PART 1. FINANCIAL INFORMATION

Item 1.

Financial Statements

FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands, except share and per share amounts)	March 31, 2022			December 31, 2021			September 30, 2022			December 31, 2021
ASSETS
Cash and due from banks	$	68,774		$	52,499		$	82,932		$	52,499
Interest bearing deposits with banks		772,312			662,961			799,951			662,961
Total cash and cash equivalents		841,086			715,460			882,883			715,460
Securities available for sale, at fair value		251,375			270,454
Securities held to maturity, at amortized cost		876,257			737,052
Securities available-for-sale, at fair value								177,454			270,454
Securities held-to-maturity, fair value $690,922 and $725,841, respectively								852,665			737,052
Allowance for credit losses								(393	)		-
Total investment securities		1,127,632			1,007,506			1,029,726			1,007,506
Non-marketable securities		15,549			15,549			15,549			15,549
Loans and leases held for investment		3,237,619			3,237,177			3,323,862			3,237,177
Allowance for credit losses		(61,032	)		(61,007	)		(63,617	)		(61,007	)
Loans held for investment, net		3,176,587			3,176,170			3,260,245			3,176,170
Bank-owned life insurance		71,953			71,411			72,566			71,411
Premises and equipment, net		47,423			47,730			49,183			47,730
Deferred income tax assets		30,361			25,542			34,411			25,542
Accrued interest receivable		14,473			18,098			20,069			18,098
Goodwill		11,183			11,183			11,183			11,183
Other intangibles		3,254			3,402			2,957			3,402
Other real estate owned		873			873			873			873
Other assets		83,802			84,796			87,136			84,796
TOTAL ASSETS	$	5,424,176		$	5,177,720		$	5,466,781		$	5,177,720

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing	$	1,764,857		$	1,750,330
Non-interest bearing							$	1,802,623		$	1,750,330
Interest bearing:
Demand		1,124,470			1,097,337			1,158,588			1,097,337
Savings and money market		1,557,332			1,400,000			1,587,662			1,400,000
Certificate of deposits		390,780			392,485
Certificates of deposit								360,384			392,485
Total interest bearing		3,072,582			2,889,822			3,106,634			2,889,822
Total deposits		4,837,439			4,640,152			4,909,257			4,640,152
Subordinated debentures		10,310			10,310			10,310			10,310
Interest payable and other liabilities		111,714			64,122			79,036			64,122
TOTAL LIABILITIES		4,959,463			4,714,584			4,998,603			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 785,146 and 789,646 outstanding at March 31, 2022 and December 31, 2021, respectively		8			8
Additional paid in capital		73,264			77,516
Preferred shares, no par value, 1,000,000 shares authorized and, none issued or outstanding								-			-
Common shares, $0.01 par value, 7,500,000 authorized 770,822 and 789,646 outstanding at September 30, 2022 and December 31, 2021, respectively								8			8
Additional paid-in capital								59,611			77,516
Retained earnings		404,389			387,331			436,258			387,331
Accumulated other comprehensive (loss), net of taxes		(12,948	)		(1,719	)
Accumulated other comprehensive (loss) / income, net of taxes								(27,699	)		(1,719	)
TOTAL SHAREHOLDERS’ EQUITY		464,713			463,136			468,178			463,136
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	5,424,176		$	5,177,720		$	5,466,781		$	5,177,720

Table of Contents

~~FARMERS & MERCHANTS BANCORP~~

~~UNAUDITED CONSOLIDATED~~ ~~STATEMENTS OF INCOME~~

Three Months Ended
March 31,

(Dollars in thousands, except share and per share amounts) 2022
2021

Interest income
Interest and fees on loans and leases $ 37,433
$ 37,087

Interest and dividends on investments 5,295 4,417
Interest on deposits with others 366 103
Total interest income 43,094 41,607

Interest expense
Deposits 803 1,237
Subordinated debentures 82 79
Total interest expense 885 1,316
Net interest income 42,209 40,291
Provision for credit losses 0 1,250
Net interest income after provision for credit losses 42,209 39,041
Noninterest income
Card processing 1,737 1,579
Service charges on deposit accounts 850 638
Increase in cash surrender value of BOLI 542 526
Gain on sale of investment securities 0 1,840
Net gain/(loss) on deferred compensation benefits 412 3,540
Other 771 1,412
Total noninterest income 4,312 9,535
Noninterest expense
Salaries and employee benefits 16,784 16,740
Net gain/(loss) on deferred compensation benefits 412 3,540
Occupancy 1,154 1,231
Data processing 1,215 1,224
FDIC insurance 349 287
Marketing 316 188
Legal 279 111
Other 3,279 3,042
Total noninterest expense 23,788 26,363
INCOME BEFORE INCOME TAXES 22,733 22,213
Income tax expense 5,675 5,500
NET INCOME $ 17,058 $ 16,713

Earnings per common share:
Basic $ 21.70 $ 21.17
Diluted $ 21.70 $ 21.17

Weighted average number of common shares
Basic 786,096 789,646
Diluted 786,096 789,646

~~Table of Contents~~

FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE~~ INCOME

	Three Months Ended September 30,					Nine Months Ended September 30,
(Dollars in thousands, except share and per share amounts)	2022			2021		2022			2021
Interest income
Interest and fees on loans and leases	$	41,868		$	36,088	$	117,871		$	109,839
Interest and dividends on investments		5,686			3,925		16,697			12,664
Interest on deposits with others		4,159			328		5,934			595
Total interest income		51,713			40,341		140,502			123,098
Interest expense
Deposits		1,122			929		2,798			3,200
Subordinated debentures		134			78		319			236
Total interest expense		1,256			1,007		3,117			3,436
Net interest income		50,457			39,334		137,385			119,662
Provision for credit losses		1,500			-		3,000			1,250
Net interest income after provision for credit losses		48,957			39,334		134,385			118,412
Non-interest income
Card processing		1,791			1,788		5,375			5,173
Service charges on deposit accounts		638			808		2,318			2,125
Increase in cash surrender value of BOLI		566			549		1,668			1,616
Net (loss)/gain on sale of investment securities available-for-sale		(2,987	)		-		(2,985	)		2,554
Net gain/(loss) on deferred compensation benefits		352			615		(227	)		1,828
Other		1,199			857		3,234			2,996
Total non-interest income		1,559			4,617		9,383			16,292
Non-interest expense
Salaries and employee benefits		15,994			14,453		49,181			47,375
Net gain/(loss) on deferred compensation benefits		352			615		(227	)		1,828
Occupancy		1,196			1,145		3,500			3,554
Data Processing		1,250			1,251		3,698			3,688
FDIC insurance		366			317		1,076			902
Marketing		303			63		959			669
Legal		49			85		733			485
Other		4,865			2,656		12,274			9,231
Total non-interest expense		24,375			20,585		71,194			67,732
INCOME BEFORE INCOME TAXES		26,141			23,366		72,574			66,972
Income tax expense		6,605			5,864		17,537			16,604
NET INCOME	$	19,536		$	17,502	$	55,037		$	50,368

Earnings per common share:
Basic	$	25.20		$	22.16	$	70.47		$	63.79
Diluted	$	25.20		$	22.16	$	70.47		$	63.79

Weighted average number of common shares
Basic		775,109			789,646		780,988			789,646
Diluted		775,109			789,646		780,988			789,646

Three Months Ended
March 31,

(Dollars in thousands) 2022
2021

Net income $ 17,058 $ 16,713
Other comprehensive income
Unrealized holding (losses)/gains on securities available for sale (15,865 ) (18,566 )
Reclassification adjustment for (gains)/losses on available for sale securities 0 (1,840 )
Amortization of unrealized loss on securities transferred to held to maturity (77 ) (58 )
Net unrealized holding (losses)/gains on securities available for sale (15,942 ) (20,464 )
Income tax benefit/(expense) 4,713 6,049
Other comprehensive (loss)/income, net of tax (11,229 ) (14,415 )
Total comprehensive income $ 5,829 $ 2,298

Table of Contents

FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2022			2021			2022			2021
Net income	$	19,536		$	17,502		$	55,037		$	50,368
Other comprehensive income
Unrealized holding (losses)/gains on securities available-for-sale		(12,378	)		(2,237	)		(39,677	)		(16,846	)
Reclassification adjustment for (gains)/losses on available-for-sale securities		2,987			-			2,985			(2,554	)
Amortization of unrealized loss on securities transferred to held-to-maturity		(52	)		(135	)		(193	)		(373	)
Net unrealized holding (losses)/gains on securities available-for-sale		(9,443	)		(2,372	)		(36,885	)		(19,773	)
Income tax benefit/(expense)		2,792			702			10,905			5,846
Other comprehensive (loss)/income, net of tax		(6,651	)		(1,670	)		(25,980	)		(13,927	)
Total comprehensive income	$	12,885		$	15,832		$	29,057		$	36,441

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FARMERS & MERCHANTS BANCORP

~~UNAUDIT~~ED UNAUDITEDCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the three and nine months ended September 30, 2022 and 2021

(Dollars in thousands, except share and per share amounts)	Common Shares			Amount		Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive (Loss)/Income			Total
Balance as of July 1, 2022		777,190		$	8	$	65,671		$	416,722	$	(21,048	)	$	461,353
Net income		-			-		-			19,536		-			19,536
Other comprehensive loss, net of tax		-			-		-			-		(6,651	)		(6,651	)
Repurchase of common stock		(6,368	)		-		(6,060	)		-		-			(6,060	)
Balance as of September 30, 2022		770,822		$	8	$	59,611		$	436,258	$	(27,699	)	$	468,178

Balance as of July 1, 2021		789,646		$	8	$	77,516		$	360,021	$	814		$	438,359
Net income		-			-		-			17,502		-			17,502
Other comprehensive loss, net of tax		-			-		-			-		(1,670	)		(1,670	)
Balance as of September 30, 2021		789,646		$	8	$	77,516		$	377,523	$	(856	)	$	454,191

(Dollars in thousands, except share and per 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		-			-		-			55,037			-			55,037
Other comprehensive loss, net of tax		-			-		-			-			(25,980	)		(25,980	)
Cash dividends declared ($7.85 per share)		-			-		-			(6,110	)		-			(6,110	)
Repurchase of common stock		(18,824	)		-		(17,905	)		-			-			(17,905	)
Balance as of September 30, 2022		770,822		$	8	$	59,611		$	436,258		$	(27,699	)	$	468,178

Balance as of January 1, 2021		789,646		$	8	$	77,516		$	333,070		$	13,071		$	423,665
Net income		-			-		-			50,368			-			50,368
Other comprehensive loss, net of tax		-			-		-			-			(13,927	)		(13,927	)
Cash dividends declared ($7.50 per share)		-			-		-			(5,922	)		-			(5,922	)
Cash dividends returned		-			-		-			7			-			7
Balance as of September 30, 2021		789,646		$	8	$	77,516		$	377,523		$	(856	)	$	454,191

(Dollars in thousands, except share amounts)
Common
Shares
Amount
Additional
Paid In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
(Loss)
Total
Balance as of December 31, 2020 789,646 $ 8 $ 77,516 $ 333,070 $ 13,071 $ 423,665
Net income - 0 0 16,713 0 16,713
Other comprehensive (loss), net of tax - 0 0 0 (14,415 ) (14,415 )
Cash dividends returned - 0 0 7 0 7
Balance as of March 31, 2021
789,646 $ 8 $ 77,516 $ 349,790 $ (1,344 ) $ 425,970

Balance as of December 31, 2021
789,646 $ 8 $ 77,516 $ 387,331 $ (1,719 ) $ 463,136
Net income - 0 0 17,058 0 17,058
Other comprehensive (loss), net of tax - 0 0 0 (11,229 ) (11,229 )
Repurchase of common stock (4,500 ) 0 (4,252 ) 0 0 (4,252 )
Balance as of March 31, 2022
785,146 $ 8 $ 73,264 $ 404,389 $ (12,948 ) $ 464,713

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FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended March 31,						Nine Months Ended September 30,
(Dollars in thousands)	2022			2021			2022			2021
Cash flows from operating activities:
Net income	$	17,058		$	16,713		$	55,037		$	50,368
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		0			1,250			3,000			1,250
Depreciation and amortization		656			660			1,849			1,971
Net amortization of securities premiums and discounts		176			407			341			1,133
Increase in cash surrender value of BOLI		(542	)		(527	)		(1,666	)		(1,616	)
(Increase)/decrease in deferred income taxes, net		(113	)		4,714
Gains on sale of securities available for sale		0			(1,840	)
Decrease /(increase) in deferred income taxes, net								2,356			(456	)
Loss/(gains) on sale of securities available-for-sale								2,985			(2,554	)
Net changes in:
Other assets		4,709			6,258			(2,362	)		(8,772	)
Other liabilities		6,966			1,386			18,134			10,738
Net cash provided by operating activities		28,910			29,021			79,674			52,062
Cash flows from investing activities:
Net change in loans held for investment		(374	)		(11,340	)		(86,401	)		(39,956	)
Purchase of available for sale securities		(10,067	)		(199,440	)
Purchase of held to maturity securities		(118,162	)		(3,211	)
Maturities/sales of available for sale securities		13,097			110,388
Maturities of held to maturity securities		19,516			3,930
Purchase of available-for-sale securities								(10,135	)		(257,228	)
Purchase of held-to-maturity securities								(168,634	)		(194,332	)
Proceeds from sales, maturities, calls and pay downs of available-for-sale securities								62,979			397,454
Proceeds from maturities, calls and pay downs of held-to-maturity securities								52,884			29,042
Purchase of premises and equipment		(363	)		(100	)		(3,318	)		(1,001	)
Purchase of other investments		0			(632	)		(5,300	)		(4,516	)
Redemption of other investments								-			2,556
Proceeds from bank-owned life insurance								511			-
Proceeds from sale of assets		34			0			73			635
Net cash used in investing activities		(96,319	)		(100,405	)		(157,341	)		(67,346	)
Cash flows from financing activities:
Net increase in deposits		197,287			180,947			269,105			508,127
Net cash used in share repurchase program		(4,252	)		0
Cash dividends returned		0			7
Cash dividends paid								(6,110	)		(5,915	)
Net cash used in share repurchase of common stock								(17,905	)		-
Net provided by financing activities		193,035			180,954			245,090			502,212
Net change in cash and cash equivalents		125,626			109,570			167,423			486,928
Cash and cash equivalents, beginning of period		715,460			383,837			715,460			383,837
Cash and cash equivalents, end of period	$	841,086		$	493,407		$	882,883		$	870,765

Supplemental disclosures of cash flow information:
Cash paid for interest	$	951		$	1,943		$	3,832		$	4,369
Income taxes paid							$	11,451		$	22,530

Supplemental disclosures of non-cash transactions:
Investment securities available for sale transferred to held to maturity	$	0		$	316,925
Security purchases settled in subsequent period	$	(40,626	)	$	0
Unrealized losses on securities available for sale	$	(15,865	)	$	(20,406	)
Investment securities available-for-sale transferred to held-to-maturity							$	-		$	316,925
Lease Liabilities Arising from Obtaining Right-of-Use Assets							$	-		$	302

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS

Note 1—Basis of Presentation and Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements include the accounts of Farmers & Merchants Bancorp (“FMCB” or “Bancorp”), a bank holding company incorporated in the State of Delaware and its wholly owned subsidiary, Farmers & Merchants Bank of Central California (“FMB” or “Bank”) collectively (the “Company”).

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In preparing these financial statements, the Company has evaluated events and transactions subsequent to ~~March 31,~~September 30, 2022 for potential recognition or disclosure. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and note disclosures have been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements. Certain reclassifications have been made to the 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 financial statements in conformity with GAAP requires management to make estimates and assumptions 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 inherent in those policies, are significant to an understanding of Bank’s financial statements. These policies relate to: (i) the methodology 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 valuation of intangibles, such as goodwill and core deposit intangibles (“CDI”); (v) the valuation of other real estate owned (“OREO”); and (vi) the valuation or recognition of deferred tax assets and liabilities. These policies and judgments, estimates and assumptions are described in greater detail in subsequent notes to the Consolidated 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.

Accounting Standards Pending Adoption — 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. 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.

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

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.

In June 2022, the FASB issued guidance within ASU 2022-03, Fair Value Measurement of Equity Securities Subject to contractual Sale Restrictions. The amendments in this ASU affect all entities that have investments in equity securities measured at fair value that are subject to a contractual sale restriction. These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.

The amendments in this ASU are effective for fiscal years, beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The adoption of this ASU is not expected to have 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.

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

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

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~~CECL 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 is to provide financial statement users with more decision-useful information about the expected credit losses on financial 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 asset not excluded from the scope that have the contractual right to receive cash. The ASU replaces the incurred loss impairment methodology in previous GAAP with CECL, a methodology that reflects current expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the 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 that affect the collectability of the reported amount. This ASU broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements.

The following table illustrates the pre-tax impact of the adoption of this ASU:

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

1011

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

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

Subsequent events — The Company has evaluated events occurring subsequent to ~~March 31,~~September 30, 2022 for disclosure in the consolidated financial statements.

Note 2—Risks and Uncertainties

The COVID-19 pandemic has affected the economy and businesses throughout the U.S., in California and in the markets served by the Company. Designated as an “essential business”, the Company’s subsidiary, Farmers & Merchants Bank of Central California, has kept all branches open and maintained regular business hours during the COVID-19 pandemic. Our staffing levels have remained stable during the COVID-19 pandemic.

Through the CARES Act and H.R. 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 ~~we expect~~ the effects of COVID-19 ~~could~~might still have an adverse future impact on our business, financial condition and results of operations, we are unable to predict the full extent or nature of these impacts at the current time.

1112

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

~~Note~~Note 3—Investment Securities

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

Available-for-Sale Securities			Gross Unrealized								Gross Unrealized
(Dollars in thousands)	Amortized Cost		Gains		Losses		Fair Value		Amortized Cost		Gains		Losses		Fair Value
As of March 31, 2022
As of September 30, 2022
U.S. Treasury notes	$	9,955	$	41	$	0	$	9,996	$	4,979	$	-	$	38	$	4,941
U.S. Government-sponsored securities		5,771		54		36		5,789		4,695		27		24		4,698
Mortgage-backed securities⁽¹⁾		241,585		370		18,054		223,901		194,600		16		38,163		156,453
Collateralized mortgage obligations⁽¹⁾		1,549		0		5		1,544		1,499		-		41		1,458
Corporate securities		10,051		0		216		9,835		10,046		-		452		9,594
Other		310		0		0		310		310		-		-		310
Total available-for-sale securities	$	269,221	$	465	$	18,311	$	251,375	$	216,129	$	43	$	38,718	$	177,454

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

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

~~Table of Contents~~

~~FARMERS & MERCHANTS BANCORP~~

~~NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)~~

~~Note 3—Investment Securities—Continued~~

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

Held-to-Maturity Securities
Gross Unrealized

(Dollars in thousands) Amortized
Cost Gains Losses
Fair
Value

As of March 31, 2022
Municipal securities $ 63,581 $ 162 $ 65 $ 63,678
Mortgage-backed securities⁽¹⁾
695,249 0 60,650 634,599
Collateralized mortgage obligations⁽¹⁾
117,427 0 4,795 112,632
Total held-to-maturity securities $ 876,257 $ 162 $ 65,510 $ 810,909

Held-to-Maturity Securities			Gross Unrealized
(Dollars in thousands)	Amortized Cost		Gains		Losses		Fair Value		Allowance for Credit Losses
As of September 30, 2022
Municipal securities	$	60,827	$	-	$	735	$	60,092	$	393
Mortgage-backed securities⁽¹⁾		709,541		-		145,836		563,705		-
Collateralized mortgage obligations⁽¹⁾		82,297		-		15,172		67,125		-
Total held-to-maturity securities	$	852,665	$	-	$	161,743	$	690,922	$	393

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

Held-to-Maturity Securities
Gross Unrealized

(Dollars in thousands)
Amortized
Cost
Gains Losses
Fair
Value

As of December 31, 2021
Municipal securities $ 66,496 $ 701 $ 0 $ 67,197
Mortgage-backed securities⁽¹⁾
596,775 45 11,764 585,056
Collateralized mortgage obligations⁽¹⁾
73,781 36 229 73,588
Total held-to-maturity securities $ 737,052 $ 782 $ 11,993 $ 725,841

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

Note 3—Investment Securities—Continued

			Gross Unrealized
(Dollars in thousands)	Amortized Cost		Gains		Losses		Fair Value		Allowance for Credit Losses
As of December 31, 2021
Municipal securities	$	66,496	$	701	$	-	$	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.

~~Table of Contents~~

~~FARMERS & MERCHANTS BANCORP~~

~~NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)~~

~~Note 3—Investment Securities—Continued~~

As of ~~March 31,~~September 30, 2022, the Company held ~~585~~200 available-for-sale investment securities of which ~~102~~86 were in an unrealized loss position for less than twelve months and ~~100~~77 securities were in an unrealized loss position for twelve months or ~~more.~~more without an allowance for credit losses. Management ~~periodically~~ evaluates ~~each~~the available-for-sale investment ~~security for other-than-temporary impairment~~securities in an unrealized loss position, 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.

The following tables show the gross unrealized losses for available-for-sale securities, for which an allowance for credit losses has not been recorded, that are less than 12 months and 12 months or more:

Available-for-Sale Securities						As of September 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 September 30, 2022
U.S. Treasury notes	$	4,941		$	38		$	-		$	-		$	4,941		$	38
U.S. Government-sponsored securities		128			1			1,409			23			1,537			24
Mortgage-backed securities⁽¹⁾		37,141			1,928			117,680			36,235			154,821			38,163
Collateralized mortgage obligations⁽¹⁾		1,458			41			-			-			1,458			41
Corporate securities		9,594			452			-			-			9,594			452
Total available-for-sale securities	$	53,262		$	2,460		$	119,089		$	36,258		$	172,351		$	38,718

Available-for-Sale Securities As of March 31, 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 March 31, 2022

U.S. Government-sponsored securities $ 15 $ 0 $ 1,992 $ 36 $ 2,007 $ 36
Mortgage-backed securities⁽¹⁾
81,711 3,753 114,391 14,301 196,102 18,054
Collateralized Mortgage Obligations⁽¹⁾
1,544 5 0 0 1,544 5
Corporate securities 9,835 216 0 0 9,835 216
Total available-for-sale securities $ 93,105 $ 3,974 $ 116,383 $ 14,337 $ 209,488 $ 18,311

^⁽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	$	-	$	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

Available-for-Sale Securities 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.

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

Note 3—Investment Securities—Continued

The following ~~tables show~~table presents the ~~gross unrealized~~activity in the allowance for credit losses for held-to-maturity debt securities ~~that are less than 12~~by major type for the nine months ~~and 12 months or more:~~ended September 30, 2022.

	For the Nine Months Ended September 30, 2022
(Dollars in thousands)	Municipal securities		Mortgage-backed securities		Collateralized Mortgage obligations		Total
Allowance for credit losses - securities
Beginning Balance	$	-	$	-	$	-	$	-
Provision for credit losses		393		-		-		393
Ending Balance	$	393	$	-	$	-	$	393

Held-to-Maturity Securities As of March 31, 2022
(Dollars in thousands) Less Than 12 Months 12 Months or More Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses

Fair
Value

Unrealized
Losses

As of March 31, 2022

Municipal securities $ 1,034 $ 65 $ 0 $ 0 $ 1,034 $ 65
Mortgage-backed securities⁽¹⁾
398,924 31,318 234,460 29,332 633,384 60,650
Collateralized mortgage obligations⁽¹⁾
73,221 4,795 0 0 73,221 4,795
Total held-to-maturity securities $ 473,179 $ 36,178 $ 234,460 $ 29,332 $ 707,639 $ 65,510

⁽¹⁾~~All mortgage-backed~~Management measures expected credit losses on held-to-maturity (“HTM”) debt securities ~~and~~ ~~collateralized mortgage obligations~~ ~~were~~ on a collective basis by major security type. The Company’s HTM portfolio contains securities issued by ~~an agency or~~U.S. government ~~sponsored entity of~~entities and agencies and municipalities. The Company uses industry historical credit loss information adjusted for current conditions to establish the ~~U.S. Government~~.allowance for credit losses on its HTM municipal bond portfolio.

Held-to-Maturity Securities As of December 31, 2021
(Dollars in thousands) Less Than 12 Months 12 Months or More Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses

Fair
Value

Unrealized
Losses

As of December 31, 2021

Mortgage-backed securities⁽¹⁾
$ 570,119 $ 11,764 $ 0 $ 0 $ 570,119 $ 11,764
Collateralized mortgage obligations⁽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⁾~~All mortgage-backed securities~~ ~~and~~ ~~collateralized mortgage obligations~~ ~~were issued by an agency or government sponsored entity of the U.S. Government~~.

U.S. Government-sponsored securities. The unrealized losses were caused by interest rate fluctuations. The decline in market value is attributable to changes in interest rates and not credit quality. ~~The Company does not intend to sell the investments and it is more likely than not that the Company will not be requied to sell the investments before recovery of their amortized cost basis.~~

Mortgage-backed securities and collateralized mortgage obligations. The unrealized losses were caused by interest rate fluctuations. The contractual cash flows of these investments are guaranteed by an agency or government-sponsored entity of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. The decline in market value is attributable to changes in interest rates and not credit quality. ~~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.~~

Corporate securities. 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. ~~The Company does not intend to sell the securities and it is more likely than not that the Company would not have to sell the securities before recovery of their amortized cost basis.~~

~~Table of Contents~~

~~FARMERS & MERCHANTS BANCORP~~

~~NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)~~

~~Note 3—Investment Securities—Continued~~

Obligations of states and political subdivisions.The Company’s bank-qualified municipal bond portfolio ~~was~~is comprised of two different segments: (1) publicly issued debt of $18.4 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 $42.4 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 Company does not intend to sell the held-to-maturity investments and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost basis.

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

Note 3—Investment Securities—Continued

The amortized cost and estimated fair values of investment securities at ~~March 31,~~September 30, 2022 by contractual final maturity are shown in the following ~~tables:~~table:

	Available-for-Sale				Held-to-Maturity				Available-for-Sale				Held-to-Maturity
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
(Dollars in thousands)									Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities maturing in:
One year or less	$	10,268	$	10,310	$	908	$	908	$	5,312	$	5,274	$	883	$	883
After one year through five years		5,160		5,073		7,118		7,113		21,418		20,600		7,484		7,324
After five years through ten years		5,455		5,326		16,690		16,846		25,492		23,196		28,907		26,852
After ten years		5,204		5,221		38,865		38,811		163,907		128,384		815,391		655,863
	$	26,087	$	25,930	$	63,581	$	63,678

Securities not due at a single maturity date:
Mortgage-backed securities		241,585		223,901		695,249		634,599
Collateralized Mortgage Obligations		1,549		1,544		117,427		112,632
Total	$	269,221	$	251,375	$	876,257	$	810,909	$	216,129	$	177,454	$	852,665	$	690,922

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

The 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 ~~rating.~~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 ~~March 31,~~September 30, 2022:

	Available-for-Sale						Held-to-Maturity						Available-for-Sale						Held-to-Maturity
	Fair Value						Amortized Cost						Fair Value						Amortized Cost
(Dollars in thousands)	AAA/AA/A		BBB/BB/B		Not Rated		AAA/AA/A		BBB/BB/B		Not Rated		AAA/AA/A		BBB/BB/B		Not Rated		AAA/AA/A		BBB/BB/B		Not Rated
March 31, 2022
September 30, 2022

Breakdown by Category:
U.S. Treasury notes⁽¹⁾	$	0	$	0	$	9,996	$	0	$	0	$	0	$	4,941	$	-	$	-	$	-	$	-	$	-
U.S. Government-sponsored securities		0		0		5,789		0		0		0		-		-		4,698		-		-		-
Mortgage-backed securities⁽¹⁾		0		0		223,901		0		0		695,249		-		-		156,453		-		-		709,541
Collateralized mortgage obligations⁽¹⁾		0		0		1,544		0		0		117,427		-		-		1,458		-		-		82,297
Obligations of States and Political Subdivisions		0		0		0		19,715		134		43,732
Municipal securities														-		-		-		18,025		386		42,416
Corporate securities		9,835		0		0		0		0		0		4,795		4,799		-		-		-		-
Other		0		0		310		0		0		0		-		-		310		-		-		-

Total Investment Grade	$	9,835	$	0	$	241,540	$	19,715	$	134	$	856,408	$	9,736	$	4,799	$	162,919	$	18,025	$	386	$	834,254

⁽¹⁾All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. ~~Government. All U.S. Treasury notes are backed by the “full faith and credit” of the U.S. Government.~~government.

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

(Dollars in thousands)	Gross Proceeds		Gross Gains		Gross Losses
Nine months ended September 30, 2022	$	31,394	$	2	$	2,987
Nine months ended September 30, 2021	$	301,320	$	5,570	$	3,016

(Dollars in thousands)
Gross
Proceeds

Gross
Gains

Gross
Losses

Three months ended March 31, 2022 $ 2,190 $ 0 $ 0
Three months ended March 31, 2021 $ 63,788 $ 1,840 $ 0

Pledged Securities

As of ~~March 31,~~September 30, 2022, securities carried at ~~$490~~$493.8 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 $426 million at December 31, 2021.

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

Note 4—Loans and Leases

Loans and leases as of the dates indicated consisted of the following:

(Dollars in thousands)	March 31, 2022			December 31, 2021			September 30, 2022			December 31, 2021
Loans and leases held-for-investment, net
Loans and leases held for investment, net
Real estate:
Commercial	$	1,172,804		$	1,167,516		$	1,246,805		$	1,167,516
Agricultural		695,565			672,830			722,448			672,830
Residential and home equity		359,214			350,581			377,249			350,581
Construction		204,794			177,163			169,624			177,163
Total real estate		2,432,377			2,368,090			2,516,126			2,368,090
Commercial & industrial		437,199			427,799			454,185			427,799
Agricultural⁽¹⁾		251,469			276,684
Agricultural								260,296			276,684
Commercial leases		92,445			96,971			94,089			96,971
Consumer and other⁽²⁾⁽¹⁾		33,255			78,367			7,776			78,367
Total gross loans and leases		3,246,745			3,247,911			3,332,472			3,247,911
Unearned income		(9,126	)		(10,734	)		(8,610	)		(10,734	)
Total net loans and leases		3,237,619			3,237,177			3,323,862			3,237,177
Allowance for credit losses		(61,032	)		(61,007	)		(63,617	)		(61,007	)
Total loans and leases held-for-investment, net	$	3,176,587		$	3,176,170
Total loans and leases held for investment, net							$	3,260,245		$	3,176,170

⁽¹⁾	~~The reduction in Agricultural loans is the result of the seasonal cycle, with the first quarter being outside the growing period.~~

⁽¹⁾ Includes SBA PPP loans.

⁽²⁾	~~Includes SBA PPP loans.~~

Paycheck Protection Program (“PPP”)—Under the CARES Act and H.R. 133 (see “Note 2 – Risks and Uncertainties”) the Small Business Administration (“SBA”) was directed by Congress to provide loans to small businesses with less than 500 employees to assist these businesses in meeting their payroll and other financial obligations during the COVID-19 pandemic. These government guaranteed loans are made with an interest rate of 1%, a risk weight of 0% under risk-based capital rules, have a term of 2 to 5 years, and under certain conditions the SBA will forgive them. The Bank actively participated in the PPP, and since April 2020, the Bank has funded $~~494.39~~494.4 million of loans for 2,680 small business customers. PPP loans outstanding were $~~26.1~~1.8 million and $70.8 million at ~~March~~ ~~31,~~September 30, 2022 and December 31,2021, respectively.

At ~~March 31,~~September 30, 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 $1.2 billion and ~~$860~~$890.6 million, respectively. The borrowing capacity on these loans was ~~$812.5~~$766 million from FHLB and ~~$664~~$657 million from the FRB.

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

Note 4—Loans and Leases—Continued

The following tables show an aging analysis of the loan & lease portfolio, including unearned income, by the time past due for the periods indicated:

	March 31, 2022												September 30, 2022
(Dollars in thousands)	Current		30-89 Days Past Due		90+ Days Past Due		Non- accrual		Total Past Due		Total		Current		30-89 Days Past Due		90+ Days Past Due		Non- accrual		Total Past Due		Total
Loans and leases held-for-investment, net
Loans and leases held for investment, net
Real estate:
Commercial	$	1,162,528	$	1,251	$	0	$	437	$	1,688	$	1,164,216	$	1,238,110	$	170	$	-	$	411	$	581	$	1,238,691
Agricultural		695,565		0		0		0		0		695,565		722,448		-		-		-		-		722,448
Residential and home equity		358,849		365		0		0		365		359,214		377,224		25		-		-		25		377,249
Construction		204,794		0		0		0		0		204,794		169,624		-		-		-		-		169,624
Total real estate		2,421,736		1,616		0		437		2,053		2,423,789		2,507,406		195		-		411		606		2,508,012
Commercial & Industrial		437,199		0		0		0		0		437,199
Commercial & industrial														454,185		-		-		-		-		454,185
Agricultural		250,669		800		0		0		800		251,469		260,296		-		-		-		-		260,296
Commercial leases		91,907		0		0		0		0		91,907		93,593		-		-		-		-		93,593
Consumer and other		33,208		47		0		0		47		33,255		7,766		10		-		-		10		7,776
Total loans and leases, net	$	3,234,719	$	2,463	$	0	$	437	$	2,900	$	3,237,619	$	3,323,246	$	205	$	-	$	411	$	616	$	3,323,862

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

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

Note 4—Loans and Leases—Continued

Non-accrual loans are summarized as follows:

(Dollars in thousands)	March 31, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Non-accrual loans and leases:
Non-accrual loans and leases, not TDRs
Real estate:
Commercial	$	437	$	0	$	411	$	-
Agricultural		0		18		-		18
Residential and home equity		0		0		-		-
Construction		0		0		-		-
Total real estate		437		18		411		18
Commercial & Industrial		0		0
Commercial & industrial						-		-
Agricultural		0		0		-		-
Commercial leases		0		0		-		-
Consumer and other		0		0		-		-
Subtotal		437		18		411		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
Commercial & industrial						-		-
Agricultural		0		498		-		498
Commercial leases		0		0		-		-
Consumer and other		0		0		-		-
Subtotal		0		498		-		498
Total non-accrual loans and leases	$	437	$	516	$	411	$	516

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

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)	March 31, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Troubled debt restructured loans and leases:
Accruing TDR loans and leases
Real estate:
Commercial	$	0	$	41	$	-	$	41
Agricultural		0		0		-		-
Residential and home equity		1,347		1,522		1,319		1,522
Construction		0		0		-		-
Total real estate		1,347		1,563		1,319		1,563
Commercial & Industrial		255		260
Commercial & industrial						6		260
Agricultural		0		0		-		-
Commercial leases		0		0		-		-
Consumer and other		1		1		-		1
Subtotal		1,603		1,824		1,325		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
Commercial & industrial						-		-
Agricultural		0		498		-		498
Commercial leases		0		0		-		-
Consumer and other		0		0		-		-
Subtotal		0		498		-		498
Total TDR loans and leases	$	1,603	$	2,322	$	1,325	$	2,322

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

	September 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		-	$	-		-	$	-		-	$	-
2021		-		-		-		-		-		-
2020		4		260		-		-		4		260
2019		-		-		-		-		-		-
Prior		8		1,065		-		-		8		1,065
Total		12	$	1,325		-	$	-		12	$	1,325

The Company did not enter into any troubled debt restructuring with borrowers during the nine months ended September 30, 2022 and 2021, respectively.

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

Note 4—Loans and Leases—Continued

~~The below table summarize TDRs outstanding as of March 31, 2022, by year of occurrence:~~

March 31, 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 5 468 0 0 5 468
2019 0 0 0 0 0 0
Thereafter 9 1,087 0 0 9 1,087
Total 15 $ 1,603 0 $ 0 15 $ 1,603

~~The Company did 0t enter into any troubled debt restructuring with borrowers during the three months ended March 31, 2022 and 2021, respectively.~~

~~Table of Contents~~

~~FARMERS & MERCHANTS BANCORP~~

~~NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)~~

~~Note 4—Loans and Leases—Continued~~

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

	March 31, 2022												September 30, 2022
(Dollars in thousands)	Pass		Special Mention		Sub- standard		Doubtful		Total Loans & Leases		Total Allowance for Credit Losses		Pass		Special Mention		Sub- standard		Doubtful		Total Loans & Leases		Total Allowance for Credit Losses
Loans and leases held-for-investment, net
Loans and leases held for investment, net
Real estate:
Commercial	$	1,153,584	$	6,878	$	3,754	$	0	$	1,164,216	$	17,920	$	1,229,837	$	7,320	$	1,534	$	-	$	1,238,691	$	16,540
Agricultural		683,415		5,996		6,154		0		695,565		14,591		705,404		10,891		6,153		-		722,448		16,560
Residential and home equity		358,847		0		367		0		359,214		6,759		377,021		-		228		-		377,249		6,865
Construction		204,794		0		0		0		204,794		3,777		169,624		-		-		-		169,624		2,995
Total real estate		2,400,640		12,874		10,275		0		2,423,789		43,047		2,481,886		18,211		7,915		-		2,508,012		42,960
Commercial & Industrial		427,109		9,437		653		0		437,199		10,361
Commercial & industrial														453,832		70		283		-		454,185		10,392
Agricultural		249,972		1,477		20		0		251,469		5,737		253,554		6,726		16		-		260,296		8,523
Commercial leases		91,772		135		0		0		91,907		1,466		93,493		100		-		-		93,593		1,588
Consumer and other		33,081		0		174		0		33,255		421		7,583		-		193		-		7,776		154
Total loans and leases, net	$	3,202,574	$	23,923	$	11,122	$	0	$	3,237,619	$	61,032	$	3,290,348	$	25,107	$	8,407	$	-	$	3,323,862	$	63,617

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

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

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 and current period gross charge-offs by year of origination as of ~~March 31,~~September 30, 2022:

	March 31, 2022																September 30, 2022
	Term Loans Amortized Cost Basis by Origination Year																Term Loans Amortized Cost Basis by Origination Year
(Dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost		Total		2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost		Total
Net loans and leases held-for-investment
Net loans and leases held for investment
Real estate:
Commercial
Pass	$	25,293	$	247,149	$	164,009	$	82,890	$	95,039	$	254,266	$	284,938	$	1,153,584	$	140,036	$	236,947	$	153,480	$	72,167	$	86,063	$	227,146	$	313,998	$	1,229,837
Special mention		0		0		0		0		3,888		840		2,150		6,878		-		-		-		-		3,844		-		3,476		7,320
Substandard		0		0		0		0		0		3,104		650		3,754		-		-		-		-		-		1,534		-		1,534
Doubtful		0		0		0		0		0		0		0		0		-		-		-		-		-		-		-		-
Total commercial	$	25,293	$	247,149	$	164,009	$	82,890	$	98,927	$	258,210	$	287,738	$	1,164,216
Total Commercial																	$	140,036	$	236,947	$	153,480	$	72,167	$	89,907	$	228,680	$	317,474	$	1,238,691
Commercial
Current-period gross charge-offs																	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Agricultural real estate
Agricultural
Pass	$	12,121	$	43,482	$	58,501	$	15,393	$	56,374	$	159,386	$	338,158	$	683,415	$	54,480	$	43,117	$	56,965	$	15,297	$	51,194	$	151,470	$	332,881	$	705,404
Special mention		0		0		2,382		2,636		143		0		835		5,996		-		-		-		2,636		-		-		8,255		10,891
Substandard		0		0		0		0		118		6,036		0		6,154		-		-		-		-		119		6,034		-		6,153
Doubtful		0		0		0		0		0		0		0		0		-		-		-		-		-		-		-		-
Total agricultural real estate	$	12,121	$	43,482	$	60,883	$	18,029	$	56,635	$	165,422	$	338,993	$	695,565
Total Agricultural																	$	54,480	$	43,117	$	56,965	$	17,933	$	51,313	$	157,504	$	341,136	$	722,448
Agricultural
Current-period gross charge-offs																	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Residential and home equity
Pass	$	21,332	$	101,603	$	93,842	$	16,431	$	7,719	$	88,166	$	29,754	$	358,847	$	51,888	$	97,973	$	88,214	$	14,851	$	6,910	$	78,458	$	38,727	$	377,021
Special mention		0		0		0		0		0		0		0		0		-		-		-		-		-		-		-		-
Substandard		0		0		0		0		0		220		147		367		-		-		-		-		-		144		84		228
Doubtful		0		0		0		0		0		0		0		0		-		-		-		-		-		-		-		-
Total residential and home equity	$	21,332	$	101,603	$	93,842	$	16,431	$	7,719	$	88,386	$	29,901	$	359,214
Total Residential and home equity																	$	51,888	$	97,973	$	88,214	$	14,851	$	6,910	$	78,602	$	38,811	$	377,249
Residential and home equity
Current-period gross charge-offs																	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Construction
Pass	$	0	$	0	$	0	$	2,275	$	0	$	122	$	202,397	$	204,794	$	-	$	-	$	-	$	1,575	$	-	$	62	$	167,987	$	169,624
Special mention		0		0		0		0		0		0		0		0		-		-		-		-		-		-		-		-
Substandard		0		0		0		0		0		0		0		0		-		-		-		-		-		-		-		-
Doubtful		0		0		0		0		0		0		0		0		-		-		-		-		-		-		-		-
Total construction	$	0	$	0	$	0	$	2,275	$	0	$	122	$	202,397	$	204,794	$	-	$	-	$	-	$	1,575	$	-	$	62	$	167,987	$	169,624
Construction
Current-period gross charge-offs																	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Total real estate	$	58,746	$	392,234	$	318,734	$	119,625	$	163,281	$	512,140	$	859,029	$	2,423,789
Total Real estate																	$	246,404	$	378,037	$	298,659	$	106,526	$	148,130	$	464,848	$	865,408	$	2,508,012

Commercial & industrial
Pass	$	4,368	$	45,633	$	16,791	$	15,010	$	11,515	$	9,983	$	323,809	$	427,109	$	24,852	$	41,476	$	13,975	$	10,646	$	8,774	$	6,386	$	347,723	$	453,832
Special mention		0		82		0		0		0		4		9,351		9,437		-		69		-		-		-		1		-		70
Substandard		0		0		0		0		38		31		584		653		-		-		-		-		6		6		271		283
Doubtful		0		0		0		0		0		0		0		0		-		-		-		-		-		-		-		-
Total commercial & industrial	$	4,368	$	45,715	$	16,791	$	15,010	$	11,553	$	10,018	$	333,744	$	437,199
Total Commercial & industrial																	$	24,852	$	41,545	$	13,975	$	10,646	$	8,780	$	6,393	$	347,994	$	454,185
Commercial & industrial
Current-period gross charge-offs																	$	-	$	-	$	-	$	246	$	78	$	-	$	-	$	324

Agriculture
Agricultural
Pass	$	1,236	$	4,736	$	1,353	$	1,624	$	834	$	2,358	$	237,831	$	249,972	$	4,387	$	3,789	$	1,082	$	1,617	$	731	$	2,211	$	239,737	$	253,554
Special mention		0		0		0		0		0		98		1,379		1,477		-		-		-		-		-		7		6,719		6,726
Substandard		0		0		0		15		5		0		0		20		-		-		-		13		3		-		-		16
Doubtful		0		0		0		0		0		0		0		0		-		-		-		-		-		-		-		-
Total Agriculture	$	1,236	$	4,736	$	1,353	$	1,639	$	839	$	2,456	$	239,210	$	251,469
Total Agricultural																	$	4,387	$	3,789	$	1,082	$	1,630	$	734	$	2,218	$	246,456	$	260,296
Agricultural
Current-period gross charge-offs																	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Commercial leases
Pass	$	3,635	$	14,816	$	14,904	$	9,041	$	22,133	$	27,243	$	0	$	91,772	$	11,541	$	16,541	$	13,664	$	7,643	$	21,387	$	22,717	$	-	$	93,493
Special mention		0		0		0		135		0		0		0		135		-		-		-		100		-		-		-		100
Substandard		0		0		0		0		0		0		0		0		-		-		-		-		-		-		-		-
Doubtful		0		0		0		0		0		0		0		0		-		-		-		-		-		-		-		-
Total commercial leases	$	3,635	$	14,816	$	14,904	$	9,176	$	22,133	$	27,243	$	0	$	91,907
Total Commercial leases																	$	11,541	$	16,541	$	13,664	$	7,743	$	21,387	$	22,717	$	-	$	93,593
Commercial leases
Current-period gross charge-offs																	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Consumer and other
Pass	$	612	$	26,679	$	967	$	425	$	656	$	2,870	$	872	$	33,081	$	965	$	2,463	$	359	$	235	$	386	$	2,481	$	694	$	7,583
Special mention		0		0		0		0		0		0		0		0		-		-		-		-		-		-		-		-
Substandard		0		0		0		0		0		47		127		174		193		-		-		-		-		-		-		193
Doubtful		0		0		0		0		0		0		0		0		-		-		-		-		-		-		-		-
Total consumer and other	$	612	$	26,679	$	967	$	425	$	656	$	2,917	$	999	$	33,255
Total Consumer and other																	$	1,158	$	2,463	$	359	$	235	$	386	$	2,481	$	694	$	7,776
Consumer and other
Current-period gross charge-offs																	$	25	$	5	$	4	$	1	$	3	$	-	$	-	$	38

Total net loans and leases	$	68,597	$	484,180	$	352,749	$	145,875	$	198,462	$	554,774	$	1,432,982	$	3,237,619	$	288,342	$	442,375	$	327,739	$	126,780	$	179,417	$	498,657	$	1,460,552	$	3,323,862

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

Note 4—Loans and Leases—Continued

The following tables provide amortized cost basis for collateral dependent loans as of ~~March 31,~~September 30, 2022 and December 31, 2021, respectively:

	March 31, 2022						September 30, 2022
(Dollars in thousands)	Real Estate		Vehicles		Total		Real Estate		Vehicles and Equipment		Total
Collateral dependent loans and leases
Real estate:
Commercial	$	1	$	0	$	1	$	1,124	$	-	$	1,124
Agricultural		5,560		0		5,560		11,944		-		11,944
Residential and home equity		235		0		235		2,002		-		2,002
Construction		0		0		0		-		-		-
Total real estate		5,796		0		5,796
Commercial & Industrial		0		0		0
Total Real estate								15,070		-		15,070
Commercial & industrial								-		-		-
Agricultural		0		0		0		-		16		16
Commercial leases		0		0		0		-		-		-
Consumer and other		0		169		169		-		161		161
Total gross loans and leases	$	5,796	$	169	$	5,965	$	15,070	$	177	$	15,247

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

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

Note 4—Loans and Leases—Continued

Changes in the allowance for credit losses are as follows:

	For the Three Months Ended March 31, 2022																			For the three Months Ended September 30, 2022
(Dollars in thousands)	Commercial & Agricultural R/E			Construction		Residential & Home Equity		Commercial & Agricultural			Commercial Leases			Consumer & Other			Total			Commercial & Agricultural R/E			Construction		Residential & Home Equity			Commercial & Agricultural			Commercial Leases			Consumer & Other			Total
Allowance for credit losses:
Balance at beginning of period, prior to adoption of ASC 326	$	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
Beginning balance																				$	34,716		$	2,876	$	6,874		$	15,808		$	1,645		$	161		$	62,080
Provision / (recapture) for credit losses		552			466		866		(1,700	)		(101	)		(83	)		0			(1,616	)		119		(15	)		3,063			(57	)		5			1,499
Charge-offs		0			0		0		0			0			(9	)		(9	)		-			-		-			(48	)		-			(20	)		(68	)
Recoveries		0			0		14		18			0			2			34			-			-		6			92			-			8			106
Net (charge-offs) / recoveries		0			0		14		18			0			(7	)		25			-			-		6			44			-			(12	)		38
Balance at end of period	$	32,511		$	3,777	$	6,759	$	16,098		$	1,466		$	421		$	61,032
Ending balance																				$	33,100		$	2,995	$	6,865		$	18,915		$	1,588		$	154		$	63,617

	For the Three Months Ended March 31, 2021																			For the Nine Months Ended September 30, 2022
(Dollars in thousands)	Commercial & Agricultural R/E		Construction		Residential & Home Equity			Commercial & Agricultural			Commercial Leases			Consumer & Other			Total			Commercial & Agricultural R/E			Construction		Residential & Home Equity		Commercial & Agricultural			Commercial Leases		Consumer & Other			Total
Allowance for credit losses:
Balance at beginning of period	$	36,312	$	1,643	$	2,984		$	14,775		$	1,731		$	1,417		$	58,862
Beginning balance																				$	38,149		$	1,456	$	2,847	$	16,954		$	938	$	663		$	61,007
Impact of Adopting ASC 326																					-			-		-		-			-		-			-
Provision / (recapture) for credit losses		1,802		4		(135	)		(584	)		(57	)		220			1,250			(5,049	)		1,539		3,893		2,058			650		(485	)		2,606
Charge-offs		0		0		0			0			0			(8	)		(8	)		-			-		-		(324	)		-		(38	)		(362	)
Recoveries		0		0		32			32			0			7			71			-			-		125		227			-		14			366
Net (charge-offs) / recoveries		0		0		32			32			0			(1	)		63			-			-		125		(97	)		-		(24	)		4
Balance at end of period	$	38,114	$	1,647	$	2,881		$	14,223		$	1,674		$	1,636		$	60,175
Ending balance																				$	33,100		$	2,995	$	6,865	$	18,915		$	1,588	$	154		$	63,617

~~Table of Contents~~

~~FARMERS & MERCHANTS BANCORP~~

~~NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)~~

Note ~~5 —~~ 5—Deposits

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

(Dollars in thousands)
March 31,
2022

December 31,
2021

Certificate of deposits:
Certificates of deposits less than or equal to $250,000 221,904 223,620
Certificates of deposits greater than $250,000 168,876 168,865
Total certificates of deposits 390,780 392,485

(Dollars in thousands)	September 30, 2022		December 31, 2021
Certificates of deposit:
Certificates of deposit less than or equal to $250,000	$	208,242	$	223,620
Certificates of deposit greater than $250,000		152,142		168,865
Total certificates of deposit	$	360,384	$	392,485

Scheduled maturities for certificates of deposit are as follows:

(Dollars in thousands)	Amount		Amount
2022	$	291,366	$	107,966
2023		89,678		224,552
2024		5,633		22,362
2025		1,818		2,783
2026 and beyond		2,285		2,721
Total time deposits	$	390,780
Total certificates of deposit			$	360,384

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

Note 6—Shareholders’ Equity

The Company and the Bank are subject to various ~~federal~~ regulatory capital ~~requirements~~adequacy guidelines as outlined under Part 324 of the ~~Basel III Capital Rules.~~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 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 the Company and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

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

Management believes that the Bank meets the requirements to be categorized as “well capitalized” under the FDIC regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables.

The Company’s and Bank’s actual and required capital amounts and ratios are as follows:

	March 31, 2022															September 30, 2022
	Actual					Minimum Capital Requirement					Well Capitalized Requirment					Actual					Minimum to be Categorized as “Adequately Capitalized”					Minimum to be Categorized as “Well Capitalized”
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
Farmers & Merchants Bancorp
CET1 capital to risk-weighted assets	$	463,607		11.63	%	$	179,354		4.50	%		N/A		N/A		$	482,053		11.82	%	$	183,537		4.50	%		N/A		N/A
Tier 1 capital to risk-weighted assets		473,607		11.88	%		239,139		6.00	%		N/A		N/A			492,053		12.06	%		244,716		6.00	%		N/A		N/A
Risk-based capital to risk-weighted assets		523,580		13.14	%		318,851		8.00	%		N/A		N/A			543,218		13.32	%		326,288		8.00	%		N/A		N/A
Tier 1 leverage capital ratio		473,607		8.45	%		224,315		4.00	%		N/A		N/A			492,053		9.12	%		215,702		4.00	%		N/A		N/A

Farmers & Merchants Bank
CET1 capital to risk-weighted assets	$	472,965		11.87	%	$	179,339		4.50	%	$	259,046		6.50	%	$	491,237		12.04	%	$	183,531		4.50	%	$	265,101		6.50	%
Tier 1 capital to risk-weighted assets		472,965		11.87	%		239,119		6.00	%		318,826		8.00	%		491,237		12.04	%		244,708		6.00	%		326,278		8.00	%
Risk-based capital to risk-weighted assets		522,934		13.12	%		318,826		8.00	%		398,532		10.00	%		542,400		13.30	%		326,278		8.00	%		407,847		10.00	%
Tier 1 leverage capital ratio		472,965		8.94	%		211,642		4.00	%		264,552		5.00	%		491,237		9.12	%		215,498		4.00	%		269,372		5.00	%

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

Note 6—Shareholders’ Equity—Continued

	December 31, 2021															December 31, 2021
	Actual					Minimum Capital Requirement					Well Capitalized Requirment					Actual					Minimum to be Categorized as “Adequately Capitalized”					Minimum to be Categorized as “Well Capitalized”
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			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		$	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			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			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			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	%	$	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	%		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	%		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	%		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 weighted-average number of common shares outstanding during the period.

Earnings per common share have been computed based on the following:

	Three Months Ended September 30,
(Dollars in thousands, except share and per share amounts)	2022		2021
Numerator
Net income	$	19,536	$	17,502

Denominator
Weighted average number of common shares outstanding		775,109		789,646
Weighted average number of dilutive shares outstanding		775,109		789,646

Basic earnings per common share	$	25.20	$	22.16
Diluted earnings per common share	$	25.20	$	22.16

	Three Months Ended March 31,				Nine Months Ended September 30,
(Dollars in thousands, except share and per share amounts)	2022		2021		2022		2021
Numerator
Net income	$	17,058	$	16,713	$	55,037	$	50,368

Denominator
Weighted average number of common shares outstanding		786,096		789,646		780,988		789,646
Weighted average number of dilutive shares outstanding		786,096		789,646		780,988		789,646

Basic earnings per common share	$	21.70	$	21.17	$	70.47	$	63.79
Diluted earning per common share	$	21.70	$	21.17
Diluted earnings per common share					$	70.47	$	63.79

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.

During the first nine months of 2022 the Company repurchased 18,824 shares under the Repurchase Plan, for a total of $17.9 million.

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

Note 7—Fair Value Measurements

The Company follows the “Fair Value Measurement and Disclosures” topic of the FASB ASC, which establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. 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 collateral dependent and an allowance for credit losses is established. Once a loan or lease is identified as collaterally dependent, management measures impairment in accordance with the “Receivable” topic of the FASB ASC. The fair value of collateral 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. Collateral 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. Collateral 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 loans is generally based on recent real estate appraisals.

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

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 ~~in to~~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 collateral dependent loans is primarily the sales comparison approach less selling costs of 10%.

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 in to account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring OREO is primarily the sales comparison approach less selling costs of 10%.

The following tables ~~present information about~~summarize the carrying value and estimated fair values of the Company’s financial assets and liabilities ~~at fair value~~ on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated.

March 31, 2022			Fair Value
September 30, 2022													Fair Value
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value		Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Financial Assets:
Cash and cash equivalents	$	841,086	$	841,086	$	0	$	0	$	841,086	$	882,883	$	882,883	$	-	$	-	$	882,883
Investment securities available-for-sale		251,375		9,996		241,379		0		251,375		177,454		4,941		172,513		-		177,454
Investment securities held-to-maturity		876,257		0		771,971		43,732		815,703		852,272		-		663,285		42,416		705,701
Non-marketable securities		15,549		0		0		15,549		15,549		15,549		-		-		15,549		15,549
Loans and leases, net		3,176,587		0		0		3,184,796		3,184,796		3,260,245		-		-		3,203,611		3,203,611
Bank-owned life insurance		71,953		71,953		0		0		71,953		72,566		72,566		-		-		72,566

Financial Liabilities:
Total deposits		4,837,439	$	4,446,659	$	0	$	387,625	$	4,834,284	$	4,909,257	$	-	$	4,548,873	$	352,319	$	4,901,192
Subordinated debentures		10,310		0		9,766		0		9,766		10,310		-		9,707		-		9,707

December 31, 2021			Fair Value										Fair Value
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value		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	$	715,460	$	715,460	$	-	$	-	$	715,460
Investment securities available-for-sale		270,454		10,214		260,240		0		270,454		270,454		10,214		260,240		-		270,454
Investment securities held-to-maturity		737,052		0		681,588		44,446		726,034		737,052		-		681,588		44,446		726,034
Non-marketable securities		15,549		-		0		15,549		15,549		15,549		-		-		15,549		15,549
Loans and leases, net		3,176,170		0		0		3,179,857		3,179,857		3,176,170		-		-		3,179,857		3,179,857
Bank-owned life insurance		71,411		71,411		0		0		71,411		71,411		71,411		-		-		71,411

Financial Liabilities:
Total deposits	$	4,640,152	$	4,247,666	$	0	$	391,732	$	4,639,398	$	4,640,152	$	-	$	4,247,666	$	391,732	$	4,639,398
Subordinated debentures		10,310		0		6,890		0		6,890		10,310		-		6,890		-		6,890

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

Note 7—Fair Value Measurements—Continued

Non-recurring Measurements: collateral dependent loans and OREO are classified with Level 3 of the fair value hierarchy. The estimated fair value of collateral dependent loans is based on the fair value of the collateral, less estimated costs to sell. The Company receives an appraisal or performs an evaluation for each collateral dependent loan. The key inputs used to determine the fair value of collateral dependent loans include selling costs, and adjustment to comparable collateral. Valuations and significant inputs obtained by independent sources are reviewed by the Company for accuracy and reasonableness. Appraisals are typically obtained at least on an annual basis. The Company also considers other factors and events that may affect the fair value. The appraisals or evaluations are reviewed at least on a quarterly basis to determine if any adjustments are needed. After review and acceptance of the appraisal or evaluation, adjustments to collateral dependent loans may occur.

The following tables present information about the Bank’s assets and liabilities measured at fair value on a recurring and non-recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Bank to determine such fair value for the periods indicated.

March 31, 2022			Fair Value Measurements
September 30, 2022													Fair Value
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value		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	$	9,996	$	9,996	$	0	$	0	$	9,996	$	4,941	$	4,941	$	-	$	-	$	4,941
U.S. Government-sponsored securities		5,789		0		5,789		0		5,789		4,698		-		4,698		-		4,698
Mortgage-backed securities		223,901		0		223,901		0		223,901		156,453		-		156,453		-		156,453
Collateralized mortgage obligations		1,544		0		1,544		0		1,544		1,458		-		1,458		-		1,458
Corporate securities		9,835		0		9,835		0		9,835		9,594		-		9,594		-		9,594
Other		310		0		310		0		310		310		-		310		-		310

Fair valued on a non-recurring basis:
Other real estate		873		0		0		873		873	$	873	$	-	$	-	$	873	$	873

December 31, 2021	Fair Value Measurements												Fair Value
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value		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	$	10,089	$	10,089	$	-	$	-	$	10,089
U.S. Government-sponsored securities		6,374		0		6,374		0		6,374		6,374		-		6,374		-		6,374
Mortgage-backed securities		251,120		0		251,120		0		251,120		251,120		-		251,120		-		251,120
Collateralized mortgage obligations		2,436		0		2,436		0		2,436		2,436		-		2,436		-		2,436
Other		435		125		310		0		435		435		125		310		-		435

Fair valued on a non-recurring basis:
Individually evaluated loans	$	2,562	$	0	$	0	$	2,562	$	2,562	$	2,562	$	-	$	-	$	2,562	$	2,562
Other real estate		873		0		0		873		873		873		-		-		873		873

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

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)	March 31, 2022		December 31, 2021		September 30, 2022		December 31, 2021

Commitments to extend credit, including unsecured commitments of $20,907 and $21,036 as of March 31, 2022 and December 31, 2021, respectively	$	987,423	$	937,009

Stand-by letters of credit, including unsecured commitments of $8,361 and $9,091 as of March 31, 2022 and December 31, 2021, respectively		16,250		17,880

Commitments to extend credit, including unsecured commitments of $20,552 and $21,036 as of September 30, 2022 and December 31, 2021, respectively					$	1,128,340	$	937,009
Stand-by letters of credit, including unsecured commitments of $7,352 and $9,091 as of September 30, 2022 and December 31, 2021, respectively						16,629		17,880
Performance guarantees under interest rate swap contracts entered into with our clients and third-parties		191		1,433		-		1,433

The Company’s exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer’s creditworthiness are performed on a case-by-case basis.

Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third-party. 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 Company’s vault cash and deposit balances maintained with the Federal Reserve Bank.

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~~Table of Contents~~

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

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to provide a more comprehensive review of the Company’s operating results and financial condition than can be obtained from reading the Unaudited Consolidated Financial Statements alone. The discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto included in “Part I. Item 1. Financial Statements.”

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10–Q may contain certain forward-looking statements within the meaning of Section 27A the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect the Company’s current views and are not 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 control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in this report and the Company’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 actual results to differ materially from those anticipated in these forward-looking statements. The following is a non-exclusive list of factors which could cause actual results to differ materially from forward-looking statements in this Quarterly Report on Form 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.

Please take into account that forward-looking statements speak only as of the date of this Form 10-Q. The Company does not undertake any obligation to release publicly revisions to such forward-looking statements to reflect events or circumstances after the date of this Form 10-Q, except as required by law.

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Overview

Farmers & Merchants Bancorp is a Delaware registered bank holding company organized in 1999. As a registered bank holding company, FMCB is subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System (“FRB”) and by 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 ~~March 31,~~September 30, 2022, consisted of ~~785,146~~770,822 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~~the Company’s asset growth has been the generation of core deposits, which ~~we raise~~the Company raises through ~~our~~its existing branch locations, newly opened branch locations, or through acquisitions. ~~Our recent~~Recent loan growth is ~~primarily~~ the result of organic growth generated by ~~our~~the Company’s seasoned relationship managers and supporting associates who provide outstanding service and responsiveness to ~~our clients or through acquisitions.~~the Company’s clients.

~~Our~~The Company’s results of operations are largely dependent on net interest income. Net interest income is the difference between interest income ~~we earn~~earned on interest earning assets, which are comprised of loans, investment securities and short-term investments, and the interest ~~we pay~~the Company pays 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~~The Company measures its performance by calculating ~~our~~the 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~~the Company’s 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. WeThe Company also ~~measure our~~measures its performance by ~~our~~the 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.

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.

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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.

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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 developed and run by the Darling Consulting Group.~~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 Regulators on the Uniform Bank Performance Report (“UBPR”) at ~~www.ffiec.gov~~.

Federal Regulators have placed the Company into a peer group of banks ~~based on bank~~ 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.

Management ~~evaluated~~evaluates macro and micro economic information as well as internal trends in credit performance on ~~our~~the Company’s loan portfolio to determine at where wethey believe ~~we are~~it is in an economic credit cycle. Depending upon ~~our estimation~~estimations of what point in the credit cycle the current economy may exist, wemanagement 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, wethe Company 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, weit 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.

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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 the positive intent and ability to hold the securities to maturity. Investment securities are classified as available-for-sale (“AFS”) when the Company has the intent of holding the security for an indefinite period of time, but not necessarily to maturity. The Company determines the appropriate classification at the time of purchase, and periodically thereafter. Investment securities classified at HTM are carried at amortized cost. Investment securities classified at AFS are reported at fair value. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Debt securities classified as held-to-maturity are carried at cost, 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~~held-to-maturity debt securities on a collective basis by major security type. The Company’s ~~held-to-maturity~~HTM portfolio contains securities issued by U.S. government entities and agencies ~~municipalities,~~ and ~~corporations.~~municipalities. The Company uses industry historical credit loss information adjusted for current conditions to establish the allowance for credit losses on its HTM municipal bond portfolio.

For available-for-sale debt securities in an unrealized loss position, the Company 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 its 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 it 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 allowance 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~~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.

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.

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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.

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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-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 ~~March 31,~~September 30, 2022 and December 31, 2021 and results of operations during the three and nine months ended ~~March 31,~~September 30, 2022 and 2021, respectively. Information related to the comparison of the results 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” in the 2021 Annual Report on Form 10-K filed with the SEC on March 15, 2022.

Factors that determine the level of net income include the volume of earning assets and interest 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 interest expense as well as average yield, cost and net interest margin information for the periods presented. Average balances are derived from daily balances.

Three Months Ended March 31,
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
$
760,080

$
366

0.20
%

$
410,276

$
103

0.10
%
Securities:⁽¹⁾

Taxable securities
1,022,457

4,588

1.82
%

834,831

3,804

1.85
%
Non-taxable securities⁽²⁾

49,997

402

3.22
%

55,078

423

3.07
%
Total securities
1,072,454

4,990

1.89
%

889,909

4,227

1.93
%
Loans:⁽³⁾

Real estate:
Commercial
1,151,611

13,276

4.68
%

965,249

10,977

4.61
%
Agricultural
680,230

7,793

4.65
%

638,292

7,136

4.53
%
Residential and home equity
353,371

3,301

3.79
%

335,573

4,571

5.52
%
Construction
191,684

2,072

4.38
%

193,366

2,097

4.40
%
Total real estate
2,376,896

26,442

4.51
%

2,132,480

24,781

4.71
%
Commercial & industrial
424,598

4,799

4.58
%

365,881

4,111

4.56
%
Agricultural
248,414

2,755

4.50
%

226,200

2,564

4.60
%
Commercial leases
94,855

1,416

6.05
%

102,566

1,344

5.31
%
Consumer and other
52,078

2,021

15.74
%

232,845

4,287

7.47
%
Total loans and leases
3,196,841

37,433

4.75
%

3,059,972

37,087

4.92
%
Non-marketable securities
15,549

305

7.96
%

12,693

190

6.07
%
Total interest earning assets
5,044,924

43,094

3.46
%

4,372,850

41,607

3.86
%
Allowance for credit losses
(61,022
)

(59,431
)

Non-interest earning assets
314,932

306,261

Total average assets
$
5,298,834

$
4,619,680

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits:
Demand
$
1,115,578

259

0.09
%

$
943,635

294

0.13
%
Savings and money market accounts
1,517,234

342

0.09
%

1,291,214

418

0.13
%
Certificates of deposit greater than $250,000
167,515

97

0.23
%

171,501

256

0.61
%
Certificates of deposit less than $250,000
223,842

105

0.19
%

247,416

269

0.44
%
Total interest bearing deposits
3,024,169

803

0.11
%

2,653,766

1,237

0.19
%
Short-term borrowings
3

-

0.00
%

4

-

0.00
%
Subordinated debentures
10,310

82

3.23
%

10,310

79

3.11
%
Total interest bearing liabilities
3,034,482

885

0.12
%

2,664,080

1,316

0.20
%
Non-interest bearing deposits
1,722,597

1,469,741

Total funding
4,757,079

885

0.08
%

4,133,821

1,316

0.13
%
Other non-interest bearing liabilities
76,061

56,268

Shareholders’ equity
465,694

429,591

Total average liabilities and shareholders’ equity
$
5,298,834

$
4,619,680

Net interest income
$
42,209

$
40,291

Interest rate spread
3.35
%

3.66
%
Net interest margin⁽⁴⁾

3.39
%

3.74
%

~~(1)~~

~~Excludes average unrealized (losses) gains of ($7.0) million and $12.9 million for the three months ended March 31, 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 25% related to income earned on tax-exempt municipal securities totaling $106,000 and $111,000 for the three months ended March 31, 2022, and 2021, respectively.

~~(3)~~

~~Loan interest income includes loan fees of $3.9 million and $5.2 million for the three months ended March 31, 2022 and 2021, respectively.~~

~~(4)~~

~~Net interest margin is computed by dividing net interest income by average interest earning assets.~~

	For the Three Months Ended September 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	$	718,794		$	4,159		2.30	%	$	856,159		$	328		0.15	%
Securities:⁽¹⁾
Taxable securities		1,063,166			5,091		1.92	%		786,983			3,282		1.67	%
Non-taxable securities⁽²⁾		47,005			386		3.28	%		49,616			399		3.22	%
Total investment securities		1,110,171			5,477		1.96	%		836,599			3,681		1.76	%
Loans:⁽³⁾
Real estate:
Commercial		1,224,689			15,179		4.92	%		1,046,626			11,255		4.27	%
Agricultural		715,286			9,243		5.13	%		640,330			8,301		5.14	%
Residential and home equity		375,699			3,836		4.05	%		338,520			3,858		4.52	%
Construction		164,664			2,468		5.95	%		175,906			2,300		5.19	%
Total real estate		2,480,338			30,726		4.91	%		2,201,382			25,714		4.63	%
Commercial & industrial		438,761			5,770		5.22	%		374,162			4,111		4.36	%
Agricultural		259,345			3,607		5.52	%		236,071			2,637		4.43	%
Commercial leases		93,051			1,365		5.82	%		96,690			1,363		5.59	%
Consumer and other		8,929			400		17.77	%		155,182			2,263		5.79	%
Total loans and leases		3,280,424			41,868		5.06	%		3,063,487			36,088		4.67	%
Non-marketable securities		15,549			209		5.33	%		15,549			244		6.23	%
Total interest earning assets		5,124,938			51,713		4.00	%		4,771,794			40,341		3.35	%
Allowance for credit losses		(63,107	)							(60,268	)
Non-interest earning assets		318,078								324,057
Total average assets	$	5,379,909							$	5,035,583

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits:
Demand	$	1,101,830			445		0.16	%	$	1,068,707			293		0.11	%
Savings and money market accounts		1,588,234			476		0.12	%		1,385,430			346		0.10	%
Certificates of deposit greater than $250,000		156,110			96		0.24	%		168,714			143		0.34	%
Certificates of deposit less than $250,000		212,036			105		0.20	%		230,532			147		0.25	%
Total interest bearing deposits		3,058,210			1,122		0.15	%		2,853,383			929		0.13	%
Short-term borrowings		-			-		0.00	%		-			-		0.00	%
Subordinated debentures		10,310			134		5.16	%		10,310			78		3.00	%
Total interest bearing liabilities		3,068,520			1,256		0.16	%		2,863,693			1,007		0.14	%
Non-interest bearing deposits		1,764,266								1,655,738
Total funding		4,832,786			1,256		0.10	%		4,519,431			1,007		0.09	%
Other non-interest bearing liabilities		77,389								68,564
Shareholders' equity		469,734								447,588
Total average liabilities and shareholders' equity	$	5,379,909							$	5,035,583

Net interest income				$	50,457							$	39,334
Interest rate spread							3.84	%							3.21	%
Net interest margin⁽⁴⁾							3.95	%							3.26	%

40⁽¹⁾Excludes average unrealized (losses) gains of ($28.5) million and $2 million for the three months ended September 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 $102,000 and $104,000 for the three months ended September 30, 2022, and 2021, respectively.

⁽³⁾Loan interest income includes loan fees of $2.6 million and $3.5 million for the three months ended September 30, 2022 and 2021, respectively.

⁽⁴⁾Net interest margin is computed by dividing net interest income by average interest earning assets.

Table of Contents

	For the Nine Months Ended September 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	$	720,692		$	5,934		1.10	%	$	620,757		$	595		0.13	%
Securities:⁽¹⁾
Taxable securities		1,058,859			14,786		1.86	%		819,747			10,780		1.75	%
Non-taxable securities⁽²⁾		48,436			1,179		3.25	%		52,816			1,238		3.13	%
Total investment securities		1,107,295			15,965		1.92	%		872,563			12,018		1.84	%
Loans:⁽³⁾
Real estate:
Commercial		1,178,731			41,986		4.76	%		1,005,970			36,602		4.86	%
Agricultural		699,205			25,545		4.88	%		633,874			22,884		4.83	%
Residential and home equity		365,062			10,728		3.93	%		337,307			10,191		4.04	%
Construction		187,181			7,075		5.05	%		186,337			6,447		4.63	%
Total real estate		2,430,179			85,334		4.69	%		2,163,488			76,124		4.70	%
Commercial & industrial		434,217			15,460		4.76	%		365,744			12,567		4.59	%
Agricultural		257,555			9,350		4.85	%		229,862			7,758		4.51	%
Commercial leases		92,914			4,158		5.98	%		100,347			4,135		5.51	%
Consumer and other		27,330			3,569		17.46	%		203,683			9,255		6.08	%
Total loans and leases		3,242,195			117,871		4.86	%		3,063,124			109,839		4.79	%
Non-marketable securities		15,549			732		6.29	%		14,451			646		5.98	%
Total interest earning assets		5,085,731			140,502		3.69	%		4,570,895			123,098		3.60	%
Allowance for credit losses		(61,864	)							(59,971	)
Non-interest earning assets		314,520								315,582
Total average assets	$	5,338,387							$	4,826,506

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits:
Demand	$	1,111,513			1,023		0.12	%	$	1,002,267			869		0.12	%
Savings and money market accounts		1,550,334			1,179		0.10	%		1,336,826			1,136		0.11	%
Certificates of deposit greater than $250,000		163,148			299		0.25	%		169,545			587		0.46	%
Certificates of deposit less than $250,000		218,302			297		0.18	%		239,185			608		0.34	%
Total interest bearing deposits		3,043,297			2,798		0.12	%		2,747,823			3,200		0.16	%
Short-term borrowings		1			-		0.00	%		-			-		0.00	%
Subordinated debentures		10,310			319		4.14	%		10,310			236		3.06	%
Total interest bearing liabilities		3,053,608			3,117		0.14	%		2,758,133			3,436		0.17	%
Non-interest bearing deposits		1,740,859								1,567,089
Total funding		4,794,467			3,117		0.09	%		4,325,222			3,436		0.11	%
Other non-interest bearing liabilities		77,953								64,439
Shareholders' equity		465,967								436,845
Total average liabilities and shareholders' equity	$	5,338,387							$	4,826,506

Net interest income				$	137,385							$	119,662
Interest rate spread							3.56	%							3.43	%
Net interest margin⁽⁴⁾							3.61	%							3.50	%

⁽¹⁾Excludes average unrealized (losses) gains of ($20.1) million and $5.4 million for the nine months ended September 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 $312,000 and $324,000 for the nine months ended September 30, 2022, and 2021, respectively.

⁽³⁾Loan interest income includes loan fees of $9.8 million and $13.1 million for the nine months ended September 30, 2022 and 2021, respectively.

⁽⁴⁾Net interest margin is computed by dividing net interest income by average interest earning assets.

Table of Contents

Third Quarter 2022 vs. Third Quarter 2021

Interest-bearing deposits with banks and Federal Reserve balances ~~are additional earning assets available to the Company.~~ ~~Average interest-bearing deposits with banks~~ consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of ~~0.20%~~2.30% and ~~0.10% for~~0.15% during the ~~three months ended March 31,~~third quarter of 2022 and 2021, respectively. Average interest-bearing deposits ~~was $760~~with banks were $719 million and ~~$410~~$856 million for the ~~three months~~quarter ended ~~March 31,~~September 30, 2022 and 2021, respectively. Interest income on interest-bearing deposits with banks was ~~$0.4~~$4.2 million and ~~$0.1~~$0.3 million for the ~~three months~~quarter ended ~~March 31,~~September 30, 2022 and 2021, respectively.

The investment securities portfolio ~~is another main component of the Company’s earning assets. Historically, the Company invested~~consists primarily ~~in:~~of: (1) mortgage-backed securities issued by government-sponsored entities; (2) debt securities issued by the U.S. Treasury, government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, at certain times the Company has selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 7 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity. Since the risk factor for these types of investments is generally lower than that of loans and leases, the yield earned on investments is generally less than that of loans and leases.

~~Average total~~Total investment securities ~~were~~averaged $1.1 billion and ~~$890~~$836.6 million for the ~~three months~~quarter ended ~~March 31,~~September 30, 2022 and 2021, respectively. Total interest income on investments was $5.5 million and $3.7 million for the quarter ended September 30, 2022 and 2021, respectively. The average yield on total investment securities ~~were 1.89%~~was 1.96% and ~~1.93%~~1.76% for the ~~three months~~quarter ended ~~March 31,~~September 30, 2022 and 2021, respectively. See “Investment Securities and Federal Reserve balances” for a discussion of the Company’s investment strategy in 2022.

~~Average loans~~Loans and leases held for investment ~~were $3.2~~averaged $3.3 billion and $3.1 billion for the ~~three months~~quarter ended ~~March 31,~~September 30, 2022 and 2021, respectively. Total interest income on loans was $41.9 million and $36.1 million for the quarter ended September 30, 2022 and 2021, respectively. The average yield on the loan & lease portfolio was ~~4.75%~~5.06% and ~~4.92%~~4.67% for the ~~three months~~quarter ended ~~March 31,~~September 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 future loan & lease yields and net interest margin.

~~Average interest-bearing~~Interest-bearing liabilities ~~were $3.0~~averaged $3.1 billion and ~~$2.7~~$2.9 billion for the ~~three months~~quarter ended ~~March 31,~~September 30, 2022 and 2021, respectively. Total interest expense on interest-bearing deposits was ~~$0.8~~$1.1 million, ~~$1.2~~$.9 million for the ~~three months~~quarter ended ~~March 31,~~September 30, 2022 and 2021, respectively. The average rate paid on interest-bearing liabilities was ~~0.12%~~0.15% and ~~0.20%~~0.13% for the ~~three~~quarter ended September 30, 2022 and 2021, respectively. As a result of recent increases in short-term market interest rates, the Company is experiencing more aggressive competitor rates on interest bearing deposits, which it may need to meet in order to retain key customers. This could place negative pressure on future deposit rates and net interest margin.

Nine Months Ended September 30, 2022 vs. Nine Months Ended September 30, 2021

Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 1.10% and 0.13% for the first nine months ended ~~March 31,~~September 30, 2022 and 2021, respectively. Average interest-bearing deposits were $721 million and $621 million for the nine months ended September 30, 2022 and 2021, respectively. Interest income on interest-bearing deposits with banks was $5.9 million and $0.6 million for the nine months ended September 30, 2022 and 2021, respectively.

Average total investment securities were $1.1 billion and $873 million for the nine months ended September 30, 2022 and 2021, respectively. Total interest income on investments was $16.0 million and $12.0 million for the nine months ended September 30, 2022 and 2021, respectively. The ~~decline was primarily~~average yield on total investment securities were 1.92% and 1.84% for the ~~result~~nine months ended September 30, 2022 and 2021, respectively. See “Investment Securities and Federal Reserve balances” for a discussion of the ~~FRB lowering rates to near zero due to the pandemic.~~Company’s investment strategy in 2022.

Table of Contents

Average loans and leases held for investment were $3.2 billion and $3.1 billion for the nine months ended September 30, 2022 and 2021, respectively. Total interest income on loans was $117.9 million and $109.8 million for the nine months ended September 30, 2022 and 2021, respectively. The average yield on the loan & lease portfolio was 4.86% and 4.79% for the nine months ended September 30, 2022 and 2021, respectively.

Average interest-bearing liabilities were $3.1 billion and $2.8 billion for the nine months ended September 30, 2022 and 2021, respectively. Total interest expense on interest-bearing deposits was $2.8 million and $3.2 million for the nine months ended September 30, 2022 and 2021, respectively. The average rate paid on interest-bearing liabilities was 0.14% and 0.17% for the nine months ended September 30, 2022 and 2021, respectively.

Rate/Volume Analysis. The following table shows the change in interest income and interest expense and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on 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 March 31, 2022 compared with 2021									Three Months Ended September 30, 2022 compared with 2021									Nine Months Ended September 30, 2022 compared with 2021
	Increase (Decrease) Due to:									Increase (Decrease) Due to:									Increase (Decrease) Due to:
(Dollars in thousands)	Volume			Rate			Net			Volume			Rate			Net			Volume			Rate			Net
Interest income:
Interest earnings deposits in other banks and federal funds sold	$	127		$	136		$	263		$	(370	)	$	4,201		$	3,831		$	111		$	5,228		$	5,339
Securities:
Taxable securities		1,174			(390	)		784			1,272			537			1,809			3,305			701			4,006
Non-taxable securities		(119	)		98			(21	)		(57	)		44			(13	)		(127	)		68			(59	)
Total securities		1,055			(292	)		763			1,214			582			1,796			3,178			769			3,947
Loans:
Real estate:
Commercial		2,146			153			2,299			2,069			1,855			3,924			6,630			(1,246	)		5,384
Agricultural		477			180			657			1,122			(180	)		942			2,384			277			2,661
Residential and home equity		1,499			(2,769	)		(1,270	)		1,625			(1,647	)		(22	)		962			(425	)		537
Construction		(18	)		(7	)		(25	)		(761	)		929			168			29			599			628
Total real estate		4,105			(2,444	)		1,661			4,055			957			5,012			10,006			(796	)		9,210
Commercial & industrial		664			24			688			775			884			1,659			2,424			469			2,893
Agricultural		525			(334	)		191			278			692			970			978			614			1,592
Commercial leases		(507	)		579			72			(210	)		212			2			(429	)		452			23
Consumer and other		(16,806	)		14,540			(2,266	)		(12,215	)		10,352			(1,863	)		(16,453	)		10,767			(5,686	)
Total loans		(12,020	)		12,366			346			(7,316	)		13,096			5,780			(3,474	)		11,506			8,032
Non-marketable securities		48			67			115			0			(35	)		(35	)		51			35			86
Total interest income		(10,790	)		12,277			1,487			(6,472	)		17,844			11,372			(135	)		17,539			17,404

Interest expense:
Interest-bearing deposits:
Interest bearing deposits:
Demand		239			(274	)		(35	)		9			143			152			98			56			154
Savings and money market accounts		349			(425	)		(76	)		55			75			130			218			(175	)		43
Certificates of deposit greater than $250,000		(6	)		(153	)		(159	)		(10	)		(37	)		(47	)		(21	)		(267	)		(288	)
Certificates of deposit less than $250,000		(24	)		(140	)		(164	)		(11	)		(31	)		(42	)		(49	)		(262	)		(311	)
Total interest bearing deposits		558			(992	)		(434	)		43			150			193			246			(648	)		(402	)
Short-term borrowings											-			-			-			-			-			-
Subordinated debentures		-			3			3			-			56			56			-			83			83
Total interest expense		558			(989	)		(431	)		43			206			249			246			(565	)		(319	)
Net interest income	$	(11,348	)	$	13,266		$	1,918		$	(6,515	)	$	17,638		$	11,123		$	(381	)	$	18,104		$	17,723

Net interest income ~~was $42.2~~increased by $17.7 million, ~~and $40.3~~or 14.81% to $137.4 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 ~~and 2021, respectively.~~compared to $119.7 million for the same period one year earlier. The increase in net interest income was driven by primarily by ~~strong deposit growth, which we were able to partially deploy into growing our loan portfolio. The remaining increase in deposits was held in~~increased interest ~~earning deposits and investment securities.~~rates.

Table of Contents

Comparison of Results of Operations for the Three and Nine Months Ended ~~March 31,~~September 30, 2022 and 2021

	Three Months Ended March 31,										Three Months Ended September 30,										Nine Months Ended September 30,
(Dollars in thousands)	2022		2021		$ Better / (Worse)			% Better / (Worse)			2022		2021		$ Better / (Worse)			% Better / (Worse)			2022		2021		$ Better / (Worse)			% Better / (Worse)
Selected Income Statement Information:
Interest income	$	43,094	$	41,607	$	1,487			3.57	%	$	51,713	$	40,341	$	11,372			28.19	%	$	140,502	$	123,098	$	17,404			14.14	%
Interest expense		885		1,316		431			32.75	%		1,256		1,007		(249	)		(24.73	%)		3,117		3,436		319			9.28	%
Net interest income		42,209		40,291		1,918			4.76	%		50,457		39,334		11,123			28.28	%		137,385		119,662		17,723			14.81	%
Provision for credit losses		-		1,250		1,250			100.00	%		1,500		-		(1,500	)	N/A				3,000		1,250		(1,750	)		(140.00	%)
Net interest income after provision for credit losses		42,209		39,041		3,168			8.11	%		48,957		39,334		9,623			24.46	%		134,385		118,412		15,973			13.49	%
Non-interest income		4,312		9,535		(5,223	)		-54.78	%		1,559		4,617		(3,058	)		(66.23	%)		9,383		16,292		(6,909	)		(42.41	%)
Non-interest expense		23,788		26,363		2,575			9.77	%		24,375		20,585		(3,790	)		(18.41	%)		71,194		67,732		(3,462	)		(5.11	%)
Income before income tax expense		22,733		22,213		520			2.34	%		26,141		23,366		2,775			11.88	%		72,574		66,972		5,602			8.36	%
Income tax expense		5,675		5,500		(175	)		-3.18	%		6,605		5,864		(741	)		(12.64	%)		17,537		16,604		(933	)		(5.62	%)
Net income	$	17,058	$	16,713	$	345			2.06	%	$	19,536	$	17,502	$	2,034			11.62	%	$	55,037	$	50,368	$	4,669			9.27	%

Net Income. For the three and nine months ended ~~March 31,~~September 30, 2022, ~~and 2021,~~Farmers & Merchants Bancorp reported net income of $19.5 million and $55 million, earnings per share of $25.20 and $70.47 and return on average assets of 1.45% and 1.37%, respectively. Return on average shareholders’ equity was ~~$17.1 million compared with $16.7 million, respectively. The increase in~~16.64% and 15.75% for the three and nine months ended September 30, 2022.

For the three and nine months ended September 30, 2021, Farmers & Merchants Bancorp reported net income ~~was primarily the result~~ of ~~higher net interest income of $1.9 million, lower non-interest expense of $2.6~~$17.5 million and ~~lower provision~~$50.4 million, 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% for ~~credit losses of $1.3 million. These increases were offset by lower non-interest income of $5.2 million~~the three and ~~higher income tax expense of $0.2 million.~~nine months ended September 30, 2021.

Net Interest Income and Net Interest Margin. For the ~~three months~~quarter ended ~~March 31,~~September 30, 2022, net interest income increased ~~$1.9~~$11.1 million, or ~~4.8%~~28.28%, to ~~$42.2~~$50.5 million compared with ~~$40.3~~$39.3 million for the same ~~period~~quarter a year earlier. The increase is ~~primarily~~ the result ofof: (1) average interest earning assets increasing ~~$679~~$353 million, or ~~14.7%~~7.40% to ~~$5.3~~$5.1 billion compared with ~~$4.6~~$4.8 billion for the same period a year ~~earlier. Higher~~earlier; and (2) the net interest ~~earning assets was driven~~margin increasing by ~~strong growth in the Company’s total deposits. Total deposits grew $623 million, or 15.11%,~~69 basis point to ~~$4.7 billion compared with $4.2 billion~~3.95% for the ~~same a year ago. The strong growth in the Company’s balance sheet was offset by narrowing net interest margins. Net interest margins narrowed 35 basis points to 3.39% for all of~~quarter ended September 30, 2022, compared with ~~3.74%~~3.26% for the same period a year earlier. ~~Narrow~~

Net interest income for the nine months ended September 30, 2022 increased by $17.7 million, or 14.81%, to $137.4 million, compared to $119.7 million at September 30, 2021. The increase in net interest ~~margins~~income was primarily due to a $515 million increase in average earning assets and an 11 basis point increase in the ~~result of~~net interest margin. For the ~~FRB lowering~~nine months ended September 30, 2022, the Company’s net interest ~~rates~~margin was 3.61% compared to ~~near zero over~~3.50% for the ~~past two years.~~same period in 2021.

Provision for Credit Losses. The provision for credit losses in each period is a charge against earnings in that period. The provision is the amount required to maintain the allowance for credit losses at a level that, in management’s judgment, is adequate to absorb expected losses over the life of the ~~portfolio.~~loan and HTM securities portfolios.

The Company ~~did not record any~~made a $3.0 million provision for credit losses ~~for~~during the ~~three~~first nine months ~~ended March 31,~~of 2022 compared ~~with~~to $1.3 million for the same period ~~a year ago. For~~in 2021. Net recoveries during the ~~three~~first nine months ~~ended March 31,~~of 2022 ~~the Company incurred~~were $4,000 compared to net recoveries of ~~$25,000 compared with net recoveries~~$191,000 in the first nine months of ~~$63,000 for the same period a year earlier.~~2021.

~~Table of Contents~~

Non-interest Income. Non-interest income decreased ~~$5.2~~$3.0 million, or ~~54.8%~~66.23%, to ~~$4.3~~$1.6 million for the ~~three months~~quarter ended ~~March 31,~~September 30, 2022 compared with ~~$9.5~~$4.6 million for the same period a year earlier. ~~The year-over-year~~This decrease in non-interest income was primarily due to a ~~$3.1~~$3.0 million ~~decline in gains/(losses) on deferred compensation investments and $1.8 million reduction in gain~~loss on sale of investment securities ~~recorded~~and a $0.2 million decrease in service charges on deposit accounts. Service charges on deposit accounts dropped because the ~~first~~Company eliminated NSF fees during the quarter ~~of 2021.~~ended September 30, 2022.

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The Company recorded net gains on deferred compensation plan investments of ~~$0.4~~$0.3 million for the ~~three months~~quarter ended ~~March 31,~~September 30, 2022 compared with net gains of ~~$3.5~~$0.6 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 GAAP ~~require~~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 net-effect on the Company’s net income.

Non-interest income decreased $6.9 million, or 42.41%, to $9.4 million for the nine months ended September 30, 2022 compared with $16.3 million for the same period of 2021. The year-over-year decrease in non-interest income was primarily due to a $3.0 million loss on sale of investment securities during the third quarter of 2022, a $2.5 million reduction in gain on sale of investment securities recorded in the first quarter of 2021 and a $2.0 million decline in gains/(losses) on deferred compensation plan investments. These reductions were partially off-set by a $0.4 million increase in services charges and processing fees received on deposit accounts and an increase of $0.2 million in other non-interest income.

The Company recorded net losses on deferred compensation plan investments of $0.2 million for the nine months ended September 30, 2022 compared with net gains of $1.8 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 GAAP 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 net-effect on the Company’s net income.

Non-interest Expense. Non-interest expense ~~decreased $2.6~~increased $3.8 million, or ~~9.8%~~18.41%, to ~~$23.8~~$24.4 million for the quarter ended September 30, 2022 compared with ~~$26.4~~$20.6 million for the same period a year ago. ~~The year-over-year decrease~~This increase was primarily ~~due to the $3.1~~comprised of: (1) a $1.5 million ~~change~~increase in salaries and employee benefits; (2) a $1.0 million increase in provision for unused commitments; (3) a $0.7 million increase in other miscellaneous expenses; (4) a $0.4 million increase in recruitment and relocation expenses; and (5) an increase of $0.2 in marketing expenses. These increases were partially off-set by a $0.3 million decline in gains/(losses) on deferred compensation ~~obligations.~~plan investments.

The Company recorded net gains on deferred compensation plan ~~obligations~~investments of ~~$0.4~~$0.3 million for the ~~three months~~quarter ended ~~March 31,~~September 30, 2022 compared with net gains of ~~$3.5~~$0.6 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 GAAP requires gains/(losses) on deferred compensation ~~obligations~~plan investments to be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no net-effect on the Company’s net income.

~~Income Tax Expense.~~ ~~For~~Non-interest expense increased $3.5 million, or 5.11%, to $71.2 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 ~~income tax expense was $5.7 million,~~ compared with ~~$5.5~~$67.7 million for the same period a year ~~earlier. For~~ago. This increase was primarily comprised of: (1) a $1.8 million increase in salaries and employee benefits; (2) a $1.0 million increase in provision for unused commitments; (3) a $0.6 million increase in recruitment and relocation expenses; (4) a $0.4 million increase in professional fees; (5) a $0.5 million increase in marketing and legal expenses; and (6) a $0.7 million increase in other miscellaneous expenses. These increases were partially off-set by a $2.0 million decline in gains/(losses) on deferred compensation plan investments.

The Company recorded net losses on deferred compensation plan investments of $0.2 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 ~~the effective tax rate was 24.96%~~ compared with ~~24.76%~~net gains of $1.8 million for the same period of 2021. 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 ~~year ago.~~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 GAAP requires gains/(losses) on deferred compensation plan investments to be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no net-effect on the Company’s net income.

Table of Contents

Income Tax Expense. The Bank’s provision for income taxes increased 5.62% to $17.5 million for the first nine months of 2022 compared to the first nine months of 2021. The Company’s effective tax rate for the first nine months of 2022 was 24.16% compared to 24.79% for the 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

Total assets grew ~~$246~~$289 million, or ~~4.76%~~5.58%, to ~~$5.4~~$5.5 billion at ~~March 31,~~September 30, 2022 compared with $5.2 billion at December 31, 2021. Loans held for investment ~~remained flat~~were $3.3 billion at September 30, 2022, an increase of $86.7 million, or 2.68% compared with $3.2 billion at ~~both March 31, 2022, and~~ December 31, 2021. Exclusive of SBA PPP loans, the loan portfolio grew $145.0 million, or 4.56%, over December 31, 2021. This data constitutes non-GAAP financial data. The Company believes that excluding the temporary effect of the PPP loans furnishes useful information regarding the Company’s growth. Total deposits grew ~~$197~~$269 million, or ~~4.25%~~5.80%, to ~~$4.8~~$4.9 billion at ~~March 31,~~September 30, 2022 compared with $4.6 billion at December 31, 2021. The increase in total assets and deposits was primarily the result of continued strong organic deposit growth.

Investment Securities and Federal Reserve Balances

The Company’s investment portfolio increased ~~$120~~$23 million, or ~~11.92%~~2.24%, ~~to $1.1 billion at March 31, 2022 compared~~ to $1.0 billion at September 30, 2022 compared to December 31, 2021. This increase is net of the impact of $30.8 million that the Company sold for interest rate risk management purposes. The Company uses its investment portfolio 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’s~~Company's total investment portfolio currently represents ~~20.79%~~18.84% of the Company’s total assets at ~~March 31,~~September 30, 2022 as compared with 19.46% at December 31, 2021.

Not included in the investment portfolio are interest bearing deposits with banks and overnight investments in Federal Reserve balances. Interest bearing deposits with banks consisted primarily of FRB deposits.

The FRB currently pays interest on the deposits that banks maintain in their FRB accounts, whereas historically banks had to sell these Federal Funds to other banks in order to earn interest. Since balances at the FRB are effectively risk free, the Company elected to maintain its excess cash at the FRB. Interest bearing deposits with banks totaled ~~$772~~$800 million at ~~March 31,~~September 30, 2022 and $663 million at December 31, 2021.

~~Table of Contents~~

The Company classifies its investment securities as either held-to-maturity (“HTM”) or available-for-sale (“AFS”). Securities are classified as held-to-maturity and are carried at amortized cost, net of an allowance for credit losses, when the Company has the intent and ability to hold the securities to maturity. See Note 3 “Investment Securities” to the Unaudited Consolidated Financial Statements in “Item 1. Financial Statements” in this quarterly Report on Form 10-Q. 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 ~~March 31,~~September 30, 2022, wethe Company held no investment securities from any issuer (other than the U.S. Treasury or an agency of the U.S. government or a government sponsored entity) that totaled over 10% of our shareholders’ equity.

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

(Dollars in thousands)	March 31, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Available-for-Sale Securities
U.S. Treasury notes	$	9,996	$	10,089	$	4,941	$	10,089
U.S. Government-sponsored securities		5,789		6,374		4,698		6,374
Mortgage-backed securities⁽¹⁾		223,901		251,120		156,453		251,120
Collateralized mortgage obligations⁽¹⁾		1,544		2,436		1,458		2,436
Corporate securities		9,835		-		9,594		-
Other		310		435		310		435
Total available-for-sale securities	$	251,375	$	270,454	$	177,454	$	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~~.Government.

(Dollars in thousands)	September 30, 2022		December 31, 2021
Held-to-Maturity Securities
Mortgage-backed securities⁽¹⁾	$	709,541	$	596,775
Collateralized mortgage obligations⁽¹⁾		82,297		73,781
Municipal securities⁽²⁾		60,434		66,496
Total held-to-maturity securities	$	852,272	$	737,052

(Dollars in thousands) March 31, 2022 December 31, 2021
Held-to-Maturity Securities
Mortgage-backed securities⁽¹⁾

$
695,249

$
596,775

Collateralized mortgage obligations⁽¹⁾

117,427

73,781

Municipal securities
63,581

66,496

Total held-to-maturity securities
$
876,257

$
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~~.Government.

⁽²⁾ Municipal securities are net of allowance for credit losses of $393 and $0, respectively.

~~Table of Contents~~

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

Investment Securities	As of March 31, 2022
																										As of September 30, 2022
	Within One Year					After One but Within Five Years					After Five but Within Ten Years					After Ten Years					Total					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			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities available-for-sale
U.S. Treasury notes	$	9,996		2.36	%	$	-		0.00	%	$	-		0.00	%	$	-		0.00	%	$	9,996		2.36	%	$	4,941		2.38	%	$	-		0.00	%	$	-		0.00	%	$	-		0.00	%	$	4,941		2.38	%
U.S. Government-sponsored securities		3		2.57	%		142		2.36	%		423		1.42	%		5,221		1.27	%		5,789		1.30	%		7		1.74	%		81		3.97	%		436		3.01	%		4,174		2.79	%		4,698		2.83	%
Mortgage-backed securities⁽¹⁾		1		1.39	%		26,319		2.31	%		37,271		2.40	%		160,310		1.67	%		223,901		1.83	%		16		3.13	%		15,725		2.27	%		17,961		2.40	%		122,751		1.74	%		156,453		1.87	%
Collateralized Mortgage Obligations⁽¹⁾		-		0.00	%		-		0.00	%		-		0.00	%		1,544		2.26	%		1,544		2.30	%
Collateralized mortgage obligations⁽¹⁾																											-		0.00	%		-		0.00	%		-		0.00	%		1,458		2.35	%		1,458		2.35	%
Corporate securities		-		0.00	%		4,932		0.68	%		4,903		0.81	%		-		0.00	%		9,835		0.00	%		-		0.00	%		4,795		1.59	%		4,799		1.72	%		-		0.00	%		9,594		1.65	%
Other		310		0.01	%		-		0.00	%		-		0.00	%		-		0.00	%		310		3.31	%		310		2.99	%		-		0.00	%		-		0.00	%		-		0.00	%		310		2.99	%
Total securities available-for-sale	$	10,310		2.29	%	$	31,393		2.05	%	$	42,597		2.21	%	$	167,075		1.66	%	$	251,375		1.77	%	$	5,274		2.42	%	$	20,601		2.12	%	$	23,196		2.27	%	$	128,383		1.78	%	$	177,454		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~~.Government.

																										As of September 30, 2022
	Within One Year					After One but Within Five Years					After Five but Within Ten Years					After Ten Years					Total					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			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities held-to-maturity
Mortgage-backed securities⁽¹⁾	$	-		0.00	%	$	-		0.00	%	$	15,820		0.72	%	$	679,429		1.80	%	$	695,249		1.70	%	$	-		0.00	%	$	-		0.00	%	$	13,906		0.89	%	$	695,635		1.88	%	$	709,541		1.86	%
Collateralized Mortgage Obligations⁽¹⁾		-		0.00	%		-		0.00	%		-		0.00	%		117,427		1.17	%		117,427		1.71	%		-		0.00	%		-		0.00	%		-		0.00	%		82,297		1.80	%		82,297		1.80	%
Municipal securities		908		1.41	%		7,118		2.20	%		16,690		3.34	%		38,865		1.22	%		63,581		3.90	%		883		4.93	%		7,484		3.40	%		15,000		3.43	%		37,460		3.52	%		60,827		3.50	%
Total securities held-to-maturity	$	908		1.41	%	$	7,118		2.20	%	$	32,510		2.06	%	$	835,721		1.68	%	$	876,257		1.86	%	$	883		4.93	%	$	7,484		3.40	%	$	28,906		2.06	%	$	815,392		1.95	%	$	852,665		1.97	%

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

Table of Contents

Investment Securities As of December 31, 2021
Within One Year
After One but
Within Five Years

After Five but
Within Ten Years
After Ten Years Total
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Securities available for sale
U.S. Treasury notes
$
5,028

2.33
%

$
5,061

2.38
%

$
-

0.00
%

$
-

0.00
%

$
10,089

2.36
%
U.S. Government-sponsored securities
2

1.80
%

148

2.29
%

512

1.55
%

5,712

1.26
%

6,374

1.30
%
Mortgage-backed securities⁽¹⁾

13

1.50
%

21,155

2.36
%

50,554

2.36
%

179,398

1.61
%

251,120

1.83
%
Collateralized Mortgage Obligations⁽¹⁾

-

0.00
%

-

0.00
%

-

0.00
%

2,436

2.30
%

2,436

2.30
%
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
%

	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	%
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~~.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					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			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities held to maturity
Securities held-to-maturity
Mortgage-backed securities⁽¹⁾		-		0.00	%		-		0.00	%		10,641		0.41	%		586,134		1.72	%		596,775		1.70	%	$	-		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	%		-		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	%		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	%
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~~.Government.

Expected maturities may differ from contractual maturities because issuers may have the right to call obligations with or without penalties. ~~We evaluate~~The Company evaluates securities for expected credit losses at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

~~Table of Contents~~

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 owner-occupied real estate, non-owner-occupied real estate, owner-occupied farmland, and multifamily residential 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, or the income will be the ~~Bank’s~~Bank's primary source of repayment for the loan. Loans are made both on owner occupied and investor properties; maturities generally do not exceed 15 years (and may have pricing adjustments on a shorter timeframe) amortizations of up to 25 years (30 years for multifamily residential properties); have debt service coverage ratios of 1.00 or better with a target of ~~greater than 1.25;~~1.25 or greater; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.

Real Estate Construction – These are loans for acquisition, development and construction 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 to 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~~an approved 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 with an appropriate spread based on the amount of perceived risk in the loan.

Single Family Residential 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, wethe Company will make loans on rural residential properties up to 4041 acres. Most residential loans have terms from ten to ~~twenty~~thirty years and carry fixed or variable rates priced to 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” loans.

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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;~~$500,000; but can be made for up to $1,000,000 in high cost counties. Combined Loan To Value (CLTV) does not exceed ~~80%~~75%; FICO scores are at or above 670; Total Debt Ratios do not exceed 43%; and in some situations the Company is in a 1^st 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 36 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 or variable rates tied to the prime rate 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 2436 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 or variable rates tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan.

~~Table of Contents~~

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.~~portfolio.

Commercial Leases – These are leases primarily to businesses and farmers for 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 with qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

The Company accounts for leases with Investment Tax Credits (“ITC”) under the deferred method as established in ASC 740-10. ITCs 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.

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 be 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.

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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 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 about Market Risk” in this Report on Form 10-Q for further details.

Overall, the ~~Company’s~~Company's loan & lease portfolio at ~~March 31,~~September 30, 2022 totaled ~~$3.2~~$3.3 billion, an increase of ~~$0.4~~$86.7 million over December 31, 2021. Exclusive of SBA PPP loans, the loan portfolio grew ~~$43.0~~$145.0 million, or ~~1.37%~~4.56%, over December 31, 2021. This increase in the non-PPP loans occurred as a result of: (1) the Company’s business development efforts directed toward credit-qualified borrowers; and (2) expansion of our service area into the East Bay of San Francisco and Napa. This data constitutes non-GAAP financial data. The Company believes that excluding the temporary effect of the PPP loans furnishes useful information regarding the Company’s growth.

~~Table of Contents~~

The following table sets forth the distribution of the loan & lease portfolio by type and percent at the end of each period presented:

March 31, 2022 December 31, 2021

(Dollars in thousands) Dollars
Percent
of Total
Dollars
Percent
of Total

Gross Loans and Leases
Real estate:
Commercial
$
1,172,804

36.12
%

$
1,167,516

35.95
%
Agricultural
695,565

21.42
%

672,830

20.72
%
Residential and home equity
359,214

11.06
%

350,581

10.79
%
Construction
204,794

6.31
%

177,163

5.45
%
Total real estate
2,432,377

74.91
%

2,368,090

72.91
%
Commercial
437,199

13.47
%

427,799

13.17
%
Agricultural
251,469

7.75
%

276,684

8.52
%
Commercial leases
92,445

2.85
%

96,971

2.99
%
Consumer and other⁽¹⁾

33,255

1.02
%

78,367

2.41
%
Total gross loans and leases
3,246,745

100.00
%

3,247,911

100.00
%

	September 30, 2022					December 31, 2021
(Dollars in thousands)	Dollars		Percent of Total			Dollars		Percent of Total
Gross Loans and Leases
Real estate:
Commercial	$	1,246,805		37.41	%	$	1,167,516		35.95	%
Agricultural		722,448		21.68	%		672,830		20.72	%
Residential and home equity		377,249		11.32	%		350,581		10.79	%
Construction		169,624		5.09	%		177,163		5.45	%
Total real estate		2,516,126		75.50	%		2,368,090		72.91	%
Commercial & industrial		454,185		13.63	%		427,799		13.17	%
Agricultural		260,296		7.81	%		276,684		8.52	%
Commercial leases		94,089		2.83	%		96,971		2.99	%
Consumer and other⁽¹⁾		7,776		0.23	%		78,367		2.41	%
Total gross loans and leases	$	3,332,472		100.00	%	$	3,247,911		100.00	%

⁽¹⁾ Includes SBA PPP ~~loans.~~loans which were $1.8 million and $70.8 million at September 30, 2022 and December 31, 2021, respectively.

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The following table shows the maturity distribution and interest rate sensitivity of the loan portfolio of the Company as of ~~March 31,~~September 30, 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
$
89,814

$
249,435

$
798,092

$
35,463

$
1,172,804

Agricultural
41,641

153,198

429,832

70,894

695,565

Residential and home equity
197

3,371

117,347

238,299

359,214

Construction
140,600

63,397

797

-

204,794

Total real estate
272,252

469,401

1,346,068

344,656

2,432,377

Commercial & Industrial
153,153

238,138

39,932

5,976

437,199

Agricultural
153,586

85,412

12,471

-

251,469

Commercial leases
6,743

33,387

52,315

-

92,445

Consumer and other⁽¹⁾

1,233

29,970

2,052

-

33,255

Total gross loans and leases
$
586,967

$
856,308

$
1,452,838

$
350,632

$
3,246,745

Rate Structure for Loans
Fixed Rate
$
112,960

$
370,873

$
1,130,743

$
234,582

$
1,849,158

Adjustable Rate
474,007

485,435

322,095

116,050

1,397,587

Total gross loans and leases
$
586,967

$
856,308

$
1,452,838

$
350,632

$
3,246,745

	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	$	54,825	$	300,999	$	853,261	$	37,720	$	1,246,805
Agricultural		26,331		155,660		466,352		74,105		722,448
Residential and home equity		407		4,616		117,436		254,790		377,249
Construction		105,343		64,281		-		-		169,624
Total real estate		186,906		525,556		1,437,049		366,615		2,516,126
Commercial & industrial		180,294		206,003		61,714		6,174		454,185
Agricultural		164,616		79,574		16,106		-		260,296
Commercial leases		7,299		32,471		54,319		-		94,089
Consumer and other⁽¹⁾		707		5,639		1,430		-		7,776
Total gross loans and leases	$	539,822	$	849,243	$	1,570,618	$	372,789	$	3,332,472
Rate Structure for Loans
Fixed Rate	$	87,323	$	354,357	$	1,188,033	$	241,872	$	1,871,585
Adjustable Rate		452,499		494,886		382,585		130,917		1,460,887
Total gross loans and leases	$	539,822	$	849,243	$	1,570,618	$	372,789	$	3,332,472

⁽¹⁾ Includes SBA PPP loans.

~~Table of Contents~~

Non-Accrual Loans and Leases - Accrual of interest on loans and leases is generally discontinued when a loan or lease becomes contractually past due by 90 days or more with respect to interest or principal. When loans and leases are 90 days past due, but in ~~management’s~~management's judgment are well secured and in the process of collection, they may not be classified as non-accrual. When a loan or lease is placed on non-accrual status, all interest previously accrued but not collected is reversed. Income on such loans and leases is then recognized only to the extent that cash is received and where the future collection of principal is probable. Non-accrual loans and leases totaled ~~$437,000~~$411,000 and $516,000 at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively.

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

At ~~March 31,~~September 30, 2022, restructured loans totaled ~~$1.6~~$1.3 million compared with $2.3 million at December 31, 2021, all of which were performing. See Note 4 “Loans and 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~~The Company records 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. The Company reported $873,000 of foreclosed OREO at ~~March 31,~~September 30, 2022, and at December 31, 2021.

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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~~the Company has restructured ~~$278~~$304 million of loans under the CARES Act and H.R. 133 guidelines. At ~~March 31,~~September 30, 2022, all loans that were restructured as part of the CARES Act have returned to the contractual terms and conditions of the loans, without exception.

~~Table of Contents~~

The following table summarizes the loans for which the accrual of interest has been discontinued and loans more than 90 days past due and still accruing interest, including those non-accrual loans that are troubled debt restructured loans, and OREO (as hereinafter defined):

(Dollars in thousands)	March 31, 2022			December 31, 2021			September 30, 2022		December 31, 2021
Non-performing assets:
Non-accrual loans and leases, not TDRs
Real estate:
Commercial	$	437		$	-		$	411	$	-
Agricultural		-			18			-		18
Residential and home equity		-			-			-		-
Construction		-			-			-		-
Total real estate		437			18			411		18
Commercial & Industrial		-			-
Commercial & industrial								-		-
Agricultural		-			-			-		-
Commercial leases		-			-			-		-
Consumer and other		-			-			-		-
Subtotal		437			18			411		18
Non-accrual loans and leases, are TDRs
Real estate:
Commercial		-			-			-		-
Agricultural		-			498			-		498
Residential and home equity		-			-			-		-
Construction		-			-			-		-
Total real estate		-			498			-		498
Commercial & Industrial		-			-
Commercial & industrial								-		-
Agricultural		-			-			-		-
Commercial leases		-			-			-		-
Consumer and other		-			-			-		-
Subtotal		-			498			-		498
Total non-performing loans and leases	$	437		$	516		$	411	$	516
Other real estate owned (“OREO”)	$	873		$	873
Other real estate owned ("OREO")							$	873	$	873
Total non-performing assets	$	1,310		$	1,389		$	1,284	$	1,389
Performing TDRs	$	1,603		$	1,824		$	1,325	$	1,824

Selected ratios:
Non-performing loans to total loans		0.01	%		0.02	%
Non-performing assets to total assets		0.02	%		0.03	%

Although management believes that non-performing loans and leases are generally well-secured and that potential losses are provided for in the Company’s allowance for credit losses, there can be no assurance that future deterioration in economic conditions and/or collateral values will not result in future credit losses. See Note 4. “Loans and Leases”, located in “Item 1. Financial Statements” in this Quarterly Report on Form 10-Q for an allocation of the allowance classified to collateral dependent loans and leases.

~~Table of Contents~~

Except for non-performing loans and leases discussed above, the Company’s management is not aware of any loans and leases as of ~~March 31,~~September 30, 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:

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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 winters of 2020-2021 and 2021-2022 were once again dry. Despite this, the availability of water in our primary service area was not an issue for the ~~2021~~2022 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. ~~“Introduction - COVID-19 (Coronavirus) Disclosure”)~~Note 2).

Allowance for Credit Losses—Loans and Leases

The Company maintains an allowance for credit losses (“ACL”) on loans based on current expected credit losses as of the balance sheet date. The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan & lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of three primary components: specific reserves related to 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.”

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

	Three Months Ended March 31,						Nine Months Ended September 30,
(Dollars in thousands)	2022			2021			2022			2021
Allowance for credit losses:
Balance at beginning of year	$	61,007		$	58,862		$	61,007		$	58,862
Provision / (recapture) for credit losses		-			1,250			2,606			1,250
Charge-offs:
Real estate:
Commercial		-			-			-			-
Agricultural		-			-			-			-
Residential and home equity		-			-			-			-
Construction		-			-			-			-
Total real estate		-			-			-			-
Commercial & Industrial		-			-
Commercial & industrial								(324	)		-
Agricultural		-			-			-			-
Commercial leases		-			-			-			-
Consumer and other		(9	)		(8	)		(38	)		(33	)
Total charge-offs		(9	)		(8	)		(362	)		(33	)
Recoveries:
Real estate:
Commercial		-			-			-			-
Agricultural		-			-			-			-
Residential and home equity		14			32			125			91
Construction		-			-			-			-
Total real estate		14			32			125			91
Commercial & Industrial		16			29
Commercial & industrial								176			83
Agricultural		2			3			51			29
Commercial leases		-			-			-			-
Consumer and other		2			7			14			21
Total recoveries		34			71			366			224
Net recoveries / charge-offs		25			63			4			191

Balance at end of year	$	61,032		$	60,175
Balance at end of period							$	63,617		$	60,303

Selected financial information:
Net loans held for investment	$	3,237,619		$	3,111,011
Gross loans held for investment							$	3,332,472		$	3,151,508
Average loans		3,196,841			3,059,972			3,242,195			3,063,124
Non-performing loans		437			493			411			516
Allowance for credit losses to non-performing loans		13966.13	%		12205.88	%		15478.59	%		11686.63	%
Net (recoveries)/charge-offs to average loans		0.00	%		0.00	%		0.00	%		(0.01	)%
Provision for credit losses to average loans		0.00	%		0.04	%		0.08	%		0.04	%
Allowance for credit losses to loans held for investment		1.89	%		1.93	%		1.91	%		1.91	%

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

	September 30, 2022					December 31, 2021
(Dollars in thousands)	Dollars		Percent of Total			Dollars		Percent of Total
Allowance for credit losses:
Real estate:
Commercial	$	16,540		37.41	%	$	28,536		35.95	%
Agricultural		16,560		21.68	%		9,613		20.72	%
Residential and home equity		6,865		11.32	%		2,847		10.79	%
Construction		2,995		5.09	%		1,456		5.45	%
Total real estate		42,960		75.50	%		42,452		72.91	%
Commercial & Industrial		10,392		13.63	%		11,489		13.17	%
Agricultural		8,523		7.81	%		5,465		8.52	%
Commercial leases		1,588		2.83	%		938		2.99	%
Consumer and other		154		0.23	%		663		2.41	%
Total allowance for credit losses	$	63,617		100.00	%	$	61,007		100.00	%

March 31, 2022 December 31, 2021
(Dollars in thousands) Dollars
Percent
of Total
Dollars Percent
of Total
Allowance for credit losses:
Real estate:
Commercial
$
17,920

36.12
%

$
28,536

35.95
%
Agricultural
14,591

21.42
%

9,613

20.72
%
Residential and home equity
6,759

11.06
%

2,847

10.79
%
Construction
3,777

6.31
%

1,456

5.45
%
Total real estate
43,047

74.91
%

42,452

72.91
%
Commercial & Industrial
10,361

13.47
%

11,489

13.17
%
Agricultural
5,737

7.75
%

5,465

8.52
%
Commercial leases
1,466

2.85
%

938

2.99
%
Consumer and other
421

1.02
%

663

2.41
%
Total allowance for credit losses
$
61,032

100.00
%

$
61,007

100.00
%

Deposits

Total deposits were ~~$4.84~~$4.9 billion and ~~$4.64~~$4.6 billion as of ~~March 31,~~September 30, 2022 and December 31, 2021, 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 SBA PPP depositing loan proceeds into their deposit accounts with the Bank until those funds are used for operating expenses.~~Napa.

Non-interest bearing demand deposits increased ~~to $1.76~~by $52.3 million and were $1.8 billion ~~or 36.48%~~as of September 30, 2022 and December 31, 2021. Non-interest bearing deposits were 36.72% of total deposits, as of ~~March 31,~~September 30, 2022 ~~from $1.75 billion, or~~and 37.72% ~~of total deposits,~~ as of December 31, 2021. Interest bearing deposits are comprised of interest-bearing transaction accounts, money market accounts, regular savings accounts, and certificates of deposit.

~~Although total deposits have increased 4.25% since December 31, 2021, more importantly, low cost transaction accounts have grown at a strong pace as well as:~~

~~Demand and interest-bearing transaction accounts totaled $2.89 billion at March 31, 2022, an increase of $41.7 million, or 1.46% from $2.85 billion held at December 31, 2021.~~

~~Savings and money market accounts increased $157 million, or 11.24%, to $1.56 billion at March 31, 2022 compared with $1.40 billion at December 31, 2021.~~

~~Time deposit accounts decreased $1.7 million, or 0.43%, to $391 million at March 31, 2022 compared with $392 million at December 31, 2021.~~

~~Table of Contents~~

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

	Three Months Ended March 31,														Nine Months Ended September 30,
	2022							2021							2022							2021
(Dollars in thousands)	Average Balance		Interest Expense		Average Rate			Average Balance		Interest Expense		Average Rate			Average Balance		Interest Expense		Average Rate			Average Balance		Interest Expense		Average Rate
Total deposits:
Interest-bearing deposits:
Interest bearing deposits:
Demand	$	1,115,578		259		0.09	%	$	943,635		294		0.13	%	$	1,111,513		1,023		0.12	%	$	1,002,267	$	869		0.12	%
Savings and Money Market		1,517,234		342		0.09	%		1,291,214		418		0.13	%
Savings and money market																1,550,334		1,179		0.10	%		1,336,826		1,136		0.11	%
Certificates of deposit greater than $250,000		167,515		97		0.23	%		171,501		256		0.61	%		163,148		299		0.25	%		169,545		587		0.46	%
Certificates of deposit less than $250,000		223,842		105		0.19	%		247,416		269		0.44	%		218,302		297		0.18	%		239,185		608		0.34	%
Total interest bearing deposits		3,024,169		803		0.11	%		2,653,766		1,237		0.19	%
Total interest-bearing deposits																3,043,297		2,798		0.12	%		2,747,823		3,200		0.16	%
Non-interest bearing deposits		1,722,597							1,469,741							1,740,859							1,567,089
Total deposits	$	4,746,766	$	803		0.07	%	$	4,123,507	$	1,237		0.12	%	$	4,784,156	$	2,798		0.08	%	$	4,314,912	$	3,200		0.10	%

Deposits are gathered from individuals and businesses in our market areas. The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements. We will continue to manage interest expense through deposit pricing. The average cost of deposits, including non-interest bearing deposits, declined to ~~0.07%~~0.08% for the ~~three~~nine months ended ~~March~~September 2022 compared with ~~0.12%~~0.10% for the same period a year ~~ago, as overall interest rates were lowered to near zero by the Federal Reserve.~~ago.

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The following table shows deposits with a balance greater than $250,000 at ~~March 31,~~September 30, 2022 and December 31, 2021:

	March 31,		December 31,		September 30,		December 31,
(Dollars in thousands)	2022		2021		2022		2021
Deposits greater than $250,000	$	2,860,003	$	2,708,576	$	2,990,165	$	2,708,576
Certificates of deposit greater $250,000, by maturity:
Certificates of deposit greater than $250,000, by maturity:
Less than 3 months		48,962		59,591		58,384		59,591
3 months to 6 months		48,130		37,182		38,722		37,182
6 months to 12 months		61,890		59,945		43,161		59,945
More than 12 months		9,881		12,147		11,875		12,147
Total Time Deposits greater than $250,000	$	168,863	$	168,865
Total certificates of deposit greater than $250,000					$	152,142	$	168,865
Total deposits greater than $250,000	$	3,028,866	$	2,877,441	$	3,142,307	$	2,877,441

Refer to the Year-To-Date Average Balances and Rate Schedules located in this ~~“Item~~"Item 7. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operations”~~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 ~~March 31,~~September 30, 2022 and December 31, 2021, the Bank had $3.0 million, of these deposits.

Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings

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

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Long-Term Subordinated Debentures

On December 17, 2003, the Company raised $10.0 million through the sale of subordinated debentures to an off-balance sheet trust and its sale of trust-preferred securities. See Note 10. “Long-Term Subordinated Debentures” located in “Item 8. Financial Statements and Supplementary Data” in our Annual Report on Form 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 Trust Preferred Securities will continue to qualify as regulatory 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 ~~June 17,~~December 19, 2022) and the rate was ~~3.77%~~6.38% as of ~~March 31, 2022.~~September 30, 2022 and 2.97% at September 30, 2021. The average rate paid for these securities was ~~3.23% in~~4.14% for the first nine months of 2022 and ~~3.11% in~~3.06% for the first nine months of 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.

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 ~~$465~~$468 million at ~~March 31,~~September 30, 2022, and $463 million at December 31, 2021.

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The Company and the Bank are subject to risk-based capital adequacy guidelines related to the adoption of U.S. Basel III Capital Rules, which impose higher risk-based capital and leverage requirements than those previously in place. Specifically, the rules impose, among other requirements, minimum capital requirements including a Tier 1 leverage capital ratio of 4.0%, common equity Tier 1 risk-based capital ratio of 4.5%, a Tier 1 risk-based capital ratio of 6.0% and a total risk-based capital ratio of 8.0%. As of March 31, 2022 and December 31, 2021, the Company and Bank meet allvarious regulatory capital adequacy guidelines as outlined under Part 324 of the FDIC Rules and Regulations. Failure to ~~which~~meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

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

The following table sets forth our capital ~~ratios:~~ratios and the related regulatory guidelines:

(Dollars in thousands)	Basel III Regulatory Well Capitalized Requirement			March 31, 2022			December 31, 2021			Minimum to be Categorized as "Well Capitalized"			Minimum to be Categorized as "Adequately Capitalized"			September 30, 2022			December 31, 2021
Farmers & Merchants Bancorp
CET1 capital to risk-weighted assets		N/A			11.63	%		11.68	%		N/A			4.50	%		11.82	%		11.68	%
Tier 1 capital to risk-weighted assets		N/A			11.88	%		11.94	%		N/A			6.00	%		12.06	%		11.94	%
Risk-based capital to risk-weighted assets		N/A			13.14	%		13.19	%		N/A			8.00	%		13.32	%		13.19	%
Tier 1 leverage capital ratio		N/A			8.45	%		8.92	%		N/A			4.00	%		9.12	%		8.92	%

Farmers & Merchants Bank
CET1 capital to risk-weighted assets		6.50	%		11.87	%		11.91	%		6.50	%		4.50	%		12.04	%		11.91	%
Tier 1 capital to risk-weighted assets		8.00	%		11.87	%		11.91	%		8.00	%		6.00	%		12.04	%		11.91	%
Risk-based capital to risk-weighted assets		10.00	%		13.12	%		13.17	%		10.00	%		8.00	%		13.30	%		13.17	%
Tier 1 leverage capital ratio		5.00	%		8.94	%		8.91	%		5.00	%		4.00	%		9.12	%		8.91	%

~~FMB met~~On November 15, 2021, the ~~definition~~Board of ~~a “well-capitalized” institution as~~Directors reauthorized the Company’s share repurchase program for up to $20.0 million of ~~March 31, 2022 and December 31, 2021 for federal regulatory purposes.~~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.

56During the first nine months of 2022 the Company repurchased 18,824 shares under the Repurchase Plan, for a total of $17.9 million.

~~Table of Contents~~

Off-Balance-Sheet Arrangements

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

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The following table sets forth our off-balance sheet lending commitments as of ~~March 31,~~September 30, 2022:

			Amount of Commitment Expiration per Period										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		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	$	987,423	$	387,129	$	436,860	$	19,049	$	144,385	$	1,128,340	$	401,604	$	477,113	$	46,626	$	202,997
Standby letters of credit		16,250		6,964		6,040		2,970		276		16,629		10,403		4,326		1,470		430
Performance guarantees		191		71		25		2		93
Total off-balance sheet commitments	$	1,003,864	$	394,164	$	442,925	$	22,021	$	144,754	$	1,144,969	$	412,007	$	481,439	$	48,096	$	203,427

The ~~Company’s~~Company's exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each ~~customer’s~~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. Most 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.

~~Table of Contents~~

Liquidity

The ability to have readily available funds sufficient to repay ~~fully~~ maturing liabilities is of primary importance to depositors, creditors and regulators. Our liquidity, represented by cash borrowing lines, federal funds and available for sale securities, is a result of our operating, investing and financing activities and related cash flows. In order to ensure funds are available at all times, we devote resources to projecting ~~on a monthly basis~~ the amount of funds that will be required and we maintain relationships with a diversified client base so funds are accessible. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets. We had the following borrowing lines available at ~~March 31,~~September 30, 2022:

	March 31, 2022										September 30, 2022
(Dollars in thousands)	Total Credit Line Limit		Current Credit Line Available		Outstanding Amount		Remaining Credit Line Available		Value of Collateral Pledged		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	$	815,060	$	815,060	$	-	$	815,060	$	1,154,080	$	766,011	$	766,011	$	-	$	766,011	$	1,183,540
Federal Reserve BIC	$	664,437	$	664,437	$	-	$	664,437	$	860,206		657,350		657,350		-		657,350		890,564
FHLB Fed Funds	$	18,000	$	18,000	$	-	$	18,000	$	-		18,000		18,000		-		18,000		-
US Bank Fed Funds	$	35,000	$	35,000	$	-	$	35,000	$	-		35,000		35,000		-		35,000		-
MUFG Union Bank Fed Funds	$	15,000	$	15,000	$	-	$	15,000	$	-		15,000		15,000		-		15,000		-
PCBB Fed Funds	$	50,000	$	50,000	$	-	$	50,000	$	-		50,000		50,000		-		50,000		-
Total additional liquidity sources	$	1,597,497	$	1,597,497	$	-	$	1,597,497	$	2,014,286	$	1,541,361	$	1,541,361	$	-	$	1,541,361	$	2,074,104

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 ~~next 60 to 90 days.~~foreseeable future. As of ~~March 31,~~September 30, 2022, we had ~~$1.4~~$1.3 billion in cash and unencumbered investment securities; ~~$2.7~~$2.2 million in investment securities and ~~$2.0~~$2.1 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 investment securities for cash flow needs.

~~On a long-term basis, our liquidity will be met by changing the relative distribution~~

Table of our asset portfolios by reducing our investment or loan volumes, or selling or encumbering assets. Further, we will increase liquidity by soliciting higher levels of deposit accounts through promotional activities and/or borrowing from our correspondent banks as well as the FHLB. At the current time, our long-term liquidity needs primarily relate to funds required to support loan originations and commitments and deposit withdrawals.Contents

~~We believe we can meet all of these needs by cash flows from investment payments and maturities, and investment sales, if the need arises.~~

Our liquidity is comprised of three primary classifications: cash flows from or used in operating activities; cash flows from or used in investing activities; and 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 ~~real estate, commercial & industrial, consumer~~ loans and purchases and sales of investment securities. As of ~~March 31,~~September 30, 2022, we had outstanding loan commitments of ~~$987 million~~$1.1 billion and outstanding letters of credit of ~~$16.3~~$16.6 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 ~~March 31,~~September 30, 2022 and 2021, deposits increased ~~$197~~$269 million and ~~$181~~$508 million compared to December 31, 2021 and 2020, respectively.

~~Table of Contents~~

~~Item 3. Quantitative and Qualitative Disclosures about Market Risk~~

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

The Company’s assessment of market risk at ~~March 31,~~September 30, 2022 indicates there have been no material changes in the quantitative and qualitative disclosures from those made in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2022.

~~Item 4. Controls and Procedures~~

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(a)) at ~~March 31,~~September 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 any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the ~~three~~nine months ended ~~March 31,~~September 30, 2022, to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

~~Item 1.~~ ~~Legal Proceedings~~

Item 1.

Legal Proceedings

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

~~Item 1A.~~ ~~Risk Factors~~

Item 1A.

Risk Factors

There have been no material changes in the risk factors previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.

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~~Item 2.~~

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

~~Not Applicable~~During the first nine months of 2022 the Company repurchased 18,824 shares under the Repurchase Plan, for a total of $17.905 million. All of these shares were purchased at prices ranging from $925.00 to $975.00 per share, based upon the then current price on the OTCQX.

~~Item 3.~~ ~~Defaults upon Senior Securities~~

Item 3.

Defaults upon Senior Securities

Not Applicable

~~Item 4.~~ ~~Mine Safety Disclosures~~

Item 4.

Mine Safety Disclosures

Not Applicable

~~Item 5.~~ ~~Other Information~~

Item 5.

Other Information

Not Applicable

~~Table of Contents~~

~~Item 6.~~ ~~Exhibits~~

Item 6.

Exhibits

List of Financial Statements and Financial Statement Schedules

~~(a)~~

(a) The following documents are filed as a part of this Quarterly Report on Form 10-Q:

~~(1)~~

(1) Financial Statements and

~~(2)~~

(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:~~

(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 Number	Description
10.11	Employment Agreement effective August 1, 2022, between Farmers & Merchants Bank of Central California and Kyle Koelbel, filed on Registrant’s Form 10-Q for the quarter ended September 30, 2022.
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	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH	Inline XBRL Taxonomy Extension Schema Document.
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*	Filed herewith

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SIGNATURES

Pursuant to the requirements 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: ~~May 10,~~November 7, 2022	/s/ Kent A. Steinwert
	Kent A. Steinwert
	Director, Chairman, President and Chief Executive Officer (Principal Executive Officer)


Date: ~~May 10,~~November 7, 2022	/s/ Stephen W. Haley
	Stephen W. Haley
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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)

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	Not Applicable	Not Applicable

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☐
Emerging growth company ☐

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

	Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		33 31
		Overview	3432
		Results of Operations	39 37
		Results of Financial Condition	44

	Item 3 - Quantitative and Qualitative Disclosures about Market Risk		59 57

	Item 4 - Controls and Procedures		59 57

PART II. - OTHER INFORMATION

	Item 1 – Legal Proceedings		59 57
	Item 1A – Risk Factors		59 57
	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		59 58
	Item 3 – Defaults upon Senior Securities		59 58
	Item 4 – Mine Safety Disclosures		59 58
	Item 5 – Other Information		59 58
	Item 6 – Exhibits		60 58
	Signatures		6159

(Dollars in thousands)	Gross Proceeds		Gross Gains		Gross Losses
Three months ended March 31, 2022	$	2,190	$	0	$	0
Three months ended March 31, 2021	$	63,788	$	1,840	$	0

	March 31, 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		5		468		0		0		5		468
2019		0		0		0		0		0		0
Thereafter		9		1,087		0		0		9		1,087
Total		15	$	1,603		0	$	0		15	$	1,603