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

FORM 10-Q

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

For the quarterly period ended SeptemberJune 30, 20212022

OR
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
NoneNot ApplicableNot Applicable

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

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.
days Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically if any, 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, or 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 ActAct. ☐


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

Securities registered pursuant to Section 12(b)
As of July 31, 2022, the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockFMCBOTCQX

registrant had Number of775,246 shares of common stock of the registrant $0.01 par value per share, outstanding.789,646 outstanding as of November 1, 2021.

FARMERS & MERCHANTS BANCORP

FORM 10-Q

TABLE OF CONTENTS

Table Of Contents

PART I. - FINANCIAL INFORMATION
Page
    
 
Item 1 - Financial Statements
Unaudited Consolidated Statements of Financial Condition
4
Unaudited Consolidated Statements of Income
5
Unaudited Consolidated Statements of Comprehensive Income
6
Unaudited Consolidated Statements of Changes in Shareholders’ Equity
7
Unaudited Consolidated Statements of Cash Flows
8
Notes to Unaudited Consolidated Financial Statements
9
    
 
Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2021, December 31, 2020 and September 30, 2020
3
Condensed Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020
4
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020
5
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020
6
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2021 and 2020
7
Notes to the Consolidated Financial Statements (Unaudited)
8
Item 2 - Management’s Discussion and Analysis of Financial Condition and  Results of Operations
32
Overview
3633
Results of Operations
38
Results of Financial Condition
45
    
 
Item 3 - Quantitative and Qualitative Disclosures Aboutabout Market Risk
5759
   
 
Item 4 - Controls and Procedures
6059
   
PART II. - OTHER INFORMATION
 
  
 Item 1 – Legal Proceedings59
 
Item 1 - Legal Proceedings
61
Item 1A – Risk Factors
6159
 
Item 2 -– Unregistered Sales of Equity Securities and Use of Proceeds
6159
 Item 3 – Defaults upon Senior Securities59
 
Item 3 - Defaults Upon Senior Securities
61
Item 4 – Mine Safety Disclosures
6160
 Item 5 – Other Information60
 
Item 5 - Other Information6 – Exhibits
6160
 
Item 6 - ExhibitsSignatures
61
Signatures
62

2
Table Of Contents
Special Note Regarding Forward-Looking Statements

Certain matters in this Quarterly Report on Form 10-Q 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; (9) water availability and management issues in California and the resulting impact on the Company’s agricultural and industrial customers; (10) expansion into new geographic markets and new lines of business; (11) the impact of COVID-19 (Coronavirus) on the Company and its customers (see “Note 2 – Risks and Uncertainties”); (12) the impact of changes in Federal and State taxation policies and rates; and (13) other factors discussed in “Item 1A. Risk Factors” on our Annual Report on Form 10-K filed with the SEC on March 15, 2022.

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.
3
PART I.1. FINANCIAL INFORMATION

ITEM 1.
Item 1.
Financial Statements

FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands, except share and per share amounts) 
June 30,
2022
  
December 31,
2021
 
ASSETS      
Cash and due from banks $67,136  $52,499 
Interest bearing deposits with banks  680,652   662,961 
Total cash and cash equivalents  747,788   715,460 
Securities available-for-sale, at fair value  225,338   270,454 
Securities held-to-maturity, net of allowance for credit losses of $393 and $0, respectively, fair value $754,834 and $725,841, respectively
  867,990   737,052 
Total investment securities  1,093,328   1,007,506 
Non-marketable securities  15,549   15,549 
Loans and leases held for investment  3,249,886   3,237,177 
Allowance for credit losses  (62,080)  (61,007
)
Loans held for investment, net  3,187,806   3,176,170 
Bank-owned life insurance  72,513   71,411 
Premises and equipment, net  46,970   47,730 
Deferred income tax assets  34,839   25,542 
Accrued interest receivable  18,231   18,098 
Goodwill  11,183   11,183 
Other intangibles  3,106   3,402 
Other real estate owned  873   873 
Other assets  94,495   84,796 
TOTAL ASSETS $5,326,681  $5,177,720 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Deposits:        
Non-interest bearing $1,753,633  $1,750,330 
Interest bearing:        
Demand  1,059,651   1,097,337 
Savings and money market  1,577,599   1,400,000 
Certificate of deposits  378,630   392,485 
Total interest bearing  3,015,880   2,889,822 
Total deposits  4,769,513   4,640,152 
Subordinated debentures  10,310   10,310 
Interest payable and other liabilities  85,505   64,122 
TOTAL LIABILITIES  4,865,328   4,714,584 
         
SHAREHOLDERS’ EQUITY        
Preferred shares, 0 par value, 1,000,000 shares authorized and, NaN issued or outstanding  0   0 
Common shares, $0.01 par value, 7,500,000 authorized 777,190 and 789,646 outstanding at June 30, 2022 and December 31, 2021, respectively
  8   8 
Additional paid-in capital  65,671   77,516 
Retained earnings  416,722   387,331 
Accumulated other comprehensive (loss) / income, net of taxes  (21,048)  (1,719
)
TOTAL SHAREHOLDERS’ EQUITY  461,353   463,136 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $5,326,681  $5,177,720 

4
FARMERS & MERCHANTS BANCORP
Condensed Consolidated
Balance Sheets (Unaudited)UNAUDITED CONSOLIDATED STATEMENTS OF INCOME


 
 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
(Dollars in thousands, except share and per share amounts) 2022  2021  2022  2021 
Interest income            
Interest and fees on loans and leases $38,570  $36,664  $76,003  $73,751 
Interest and dividends on investments  5,716   4,322   11,011   8,739 
Interest on deposits with others  1,409   164   1,775   267 
Total interest income  45,695   41,150   88,789   82,757 
Interest expense                
Deposits  873   1,034   1,676   2,271 
Subordinated debentures  103   79   185   158 
Total interest expense  976   1,113   1,861   2,429 
Net interest income  44,719   40,037   86,928   80,328 
Provision for credit losses  1,500   0   1,500   1,250 
Net interest income after provision for credit losses  43,219   40,037   85,428   79,078 
Non-interest income                
Card processing
  1,847   1,806   3,584   3,385 
Service charges on deposit accounts  830   679   1,680   1,317 
Increase in cash surrender value of BOLI  560   541   1,102   1,067 
Gain on sale of investment securities
  2   714   2   2,554 
Net (loss)/gain on deferred compensation benefits
  (991)  492   (579)  1,213 
Other  1,264   727   2,035   2,139 
Total non-interest income  3,512   4,959   7,824   11,675 
Non-interest expense                
Salaries and employee benefits  16,403   16,182   33,187   32,922 
Net (loss)/gain on deferred compensation benefits
  (991)  492   (579)  1,213 
Occupancy  1,150   1,178   2,304   2,409 
Data Processing
  1,233   1,213   2,448   2,437 
FDIC insurance
  361   298   710   585 
Marketing  340   418   656   606 
Legal  405   289   684   400 
Other  4,130   3,533   7,409   6,575 
Total non-interest expense  23,031   23,603   46,819   47,147 
INCOME BEFORE INCOME TAXES
  23,700   21,393   46,433   43,606 
Income tax expense
  5,257   5,240   10,932   10,740 
NET INCOME
 $18,443  $16,153  $35,501  $32,866 
                 
Earnings per common share:                
Basic $23.58  $20.45  $45.28  $41.62 
Diluted $23.58  $20.45  $45.28  $41.62 
                 
Weighted average number of common shares                
Basic  781,880   789,646   783,976   789,646 
Diluted  781,880   789,646   783,976   789,646 
(in thousands except share data)
Assets 
September 30,
2021
  
December 31,
2020
  
September 30,
2020
 
Cash and Cash Equivalents:         
Cash and Due from Banks $66,503  $66,327  $58,810 
Interest Bearing Deposits with Banks  804,260   317,510   299,558 
Total Cash and Cash Equivalents  870,763   383,837   358,368 
             
Investment Securities:            
Available-for-Sale
  333,151   807,732   568,536 
Held-to-Maturity, fair value $540,308, $70,049 and $71,055, respectively
  550,618   68,933   69,913 
Total Investment Securities  883,769   876,665   638,449 
             
Loans & Leases:  3,139,801   3,099,592   3,111,931 
Less: Allowance for Credit Losses  60,303   58,862   56,798 
Loans & Leases, Net  3,079,498   3,040,730   3,055,133 
             
Premises and Equipment, Net  48,580   50,147   49,214 
Bank Owned Life Insurance, Net  70,852   69,235   68,705 
Interest Receivable and Other Assets  149,296   129,839   131,745 
Total Assets $5,102,758  $4,550,453  $4,301,614 
             
Liabilities            
Deposits:            
Demand $1,694,431  $1,475,425  $1,340,797 
Interest Bearing Transaction  1,077,569   902,487   812,166 
Savings and Money Market  1,402,560   1,260,487   1,201,566 
Time  393,834   421,868   460,248 
Total Deposits  4,568,394   4,060,267   3,814,777 
             
Subordinated Debentures  10,310   10,310   10,310 
Interest Payable and Other Liabilities  69,863   56,211   59,626 
Total Liabilities  4,648,567   4,126,788   3,884,713 
             
Shareholders’ Equity            
Preferred Stock:  NaN Par Value,  1,000,000 Shares Authorized, NaN Issued or Outstanding
  0   0   0 
Common Stock:  Par Value $0.01, 7,500,000 Shares Authorized, 789,646, 789,646, and 793,556 Shares Issued and Outstanding at September 30, 2021, December 31, 2020 and September 30, 2020, Respectively
  8   8   8 
Additional Paid-In Capital  77,516   77,516   80,350 
Retained Earnings  377,523   333,070   323,524 
Accumulated Other Comprehensive (Loss) Income, Net of Taxes  (856)  13,071   13,019 
Total Shareholders’ Equity
  454,191   423,665   416,901 
Total Liabilities and Shareholders’ Equity
 $5,102,758  $4,550,453  $4,301,614 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
35
FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


 
 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
(Dollars in thousands) 2022  2021  2022  2021 
Net income 
$
18,443
  
$
16,153
  
$
35,501
  
$
32,866
 
Other comprehensive income                
Unrealized holding (losses)/gains on securities available-for-sale
  
(11,434
)  
3,957
   
(27,299
)  
(14,609
)
Reclassification adjustment for (gains)/losses on available-for-sale securities  
(2
)
  
(714
)  
(2
)  
(2,554
)
Amortization of unrealized loss on securities transferred to held-to-maturity  
(64
)  
(180
)  
(141
)  
(238
)
Net unrealized holding (losses)/gains on securities available-for-sale  (11,500)  3,063   (27,442)  (17,401)
Income tax benefit/(expense)  
3,400
   
(905
)
  
8,113
   
5,144
 
Other comprehensive (loss)/income, net of tax
  
(8,100
)  
2,158
   
(19,329
)  
(12,257
)
Total comprehensive income 
$
10,343
  
$
18,311
  
$
16,172
  
$
20,609
 

6

FARMERS & MERCHANTS BANCORP
Condensed Consolidated Statements of Income (Unaudited)UNAUDITEDCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the three and six months ended June 30, 2022 and 2021
(in thousands except per share data)
 
 
Three Months
Ended September 30,
  
Nine Months
Ended September 30,
 
  2021  2020  2021  2020 
Interest Income            
Interest and Fees on Loans & Leases $36,088  $36,409  $109,839  $104,880 
Interest on Deposits with Banks  328   81   595   1,093 
Interest on Investment Securities:                
Taxable  3,283   2,889   10,781   9,216 
Exempt from Federal Tax  399   414   1,238   1,260 
Total Interest Income  40,098   39,793   122,453   116,449 
                 
Interest Expense                
Deposits  929   2,011   3,200   7,613 
Subordinated Debentures  78   83   236   296 
Total Interest Expense  1,007   2,094   3,436   7,909 
                 
Net Interest Income  39,091   37,699   119,017   108,540 
Provision for Credit Losses  0   1,700   1,250   2,000 
Net Interest Income After Provision for Loan Losses  39,091   35,999   117,767   106,540 
                 
Non-Interest Income                
Service Charges on Deposit Accounts  808   654   2,125   1,948 
Net Gain on Sale of Investment Securities  0   0   2,554   13 
Increase in Cash Surrender Value of Bank Owned Life Insurance  549   528   1,616   1,557 
Debit Card and ATM Fees  1,788   1,465   5,173   4,044 
Net Gain on Deferred Compensation Investments  615   1,022   1,828   883 
Other  1,100   870   3,641   2,535 
Total Non-Interest Income  4,860   4,539   16,937   10,980 
                 
Non-Interest Expense                
Salaries and Employee Benefits  14,453   13,606   47,375   42,269 
Net Gain on Deferred Compensation Investments  615   1,022   1,828   883 
Occupancy  1,145   1,186   3,554   3,429 
Equipment  1,251   1,272   3,688   3,726 
Marketing  63   245   669   515 
Legal  85  23   485   100 
FDIC Insurance  317   249   902   256 
Other  2,656   3,180   9,231   9,182 
Total Non-Interest Expense  20,585   20,783   67,732   60,360 
                 
Income Before Provision for Income Taxes  23,366   19,755   66,972   57,160 
Provision for Income Taxes  5,864   4,945   16,604   13,919 
Net Income $17,502  $14,810  $50,368  $43,241 
Basic and Diluted Earnings Per Common Share $22.16  $18.66  $63.79  $54.49 


 

(Dollars in thousands, except share amounts)
 
Common
Shares
  Amount
  
Additional
Paid-In
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
(Loss)/Income
  Total 
Balance as of April 1, 2022
  
785,146
  
$
8
  
$
73,264
  
$
404,389
  
$
(12,948
)
 
$
464,713
 
Net income  -   0   
0
   
18,443
   
0
   
18,443
 
Other comprehensive loss, net of tax  -   
0
   
0
   
0
   
(8,100
)
  
(8,100
)
Cash dividends declared ($7.85 per share)  -   0   0   (6,110)  0   (6,110)
Repurchase of common stock  (7,956)  0   (7,593)  0   0   (7,593)
Balance as of June 30, 2022
  
777,190
  
$
8
  
$
65,671
  
$
416,722
  
$
(21,048
)
 
$
461,353
 
Balance as of April 1, 2021
  
789,646
  
$
8
  
$
77,516
  
$
349,790
  
$
(1,344
)
 
$
425,970
 
Net income  -   0   
0
   
16,153
   
0
   
16,153
 
Other comprehensive loss, net of tax  -   
0
   
0
   
0
   
2,158
   
2,158
 
Cash dividends declared ($7.50 per share)  -   0   0   (5,922)  0   (5,922)
Balance as of June 30, 2021
  
789,646
  
$
8
  
$
77,516
  
$
360,021
  
$
814
  
$
438,359
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
4

 

(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, 2022  
789,646
  
$
8
  
$
77,516
  
$
387,331
  
$
(1,719
)
 
$
463,136
 
Net income  -   0   
0
   
35,501
   
0
   
35,501
 
Other comprehensive loss, net of tax  -   
0
   
0
   
0
   
(19,329
)
  
(19,329
)
Cash dividends declared ($7.85 per share)  -   0   0   (6,110)  0   (6,110)
Repurchase of common stock  (12,456)  0   (11,845)  0   0   (11,845)
Balance as of June 30, 2022
  
777,190
  
$
8
  
$
65,671
  
$
416,722
  
$
(21,048
)
 
$
461,353
 
Balance as of January 1, 2021  
789,646
  
$
8
  
$
77,516
  
$
333,070
  
$
13,071
  
$
423,665
 
Net income  -   0   
0
   
32,866
   
0
   
32,866
 
Other comprehensive loss, net of tax  -   
0
   
0
   
0
   
(12,257
)
  
(12,257
)
Cash dividends declared ($7.50 per share)  -   0   0   (5,922)  0   (5,922)
Cash dividends returned
  -   0   0   7   0   7 
Balance as of June 30, 2021
  
789,646
  
$
8
  
$
77,516
  
$
360,021
  
$
814
  
$
438,359
 
Table of Contents
FARMERS & MERCHANTS BANCORP
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 (in thousands)
 
 
Three Months
Ended September 30,
  
Nine Months
Ended September 30,
 
  2021  2020  2021  2020 
Net Income $17,502  $14,810  $50,368  $43,241 
                 
Other Comprehensive Income                
Increase in Net Unrealized (Loss) Gain on Available-for-Sale Securities  (2,237)  (2,325)  (16,846)  13,803 
Deferred Tax Provision Benefit (Expense) Related to Unrealized (Loss) Gains  662   688   4,981   (4,080)
Reclassification Adjustment for Realized Gains on Available-for-Sale Securities Included in Net Income  0   0   (2,554)  (13)
Deferred Tax Related to Reclassification Adjustment  0   0   755   4 
Amortization of Unrealized Loss on Securities Transferred to Held to Maturity  (135)  0   (373)  0 
Deferred Tax Benefit Related to Loss on Securities Transferred  40   0   110   0 
Total Other Comprehensive (Loss) Income  (1,670)  (1,637)  (13,927)  9,714 
Comprehensive Income $15,832  $13,173  $36,441  $52,955 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

5
Table of Contents
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
For the three and nine months ended September 30, 2021 and 2020 
(in thousands except share data)
 
 
Common
Shares
Outstanding
  
Common
Stock
  
Additional
Paid-In
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
(Loss) Income, net
  
Total
Shareholders’
Equity
 
Three Months Ended September 30, 2021 
Balance, June 30, 2021
  789,646  $8  $77,516  $360,021  $814  $438,359 
Net Income          0   17,502   0   17,502 
Other Comprehensive Loss
      0   0   0   (1,670)  (1,670)
Balance, September 30, 2021
  789,646  $8  $77,516  $377,523  $(856) $454,191 
  
Three Months Ended September 30, 2020
 
Balance, June 30, 2020
  793,556  $8  $80,350  $308,714  $14,656  $403,728 
Net Income          0   14,810   0   14,810 
Other Comprehensive Loss
      0   0   0   (1,637)  (1,637)
Balance, September 30, 2020
  793,556  $8  $80,350  $323,524  $13,019  $416,901 

Nine Months Ended September 30, 2021 
Balance, December 31, 2020
  789,646  $8  $77,516  $333,070  $13,071  $423,665 
Net Income      -   0   50,368   0   50,368 
Cash Dividends Declared on Common Stock ($7.50 per share)
      0   0   (5,922)  0   (5,922)
Cash Dividends Returned      0   0   7   0   7 
Other Comprehensive Loss      0   0   0   (13,927)  (13,927)
Balance, September 30, 2021
  789,646  $8  $77,516  $377,523  $(856) $454,191 
                         
Nine Months Ended September 30, 2020 
Balance, December 31, 2019
  793,033  $8  $79,947  $286,036  $3,305  $369,296 
Net Income      -   0   43,241   0   43,241 
Cash Dividends Declared on Common Stock ($7.25 per share)
      0   0   (5,753)  0   (5,753)
Issuance of Common Stock  523   0   403   0   0   403 
Other Comprehensive Income      0   0   0   9,714   9,714 
Balance, September 30, 2020
  793,556  $8  $80,350  $323,524  $13,019  $416,901 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

6
Table of Contents
FARMERS & MERCHANTS BANCORP
Condensed Consolidated Statements of Cash Flows (Unaudited)
 Nine Months 
   Ended September 30, 
(in thousands) 2021
   2020
 
Operating Activities:      
Net Income $50,368  $43,241 
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:        
Provision for Credit Losses  1,250   2,000 
Depreciation and Amortization  1,971   2,117 
Net Amortization of Investment Security Premiums & Discounts  1,133   741 
Amortization of Core Deposit Intangible  458   470 
Accretion of Discount on Acquired Loans  (62)  (134)
Net (Gain) on Sale of Investment Securities  (2,554)  (13)
Net (Gain) on Sale of Property & Equipment  (31)  (38)
Net Change in Operating Assets & Liabilities:        
Net (Increase) in Interest Receivable and Other Assets  (11,211)  (6,269)
Net Increase (Decrease) in Interest Payable and Other Liabilities  10,738   (1,773)
Net Cash Provided by Operating Activities  52,060   40,342 
Investing Activities:        
Purchase of Investment Securities Available-for-Sale  (257,228)  (273,408)
Proceeds from Sold, Matured or Called Securities Available-for-Sale  397,454   225,332 
Purchase of Investment Securities Held-to-Maturity  (194,332)  (19,056)
Proceeds from Matured or Called Securities Held-to-Maturity  29,042   9,341 
Net Loans & Leases Paid, Originated or Acquired  (39,956)  (438,984)
Additions to Premises and Equipment, Net  (1,001)  (6,108)
Purchase of Other Investments  (4,516)  (4,935)
Redemption of Other Investment  2,556   0 
Proceeds from Sale of Property & Equipment  635   81 
Net Cash Used in Investing Activities  (67,346)  (507,737)
Financing Activities:        
Net Increase in Deposits  508,127   536,758 
Cash Dividends  (5,922)  (5,753)
Cash Dividends Return  7   0 
Net Cash Provided by Financing Activities  502,212   531,005 
Net Change in Cash and Cash Equivalents  486,926   63,610 
Cash and Cash Equivalents at Beginning of Period  383,837   294,758 
Cash and Cash Equivalents at End of Period $870,763  $358,368 
Supplementary Data        
Cash Payments Made for Income Taxes $22,530  $7,443 
Issuance of Common Stock to the Bank’s Non-Qualified Retirement Plans $0  $403 
Interest Paid $4,369  $9,085 
Supplementary Noncash Disclosure        
Investment Securities Available-for-Sale Transferred to Held-to-Maturity $316,925  $0 
 Lease Liabilities Arising from Obtaining Right-of-Use Assets $302  $0 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

7
Table ofOf Contents
FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

  
Six Months Ended
June 30,
 
(Dollars in thousands) 2022  2021 
Cash flows from operating activities:      
Net income $35,501  $32,866 
Adjustments to reconcile net income to net cash provided by operating activities:        
Provision for credit losses  1,500   1,250 
Depreciation and amortization  1,270   1,318 
Net amortization of securities premiums and discounts  275   797 
Increase in cash surrender value of BOLI  (1,102
)
  (1,067
)
Increase in deferred income taxes, net  (1,127
)
  (1,178)
Gains on sale of securities available-for-sale  (2)  (2,554
)
Net changes in:        
Other assets  (7,797)  (18,274)
Other liabilities  22,823   14,280 
Net cash provided by operating activities  51,341   27,438 
Cash flows from investing activities:        
Net change in loans held for investment  (12,568
)
  66,550 
Purchase of available-for-sale securities  (10,090
)
  (257,225
)
Purchase of held-to-maturity securities  (168,149
)
  (124,070
)
Maturities/sales of available-for-sale securities  27,679   381,117 
Maturities of held-to-maturity securities  36,641   13,140 
Purchase of premises and equipment  (526
)
  (377
)
Purchase of other investments  (3,440)  (1,656
)
Proceeds from sale of assets  34   74 
Net cash provided by investing activities  (130,419
)
  77,553 
Cash flows from financing activities:        
Net increase in deposits  129,361   351,797 
Cash dividends paid
  (6,110
)
  (5,915)
Net cash used in share repurchase of common stock
  (11,845)  0 
Net provided by financing activities  111,406   345,882 
Net change in cash and cash equivalents  32,328   450,873 
Cash and cash equivalents, beginning of period
  715,460   383,837 
Cash and cash equivalents, end of period
 $747,788  $834,710 
         
Supplemental disclosures of cash flow information:        
Cash paid for interest $2,580  $3,220 
Income taxes paid
 $9,343  $19,181 
         
Supplemental disclosures of non-cash transactions:        
Investment securities available-for-sale transferred to held-to-maturity $0  $316,925 

8

FARMERS & MERCHANTS BANCORP
NOTES TO THE CONDENSEDUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



1.Note 1—Basis of Presentation and Significant Accounting Policies

The accompanying unaudited consolidated financial statements include the accounts of Farmers & Merchants Bancorp (the “Company”(“FMCB” or “Bancorp”) was organized March 10, 1999. Primary operations are related to traditional banking activities through, a bank holding company incorporated in the State of Delaware and its wholly owned subsidiary, Farmers & Merchants Bank of Central California (the(“FMB” or “Bank”) which was established in 1916. The Bank’s wholly owned subsidiaries include Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Farmers & Merchants Investment Corporation has been dormant since 1991. Farmers/Merchants Corp. acts as trustee on deeds of trust originated by the Bank.collectively (the “Company”).

The Company’s other wholly 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.

The accounting and reporting policies of the Company conform to U.S. GAAP and prevailing practice within the banking industry. The following is a summary 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 accordance 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.

TheThese unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America(“GAAP”) for interim financial information and in accordance with the instructions for quarterly reports onto Form 10-Q. These unaudited consolidated10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In preparing these financial statements, do not include all disclosures associated with the Company’s consolidated annual financial statements included in its Annual Report on Form 10-K, as amended (“2020 Annual Report on Form 10-K”),Company has evaluated events and transactions subsequent to June 30, 2022 for the year ended December 31, 2020 and, accordingly, should be read in conjunction with such audited consolidated financial statements.potential recognition or disclosure. In the opinion of management, all adjustments (all(consisting of which are normal and recurring in nature)accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Operating results forCertain information and note disclosures have been condensed or omitted pursuant to the threerules and nine months ended September 30, 2021 are not necessarily indicativeregulations of the results that may be expectedSEC and the accounting standards for interim financial statements. Certain reclassifications have been made to the year ending December 31, 2021. Consolidated Financial Statements and/or schedules to conform to the 2022 presentation. All significant intercompany transactions and balances have been eliminated.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. Theseassumptions that affect amounts reported in the financial statements. Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions affectinherent in those policies, are significant to an understanding of Bank’s financial statements. These policies relate to: (i) the reported amountsmethodology for the recognition of interest income; (ii) the determination of the provision and allowance for credit losses; (iii) the valuation of financial assets and liabilities recorded at fair value; (iv) the datevaluation of intangibles, such as goodwill and core deposit intangibles (“CDI”); (v) the financial statementsvaluation of other real estate owned (“OREO”); and (vi) the reported amountsvaluation or recognition of revenuesdeferred tax assets and expenses duringliabilities. These policies and judgments, estimates and assumptions are described in greater detail in subsequent notes to the reportingConsolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, Summary of Critical Accounting Policies and Estimates, in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 15, 2022 and Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations Summary of Critical Accounting Policies and Estimates included in this Quarterly Report on Form 10-Q.

The information included in this Form 10-Q should be read in conjunction with our 2021 Form 10-K. Interim results are not necessarily indicative of results for a full year or any other interim period. Actual results could differ from these estimates.

Accounting GuidanceStandards Pending Adoption at September 30, 2021
— 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,March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The amendments in this ASU are elective and provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Since the issuance of this guidance, the publication cessation of the U.S. dollar LIBOR has been extended to June 30, 2023.  We have not elected to apply these amendments. However, we will assess the applicability of the ASU to us and continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations.

92016
Note 1—Basis of Presentation and Significant Accounting Policies—Continued
 
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). The main amendments in this ASU are intended to clarify certain optional expedients and scope of derivative instruments. The amendments are elective and effective immediately upon issuance of this ASU. Amendments may be elected through December 31, 2022. We have not elected to apply amendments at this time, however, will assess the applicability of this ASU to us as we continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations.

In March 2022, the FASB issued guidance within ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments in this ASU eliminatethe current troubled debt restructuring (TDR) recognition and measurement guidance and, instead, require that a creditor evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.

These amendments require vintage disclosures including current-period gross write-offs by year of origination for financing receivables. Gross write-off information must be included in the vintage disclosures in accordance with ASC 326-20-50-6, which requires disclosure of the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination.

The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years since the Company previously adopted the amendments in ASU 2016-13, which is commonly referred to as the current expected credit loss methodology, on January 1, 2020. These amendments should be applied prospectively, though for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption.

Early adoption is permitted, including adoption in an interim period. If an entity elects to early adopt in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to the vintage disclosures. The adoption of this ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.

Impact of recent authoritative accounting guidance —The Accounting Standards Codification™(“ASC”) is the FASB officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities. Periodically, the FASB will issue Accounting Standard updates (“ASU”) to its ASC. Rules and interpretive releases of the SEC under the authority of the federal securities laws are also sources of authoritative GAAP for the Company as an SEC registrant. All other accounting literature is non-authoritative.
10
Note 1—Basis of Presentation and Significant Accounting Policies—Continued
 
On January 1, 2022, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326):, Measurement of Credit Losses on Financial Instruments.Instruments, as amended, which replaces the incurred loss methodology that delays recognition until it is probable a loss has been incurred with an expected loss methodology that is referred to as CECL.


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


The implementation of the WARM method did not result in any material change in the calculation of the Company’s December 31, 2021 Allowance for Credit Losses, therefore, no adjustment to Shareholders’ Equity was made as of January 1, 2022.

The main objective of this ASU will requireis to provide financial statement users with more decision-useful information about the earlier recognition ofexpected credit losses on loansfinancial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The ASU affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial instruments based on an expected loss model, replacingasset not excluded from the scope that have the contractual right to receive cash. The ASU replaces the incurred loss modelimpairment methodology in previous GAAP with CECL, a methodology that is currently in use. Under the new guidance, an entity will measure allreflects current expected credit losses forand requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU requires a financial instruments heldasset (or group of financial assets) measured at amortized cost basis to be presented at the reporting datenet amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts. 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 requireforecasts that affect the recognitioncollectability 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. During 2019,reported amount. This ASU broadens the Company completedinformation that an assessment ofentity must consider in developing its current expected credit losses (CECL) data and system needs, and engaged a third-party vendor to assist in developing a CECL model.loss estimate for assets measured either collectively or individually. 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 beganuse of forecasted information incorporates more timely information in the third quarter of 2019, enabling the Company to complete parallel runs using data beginning with the second quarter of 2019.

8
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 delaying 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 has elected to delay CECL adoption, but continues to run its CECL model quarterly to accumulate data for the ultimate implementation. Management is currently evaluating the impact that the standard will have on its consolidated financial statements.

Cash and Cash Equivalents
For purposes of 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 three 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 to earliest call date 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 period in which they occur.

Securities are classified as available-for-sale (“AFS”) if it is management’s intent, at the time 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 are based on quoted market prices or broker/dealer price quotations on a specific identification basis. Gains or losses on the sale of these securities are computed using the specific identification method.

Transfers of debt securities from the available-for-sale category to the held-to-maturity category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer remains in accumulated other comprehensive income and in the carrying value of the held-to-maturity investment security. Premiums or discounts on investment securities are amortized or accreted using the effective interest method over the life of the security as an adjustment of yield. Unrealized holding gains or losses that remain in accumulated other comprehensive income are amortized or accreted over the remaining life of the security as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount.

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 2 components as follows: (1) OTTI related toexpected credit loss, which mustwill be recognized in the income statement; and (2) OTTI relatedmore decision useful to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present valueusers of the cash flows expected to be collected and the amortized cost basis.

9
Table of Contents
financial statements.
Equity securities are carried at fair value with changes in market value 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 more than insignificant 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 non-accrual status at the time they become TDR, remain on non-accrual 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 by Congress and was amended and extended by the Consolidated 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 of time 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 provides that these modified loans generally will not be classified as non-accrual during the term of the modification. See “Note 2 – Risks and Uncertainties” for additional information on the CARES Act and H.R. 133 and the impact of COVID-19 on the Company.

10
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 3 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 determinationfollowing table illustrates the pre-tax impact 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, considerationadoption 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.this ASU:

  
January-2022
 
(Dollars in thousands) 
Reported
under
ASC 326
  
Reported
Pre-
Adoption
  
Impact of
ASC 326
Adoption
 
Allowance for credit losses:         
Real estate:         
Commercial $(17,379
)
 $(28,536
)
 $11,157 
Agricultural  (14,580
)
  (9,613
)
  (4,967
)
Residential and home equity  (5,879
)
  (2,847
)
  (3,032
)
Construction  (3,311
)
  (1,456
)
  (1,855
)
Total real estate  (41,149
)
  (42,452
)
  1,303 
Commercial & industrial  (11,417
)
  (11,489
)
  72 
Agricultural  (6,363
)
  (5,465
)
  (898)
Commercial leases  (1,567
)
  (938
)
  (629
)
Consumer and other  (511
)
  (663
)
  152 
Total allowance for credit losses $(61,007
)
 $(61,007
)
 $0 
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 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 individual 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 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.

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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, conditionsNote 1—Basis of Presentation and values, highly questionable or improbable.Significant Accounting Policies—Continued

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 2 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.

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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’sSubsequent events 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.

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.

Right of Use Lease Asset & Lease Liability
The Company leases retail space and office space under operating leases. Most leases require the Company to pay real estate taxes, maintenance, insurance and other 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 use (ROU) asset and an operating lease liability (lease liability) for operating leases with a lease term greater than —12 months. The ROU asset and lease liability are recorded in other assets and other liabilities, respectively, in the consolidated statement of financial condition. ROU assets represent our right to use an underlying asset for the 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 lease payments over the lease term. Accordingly, ROU assets are reduced by tenant improvement allowances from landlords 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 with 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 that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Revenue from Contracts with 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’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 presentedevents occurring subsequent to June 30, 2022 fordisclosure 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 consolidated financial statements.606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

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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 three to seven years. Leasehold improvements are amortized over the lesser of the terms of the respective leases, or their useful lives, which are generally five to ten 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.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law by Congress and was amended and extended by the Consolidated Appropriations Act of 2021 (“H.R. 133”) on December 21, 2020. The CARES Act and H.R. 133 restrict 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 September 30, 2021, but these guidelines have now expired. The Company continues to work with its borrowers when they make requests to defer payments on their mortgage loans. See “Note 2 – Risks and Uncertainties” for additional information on the CARES Act and H.R. 133 and the impact of COVID-19 on the Company.

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”) 740, 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 Low Income Housing Tax Credits (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.

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When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination 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.

For the three and nine-month periods ended SeptemberNote 30,2—2021 and 2020, the Company had no material uncertain tax positions and recognized 0 interest or penalties. The Company’s policy is to recognize interest and penalties related to income taxes in the provision for income taxes in the Consolidated Statements of Income.

Basic and 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 0 common stock equivalent shares. Therefore, diluted and basic earnings per common share are the same. See Note 9 – “Dividends and Basic and Diluted Earnings Per Common Share” for additional information.

Segment Reporting
The “Segment Reporting” topic of the FASB ASC 280 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 220 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, 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.

Goodwill 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.

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At September 30,2021, the future estimated amortization expense for the CDI arising from our past acquisitions is as follows:

(in thousands) 2021  2022  2023  2024  2025  Thereafter  Total 
Core Deposit Intangible Amortization $153  $593  $573  $549  $522  $1,165  $3,555 

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 value as well as positive and mitigating events. Such indicators may include, among others, a significant change in legal factors or in 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.


2. Risks and Uncertainties

The
The COVID-19 pandemic has affected all of us.the economy and businesses throughout the U.S., in California and in the markets served by the Company. Designated as an “essential business”, the Company’s subsidiary, Farmers & Merchants Bank of Central California, has kept all branches open and maintained regular business hours during these difficult times.the COVID-19 pandemic. Our staffing levels have remained stable during the COVID-19 crisis. We have taken what we believe are prudent measures to protect our employeespandemic.

Through the CARES Act and customers, while still providing core banking services.
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 Appropriations Act of 2021 (“H.R. 133”) on December 21, 2020. Through this legislation,133, as well as related federal and state 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 continue to impact our economy, and therefore, the Company.

While tremendous strides have been made in fightingwe expect the virus, particularly with the development of a vaccine, the lingering effects of COVID-19 could have an adverse future impact on our business, financial condition and results of operations, however, we are unable to predict the full extent or nature of these impacts at the current time.

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3. Note 3—Investment Securities

The amortized cost, fair values, and unrealized gains and losses of the debt securities available-for-sale are as follows
(in thousands):follows:

 
Amortized
Cost
  Gross Unrealized  
Fair
Value
 
September 30, 2021
   Gains  Losses   
U.S. Treasury Notes $9,922  $228  $0  $10,150 
U.S. Government Agency SBA  6,892   70   43   6,919 
Mortgage-Backed Securities (1)(2)
  270,667   4,243   5,341   269,569 
Other  46,513   0   0   46,513 
Total $333,994  $4,541  $5,384  $333,151 
Available-for-Sale Securities 
   Gross Unrealized  
 
(Dollars in thousands) 
Amortized
Cost
  Gains  Losses  
Fair
Value
 
As of June 30, 2022                
U.S. Treasury notes $4,968  $0  $16  $4,952 
U.S. Government-sponsored securities  5,402   65   26   5,441 
Mortgage-backed securities (1)
  232,368   116   28,877   203,607 
Collateralized mortgage obligations (1)
  1,525   0   23   1,502 
Corporate securities  10,049   0   523   9,526 
Other  310   0   0   310 
Total available-for-sale securities $254,622  $181  $29,465  $225,338 
 
(1)All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.


 
  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 (1)
  2,412   24   0   2,436 
Other  435   0   0   435 
Total available-for-sale securities $272,436  $3,437  $5,419  $270,454 
(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.

1613
Note 3—Investment Securities—Continued
 
Amortized
Cost
  Gross Unrealized  
Fair
Value
 
December 31, 2020
   Gains  Losses   
U.S. Treasury Notes $14,859  $429  $0  $15,288 
U.S. Government Agency SBA  8,252   1   93   8,160 
Mortgage-Backed Securities (1)
  720,562   17,359   48   737,873 
Corporate Securities  45,010   927   18   45,919 
Other  492   0   0   492 
Total $789,175  $18,716  $159  $807,732 

 
Amortized
Cost
  Gross Unrealized  
Fair
Value
 
September 30, 2020
   Gains  Losses   
U.S. Treasury Notes $94,830  $512  $0  $95,342 
U.S. Government Agency SBA  8,530   1   102   8,429 
Mortgage-Backed Securities (1)
  421,263   18,050   39   439,274 
Corporate Securities  25,002   159   98   25,063 
Other  428   0   0   428 
Total $550,053  $18,722  $239  $568,536 

(1)All Mortgage-Backed securities consist of securities collateralized by residential real estate and were issued by an agency or government-sponsored entity of the U.S. government.
(2)
During Q12021, the Company transferred $316.9 million of AFS securities to HTM.

The amortized cost,book values, estimated fair values and unrealized gains and losses of investments classified as held-to-maturity are as followsfollows:
Held-to-Maturity Securities 
  Gross Unrealized  
     
(Dollars in thousands) Amortized
Cost		  Gains  Losses  
Fair
Value
   
Allowance
for Credit
Losses
 
As of June 30, 2022                
Municipal securities $62,459  $33  $151  $62,341  $
393 
Mortgage-backed securities (1)
  721,510   0   104,726   616,784   0 
Collateralized mortgage obligations (1)
  84,414   0   8,705   75,709   0 
Total held-to-maturity securities $868,383  $33  $113,582  $754,834  $
393 
 (in thousands):

 
Amortized
Cost
  Gross Unrealized  
Fair
Value
 
September 30, 2021
   Gains  Losses   
Obligations of States and Political Subdivisions $62,936  $768  $0  $63,704 
Mortgage Backed Securities (1)(2)
  487,682   48   11,126   476,604 
Total $550,618  $816  $11,126  $540,308 

 
Amortized
Cost
  Gross Unrealized  
Fair
Value
 
December 31, 2020
   Gains  Losses   
Obligations of States and Political Subdivisions $68,933  $1,116  $0  $70,049 
Total $68,933  $1,116  $0  $70,049 

 
Amortized
Value
  Gross Unrealized  
Fair
Value
 
September 30, 2020
   Gains  Losses   
Obligations of States and Political Subdivisions $69,913  $1,142  $0  $71,055 
Total $69,913  $1,142  $0  $71,055 

(1)All Mortgage-Backed securities were issued by an agency or government-sponsored(1)All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. government.
(2)
During Q12021, the Company transferred $316.9 million of AFS securities to HTM.

As part of our ongoing review of our investment securities portfolio, we reassessed the classification of certain MBS securities. During the first quarter of 2021, we transferred $316.9 million of these securities, which we intend and have the ability to hold to maturity, from available-for-sale securities to held-to-maturity at fair value. The unrealized pre-tax loss of $2,000 at the date of transfer remained in accumulated other comprehensive income and is amortized to yield over the remaining lives of the securities.U.S. Government.


 
  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 (1)
  73,781   36   229   73,588 
Total held-to-maturity securities $737,052  $782  $11,993  $725,841 
(1)All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.

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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The amortized cost and estimated fair values of investment securities at September 30, 2021 by contractual maturity are shown in the following table (in thousands):

 Available-for-Sale  Held-to-Maturity 
September 30, 2021
 
Amortized
Cost
  
Fair
Value
  
Amortized
Cost
  
Fair
Value
 
Within one year $51,503  $51,569  $308  $308 
After one year through five years  5,100   5,262   6,969   7,012 
After five years through ten years  563   566   19,543   20,254 
After ten years  6,161   6,185   36,116   36,130 
   63,327   63,582   62,936   63,704 
                 
Investment securities not due at a single maturity date:                
Mortgage-Backed securities  270,667   269,569   487,682   476,604 
                 
Total $333,994  $333,151  $550,618  $540,308 

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

The following tables show those 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):

 Less Than 12 Months  12 Months or More  Total 
September 30, 2021
 
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
 
                   
Securities Available-for-Sale                  
U.S. Government Agency SBA $188  $1  $2,141  $42  $2,329  $43 
Mortgage-Backed Securities  171,869   5,339   116   2   171,985   5,341 
Total $172,057  $5,340  $2,257  $44  $174,314  $5,384 
                         
Securities Held-to-Maturity                        
Mortgage Backed Securities  468,360   11,126   0   0  $468,360  $11,126 
Total $468,360  $11,126  $0  $0  $468,360  $11,126 

 Less Than 12 Months  12 Months or More  Total 
December 31, 2020
 
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
 
                   
Securities Available-for-Sale                  
U.S. Government Agency SBA $1,741  $3  $6,126  $90  $7,867  $93 
Mortgage-Backed Securities  20,142   45   177   3   20,319   48 
Corporate Securities  4,041   18   0   0   4,041   18 
Total $25,924  $66  $6,303  $93  $32,227  $159 

There were 0 HTM investments with gross unrealized losses at December 31, 2020.
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 Less Than 12 Months  12 Months or More  Total 
September 30, 2020
 
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
 
                   
Securities Available-for-Sale                  
U.S. Government Agency SBA $
2,312  $
4  $
5,810  $
98  $
8,122  $
102 
Mortgage-Backed Securities  20,741   35   194   4   20,935   39 
Corporate Securities  10,363   98   0   0   10,363   98 
Total $33,416  $137  $6,004  $102  $39,420  $239 

There were 0 HTM investments with gross unrealized losses at September 30, 2020.

As of SeptemberJune 30, 2021,2022, the Company held 590556 investment securities of which 68148 were in an unrealized loss position for less than twelve months and 60101 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. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities.

U.S. Treasury Notes14
– At September 30, 2021Table Of Contents, December 31, 2020, and September 30, 2020,0 U.S. Treasury
Note security investments were in an unrealized loss position.3—Investment Securities—Continued

U.S. Government Agency SBAThe following tables show the gross unrealized losses – At September 30, 2021,4 U.S. Government SBA security investments were in an unrealized loss position for available-for-sale securities that are less than 12 months and 44 were in a loss position for 12 months or more. more:

Available-for-Sale Securities
   As of June 30, 2022   

 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 June 30, 2022
             
U.S. Treasury notes
 $
4,952  $
16  $
0  $
0  $
4,952  $
16 
U.S. Government-sponsored securities 
46  
0  
1,623  
26  
1,669  
26 
Mortgage-backed securities (1)
  90,670   6,663   103,737   22,214   194,407   28,877 
Collateralized mortgage obligations (1)
  1,501   23   0   0   1,501   23 
Corporate securities
  9,526   523   0   0   9,526   523 
Total available-for-sale securities $106,695  $7,225  $105,360  $22,240  $212,055  $29,465 

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

     As of 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 and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.


The following tables show the gross unrealized losses on the Company's investment in U.S. Government Agency SBAfor held-to-maturity securities were that are less than 12 months and 12 months or more:


Held-to-Maturity Securities       As of June 30, 2022       

 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 June 30, 2022
                  
Municipal securities $6,862  $151  $0  $0  $6,862  $151 
Mortgage-backed securities (1)
  404,026   57,850   212,758   46,876   616,784   104,726 
Collateralized mortgage obligations (1)
  73,221   8,705   0   0   73,221   8,705 
Total held-to-maturity securities $484,109  $66,706  $212,758  $46,876  $696,867  $113,582 



(1)$43,000, $93,000,All mortgage-backed securities and $102,000 at September collateralized mortgage obligations30, were issued by an agency or government sponsored entity of the U.S. Government.


       As of 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
                  
Mortgage-backed securities (1)
 $570,119  $11,764  $0  $0  $570,119  $11,764 
Collateralized mortgage obligations (1)
  58,977   229   0   0   58,977   229 
Total held-to-maturity securities $629,096  $11,993  $0  $0  $629,096  $11,993 


(1) 2021, December 31,2020,All mortgage-backed securities and September collateralized mortgage obligations30, were issued by an agency or government sponsored entity of the U.S. Government.2020,

respectively.15
Note 3—Investment Securities—Continued

U.S. Government-sponsored securities. The unrealized losses were caused by interest rate fluctuations. Because theThe decline in market value is attributable to changes in interest rates and not credit quality, and because thequality. The Company does not intend to sell the securitiesinvestments and it is more likely than not that the Company will not havebe requied to sell the securitiesinvestments before recovery of their amortized cost basis, the Company did not consider these investments to be other-than-temporarily impaired at September basis.30,2021, December 31,2020, and September 30,2020.

Mortgage-Backed SecuritiesMortgage-backed securities and collateralized mortgage obligations. – At September 30,2021,64 mortgage-backed security investments were in an unrealized loss position for less than 12 months and 16 were in an unrealized loss position for 12 months or more. The unrealized losses on the Company's investment in mortgage-backed securities were $16.5 million, $48,000, and $39,000 at September 30,2021, December 31,2020, and September 30,2020, respectively. 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'sCompany’s investment. Because theThe decline in market value is attributable to changes in interest rates and not credit quality, and because thequality. 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 amortized cost basis, the Company did not consider these investments to be other-than-temporarily impaired at September basis.30,2021, December 31,2020, and September 30,2020.

Corporate Securitiessecurities. - At September 30,2021, we had 0 corporate securities in our portfolio, having sold all positions during the second quarter of 2021. The unrealized loss on the Company’s investment in the corporate securities were $0,$18,000 and $98,000 at September 30,2021, December 31,2020 and September 30,2020, respectively. Changes in the prices of corporate securities are primarily influenced by: (1) changes in market interest rates; (2) changes in perceived credit risk in the general economy or in particular industries; (3) changes in the perceived credit risk of a particular company; and (4) day to day trading supply, demand and liquidity. The Company monitors the status of each of our corporate securities 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. Because theThe Company diddoes not intend to sell the securities and it wasis more likely than not that the Company would not have to sell the securities before recovery of their amortized cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December basis.31,2020 and September 30,2020.

19
Other Securities – At September 30, 2021, NaN of the other securities were in an unrealized loss position.  Other securities consisted of Money Market accounts held at  investment brokerages.

Obligations of States and Political Subdivisions –At September 30,2021, December 31, 2020 and September 30,2020,0 obligation of states and political subdivisions was in an unrealized loss position. As of September subdivisions.30,2021, the The Company’s bank-qualified municipal bond portfolio wasis comprised of 2 different segments: (1) publicly issued debt of $19.4 million purchased on the open market, all rated at either the issue or issuer level and all of these ratings are “investment grade.”grade”; and (2) municipal debt of $43 million purchased directly from the Bank’s customers, all of which is monitored through quarterly or annual financial reviews of the issuer. 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 amortized cost and estimated fair values of investment securities at June 30, 2022 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
 $5,290  $5,274  $700  $700 
After one year through five years  5,120   4,842   7,089   7,074 
After five years through ten years  5,411   5,168   15,948   15,926 
After ten years  4,908   4,945   38,722   38,641 
  $
20,729  $
20,229  $
62,459  $
62,341 
                 
Securities not due at a single maturity date:                
Mortgage-backed securities  232,368   203,607   721,510   616,784 
Collateralized mortgage obligations
  1,525   1,502   84,414   75,709 
Total $254,622  $225,338  $868,383  $754,834 

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.

16
Note 3—Investment Securities—Continued

The Company monitors the credit quality of those available-for-sale and held-to-maturity debt securities not issued by the U.S. government or one of its agencies or government sponsored entities, through the use of credit ratings. Credit ratings are reviewed and updated quarterly. The following table summarizes the fair value of available-for-sale and amortized cost of held-to-maturity debt securities by credit rating at June 30, 2022:

   Available-for-Sale   Held-to-Maturity 
  Fair Value  Amortized Cost 
(Dollars in thousands) AAA/AA/A  BBB/BB/B  Not Rated  AAA/AA/A  BBB/BB/B  Not Rated 
June 30, 2022                  
                   
Breakdown by Category:                  
U.S. Treasury notes
 $0  $0  $4,952  $0  $0  $0 
U.S. Government-sponsored securities  0   0   5,441   0   0   0 
Mortgage-backed securities (1)
  0   0   203,607   0   0   721,510 
Collateralized mortgage obligations (1)
  0   0   1,502   0   0   84,414 
Municipal securities
  0


0


0


19,271


149


43,039 
Corporate securities  4,738   4,788   0   0   0   0 
Other  0   0   310   0   0   0 
Total Investment Grade $4,738  $4,788  $215,812  $19,271  $149  $848,963 

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

The following table presents the activity in the allowance for credit losses for held-to-maturity debt securities by major type for the six months ended June 30, 2022.

  For the Six Months Ended June 30, 2022 
(Dollars in thousands) 
Municipal
securities
  
Mortgage-
backed
securites
  
Collateralized
Mortgage
obligation
  Total 
Allowance for credit losses - securities            
Beginning Balance $0  $0  $0  $0 
Provision for credit losses  393   0   0   393 
Ending Balance $393  $0  $0  $393 

Proceeds from sales and calls of these securities for the periods shown were as follows:

  
Three Months
Ended September 30,
  
Nine Months
Ended September 30,
 
(in thousands)
 2021  2020  2021  2020 
Proceeds $1,450  $50,620  $301,320  $53,620 
Gains  0   0   5,570   13 
Losses  0   0   3,016   0 
(Dollars in thousands) Gross Proceeds  Gross Gains  Gross Losses 
Six months ended June 30, 2022 $2,610  $2  $0 
Six months ended June 30, 2021 $299,870  $5,570  $3,016 

Pledged Securities
As of SeptemberJune 30, 2021,2022, securities carried at $445.2$512 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 $439.7$426 million at December 31, 2020, and $333.2 million at September 30, 2020.2021.


4. Federal Home Loan Bank Stock and Other Equity Securities, at Cost

The Bank is a member17
Note 4—Loans and Leases

Loans and leases as 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 Assets on the Company’s Consolidated Balance Sheets and totaled $15.5 million at September 30, 2021, and $12.7 at December 31,2020 and September 2020.

5. Loans & Leases

Loans & Leasesdates indicated consisted of the following:

(in thousands) September 30, 2021 December 31, 2020 September 30, 2020
Commercial Real Estate $1,126,230$971,326 $887,999 
Agricultural Real Estate  656,337 643,014  639,172 
Real Estate Construction  178,451 185,741  186,623 
Residential 1st Mortgages  309,728 299,379  293,489 
Home Equity Lines & Loans  31,664 34,239  35,875 
Agricultural  235,085 264,372  252,031 
Commercial  394,326 374,816  367,052 
Consumer & Other (1)
  129,665 235,529  359,697 
Leases  90,022 103,117  105,511 
Total Gross Loans & Leases  3,151,508 3,111,533  3,127,449 
Less: Unearned Income  11,707  11,941  15,518 
Subtotal  3,139,801  3,099,592  3,111,931 
Less: Allowance for Credit Losses  60,303  58,862  56,798 
Net Loans & Leases $3,079,498 $3,040,730 $3,055,133 
(Dollars in thousands) 
June 30,
2022
  
December 31,
2021
 
Loans and leases held for investment, net      
Real estate:      
Commercial $1,210,195  $1,167,516 
Agricultural  709,624   672,830 
Residential and home equity  371,874   350,581 
Construction  162,713   177,163 
Total real estate  2,454,406   2,368,090 
Commercial & industrial  439,455   427,799 
Agricultural
  261,856   276,684 
Commercial leases  89,095   96,971 
Consumer and other(1)
  13,588   78,367 
Total gross loans and leases  3,258,400   3,247,911 
Unearned income  (8,514)  (10,734)
Total net loans and leases  3,249,886   3,237,177 
Allowance for credit losses  (62,080)  (61,007)
Total loans and leases held for investment, net $3,187,806  $3,176,170 

(1)
Includes CARES Act Small Business Administration Paycheck Protection Program loans of $SBA PPP loans.121,182, $224,309 and $347,180 as of September 30, 2021, December 31, 2020 and September 30, 2020, respectively.

20
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 two2 to five5 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 $494.9494.39 million of loans for over 2,0002,680 small business customers. PPP loans outstanding were $6.8 million and $70.8 million at June 30,2022 and December 31,2021, respectively.

At SeptemberJune 30, 2021,2022, 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 $1$1.2 billion and $742.4$870 million, respectively. The borrowing capacity on these loans were $749.5was $794 million from FHLB and $467.8$657 million from the FRB.


6. Allowance for Credit Losses

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 provide the election to defer CECL implementation until January 1, 2022. The Company has elected to delay CECL implementation.

The following tables show the allocation of the allowance for credit losses by portfolio segment and by impairment methodology at the dates indicated (in thousands):

September 30, 2021
 
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- December 31, 2020
 $27,679  $8,633  $1,643  $960  $2,024  $4,814  $9,961  $333  $1,731  $1,084  $58,862 
Charge-Offs  0   0   0   0   0   0   0   (33)  0   0   (33)
Recoveries  0   0   0   74   17   29   83   21   0   0   224 
Provision  1,200   794   (210)  (70)  (129)  (238)  738   (23)  (872)  60   1,250 
Ending Balance- September 30, 2021
 $28,879  $9,427  $1,433  $964  $1,912  $4,605  $10,782  $298  $859  $1,144  $60,303 
Third Quarter Allowance for Credit Losses:                                         
Beginning Balance- June 30, 2021 $28,890  $9,107  $1,405  $957  $1,899  $4,552  $9,920  $281  $1,639  $1,579  $60,229 
Charge-Offs  0   0   0   0   0   0   0   (17)  0   0   (17)
Recoveries  0   0   0   15   6   24   38   8   0   0   91 
Provision  (11)  320   28   (8)  7   29   824   26   (780)  (435)  0 
Ending Balance- September 30, 2021
 $28,879  $9,427  $1,433  $964  $1,912  $4,605  $10,782  $298  $859  $1,144  $60,303 
Ending Balance Individually Evaluated for Impairment  0   0   0   88   6   0   6   40   0   0   140 
Ending Balance Collectively Evaluated for Impairment  28,879   9,427   1,433   876   1,906   4,605   10,776   258   859   1,144   60,163 
Loans & Leases:                                            
Ending Balance $1,114,149  $656,337  $178,451  $309,728  $31,664  $235,085  $394,326  $129,665  $90,396  $0  $3,139,801 
Ending Balance Individually Evaluated for Impairment  74   0   0   1,764   112   6,129   218   178   0   0   8,475 
Ending Balance Collectively Evaluated for Impairment $1,114,075  $656,337  $178,451  $307,964  $31,552  $228,956  $394,108  $129,487  $90,396  $0  $3,131,326 

2118
December 31, 2020
 
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- December 31, 2019 $11,053  $15,128  $1,949  $855  $2,675  $8,076  $11,466  $456  $3,162  $192  $55,012 
Charge-Offs  0   0   0   0   (7)  0   (1,101)  (66)  0   0   (1,174)
Recoveries  0   0   0   52   78   81   280   33   0   0   524 
Provision  16,626   (6,495)  (306)  53   (722)  (3,343)  (684)  (90)  (1,431)  892   4,500 
Ending Balance- December 31, 2020
 $27,679  $8,633  $1,643  $960  $2,024  $4,814  $9,961  $333  $1,731  $1,084  $58,862 
Ending Balance Individually Evaluated for Impairment  0   0   0   117   8   92   20   52   0   0   289 
Ending Balance Collectively Evaluated for Impairment  27,679   8,633   1,643   843   2,016   4,722   9,941   281   1,731   1,084   58,573 
Loans & Leases:                                            
Ending Balance $958,980  $643,014  $185,741  $299,379  $34,239  $264,372  $374,816  $235,529  $103,522  $0  $3,099,592 
Ending Balance Individually Evaluated for Impairment  104   5,629   0   2,365   158   495   233   254   0   0   9,238 
Ending Balance Collectively Evaluated for Impairment $958,876  $637,385  $185,741  $297,014  $34,081  $263,877  $374,583  $235,275  $103,522  $0  $3,090,354 

September 30, 2020
 
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- December 31, 2019 $11,053  $15,128  $1,949  $855  $2,675  $8,076  $11,466  $456  $3,162  $192  $55,012 
Charge-Offs  0   0   0   0   (7)  0   (426)  (54)  0   0   (487)
Recoveries  0   0   0   49   65   54   80   25   0   0   273 
Provision  13,236   (6,336)  (381)  45   (617)  (3,458)  (1,127)  (63)  (248)  949   2,000 
Ending Balance- September 30, 2020
 $24,289  $8,792  $1,568  $949  $2,116  $4,672  $9,993  $364  $2,914  $1,141  $56,798 
Third Quarter Allowance for Credit Losses:                                         
Beginning Balance- June 30, 2020 $21,423  $9,021  $1,452  $1,771  $2,239  $4,790  $10,043  $359  $2,800  $1,160  $55,058 
Charge-Offs  0   0   0   0   0   0   0   (25)  0   0   (25)
Recoveries  0   0   0   3   31   24   0   7   0   0   65 
Provision  2,866   (229)  116   (825)  (154)  (142)  (50)  23   114   (19)  1,700 
Ending Balance- September 30, 2020
 $24,289  $8,792  $1,568  $949  $2,116  $4,672  $9,993  $364  $2,914  $1,141  $56,798 
Ending Balance Individually Evaluated for Impairment  0   0   0   118   8   92   13   56   0   0   287 
Ending Balance Collectively Evaluated for Impairment  24,289   8,792   1,568   831   2,108   4,580   9,980   308   2,914   1,141   56,511 
Loans & Leases:                                            
Ending Balance $871,623  $639,172  $186,623  $293,489  $35,875  $252,031  $367,052  $359,697  $106,369  $0  $3,111,931 
Ending Balance Individually Evaluated for Impairment  108   5,629   0   2,390   164   498   235   194   0   0   9,218 
Ending Balance Collectively Evaluated for Impairment $871,515  $633,543  $186,623  $291,099  $35,711  $251,533  $366,817  $359,503  $106,369  $0  $3,102,713 

The ending balance of loans individually evaluated for impairment includes restructured loans in the amount of $327,200 at September 30, 2021, $876,000 at December 31, 2020,
Note 4—Loans and $828,500 at September 30, 2020, which are no longer disclosed or classified as TDRs since they were restructured at market terms.Leases—Continued

22
The following tables show the loan & lease portfolio, including unearned income, allocated by management’s internal risk ratings at the dates indicated (in thousands):

September 30, 2021
 
Pass(1)
  
Special
Mention
  Substandard  
Total Loans
& Leases
 
Loans & Leases:            
Commercial Real Estate $1,098,929  $7,371  $7,849  $1,114,149 
Agricultural Real Estate  646,486   3,312   6,539   656,337 
Real Estate Construction  178,451   0   0   178,451 
Residential 1st Mortgages  308,960   0   768   309,728 
Home Equity Lines & Loans  31,490   0   174   31,664 
Agricultural  233,493   1,018   574   235,085 
Commercial  384,660   8,970   696   394,326 
Consumer & Other  129,450   0   215   129,665 
Leases  90,396   0   0   90,396 
Total $3,102,315  $20,671  $16,815  $3,139,801 

(1)
Includes "Watch" loans of $954.4 million.

December 31, 2020
 
Pass(1)
  
Special
Mention
  Substandard  
Total Loans
& Leases
 
Loans & Leases:            
Commercial Real Estate $946,621  $7,849  $4,510  $958,980 
Agricultural Real Estate  631,043   400   11,571   643,014 
Real Estate Construction  185,741   0   0   185,741 
Residential 1st Mortgages  298,689   0   690   299,379 
Home Equity Lines & Loans  34,058   0   181   34,239 
Agricultural  263,781   96   495   264,372 
Commercial  373,038   1,060   718   374,816 
Consumer & Other  235,063   0   466   235,529 
Leases  103,522   0   0   103,522 
Total $3,071,556  $9,405  $18,631  $3,099,592 

(1)
Includes "Watch" loans of $958.2 million.

September 30, 2020
 
Pass(1)
  
Special
Mention
  Substandard  
Total Loans
& Leases
 
Loans & Leases:            
Commercial Real Estate $861,874  $5,239  $4,510  $871,623 
Agricultural Real Estate  624,859   1,525   12,788   639,172 
Real Estate Construction  186,623   0   0   186,623 
Residential 1st Mortgages  292,792   0   697   293,489 
Home Equity Lines & Loans  35,691   0   184   35,875 
Agricultural  251,108   0   923   252,031 
Commercial  364,465   1,316
   1,271   367,052 
Consumer & Other  359,194   0   503   359,697 
Leases  106,369   0   0   106,369 
Total $3,082,975  $8,080  $20,876  $3,111,931 

(1)
Includes "Watch" loans of $947.4 million.

See “Note 1. Significant Accounting Policies - Allowance for Credit Losses” for a description of the internal risk ratings used by the Company. There were 0 loans or leases outstanding at September 30, 2021, December 31, 2020, and September 30, 2020, rated doubtful or loss.

23
The following tables show an aging analysisanalysis of the loan & lease portfolio, including unearned income, by the time past due atfor the dates indicated (in thousands)periods indicated::

September 30, 2021
 
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 $453  $0  $0  $0  $453  $1,113,696  $1,114,149 
Agricultural Real Estate  0   0   0   19   19   656,318   656,337 
Real Estate Construction  0   0   0   0   0   178,451   178,451 
Residential 1st Mortgages  102   0   0   0   102   309,626   309,728 
Home Equity Lines & Loans  0   0   0   0   0   31,664   31,664 
Agricultural  0   0   0   497   497   234,588   235,085 
Commercial  50   0   0   0   50   394,276   394,326 
Consumer & Other  5   0   0   0   5   129,660   129,665 
Leases  0   0   0   0   0   90,396   90,396 
Total $610  $0  $0  $516  $1,126  $3,138,675  $3,139,801 

December 31, 2020
 
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 $0  $0  $0  $0  $0  $958,980  $958,980 
Agricultural Real Estate  0   0   0   495   495   642,519   643,014 
Real Estate Construction  0   0   0   0   0   185,741   185,741 
Residential 1st Mortgages  0   0   0   0   0   299,379   299,379 
Home Equity Lines & Loans  0   0   0   0   0   34,239   34,239 
Agricultural  0   0   0   0   0   264,372   264,372 
Commercial  0   0   0   0   0   374,816   374,816 
Consumer & Other  11   0   0   0   11   235,518   235,529 
Leases  0   0   0   0   0   103,522   103,522 
Total $11  $0  $0  $495  $506  $3,099,086  $3,099,592 
  June 30, 2022 
(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 $1,200,516  $0  $0  $1,674  $1,674  $1,202,190 
Agricultural  709,149   0   0   475   475   709,624 
Residential and home equity  371,847   27   0   0   27   371,874 
Construction  162,713   0   0   0   0   162,713 
Total real estate  2,444,225   27   0   2,149   2,176   2,446,401 
Commercial & industrial  439,258   197   0   0   197   439,455 
Agricultural  260,977   0   0   879   879   261,856 
Commercial leases  88,586   0   0   0   0   88,586 
Consumer and other  13,578   10   0   0   10   13,588 
Total loans and leases, net $3,246,624  $234  $0  $3,028  $3,262  $3,249,886 

September 30, 2020
 
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 $0  $0  $0  $0  $0  $871,623  $871,623 
Agricultural Real Estate  0   0   0   498   498   638,674   639,172 
Real Estate Construction  85   0   0   0   85   186,538   186,623 
Residential 1st Mortgages  0   0   0   0   0   293,489   293,489 
Home Equity Lines & Loans  0   0   0   0   0   35,875   35,875 
Agricultural  0   0   0   0   0   252,031   252,031 
Commercial  547   0   0   0   547   366,505   367,052 
Consumer & Other  67   0   0   0   67   359,630   359,697 
Leases  0   0   0   0   0   106,369   106,369 
Total $699  $0  $0  $498  $1,197  $3,110,734  $3,111,931 

  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
 $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 

19
Note 4—Loans and Leases—Continued

 

Non-accrual loans & leases were $516,000 at Septemberare summarized as follows:


(Dollars in thousands) 
June 30,
2022
  
December 31,
2021
 
Non-accrual loans and leases:      
Non-accrual loans and leases, not TDRs      
Real estate:      
Commercial $1,674  $0 
Agricultural  475   18 
Residential and home equity  0   0 
Construction  0   0 
Total real estate  2,149   18 
Commercial & industrial  0   0 
Agricultural  879   0 
Commercial leases  0   0 
Consumer and other  0   0 
Subtotal  3,028   18 
Non-accrual loans and leases, are TDRs        
Real estate:        
Commercial $0  $0 
Agricultural  0   0 
Residential and home equity  0   0 
Construction  0   0 
Total real estate  0   0 
Commercial & industrial  0   0 
Agricultural  0   498 
Commercial leases  0   0 
Consumer and other  0   0 
Subtotal  0   498 
Total non-accrual loans and leases $3,028  $516 


20
Note 4—Loans and Leases—Continued


The following table lists total troubled debt restructured loans that the Company is either accruing or not accruing interest by loan category:


(Dollars in thousands) 
June 30,
2022
  
December 31,
2021
 
Troubled debt restructured loans and leases:      
Accruing TDR loans and leases      
Real estate:      
Commercial $0  $41 
Agricultural  0   0 
Residential and home equity  1,334   1,522 
Construction  0   0 
Total real estate  1,334   1,563 
Commercial & industrial  55   260 
Agricultural  0   0 
Commercial leases  0   0 
Consumer and other  0   1 
Subtotal  1,389   1,824 
Non-accruing TDR loans and leases        
Real estate:        
Commercial $
0  $
0 
Agricultural  0   0 
Residential and home equity  0   0 
Construction  0   0 
Total real estate  0   0 
Commercial & industrial  0   0 
Agricultural  0   498 
Commercial leases  0   0 
Consumer and other  0   0 
Subtotal  0   498 
Total TDR loans and leases $1,389  $2,322 



The below table summarize TDRs outstanding as of June 30, 2022, by year of occurrence:


  June 30, 2022 
(Dollars in thousands) 
# of Accruing
TDR
  
$ of Accruing
TDR
  
# of Non-
Accruing TDR
  
$ of Non-
Accruing TDR
  # of Total TDR  $ of Total TDR 
Loan and lease TDRs                  
2022  0  $0   0  $0   0  $0 
2021  1   48   0   0   1   48 
2020  4   266   0   0   4   266 
2019  0   0   0   0   0   0 
Thereafter  8   1,075   0   0   8   1,075 
Total  13  $1,389   0  $0   13  $1,389 



The Company did 0t enter into any troubled debt restructuring with borrowers during the six months ended June 30, 2022 and 2021, $495,000 atrespectively.
 
21
Note 4—Loans and Leases—Continued

 

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


  June 30, 2022 
(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 $1,187,461  $8,629  $6,100  $0  $1,202,190  $17,879 
Agricultural  697,994   5,003   6,627   0   709,624   16,837 
Residential and home equity  371,494   0   380   0   371,874   6,874 
Construction  160,787   1,926   0   0   162,713   2,876 
Total real estate  2,417,736   15,558   13,107   0   2,446,401   44,466 
Commercial & industrial  431,441   7,459   555   0   439,455   10,139 
Agricultural  260,079   880   897   0   261,856   5,669 
Commercial leases  88,468   118   0   0   88,586   1,645 
Consumer and other  13,391   0   197   0   13,588   161 
Total loans and leases, net $3,211,115  $24,015  $14,756  $0  $3,249,886  $62,080 


  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 $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   663 
Total loans and leases, net $3,200,251  $20,474  $16,452  $0  $3,237,177  $61,007 

22
Note 4—Loans and Leases—Continued

 

The following table represents outstanding loan balances by credit quality indicators and vintage year by class of financing receivable as of June 30, 2022:


  June 30, 2022 
  Term Loans Amortized Cost Basis by Origination Year       
(Dollars in thousands) 2022  2021  2020  2019  2018  Prior  
Revolving
Loans
Amortized
Cost
  Total 
Net loans and leases held for investment                        
Real estate:                        
Commercial                        
Pass $64,720  $239,840  $161,165  $73,041  $87,035  $237,333  $324,326  $1,187,461 
Special mention  0   0   0   0   3,866   834   3,929   8,629 
Substandard  0   0   0   0   0   4,203   1,897   6,100 
Doubtful  0   0   0   0   0   0   0   0 
Total Commercial $64,720  $239,840  $161,165  $73,041  $90,901  $242,370  $330,152  $1,202,190 
                                 
Agricultural
                                
Pass $34,325  $43,251  $58,263  $15,341  $53,916  $157,648  $335,250  $697,994 
Special mention  0   0   2,367   2,636   0   0   0   5,003 
Substandard  0   0   0   0   118   6,034   475   6,627 
Doubtful  0   0   0   0   0   0   0   0 
Total Agricultural
 $34,325  $43,251  $60,630  $17,977  $54,034  $163,682  $335,725  $709,624 
                                 
Residential and home equity                                
Pass $40,868  $100,298  $90,939  $15,957  $7,140  $82,590  $33,702  $371,494 
Special mention  0   0   0   0   0   0   0   0 
Substandard  0   0   0   0   0   235   145   380 
Doubtful  0   0   0   0   0   0   0   0 
Total Residential and home equity $40,868  $100,298  $90,939  $15,957  $7,140  $82,825  $33,847  $371,874 
                                 
Construction                                
Pass $0  $0  $0  $2,272  $0  $92  $158,423  $160,787 
Special mention  0   0   0   0   0   0   1,926   1,926 
Substandard  0   0   0   0   0   0   0   0 
Doubtful  0   0   0   0   0   0   0   0 
Total construction $0  $0  $0  $2,272  $0  $92  $160,349  $162,713 
                                 
Total Real estate $139,913  $383,389  $312,734  $109,247  $152,075  $488,969  $860,073  $2,446,401 
                                 
Commercial & industrial                                
Pass $8,395  $44,225  $15,482  $12,734  $10,126  $9,183  $331,296  $431,441 
Special mention  0   76   0   0   0   3   7,380   7,459 
Substandard  0   0   0   0   0   30   525   555 
Doubtful  0   0   0   0   0   0   0   0 
Total Commercial & industrial $8,395  $44,301  $15,482  $12,734  $10,126  $9,216  $339,201  $439,455 
                                 
Agricultural                                
Pass $3,547  $4,532  $1,194  $1,626  $776  $2,273  $246,131  $260,079 
Special mention  0   0   0   0   0   12   868   880 
Substandard  0   0   0   14   4   79   800   897 
Doubtful  0   0   0   0   0   0   0   0 
Total Agricultural $3,547  $4,532  $1,194  $1,640  $780  $2,364  $247,799  $261,856 
                                 
Commercial leases                                
Pass $1,566  $17,129  $14,293  $8,473  $21,686  $25,320  $0  $88,468 
Special mention  0   0   0   118   0   0   0   118 
Substandard  0   0   0   0   0   0   0   0 
Doubtful  0   0   0   0   0   0   0   0 
Total Commercial leases $1,566  $17,129  $14,293  $8,591  $21,686  $25,320  $0  $88,586 
                                 
Consumer and other                                
Pass $901  $7,589  $475  $350  $531  $2,713  $832  $13,391 
Special mention  0   0   0   0   0   0   0   0 
Substandard  197   0   0   0   0   0   0   197 
Doubtful  0   0   0   0   0   0   0   0 
Total Consumer and other $1,098  $7,589  $475  $350  $531  $2,713  $832  $13,588 
                                 
Total net loans and leases $154,519  $456,941  $344,178  $132,563  $185,198  $528,583  $1,447,905  $3,249,886 

23
Note 4—Loans and Leases—Continued

 

The following tables provide amortized cost basis for collateral dependent loans as of June 30, 2022 and December 31, 2020 and $498,000 at September 30, 2020. Foregone interest income on non-accrual loans & leases, which would have been recognized during the period, if all such loans & leases had been current in accordance with their original terms, totaled $35,700, $22,000, and $15,530 at September 30, 2021, December 31, 2020 and September 30, 2020 respectively.respectively:


  June 30, 2022 
(Dollars in thousands) Real Estate  Vehicles  Total 
Collateral dependent loans and leases         
Real estate:         
Commercial $0  $0  $0 
Agricultural  5,533   0   5,533 
Residential and home equity  216   0   216 
Construction  0   0   0 
Total Real estate  5,749   0   5,749 
Commercial & industrial  0   0   0 
Agricultural  0   0   0 
Commercial leases  0   0   0 
Consumer and other  0   165   165 
Total gross loans and leases $5,749  $165  $5,914 


  December 31, 2021 
(Dollars in thousands) Real Estate  Vehicles  Total 
Collateral dependent loans and leases         
Real estate:         
Commercial $5  $0  $5 
Agricultural  5,587   0   5,587 
Residential and home equity  330   0   330 
Construction  0   0   0 
Total Real estate  5,922   0   5,922 
Commercial & industrial  0   0   0 
Agricultural  0   0   0 
Commercial leases  0   0   0 
Consumer and other  0   173   173 
Total gross loans and leases $5,922  $173  $6,095 

24
The following tables show information related to impaired loans & leases for the periods indicated (in thousands):
Note 4—Loans and Leases—Continued

           
Three Months Ended
September 30, 2021
  
Nine Months Ended
September 30, 2021
 
September 30, 2021
 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance recorded:                     
Commercial Real Estate $65  $65  $-  $73  $1  $52  $2 
Agricultural Real Estate  5,613   5,613   -   5,621   88   5,626   324 
Agricultural  516   559   -   504   12   415   46 
Commercial  8   8   -   9   0   5   0 
  $6,202  $6,245  $-  $6,207  $101  $6,098  $372 
With an allowance recorded:                            
Commercial Real Estate $0  $0  $0  $0  $0  $28  $3 
Residential 1st Mortgages  1,503   1,719   75   1,585   16   1,638   52 
Home Equity Lines & Loans  60   71   3   61   1   62   3 
Agricultural  0   0   0   0   0   82   0 
Commercial  210   210   6   213   4   222   12 
Consumer & Other  178   179   40   181   3   185   10 
  $1,951  $2,179  $124  $2,040  $24  $2,217  $80 
Total $8,153  $8,424  $124  $8,247  $125  $8,315  $452 
 

December 31, 2020
 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance recorded:               
Commercial Real Estate $84  $84  $-  $764  $35 
Agricultural Real Estate  5,629   5,629   -   5,629   352 
Agricultural  3   3   -   2   0 
Commercial  0   0   -   377   16 
  $5,716  $5,716  $-  $6,772  $403 
With an allowance recorded:                    
Commercial Real Estate $0  $0  $0  $21  $1 
Agricultural Real Estate  0   0   0   137   0 
Residential 1st Mortgages  1,671   1,895   84   1,652   76 
Home Equity Lines & Loans  64   75   3   66   4 
Agricultural  492   534   92   410   59 
Commercial  234   234   13   123   18 
Consumer & Other  190   191   56   194   13 
  $2,651  $2,929  $248  $2,603  $171 
Total $8,367  $8,645  $248  $9,375  $574 
Changes in the allowance for credit losses are as follows:


  For the Three Months Ended June 30, 2022 
(Dollars in thousands) 
Commercial &
Agricultural
R/E
  Construction  
Residential &
Home Equity
  
Commercial
&
Agricultural
  
Commercial
Leases
  Consumer
& Other		  Total 
Allowance for credit losses:                     
Beginning balance
 $32,511  $3,777  $6,759  $16,098  $1,466  $421  $61,032 
Provision / (recapture) for credit losses  2,205   (901)  10   (131)  179   (255)  1,107 
Charge-offs  0   0   0   (276)  0   (9)  (285)
Recoveries  0   0   105   117   0   4   226 
Net (charge-offs) / recoveries  0   0   105   (159)  0   (5)  (59)
Ending balance
 $34,716  $2,876  $6,874  $15,808  $1,645  $161  $62,080 



  For the Six Months Ended June 30, 2022 
(Dollars in thousands) 
Commercial &
Agricultural
R/E
  Construction  
Residential &
Home Equity
  
Commercial
&
Agricultural
  
Commercial
Leases
  
Consumer
& Other
  Total 
Allowance for credit losses:                     
Beginning balance
 $38,149  $1,456  $2,847  $16,954  $938  $663  $61,007 
Impact of Adopting ASC 326
  (6,190)  1,855   3,032   826   629   (152)  0 
Provision / (recapture) for credit losses  2,757   (435)  876   (1,831)  78   (338)  1,107 
Charge-offs  0   0   0   (276)  0   (18)  (294)
Recoveries  0   0   119   135   0   6   260 
Net (charge-offs) / recoveries  0   0   119   (141)  0   (12)  (34)
Ending balance
 $34,716  $2,876  $6,874  $15,808  $1,645  $161  $62,080 


Note 5—Deposits



Certificate of deposits greater than and less than or equal to the FDIC insurance limit are summarized as follows:


(Dollars in thousands) 
June 30,
2022
  
December 31,
2021
 
Certificate of deposits:      
Certificates of deposits less than or equal to $250,000 $216,390  $223,620 
Certificates of deposits greater than $250,000  162,240   168,865 
Total certificates of  deposits $378,630  $392,485 



Scheduled maturities for certificates of deposit are as follows:


(Dollars in thousands) Amount 
2022
 $217,575 
2023
  147,620 
2024
  8,788 
2025
  2,270 
2026 and beyond
  2,377 
Total time deposits $378,630 

25
          
Three Months Ended
September 30, 2020
  
Nine Months Ended
September 30, 2020
 
September 30, 2020
 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance recorded:             
Commercial Real Estate $84  $84  $-  $42  $2  $991  $33 
Agricultural Real Estate  5,629   5,629   -   5,629   88   5,633   264 
Agricultural
  5
   6
   -
   3
   0
   1
   0
 
Commercial  0   0   -   0   0   503   16 
  $5,718  $5,719  $-  $5,674  $90  $7,128  $313 
With an allowance recorded:                     
Commercial Real Estate $0  $0  $0  $42  $0  $498  $1 
Agricultural Real Estate  0   0   0   0   0   183   0 
Residential 1st Mortgages  1,686   1,909   84   1,694   18   1,625   58 
Home Equity Lines & Loans  65   76   3   66   1   67   3 
Agricultural  492   534   92   483   7   333   52 
Commercial  235   235   13   123   13   301   15 
Consumer & Other  194   195   56   195   3   196   10 
  $2,672  $2,949  $248  $2,603  $42  $3,203  $139 
Total $8,390  $8,668  $248  $8,277  $132  $10,331  $452 

Total recorded investment shown in the prior table will not equal the total ending balance of loans & leases individually evaluated for impairment on the allocation of allowance table. This is because this table does not include impaired loans that were previously modified in a troubled debt restructuring, are currently performing and are no longer disclosed or classified as TDR’s since they were restructured at market terms.

Since April 2020, weNote 6—Shareholders’ Equity


The Company and the Bank are subject to various regulatory capital adequacy guidelines as outlined under Part 324 of the FDIC Rules and Regulations. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have restructured $278.1 milliona 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 Bank must meet specific capital guidelines that involve quantitative measures of loansthe Company and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the CARES ActBank’s capital amounts and H.R. 133 guidelines. As of September 30, 2021,classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.



The Company believes that it is currently in compliance with all of these loans have returnedcapital requirements and that they will not result in any restrictions on the Company’s business activity.



Management believes that the Bank meets the requirements to making principal and/or interest payments. We believe that these actions have assisted these borrowers in getting through these difficult times, but no guarantees can be made that at some timecategorized 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 future these loans will not be required to be accounted for as a TDR. For borrowers who were 30 days or more past due when enrolling in a loan modification program related to the COVID-19 pandemic, we evaluated the loan modifications under our existing TDR framework, and where such a loan modification would have resulted in a more than insignificant concession to a borrower experiencing financial difficulty, the loan was accounted for as a TDR and would generally not accrue interest. See “Note 2 – Risks and Uncertainties” for additional information on the CARES Act and H.R. 133, and the impact of COVID-19 on the Company.following tables.

At September 30, 2021, there were 0 formal foreclosure proceedings in process for consumer mortgage loans secured by residential real estate properties.


At September 30, 2021, the Company allocated $123,800 of specific reserves to $8.1 million of troubled debt restructured loans & leases, of which $7.6 million were performing. The Company had 0 commitments at September 30, 2021, to lend additionalCompany’s and Bank’s actual and required capital amounts to customers with outstanding loans or leases thatand ratios are classified as TDRs.follows: 

During the three and nine-month periods ended September 30, 2021, there were 0 loans or leases modified as a troubled debt restructuring.

During the three and nine-month periods ended September 30, 2021, the year ended December 31, 2020, and the three and nine-month periods ended September 30, 2020 there were 0 payment defaults on loans or leases modified as troubled debt restructurings within twelve months following the modification. The Company considers a loan or lease to be in payment default once it is greater than 90 days contractually past due under the modified terms.

At December 31, 2020, there were 0 formal foreclosure proceedings in process for consumer mortgage loans secured by residential real estate properties.
  June 30, 2022 
  Actual  
Minimum to be
Categorized as
“Adequately Capitalized”
  
Minimum to be
Categorized as
“Well Capitalized”
 
(Dollars in thousands) Amount  Ratio  Amount  Ratio  Amount  Ratio 
Farmers & Merchants Bancorp                  
CET1 capital to risk-weighted assets $468,463   11.55
%
 $182,499   4.50
%
  N/A   N/A 
Tier 1 capital to risk-weighted assets  478,463   11.80
%
  243,332   6.00
%
  N/A   N/A 
Risk-based capital to risk-weighted assets  529,311   13.05
%
  324,442   8.00
%
  N/A   N/A 
Tier 1 leverage capital ratio  478,463   8.94
%
  214,167   4.00
%
  N/A   N/A 
                         
Farmers & Merchants Bank                        
CET1 capital to risk-weighted assets $475,077   11.72
%
 $182,470   4.50
%
 $263,567   6.50
%
Tier 1 capital to risk-weighted assets  475,077   11.72
%
  243,293   6.00
%
  324,391   8.00
%
Risk-based capital to risk-weighted assets  525,918   12.97
%
  324,391   8.00
%
  405,488   10.00
%
Tier 1 leverage capital ratio  475,077   8.89
%
  213,871   4.00
%
  267,339   5.00
%

26
At December 31, 2020,Note 6—Shareholders’ Equity—Continued


  December 31, 2021 
  Actual  
Minimum to be
Categorized as
“Adequately Capitalized”
  
Minimum to be
Categorized as
“Well Capitalized”
 
(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
%
Basic and diluted earnings per common share represents income available to common shareholders divided by the Company allocated $158,000weighted-average number of specific reserves to $7.9 million of troubled debt restructured loans, all of which were performing. The Company had 0 commitments at December 31, 2020 to lend additional amounts to customers withcommon shares outstanding loans that are classified as troubled debt restructurings. The modification ofduring 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.period.

Modifications involving a reduction of the stated interest rate of the loan were for 5 years. Modifications involving an extension of the maturity date range from 3 months to 10 years.

The following table presents loans or leases by class modified as troubled debt restructured loans or leases for the year ended December 31, 2020 (in thousands):

 December 31, 2020 
Troubled Debt Restructurings 
Number of
Loans
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
 
Residential 1st Mortgages  2  $156  $156 
Agricultural  3   495   495 
Commercial  1   224   224 
Total  6  $875  $875 

The troubled debt restructurings described above increased the allowance for credit losses by $120,000 for the twelve months ended December 31, 2020.

During the year ended December 31, 2020, there were 0 payment defaults on loans modified as troubled debt restructurings within twelve months following the modification.

At September 30, 2020, there were 0 formal foreclosure proceedings in process for consumer mortgage loans secured by residential real estate properties.

At September 30, 2020,Earnings per common share have been computed based on the Company allocated $156,000 of specific reserves to $7.9 million of troubled debt restructured loans & leases, all of which were performing. The Company had 0 commitments at September 30, 2020, to lend additional amounts to customers with outstanding loans or leases that were classified as TDRs.following:

  
Three Months Ended
June 30,
 
(Dollars in thousands, except share and per share amounts) 2022  2021 
Numerator      
Net income $18,443  $16,153 

        
Denominator        
Weighted average number of common shares outstanding  781,880   789,646 
Weighted average number of dilutive shares outstanding  781,880   789,646 
         
Basic earnings per common share $23.58  $20.45 
Diluted earning per common share $23.58  $20.45 

During the nine-month period ended September 30, 2020, there were 6 loans modified as a troubled debt restructuring. The modifications involved a reduction of the stated interest rate of the loans for 5 years and extended the maturity dates for 10 years.
  
Six Months Ended
June 30,
 
(Dollars in thousands, except share and per share amounts) 2022
  2021
 
Numerator      
Net income $35,501  $32,866 
         
Denominator        
Weighted average number of common shares outstanding  783,976   789,646 
Weighted average number of dilutive shares outstanding  783,976   789,646 
     ��   
Basic earnings per common share $45.28  $41.62 
Diluted earning per common share $45.28  $41.62 

The following table presents loans or leases by class modified as troubled debt restructured loans or leases during the three and nine-month periods ended September 30,2020(in thousands):

 
Three Months Ended
September 30, 2020
  
Nine Months Ended
September 30, 2020
 
Troubled Debt Restructurings 
Number of
Loans
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
  
Number of
Loans
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
 
Residential 1st Mortgages  0  $0  $0   2  $156  $156 
Agricultural  0   0   0   3   495   495 
Commercial
  1
   224
   224
   1
   224
   224
 
Total  1  $224  $224   6  $875  $875 

27
TDRs described above had minimal impact on the allowance for credit losses and resulted in charge-offs of $7,000 for the nine-month period ended September 30, 2020.

During the three and nine-month periods ended September 30,2020, there were 0 payment defaults on loans or leases modified as troubled debt restructurings within twelve months following the modification. The Company considers a loan or lease to be in payment default once it is greater than 90 days contractually past due under the modified terms.

7. Note 7—Fair Value Measurements

The Company follows the “Fair Value Measurement and Disclosures” topic of the FASB ASC, 820, which establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. 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. 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 impairedcollateral dependent and an allowance for credit losses is established. Once a loan or lease is identified as individually impaired,collaterally dependent, management measures impairment in accordance with the “Receivable” topic of the FASB ASC 310.ASC. The fair value of impairedcollateral dependent 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. ImpairedCollateral dependent 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. ImpairedCollateral dependent 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.
28
Note 7—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 into 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 impairedcollateral dependent loans is primarily the sales comparison approach less selling costs of 10%.

28
Other Real Estate (“ORE”)OREO 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 intoin 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 OREOREO is primarily the sales comparison approach less selling costs of 10%.

The following tables present information aboutsummarize the carrying value and estimated fair values of the Company’s financial assets measured at fair valueand liabilities 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 September 30, 2021, Using
 
  Fair Value  
Quoted Prices in
Active Markets
for Identical
Assets
  
Other
Observable
Inputs
  
Significant
Unobservable
Inputs
 
(in thousands) Total  (Level 1)  (Level 2)  (Level 3) 
Available-for-Sale Securities:            
U.S. Treasury Notes $10,150  $10,150  $0  $0 
U.S. Government Agency SBA  6,919   0   6,919   0 
Mortgage-Backed Securities  269,569   0   269,569   0 
Other  46,513   46,203   310   0 
Total Assets Measured at Fair Value On a Recurring Basis $333,151  $56,353  $276,798  $0 
June 30, 2022
    Fair Value
 
(Dollars in thousands) 
Carrying
Amount
  Level 1  Level 2  Level 3  
Total Fair
Value
 
Financial Assets:               
Cash and cash equivalents $747,788  $747,788  $0  $0  $747,788 
Investment securities available-for-sale  225,338   4,952   220,386   0   225,338 
Investment securities held-to-maturity  867,990   0   720,108   43,039   763,147 
Non-marketable securities  15,549   0   0   15,549   15,549 
Loans and leases, net  3,187,806   0   0   3,180,540   3,180,540 
Bank-owned life insurance  72,513   72,513   0   0   72,513 
                     
Financial Liabilities:                    
Total deposits $
4,769,513  $0  $4,390,883  $373,285  $4,764,168 
Subordinated debentures  10,310   0   9,181   0   9,181 

    
Fair Value Measurements
At December 31, 2020, Using
 
  Fair Value  
Quoted Prices in
Active Markets
for Identical
Assets
  
Other
Observable
Inputs
  
Significant
Unobservable
Inputs
 
(in thousands) Total  (Level 1)  (Level 2)  (Level 3) 
Available-for-Sale Securities:            
U.S. Treasury Notes $15,288  $15,288  $0  $0 
U.S. Government Agency SBA  8,160   0   8,160   0 
Mortgage-Backed Securities  737,873   0   737,873   0 
Corporate Securities  45,919   0   45,919   0 
Other  492   182   310   0 
Total Assets Measured at Fair Value On a Recurring Basis $807,732  $15,470  $792,262  $0 

    
Fair Value Measurements
At September 30, 2020, Using
 
  Fair Value  
Quoted Prices in
Active Markets
for Identical
Assets
  
Other
Observable
Inputs
  
Significant
Unobservable
Inputs
 
(in thousands) Total  (Level 1)  (Level 2)  (Level 3) 
Available-for-Sale Securities:            
U.S. Treasury Notes $95,342  $95,342  $0  $0 
U.S. Government Agency SBA  8,429   0   8,429   0 
Mortgage-Backed Securities  439,274   0   439,274   0 
Corporate Securities  25,063   0   25,063   0 
Other  428   118   310   0 
Total Assets Measured at Fair Value On a Recurring Basis $568,536  $95,460  $473,076  $0 

December 31, 2021
    Fair Value
 
(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  $0  $4,247,666  $391,732  $4,639,398 
Subordinated debentures  10,310   0   6,890   0   6,890 

29
Note 7—Fair values forValue Measurements—Continued

Non-recurring Measurements: collateral dependent loans and OREO are classified with Level 2 available-for-sale investment securities are3 of the fair value hierarchy. The estimated fair value of collateral dependent loans is based on quoted market pricesthe fair value of the collateral, less estimated costs to sell. The Company receives an appraisal or performs an evaluation for similar securities.  Duringeach collateral dependent loan. The key inputs used to determine the threefair value of collateral dependent loans include selling costs, and nine-month periods ended September 30,2021adjustment to comparable collateral. Valuations and 2020, there were 0  transfers insignificant 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 outevaluations are reviewed at least on a quarterly basis to determine if any adjustments are needed. After review and acceptance of Level 1, 2,the appraisal or 3.evaluation, adjustments to collateral dependent loans may occur.

The following tables present information about the Company’s other real estateBank’s assets and impaired loans or leases, 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 or leases are carried at fair value. Impaired loans or leases are only included in the following tables when their fair value is based upon a current 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 September 30, 2021, 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:            
Residential 1st Mortgage $1,423  $0  $0  $1,423 
Home Equity Lines & Loans  57   0   0   57 
Commercial  204   0   0   204 
Consumer  138   0   0   138 
Total Impaired Loans  1,822   0   0   1,822 
Other Real Estate:                
Real Estate Construction  873   0   0   873 
Total Other Real Estate  873   0   0   873 
Total Assets Measured at Fair Value On a Non-Recurring Basis $2,695  $0  $0  $2,695 
June 30, 2022
    Fair Value
 
(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 $4,952  $4,952  $0  $0  $4,952 
U.S. Government-sponsored securities  5,441   0   5,441   0   5,441 
Mortgage-backed securities  203,607   0   203,607   0   203,607 
Collateralized mortgage obligations  1,502   0   1,502   0   1,502 
Corporate securities  9,526   0   9,526   0   9,526 
Other  310   0   310   0   310 
                     
Fair valued on a non-recurring basis:                    
Other real estate $
873  $
0  $
0  $
873  $
873 

    
Fair Value Measurements
At December 31, 2020, 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:            
Residential 1st Mortgage $1,584  $0  $0  $1,584 
Home Equity Lines & Loans  61   0   0   61 
Agricultural  400   0   0   400 
Commercial  213   0   0   213 
Consumer  138   0   0   138 
Total Impaired Loans  2,396   0   0   2,396 
Other Real Estate:                
Real Estate Construction  873   0   0   873 
Total Other Real Estate  873   0   0   873 
Total Assets Measured at Fair Value On a Non-Recurring Basis $3,269  $0  $0  $3,269 
December 31, 2021    Fair Value 
(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 

30
    
Fair Value Measurements
At September 30, 2020, 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:            
Residential 1st Mortgage $1,599  $0  $0  $1,599 
Home Equity Lines & Loans  62   0   0   62 
Agricultural  400   0   0   400 
   Commercial  222   0   0   222 
Consumer  138   0   0   138 
Total Impaired Loans $2,421  $
0  $
0  $
2,421 
Other Real Estate:                
Real Estate Construction  873   0   0   873 
Total Other Real Estate  873   0   0   873 
Total Assets Measured at Fair Value On a Non-Recurring Basis $3,294  $0  $0  $3,294 

Note 8—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.


(Dollars in thousands) 
June 30,
2022
  
December 31,
2021
 
       
Commitments to extend credit, including unsecured commitments of $20,787 and $21,036 as of June 30, 2022 and  December 31, 2021, respectively
 $995,795  $937,009 
         
Stand-by letters of credit, including unsecured commitments of $7,409 and $9,091 as of June 30, 2022 and December 31, 2021, respectively
  16,484   17,880 
         
Performance guarantees under interest rate swap contracts entered into with our clients and third-parties  0   1,433 



The Company’s property appraisalsexposure 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. Outstanding standby letters of credit have maturity dates ranging from 1 to 60 months with final expiration in January 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 sales comparison approachCompany’s vault cash and deposit balances maintained with 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.Federal Reserve Bank.

The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at the dates indicated.

September 30, 2021        
(in thousands) Fair Value Valuation TechniqueUnobservable Inputs Range, Weighted Avg. 
Impaired Loans:        
Residential 1st Mortgage $1,423 Sales Comparison Approach
Adjustment for Difference
Between Comparable Sales
  0.68% - 4.02%, 2.54%
Home Equity Lines & Loans $57 Sales Comparison Approach
Adjustment for Difference
Between Comparable Sales
  1.1% - 1.3%, 1.20%
Commercial $204 Income ApproachCapitalization Rate  10%, 10%
Consumer $138 Income ApproachCapitalization Rate  10%, 10%
           
Other Real Estate:          
Real Estate Construction $873 Sales Comparison Approach
Adjustment for Difference
Between Comparable Sales
  10%, 10%

31
December 31, 2020        
(in thousands) Fair Value Valuation TechniqueUnobservable Inputs Range, Weighted Avg. 
Impaired Loans:        
Residential 1st Mortgage $1,584 Sales Comparison Approach
Adjustment for Difference
Between Comparable Sales
  0.72% - 4.13%, 2.57%
Home Equity Lines & Loans $61 Sales Comparison Approach
Adjustment for Difference
Between Comparable Sales
  1.1% - 1.4%, 1.25%
Agricultural $400 Income ApproachCapitalization Rate  10%, 10%
Commercial $213 Income ApproachCapitalization Rate  10%, 10%
Consumer $138 Income Approach
Adjustment for Difference
Between Comparable Sales
  10%, 10%
           
Other Real Estate:          
Real Estate Construction $873 Sales Comparison Approach
Adjustment for Difference
Between Comparable Sales
  10%, 10%

September 30, 2020        
(in thousands) Fair Value Valuation TechniqueUnobservable Inputs Range, Weighted Avg. 
Impaired Loans:        
Residential 1st Mortgage $1,599 Sales Comparison Approach
Adjustment for Difference
Between Comparable Sales
  0.73% - 4.16%, 2.58%
Home Equity Lines & Loans $62 Sales Comparison Approach
Adjustment for Difference
Between Comparable Sales
  1.1% - 1.4%, 1.28%
Agricultural $400 Income ApproachCapitalization Rate  10%, 10%
   Commercial $
222  Income Approach Capitalization Rate  10%, 10%
Consumer $138 Income Approach
Adjustment for Difference
Between Comparable Sales
  10%, 10%
           
Other Real Estate:          
Real Estate Construction $873 Sales Comparison Approach
Adjustment for Difference
Between Comparable Sales
  10%, 10%


8. 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 based on the assumptions market participants would use when pricing the asset or liability. 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 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 consistent with ASC 820. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, risk premium, credit, and non-performance risk of the loans. Loans are considered a Level 3 classification.

32
The following tables summarize the book value and estimated fair value of financial instruments for the periods indicated:

    Fair Value of Financial Instruments Using    
September 30, 2021
(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 $870,763  $870,763  $0  $0  $870,763 
                     
Investment Securities Available-for-Sale  333,151   56,353   276,798   0   333,151 
                     
Investment Securities Held-to-Maturity  550,618   0   499,432   40,876   540,308 
                     
Loans & Leases, Net  3,079,498   0   0   3,090,187   3,090,187 
Accrued Interest Receivable  18,762   0   18,762   0   18,762 
                     
Liabilities:                    
Deposits  4,568,394   4,174,561   0   394,158   4,568,719 
Subordinated Debentures  10,310   0   6,830   0   6,830 
Accrued Interest Payable  451   0   451   0   451 

    Fair Value of Financial Instruments Using    
December 31, 2020
(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 $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 
                     
Loans & Leases, Net  3,040,730   0   0   3,045,911   3,045,911 
Accrued Interest Receivable  20,333   0   20,333   0   20,333 
                     
Liabilities:                    
Deposits  4,060,267   3,638,400   0   422,840   4,061,240 
Subordinated Debentures  10,310   0   6,888   0   6,888 
Accrued Interest Payable  1,383   0   1,383   0   1,383 

33
    Fair Value of Financial Instruments Using    
September 30, 2020
(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 $358,368  $358,368  $0  $0  $358,368 
                     
Investment Securities Available-for-Sale  568,536   95,460   473,076   0   568,536 
                     
Investment Securities Held-to-Maturity  69,913   0   28,244   42,811   71,055 
                     
Loans & Leases, Net  3,055,133   0   0   3,065,624   3,065,624 
Accrued Interest Receivable  22,596   0   22,596   0   22,596 
                     
Liabilities:                    
Deposits  3,814,777   3,354,528   0   461,754   3,816,282 
Subordinated Debentures  10,310   0   6,518   0   6,518 
Accrued Interest Payable  1,618   0   1,618   0   1,618 


9.Dividends and Basic and Diluted Earnings Per Common Share

Farmers & Merchants Bancorp common stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. However, trades are reported on the OTCQX under the symbol “FMCB”.

On May 13, 2021, the Board of Directors declared a mid-year cash dividend of $7.50 per share, a 3.4% increase over the $7.25 per share paid on July 1, 2020. The cash dividend was paid on July 1, 2021, to shareholders of record on June 11, 2021.

Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period.The Company has nosecurities or other contracts, such as stock options, that could require the issuance of additional common stock. Accordingly, diluted earnings per share are equal to basic earnings per share.

The following table calculates the basic earnings per common share for the three and nine-month periods ended September 30, 2021 and 2020.

 
Three Months
Ended September 30,
  
Nine Months
Ended September 30,
 
(net income in thousands)
 2021  2020  2021  2020 
Net Income $17,502  $14,810  $50,368  $43,241 
Weighted Average Number of Common Shares Outstanding  789,646   793,556   789,646   793,539 
Basic and Diluted Earnings Per Common Share $22.16  $18.66  $63.79  $54.49 


10. Leases

Lessee – Operating Leases
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.

34
Our leases relate primarily to office space and bank branches with remaining lease terms of generally one to ten years. Certain lease arrangements contain extension options which typically range from five to ten 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 September 30,2021, operating lease ROU assets and liabilities were $4.19 million and $4.29 million, respectively. As of December 31, 2020, operating lease ROU assets and liabilities were $4.80 million and $4.92 million, respectively. As of September 30,2020, operating lease ROU assets and liabilities were $4.47 million and $4.55 million, respectively. In the first quarter of 2021, early termination of 1 lease resulted in a reduction to ROU assets and liabilities of $482,000 and $494,000, respectively. In the third quarter of 2021, a new modification to renew a lease for five more years resulted in an addition to ROU assets and liabilities of $302,000.

The table below summarizes the information related to our operating leases:

(in thousands except for percent and period data) 
Nine Months Ended
September 30, 2021
  
Year Ended
December 31, 2020
  
Nine Months Ended
September 30, 2020
 
Cash Paid for Amounts Included in the Measurement of Lease Liabilities         
Operating Cash Flow from Operating Leases $536  $795  $594 
Right-of-Use Assets Obtained in Exchange for New Operating Lease Liabilities
 $302  $0  $0 
Weighted-Average Remaining Lease Term - Operating Leases, in Years  6.76   7.33   7.29 
Weighted-Average Discount Rate - Operating Leases  2.6%  2.9%  3.2%

The table below summarizes the maturity of remaining lease liability:

(in thousands) September 30, 2021 
2021 $
174 
2022  702 
2023  714 
2024  730 
2025  741 
2026 and thereafter  1,602 
Total Lease Payments  4,663 
Less: Interest  (377)
Present Value of Lease Liabilities $4,286 

As of September 30, 2021, we have 0  additional operating leases for office space that have not yet commenced or that are anticipated to commence during the fourth quarter of 2021.

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 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 of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

35
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 party 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 $90.4 million at September 30, 2021, $103.5 million at December 31, 2020, and $106.4 million at September 30,2020.


11. Recent Accounting Pronouncements

Accounting Standards Adopted in 2021

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). The updated guidance simplifies the accounting for income taxes by removing certain exceptions and improves the consistent application of GAAP by clarifying and amending other existing guidance. We adopted this ASU prospectively on January 1, 2021, which did not have a material impact on our financial condition or results of operations.

Accounting Guidance Pending Adoption at September 30, 2021
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 March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The amendments in this ASU are elective and provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this ASU may be elected as of March 12,2020 through December 31,2022. An entity may choose to elect the amendments in this update at an interim period subsequent to March 12,2020 with adoption methods varying based on transaction type. We have not elected to apply these amendments. However, we will assess the applicability of the ASU to us and continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations.

In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). The main amendments in this ASU are intended to clarify certain optional expedients and scope of derivative instruments. The amendments are elective and effective immediately upon issuance of this ASU. Amendments may be elected through December 31, 2022. We have not elected to apply amendments at this time, however, will assess the applicability of this ASU to us as we continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations.

36
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is management’s discussion and analysisintended to provide a more comprehensive review of the major factors that influenced ourCompany’s operating results and financial performance forcondition than can be obtained from reading the three and nine-month periods ended September 30, 2021. This analysisUnaudited Consolidated Financial Statements alone. The discussion should be read in conjunction with our 2020 Annual Report to Shareholders on Form 10-K,the Unaudited Consolidated Financial Statements and with the unaudited consolidated financial statements and notes as set forththereto included in this report.“Part I. Item 1. Financial Statements.”

Forward–Looking StatementsFORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains various10–Q may contain certain forward-looking statements usually containingwithin the words “estimate,” “project,” “expect,” “objective,” “goal,” or similar expressionsmeaning of Section 27A the Securities Act of 1933, as amended (the “Securities Act”), and includes assumptions concerning Farmers & Merchants Bancorp’s (together with its subsidiaries,Section 21E of the “Company” or “we”Securities Exchange Act of 1934, as amended (the “Exchange Act”) operations, future results, and prospects.. These forward-looking statements are based uponreflect the Company’s current expectationsviews and are subjectnot historical facts. 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 the Company’s 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 the Company’s ability to risks and uncertainties. In connection withcontrol or predict. For those statements, the “safe-harbor” provisionsCompany claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995,1995.

These forward-looking statements involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the Company provides“Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in this report and the following cautionary statement identifying important factors whichCompany’s Annual Report on Form 10-K for the year ended December 31, 2021 (“Form 10-K”), and other parts of this report that could cause the actual results of events to differ materially from those set forthanticipated in or implied by thethese forward-looking statements. The following is a non-exclusive list of factors which could cause actual results to differ materially from forward-looking statements and related assumptions.

Such factors include, but are not limited to, the following: (1) economic conditions in the Central Valley of 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) 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) water management issues in California and the resulting impact on the Company’s agricultural customers; (9) expansion into new geographic markets and new lines of business; (10) the impact of COVID-19 on the Company and its customers (see COVID-19 Disclosure below); and (11) other factors discussed in Item 1A. Risk Factors located in the Company’s 2020 Annualthis Quarterly Report on Form 10-K.10-Q:

◾
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; and
◾
regulatory or judicial proceedings.

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.

Readers are cautioned not to place undue reliance on thesePlease take into account that forward-looking statements which speak only as of the date hereof.of this Form 10-Q. The Company undertakes nodoes not undertake any obligation to update anyrelease publicly revisions to such forward-looking statements to reflect events or circumstances arising after the date on which they are made.

COVID-19 (Coronavirus) Disclosure

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 future impact that this will have on our communities and customers.

Designated as an “essential business”, Farmers & Merchants Bank of Central California has kept all branches open and maintained regular business hours during this difficult time. Our staffing levels have remained stable during the COVID-19 crisis.

Impact on the Banking Industry
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law by Congress and was amended and extended by the Consolidated Appropriations Act of 2021 (“H.R. 133”) on December 21, 2020. The primary impact of this legislation,Form 10-Q, except as well as related federal and state regulatory actions, is as follows:

Paycheck Protection Program (“PPP”) … The Small Business Administration (“SBA”) was directedrequired 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 two to five years, and under certain conditions the SBA can forgive them after eight or twenty-four weeks. Farmers & Merchants Bank of Central California has actively participated in the PPP, and since April 2020 we have funded $494.9 million of loans for over 2,000 of our small business customers. As of September 30, 2021, $121.2 million of these loans remain outstanding. 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 amortized over the life of the loans. The Company has collected $17.9 million in fees from the SBA and as of September 30, 2021, $13.5 million of these fees have been accreted into income, since inception. Since these loans are currently in the process of being forgiven by the SBA, the income statement impact to the Company in the fourth quarter of 2021 could be significant.
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 (“TDR”) for a limited period of time to account for the effects of COVID-19. Farmers & Merchants Bank of Central California has, and continues to, actively work with existing borrowers to restructure loans, primarily for up to six months, moving to either interest only payments or full deferral of principal and interest payments. After the deferral period ends, any deferred amounts would then be added to the final principal balance. We believe that these actions will assist these borrowers in getting through these difficult times, but no guaranties can be made that at some time in the future these loans will not be required to be accounted for as a TDR.
Since April 2020, we have restructured $278.1 million of loans under the CARES Act and H.R. 133 guidelines. As of September 30, 2021 all of these loans have returned to some form of payment status, whether interest-only or full principal and interest.
law.

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Foreclosure Actions … The CARES Act and H.R. 133 restrict 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 September 30, 2021, but these guidelines have now expired. The Company continues to work with its borrowers when they make requests to defer payments on their mortgage loans.
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 provide 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 has elected to delay CECL implementation.
Impact on Farmers & Merchants Bancorp and Farmers & Merchants Bank of Central California
Although as vaccination rates increase the impact of COVID-19 may diminish, the Company remains exposed to the following COVID-19 risks and uncertainties:
We may not be able to maintain staff levels in order 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 (e.g., hotels, movie theaters, health clubs and restaurants); or (2) possible reinstatements of “shelter-in-place” orders by local, state and federal officials (e.g., small businesses determined to be “non-essential”).
Our liquidity position may be affected as a result of significant and unusual deposit outflows or loan drawdowns.
However, from a financial perspective, as reflected by the following September 30, 2021 measures, the Company enters the fourth quarter of 2021 with strong fundamentals which should assist us in continuing to respond to the risks of COVID-19:

•
Liquidity consisting of $804 million of Fed Funds Sold and $884 million of Investment Securities;
•
Strong Asset Quality as reflected by only $516,000 of non-performing loans, and a negligible delinquency ratio of .036% of total loans and leases;
•
Risk Based Capital Ratio of 13.28%;
•
Allowance for Credit Losses of $60.3 million or 1.92% of total loans and leases (2.00% exclusive of government fully guaranteed loans issued under the SBA’s PPP); and
•
ROAA of 1.39% and ROAE of 15.64% in third quarter 2021.
Our credit exposure to the “Hospitality” (primarily hotels) and “Entertainment” (primarily restaurants, health clubs and movie theaters) industries totals $153.5 million in loans and leases outstanding at September 30, 2021. This represents 4.9% of total loans and leases outstanding and 33.8% of total shareholders’ equity, both measures that are thought to be reasonable when compared to peers. Most of these loans: (1) were underwritten with an original LTV of 50-70% on the underlying real estate, providing us what should be adequate collateral coverage; and (2) have financially strong guarantors with liquidity that provides additional protection. Over and above the impact on the Hospitality and Entertainment industries there has been a general economic slowdown in some areas as a result of COVID-19. The Central Valley of California has been and should continue to be in a better position than other areas to weather this impact because agricultural activity has substantially continued. Although the financial position of these borrowers has improved over the past three months as the economy has opened up, we continue to monitor the impact on our borrowers, and continue to work closely with them using all of the tools at our disposal to help them move through this period of reduced business activity.

Although our 2021 financial performance could still be negatively impacted by sustained low interest rates and the potential for increased borrower stress, the full extent of this impact cannot be determined at this time. Additionally, these negative impacts may be somewhat mitigated by the fees paid by the SBA under the PPP. We believe that we are well positioned to continue moving through this difficult period with sustained profitability.

38
IntroductionOverview

Farmers & Merchants Bancorp or the Company, is a Delaware registered bank holding company formed March 10,organized in 1999. Its subsidiary, Farmers & Merchants Bank of Central California, or the Bank, isAs a California state-chartered bank formed in 1916. Banking services are provided in twenty-nine full-service branches and three stand-alone ATM’s in the Company’s service area. The service area includes Sacramento, San Joaquin, Stanislaus, Merced, Contra Costa, Napa and Solano Counties with branches in Sacramento, Elk Grove, Galt, Lodi, Stockton, Linden, Modesto, Turlock, Hilmar, Merced, Manteca, Riverbank, Napa, Walnut Creek, Concord, Rio Vista, Walnut Grove and Lockeford.

As aregistered bank holding company, the CompanyFMCB is subject to regulation, supervision, 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 ofby the California Department of Financial Protection and 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.

The Company’s outstanding common stock as of June 30, 2022, consisted of 777,190 shares of common stock, $0.01 par value and no shares of preferred stock were issued or outstanding. 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.”

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. 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”.

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 lesser 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 sum of net interest income and non-interest income.

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 reflect all adjustments (which include reclassification and normal recurring adjustments) that are necessary for a fair presentation in conformity with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements.

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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 — Loans —The methodology for determining the allowance for credit losses (“ACL”) on loans is considered a critical accounting policy by Management because of the high degree of judgment involved. The subjectivity of the assumptions used and the potential for changes in the economic environment could result in changes to the amount of the recorded ACL. Among the material estimates required to establish the ACL are: (i) a reasonable and supportable forecast; (ii) a reasonable and supportable forecast period and the reversion period; (iii) value of collateral; strength of guarantors; (iv) the amount and timing of future cash flows for loans individually evaluated; and (v) the determination of the qualitative loss factors. All of these estimates are susceptible to significant change.

The Company has established systematic methodologies for the determination of the adequacy of the ACL. The methodologies are set forth in a formal policy and take into consideration the need for a valuation allowance for loans evaluated on a collective (pool) basis, which have similar risk characteristics as well as allowances to individual loans that do not share risk characteristics.

The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The provision for credit losses reflects the amount required to maintain the ACL at an appropriate level based upon management’s evaluation of the adequacy of loss reserves. The Company increases its ACL by charging provisions for credit losses on its consolidated statement of income. Losses related to specific assets are applied as a reduction of the carrying value of the assets and charged against the ACL when management believes a loan balance is uncollectable. Recoveries on previously charged off loans are credited to the ACL.

Management estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience, either internal or peer information, provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made, using qualitative factors, when management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The ACL is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. These factors include, among others, changes in the size and composition of the loan portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions.

34
On January 1, 2022, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology that delays recognition until it is probable a loss has been incurred with an expected loss methodology that is referred to as CECL. Both the Financial Accounting Standards Board (“FASB Staff Q&A Topic 326, No. 1”) and the federal financial institution regulatory agencies (“Financial Institution Letter FIL-17-2019”), along with the Securities and Exchange Commission, have confirmed that smaller, less complex organizations are not required to implement complex models, developed by outside vendors to calculate current expected credit losses. Accordingly, in adopting ASU 2016-13 (Topic 326) Management determined that the Weighted Average Remaining Maturity (“WARM”) method was most appropriate given the Company’s current size and complexity.

Management will incorporate reasonable and supportable information in order to calculate CECL reserves.This includes the ability to reliably forecast and document exogenous events that may affect the credit performance of the Company’s loan portfolio. Management is confident with its ability to effectively identify historical loss information by the appropriate portfolio segmentation.  In addition, Management believes that it can reasonably obtain historical loss information by its respective peers to further improve historical loss information. Additionally, the Company believes that it can effectively evaluate the potential impact that both macro and micro-economic conditions can have on its loan portfolio. Management is also comfortable that it can rely on weighted average maturity calculations, including estimated prepayments with its existing third party Asset/Liability Management (“ALM”) applications.

Management determined that the most effective approach to segment its portfolio and to extract the relevant information it needed to calculate its CECL reserves was to utilize the seventeen loan segments used in preparing regulatory Call Reports. This allows Management the ability to obtain historical loss information for itself as well as its peer group. Additionally, Management’s ALM application also utilizes a similar loan segmentation in calculating weighted average remaining terms.

The foundation of CECL modeling is the ability to estimate expected credit losses over the lifetime of a loan. Management must use relevant available information about past events (e.g. historical losses) current conditions, and reasonable and supportable forecasts about future conditions. Historical losses serve as the starting point to estimate expected credit losses. When available, historical losses should include cumulative actual losses incurred over the lifetime of the various loan segments of the loans being evaluated. In cases where such information is not available, companies may need to rely on external data, such as peer data of historical losses for similar loan segments.

Management has determined to use a “through-the-cycle” historical credit loss experience as its baseline for historical credit losses. Management has determined a representative period for a full credit cycle would be from 2008 to 2022 (fifteen-year credit cycle). Management has collected historical loss information on its own loan portfolio as well as peer group information by the seventeen loan segments over this time horizon using information available from Federal Deposit Insurance CorporationRegulators on the Uniform Bank Performance Report (“FDIC”UBPR”).

OverviewFederal Regulators have placed the Company into a peer group of banks with assets between $3 billion to $10 billion. This peer group segmentation includes 181 banks across the nation. The model calculates the mean historical loss rate over the fifteen year economic cycle for both the Bank and its peer group. The model calculates the stressed historical loss rate over the fifteen year economic cycle for both the Bank and its peer group.

Although
35
Management evaluates macro and micro economic information as well as internal trends in credit performance on our loan portfolio to determine where we believe we are in an economic credit cycle. Depending upon our estimation of what point in the credit cycle the current economy may exist, we adjust, on a quantitative basis, historical loss rates either upwards or downwards from the mean. If Management believes we are nearing the end on a credit cycle, we may adjust historical losses in increments higher from the mean (e.g. one standard deviation from the mean). If the Company believes that we are in the recovery stage of a credit cycle, we may adjust historical losses downwards from the mean. Management understands that historical credit losses may not exactly follow a normal bell-shaped curve, but that the approach provides consistency across all loan segments as well as a measured probability of credit loss coverage.

Management evaluated current economic metrics as its basis to determine that we believe that we are at the beginning of an economic recession. Based on this determination, management has used a one-standard deviation from the mean to capture 68.2% of all credit losses over the 15-year economic cycle.

Management used the duration of each loan segment to estimate the remaining life of loans to ensure that the model covers credit losses over the expect life of such loans.

Management will continue to employ the use of qualitative factors as defined by the Interagency Policy Statement on the Allowance for Loan and Lease Losses (“SR 2006-17”). Management will consider qualitative or environmental factors that are likely to cause estimated credit losses associated with our existing portfolio to differ from historical loss experience, as defined in the Interagency Guidance, including but not limited to:


■
Changes 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 international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments.

■
Changes in the nature and volume of the portfolio and in the terms of loans.

■
Changes in the experience, ability, and depth of lending management and other relevant staff.

■
Changes in the volume and severity of past due loans, 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.

■
The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.
These qualitative factors are applied primarily to our agriculture and agricultural real estate loan exposure.

Investment Securities — Investment securities are classified as held-to-maturity (“HTM”) when the Company has initiated effortsthe positive intent and ability to expandhold 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, net of the allowance for credit losses - securities, adjusted for amortization of premiums and discounts to the earliest callable date. 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, until realized. When AFS securities, specifically identified, are sold, the unrealized gain or loss is reclassified from AOCI to non-interest income.

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Allowance for Credit Losses – Securities — Management measures expected credit losses on held-to- maturity debt securities on a collective basis by major security type. The Company’s HTM portfolio contains securities issued by U.S. government entities and agencies and municipalities. The Company uses industry historical credit loss information adjusted for current conditions to establish the allowance for credit losses on its geographic footprint intoHTM municipal bond portfolio.

For available-for-sale debt securities in an unrealized loss position, the East Bay areaCompany first assesses whether it intends to sell, or is more likely than not that it will be required to sell the security before recovery of San Franciscoits amortized cost basis. If the Company intends to sell the security or it is more likely than not that, the Company will be required to sell the security before recovering its cost basis; the entire impairment loss would be recognized in earnings. If the Company does not intend to sell the security and Napa, California (see Item 1: Business – Service Area locatedit is not more likely than not that, the Company will be required to sell the security the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized costs, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. Projected cash flows are discounted by the current effective interest rate. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to AOCI.

Changes in the Company’s 2020 Annualallowance for credit losses-securities are recorded as provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the non-collectability of an available-for-sale security is confirmed or when either criteria regarding intent of requirement to sell is met.

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 value of transaction-related deposits and the value of the client 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 underlying 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 assets.

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Fair Value Measurements — The Company discloses the fair value of financial instruments and the methods and significant assumptions used to estimate those fair values. The Company, using available market information and appropriate valuation methodologies has determined the estimated fair value amounts. 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 instrument and its expected realization.

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 consolidated provision for income taxes. Deferred income tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their respective tax bases.

Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The determination of the amount 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 valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred income tax asset will not be realized. “More likely than not” is defined as greater than a 50% 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 liability 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 consolidated statements of income.

Impact of Recently Issued Accounting Standards

See Note 1. “Basis of Presentation and Significant Accounting Policies” to the Consolidated Financial Statements in “Item 1. Financial Information” in this Quarterly Report on Form 10-K),10-Q.

Results of Operations

The following discussion and analysis is intended to provide a better understanding of Farmers & Merchants Bancorp and its subsidiaries’ financial condition at June 30, 2022 and December 31, 2021 and results of operations during the Company’s primary service area remainsthree and six months ended June 30, 2022 and 2021, respectively. Information related to the mid Central Valley of California. Accordingly, discussioncomparison of the Company’sresults of operations for the three years ended December 31, 2021, 2020, and 2019 can be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations is influenced byOperations” in the seasonal banking needs2021 Annual Report on Form 10-K filed with the SEC on March 15, 2022.

Factors that determine the level of its agricultural customers (e.g., duringnet income include the springvolume of earning assets and summer customers draw down theirinterest bearing liabilities, yields earned and rates paid, fee income, non-interest expense, the level of non-performing loans and other non-earning assets, and the amount of non-interest bearing liabilities supporting earning assets. Non-interest income includes card processing fees, service charges on deposit accounts, bank-owned life insurance income, gains/losses on the sale of investment securities, and gains/losses on deferred compensation investments. Non-interest expense consists primarily of salaries and employee benefits, cost of deferred compensation benefits, occupancy, data processing, FDIC insurance, marketing, legal and other expenses.

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Average Balance and Yields. The following table sets forth a summary of average balances with corresponding interest income and increase loan borrowing to fundinterest expense as well as average yield, cost and net interest margin information for the purchase of equipment and planting of crops. Correspondingly, depositperiods presented. Average balances are replenished and loans repaid in late fall and winter as crops are harvested and sold).derived from daily balances.

  For the Three Months Ended June 30, 
  2022  2021 
(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 and federal funds sold 
$
683,655
  
$
1,409
   
0.83
%
 
$
590,936
  
$
164
   
0.11
%
Securities:(1)
                        
Taxable securities  
1,090,507
   
5,107
   
1.87
%
  
839,121
   
3,694
   
1.76
%
Non-taxable securities(2)
  
48,339
   
391
   
3.24
%
  
53,813
   
416
   
3.09
%
Total investment securities  
1,138,846
   
5,498
   
1.94
%
  
892,934
   
4,110
   
1.84
%
Loans:(3)
                        
Real estate:                        
Commercial  
1,158,892
   
13,373
   
4.63
%
  
1,005,143
   
12,370
   
4.94
%
Agricultural  
701,905
   
8,415
   
4.81
%
  
622,977
   
7,447
   
4.79
%
Residential and home equity  
365,872
   
3,539
   
3.88
%
  
337,796
   
3,662
   
4.35
%
Construction  
205,491
   
2,508
   
4.90
%
  
189,930
   
2,150
   
4.54
%
Total real estate  
2,432,160
   
27,835
   
4.59
%
  
2,155,846
   
25,629
   
4.77
%
Commercial & industrial  
439,137
   
4,546
   
4.15
%
  
357,098
   
4,345
   
4.88
%
Agricultural  
264,791
   
2,988
   
4.53
%
  
227,206
   
2,557
   
4.51
%
Commercial leases  
90,855
   
1,377
   
6.08
%
  
101,848
   
1,428
   
5.62
%
Consumer and other  
21,457
   
1,824
   
34.10
%
  
223,877
   
2,705
   
4.85
%
Total loans and leases  
3,248,400
   
38,570
   
4.76
%
  
3,065,875
   
36,664
   
4.80
%
Non-marketable securities  
15,549
   
218
   
5.62
%
  
15,078
   
212
   
5.64
%
Total interest earning assets  
5,086,450
   
45,695
   
3.60
%
  
4,564,823
   
41,150
   
3.62
%
Allowance for credit losses  
(61,439
)
          
(60,204
)
        
Non-interest earning assets  
317,066
           
315,846
         
Total average assets 
$
5,342,077
          
$
4,820,465
         
                         
LIABILITIES AND SHAREHOLDERS' EQUITY                        
Interest bearing deposits:                        
Demand 
$
1,117,283
   
319
   
0.11
%
 
$
993,084
   
282
   
0.11
%
Savings and money market accounts  
1,544,753
   
361
   
0.09
%
  
1,332,799
   
372
   
0.11
%
Certificates of deposit greater than $250,000  
165,944
   
106
   
0.26
%
  
168,450
   
188
   
0.45
%
Certificates of deposit less than $250,000  
219,157
   
87
   
0.16
%
  
239,792
   
192
   
0.32
%
Total interest bearing deposits  
3,047,137
   
873
   
0.11
%
  
2,734,125
   
1,034
   
0.15
%
Short-term borrowings  
-
   
-
   
0.00
%
  
-
   
-
   
0.00
%
Subordinated debentures  
10,310
   
103
   
4.01
%
  
10,310
   
79
   
3.07
%
Total interest bearing liabilities  
3,057,447
   
976
   
0.13
%
  
2,744,435
   
1,113
   
0.16
%
Non-interest bearing deposits  
1,735,258
           
1,573,743
         
Total funding  
4,792,705
   
976
   
0.08
%
  
4,318,178
   
1,113
   
0.10
%
Other non-interest bearing liabilities  
86,550
           
69,049
         
Shareholders' equity  
462,822
           
433,238
         
Total average liabilities and shareholders' equity 
$
5,342,077
          
$
4,820,465
         
Net interest income     
$
44,719
          
$
40,037
     
Interest rate spread          
3.48
%
          
3.45
%
Net interest margin(4)
          
3.53
%
          
3.52
%
For the three
(1)Excludes average unrealized (losses) gains of ($24.7) million and nine months ended September 30, 2021, Farmers & Merchants Bancorp reported net income of $17,502,000 and $50,368,000, earnings per share of $22.16 and $63.79 and return on average assets of 1.39% and 1.39%, respectively. Return on average shareholders’ equity was 15.64% and 15.37%$.3 million for the three and nine months ended SeptemberJune 30, 2022, and 2021, 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 26% related to income earned on tax-exempt municipal securities totaling $103,000 and $109,000 for the three months ended June 30, 2022, and 2021, respectively.

For the three(3)Loan interest income includes loan fees of $3.3 million and nine months ended September 30, 2020, Farmers & Merchants Bancorp reported net income of $14,810,000 and $43,241,000, earnings per share of $18.66 and $54.49 and return on average assets of 1.40% and 1.44%, respectively. Return on average shareholders’ equity was 14.40% and 14.54%$4.4 million for the three and nine months ended SeptemberJune 30, 2020,2022 and 2021, respectively.

The following(4)Net interest margin is a summary of the financial results for the nine-month period ended September 30, 2021, compared to September 30, 2020:

Net income increased 16.5% to $50.4 million from $43.2 million.
Earnings per share increased 17.1% to $63.79 from $54.49.
Total assets increased 18.6% to $5.1 billion from $4.3 billion.
Loans & leases (exclusive of SBA PPP loans) increased 9.2% to $3.02 billion from $2.76 billion.
Total deposits increased 19.8% to $4.6 billion from $3.8 billion.

The primary reasons for the Company’s $7.1 million or 16.5% increase in net income in the first nine months of 2021 as compared to the same period of 2020 were:

A $10.5 million increase incomputed by dividing net interest income related to the growth inby average interest earning assets.
A $2.5 million increase in gain on investment securities sold.
A $1.1 million increase in Debit Card and ATM fees.
A $1.1 million increase in other non-interest income.
A $750,000 decrease in the provision for credit losses.

39
These positive impacts were partially offset by:
  For the Six Months Ended June 30, 
  2022  2021 
(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 and federal funds sold 
$
721,656
  
$
1,775
   
0.50
%
 
$
501,105
  
$
267
   
0.11
%
Securities:(1)
                        
Taxable securities  
1,056,670
   
9,695
   
1.84
%
  
836,501
   
7,498
   
1.79
%
Non-taxable securities(2)
  
49,164
   
793
   
3.23
%
  
54,442
   
839
   
3.08
%
Total investment securities  
1,105,834
   
10,488
   
1.90
%
  
890,943
   
8,337
   
1.87
%
Loans:(3)
                        
Real estate:                        
Commercial  
1,155,271
   
26,649
   
4.65
%
  
985,307
   
25,347
   
5.19
%
Agricultural  
691,128
   
16,208
   
4.73
%
  
630,592
   
14,583
   
4.66
%
Residential and home equity  
359,656
   
6,840
   
3.84
%
  
336,691
   
6,333
   
3.79
%
Construction  
198,626
   
4,580
   
4.65
%
  
191,638
   
4,147
   
4.36
%
Total real estate  
2,404,681
   
54,277
   
4.55
%
  
2,144,228
   
50,410
   
4.74
%
Commercial & industrial  
431,907
   
9,345
   
4.36
%
  
361,465
   
8,456
   
4.72
%
Agricultural  
256,648
   
5,743
   
4.51
%
  
226,706
   
5,121
   
4.56
%
Commercial leases  
92,844
   
2,793
   
6.07
%
  
102,205
   
2,772
   
5.47
%
Consumer and other  
36,683
   
3,845
   
21.14
%
  
228,336
   
6,992
   
6.18
%
Total loans and leases  
3,222,763
   
76,003
   
4.76
%
  
3,062,940
   
73,751
   
4.86
%
Non-marketable securities  
15,549
   
523
   
6.78
%
  
13,892
   
402
   
5.84
%
Total interest earning assets  
5,065,802
   
88,789
   
3.53
%
  
4,468,880
   
82,757
   
3.73
%
Allowance for credit losses  
(61,232
)
          
(59,820
)
        
Non-interest earning assets  
315,037
           
310,629
         
Total average assets 
$
5,319,607
          
$
4,719,689
         
                         
LIABILITIES AND SHAREHOLDERS' EQUITY                        
Interest bearing deposits:                        
Demand 
$
1,116,436
   
578
   
0.10
%
 
$
968,496
   
576
   
0.12
%
Savings and money market accounts  
1,531,069
   
703
   
0.09
%
  
1,312,122
   
790
   
0.12
%
Certificates of deposit greater than $250,000  
166,725
   
203
   
0.25
%
  
169,967
   
444
   
0.53
%
Certificates of deposit less than $250,000  
221,487
   
192
   
0.17
%
  
243,583
   
461
   
0.38
%
Total interest bearing deposits  
3,035,717
   
1,676
   
0.11
%
  
2,694,168
   
2,271
   
0.17
%
Short-term borrowings  
1
   
-
   
0.00
%
  
2
   
-
   
0.00
%
Subordinated debentures  
10,310
   
185
   
3.62
%
  
10,310
   
158
   
3.09
%
Total interest bearing liabilities  
3,046,028
   
1,861
   
0.12
%
  
2,704,480
   
2,429
   
0.18
%
Non-interest bearing deposits  
1,728,962
           
1,522,029
         
Total funding  
4,774,990
   
1,861
   
0.08
%
  
4,226,509
   
2,429
   
0.12
%
Other non-interest bearing liabilities  
80,413
           
61,662
         
Shareholders' equity  
464,204
           
431,518
         
Total average liabilities and shareholders' equity 
$
5,319,607
          
$
4,719,689
         
                         
Net interest income     
$
86,928
          
$
80,328
     
Interest rate spread          
3.41
%
          
3.55
%
Net interest margin(4)
          
3.46
%
          
3.62
%

A $5.1(1)Excludes average unrealized (losses) gains of ($15.9) million increase in salaries and employee benefits.
A $646,000 increase in FDIC insurance expense.
A $499,000 increase in other non-interest expense.
An increase in the tax provision from 24.4% to 24.8%.
Results of Operations

Net Interest Income / Net Interest Margin
The tables on the following pages reflect the Company’s average balance sheets and volume and rate analysis$7.1 million for the threesix months ended June 30, 2022, and nine-month periods ended September 30, 2021, and 2020.respectively, which are included in non-interest earning assets.

(2)The average yields on earning assets and average rates paid on interest-bearing liabilities have been computed onyield does not include the federal tax benefits at an annualized basis for purposesassumed effective yield of comparability with full year data. Average balance amounts for assets and liabilities are the computed average of daily balances.

Net interest26% related to 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 investmentsmunicipal securities totaling $210,000 and municipal loans$220,000 for the six months ended June 30, 2022, and 2021, respectively.
(3)Loan interest income includes loan fees of $7.2 million and $9.6 million for the six months ended June 30, 2022 and 2021, respectively.
(4)Net interest margin 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 presentation ofcomputed by dividing net interest income and netby average interest margin on a tax equivalent basis is a common practice within the banking industry.

The Volume and Rate Analysis 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 rate sensitive liabilities are subject to repricing at different times, which exposes the Company to income fluctuations when interest rates change. In order to minimize income fluctuations, the Company attempts to match asset and liability maturities. However, some maturity mismatch is inherent in the asset and liability mix. See “Item 3. Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Riskassets.

40
Farmers & Merchants Bancorp
Quarterly Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)

  
Three Months Ended
Sept 30, 2021
  
Three Months Ended
Sept 30, 2020
 
Assets Balance  Interest  Rate  Balance  Interest  Rate 
Interest Bearing Deposits with Banks 
$
856,159
  
$
328
   
0.15
%
 
$
314,049
  
$
81
   
0.10
%
Investment Securities:























U.S. Treasury Notes  
9,911
   
59
   
2.36
%
  
27,423
   
89
   
1.29
%
U.S. Government Agency SBA  
7,151
   
14
   
0.78
%
  
9,167
   
24
   
1.05
%
Municipals - Taxable  
15,088
   
141
   
3.74
%
  
19,966
   
156
   
3.13
%
Obligations of States and Political Subdivisions - Non-Taxable (1)
  
49,616
   
503
   
4.06
%
  
49,452
   
525
   
4.24
%
Mortgage-Backed Securities  
708,322
   
2,937
   
1.66
%
  
430,145
   
2,567
   
2.39
%
Other  
46,511
   
132
   
1.14
%
  
25,477
   
53
   
0.83
%
Total Investment Securities  
836,599
   
3,786
   
1.81
%
  
561,630
   
3,414
   
2.43
%
                         
Loans & Leases: (2)
                        
Real Estate  
2,169,270
   
25,354
   
4.64
%
  
1,952,892
   
24,193
   
4.93
%
Home Equity Lines & Loans  
32,112
   
360
   
4.45
%
  
37,815
   
423
   
4.45
%
Agricultural  
236,071
   
2,637
   
4.43
%
  
263,706
   
3,365
   
5.08
%
Commercial  
374,162
   
4,111
   
4.36
%
  
362,880
   
4,377
   
4.80
%
Consumer  
8,521
   
125
   
5.82
%
  
12,261
   
190
   
6.16
%
Other (3)
  
146,661
   
2,138
   
5.78
%
  
348,093
   
2,415
   
2.76
%
Leases  
96,690
   
1,363
   
5.59
%
  
106,272
   
1,446
   
5.41
%
Total Loans & Leases  
3,063,487
   
36,088
   
4.67
%
  
3,083,919
   
36,409
   
4.70
%
Total Earning Assets  
4,756,245
  
$
40,202
   
3.35
%
  
3,959,598
  
$
39,904
   
4.01
%
                         
Unrealized Gain on Securities Available-for-Sale
  
1,995
           
20,960
         
Allowance for Credit Losses  
(60,268
)
          
(55,782
)
        
Cash and Due From Banks  
72,887
           
61,633
         
All Other Assets  
264,724
           
244,056
         
Total Assets 
$
5,035,583
          
$
4,230,465
         
                         
Liabilities & Shareholders’ Equity                        
Interest Bearing Deposits:                        
Interest Bearing DDA 
$
1,068,707
  
$
293
   
0.11
%
 
$
824,587
  
$
383
   
0.18
%
Savings and Money Market  
1,385,430
   
346
   
0.10
%
  
1,176,238
   
594
   
0.20
%
Time Deposits  
399,246
   
290
   
0.29
%
  
468,072
   
1,034
   
0.88
%
Total Interest Bearing Deposits  
2,853,383
   
929
   
0.13
%
  
2,468,897
   
2,011
   
0.32
%
Subordinated Debentures  
10,310
   
78
   
3.00
%
  
10,310
   
83
   
3.20
%
Total Interest Bearing Liabilities  
2,863,693
  
$
1,007
   
0.14
%
  
2,479,207
  
$
2,094
   
0.34
%
Interest Rate Spread (4)
          
3.21
%
          
3.67
%
Demand Deposits (Non-Interest Bearing)  
1,655,738
           
1,279,142
         
All Other Liabilities  
68,564
           
60,812
         
Total Liabilities  
4,587,995
           
3,819,161
         
                         
Shareholders’ Equity  
447,588
           
411,304
         
Total Liabilities & Shareholders’ Equity 
$
5,035,583
          
$
4,230,465
         
Net Interest Income and Margin on Total Earning Assets (5)
      
39,195
   
3.27
%
      
37,810
   
3.80
%
Tax Equivalent Adjustment      
(104
)
          
(111
)
    
Net Interest Income     
$
39,091
   
3.26
%
     
$
37,699
   
3.79
%

(1) Yields and interest income are calculated on an fully taxable equivalent basis using the current statutory federal tax rate.          
(2) Average balances on loans & leases outstanding include non-performing loans, if any. The amortized portion of net loan origination fees is included in interest income on loans & leases, representing an adjustment to the yield.
(3) Includes Cares Act Small Business Administration Paycheck Protection Progam loans.
(4) Interest rate spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
(5) Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets.

41
Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)

  
Nine Months Ended
Sept. 30, 2021
  
Nine Months Ended
Sept. 30, 2020
 
Assets Balance  Interest  Rate  Balance  Interest  Rate 
Interest Bearing Deposits with Banks 
$
620,757
  
$
595
   
0.13
%
 
$
286,049
  
$
1,093
   
0.51
%
Investment Securities:                        
U.S. Treasury Notes  
12,071
   
212
   
2.35
%
  
19,897
   
267
   
1.79
%
U.S. Government Agency SBA  
7,590
   
41
   
0.72
%
  
9,799
   
94
   
1.28
%
Municipals - Taxable  
15,662
   
445
   
3.79
%
  
11,362
   
359
   
4.21
%
Obligations of States and Political Subdivisions - Non-Taxable (1)
  
52,816
   
1,562
   
3.94
%
  
52,741
   
1,587
   
4.01
%
Mortgage-Backed Securities  
738,454
   
9,396
   
1.70
%
  
445,336
   
8,432
   
2.52
%
Other  
45,970
   
687
   
1.99
%
  
10,747
   
64
   
0.79
%
Total Investment Securities  
872,563
   
12,343
   
1.89
%
  
549,882
   
10,803
   
2.62
%
                         
Loans & Leases: (2)
                        
Real Estate  
2,131,071
   
75,041
   
4.71
%
  
1,885,455
   
71,031
   
5.03
%
Home Equity Lines & Loans  
32,417
   
1,083
   
4.47
%
  
39,162
   
1,447
   
4.94
%
Agricultural  
229,862
   
7,758
   
4.51
%
  
264,528
   
10,180
   
5.14
%
Commercial  
365,744
   
12,567
   
4.59
%
  
378,272
   
13,810
   
4.88
%
Consumer  
9,388
   
1,010
   
14.38
%
  
13,294
   
619
   
6.22
%
Other (3)
  
194,295
   
8,245
   
5.67
%
  
209,653
   
3,521
   
2.24
%
Leases  
100,347
   
4,135
   
5.51
%
  
105,880
   
4,272
   
5.39
%
Total Loans & Leases  
3,063,124
   
109,839
   
4.79
%
  
2,896,244
   
104,880
��  
4.84
%
Total Earning Assets  
4,556,444
  
$
122,777
   
3.60
%
  
3,732,175
  
$
116,776
   
4.18
%
                         
Unrealized Gain on Securities Available-for-Sale
  
5,431
           
16,096
         
Allowance for Credit Losses  
(59,971
)
          
(55,190
)
        
Cash and Due From Banks  
68,755
           
61,588
         
All Other Assets  
255,847
           
238,898
         
Total Assets 
$
4,826,506
          
$
3,993,567
         
                         
Liabilities & Shareholders’ Equity                        
Interest Bearing Deposits:                        
Interest Bearing DDA 
$
1,002,267
  
$
869
   
0.12
%
 
$
761,437
  
$
1,342
   
0.24
%
Savings and Money Market  
1,336,826
   
1,136
   
0.11
%
  
1,091,672
   
2,280
   
0.28
%
Time Deposits  
408,730
   
1,195
   
0.39
%
  
503,319
   
3,991
   
1.06
%
Total Interest Bearing Deposits  
2,747,823
   
3,200
   
0.16
%
  
2,356,428
   
7,613
   
0.43
%
Federal Home Loan Bank Advances  
-
   
-
   
0.00
%
  
1
   
-
   
0.00
%
Subordinated Debentures  
10,310
   
236
   
3.06
%
  
10,310
   
296
   
3.83
%
Total Interest Bearing Liabilities  
2,758,133
  
$
3,436
   
0.17
%
  
2,366,739
  
$
7,909
   
0.45
%
Interest Rate Spread(4)
          
3.44
%
          
3.73
%
Demand Deposits (Non-Interest Bearing)  
1,567,089
           
1,169,333
         
All Other Liabilities  
64,439
           
61,024
         
Total Liabilities  
4,389,661
           
3,597,096
         
                         
Shareholders’ Equity  
436,845
           
396,471
         
Total Liabilities & Shareholders’ Equity 
$
4,826,506
          
$
3,993,567
         
Net Interest Income and Margin on Total Earning Assets (5)
      
119,341
   
3.50
%
      
108,867
   
3.90
%
Tax Equivalent Adjustment      
(324
)
          
(327
)
    
Net Interest Income     
$
119,017
   
3.49
%
     
$
108,540
   
3.88
%

(1) Yields and interest income are calculated on an fully taxable equivalent basis using the current statutory federal tax rate.          
(2) Average balances on loans & leases outstanding include non-performing loans, if any. The amortized portion of net loan origination fees is included in interest income on loans & leases, representing an adjustment to the yield.
(3) Includes CARES Act Small Business Administration Paycheck Protection Progam loans.
(4) Interest rate spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
(5) Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets.

42
Farmers & Merchants Bancorp
Volume and Rate Analysis of Net Interest Revenue
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)


 
Three Months Ended
Sept. 30, 2021 compared to Sept. 30, 2020
  
Nine Months Ended
Sept. 30, 2021 compared to Sept. 30, 2020
Interest Earning Assets Volume  Rate  Net Chg.  Volume  Rate  Net Chg. 
Interest Bearing Deposits with Banks $193  $54  $247  $696  $(1,194) $(498)
Investment Securities:                        
U.S. Treasuries  (78)  47   (30)  (123)  68   (55)
U.S. Government Agency SBA  (14)  4   (10)  (31)  (22)  (53)
Municipals - Taxable  (42)  28   (15)  117   (31)  86 
Obligations of States and Political Subdivisions - Non-Taxable  2   (23)  (21)  2   (27)  (25)
Mortgage-Backed Securities  700   (330)  370   1,922   (958)  964 
Other  55   24   79   427   197   623 
Total Investment Securities  623   (250)  373   2,313   (773)  1,540 
                         
Loans & Leases:                        
Real Estate  2,490   (1,329)  1,161   7,936   (3,926)  4,010 
Home Equity Lines & Loans  (62)  (0)  (63)  (198)  (167)  (364)
Agricultural  (576)  (152)  (728)  1,035   (3,457)  (2,422)
Commercial  136   (403)  (266)  (481)  (762)  (1,243)
Consumer  (54)  (12)  (65)  (226)  617   391 
Other(1)
  (1,915)  1,638   (277)  (277)  5,002   4,724 
Leases  (131)  48   (83)  (230)  92   (137)
Total Loans & Leases  (113)  (209)  (321)  7,559   (2,601)  4,958 
Total Earning Assets  703   (405)  299   10,569   (4,568)  6,001 
                         
Interest Bearing Liabilities                        
Interest Bearing Deposits:                        
Interest Bearing DDA  231   (321)  (90)  782   (1,255)  (473)
Savings and Money Market  134   (382)  (248)  698   (1,842)  (1,144)
Time  (179)  (565)  (744)  (954)  (1,842)  (2,796)
Total Interest Bearing Deposits  186   (1,268)  (1,082)  526   (4,939)  (4,413)
Subordinated Debentures  -   (5)  (5)  -   (60)  (60)
Total Interest Bearing Liabilities  186   (1,273)  (1,087)  526   (4,999)  (4,473)
Total Change on a Tax Equivalent Basis $517  $868  $1,386  $10,043  $431  $10,474 
(1) Includes CARES Act Small Business Administration Paycheck Protection Progam loans.
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.

ThirdSecond Quarter 2022 vs. Second Quarter 2021 vs. Third Quarter 2020
NetInterest-bearing deposits with banks and Federal Reserve balances consisted primarily of FRB deposits. Balances with the FRB earned an average interest income forrate of 0.83% and 0.11% during the thirdsecond quarter of 2022 and 2021, increased 3.7% or $1.4respectively. Average interest-bearing deposits with banks were $684 million to $39.1 million. On a fully taxable equivalent basis, net interest income increased 3.7% and totaled $39.2$591 million for the third quarter of 2021. As more fully discussed below, the increase in net interest income was due primarily to a $796.6 million increase in average earning assets offset by a 53 basis point decrease in the net interest margin.

Net interestJune 30, 2022 and 2021, respectively. Interest income on a taxable equivalent basis, expressed as a percentage of average total earning assets, is referred to as the net interest margin. For the quarter ended September 30, 2021, the Company’s net interest margininterest-bearing deposits with banks was 3.27% compared to 3.80%$1.4 million and $0.2 million for the quarter ended SeptemberJune 30, 2020. This decrease in net interest margin was due primarily to a 66 basis point decrease in yield on earning assets offset somewhat by a 20 basis point decrease in the cost of interest bearing liabilities.

Average loans & leases totaled $3.1 billion for the quarter ended September 30, 2021; a decrease of $20.4 million compared to the average balance for the quarter ended September 30, 2020. Loans & leases decreased from 77.9% of average earning assets at September 30, 2020 to 64.4% at September 30, 2021. The annualized yield on the Company’s loan & lease portfolio decreased slightly to 4.67% for the quarter ended September 30,2022 and 2021, compared to 4.70% for the quarter ended September 30, 2020. This decrease in the current quarter as compared to the same quarter last year was due to the decline in rates across loan types due to an overall drop in market interest rates offset by an increase in PPP loans earning at a rate of 5.78% as compared to 2.76% in the third quarter of 2020. This increase in yield on PPP loans was due to the SBA’s forgiveness of a significant volume of these loans during the third quarter of 2021, which resulted in a large amount of deferred loan fees being accreted into income during the quarter.

43respectively.
A lower yield, when combined with the impact of a decrease in average loan & lease balances, resulted in interest revenue from loans & leases decreasing slightly by 3 basis points to $36.1 million. The Company continues to experience aggressive competitor pricing for loans & leases to which it may need to continue to respond in order to retain key customers. This could place negative pressure on future loan & lease yields and net interest margin.

The investment securities portfolio is the other main component of the Company’s earning assets. Historically, the Company has investedconsists primarily in:of: (1) mortgage-backed securities issued by U.S. 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 has selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than seven7 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.

AverageTotal investment securities totaled $836.6averaged $1.1 billion and $893 million for the quarter ended SeptemberJune 30, 2021; an increase of $275 million compared to the2022 and 2021, respectively. The average balanceyield on total investment securities was 1.94% and 1.84% for the quarter ended SeptemberJune 30, 2020. The average investment portfolio yield, on a tax equivalent (TE) basis, was 1.81% for the quarter ended September 30,2022 and 2021, compared to 2.43% for the quarter ended September 30, 2020. This overall decrease in yield was caused primarily by a drop in market interest rates. As a result of the combined impact of these balancerespectively. See “Investment Securities and yield changes, tax equivalent interest income on securities increased $373,000 to $3.79 million for the quarter ended September 30, 2021, compared to $3.41 million for the quarter ended September 30, 2020. See “Financial Condition – Investment Securities”Federal Reserve balances” for a discussion of the Company’s investment strategy in 2021. Net interest income2022.
Loans and leases held for investment averaged $3.2 billion and $3.1 billion for the quarter ended June 30, 2022 and 2021, respectively. The yield on the Schedule of Year-to-Date Average Balancesloan & lease portfolio was 4.76% and Interest Rates is shown4.80% for the quarter ended June 30, 2022 and 2021, 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 a tax equivalent basis, which is higher thanfuture loan & lease yields and 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.margin.

Interest-bearing liabilities averaged $3.1 billion and $2.7 billion for the quarter ended June 30, 2022 and 2021, respectively. Total interest expense on interest-bearing deposits with bankswas $0.9 million, $1.0 million for the quarter ended June 30, 2022 and overnight investments2021, respectively. The average rate paid on interest-bearing liabilities was 0.13% and 0.16% for the quarter ended June 30, 2022 and 2021, respectively. As a result of recent increases in Federal Funds Sold are additional earning assets availableshort-term market interest rates, the Company is experiencing more aggressive competitor rates on interest bearing deposits, which it may need to the Company. meet in order to retain key customers.  This could place negative pressure on future deposit rates and net interest margin.

Six Months Ended June 30, 2022 vs. Six Months Ended June 30, 2021
Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earnearned an average interest atrate of 0.50% and 0.11% for the Fed Funds rate, which was .15% in Septemberfirst six months ended June 30, 2022 and 2021, compared to .10% in September 2020.respectively. Average interest-bearing deposits with bankswere $722 million and $501 million for the quartersix months ended SeptemberJune 30, 2022 and 2021, was $856.2 million, an increase of $542.1 million compared to the average balance for the quarter ended September 30, 2020.respectively. Interest income on interest-bearing deposits with banks was $1.8 million and $0.3 million for the quartersix months ended SeptemberJune 30, 2022 and 2021, increased $247,000 to $328,000 compared to the quarter ended September 30, 2020.respectively.

Average interest-bearing liabilities increased $384.5total investment securities were $1.1 billion and $891 million or 15.5% duringfor the third quarter of 2021. Of that increase: (1) interest-bearing transaction deposits increased $244.1 million; (2) savingssix months ended June 30, 2022 and money market deposits increased $209.2 million; (3) time deposits decreased $68.8 million (see “Financial Condition – Deposits”); (4) FHLB advances remained unchanged (see “Financial Condition – Federal Home Loan Bank Advances2021, respectively. The average yield on total investment securities were 1.90% and 1.87% for the six months ended June 30, 2022 and 2021, respectively. See “Investment Securities and Federal Reserve Bank Borrowings”);balances” for a discussion of the Company’s investment strategy in 2022.
Average loans and (5) subordinated debt remained unchanged (see “Financial Condition – Subordinated Debentures”). A significant portion of this deposit growthleases held for investment were $3.2 billion and $3.1 billion for the six months ended June 30, 2022 and 2021, respectively. The yield on the loan & lease portfolio was a result of funds from4.76% and 4.86% for the SBA PPP being deposited into borrower accounts until those funds will be used for operating expenses.six months ended June 30, 2022 and 2021, respectively.

41
Average interest-bearing liabilities were $3.0 billion and $2.7 billion for the six months ended June 30, 2022 and 2021, respectively. Total interest expense on interest-bearing deposits was $929,000 for the third quarter of 2021 as compared to $2.0$1.7 million, $2.3 million for the third quarter of 2020.six months ended June 30, 2022 and 2021, respectively. The average rate paid on interest-bearing depositsliabilities was 0.13%0.12% and 0.18% for the third quarter ofsix months ended June 30, 2022 and 2021, compared to 0.32% for the third quarter of 2020 due to the significant drop in market interest rates.respectively.

NineRate/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 the 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.

  Three Months Ended June 30,
 2022 compared with 2021		  Six Months Ended June 30, 2022 compared with 2021 
  Increase (Decrease) Due to:  Increase (Decrease) Due to: 
(Dollars in thousands) Volume  Rate  Net  Volume  Rate  Net 
Interest income:                  
Interest earnings deposits in other banks and federal funds sold 
$
30
  
$
1,215
  
$
1,245
  
$
164
  
$
1,344
  
$
1,508
 
Securities:                        
Taxable securities  
1,165
   
248
   
1,413
   
2,016
   
181
   
2,197
 
Non-taxable securities  
(123
)
  
98
   
(25
)
  
(137
)
  
91
   
(46
)
Total securities  
1,042
   
346
   
1,388
   
1,879
   
272
   
2,151
 
Loans:                        
Real estate:                        
Commercial  
5,108
   
(4,105
)
  
1,003
   
7,420
   
(6,118
)
  
1,302
 
Agricultural  
946
   
22
   
968
   
1,417
   
208
   
1,625
 
Residential and home equity  
1,325
   
(1,448
)
  
(123
)
  
436
   
71
   
507
 
Construction  
183
   
175
   
358
   
155
   
278
   
433
 
Total real estate  
7,562
   
(5,356
)
  
2,206
   
9,428
   
(5,561
)
  
3,867
 
Commercial & industrial  
3,275
   
(3,074
)
  
201
   
2,491
   
(1,602
)
  
889
 
Agricultural  
424
   
7
   
431
   
762
   
(140
)
  
622
 
Commercial leases  
(559
)
  
508
   
(51
)
  
(547
)
  
568
   
21
 
Consumer and other  
(17,178
)
  
16,297
   
(881
)
  
(18,389
)
  
15,242
   
(3,147
)
Total loans  
(6,477
)
  
8,383
   
1,906
   
(6,257
)
  
8,509
   
2,252
 
Non-marketable securities  
10
   
(4
)
  
6
   
51
   
70
   
121
 
Total interest income  
(5,395
)
  
9,940
   
4,545
   
(4,162
)
  
10,194
   
6,032
 
                         
Interest expense:                        
Interest bearing deposits:                        
Demand  
35
   
2
   
37
   
164
   
(162
)
  
2
 
Savings and money market accounts  
235
   
(246
)
  
(11
)
  
276
   
(363
)
  
(87
)
Certificates of deposit greater than $250,000  
(3
)
  
(79
)
  
(82
)
  
(8
)
  
(233
)
  
(241
)
Certificates of deposit less than $250,000  
(15
)
  
(90
)
  
(105
)
  
(39
)
  
(230
)
  
(269
)
Total interest bearing deposits  
252
   
(413
)
  
(161
)
  
393
   
(988
)
  
(595
)
Short-term borrowings  
-
   
-
   
-
   
-
   
-
   
-
 
Subordinated debentures  
-
   
24
   
24
   
-
   
27
   
27
 
Total interest expense  
252
   
(389
)
  
(137
)
  
393
   
(961
)
  
(568
)
Net interest income 
$
(5,647
)
 
$
10,329
  
$
4,682
  
$
(4,556
)
 
$
11,156
  
$
6,600
 

Net interest income increased by $6.6 million, or 8.22% to $86.9 million for the six months ended June 30, 2022 compared to $40.0 million for the same quarter one year earlier. The increase in net interest income was driven 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 Fed Funds sold and investment securities.

42
Comparison of Results of Operations for the Three and Six Months Ended SeptemberJune 30, 2022 and 2021

  
Three Months
Ended June 30,
        
Six Months Ended
June 30,
       
(Dollars in thousands) 2022  2021  
$ Better /
(Worse)
  
% Better /
(Worse)
  2022  2021  
$ Better /
(Worse)
  
% Better /
(Worse)
 
Selected Income Statement Information:                        
Interest income 
$
45,695
  
$
41,150
  
$
4,545
   
11.04
%
 
$
88,789
  
$
82,757
  
$
6,032
   
7.29
%
Interest expense  
976
   
1,113
   
137
   
12.31
%
  
1,861
   
2,429
   
568
   
23.38
%
Net interest income  
44,719
   
40,037
   
4,682
   
11.69
%
  
86,928
   
80,328
   
6,600
   
8.22
%
Provision for credit losses  
1,500
   
-
   
(1,500
)
  
0.00
%
  
1,500
   
1,250
   
(250
)
  
(20.00
%)
Net interest income after provision for credit losses  
43,219
   
40,037
   
3,182
   
7.95
%
  
85,428
   
79,078
   
6,350
   
8.03
%
Non-interest income  
3,512
   
4,959
   
(1,447
)
  
(29.18
%)
  
7,824
   
11,675
   
(3,851
)
  
(32.99
%)
Non-interest expense  
23,031
   
23,603
   
572
   
2.42
%
  
46,819
   
47,147
   
328
   
0.70
%
Income before income tax expense  
23,700
   
21,393
   
2,307
   
10.78
%
  
46,433
   
43,606
   
2,827
   
6.48
%
Income tax expense  
5,257
   
5,240
   
(17
)
  
(0.32
%)
  
10,932
   
10,740
   
(192
)
  
(1.79
%)
Net income 
$
18,443
  
$
16,153
  
$
2,290
   
14.18
%
 
$
35,501
  
$
32,866
  
$
2,635
   
8.02
%

Net Income. For the three and six months ended June 30, 2022, Farmers & Merchants Bancorp reported net income of $18.4 million and $35.5 million, earnings per share of $23.58 and $45.28 and return on average assets of 1.38% and 1.33%, respectively. Return on average shareholders’ equity was 15.94% and 15.30% for the three and six months ended June 30, 2022.

For the three and six months ended June 30, 2021, vs. Nine Months Ended SeptemberFarmers & Merchants Bancorp reported net income of $16.2 million and $32.9 million, earnings per share of $20.45 and $41.62 and return on average assets of 1.34% and 1.39%, respectively. Return on average shareholders’ equity was 14.91% and 15.23% for the three and six months ended June 30, 20202021.
During
Net Interest Income and Net Interest Margin. For the first nine months of 2021,quarter ended June 30, 2022, net interest income increased 9.65%$4.7 million, or 11.7%, to $119.0$44.7 million compared with $40.0 million for the same quarter a year earlier. The increase is primarily the result of average interest earning assets increasing $522 million, or 11.4% to $5.1 billion compared with $4.6 billion for the same period a year earlier. Total deposits grew $475 million, or 12.31%, to $4.8 billion compared with $4.3 billion for the same a year ago. Net interest margins increased slightly by 1 basis point to 3.53% for the quarter ended June 30, 2022, compared with 3.52% for the same period a year earlier.
Net interest income for the six months ended June 30, 2022 increased by $6.6 million, or 8.22%, to $86.9 million, compared to $108.5$80.3 million at SeptemberJune 30, 2020. On a fully taxable equivalent basis, net interest income increased 9.62% and totaled $119.3 million at September 30, 2021, compared to $108.9 million at September 30, 2020. As more fully discussed below the2001. The increase in net interest income was primarily due to a $824.3$597 million increase in average earning assets offset by a 4016 basis point decrease in the net interest margin.

For the ninesix months ended SeptemberJune 30, 2021,2022, the Company’s net interest margin was 3.50%3.46% compared to 3.90%3.62% for the same period in 2020.2021. This decrease in net interest margin was due primarily to a decrease of 0.58%20 basis points in the yield received on earning assets offset somewhat by a 286 basis point decrease in the cost of interest-bearing liabilities.

44
The average balance of loans & leases increased by $166.9 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The yield on the loan & lease portfolio decreased 5 basis points to 4.79% for the nine months ended September 30, 2021, compared to 4.84% for the nine months ended September 30, 2020. This lower yield offset somewhat the positive impact of increased average loan & lease balances resulting in interest revenue from loans & leases increasing 4.73% or $4.9 million for the first nine months of 2021.

Average investment securities were $872.6 million for the nine months ended September 30, 2021 compared to $549.9 million for the same period in 2020. The average investment portfolio yield, on a tax equivalent basis, for the nine months ended September 30, 2021, was 1.89% compared to 2.62% for the nine months ended September 30, 2020. This overall decrease in yield was caused primarily by a drop in market interest rates. As a result of the combined impact of these balance and yield changes, tax equivalent interest income on securities increased $1.5 million to $12.3 million for nine months ended September 30, 2021 compared to $10.8 million for the nine months ended September 30, 2020. See “Financial Condition – Investment Securities” for a discussion of the Company’s investment strategy in 2021. Net interest income on the Schedule 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. Interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earn interest at the Fed Funds rate, which was .13% for the nine months ended September 2021, compared to .51% for the nine months ended September 2020. Average interest-bearing deposits with banks for the nine months ended September 30, 2021, was $620.7 million, an increase of $334.7 million compared to the average balance for the nine months ended September 30, 2020. Interest income on interest-bearing deposits with banks for the nine months ended September 30, 2021, decreased $498,000 to $595,000 million compared to the nine months ended September 30, 2020.

Average interest-bearing liabilities increased $391.4 million or 16.5% during the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. Of that increase: (1) interest-bearing transaction deposits increased $240.8 million; (2) savings and money market deposits increased $245.2 million; (3) time deposits decreased $94.6 million (see “Financial Condition – Deposits”); and (4) FHLB advances remained unchanged (see “Financial Condition – Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings”); and (5) subordinated debt remained unchanged (see “Financial Condition – Subordinated Debentures”).

Total interest expense on interest-bearing deposits was $3.2 million for the first nine months of 2021 as compared to $7.6 million for the first nine months of 2020. The average rate paid on interest-bearing deposits was 0.16% in the first nine months of 2021 and 0.43% in the first nine months of 2020, due to the significant drop in market interest rates.

Provision and Allowance 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.Losses. 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.

45
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 whichin each period is chargeda charge against earnings in that period. The provision is the amount required 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.

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 more than insignificant 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 non-accrual status at the time they become TDR, remain on non-accrual 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 or leases, 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 general reserve component of the allowance for credit losses also consists of reserve factorsat a level that, are based onin management’s assessment ofjudgment, is adequate to absorb expected losses over 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. See “Note 1 Significant Accounting Policies - Allowance for Credit Losses.”

In addition, the Company’s and Bank’s regulators, including the FRB, DFPI 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.

46
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 qualitylife 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 State of California experienced drought conditions from 2013 through most of 2016. After 2016, reasonable levels of rain and snow alleviated drought conditions in our primary service area, but the winter of 2020-2021 was once again dry. Despite this, the availability of water in our primary service area was not an issue for the 2021 growing season. However, the weather patterns over the past eight years further reinforce the fact that the long-term risks associated with the availability of water are significant.HTM securities portfolios.

The Company made a $1.25$1.5 million provision for credit losses during the first nine monthshalf of 20212022 compared to $2.0$1.3 million during the first half of 2021. Net charge-offs during the first half of 2022 were $34,000 compared to net recoveries of $117,000 in the first half of 2021.

43
Non-interest Income. Non-interest income decreased $1.4 million, or 29.2%, to $3.5 million for the quarter ended June 30, 2022 compared with $5.0 million for the same period a year earlier. This decrease in 2020. Net recoveries during the first nine months of 2021 were $191,000 compared to net charge-offs of $214,000 in the first nine months of 2020. See “Overview – Looking Forward: 2021 and Beyond”, “Critical Accounting Policies and Estimates – Allowance for Credit Losses” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk-Credit Risk” located in the Company’s 2020 Annual Report on Form 10-K.

After reviewing all factors above, management concluded that the allowance for credit losses, as of September 30, 2021 were adequate.

The following table contains the allowance for credit losses for the three and nine-month periods ended September 2021 and 2020:

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
             
(in thousands) 2021  2020  2021  2020 
Balance at Beginning of Period 
$
60,229
  
$
55,058
  
$
58,862
  
$
55,012
 
Charge-Offs  
(17
)
  
(25
)
  
(33
)
  
(487
)
Recoveries  
91
   
65
   
224
   
273
 
Provision  
-
   
1,700
   
1,250
   
2,000
 
Balance at End of Period $60,303  $56,798  $60,303  $56,798 

The table below breaks out current quarter activity by portfolio segment (in thousands):

September 30, 2021 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- December 31, 2020 
$
27,679
  
$
8,633
  
$
1,643
  
$
960
  
$
2,024
  
$
4,814
  
$
9,961
  
$
333
  
$
1,731
  
$
1,084
  $58,862 
Charge-Offs  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
(33
)
  
-
   
-
   (33)
Recoveries  
-
   
-
   
-
   
74
   
17
   
29
   
83
   
21
   
-
   
-
   224 
Provision  
1,200
   
794
   
(210
)
  
(70
)
  
(129
)
  
(238
)
  
738
   
(23
)
  
(872
)
  
60
   1,250 
Ending Balance- September 30, 2021 
$
28,879
  
$
9,427
  
$
1,433
  
$
964
  
$
1,912
  
$
4,605
  
$
10,782
  
$
298
  
$
859
  
$
1,144
  $60,303 
Third Quarter Allowance for Credit Losses:                                            
Beginning Balance- June 30, 2021 
$
28,890
  
$
9,107
  
$
1,405
  
$
957
  
$
1,899
  
$
4,552
  
$
9,920
  
$
281
  
$
1,639
  
$
1,579
  $60,229 
  Charge-Offs  
-
   
-
   
-
   
-
   
-
   
-
   
-
   
(17
)
  
-
   
-
   (17)
  Recoveries  
-
   
-
   
-
   
15
   
6
   
24
   
38
   
8
   
-
   
-
   91 
  Provision  
(11
)
  
320
   
28
   
(8
)
  
7
   
29
   
824
   
26
   
(780
)
  
(435
)
  - 
Ending Balance- September 30, 2021 
$
28,879
  
$
9,427
  
$
1,433
  
$
964
  
$
1,912
  
$
4,605
  
$
10,782
  
$
298
  
$
859
  
$
1,144
  $60,303 

47
The Allowance for Credit Losses at September 30, 2021 increased $3.5 million from September 30, 2020 and increased $1.41 million from December 31, 2020. The Company believes that an allowance of 1.92% of gross loans (2.00% when government guaranteed SBA PPP loans are excluded) provides sufficiently for our exposure at the current time.

Changes to the reserve during the first nine months of 2021 are due to: (1) changes in volume by segment and (2) changes in the underlying credit quality of the loan and lease portfolio. Overall: (1) reserves for “Agricultural” and “Agricultural Real Estate” loans (which are currently thought to have more limited COVID-19 loss exposure since agricultural activity has substantially continued) have remained relatively stable or increased due to volume changes; (2) reserves for Commercial Real Estate (where our COVID-19 exposure is thought to be greater since many of these companies and consumers were, and may continue to be, impacted by “non-essential” designations and “shelter-in-place” orders) have been increased; (3) reserves for Commercial loans have increased with volume; and (4) reserves for “Leases” have decreased as that relatively new product segment matures within our portfolio and the risk is perceived to be lower. See “Management’s Discussion and Analysis - COVID-19 (Coronavirus) Disclosure” for additional information of the Company’s COVID-19 exposure.

See “Management’s Discussion and Analysis - Financial Condition – Classified Loans & Leases and Non-Performing Assets” for further discussion regarding these loan categories.

See “Note 6. Allowance for Credit Losses” for additional details regarding the provision and allowance for credit losses.

Non-Interest Income
Non-interestnon-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 plans; and (6) fees from other miscellaneous business services.

Third Quarter 2021 vs. Third Quarter 2020
Non-interest income increased $321,000 or 7.1% for the three months ended September 30, 2021, compared to the same period of 2020. This increase was primarily due to: (1)to a $323,000 increase$1.5 million decline in debit card/ATM fees; (2) a $154,000 increase in service charges collected on deposit accounts; (3) a $136,000 increase in other miscellaneous non-interest income; (4) an increase of $76,000 in dividends received from the FHLB; (5) a $21,000 increase in value of Bank owned life insurance; and (6) an $18,600 increase in gain on sales of leases. This increase is partially offset by: (1) a $407,000 decrease in the net gaingains/(losses) loss on deferred compensation investments (Balancesand a $0.7 million reduction in gain on sale of investment securities recorded in the first quarter of 2021. This decrease in non-interest income was partially off-set by an increase of $.4 million in other investment income.

The Company recorded net losses on deferred compensation plan investments of $1 million for the quarter ended June 30, 2022 compared with net gains of $0.5 million for the same respective period. See Note 12, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2021 Form 10-K filed on March 15, 2022 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 requireGAAP requires these investment gains/losses to be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no effectnet-effect on the Company’s net income).income.

Nine Months Ended September 30, 2021 vs. Nine Months Ended September 30, 2020
Non‑interestNon-interest income increased $5.9decreased $3.9 million, or 54.3%33%, to $7.8 million for the ninesix months ended SeptemberJune 30, 2021,2022 compared towith $11.7 million for the same period of 2020. This increase2021. The year-over-year decrease in non-interest income was primarily due to: (1)to a $1.8 million reduction in gain on sale of investment securities recorded in the first quarter of 2021and a $2.5 million increasedecline in gaingains/(losses) on the sale of investment securities; (2)deferred compensation plan investments. These reductions were primarily off-set by a $1.1$0.4 million increase in debit card/ATM fees; (3) a $945,000 increase in theservices charges received on deposit accounts. The Company recorded net gainlosses on deferred compensation plan investments (Balancesof $0.6 million for the six months ended June 30, 2022 compared with net gains of $1.2 million for the same respective period. See Note 12, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2021 Form 10-K filed on March 15, 2022 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 requireGAAP requires these investment gains/losses to be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no effectnet-effect on the Company’s net income); (4) a $687,000 increase in gain on sales of leases; (5) a $177,000 increase in service charges collected on deposit accounts; and (6) a $156,000 increase in dividend income received from FHLB.income.

Non-Interest Expense
Non-interest Expense.Non-interest expense decreased $0.6 million, or 2.4%, to $23 million 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; (11) ORE carrying costs and gains/losses on sale; and (12) other miscellaneous expenses.

48
Third Quarter 2021 vs. Third Quarter 2020
Overall, non-interest expense decreased $198,000 or 1.0%quarter ended June 30, 2022 compared with $23.6 million for the three months ended September 30, 2021, compared to the same period in 2020.a year ago. This decrease was primarily comprised of: (1) a $524,000 decreasedue to the $1.5 million decline in other miscellaneous expenses; (2) a $407,000 decrease in the net gaingains/(losses) on deferred compensation plan investments. This decrease was partially off-set by a $0.5 million increase in outside professional fees, a $0.2 million increase in salaries and employee benefits and a $0.1 million increase in legal expenses.  The Company recorded net losses on deferred compensation plan investments (Balancesof $1.0 million for the quarter ended June 30, 2022 compared with net gains of $0.5 million for the same respective period. See Note 12, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2021 Form 10-K filed on March 15, 2022 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 investmentGAAP requires gains/losses(losses) on deferred compensation plan investments to be recorded in non-interest income,expense, an offsetting entry is also required to be made to non-interest expenseincome resulting in no effectnet-effect on the Company’s net income); and (3) a $182,000 decrease in marketing expenses. These decreases were partially offset by (1) an $847,000 increase in salaries and employee benefits; (2) a $68,000 increase in FDIC insurance.income.

Nine Months Ended September 30, 2021 vs. Nine Months Ended September 30, 2020
Non-interest expense increased $7.4decreased $.3 million, or 12.2%0.7%, to $46.8 million for the ninesix months ended SeptemberJune 30, 2021,2022 compared with $47.1 million for the same period a year ago. This decrease was primarily due to the $1.8 million decline in gains/(losses) on deferred compensation plan investments. This decrease was off-set by a $0.4 million increase in accounting expenses, a $0.3 million increase in legal expenses and a $0.3 million increase in employee salaries and benefits. The Company recorded net losses on deferred compensation plan investments of $0.6 million for the six months ended June 30, 2022 compared with net gains of $1.2 million for the same period of 2020. This increase was primarily comprised of: (1) a $5.1 million increase2021. See Note 12, located in salaries“Item 8. Financial Statements and employee benefits; (2) a $945,000 increaseSupplementary Data” in the net gainCompany’s December 31, 2021 Form 10-K filed on deferred compensation investments (BalancesMarch 15, 2022 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.

44
Although Generally Accepted Accounting Principles require these investmentGAAP requires gains/losses(losses) on deferred compensation plan investments to be recorded in non-interest income,expense, an offsetting entry is also required to be made to non-interest expenseincome resulting in no effectnet-effect on the Company’s net income); (3) a $646,000 increase in FDIC insurance; (4) a $385,000 increase in legal expense; (5) a $154,000 increase in marketing expense; and (6) a $125,000 increase in occupancy expense.income.

Income Taxes
Tax Expense.The Bank’s provision for income taxes increased 18.6%1.79% to $5.9$10.9 million for the third quarterfirst six months of 20212022 compared to the third quarterfirst six months of 2020.2021. The Company’s effective tax rate for the third quarterfirst six months of 20212022 was 25.10%23.54% compared to 25.03%24.63% for the third quarter of 2020.same period in 2021. The Company’s effective tax rate can fluctuate from quarter to quarter 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 30% 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.

Financial Condition

This section discusses material changes in the Company’s consolidated balance sheetTotal assets grew $149 million, or 2.88%, to $5.3 billion at SeptemberJune 30, 2021, as2022 compared with $5.2 billion at December 31, 2021. Loans held for investment were $3.2 billion at June 30, 2022, an increase of $12.7 million, or .39% compared to December 31, 2020,2021. Total deposits grew $129 million, or 2.8%, to $4.8 billion at June 30, 2022 compared with $4.6 billion at December 31, 2021. The increase in total assets and to September 30, 2020. As previously discussed (see “Overview”),deposits was primarily the Company’s consolidated financial condition can be influenced by the seasonal banking needsresult of its agricultural customers.continued strong organic deposit growth.

Investment Securities and Federal Funds Sold
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 U.S. government-sponsored entities; (2) debt securities issued by U.S. Treasury, government agencies and U.S. 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 seven 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.Reserve Balances

The Company’s investment portfolio increased $86 million, or 8.56%, to $1.1 billion at SeptemberJune 30, 2021, was $883.8 million2022 compared to $638.4 million$1.0 billion at the end of 2020, an increase of $245.3 million or 38.4%. At December 31, 2020, the2021. The Company uses its investment portfolio totaled $876.7 million.

to manage interest rate and liquidity risks. Accordingly, when market rates are increasing it invests most of its funds in shorter-term Treasury and Agency securities or shorter-term (10, 15 and 20 year) mortgage-backed securities. Conversely, when rates are falling, 30-year mortgage-backed securities or longer term Treasury and Agency securities may be increased. The Company’sCompany's total investment portfolio currently represents 17.3%20.53% of the Company’s total assets at June 30, 2022 as compared to 19.3%with 19.46% at December 31, 2020, and 14.8% at September 30, 2020.

49
As of September 30, 2021, the Company held $62.9 million of municipal investments, all classified as HTM. Of this balance, $21.3 million were bank-qualified municipal bonds, and $41.6 million were private placement municipal bonds, and CRA qualified investments in our service area. In order to comply with Section 939A of the Dodd-Frank Act, the Company performs its own credit analysis on new purchases of municipal bonds. As of September 30, 2021, all of the Company’s bank-qualified municipal bond portfolio was rated at either the issue or issuer level, and all of these ratings were “investment grade.” The Company monitors the status of all municipal investments, 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.

2021. Not included in the investment portfolio are interest-bearinginterest bearing deposits with banks and overnight investments in Federal Funds Sold. Interest-bearingReserve 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-bearingInterest bearing deposits with banks totaled $804.3$681 million at SeptemberJune 30, 2021, $317.52022 and $663 million at December 31, 2020, and $299.6 million at September 30, 2020.2021.

The Company classifies its investmentsinvestment securities as either held-to-maturity (“HTM”), trading, or available-for-sale (“AFS”). Securities are classified as HTMheld-to-maturity and are carried at amortized cost when the Company has the intent and ability to hold the securities to maturity. During the first quarter of 2021, $316.9 million in mortgage-backed securities were transferred from available-for-sale securities to held-to-maturity at fair value. See “Note 3 – Investment Securities” for additional details regarding the transfer of investment securities. 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 September 30, 2021, December 31, 2020, and September 30, 2020, there were no securities in the trading portfolio. Securities classified as AFS 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 June 30, 2022, we held no investment securities from any issuer that totaled over 10% of our shareholders’ equity.

Loans45 &
The carrying value of our portfolio of investment securities was as follows:

(Dollars in thousands) 
June 30,
2022
  December 31, 2021 
Available-for-Sale Securities      
U.S. Treasury notes 
$
4,952
  
$
10,089
 
U.S. Government-sponsored securities  
5,441
   
6,374
 
Mortgage-backed securities(1)
  
203,607
   
251,120
 
Collateralized mortgage obligations(1)
  
1,502
   
2,436
 
Corporate securities  
9,526
   
-
 
Other  
310
   
435
 
Total available-for-sale securities 
$
225,338
  
$
270,454
 

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

(Dollars in thousands) 
June 30,
2022
  December 31, 2021 
Held-to-Maturity Securities      
Mortgage-backed securities(1)
 
$
721,510
  
$
596,775
 
Collateralized mortgage obligations(1)
  
84,414
   
73,781
 
Municipal securities  
62,459
   
66,496
 
Total held-to-maturity securities 
$
868,383
  
$
737,052
 

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

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

  As of June 30, 2022 
  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 
$
4,952
   
2.39
%
 
$
-
   
0.00
%
 
$
-
   
0.00
%
 
$
-
   
0.00
%
 
$
4,952
   
2.39
%
U.S. Government-sponsored securities  
12
   
1.09
%
  
104
   
2.90
%
  
380
   
1.70
%
  
4,945
   
1.52
%
  
5,441
   
1.56
%
Mortgage-backed securities(1)
  
-
   
0.00
%
  
24,553
   
2.36
%
  
34,650
   
2.40
%
  
144,403
   
1.72
%
  
203,607
   
1.91
%
Collateralized mortgage obligations(1)
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
1,502
   
2.30
%
  
1,502
   
2.30
%
Corporate securities  
-
   
0.00
%
  
4,738
   
0.78
%
  
4,788
   
0.90
%
  
-
   
0.00
%
  
9,526
   
0.84
%
Other  
310
   
1.72
%
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
310
   
1.72
%
Total securities available-for-sale 
$
5,273
   
2.35
%
 
$
29,395
   
2.10
%
 
$
39,818
   
2.21
%
 
$
150,851
   
1.72
%
 
$
225,338
   
1.87
%

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

46
  As of June 30, 2022 
  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
%
 
$
14,693
   
7.90
%
 
$
706,817
   
1.87
%
 
$
721,510
   
1.85
%
Collateralized Mortgage Obligations(1)
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
84,414
   
1.88
%
  
84,414
   
1.88
%
Municipal securities  
700
   
1.51
%
  
7,089
   
2.81
%
  
15,948
   
3.40
%
  
38,723
   
2.38
%
  
62,460
   
2.68
%
Total securities held-to-maturity 
$
700
   
1.51
%
 
$
7,089
   
2.81
%
 
$
30,641
   
2.06
%
 
$
829,954
   
1.90
%
 
$
868,383
   
1.91
%

(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.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 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(1)
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
2,436
   
2.30
%
  
2,436
   
2.30
%
Municipal securities  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
Corporate securities  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
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 and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.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(1)
  
-
   
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 and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.
Expected maturities may differ from contractual maturities because issuers may have the right to call obligations with or without penalties.  We evaluate securities for expected credit losses at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

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’sBank'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.
 
47
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.
 
50
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 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.

48
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 3. 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 “Item 3. Quantitative and Qualitative Disclosures Aboutabout Market Risk-Interest Rate Risk” in this Report on Form 10-Q for further details.

51
Overall, the Company’sCompany's loan & lease portfolio at SeptemberJune 30, 2021,2022 totaled $3.1$3.2 billion, an increase of $27.9$13 million or 0.9% over September 30, 2020.December 31, 2021. Exclusive of SBA PPP loans, the loan portfolio grew $253.9$66 million, or 9.2%2.08%, over September 30, 2020.December 31, 2021. This increase in the non-PPP loan portfolioloans 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. Loans & leases at September 30, 2021 increased $40.2 million from $3.1 billion at December 31, 2020.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 the periods indicated.each period presented:

(in thousands) September 30, 2021  December 31, 2020  September 30, 2020 
Commercial Real Estate 
$
1,126,230
   
35.7
%
 
$
971,326
   
31.2
%
 
$
887,999
   
28.4
%
Agricultural Real Estate  
656,337
   
20.8
%
  
643,014
   
20.7
%
  
639,172
   
20.4
%
Real Estate Construction  
178,451
   
5.7
%
  
185,741
   
6.0
%
  
186,623
   
6.0
%
Residential 1st Mortgages  
309,728
   
9.8
%
  
299,379
   
9.6
%
  
293,489
   
9.4
%
Home Equity Lines & Loans  
31,664
   
1.0
%
  
34,239
   
1.1
%
  
35,875
   
1.1
%
Agricultural  
235,085
   
7.5
%
  
264,372
   
8.5
%
  
252,031
   
8.1
%
Commercial  
394,326
   
12.5
%
  
374,816
   
12.0
%
  
367,052
   
11.7
%
Consumer & Other (1)
  
129,665
   
4.1
%
  
235,529
   
7.6
%
  
359,697
   
11.5
%
Leases  
90,022
   
2.9
%
  
103,117
   
3.3
%
  
105,511
   
3.4
%
Total Gross Loans & Leases  
3,151,508
   
100.0
%
  
3,111,533
   
100.0
%
  
3,127,449
   
100.0
%
Less: Unearned Income  
11,707
       
11,941
       
15,518
     
Subtotal  
3,139,801
       
3,099,592
       
3,111,931
     
Less: Allowance for Credit Losses  
60,303
       
58,862
       
56,798
     
Net Loans & Leases 
$
3,079,498
      
$
3,040,730
      
$
3,055,133
     
  June 30, 2022  December 31, 2021 
             
(Dollars in thousands) Dollars  
Percent
of Total
  Dollars  
Percent
of Total
 
Gross Loans and Leases            
Real estate:            
Commercial 
$
1,210,195
   
37.14
%
 
$
1,167,516
   
35.95
%
Agricultural  
709,624
   
21.78
%
  
672,830
   
20.72
%
Residential and home equity  
371,874
   
11.41
%
  
350,581
   
10.79
%
Construction  
162,713
   
4.99
%
  
177,163
   
5.45
%
Total real estate  
2,454,406
   
75.32
%
  
2,368,090
   
72.91
%
Commercial & industrial  
439,455
   
13.49
%
  
427,799
   
13.17
%
Agricultural  
261,856
   
8.04
%
  
276,684
   
8.52
%
Commercial leases  
89,095
   
2.73
%
  
96,971
   
2.99
%
Consumer and other(1)
  
13,588
   
0.42
%
  
78,367
   
2.41
%
Total gross loans and leases 
$
3,258,400
   
100.00
%
 
$
3,247,911
   
100.00
%

(1) Includes CARES Act Small Business Administration Paycheck Protection Program loans of $121,182, $224,309 and $347,180 as of September 30, 2021, December 31,2020 and September 30, 2020, respectively.SBA PPP  loans.

Classified Loans & Leases
49
The following table shows the maturity distribution and Non-Performing Assets
All loans & leases are assigned a credit risk grade using grading standards developed by bank regulatory agencies. See “Resultsinterest rate sensitivity of Operations - Provision and Allowance for Credit Losses” for more detail on risk grades. The Company utilizes the servicesloan portfolio 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 SeptemberJune 30, 2021, classified loans totaled $16.8 million compared to $18.6 million at December 31, 2020, and $20.8 million at September 30, 2020.2022.

  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 
$
89,939
  
$
267,837
  
$
818,910
  
$
33,509
  
$
1,210,195
 
Agricultural  
34,682
   
154,188
   
447,414
   
73,340
   
709,624
 
Residential and home equity  
120
   
4,023
   
118,208
   
249,523
   
371,874
 
Construction  
115,397
   
47,316
   
-
   
-
   
162,713
 
Total real estate  
240,138
   
473,364
   
1,384,532
   
356,372
   
2,454,406
 
Commercial & industrial  
163,698
   
222,395
   
47,140
   
6,222
   
439,455
 
Agricultural  
160,447
   
86,559
   
14,850
   
-
   
261,856
 
Commercial leases  
6,870
   
31,772
   
50,453
   
-
   
89,095
 
Consumer and other(1)
  
952
   
10,766
   
1,870
   
-
   
13,588
 
Total gross loans and leases 
$
572,105
  
$
824,856
  
$
1,498,845
  
$
362,594
  
$
3,258,400
 
Rate Structure for Loans                    
Fixed Rate 
$
481,614
  
$
492,971
  
$
396,902
  
$
123,043
  
$
1,494,530
 
Adjustable Rate  
90,491
   
331,885
   
1,101,943
   
239,551
   
1,763,870
 
Total gross loans and leases 
$
572,105
  
$
824,856
  
$
1,498,845
  
$
362,594
  
$
3,258,400
 

(1) Includes SBA PPP  loans.

Classified loans & leases with higher levels of credit risk can be further designated as “impaired” loans & leases. 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. See “Results of Operations - Provision and Allowance for Credit Losses” for further details. Impaired loans & leases consist of: (1) non-accrual loans & leases; and/or (2) restructured loans & leases that are still performing (i.e., accruing interest).

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’smanagement'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. At September 30, 2021, non-accrualNon-accrual loans &and leases totaled $516,000. At$3.0 million and $516,000 at June 30, 2022 and December 31, 2020 and September 30, 2020, non-accrual loans & leases totaled $495,000 and $498,000,2021, respectively.

52
Restructured Loans &and 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’sdebtor'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 non-accrualnonaccrual status at the time they become TDR loans or leases, remain on non-accrualnonaccrual 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 impairedcollateral dependent and are individually evaluated for impairment.

As of September
50
At June 30, 2021,2022, restructured loans & leases on accrual totaled $7.6$1.4 million as compared to $7.9with $2.3 million at December 31, 2020,2021, all of which were performing.  See Note 4 “Loans and $7.9 million at September 30, 2020.Leases” to the Unaudited Consolidated Financial Statements in “Item 1. Financial Statements” in this quarterly Report on Form 10-Q.

Other Real Estate Owned -–OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower. We record all OREO properties at amounts equal to or less than the fair market value of the properties based on current independent appraisals reduced by estimated selling costs. Loans where the collateral has been repossessed are classified as other real estate (“ORE”) or, if the collateral is personal property, the loan is classified as other assets on the Company’s financial statements.The Company reported $873,000 of foreclosed OREO at June 30, 2022, and at December 31, 2021.

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$278 million of loans under the CARES Act and H.R. 133 guidelines (see “Management’s Discussionguidelines.  At June 30, 2022, all loans that were restructured as part of the CARES Act have returned to the contractual terms and Analysis - COVID-19 (Coronavirus) Disclosure”).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 & leases (defined asmore than 90 days past due and still accruing interest, including those non-accrual loans & leases plus accruingthat are troubled debt restructured loans, & leases past due 90 days or more) and ORE as of the dates indicated.OREO (as hereinafter defined):

Non-Performing Assets
(in thousands) September 30, 2021  December 31, 2020  September 30, 2020 
Non-Performing Loans & Leases 
$
516
  
$
495
  
$
498
 
Other Real Estate  
873
   
873
   
873
 
Total Non-Performing Assets 
$
1,389
  
$
1,368
  
$
1,371
 
Non-Performing Loans & Leases            
as a % of Total Loans & Leases  
0.02
%
  
0.02
%
  
0.02
%
Restructured Loans & Leases (Performing) 
$
7,631
  
$
7,868
  
$
7,890
 
(Dollars in thousands) 
June 30,
2022
  December 31, 2021 
Non-performing assets:      
Non-accrual loans and leases, not TDRs      
Real estate:      
Commercial 
$
1,674
  
$
-
 
Agricultural  
475
   
18
 
Residential and home equity  
-
   
-
 
Construction  
-
   
-
 
Total real estate  
2,149
   
18
 
Commercial & industrial  
-
   
-
 
Agricultural  
879
   
-
 
Commercial leases  
-
   
-
 
Consumer and other  
-
   
-
 
Subtotal  
3,028
   
18
 
Non-accrual loans and leases, are TDRs        
Real estate:        
Commercial  
-
   
-
 
Agricultural  
-
   
498
 
Residential and home equity  
-
   
-
 
Construction  
-
   
-
 
Total real estate  
-
   
498
 
Commercial & industrial  
-
   
-
 
Agricultural  
-
   
-
 
Commercial leases  
-
   
-
 
Consumer and other  
-
   
-
 
Subtotal  
-
   
498
 
Total non-performing loans and leases 
$
3,028
  
$
516
 
Other real estate owned ("OREO") 
$
873
  
$
873
 
Total non-performing assets 
$
3,901
  
$
1,389
 
Performing TDRs 
$
1,389
  
$
1,824
 
         
Selected ratios:        
Non-performing loans to total loans  
0.09
%
  
0.02
%
Non-performing assets to total assets  
0.07
%
  
0.03
%

51
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. Specific reservesSee Note 4. “Loans and Leases”, located in “Item 1. Financial Statements” in this Quarterly Report on Form 10-Q for an allocation of $0, $92,000,the allowance classified to collateral dependent loans and $92,400 have been establishedleases.

Except for non-performing loans & leases at September 30, 2021, December 31, 2020 and September 30, 2020, respectively.

Foregone interest income on non-accrual loans & leases, which would have been recognized during the period, if all such loans & leases had been current in accordance with their original terms, totaled $35,700 $22,000 and $15,530 at September 30, 2021, December 31, 2020, and September 30, 2020, respectively.

The Company reported $873,000 of ORE at September 30, 2021, December 31, 2020, and September 30, 2020.

Except for: (i) those classified and non-performing loans & leases discussed above; and (ii) those loans modified under the COVID-19 guidelines of the CARES Act and H.R. 133,above, the Company’s management is not aware of any loans orand leases as of June 30, 2021,2022, 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:

53
The State of California experienced drought conditions from 2013 through most of 2016. After 2016, reasonable levels of rain and snow alleviated drought conditions in our primary service area, but the winterwinters of 2020-2021 wasand 2021-2022 were once again dry. Despite this, the availability of water in our primary service area was not an issue for the 2021 growing season. However, the weather patterns over the past eight 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, ITEM 2. COVID-19 (Coronavirus) Disclosure”)Part I. Note 2).

See “Part I, Item 1A. Risk Factors” in the Company’s 2020 Annual ReportAllowance for Credit Losses—Loans and Leases

The Company maintains an allowance for credit losses (“ACL”) on Form 10-K, and “Management’s Discussion and Analysis - COVID-19 (Coronavirus) Disclosure” for additional informationloans based on current expected credit losses as of the Company’s COVID-19 exposure.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 collateral dependent loans and leases; general reserves for current expected credit losses related to loans and leases that are not collateral dependent; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors. See “Summary of Critical Accounting Policies and Estimates - Allowance for Credit Losses—Loans.”

52
The following table sets forth the activity in our ACL for the periods indicated:

  Six Months Ended June 30, 
(Dollars in thousands) 2022  2021 
Allowance for credit losses:      
Balance at beginning of year 
$
61,007
  
$
58,862
 
Provision / (recapture) for credit losses  
1,107
   
1,250
 
Charge-offs:        
Real estate:        
Commercial  
-
   
-
 
Agricultural  
-
   
-
 
Residential and home equity  
-
   
-
 
Construction  
-
   
-
 
Total real estate  
-
   
-
 
Commercial & industrial  
(276
)
  
-
 
Agricultural  
-
   
-
 
Commercial leases  
-
   
-
 
Consumer and other  
(18
)
  
(16
)
Total charge-offs  
(294
)
  
(16
)
Recoveries:        
Real estate:        
Commercial  
-
   
-
 
Agricultural  
-
   
-
 
Residential and home equity  
119
   
70
 
Construction  
-
   
-
 
Total real estate  
119
   
70
 
Commercial & industrial  
131
   
45
 
Agricultural  
4
   
5
 
Commercial leases  
-
   
-
 
Consumer and other  
6
   
13
 
Total recoveries  
260
   
133
 
Net recoveries / charge-offs  
(34
)
  
117
 
 
        
Balance at end of period 
$
62,080
  
$
60,229
 
 
        
Selected financial information:        
Gross loans held for investment 
$
3,258,400
  
$
3,046,492
 
Average loans  
3,222,763
   
3,062,940
 
Non-performing loans  
3,028
   
548
 
Allowance for credit losses to non-performing loans  
2050.20
%
  
10990.69
%
Net (recoveries)/charge-offs to average loans  
0.00
%
  
0.00
%
Provision for credit losses to average loans  
0.03
%
  
0.04
%
Allowance for credit losses to loans held for investment  
1.91
%
  
1.98
%

53
The following table indicates management’s allocation of the ACL by loan type as of each of the following dates:

  June 30, 2022  December 31, 2021 
(Dollars in thousands) Dollars  
Percent
of Total
  Dollars  
Percent
of Total
 
Allowance for credit losses:            
Real estate:            
Commercial 
$
17,879
   
37.14
%
 
$
28,536
   
35.95
%
Agricultural  
16,837
   
21.78
%
  
9,613
   
20.72
%
Residential and home equity  
6,874
   
11.41
%
  
2,847
   
10.79
%
Construction  
2,876
   
4.99
%
  
1,456
   
5.45
%
Total real estate  
44,466
   
75.32
%
  
42,452
   
72.91
%
Commercial & Industrial  
10,139
   
13.49
%
  
11,489
   
13.17
%
Agricultural  
5,669
   
8.04
%
  
5,465
   
8.52
%
Commercial leases  
1,645
   
2.73
%
  
938
   
2.99
%
Consumer and other  
161
   
0.42
%
  
663
   
2.41
%
Total allowance for credit losses 
$
62,080
   
100.00
%
 
$
61,007
   
100.00
%

Deposits
One
Total deposits were $4.8 billion and $4.64 billion as 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,June 30, 2022 and subsequently deposits, is a significant element in the performance of the Company.

The Company’s deposit balances at September 30,December 31, 2021, have increased $753.6 million or 19.8% compared to September 30, 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, Oakland, Concord and Napa; and (3) borrowers under the PPP depositing loan proceeds into their deposit accounts until those funds are used for operating expenses.Napa.

AlthoughNon-interest bearing demand deposits increased slightly by $0.3 million and were $1.75 billion as of June 30, 2022 and December 31, 2021.  Non-interest bearing deposits were 36.77% of total deposits, have increased 19.8% since Septemberas of June 30, 2020, importantly, low cost transaction accounts have grown at a strong pace2022 and 37.72% as well:

Demand andof December 31, 2021. Interest bearing deposits are comprised of interest-bearing transaction accounts, increased $619 million or 28.8% since September 30, 2020.
Savings and money market accounts, have increased $201 million or 16.7% since September 30, 2020.
Time depositregular savings accounts, have decreased $66.4 million or 14.4% since September 30, 2020.
and certificates of deposit.

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

  Six Months Ended June 30, 
  2022  2021 
(Dollars in thousands) Average Balance  Interest Expense  Average Rate  Average Balance  Interest Expense  Average Rate 
Total deposits:                  
Interest bearing deposits:                  
Demand 
$
1,116,436
   
578
   
0.10
%
 
$
968,496
  
$
576
   
0.12
%
Savings and money market  
1,531,069
   
703
   
0.09
%
  
1,312,122
   
790
   
0.12
%
Certificates of deposit greater than $250,000  
166,725
   
203
   
0.25
%
  
169,967
   
444
   
0.53
%
Certificates of deposit less than $250,000  
221,487
   
192
   
0.17
%
  
243,583
   
461
   
0.38
%
Total interest-bearing deposits  
3,035,717
   
1,676
   
0.11
%
  
2,694,168
   
2,271
   
0.17
%
Non-interest bearing deposits  
1,728,962
           
1,522,029
         
Total deposits 
$
4,764,679
  
$
1,676
   
0.07
%
 
$
4,216,197
  
$
2,271
   
0.11
%

Deposits are gathered from individuals and businesses in our market areas. The interest rates paid are competitively priced for each particular deposit balancesproduct 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 0.07% for the six months ended June 2022 compared with 0.11% for the same period a year ago.

54
The following table shows deposits with a balance greater than $250,000 at SeptemberJune 30, 2021, have increased $508.1 million or 12.5% compared to2022 and December 31, 2020. Interest-bearing transaction accounts increased by $3942021:

  June 30,  December 31, 
(Dollars in thousands) 2022  2021 
Deposits greater than $250,000 
$
2,817,460
  
$
2,708,576
 
Certificates of deposit greater $250,000, by maturity:        
Less than 3 months  
58,135
   
59,591
 
3 months to 6 months  
46,841
   
37,182
 
6 months to 12 months  
50,299
   
59,945
 
More than 12 months  
6,965
   
12,147
 
Total time deposits greater than $250,000 
$
162,240
  
$
168,865
 
Total deposits greater than $250,000 
$
2,979,700
  
$
2,877,441
 

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 June 30, 2022 and December 31, 2021, the Bank had $3.0 million, or 16.6%, savings and money market deposits increased 11.3% or $142.1 million and time deposit accounts decreased by $28 million or 6.6%.of these deposits.

Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings

Lines of creditCredit with the Federal Reserve Bank and the Federal Home Loan Bank are other key sources of funds to support earning assets. These sources of funds are also used to manage the Company’s interest rate risk exposure,exposure; and, as opportunities arise, to borrow and invest the proceeds at a positive spread through the investment portfolio. There were no FHLB Advancesadvances at SeptemberJune 30, 2021,2022 or December 31, 2020, or September 30, 2020.2021. There were no Federal Funds purchased or advances from the FRB at SeptemberJune 30, 2021,2022 or December 31, 2020, or September 30, 2020.

As of September 30, 2021, the Company has additional borrowing capacity of $749.5 million with the Federal Home Loan Bank and $467.8 million with the Federal Reserve Bank. Any borrowings under these lines would be collateralized with loans that have been accepted for pledging at the FHLB and FRB.2021.

Long-Term Subordinated Debentures

On December 17, 2003, the Company raised $10$10.0 million through the sale of subordinated debentures to an offeringoff-balance sheet trust and its sale of trust-preferred securities (“TPS”).securities. See Financial ConditionNote 10. “Long-Term Subordinated Debentures” located in “Item 7. Management’s Discussion8. Financial Statements and Analysis of Financial Condition and Results of Operations” of the Company’s 2020Supplementary Data” in our Annual Report on Form 10-K.10-K filed with the SEC on March 15, 2022. 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 (See “Capital”). capital.

These securities accrue interest at a variable rate based upon 3-month LIBOR plus 2.85%. Interest rates reset quarterly (the next reset is September 17, 2022) and were 2.97%the rate was 4.88% as of SeptemberJune 30, 2021, 3.08%2022 and 2.97% at December 31, 2020, and 3.10% at SeptemberJune 30, 2020.2021. The average rate paid for these securities was 3.62% for the first nine monthshalf of 2021 was 3.06%2022 and 3.83%3.09% for the first nine monthshalf of 2020.in 2021. 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.

5455
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 $454.2$461 million at SeptemberJune 30, 2021, $423.72022, and $463 million at December 31, 2020, and $416.9 million at September 30, 2020.2021.

The Company and the Bank are subject to various regulatory capital requirements administered byadequacy guidelines as outlined under Part 324 of the federal banking agencies.FDIC Rules and Regulations. 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 CompanyCompany’s and the Bank’sBank'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’sCompany and the Bank’sBank's assets, liabilities, and certain off-balance sheetoff-balance-sheet items as calculated under regulatory accounting practices. The Company’sCompany and the Bank’sBank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The minimum capital level requirements applicable to the Company and the Bank 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. A “capital conservation buffer” of 2.5% above each of the regulatory minimum capital ratios, which would result 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 Company’s subordinated debentures issued in 2003 continue to be counted as Tier 1 capital.

The Company believes that it is currently in compliance with all of these capital requirements and that they didwill not result in any restrictions on the Company’s business activity.

In addition,Management believes that the most recent notification fromBank meets the FDICrequirements to be categorized the Bank as “well capitalized” under the FDIC regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changedTo be categorized as well capitalized, the Bank’s category.

(in thousands) Actual  
Current Regulatory
Capital Requirements
  
Well Capitalized
Under Prompt
Corrective Action
 
The Company: Amount  Ratio  Amount  Ratio  Amount  Ratio 
As of September 30, 2021                  
Total Capital Ratio $497,797   13.28% $299,941   8.0%  N/A   N/A 
Common Equity Tier 1 Capital Ratio $440,761   11.76% $168,717   4.5%  N/A   N/A 
Tier 1 Capital Ratio $450,761   12.02% $224,956   6.0%  N/A   N/A 
Tier 1 Leverage Ratio $450,761   8.97% $200,908   4.0%  N/A   N/A 
                         

(in thousands) Actual  
Current Regulatory
Capital Requirements
  
Well Capitalized
Under Prompt
Corrective Action
 
The Bank: Amount  Ratio  Amount  Ratio  Amount  Ratio 
As of September 30, 2021                  
Total Capital Ratio $497,783   13.28% $299,906   8.0% $374,883   10.0%
Common Equity Tier 1 Capital Ratio $450,753   12.02% $168,697   4.5% $243,674   6.5%
Tier 1 Capital Ratio $450,753   12.02% $224,930   6.0% $299,906   8.0%
Tier 1 Leverage Ratio $450,753   8.98% $200,850   4.0% $251,063   5.0%

55
Loans originated under the SBA’s PPP are assigned a risk-weighting of 0% so they have no impact on the Company’s RBC ratios.  However, they are fully includableBank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the tier 1 leverage capital ratio calculation, which has resulted in a short-term reduction in that ratio (until the PPP loans are forgiven).  Had the Company not participated in the PPP program, the net result would have been a 26 basis point improvement to the September 30, 2021 tier 1 leverage capital ratio, increasing the ratio to 9.23%.

As previously discussed (see “Long-Term Subordinated Debentures”), in order to supplement its regulatory capital base, during December 2003 the Company issued $10 million of trust preferred securities. On March 1, 2005, the Federal Reserve Board issued its final rule effective April 11, 2005, concerning the regulatory capital treatment of trust preferred securities (“TPS”) by bank holding companies (“BHCs”). Under the final rule BHCs may include TPS in Tier 1 capital in an amount equal to 25% of the sum of core capital net of goodwill. Any portion of trust-preferred securities not qualifying as Tier 1 capital would qualify as Tier 2 capital subject to certain limitations. The Company has received notification from the Federal Reserve Bank of San Francisco that all of the Company’s trust preferred securities currently qualify as Tier 1 capital.following tables.

The Company is not consideredfollowing table sets forth our capital ratios and the primary beneficiary of this 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.related regulatory guidelines:

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” of the Company’s 2020 Annual Report on Form 10-K for additional information.

There were no stock repurchases during the first nine months of 2021 or 2020. The remaining dollar value of shares that may yet be purchased under the Company’s Common Stock Repurchase Plan is approximately $20 million.

On November 23, 2020, the Board of Directors of Farmers & Merchants Bancorp approved, and all applicable regulators provided statements of non-objection regarding, the Company’s repurchase and retirement of up to $8.5 million of its outstanding common stock during the fourth quarter of 2020 and the first half of 2021. These repurchases were done outside of the Company’s current repurchase plan.  All repurchases were made at the then prevailing market prices. The Company did not repurchase shares during the first nine months of 2021. During the fourth quarter of 2020 the Company repurchased $2.8 million of shares from shareholders.

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” of the Company’s 2020 Annual Report on Form 10-K for further explanation.

The Company did not issue any new shares during the nine months ended September 30, 2021. During the nine months ended September 30, 2020, the Company issued 523 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans. These shares were issued at a price of $770.00 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 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. These judgments govern areas such as the allowance for credit losses, the fair value of financial instruments and accounting for income taxes.
(Dollars in thousands) 
Minimum to be
Categorized as
"Well Capitalized"
  
Minimum to be
Categorized as
"Adequately
Capitalized"
  June 30, 2022  December 31, 2021 
Farmers & Merchants Bancorp            
CET1 capital to risk-weighted assets  
N/A
   
4.50
%
  
11.55
%
  
11.68
%
Tier 1 capital to risk-weighted assets  
N/A
   
6.00
%
  
11.80
%
  
11.94
%
Risk-based capital to risk-weighted assets  
N/A
   
8.00
%
  
13.05
%
  
13.19
%
Tier 1 leverage capital ratio  
N/A
   
4.00
%
  
8.94
%
  
8.92
%
                 
Farmers & Merchants Bank                
CET1 capital to risk-weighted assets  
6.50
%
  
4.50
%
  
11.72
%
  
11.91
%
Tier 1 capital to risk-weighted assets  
8.00
%
  
6.00
%
  
11.72
%
  
11.91
%
Risk-based capital to risk-weighted assets  
10.00
%
  
8.00
%
  
12.97
%
  
13.17
%
Tier 1 leverage capital ratio  
5.00
%
  
4.00
%
  
8.89
%
  
8.91
%

56
For a full discussion of the Company’s critical accounting policies and estimates see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2020 Annual Report on Form 10-K.Off-Balance-Sheet Arrangements

Off Balance Sheet Commitments
In the normal course of business,Off-balance-sheet arrangements are any contractual arrangement to which an unconsolidatedentity is a party, under which the Company enters into financial instrumentshas: (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 off balance sheet risks in order to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit, letters of credit and other types of financial guarantees.Company. The Company had the following off balance sheet commitments as of the dates indicated.

(in thousands) September 30, 2021  December 31, 2020  September 30, 2020 
Commitments to Extend Credit $1,058,760  
$
1,040,844
  $969,258 
Letters of Credit  19,391   
18,846
   19,816 
Performance Guarantees Under Interest Rate Swap Contracts Entered Into Between Our Borrowing Customers and Third Parties  1,808   
2,786
   3,797 
The following table sets forth our off-balance sheet lending commitments as of June 30, 2022:

     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 
$
995,795
  
$
402,558
  
$
410,901
  
$
27,166
  
$
155,170
 
Standby letters of credit  
16,484
   
7,076
   
7,662
   
1,470
   
276
 
Total off-balance sheet commitments 
$
1,012,279
  
$
409,634
  
$
418,563
  
$
28,636
  
$
155,446
 

The Company’sCompany's exposure to credit loss in the event of non-performancenonperformance 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’scustomer'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 12have maturity dates ranging from 1 to 60 months or less.with final expiration in January 2027. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Additionally, the Company maintains a reserve

57
Liquidity

The ability to have readily available funds sufficient to repay maturing liabilities is of primary importance to depositors, creditors and regulators. Our liquidity, represented by cash borrowing lines, federal funds and available for off balance sheet commitments, which totaled $315,000 at September 30, 2021, December 31, 2020, and September 30, 2020. We do not anticipate any material losses assale securities, is a result of 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 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 June 30, 2022:

  June 30, 2022 
(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 
$
796,368
  
$
796,368
  
$
-
  
$
796,368
  
$
1,169,949
 
Federal Reserve BIC  
656,756
   
656,756
   
-
   
656,756
   
869,376
 
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 
$
1,571,124
  
$
1,571,124
  
$
-
  
$
1,571,124
  
$
2,039,325
 

We believe our liquid assets and short-term borrowing credit lines are adequate to meet our cash flow needs for loan funding and deposit cash withdrawal for the foreseeable future. As of June 30, 2022, we had $1.3 billion in cash and unencumbered investment securities; $2.5 million in investment securities and $2.0 billion in loans pledged as collateral on short-term borrowing credit lines. We have the option of either borrowing on our credit lines or selling these transactions.investment securities for cash flow needs.

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 cash flows from or 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 amortization and depreciation.

Our primary investing activities are the origination of loans and purchases and sales of investment securities. As of June 30, 2022, we had outstanding loan commitments of $996 million and outstanding letters of credit of $16.5 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. At June 30, 2022 and 2021, deposits increased $151 million and $352 million compared to December 31, 2021 and 2020, respectively.

58
Item 3.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
Credit risk is the risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract or otherwise fail to perform as agreed. Credit risk is found in all activities where success depends on counterparty, issuer, or borrower performance.

Credit risk in the investment portfolio and correspondent bank accounts is addressed through defined limits in the Company’s policy statements. In addition, certain securities carry insurance to enhance credit quality of the bond.

In order to control credit risk in the loan & lease portfolio 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, 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. 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 considered by management to be adequate to provide for risks inherent in the loan & lease portfolio. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs.

57
The Company’s methodology for assessing 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 310. 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 DFPI 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 450. 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, 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.

58
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 September 30, 2021, was adequate. No assurances can be given that future events may not result in increases in delinquencies, non-performing loans & leases, or net loan & lease charge-offs that would require increases in the provision for credit losses and thereby adversely affect the results of operations.

See “PART 1. – Item 2. - Management’s Discussion and Analysis - COVID-19 (Coronavirus) Disclosure” for a discussion of how COVID-19 may impact credit risk.

Interest Rate Risk
The mismatch between maturities of interest sensitive assets and liabilities results in uncertainty in the Company’s earnings and economic value and is referred to as 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 measures interest rate risk in terms of potential impact on both its economic value and earnings. The methods for governing the amount of 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 between earning assets and interest-bearing liabilities for which repricing opportunities will occur. A positive difference, or Gap, indicates that earning assets will reprice faster than interest-bearing liabilities. This will generally produce a greater net interest margin during periods of rising interest rates and a lower net interest margin during periods of declining interest rates. Conversely, 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 proportionate to the magnitude of changes in the rate paid for deposits. Consequently, changes in interest rates do not necessarily result in an increase or decrease 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 dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. The sensitivity of the Company’s net interest income is measured over a rolling one-year horizon.

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 September 30, 2021, 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 3.4% if rates increase by 200 basis points and a decrease in net interest income of 0.9% if rates decline 100 basis points. Comparatively, at December 31, 2020, the Company’s estimated net interest income sensitivity to changes in interest rates, as a percent of net interest income was a decrease in net interest income of .03% if rates increase by 200 basis points and a decrease in net interest income of .2% if rates decline 100 basis points.

59
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.

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 sourcesassessment of liquidity include (see “Item 8. Financial Statementsmarket risk at June 30, 2022 indicates there have been no material changes in the quantitative and Supplementary Data – Consolidated Statements of Cash Flows” ofqualitative disclosures from those made in the Company’s 20 Annual Report on Form 10-K) 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 $118 million and repurchase lines of $112 million with major banks. As of September 30, 2021, the Company has additional borrowing capacity of $749.5 million10-K filed with the FHLB and $467.8 million with the FRB. Borrowings under these lines are collateralized with loans or securities that have been accepted for pledging at the FHLB and FRB.SEC on March 15, 2022.

At September 30, 2021, the Company had available sources of liquidity, which included cash and cash equivalents and unpledged investment securities AFS of approximately $1.8 billion, which represents 34.7% of total assets.

See “PART 1. – Item 2. - Management’s Discussion and Analysis - COVID-19 (Coronavirus) Disclosure” for a discussion of how COVID-19 may impact liquidity risk.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure that 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 designing these controls and procedures, management recognizes that they can only provide reasonable assurance of achieving the desired control objectives. Management also evaluated the cost-benefit relationship of possible controls and procedures.

As of the end of the period covered by this report, the Company carried out an evaluation of the effectiveness of Company’s disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer, the Chief Financial Officer and other senior management of the Company. The evaluation was based, in part, upon reports and affidavits provided by a number of executives. Based on the foregoing, the Company’s Chief Executive Officer and the Chief Financial Officer concluded thathave reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures were effective.(as required by Exchange Act Rules 240.13a-15(b) and 15d-14(a)) at June 30, 2022. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective and timely, providing them with material information relating to the Company required to be disclosed in the reports the Company files or submits under the Exchange Act.

Changes in Internal Controls

There have not been no significantany changes in the Company’s internal controls or in other factors that could significantly affect the internal controlscontrol over financial reporting subsequent(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the six months ended June 30, 2022, to which this report relates that have materially affected, or are reasonably likely to materially affect, the date the Company completed its evaluation.Company’s internal control over financial reporting.

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PART II.II – OTHER INFORMATION

Item 1.Legal Proceedings

Certain lawsuitsThe Company is involved in various claims, legal actions, and claims arisingcomplaints that arise in the ordinary course of business have been filedbusiness. In the Company’s opinion, all such matters are adequately covered by insurance, are without merit 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,kind, or involve such amounts, that unfavorable disposition would not have a material adverse effect on its consolidatedthe financial statements.condition or results of operations of the Company.

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

Item 1A.Risk Factors

See “Item 1A. Risk Factors” in the Company’s 2020 Annual Report to Shareholders on Form 10-K. In management’s opinion, with the exception of the disclosure regarding COVID-19 (see “PART I. – Item 2. - Management’s Discussion and Analysis - COVID-19 Disclosure”), thereThere have been no material changes in the risk factors sincepreviously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the filing of the 2020 Form 10-K.year ended December 31, 2021.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

On November 15, 2021, the Board of Directors reauthorized the Company’s share repurchase program for up to $20.0 million of the Company’s common stock (“Repurchase Plan”), representing approximately 4% of outstanding shareholders’ equity.  Repurchases by the Company under the Repurchase Plan may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means.

There were no shares repurchased by Farmers & Merchants Bancorp duringDuring the first nine monthshalf of 2021. The remaining dollar value of2022 the Company repurchased 12,456 shares that may yet be purchased under the Company’s Stock Repurchase Plan, is approximately $20.0for a total of $11.845 million.  All of these shares were purchased at prices ranging from $925.00 to $966.00 per share, based upon the then current price on the OTCQX.

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”.

Item 3.Defaults Uponupon Senior Securities

Not applicableApplicable

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Item 4.Mine Safety Disclosures

Not applicableApplicable

Item 5.Other Information

Not Applicable

None

Item 6.Exhibits
List of Financial Statements and Financial Statement Schedules
(a)
The following documents are filed as a part of this Quarterly Report on Form 10-Q:
(1)
Financial Statements and
(2)
Financial Statement schedules required to be filed by Item 1 of this Quarterly Report on Form 10-Q.
(3)
The following exhibits are required by Item 601 of Regulation S-K and are included as part of this Quarterly Report on Form 10-Q:


Exhibit		Exhibit  No.
NumberDescription

  

31(a)
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*

31(b)
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32
CertificationsCertification 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.INSInline 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.SCHInline XBRL Taxonomy Extension Schema Document.

101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.

101.LABInline XBRL Taxonomy Extension Label Linkbase Document.

101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document.

104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

*Filed herewith

6160
SIGNATURES

Pursuant to the requirementrequirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
FARMERS & MERCHANTS BANCORP
  
Date:  NovemberAugust 8, 20212022
/s/ Kent A. Steinwert

 
Kent A. Steinwert
 
Director, Chairman, President
& and Chief Executive Officer
(Principal Executive Officer)

Date:  August 8, 2022
Date:  November 8, 2021
/s/ Stephen W. Haley
 
Stephen W. Haley
 Stephen W. Haley
Executive Vice President and
Chief Financial Officer
(Principal Financial & Accounting Officer)


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