons on behalf of the registrant and in the capacities indicated on March 13, 2020.indicated.


/s/ Kent A. Steinwert
 
Director, Chairman, President &and Chief Executive Officer
Kent A. Steinwert
(Principal Executive Officer)

/s/ Stephen W. Haley

Mark K. Olson
 
Executive Vice President &and Chief Financial Officer
Stephen W. HaleyMark K. Olson
(Principal Financial and Accounting Officer)

/s/ Gary Long

 
/s/ Calvin Suess

 
Gary Long, Director
Calvin Suess, Director

/s/ Kevin Sanguinetti

/s/ Edward Corum, Jr.

Director
Edward Corum, Jr.
 
Kevin Sanguinetti, Director
Edward Corum, Jr., Director

/s/ Stephenson K. Green

Director
Stephenson K. Green
/s/ Gary Long
 
Director
Gary Long
/s/ Kevin Sanguinetti
Director
Kevin Sanguinetti
/s/ Calvin Suess
Director
Calvin Suess
/s/ Terrence A. Young

 
Stephenson K. Green, Director
Terrence A. Young Director




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