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

FORM 10-Q

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

For the quarterly period ended SeptemberJune 30, 20222023

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________

Commission File Number:  000-26099

FARMERS & MERCHANTS BANCORP
(Exact name of registrant as specified in its charter)

Delaware 94-3327828
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

111 W. Pine Street, Lodi, California 95240
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (209) 367-2300

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

Title of each classTrading Symbol(s)Name of each exchange on which registered
NoneNot ApplicableNot Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of OctoberJuly 31, 2022,2023, the registrant had 769,357754,436 shares of common stock $0.01 par value per share, outstanding.

FARMERS & MERCHANTS BANCORP
FORM 10-Q

TABLE OF CONTENTS

PART I. - FINANCIAL INFORMATION
Page
    
 Item 1 - Financial Statements 
  
Unaudited Consolidated Statements of Financial ConditionBalance Sheets
  43
  
Unaudited Consolidated Statements of Income
54
  
Unaudited Consolidated Statements of Comprehensive Income
65
  
Unaudited Consolidated Statements of Changes in Shareholders’ Equity
76
  
Unaudited Consolidated Statements of Cash Flows
87
  
Notes to Unaudited Consolidated Financial Statements
  98
    
 
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
31
Overview
32
Results of Operations
37
Results of Financial Condition
4427
    
 
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
5749
    
 
Item 4 - Controls and Procedures
5751
    
PART II. - OTHER INFORMATION
 
    
 
Item 1 – Legal Proceedings
           5752
 
Item 1A – Risk Factors
5752
 
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
5852
 
Item 3 – Defaults upon Senior Securities
5853
 
Item 4 – Mine Safety Disclosures
5853
 
Item 5 – Other Information
5853
 
Item 6 – Exhibits
5853
 
Signatures
5954

2
Table of Contents
Special Note Regarding Forward-Looking Statements

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

Such factors include, but are not limited to, the following: (1) economic conditions in the mid Central Valley or the East Bay region of San Francisco in California; (2) significant changes in interest rates and loan prepayment speeds; (3) credit risks of lending and investment activities; (4) changes in federal and state banking laws or regulations; (5) competitive pressure in the banking industry; (6) changes in governmental fiscal or monetary policies; (7) the possible adverse impacts on the banking industry and our business from a period of significant, prolonged inflation; (8) uncertainty regarding the economic outlook resulting from the continuing war on terrorism, as well as actions taken or to be taken by the U.S. or other governments as a result of further acts or threats of terrorism; (9) water availability and management issues in California and the resulting impact on the Company’s agricultural and industrial customers; (10) expansion into new geographic markets and new lines of business; (11) the impact of COVID-19 (Coronavirus) on the Company and its customers (see “Note 2 – Risks and Uncertainties”); (12) the impact of changes in Federal and State taxation policies and rates; and (13) other factors discussed in “Item 1A. Risk Factors” on our Annual Report on Form 10-K filed with the SEC on March 15, 2022.

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

3
Table of Contents
PART 1. FINANCIAL INFORMATION

Item 1.
Financial Statements

FARMERS & MERCHANTS BANCORP 
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITIONBALANCE SHEETS

(Dollars in thousands, except share and per share amounts) 
September 30,
2022
  
December 31,
2021
  
June 30,
2023
  
December 31,
2022
 
ASSETS            
Cash and due from banks $82,932  $52,499  $80,280  $73,358 
Interest bearing deposits with banks  799,951   662,961   506,692   514,899 
Total cash and cash equivalents  882,883   715,460   586,972   588,257 
Securities available-for-sale, at fair value  177,454   270,454   114,643   152,864 
Securities held-to-maturity, fair value $690,922 and $725,841, respectively
  852,665   737,052 
Allowance for credit losses  (393)  - 
Securities held-to-maturity, fair value $684,503 and $688,393 respectively
  838,446   845,346 
Allowance for credit losses - securities held-to-maturity  (450)  (393)
Total investment securities  1,029,726   1,007,506   952,639   997,817 
Non-marketable securities  15,549   15,549   15,549   15,549 
Loans and leases held for investment  3,323,862   3,237,177 
Allowance for credit losses  (63,617)  (61,007
)
Loans held for investment, net  3,260,245   3,176,170 
Loans and leases held-for-investment
  3,491,723   3,512,361 
Allowance for credit losses - loans and leases  (71,112)  (66,885
)
Loans held-for-investment, net  3,420,611   3,445,476 
Bank-owned life insurance  72,566   71,411   66,582   73,038 
Premises and equipment, net  49,183   47,730   51,519   49,476 
Deferred income tax assets  34,411   25,542   30,612   31,507 
Accrued interest receivable  20,069   18,098   22,116   21,602 
Goodwill  11,183   11,183   11,183   11,183 
Other intangibles  2,957   3,402   2,523   2,809 
Other real estate owned  873   873   873   873 
Other assets  87,136   84,796   89,199   89,812 
TOTAL ASSETS $5,466,781  $5,177,720  $5,250,378  $5,327,399 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Deposits:                
Non-interest bearing $1,802,623  $1,750,330  $1,495,279  $1,758,793 
Interest bearing:                
Demand  1,158,588   1,097,337   920,920   1,125,014 
Savings and money market  1,587,662   1,400,000   1,669,334   1,544,062 
Certificates of deposit  360,384   392,485   552,780   331,400 
Total interest bearing  3,106,634   2,889,822   3,143,034   3,000,476 
Total deposits  4,909,257   4,640,152   4,638,313   4,759,269 
Subordinated debentures  10,310   10,310   10,310   10,310 
Interest payable and other liabilities  79,036   64,122   87,046   72,512 
TOTAL LIABILITIES  4,998,603   4,714,584   4,735,669   4,842,091 
                
SHAREHOLDERS’ EQUITY                
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 
Common shares, $0.01 par value, 7,500,000 authorized 754,523 and 768,337 outstanding at June 30, 2023 and December 31, 2022, respectively
  8   8 
Additional paid in capital  43,263   57,206 
Retained earnings  436,258   387,331   488,501   449,932 
Accumulated other comprehensive (loss) / income, net of taxes  (27,699)  (1,719
)
Accumulated other comprehensive (loss), net of taxes  (17,063)  (21,838
)
TOTAL SHAREHOLDERS’ EQUITY  468,178   463,136   514,709   485,308 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $5,466,781  $5,177,720  $5,250,378  $5,327,399 


See accompanying notes to the unaudited consolidated financial statements.

43
Table of Contents
FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME


 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
(Dollars in thousands, except share and per share amounts) 2022  2021  2022  2021  2023  2022  2023  2022 
Interest income                        
Interest and fees on loans and leases $41,868  $36,088  $117,871  $109,839  $49,690  $38,570  $97,698  $76,003 
Interest and dividends on investments  5,686   3,925   16,697   12,664 
Interest and dividends on investment securities
  5,445   5,716   11,108   11,011 
Interest on deposits with others  4,159   328   5,934   595   5,882   1,409   11,843   1,775 
Total interest income  51,713   40,341   140,502   123,098   61,017   45,695   120,649   88,789 
Interest expense                                
Deposits  1,122   929   2,798   3,200   8,391   873   12,105   1,676 
Subordinated debentures  134   78   319   236   204   103   400   185 
Total interest expense  1,256   1,007   3,117   3,436   8,595   976   12,505   1,861 
Net interest income  50,457   39,334   137,385   119,662   52,422   44,719   108,144   86,928 
Provision for credit losses  1,500   -   3,000   1,250   2,557   1,500   4,057   1,500 
Net interest income after provision for credit losses  48,957   39,334   134,385   118,412   49,865   43,219   104,087   85,428 
Non-interest income                                
Card processing
  1,791   1,788   5,375   5,173   1,712   1,847   3,303   3,584 
Service charges on deposit accounts  638   808   2,318   2,125   690   830   1,324   1,680 
Increase in cash surrender value of BOLI  566   549   1,668   1,616   506   560   950   1,102 
Net (loss)/gain on sale of investment securities available-for-sale
  (2,987)  -   (2,985)  2,554 
Gain on BOLI death benefit
  -   -   4,346   - 
Net gain/(loss) on sale of securities available-for-sale
  -   2   (5,686)  2 
Net gain/(loss) on deferred compensation benefits
  352   615   (227)  1,828   1,302   (991)  2,198   (579)
Other  1,199   857   3,234   2,996   1,237   1,264   2,472   2,035 
Total non-interest income  1,559   4,617   9,383   16,292   5,447   3,512   8,907   7,824 
Non-interest expense                                
Salaries and employee benefits  15,994   14,453   49,181   47,375   17,937   16,403   37,521   33,187 
Net gain/(loss) on deferred compensation benefits
  352   615   (227)  1,828   1,302   (991)  2,198   (579)
Data processing  1,307   1,233   2,567   2,448 
Occupancy  1,196   1,145   3,500   3,554   1,228   1,150   2,408   2,304 
Data Processing
  1,250   1,251   3,698   3,688 
FDIC insurance
  366   317   1,076   902   592   361   1,203   710 
Marketing  303   63   959   669   425   340   895   656 
Legal  49   85   733   485   264   405   524   684 
Other  4,865   2,656   12,274   9,231   3,767   4,130   7,689   7,409 
Total non-interest expense  24,375   20,585   71,194   67,732   26,822   23,031   55,005   46,819 
INCOME BEFORE INCOME TAXES
  26,141   23,366   72,574   66,972   28,490   23,700   57,989   46,433 
Income tax expense
  6,605   5,864   17,537   16,604   7,182   5,257   13,134   10,932 
NET INCOME
 $19,536  $17,502  $55,037  $50,368  $21,308  $18,443  $44,855  $35,501 
                                
Earnings per common share:                                
Basic $25.20  $22.16  $70.47  $63.79  $28.03  $23.58  $58.83  $45.28 
Diluted $25.20  $22.16  $70.47  $63.79  $28.03  $23.58  $58.83  $45.28 
                                
Weighted average number of common shares                                
Basic  775,109   789,646   780,988   789,646   760,308   781,880   762,443   783,976 
Diluted  775,109   789,646   780,988   789,646   760,308   781,880   762,443   783,976 

See accompanying notes to the unaudited consolidated financial statements.

54
Table of Contents
FARMERS & MERCHANTS BANCORP 
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
(Dollars in thousands) 2022  2021  2022  2021  2023  2022  2023  2022 
Net income 
$
19,536
  
$
17,502
  
$
55,037
  
$
50,368
  
$
21,308
  
$
18,443
  
$
44,855
  
$
35,501
 
Other comprehensive income                                
Unrealized holding (losses)/gains on securities available-for-sale
  
(12,378
)  
(2,237
)
  
(39,677
)  
(16,846
)
Unrealized (losses)/gains on available-for-sale securities
  
(1,191
)  
(11,434
)
  
1,171
   
(27,299
)
Reclassification adjustment for (gains)/losses on available-for-sale securities  
2,987
   
-
   
2,985
   
(2,554
)  
-
   
(2
)
  
5,685
   
(2
)
Amortization of unrealized loss on securities transferred to held-to-maturity  
(52
)  
(135
)  
(193
)  
(373
)
  
(47
)  
(64
)  
(77
)  
(141
)
Net unrealized holding (losses)/gains on securities available-for-sale  (9,443)  (2,372)  (36,885)  (19,773)
Net unrealized (losses)/gains on available-for-sale securities  (1,238)  (11,500)  6,779   (27,442)
Income tax benefit/(expense)  
2,792
   
702
   
10,905
   
5,846
   
375
   
3,400
   
(2,004
)
  
8,113
 
Other comprehensive (loss)/income, net of tax
  
(6,651
)  
(1,670
)
  
(25,980
)  
(13,927
)
  
(863
)  
(8,100
)
  
4,775
   
(19,329
)
Total comprehensive income 
$
12,885
  
$
15,832
  
$
29,057
  
$
36,441
  
$
20,445
  
$
10,343
  
$
49,630
  
$
16,172
 

See accompanying notes to the unaudited consolidated financial statements.

65
Table of Contents
FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATED 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
 
 For the three and six months ended June 30, 2023 and 2022
 
(Dollars in thousands, except share amounts) 
Common
Shares
  Amount
  
Additional
Paid-In
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
(Loss)/Income
  Total 
Balance as of March 31, 2023
  
762,931
  
$
8
  
$
51,615
  
$
473,479
  
$
(16,200
)
 
$
508,902
 
Net income  -   -   
-
   
19,536
   
-
   
19,536
   -   -   
-
   
21,308
   
-
   
21,308
 
Other comprehensive loss, net of tax  -   
-
   
-
   
-
   
(6,651
)
  
(6,651
)
  -   
-
   
-
   
-
   
(863
)
  
(863
)
Cash dividends declared ($8.30 per share)
  -
   -   -   (6,286)  -   (6,286)
Repurchase of common stock  (6,368)  -   (6,060)  -   -   (6,060)  (8,408)  -   (8,352)  -   -   (8,352)
Balance as of September 30, 2022
  
770,822
  
$
8
  
$
59,611
  
$
436,258
  
$
(27,699
)
 
$
468,178
 
Balance as of June 30, 2023
  
754,523
  
$
8
  
$
43,263
  
$
488,501
  
$
(17,063
)
 
$
514,709
 
                                                
Balance as of July 1, 2021
  
789,646
  
$
8
  
$
77,516
  
$
360,021
  
$
814
  
$
438,359
 
Balance as of March 31, 2022
  
785,146
  
$
8
  
$
73,264
  
$
404,389
  
$
(12,948
)
 
$
464,713
 
Net income  -   -   
-
   
17,502
   
-
   
17,502
   -   -   
-
   
18,443
   
-
   
18,443
 
Other comprehensive loss, net of tax  -   
-
   
-
   
-
   
(1,670
)
  
(1,670
)
  -   
-
   
-
   
-
   
(8,100
)
  
(8,100
)
Balance as of September 30, 2021
  
789,646
  
$
8
  
$
77,516
  
$
377,523
  
$
(856
)
 
$
454,191
 
Cash dividends declared ($7.85 per share)
  -   -   -   (6,110)  -   (6,110)
Repurchase of common stock
  (7,956)  -   (7,593)  -   -   (7,593)
Balance as of June 30, 2022
  
777,190
  
$
8
  
$
65,671
  
$
416,722
  
$
(21,048
)
 
$
461,353
 


 

(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)/Income
  Total 
Balance as of December 31, 2022  
768,337
  
$
8
  
$
57,206
  
$
449,932
  
$
(21,838
)
 
$
485,308
 
Net income  -   -   
-
   
44,855
   
-
   
44,855
 
Other comprehensive loss, net of tax  -   
-
   
-
   
-
   
4,775
   
4,775
 
Cash dividends declared ($8.30 per share)
  -   -   -   (6,286)  -   (6,286)
Repurchase of common stock  (13,814)  -   (13,943)  -   -   (13,943)
Balance as of June 30, 2023
  
754,523
  
$
8
  
$
43,263
  
$
488,501
  
$
(17,063
)
 
$
514,709
 
                         
Balance as of December 31, 2021  
789,646
  
$
8
  
$
77,516
  
$
387,331
  
$
(1,719
)
 
$
463,136
 
Net income  -   -   
-
   
35,501
   
-
   
35,501
 
Other comprehensive loss, net of tax  -   
-
   
-
   
-
   
(19,329
)
  
(19,329
)
Cash dividends declared ($7.85 per share)
  -   -   -   (6,110)  -   (6,110)
Repurchase of common stock
  (12,456)  -   (11,845)  -   -   (11,845)
Balance as of June 30, 2022
  
777,190
  
$
8
  
$
65,671
  
$
416,722
  
$
(21,048
)
 
$
461,353
 

See accompanying notes to the unaudited consolidated financial statements.

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FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
Nine Months Ended
September 30,
  
Six Months Ended
June 30,
 
(Dollars in thousands) 2022  2021  2023  2022 
Cash flows from operating activities:            
Net income $55,037  $50,368  $44,855  $35,501 
Adjustments to reconcile net income to net cash provided by operating activities:                
Provision for credit losses  3,000   1,250   4,057   1,500 
Depreciation and amortization  1,849   1,971   1,196   1,270 
Net amortization of securities premiums and discounts  341   1,133   35   275 
Increase in cash surrender value of BOLI  (1,666
)
  (1,616
)
  (950
)
  (1,102
)
Gain on BOLI death benefit
  (4,346)  - 
Decrease /(increase) in deferred income taxes, net  2,356   (456)  1,773   (1,127)
Loss/(gains) on sale of securities available-for-sale  2,985   (2,554
)
Loss/(gain) on sale of securities available-for-sale  5,686   (2)
Net changes in:                
Other assets  (2,362)  (8,772)  (2,636)  (7,797)
Other liabilities  18,134   10,738   16,671   22,823 
Net cash provided by operating activities  79,674   52,062   66,341   51,341 
Cash flows from investing activities:                
Net change in loans held for investment  (86,401
)
  (39,956)
Net change in loans and leases held-for-investment  6,388   (12,568)
Purchase of available-for-sale securities  (10,135
)
  (257,228
)
  (4,515
)
  (10,090
)
Purchase of held-to-maturity securities  (168,634
)
  (194,332
)
  (2,071
)
  (168,149
)
Proceeds from sales, maturities, calls and pay downs of available-for-sale securities
  62,979   397,454   43,885   27,679 
Proceeds from maturities, calls and pay downs of held-to-maturity securities  52,884   29,042   23,498   36,641 
Purchase of premises and equipment  (3,318
)
  (1,001
)
  (3,239
)
  (526
)
Purchase of other investments  (5,300)  (4,516
)
  (2,166)  (3,440)
Redemption of other investments  -   2,556 
Proceeds from bank-owned life insurance  511   -   11,752   - 
Proceeds from sale of assets  73   635   27   34 
Net cash used in investing activities  (157,341
)
  (67,346)
Net cash provided by (used in) investing activities  73,559   (130,419)
Cash flows from financing activities:                
Net increase in deposits  269,105   508,127 
Net (decrease) increase in deposits  (120,956)  129,361 
Cash dividends paid
  (6,110
)
  (5,915)  (6,286)  (6,110)
Net cash used in share repurchase of common stock
  (17,905)  -   (13,943)  (11,845)
Net provided by financing activities  245,090   502,212 
Net cash (used in) provided by financing activities  (141,185)  111,406 
Net change in cash and cash equivalents  167,423   486,928   (1,285)  32,328 
Cash and cash equivalents, beginning of period
  715,460   383,837   588,257   715,460 
Cash and cash equivalents, end of period
 $882,883  $870,765  $586,972  $747,788 
                
Supplemental disclosures of cash flow information:                
Cash paid for interest $3,832  $4,369  $9,907  $2,580 
Income taxes paid
 $11,451  $22,530  $16  $9,343 
                
Supplemental disclosures of non-cash transactions:                
Investment securities available-for-sale transferred to held-to-maturity $-  $316,925 
Lease Liabilities Arising from Obtaining Right-of-Use Assets $-  $302 
Net change in unrealized gain/(losses) on securities available-for-sale $6,857  $(27,301)

See accompanying notes to the unaudited consolidated financial statements.

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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 CaliforniaCalifornia (“FMB”F&M Bank” or the “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 SeptemberJune 30, 20222023 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 Unaudited 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, 20212022 filed with the SEC on March 15, 20222023 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 20212022 Form 10-K. Interim results are not necessarily indicative of results for a full year or any other interim period.

Accounting Standards Adopted in 2023
On January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures using the prospective transition method. This ASU eliminates the troubled debt restructuring recognition and measurement guidance and requires an entity to present gross write-offs by year of origination. The amendments also enhance disclosure requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. With the exception of enhanced disclosures, there was no material impact to the consolidated financial statements from adoption of this ASU. The Company’s updated accounting policy, as a result of this new ASU, is outlined below.

Modifications for Borrowers Experiencing Financial Difficulty. The Company may renegotiate the terms of existing loans for a variety of reasons. When refinancing or restructuring a loan, the Company evaluates where the borrower is experiencing financial difficulty. In making this determination, the Company considers whether the borrower is currently in default on any of its debt. In addition, the Company evaluates whether it is probable that the borrower would be in payment default on any of its debt in the foreseeable future without the modification and if the borrower (without the current modification) could obtain equivalent financing from another creditor at a market rate for similar debt. Modifications of loans to borrowers in these situations may indicated that the borrower is facing financial difficulty. Modifications of loans to borrowers experiencing financial difficulty that are in the form of principal forgiveness, interest rate reductions, other-than-insignificant payment delays, or a term extension (or a combination thereof) require disclosure. The Company’s disclosures are included in Note 3, Loans and Leases.

8
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 1—Basis of Presentation and Significant Accounting Policies—Continued

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
In March 2023, the FASB officially recognized sourceissued ASU 2023-02, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.  ASU 2023-02 allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of authoritative GAAP applicablethe program giving rise to the related income tax credits. The Amendments in ASU 2023-02 apply to all publicreporting entities that hold (1) tax equity investments that meet the conditions for and non-public non-governmental entities. Periodically,elect to account for them using the proportional amortization method or (2) an investment in a LIHTC structure through a limited liability entity that is not accounted for using the proportional amortization method and to which certain LIHTC-specific guidance removed from FASB will issue Accounting Standard updates (“ASU”)ASC 323-740, Investments – Equity Method and Joint Ventures: Income Taxes, has been applied. ASU 2023-02 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.  Early adoption is permitted for any interim period within those fiscal years. The amendments in ASU 2023-02 must be applied on either a modified retrospective or a retrospective basis (except as discussed in the ASU for LIHTC investments not accounted for using the proportional amortization method). The adoption of this ASU is not expected to its ASC. Rules and interpretive releases ofhave material impact on 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.Company’s Consolidated Financial Statements.

109
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)(Continued)
Note 1—Basis of Presentation and Significant Accounting Policies—Continued
 
On January 1, 2022, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology that delays recognition until it is probable a loss has been incurred with an expected loss methodology that is referred to as CECL.


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


The implementation of 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
 
(Dollars in thousands) 
Reported
under
ASC 326
  
Reported
Pre-
Adoption
  
Impact of
ASC 326
Adoption
 
Allowance for credit losses:         
Real estate:         
Commercial $(17,379
)
 $(28,536
)
 $11,157 
Agricultural  (14,580
)
  (9,613
)
  (4,967
)
Residential and home equity  (5,879
)
  (2,847
)
  (3,032
)
Construction  (3,311
)
  (1,456
)
  (1,855
)
Total real estate  (41,149
)
  (42,452
)
  1,303 
Commercial & industrial  (11,417
)
  (11,489
)
  72 
Agricultural  (6,363
)
  (5,465
)
  (898)
Commercial leases  (1,567
)
  (938
)
  (629
)
Consumer and other  (511
)
  (663
)
  152 
Total allowance for credit losses $(61,007
)
 $(61,007
)
 $- 
11
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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 September 30, 2022 fordisclosure 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 the effects of COVID-19 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.

12
Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)

Note 3—2—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 September 30, 2022                
U.S. Treasury notes $4,979  $-  $38  $4,941 
As of June 30, 2023                
U.S. Government-sponsored securities  4,695   27   24   4,698  $
3,845  $
17  $
21  $
3,841 
Mortgage-backed securities (1)
  194,600   16   38,163   156,453   123,302   4   23,238   100,068 
Collateralized mortgage obligations (1)
  1,499   -   41   1,458   599   -   13   586 
Corporate securities  10,046   -   452   9,594   10,038   -   200   9,838 
Other  310   -   -   310   310   -   -   310 
Total available-for-sale securities $216,129  $43  $38,718  $177,454  $138,094  $21  $23,472  $114,643 

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


 
  Gross Unrealized  
 
Available-for-Sale Securities 
  Gross Unrealized  
 
(Dollars in thousands) 
Amortized
Cost
  Gains  Losses  
Fair
Value
  
Amortized
Cost
  Gains  Losses  Fair Value 
As of December 31, 2021
                
As of December 31, 2022
                
U.S. Treasury notes $9,938  $151  $-  $10,089  $4,989  $-  $25  $4,964 
U.S. Government-sponsored securities  6,351   62   39   6,374   4,430   21   24   4,427 
Mortgage-backed securities (1)
  253,300   3,200   5,380   251,120   162,314   9   29,795   132,528 
Collateralized mortgage obligations (1)
  2,412   24   -   2,436   1,085   -   31   1,054 
Corporate securities  10,043   -   462   9,581 
Other  435   -   -   435   310   -   -   310 
Total available-for-sale securities $272,436  $3,437  $5,419  $270,454  $183,171  $30  $30,337  $152,864 

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

The book values, estimated fair values and unrealized gains and losses of investments classified as held-to-maturity are as follows:
 
Held-to-Maturity Securities 
  Gross Unrealized  
    
  Gross Unrealized  
  
 
(Dollars in thousands) Amortized
Cost		  Gains  Losses  
Fair
Value
  
Allowance
for Credit
Losses
  Amortized Cost  Gains  Losses  Fair Value  
Allowance
for Credit Losses
 
As of September 30, 2022              
Municipal securities $60,827  $-  $735  $60,092  $393 
As of June 30, 2023               
Mortgage-backed securities (1)
  709,541   -   145,836   563,705   -  $685,028  $16  $138,764  $546,280  $- 
Collateralized mortgage obligations (1)
  82,297
   -
   15,172
   67,125
   -
   77,290
   -
   15,022
   62,268
   -
 
Municipal securities  76,128   72   245   75,955   450 
Total held-to-maturity securities $852,665  $-  $161,743  $690,922  $393  $838,446  $88  $154,031  $684,503  $450 
(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.


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FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)(Continued)
Note 3—2—Investment Securities—Continued

    Gross Unrealized       
Held-to-Maturity Securities 
  Gross Unrealized  
  
 
(Dollars in thousands) Amortized Cost  Gains  Losses  
Fair
Value
  
Allowance
for Credit
Losses
  
Amortized
Cost
  Gains  Losses  Fair Value  
Allowance
for Credit Losses
 
As of December 31, 2021               
Municipal securities $66,496  $701  $-  $67,197  $- 
As of December 31, 2022               
Mortgage-backed securities(1)
  596,775   45   11,764   585,056   -  $702,858  $29  $141,121  $561,766  $- 
Collateralized mortgage obligations(1)
  73,781   36   229   73,588   -   80,186   -   15,701   64,485   - 
Municipal securities  62,302   49   209   62,142   393 
Total held-to-maturity securities $737,052  $782  $11,993  $725,841  $-  $845,346  $78  $157,031  $688,393  $393 
  
(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.

The allowance for credit losses on held-to-maturity securities is a contra-asset valuation account that is deducted from the amortized cost basis of held-to-maturity securities to present the net amount expected to be collected. Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to residential mortgage-backed securities issued by the U.S. government, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by States and political subdivisions and other held-to-maturity securities, management considers (i) issuer bond ratings, (ii) historical loss rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) internal forecasts and (v) whether or not such securities are guaranteed or pre-refunded by the issuers.

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.

As of September 30, 2022, the Company held 200 available-for-sale investment securities of which 86 were in an unrealized loss position for less than twelve months and 77 securities were in an unrealized loss position for twelve months or more without an allowance for credit losses. Management evaluates the available-for-sale investment 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
 

  June 30, 2023 
  Less Than 12 Months  12 Months or More  Total 
(Dollars in thousands) Fair Value  
Unrealized
Losses
  Fair Value  Unrealized
Losses		  Fair Value  
Unrealized
Losses
 
Available-for-Sale Securities                  
U.S. Government-sponsored securities 
$
267
  
$
1
  
$
1,127
  
$
20
  
$
1,394
  
$
21
 
Mortgage-backed securities(1)
  
15,374
   
480
   
83,944
   
22,758
   
99,318
   
23,238
 
Collateralized mortgage obligations(1)
  
-
   
-
   
586
   
13
   
586
   
13
 
Corporate securities  
-
   
-
   
9,838
   
200
   
9,838
   
200
 
Total available-for-sale securities 
$
15,641
  
$
481
  
$
95,495
  
$
22,991
  
$
111,136
  
$
23,472
 

(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    

 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 
11
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FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 2—Investment Securities—Continued

     December 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
 
Available-for-Sale Securities                  
U.S. Treasury notes
 $
4,964  $
25  $
-  $
-  $
4,964  $
25 
U.S. Government-sponsored securities 
378  
1  
1,326  
23  
1,704  
24 
Mortgage-backed securities (1)
  35,117   1,639   96,589   28,156   131,706   29,795 
Collateralized Mortgage Obligations (1)
  1,054   31   -   -   1,054   31 
Corporate securities  --   9,581   462   9,581   462 
Total available-for-sale securities $41,513  $1,696  $107,496  $28,641  $149,009  $30,337 

(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 June 30, 2023, the Company held 182 available-for-sale securities of which 56 were in an unrealized loss position for less than twelve months and 102 securities were in an unrealized loss position for twelve months or more without an allowance for credit losses. Because the decline in fair value is attributable to changes in interest rates and not credit quality and because the Company does not have the intent to sell these securities and it is more likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be impaired. Management evaluates the available-for-sale securities in an unrealized loss position, relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations.

14
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FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)
Note 3—Investment Securities—Continued

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

 For the Nine Months Ended September 30, 2022   June 30, 2023 
(Dollars in thousands) Municipal securities  Mortgage-backed securities  Collateralized Mortgage obligations  Total  Municipal securities  Mortgage-backed securities  Collateralized Mortgage obligations  Total 
Allowance for credit losses - securities                        
Beginning Balance $-  $-  $-  $-  $393  $-  $-  $393 
Provision for credit losses  393   -   -   393   57   -   -   57 
Ending Balance $393  $-  $-  $393  $450  $-  $-  $450 

Management measures expected credit losses on held-to-maturity (“HTM”) debt securities on a collective basis by major security type. The Company’s HTM portfolio contains securities issued by U.S. government entities and agencies and municipalities. The Company uses industry historical credit loss information adjusted for current conditions to establish the allowance for credit losses on its HTM municipal bond portfolio.
  December 31, 2022
 
(Dollars in thousands) 
Municipal
securities
  
Mortgage-
backed
securities
  
Collateralized
Mortgage
obligations
  Total 
Allowance for credit losses - securities            
Beginning Balance 
$
393
  
$
-
  
$
-
  
$
393
 
Provision for credit losses  
-
   
-
   
-
   
-
 
Ending Balance 
$
393
  
$
-
  
$
-
  
$
393
 

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.

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.

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.

Obligations of states and political subdivisions. The Company’s bank-qualified municipal bond portfolio 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”; 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.
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FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)(Continued)

Note 3—2—Investment Securities—Continued

The amortized cost and estimated fair values of investment securities at SeptemberJune 30, 20222023 by contractual final maturity are shown in the following tabletable::


 Available-for-Sale  Held-to-Maturity  Available-for-Sale  Held-to-Maturity 
(Dollars in thousands)
 Amortized Cost  Fair Value  Amortized Cost  Fair Value  
Amortized
Cost
  Fair Value  
Amortized
Cost
  Fair Value 
Securities maturing in:
                                
One year or less
 $5,312  $5,274  $883  $883  $321  $321  $283  $283 
After one year through five years  21,418   20,600   7,484   7,324   18,571   18,018   12,292   12,201 
After five years through ten years  25,492   23,196   28,907   26,852   7,135   6,871   28,355   26,675 
After ten years  163,907   128,384   815,391   655,863   112,067   89,433   797,516   645,344 
Total $
216,129  $
177,454  $
852,665  $
690,922  $
138,094  $
114,643  $
838,446  $
684,503 

Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Expected maturities of mortgage-backed and CMO securities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

The Company monitors the credit quality of those available-for-sale and held-to-maturity debt securities not issued by the U.S. government or one of its agencies or government sponsored entities, through the use of credit ratings. Credit ratings are reviewed and updated quarterly. The following table summarizes the fair value of available-for-sale and amortized cost of held-to-maturity debtmunicipal securities by credit rating at SeptemberJune 30, 2022:2023:

   Available-for-Sale   Held-to-Maturity 
  Fair Value  Amortized Cost 
(Dollars in thousands) AAA/AA/A  BBB/BB/B  Not Rated  AAA/AA/A  BBB/BB/B  Not Rated 
September 30, 2022                  
                   
Breakdown by Category:                  
U.S. Treasury notes
 $4,941  $-  $-  $-  $-  $- 
U.S. Government-sponsored securities  -   -   4,698   -   -   - 
Mortgage-backed securities (1)
  -   -   156,453   -   -   709,541 
Collateralized mortgage obligations (1)
  -   -   1,458   -   -   82,297 
Municipal securities
  -


-


-


18,025


386


42,416 
Corporate securities  4,795   4,799   -   -   -   - 
Other  -   -   310   -   -   - 
Total Investment Grade $9,736  $4,799  $162,919  $18,025  $386  $834,254 

  Held-to-Maturity 
  Amortized Cost 
(Dollars in thousands) AAA/AA/A  BBB/BB/B  Not Rated  Total 
June 30, 2023            
Municipal securities $19,380  $391  $56,357  $76,128 
Total $19,380  $391  $56,357  $76,128 
(1) All mortgage-backed securities and collateralized mortgage obligations

As of June 30, 2023, there were issued by an agencyno past due principal or government sponsored entity of the U.S. government.
interest payments associated with these securities.

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 
Six months ended June 30, 2023 $30,482  $-  $5,686 
Six months ended June 30, 2022 $2,610  $2  $- 

Pledged Securities

As of SeptemberJune 30, 2022,2023, securities carried at $493.8$582.2 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$478.7 million at December 31, 2021.2022.

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FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)(Continued)
Note 4—3—Loans and Leases

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

(Dollars in thousands) 
September 30,
2022
  
December 31,
2021
  
June 30,
2023
  
December 31,
2022
 
Loans and leases held for investment, net
      
Loans and leases held-for-investment, net
      
Real estate:            
Commercial $1,246,805  $1,167,516  $1,302,460  $1,328,691 
Agricultural  722,448   672,830   739,207   726,938 
Residential and home equity  377,249   350,581   392,754   387,753 
Construction  169,624   177,163   172,903   166,538 
Total real estate  2,516,126   2,368,090   2,607,324   2,609,920 
Commercial & industrial  454,185   427,799   479,908   478,758 
Agricultural
  260,296   276,684   282,725   314,525 
Commercial leases  94,089   96,971   126,554   112,629 
Consumer and other(1)
  7,776   78,367   5,553   5,886 
Total gross loans and leases  3,332,472   3,247,911   3,502,064   3,521,718 
Unearned income  (8,610)  (10,734)  (10,341)  (9,357)
Total net loans and leases  3,323,862   3,237,177   3,491,723   3,512,361 
Allowance for credit losses  (63,617)  (61,007)  (71,112)  (66,885)
Total loans and leases held for investment, net $3,260,245  $3,176,170 
Total loans and leases held-for-investment, net $3,420,611  $3,445,476 

(1) Includes SBA PPP loans.

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

At SeptemberJune 30, 2022,2023, 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$1.3 billion and $890.6$894.4 million, respectively. The borrowing capacity on these loans was $766$784.1 million from FHLB and $657$655.0 million from the FRB.

17
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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 &and lease portfolio, including unearned income, by the time past due for the periods indicated:


 September 30, 2022  June 30, 2023 
(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 $1,238,110  $170  $-  $411  $581  $1,238,691  $1,293,842  $-  $-  $375  $375  $1,294,217 
Agricultural  722,448   -   -   -   -   722,448   739,207   -   -   -   -   739,207 
Residential and home equity  377,224   25   -   -   25   377,249   392,754   -   -   -   -   392,754 
Construction  169,624   -   -   -   -   169,624   172,903   -   -   -   -   172,903 
Total real estate  2,507,406   195   -   411   606   2,508,012   2,598,706   -   -   375   375   2,599,081 
Commercial & industrial  454,185   -   -   -   -   454,185   479,729   179   -   -   179   479,908 
Agricultural  260,296   -   -   -   -   260,296   282,725   -   -   -   -   282,725 
Commercial leases  93,593   -   -   -   -   93,593   124,456   -   -   -   -   124,456 
Consumer and other  7,766   10   -   -   10   7,776   5,549   4   -   -   4   5,553 
Total loans and leases, net $3,323,246  $205  $-  $411  $616  $3,323,862  $3,491,165  $183  $-  $375  $558  $3,491,723 


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

1814
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FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)(Continued)
Note 4—3—Loans and Leases—Continued

  December 31, 2022 
(Dollars in thousands) Current  
30-89 Days
Past Due
  
90+ Days
Past Due
  Non-accrual  
Total
Past Due
  Total 
Loans and leases held-for-investment, net
                  
Real estate:                  
Commercial
 $1,319,911  $-  $-  $403  $403  $1,320,314 
Agricultural  726,938   -   -   -   -   726,938 
Residential and home equity  387,753   -   -   -   -   387,753 
Construction  166,370   -   -   168   168   166,538 
Total real estate  2,600,972   -   -   571   571   2,601,543 
Commercial & industrial  478,758   -   -   -   -   478,758 
Agricultural  314,525   -   -   -   -   314,525 
Commercial leases  111,649   -   -   -   -   111,649 
Consumer and other  5,789   97   -   -   97   5,886 
Total loans and leases, net $3,511,693  $97  $-  $571  $668  $3,512,361 



Non-accrual loans are summarized as follows:


(Dollars in thousands) 
September 30,
2022
  
December 31,
2021
  
June 30,
2023
  
December 31,
2022
 
Non-accrual loans and leases:            
Non-accrual loans and leases, not TDRs      
Real estate:            
Commercial $411  $-  $375  $403 
Agricultural  -   18   -   - 
Residential and home equity  -   -   -   - 
Construction  -   -   -   168 
Total real estate  411   18   375   571 
Commercial & industrial  -   -   -   - 
Agricultural  -   -   -   - 
Commercial leases  -   -   -   - 
Consumer and other  -   -   -   - 
Subtotal  411   18 
Non-accrual loans and leases, are TDRs        
Real estate:        
Commercial $-  $- 
Agricultural  -   - 
Residential and home equity  -   - 
Construction  -   - 
Total real estate  -   - 
Commercial & industrial  -   - 
Agricultural  -   498 
Commercial leases  -   - 
Consumer and other  -   - 
Subtotal  -   498 
Total non-accrual loans and leases $411  $516  $375  $571 

During the six months ended June 30, 2023, we had one residential real estate loan modified in the amount of $127,000.  The contractual interest rate of the modified loan decreased from 3.18% to 2.18% and the contractual term was extended from 15 years to 25 years.  There were no loans modified on or after January 1, 2023, when the company adopted ASU 2022-02, through June 30, 2023 that subsequently defaulted during the period presented.


1915
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FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)(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) 
September 30,
2022
  
December 31,
2021
 
Troubled debt restructured loans and leases:      
Accruing TDR loans and leases      
Real estate:      
Commercial $-  $41 
Agricultural  -   - 
Residential and home equity  1,319   1,522 
Construction  -   - 
Total real estate  1,319   1,563 
Commercial & industrial  6   260 
Agricultural  -   - 
Commercial leases  -   - 
Consumer and other  -   1 
Subtotal  1,325   1,824 
Non-accruing TDR loans and leases        
Real estate:        
Commercial $
-  $
- 
Agricultural  -   - 
Residential and home equity  -   - 
Construction  -   - 
Total real estate  -   - 
Commercial & industrial  -   - 
Agricultural  -   498 
Commercial leases  -   - 
Consumer and other  -   - 
Subtotal  -   498 
Total TDR loans and leases $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.
 
20
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:


  September 30, 2022 
(Dollars in thousands) Pass  
Special
Mention
  
Sub-
standard
  Doubtful  
Total Loans
& Leases
  
Total
Allowance
for Credit
Losses
 
Loans and leases held for investment, net                  
Real estate:                  
Commercial $1,229,837  $7,320  $1,534  $-  $1,238,691  $16,540 
Agricultural  705,404   10,891   6,153   -   722,448   16,560 
Residential and home equity  377,021   -   228   -   377,249   6,865 
Construction  169,624   -   -   -   169,624   2,995 
Total real estate  2,481,886   18,211   7,915   -   2,508,012   42,960 
Commercial & industrial  453,832   70   283   -   454,185   10,392 
Agricultural  253,554   6,726   16   -   260,296   8,523 
Commercial leases  93,493   100   -   -   93,593   1,588 
Consumer and other  7,583   -   193   -   7,776   154 
Total loans and leases, net $3,290,348  $25,107  $8,407  $-  $3,323,862  $63,617 


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

21
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FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)
Note 4—3—Loans and Leases—Continued

 

The following table representspresents the credit risk rating categories for loans and leases held-for-investment (accruing and non-accruing) net of deferred fees by loan portfolio segment and class as of the dates indicated.


  June 30, 2023 
(Dollars in thousands) Pass  
Special
Mention
  
Sub-
standard
  Doubtful  
Total Loans
& Leases
  
Total
Allowance
for Credit
Losses
 
Loans and leases held-for-investment, net                  
Real estate:                  
Commercial $1,290,902  $2,940  $375  $-  $1,294,217  $24,787 
Agricultural  728,490   -   10,717   -   739,207   9,908 
Residential and home equity  392,462   -   292   -   392,754   7,179 
Construction  172,903   -   -   -   172,903   3,195 
Total real estate  2,584,757   2,940   11,384   -   2,599,081   45,069 
Commercial & industrial  471,586   8,083   239   -   479,908   11,291 
Agricultural  282,699   17   9   -   282,725   12,903 
Commercial leases  124,412   44   -   -   124,456   1,657 
Consumer and other  5,391   -   162   -   5,553   192 
Total loans and leases, net $3,468,845  $11,084  $11,794  $-  $3,491,723  $71,112 


  
December 31, 2022
 
(Dollars in thousands) Pass  Special Mention  
Sub-
standard
  Doubtful  
Total Loans
& Leases
  
Total
Allowance
for Credit
Losses
 
Loans and leases held-for-investment, net                  
Real estate:                  
Commercial $1,314,377  $5,535  $402  $-  $1,320,314  $18,055 
Agricultural  709,927   10,891   6,120   -   726,938   14,496 
Residential and home equity  387,371   -   382   -   387,753   7,508 
Construction  166,370   -   168   -   166,538   3,026 
Total real estate  2,578,045   16,426   7,072   -   2,601,543   43,085 
Commercial & industrial  478,437   63   258   -   478,758   11,503 
Agricultural  308,830   5,682   13   -   314,525   10,202 
Commercial leases  111,568   81   -   -   111,649   1,924 
Consumer and other  5,650   -   236   -   5,886   171 
Total loans and leases, net $3,482,530  $22,252  $7,579  $-  $3,512,361  $66,885 
 
16
Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 3—Loans and Leases—Continued

 
The following table presents outstanding loan and lease balances held-for-investment by segment and class, credit quality indicators, and vintage year by class of financing receivable, and current period gross charge-offs by year of origination as of September 30, 2022:June 30, 2023:


  September 30, 2022 
  Term Loans Amortized Cost Basis by Origination Year       
(Dollars in thousands) 2022  2021  2020  2019  2018  Prior  
Revolving
Loans
Amortized
Cost
  Total 
Net loans and leases held for investment                        
Real estate:                        
Commercial                        
Pass $140,036  $236,947  $153,480  $72,167  $86,063  $227,146  $313,998  $1,229,837 
Special mention  -   -   -   -   3,844   -   3,476   7,320 
Substandard  -   -   -   -   -   1,534   -   1,534 
Doubtful  -   -   -   -   -   -   -   - 
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
                                
Pass $54,480  $43,117  $56,965  $15,297  $51,194  $151,470  $332,881  $705,404 
Special mention  -   -   -   2,636   -   -   8,255   10,891 
Substandard  -   -   -   -   119   6,034   -   6,153 
Doubtful  -   -   -   -   -   -   -   - 
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 $51,888  $97,973  $88,214  $14,851  $6,910  $78,458  $38,727  $377,021 
Special mention  -   -   -   -   -   -   -   - 
Substandard  -   -   -   -   -   144   84   228 
Doubtful  -   -   -   -   -   -   -   - 
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 $-  $-  $-  $1,575  $-  $62  $167,987  $169,624 
Special mention  -   -   -   -   -   -   -   - 
Substandard  -   -   -   -   -   -   -   - 
Doubtful  -   -   -   -   -   -   -   - 
Total construction $-  $-  $-  $1,575  $-  $62  $167,987  $169,624 
Construction                                
Current-period gross charge-offs $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
- 
                                 
Total Real estate $246,404  $378,037  $298,659  $106,526  $148,130  $464,848  $865,408  $2,508,012 
                                 
Commercial & industrial                                
Pass $24,852  $41,476  $13,975  $10,646  $8,774  $6,386  $347,723  $453,832 
Special mention  -   69   -   -   -   1   -   70 
Substandard  -   -   -   -   6   6   271   283 
Doubtful  -   -   -   -   -   -   -   - 
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 
                                 
Agricultural                                
Pass $4,387  $3,789  $1,082  $1,617  $731  $2,211  $239,737  $253,554 
Special mention  -   -   -   -   -   7   6,719   6,726 
Substandard  -   -   -   13   3   -   -   16 
Doubtful  -   -   -   -   -   -   -   - 
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 $11,541  $16,541  $13,664  $7,643  $21,387  $22,717  $-  $93,493 
Special mention  -   -   -   100   -   -   -   100 
Substandard  -   -   -   -   -   -   -   - 
Doubtful  -   -   -   -   -   -   -   - 
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 $965  $2,463  $359  $235  $386  $2,481  $694  $7,583 
Special mention  -   -   -   -   -   -   -   - 
Substandard  193   -   -   -   -   -   -   193 
Doubtful  -   -   -   -   -   -   -   - 
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 $288,342  $442,375  $327,739  $126,780  $179,417  $498,657  $1,460,552  $3,323,862 
  June 30, 2023 
  Term Loans Amortized Cost Basis by Origination Year       
(Dollars in thousands) 2023  2022  2021  2020  2019  Prior  
Revolving
Loans
Amortized
Cost
  Total 
Net loans and leases held-for-investment                        
Real estate:                        
Commercial                        
Pass $72,459  $172,866  $226,209  $146,307  $69,072  $285,957  $318,032  $1,290,902 
Special mention  -   -   -   -   -   2,340   600   2,940 
Substandard  -   -   -   -   -   375   -   375 
Doubtful  -   -   -   -   -   -   -   - 
Total Commercial $72,459  $172,866  $226,209  $146,307  $69,072  $288,672  $318,632  $1,294,217 
Commercial
                                
Current-period gross charge-offs
 $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
- 
                                 
Agricultural
                                
Pass $35,673  $74,658  $41,588  $51,985  $14,224  $174,620  $335,742  $728,490 
Special mention  -   -   -   -   -   -   -   - 
Substandard  -   -   -   -   -   6,128   4,589   10,717 
Doubtful  -   -   -   -   -   -   -   - 
Total Agricultural
 $35,673  $74,658  $41,588  $51,985  $14,224  $180,748  $340,331  $739,207 
Agricultural                                
Current-period gross charge-offs $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
- 
                                 
Residential and home equity                                
Pass $19,331  $63,975  $92,602  $82,832  $13,730  $76,970  $43,022  $392,462 
Special mention
  -   -   -   -   -   -   -   - 
Substandard  -   -   -   -   -   292   -   292 
Doubtful  -   -   -   -   -   -   -   - 
Total Residential and home equity $19,331  $63,975  $92,602  $82,832  $13,730  $77,262  $43,022  $392,754 
Residential and home equity                                
Current-period gross charge-offs $
14  $
-  $
-  $
-  $
-  $
-  $
-  $
14 
                                 
Construction                                
Pass $-  $3,000  $-  $-  $1,575  $-  $168,328  $172,903 
Special mention
  -   -   -   -   -   -   -   - 
Substandard  -   -   -   -   -   -   -   - 
Doubtful  -   -   -   -   -   -   -   - 
Total construction $-  $3,000  $-  $-  $1,575  $-  $168,328  $172,903 
Construction  




























 
Current-period gross charge-offs $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
- 
                                 
Total Real estate $127,463  $314,499  $360,399  $281,124  $98,601  $546,682  $870,313  $2,599,081 
                                 
Commercial & industrial                                
Pass $33,979  $29,326  $33,982  $10,053  $6,174  $8,715  $349,357  $471,586 
Special mention  -   -   48   -   -   517   7,518   8,083 
Substandard  -   -   -   -   -   5   234   239 
Doubtful  -   -   -   -   -   -   -   - 
Total Commercial & industrial $33,979  $29,326  $34,030  $10,053  $6,174  $9,237  $357,109  $479,908 
Commercial & industrial                                
Current-period gross charge-offs $
-  $-  $
-  $
-  $
-  $
-  $
-  $
- 

2217
Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)(Continued)
Note 4—3—Loans and Leases—Continued

 

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


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


  December 31, 2021 
(Dollars in thousands) Real Estate  
Vehicles
and
Equipment
  Total 
Collateral dependent loans and leases         
Real estate:         
Commercial $5  $-  $5 
Agricultural  5,587   -   5,587 
Residential and home equity  330   -   330 
Construction  -   -   - 
Total Real estate  5,922   -   5,922 
Commercial & industrial  -   -   - 
Agricultural  -   -   - 
Commercial leases  -   -   - 
Consumer and other  -   173   173 
Total gross loans and leases $5,922  $173  $6,095 
  June 30, 2023 
  Term Loans Amortized Cost Basis by Origination Year         
(Dollars in thousands) 2023  2022  2021  2020  2019  Prior  
Revolving
Loans
Amortized
Cost
  Total 
Net loans and leases held-for-investment                        
Agricultural                                
Pass $395  $4,976  $2,491  $794  $1,109  $2,368  $270,566  $282,699 
Special mention  -   -   -   -   -   -   17   17 
Substandard  -   -   -   -   9   -   -   9 
Doubtful  -   -   -   -   -   -   -   - 
Total Agricultural $395  $4,976  $2,491  $794  $1,118  $2,368  $270,583  $282,725 
Agricultural                                
Current-period gross charge-offs $-  $-  $-  $-  $-  $-  $-  $- 
                                 
Commercial leases                                
Pass $28,715  $34,385  $12,082  $10,626  $5,315  $33,289  $-  $124,412 
Special mention  -   -   -   -   44   -   -   44 
Substandard  -   -   -   -   -   -   -   - 
Doubtful  -   -   -   -   -   -   -   - 
Total Commercial leases $28,715  $34,385  $12,082  $10,626  $5,359  $33,289  $-  $124,456 
Commercial leases                                
Current-period gross charge-offs $-  $-  $-  $-  $-  $-  $-  $- 
                                 
Consumer and other                                
Pass $793  $1,361  $516  $155  $93  $1,694  $779  $5,391 
Special mention  -   -   -   -   -   -   -   - 
Substandard  127   -   -   -   -   35   -   162 
Doubtful  -   -   -   -   -   -   -   - 
Total Consumer and other $920  $1,361  $516  $155  $93  $1,729  $779  $5,553 
Consumer and other                                
Current-period gross charge-offs $18  $-  $-  $-  $-  $-  $-  $18 
Total net loans and leases
                                
Pass
 $
191,345  $
384,547  $
409,470  $
302,752  $
111,292  $
583,613  $
1,485,826  $
3,468,845 
Special mention
  -   -   48   -   44   2,857   8,135   11,084 
Substandard
  127   -   -   -   9   6,835   4,823   11,794 
Doubtful
  -   -   -   -   -   -   -   - 
Total net loans and leases $191,472  $384,547  $409,518  $302,752  $111,345  $593,305  $1,498,784  $3,491,723 
Total current-period gross charge-offs
 $32  $-  $-  $-  $-  $-  $-  $32 

Certain directors and executive officers of the Company are defined as related parties. These related parties, including their immediate families and companies in which they are principal owners, were loan customers of the Bank during the six months ended June 30, 2023 and year ended December 31, 2022. Such loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with borrowers not related to the Company. These loans did not involve more than the normal risk of collection or have other unfavorable features. A summary of the changes in those loans is as follows:
23
  June 30,  December 31, 
(Dollars in thousands) 2023  2022 

      
Balance at beginning of the period $17,521  $18,128 
New loans or advances during year  1,681   523 
Repayments  (579)  (1,130)
Balance at end of period $18,623  $17,521 

18
Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)(Continued)
Note 3—Loans and Leases—Continued



A loan or lease is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. When management determines that foreclosure is probable, expected credit losses for collateral dependent loans or leases are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. The collateral on the loans and leases is a significant portion of what secures the collateral dependent loans or leases and significant changes to the fair value of the collateral can impact the ACL. During the six months ended June 30, 2023, there were no significant changes to the collateral that secures the collateral dependent loans, whether due to general deterioration or with credit quality indicators like appraisal value. The following tables present the amortized cost basis for collateral dependent loans and leases by type as of June 30, 2023 and December 31, 2022, respectively:


  June 30, 2023 
(Dollars in thousands) Real Estate  
Vehicles and
Equipment
  Total 
Collateral dependent loans and leases         
Real estate:         
Commercial $1,471  $-  $1,471 
Agricultural  10,717   -   10,717 
Residential and home equity  1,649   -   1,649 
Construction  -   -   - 
Total real estate  13,837   -   13,837 
Commercial & industrial  -   -   - 
Agricultural  -   9   9 
Commercial leases  -   -   - 
Consumer and other  -   184   184 
Total gross loans and leases $13,837  $193  $14,030 


  December 31, 2022 
(Dollars in thousands) Real Estate  
Vehicles and
Equipment
  Total 
Collateral dependent loans and leases         
Real estate:         
Commercial $1,114  $-  $1,114 
Agricultural  11,035   -   11,035 
Residential and home equity  2,153   -   2,153 
Construction  -   -   - 
Total real estate  14,302   -   14,302 
Commercial & industrial  -   -   - 
Agricultural  -   13   13 
Commercial leases  -   -   - 
Consumer and other  -   158   158 
Total gross loans and leases $14,302  $171  $14,473 

19
Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 4—3—Loans and Leases—Continued

 

Changes in the allowance for credit losses are as follows:


  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 
Allowance for credit losses:                     
Beginning balance
 $34,716  $2,876  $6,874  $15,808  $1,645  $161  $62,080 
Provision / (recapture) for credit losses  (1,616)  119   (15)  3,063   (57)  5   1,499 
Charge-offs  -   -   -   (48)  -   (20)  (68)
Recoveries  -   -   6   92   -   8   106 
Net (charge-offs) / recoveries  -   -   6   44   -   (12)  38 
Ending balance
 $33,100  $2,995  $6,865  $18,915  $1,588  $154  $63,617 

  For the Three Months Ended June 30, 2023 
(Dollars in thousands) 
Commercial &
Agricultural
R/E
  Construction  
Residential &
Home Equity
  
Commercial
&
Agricultural
  
Commercial
Leases
  Consumer
& Other		  Total 
Allowance for credit losses:                     
Balance at beginning of period
 $32,694  $2,785  $7,334  $23,888  $1,720  $152  $68,573 
Provision / (recapture) for credit losses  2,001   410   (176)  285   (63)
  43   2,500 
Charge-offs  -   -   -   -   -   (9)  (9)
Recoveries  -   -   21   21   -   6   48 
Net (charge-offs) / recoveries  -   -   21   21   -   (3)  39 
Balance at end of period
 $34,695  $3,195  $7,179  $24,194  $1,657  $192  $71,112 

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

  For the Six Months Ended June 30, 2023 
(Dollars in thousands) 
Commercial &
Agricultural
R/E
  Construction  
Residential &
Home Equity
  
Commercial
&
Agricultural
  
Commercial
Leases
  Consumer
& Other		  Total 
Allowance for credit losses:                     
Balance at beginning of period
 $32,551  $3,026  $7,508  $21,705  $1,924  $171  $66,885 
Provision / (recapture) for credit losses  1,974   169   (346)  2,448   (267)  22   4,000 
Charge-offs  -   -   (14)  -   -   (18)  (32)
Recoveries  170   -   31   41   -   17   259 
Net (charge-offs) / recoveries  170   -   17   41   -   (1)  227 
Balance at end of period
 $34,695  $3,195  $7,179  $24,194  $1,657  $192  $71,112 

  For the Six Months Ended June 30, 2022 
(Dollars in thousands) 
Commercial &
Agricultural
R/E
  Construction  
Residential &
Home Equity
  
Commercial
&
Agricultural
  
Commercial
Leases
  Consumer
& Other		  Total 
Allowance for credit losses:                     
Balance at beginning of period $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)  - 
Provision / (recapture) for credit losses  2,757   (435)  876   (1,831)  78   (338)  1,107 
Charge-offs  -   -   -   (276)  -   (18)  (294)
Recoveries  -   -   119   135   -   6   260 
Net (charge-offs) / recoveries  -   -   119   (141)  -   (12)  (34)
Balance at end of period
 $34,716  $2,876  $6,874  $15,808  $1,645  $161  $62,080 

  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 
Allowance for credit losses:                     
Beginning balance
 $38,149  $1,456  $2,847  $16,954  $938  $663  $61,007 
Impact of Adopting ASC 326
  -   -   -   -   -   -   - 
Provision / (recapture) for credit losses  (5,049)  1,539   3,893   2,058   650   (485)  2,606 
Charge-offs  -   -   -   (324)  -   (38)  (362)
Recoveries  -   -   125   227   -   14   366 
Net (charge-offs) / recoveries  -   -   125   (97)  -   (24)  4 
Ending balance
 $33,100  $2,995  $6,865  $18,915  $1,588  $154  $63,617 
20

Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 5—4—Deposits



Certificates of deposit greater than and less than or equal to the FDIC insurance limit of $250,000 are summarized as follows:


(Dollars in thousands) 
September 30,
2022
  
December 31,
2021
  
June 30,
2023
  
December 31,
2022
 
Certificates of deposit:
            
Certificates of deposit less than or equal to $250,000 $208,242  $223,620  $286,881  $202,554 
Certificates of deposit greater than $250,000  152,142   168,865   265,899   128,846 
Total certificates of deposit
 $360,384  $392,485  $552,780  $331,400 



Scheduled maturities for certificates of deposit are as follows:


(Dollars in thousands) Amount  Amount 
2022
 $107,966 
2023
  224,552  $205,571 
2024
  22,362   327,243 
2025
  2,783   15,007 
2026 and beyond
  2,721 
2026
  3,894 
2027 and beyond
  1,065 
Total certificates of deposit
 $360,384  $552,780 

Note 5—Short-term borrowings

As of June 30, 2023 and December 31, 2022, committed lines of credit arrangements totaling $1.6 billion and $1.5 billion were available to the Company from unaffiliated banks, respectively. The average Federal Funds interest rate as of June 30, 2023 was 5.25%.

The Company is a member of the FHLB of San Francisco and has a committed credit line of $784.1 million, which is secured by $1.3 billion in various real estate loans and investment securities pledged as collateral. Borrowings generally provide for interest at the then current published rate, which was 5.35% as of June 30, 2023.

The Company has $894.4 million in pledged loans with the Federal Reserve Bank (the “Fed”). As of June 30, 2023, the Company’s overnight borrowing capacity using the primary credit facilities from the Fed account was $655.0 million. The borrowing rate was 5.25% as of June 30, 2023.

There were no outstanding advances on the above borrowing facilities as of June 30, 2023 and December 31, 2022.

2421
Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)(Continued)

Note 6—Shareholders’ EquityEmployee Benefit Plans


Executive Retirement Plan
The Company, andthrough the Bank, sponsors an Executive Retirement Plan (“ERP”) for certain executive level employees. The ERP is a non-qualified deferred compensation plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by Internal Revenue Service regulations. The ERP is comprised of: (1) a Performance Component comprised of two contributions, one based upon profitability and a second based upon long-term cumulative profitability in the form of the increase in market value in excess of the increase in the book value of the Company; (2) a Salary Component which makes contributions based upon participant salary levels; and (3) an Equity Component for which contributions are discretionary and subject to various regulatory capital adequacy guidelines as outlined under Part 324Board of the FDIC Rules and Regulations. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have 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.


Directors approval.

The Company believes that itexpensed $4.5 million to the ERP during the six months ended June 30, 2023 and $3.3 million during the six months ended June 30, 2022. The Company’s carrying value of the liability under the ERP was $58.3 million as of June 30, 2023 and $57.0 million as of December 31, 2022. The Company’s shares of common stock held as investments in the Rabbi Trust of the ERP as of June 30, 2023 and December 31, 2022 totaled 49,156 and 50,196 with an historical cost basis of $31.6 million and $31.4 million, respectively. All amounts have been fully funded into the Rabbi Trust as of June 30, 2023 and December 31, 2022. The consolidated investments held in the Rabbi Trust are recorded at fair value with changes in unrealized gains or losses recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income.

Net gains on ERP plan investments were $1.8 million compared to net loss of $0.7 million at June 30, 2023 and 2022, respectively. 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.

Senior Management Retention Plan
The Company, through the Bank, sponsors a Senior Management Retention Plan (“SMRP”) for certain senior level employees. The SMRP is currently in compliance with all of these capital requirementsa non-qualified deferred compensation plan and that they will not result in any restrictions onwas developed to supplement the Company’s business activity.



Management believes that the Bank meets the requirements to be categorizedProfit Sharing Plan, which, 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 ratiosa qualified retirement plan, has a ceiling on benefits as set forth inby Internal Revenue Service regulations. All contributions are discretionary and subject to the following tables.


Board of Directors approval.

The Company expensed $2.1 million to the SMRP during the six months ended June 30, 2023 and $1.4 million for six months ended June 30, 2022. The Company’s carrying value of the liability under the SMRP was $16.9 million as of June 30, 2023 and Bank’s actual$13.6 million as of December 31, 2022. The Company’s shares of stock held as investments in the Rabbi Trust of the SMRP as of June 30, 2023 and required capitalDecember 31, 2022 totaled 17,941 and 15,998 shares with an historical cost basis of $12.7 million and $10.8 million, respectively. All amounts have been fully funded into the Rabbi Trust as of June 30, 2023 and ratiosDecember 31, 2022. The consolidated investments held in the Rabbi Trust are as follows: recorded at fair value with changes in unrealized gains or losses recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income.


Net gains on SMRP plan investments were $0.4 million compared to net gains of $0.1 million at June 30, 2023 and 2022, respectively. 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.
  September 30, 2022 
  Actual  
Minimum to be
Categorized as
“Adequately Capitalized”
  
Minimum to be
Categorized as
“Well Capitalized”
 
(Dollars in thousands) Amount  Ratio  Amount  Ratio  Amount  Ratio 
Farmers & Merchants Bancorp                  
CET1 capital to risk-weighted assets $482,053   11.82
%
 $183,537   4.50
%
  N/A   N/A 
Tier 1 capital to risk-weighted assets  492,053   12.06
%
  244,716   6.00
%
  N/A   N/A 
Risk-based capital to risk-weighted assets  543,218   13.32
%
  326,288   8.00
%
  N/A   N/A 
Tier 1 leverage capital ratio  492,053   9.12
%
  215,702   4.00
%
  N/A   N/A 
                         
Farmers & Merchants Bank                        
CET1 capital to risk-weighted assets $491,237   12.04
%
 $183,531   4.50
%
 $265,101   6.50
%
Tier 1 capital to risk-weighted assets  491,237   12.04
%
  244,708   6.00
%
  326,278   8.00
%
Risk-based capital to risk-weighted assets  542,400   13.30
%
  326,278   8.00
%
  407,847   10.00
%
Tier 1 leverage capital ratio  491,237   9.12
%
  215,498   4.00
%
  269,372   5.00
%

2522
Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)(Continued)
Note 6—Shareholders’ Equity—Continued


  December 31, 2021 
  Actual  
Minimum to be
Categorized as
“Adequately Capitalized”
  
Minimum to be
Categorized as
“Well Capitalized”
 
(Dollars in thousands) Amount  Ratio  Amount  Ratio  Amount  Ratio 
Farmers & Merchants Bancorp                  
CET1 capital to risk-weighted assets $450,687   11.68
%
 $173,674   4.50
%
  N/A   N/A 
Tier 1 capital to risk-weighted assets  460,687   11.94
%
  231,566   6.00
%
  N/A   N/A 
Risk-based capital to risk-weighted assets  509,091   13.19
%
  308,755   8.00
%
  N/A   N/A 
Tier 1 leverage capital ratio  460,687   8.92
%
  206,606   4.00
%
  N/A   N/A 
                         
Farmers & Merchants Bank                        
CET1 capital to risk-weighted assets $459,813   11.91
%
 $173,664   4.50
%
 $250,847   6.50
%
Tier 1 capital to risk-weighted assets  459,813   11.91
%
  231,551   6.00
%
  308,735   8.00
%
Risk-based capital to risk-weighted assets  508,215   13.17
%
  308,735   8.00
%
  385,919   10.00
%
Tier 1 leverage capital ratio  459,813   8.91
%
  206,426   4.00
%
  258,033   5.00
%
Basic and diluted earnings per common share represents income available to common shareholders divided by the 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 

  
Nine Months Ended
September 30,
 
(Dollars in thousands, except share and per share amounts) 2022
  2021
 
Numerator      
Net income $55,037  $50,368 
         
Denominator        
Weighted average number of common shares outstanding  780,988   789,646 
Weighted average number of dilutive shares outstanding  780,988   789,646 
         
Basic earnings per common share $70.47  $63.79 
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.

26
Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)
Note 7—Fair Value Measurements


The Company followsuses fair value measurements to record fair value adjustments to certain financial and non-financial assets and liabilities and to determine fair value disclosures. Various financial instruments such as available-for-sale securities are recorded at fair value on a recurring basis. Additionally, from time to time, the “FairCompany may be required to record at fair value other assets and liabilities on a non-recurring basis, such as collateral dependent loans and other real estate owned. These non-recurring fair value adjustments typically involve lower of cost or fair value accounting or write-down of individual assets.



Fair Value Measurement and Disclosures” topicis the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the FASB ASC, which establishesasset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. For accounting disclosure purposes, a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. U.S. GAAP requires disclosurethree-level valuation hierarchy of fair value information about financial instruments, whether or not recognized onmeasurements has been established. The valuation hierarchy is based upon the balance sheet, for which it is practicaltransparency of inputs 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 usevaluation 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 thean asset or liability. In supportliability as of this principle, this standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.measurement date. The fair value hierarchy isthree levels are defined as follows:


Level 1 – inputs – Unadjustedto the valuation methodology are quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.in active markets.


Level 2 – inputs – Inputs other than quoted prices included in Level 1 that are observable forto the asset or liability, either directly or indirectly. These mightvaluation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs other than quoted prices that are observable for the assetassets or liability, suchliabilities, either directly or indirectly (such as interest rates, and yield curves, that are observable at commonly quoted intervals.and prepayment speeds).


Level 3 – inputs – Unobservable inputs for determiningto the valuation methodology are unobservable and significant to the fair value. These may be internally developed, using the Company’s best information and assumptions that a market participant would consider.



The carrying amounts and estimated fair values of assetsfinancial instruments held by the Company are set forth below. Fair value estimates are made at a specific point in time based on relevant market information. They do not reflect any premium or liabilitiesdiscount that reflect an entity’s owncould result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.  Because no market exists for many of the Company’s financial instruments, fair value estimates are based on judgements regarding future expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties, and cannot be determined with precision. Changes in assumptions aboutcould significantly affect the assumptions that market participants would use in pricing the assets or liabilities.
estimates.

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 instrumentThe valuation methodologies for assets and size of the transfer relative to total assets, total liabilities or total earnings.

Securities classified as available-for-sale are reportedmeasured at fair value on a recurring and non-recurring basis utilizing Level 1, 2 and 3 inputs. Forare described in the Fair Value note in the Company’s 2022 Annual Report on Form 10-K. There have been no significant changes in 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.methodologies since then.

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.
2723
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)(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 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 summarize the carrying valueamount and estimated fair values of the Company’s financial assets and liabilities on a recurring basisnot carried at fair value, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated.

September 30, 2022
   Fair Value
 
June 30, 2023
   
Fair Value Measurements
 
(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 $882,883 $882,883 $- $- $882,883  $586,972 $586,972 $- $- $586,972 
Investment securities available-for-sale 177,454 4,941 172,513 - 177,454 
Investment securities held-to-maturity 852,272 - 663,285 42,416 705,701 
Held-to-maturity securities 837,996 - 628,149 56,356 684,505 
Non-marketable securities 15,549 - - 15,549 15,549  15,549 - - 15,549 15,549 
Loans and leases, net 3,260,245 - - 3,203,611 3,203,611  3,420,611 - - 3,224,473 3,224,473 
Bank-owned life insurance 72,566 72,566 - - 72,566  66,582 66,582 - - 66,582 
                      
Financial Liabilities:                      
Total deposits $
4,909,257 $- $4,548,873 $352,319 $4,901,192  $
4,638,313 $- $4,085,533 $543,784 $4,629,317 
Subordinated debentures 10,310 - 9,707 - 9,707  10,310 - 12,717 - 12,717 

December 31, 2021
   Fair Value
 
December 31, 2022
   
Fair Value Measurements
 
(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 $- $- $715,460  $588,257 $588,257 $- $- $588,257 
Investment securities available-for-sale 270,454 10,214 260,240 - 270,454 
Investment securities held-to-maturity 737,052 - 681,588 44,446 726,034 
Held-to-maturity securities 844,953 - 645,859 42,534 688,393 
Non-marketable securities 15,549 - - 15,549 15,549  15,549 - - 15,549 15,549 
Loans and leases, net 3,176,170 - - 3,179,857 3,179,857  3,445,476 - - 3,335,042 3,335,042 
Bank-owned life insurance 71,411 71,411 - - 71,411  73,038 73,038 - - 73,038 
                      
Financial Liabilities:                      
Total deposits $4,640,152 $- $4,247,666 $391,732 $4,639,398  $4,759,269 $- $4,427,869 $323,572 $4,751,441 
Subordinated debentures 10,310 - 6,890 - 6,890  10,310 - 12,211 - 12,211 

2824
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)(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.

September 30, 2022
   Fair Value
 
June 30, 2023
   
Fair Value Measurements
 
(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 $4,941 $4,941 $- $- $4,941 
Available-for-sale securities           
U.S. Government-sponsored securities 4,698 - 4,698 - 4,698  $
3,841 $
- $
3,841 $
- $
3,841 
Mortgage-backed securities 156,453 - 156,453 - 156,453  100,068 - 100,068 - 100,068 
Collateralized mortgage obligations 1,458 - 1,458 - 1,458  586 - 586 - 586 
Corporate securities 9,594 - 9,594 - 9,594  9,838 - 9,838 - 9,838 
Other 310 - 310 - 310  310 - 310 - 310 
                      
Fair valued on a non-recurring basis:                      
Other real estate $
873 $
- $
- $
873 $
873 
Collateral Dependent loans
 $
14,030 $
- $
- $
14,030 $
14,030 
Other real estate owned
  
873  
-  
-  
873  
873 

December 31, 2021    Fair Value 
December 31, 2022    Fair Value Measurements 
(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           
Available-for-sale securities           
U.S. Treasury notes $10,089 $10,089 $- $- $10,089  $4,964 $4,964 $- $- $4,964 
U.S. Government-sponsored securities 6,374 - 6,374 - 6,374  4,427 - 4,427 - 4,427 
Mortgage-backed securities 251,120 - 251,120 - 251,120  132,528 - 132,528 - 132,528 
Collateralized mortgage obligations 2,436 - 2,436 - 2,436  1,054 - 1,054 - 1,054 
Corporate securities 9,581 - 9,581 - 9,581 
Other 435 125 310 - 435  310 - 310 - 310 
                      
Fair valued on a non-recurring basis:                      
Individually evaluated loans $2,562 $- $- $2,562 $2,562 
Other real estate 873 - - 873 873 
Collateral Dependent loans $14,473 $- $- $14,473 $14,473 
Other real estate owned
 873 - - 873 873 

2925
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (CONTINUED)(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) 
September 30,
2022
  
December 31,
2021
 
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  -   1,433 
(Dollars in thousands) 
June 30,
2023
  
December 31,
2022
 
         
Commitments to extend credit, including unsecured commitments of $19,961 and $20,401 as of June 30, 2023 and  December 31, 2022, respectively
 $1,123,756  $1,141,036 
Stand-by letters of credit, including unsecured commitments of $8,065 and $7,954 as of June 30, 2023 and December 31, 2022, respectively
  16,863   17,138 



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.The estimated exposure to loss from these commitments is included in the reserve for unfunded loan commitments which amounted to $2.1 million at June 30, 2023 and December 31, 2022.



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 6078 months with final expiration in January 2027. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.


The Company has commitments to fund investments in LIHTC partnerships and limited liability companies. At June 30, 2023, the remaining commitments to the LIHTC partnerships and limited liability companies were approximately $20.5 million. At December 31, 2022, the remaining commitments to the LIHTC partnerships and the limited liability companies were $19.7 million.



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.

3026
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.condition. The discussioninformation contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes theretoaccompanying Notes to Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q included in “Part I. Item 1. Financial Statements.”

FORWARD-LOOKING STATEMENTSINFORMATION

This Quarterly Report on Form 10–Q may contain certain forward-looking statements within the meaning of Section 27A of 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”).Act. These forward-looking statements reflect the Company’sour current views and are not historical facts. These statements may include statements regarding projected performance for periods following the date of this report. These statements can generally be identified by use of phrases such as “believe,” “expect,” “will,” “seek,” “should,” “anticipate,” “estimate,” “intend,” “plan,” “target,” “project,” “commit” or other words of similar import. Similarly, statements that describe the Company’sour 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’sour ability to control or predict. For those statements, the Company claimswe claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections inand other parts of this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 20212022 (“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;
■risks associated with recent negative events in the banking industry, and any legislative and/or bank regulatory actions, that could potentially impact earnings, liquidity and/or the availability of capital;
■higher defaults in our loan and lease 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.proceedings; and
■other factors and risks including those described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

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. 10-Q (or documents incorporated by reference, if applicable).

27
The Company does not undertake any obligation to release publicly revisionscorrect or update any forward-looking statements if it later becomes aware that actual results are likely to differ materially from those expressed in such forward-looking statements, to reflect events or circumstances after the date of this Form 10-Q, except as required by law.

31
Overview

Farmers & Merchants Bancorp (the “Company” or “FMCB”) 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 Farmers & Merchants Bank of Central California (the “Bank” or “F&M Bank”) 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 September 30, 2022, consisted of 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 Company’s outstanding common stock as of June 30, 2023, consisted of 754,523 shares of common stock, $0.01 par value and no shares of preferred stock were issued or outstanding. The common stock of the Company is not widely held or listed on any exchange. However, trades are reported on the OTCQX under the symbol “FMCB.”

The primary source of funding for the Company’s asset growth has been the generation of core deposits, which the Company raises through its existing branch locations, newly opened branch locations, or through acquisitions. Recent loanLoan growth over the years is the result of organic growth generated by the Company’s seasoned relationship managers and supporting associates who provide outstanding service and responsiveness to the Company’s clients.

The Company’s results of operations are largely dependent on net interest income. Net interest income is the difference between interest income earned on interest earning assets, which are comprised of loans and leases, investment securities and short-term investments, and the interest the Company pays on 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.

The Company measures its performance by calculating 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 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. The Company also measures its performance by the efficiency ratio, which is calculated by dividing non-interest expense by the sum of net interest income and non-interest income.

Summary
28
Critical Accounting Policies and Estimates

In the opinionOur accounting policies are fundamental to understanding management’s discussion and analysis of management, the accompanying Consolidated Statementsresults of Financial Conditionoperations and related Consolidated Statements of Income, Comprehensive Income, Changes in Shareholders’ Equityfinancial condition. We identify critical policies and Cash Flows reflect all adjustments (which include reclassification and normal recurring adjustments)estimates as those that are necessary for a fair presentation in conformity with GAAP. The preparation of financial statements in conformity with GAAP requiresrequire management to make estimates and assumptionsparticularly difficult, subjective, and/or complex judgments about matters that affect amounts reported in the financial statements.

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptionsuncertain 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.
32
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 loanslikelihood 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.

33
On January 1, 2022, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology that delays recognition until it is probable a loss has been incurred with an expected loss methodology that is referred to as CECL. Both the Financial Accounting Standards Board (“FASB Staff Q&A Topic 326, No. 1”) and the federal financial institution regulatory agencies (“Financial Institution Letter FIL-17-2019”), along with the Securities and Exchange Commission, have confirmed that smaller, less complex organizations are not required to implement complex models, developed by outside vendors to calculate current expected credit losses. Accordingly, in adopting ASU 2016-13 (Topic 326) Management determined that the Weighted Average Remaining Maturity (“WARM”) method was most appropriate given the Company’s current size and complexity.

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

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

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

Management has determined to use a “through-the-cycle” historical credit loss experience as its baseline for historical credit losses. Management has determined a representative period for a full credit cyclematerially different amounts would be from 2008reported under different conditions or using different assumptions. These policies and estimates relate 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”).

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

Management evaluates macro and micro economic information as well as internal trends in credit performance on the Company’s loan portfolio to determine where they believe it is in an economic credit cycle. Depending upon estimations of what point in the credit cycle the current economy may exist, management 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, the 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, it 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.

34
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.

35
Allowance for Credit Losses – Securities — Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. The Company’s HTM portfolio contains securities issued by U.S. government entities and agencies and municipalities. The Company uses industry historical credit loss information adjusted for current conditions to establish the allowance for credit losses on its HTM municipal bond portfolio.

For available-for-sale debtloans and leases held for investment, investment 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 recoverycarrying value 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 securitygoodwill and it is not more likely than not that, the Company will be required to sell the security the Company evaluates whether the decline inother intangible assets, 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 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 depositsmeasurements 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.

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.

36
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.liabilities.

Only tax positions that meet the more likely than not recognition thresholdOur critical accounting policies and estimates are recognized. The benefitdescribed in Item 7. Management’s Discussion and Analysis of a tax position is recognizedFinancial Condition and Results of Operations included 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.our Form 10-K.

Impact of Recently Issued Accounting Standards

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

Non-GAAP Measurements

We use certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance.  The methodology for determining these non-GAAP measures may differ among companies. We used the following non-GAAP measures in this Form 10-Q:


•
Tangible common equity ratio and tangible book value per common share: Given that the use of these measures is prevalent among banking regulators, investors, and analysts, we disclose them in addition the related GAAP measures of return on average equity and book value per common share. The reconciliations of these non-GAAP measurements to the GAAP measurements are presented in the following tables for and as of the periods presented.

Tangible Common Equity Ratio and June 30,  June 30, 
Tangible Book Value Per Common Share 2023  2022 
(Dollars in thousands, except per share data)      
Shareholders' equity 
$
514,709
  
$
461,353
 
Less:  Intangible assets  
13,705
   
14,289
 
Tangible common equity 
$
501,004
  
$
447,064
 
         
Total Assets 
$
5,250,378
  
$
5,326,681
 
Less:  Intangible assets  
13,705
   
14,289
 
Tangible assets 
$
5,236,673
  
$
5,312,392
 
         
Tangible comon equity ratio(1)
  9.57%  8.42%
Book Value per common share(2)
 
$
682.16
  
$
593.62
 
Tangible book value per common share(3)
 
$
664.00
  
$
575.23
 
Common shares oustanding  754,523   777,190 

(1)
Tangible common equity divided by tangible asssets
(2)
Total common equtiy divided by common shares outstanding.
(3)
Tangible common equity divided by common shares outstanding.

29
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 SeptemberJune 30, 20222023 and December 31, 20212022 and results of operations during the three and ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. Information related to the comparison of the results of operations for the three years ended December 31, 2021, 2020,2022, and 20192021 can be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 20212022 Annual Report on Form 10-K filed with the SEC on March 15, 2022.2023.

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 plan 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.

Earnings Performance
37
The following table presents performance metrics for the periods indicated:

  
Three Months ended
June 30,
  
Six Months Ended
June 30,
 
(dollars in thousands, except per share amounts) 2023  2022  2023  2022 
Earnings Summary:            
Interest income 
$
61,017
  
$
45,695
  
$
120,649
  
$
88,789
 
Interest expense  
8,595
   
976
   
12,505
   
1,861
 
Net interest income  
52,422
   
44,719
   
108,144
   
86,928
 
Provision for credit losses  
2,557
   
1,500
   
4,057
   
1,500
 
Noninterest income  
5,447
   
3,512
   
8,907
   
7,824
 
Noninterest expense  
26,822
   
23,031
   
55,005
   
46,819
 
Income before taxes  
28,490
   
23,700
   
57,989
   
46,433
 
Income tax expense  
7,182
   
5,257
   
13,134
   
10,932
 
Net Income $21,308  $18,443  $44,855  $35,501 
                 
Per Common Share Data:                
Diluted earnings per common share $28.03  $23.58  $58.83  $45.28 
Book value per common share $682.16  $593.62  $682.16  $593.62 
Tangible book value per common share(1)
 $664.00  $575.23  $664.00  $575.23 
                 
Performance Ratios:                
Return on average assets  1.65%  1.38%  1.73%  1.33%
Return on average equity  16.60%  15.94%  17.75%  15.30%
Net interest margin (tax equivalent)  4.27%  3.52%  4.38%  3.44%
Yield on average loans and leases (tax equivalent)  5.75%  4.76%  5.72%  4.76%
Cost of average total deposits  0.74%  0.07%  0.53%  0.07%
Efficiency Ratio  46.35%  47.75%  46.99%  49.41%
Loan-to-deposit ratio  75.50%  68.32%  75.50%  68.32%
Percentage of checking deposits to total deposits  52.09%  58.98%  52.09%  58.98%
                 
Capital Ratios Bancorp:                
Common equity tier 1 capital to risk-weighted assets  12.22%  11.55%  12.22%  11.55%
Tier 1 capital to risk-weighted assets  12.46%  11.80%  12.46%  11.80%
Risk-based capital to risk-weighted assets  13.71%  13.05%  13.71%  13.05%
Tier 1 leverage capital ratio  10.21%  8.94%  10.21%  8.94%
Tangible Common Equity Ratio(1)
  9.57%  8.42%  9.57%  8.42%

(1)
See "Non-GAAP Measurements"

30
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.

 For the Three Months Ended September 30,  Three Months Ended June 30, 
 2022 2021  2023 2022 
(Dollars in thousands) 
Average
Balance
  
Interest
Income /
Expense
  
Average
Yield /
Rate
  
Average
Balance
  
Interest
Income /
Expense
  
Average
Yield /
Rate
  
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
%
 
$
458,927
  
$
5,882
   
5.14
%
 
$
683,655
  
$
1,409
   
0.83
%
Securities:(1)
             
Investment Securities:(1)
                        
Taxable securities 
1,063,166
 
5,091
 
1.92
%
 
786,983
 
3,282
 
1.67
%
  
923,063
   
4,626
   
2.00
%
  
1,090,507
   
5,107
   
1.87
%
Non-taxable securities(2)
  
47,005
 
386
 
3.28
%
  
49,616
 
399
 
3.22
%
  
61,576
   
564
   
3.66
%
  
48,339
   
391
   
3.24
%
Total investment securities 
1,110,171
 
5,477
 
1.96
%
 
836,599
 
3,681
 
1.76
%
  
984,639
   
5,190
   
2.11
%
  
1,138,846
   
5,498
   
1.94
%
Loans:(3)
                                     
Real estate:                                     
Commercial 
1,224,689
 
15,179
 
4.92
%
 
1,046,626
 
11,255
 
4.27
%
  
1,307,376
   
16,744
   
5.14
%
  
1,158,892
   
13,531
   
4.68
%
Agricultural 
715,286
 
9,243
 
5.13
%
 
640,330
 
8,301
 
5.14
%
  
718,094
   
9,762
   
5.45
%
  
701,905
   
8,509
   
4.86
%
Residential and home equity 
375,699
 
3,836
 
4.05
%
 
338,520
 
3,858
 
4.52
%
  
390,416
   
4,267
   
4.38
%
  
365,872
   
3,591
   
3.94
%
Construction  
164,664
 
2,468
 
5.95
%
  
175,906
 
2,300
 
5.19
%
  
161,992
   
2,928
   
7.25
%
  
205,491
   
2,535
   
4.95
%
Total real estate 
2,480,338
 
30,726
 
4.91
%
 
2,201,382
 
25,714
 
4.63
%
  
2,577,878
   
33,701
   
5.24
%
  
2,432,160
   
28,166
   
4.64
%
Commercial & industrial 
438,761
 
5,770
 
5.22
%
 
374,162
 
4,111
 
4.36
%
  
475,472
   
8,346
   
7.04
%
  
439,137
   
4,891
   
4.47
%
Agricultural 
259,345
 
3,607
 
5.52
%
 
236,071
 
2,637
 
4.43
%
  
281,321
   
5,613
   
8.00
%
  
264,791
   
2,988
   
4.53
%
Commercial leases 
93,051
 
1,365
 
5.82
%
 
96,690
 
1,363
 
5.59
%
  
126,158
   
1,947
   
6.19
%
  
90,855
   
1,377
   
6.08
%
Consumer and other  
8,929
 
400
 
17.77
%
  
155,182
 
2,263
 
5.79
%
  
5,531
   
83
   
6.02
%
  
21,457
   
1,148
   
21.46
%
Total loans and leases 
3,280,424
 
41,868
 
5.06
%
 
3,063,487
 
36,088
 
4.67
%
  
3,466,360
   
49,690
   
5.75
%
  
3,248,400
   
38,570
   
4.76
%
Non-marketable securities  
15,549
 
209
 
5.33
%
  
15,549
 
244
 
6.23
%
  
15,549
   
255
   
6.58
%
  
15,549
   
218
   
5.62
%
Total interest earning assets 
5,124,938
 
51,713
 
4.00
%
 
4,771,794
 
40,341
 
3.35
%
  
4,925,475
   
61,017
   
4.97
%
  
5,086,450
   
45,695
   
3.60
%
Allowance for credit losses 
(63,107
)
     
(60,268
)
       
(69,800
)
          
(61,439
)
        
Non-interest earning assets  
318,078
      
324,057
       
313,671
           
317,066
         
Total average assets 
$
5,379,909
     
$
5,035,583
      
$
5,169,346
          
$
5,342,077
         
                                     
LIABILITIES AND SHAREHOLDERS' EQUITY                                     
Interest bearing deposits:                                     
Demand 
$
1,101,830
 
445
 
0.16
%
 
$
1,068,707
 
293
 
0.11
%
 
$
941,500
   
444
   
0.19
%
 
$
1,117,283
   
319
   
0.11
%
Savings and money market accounts 
1,588,234
 
476
 
0.12
%
 
1,385,430
 
346
 
0.10
%
  
1,624,285
   
5,153
   
1.27
%
  
1,544,753
   
361
   
0.09
%
Certificates of deposit greater than $250,000 
156,110
 
96
 
0.24
%
 
168,714
 
143
 
0.34
%
  
227,958
   
1,655
   
2.91
%
  
165,944
   
106
   
0.26
%
Certificates of deposit less than $250,000  
212,036
 
105
 
0.20
%
  
230,532
 
147
 
0.25
%
  
261,372
   
1,139
   
1.75
%
  
219,157
   
87
   
0.16
%
Total interest bearing deposits 
3,058,210
 
1,122
 
0.15
%
 
2,853,383
 
929
 
0.13
%
  
3,055,115
   
8,391
   
1.10
%
  
3,047,137
   
873
   
0.11
%
Short-term borrowings 
-
 
-
 
0.00
%
 
-
 
-
 
0.00
%
  
-
   
-
   
0.00
%
  
-
   
-
   
0.00
%
Subordinated debentures  
10,310
 
134
 
5.16
%
  
10,310
 
78
 
3.00
%
  
10,310
   
204
   
7.94
%
  
10,310
   
103
   
4.01
%
Total interest bearing liabilities 
3,068,520
 
1,256
 
0.16
%
 
2,863,693
 
1,007
 
0.14
%
  
3,065,425
   
8,595
   
1.12
%
  
3,057,447
   
976
   
0.13
%
Non-interest bearing deposits  
1,764,266
      
1,655,738
       
1,506,145
           
1,735,258
         
Total funding 
4,832,786
 
1,256
 
0.10
%
 
4,519,431
 
1,007
 
0.09
%
  
4,571,570
   
8,595
   
0.75
%
  
4,792,705
   
976
   
0.08
%
Other non-interest bearing liabilities 
77,389
     
68,564
       
84,454
           
86,550
         
Shareholders' equity  
469,734
      
447,588
       
513,322
           
462,822
         
Total average liabilities and shareholders' equity 
$
5,379,909
     
$
5,035,583
      
$
5,169,346
          
$
5,342,077
         
                                       
Net interest income   
$
50,457
     
$
39,334
        
$
52,422
          
$
44,719
     
Interest rate spread     
3.84
%
     
3.21
%
          
3.84
%
          
3.48
%
Net interest margin(4)
     
3.95
%
     
3.26
%
          
4.27
%
          
3.53
%

(1)Excludes average unrealized (losses) gains of ($28.5)
(1)
Excludes average unrealized (losses) of ($22.5) million and ($24.7) million for the three months ended June 30, 2023, 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.
(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 $149,000 and $103,000 for the three months ended June 30, 2023, and 2022, respectively.
(3)
Loan interest income includes loan fees of $1.3 million and $3.3 million for the three months ended June 30, 2023 and 2022, respectively.
(4)
Net interest margin is computed by dividing net interest income by average interest earning assets.

3831
  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.
  For the Six Months Ended June 30, 
  2023  2022 
(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 
$
489,865
  
$
11,843
   
4.88
%
 
$
721,656
  
$
1,775
   
0.50
%
Investment Securities:(1)
                        
Taxable securities  
945,258
   
9,431
   
2.00
%
  
1,056,670
   
9,695
   
1.84
%
Non-taxable securities(2)
  
59,556
   
1,121
   
3.76
%
  
49,164
   
793
   
3.23
%
Total investment securities  
1,004,814
   
10,552
   
2.10
%
  
1,105,834
   
10,488
   
1.90
%
Loans:(3)
                        
Real estate:                        
Commercial  
1,293,712
   
33,393
   
5.21
%
  
1,155,271
   
26,807
   
4.68
%
Agricultural  
716,921
   
19,376
   
5.45
%
  
691,128
   
16,302
   
4.76
%
Residential and home equity  
388,901
   
8,362
   
4.34
%
  
359,656
   
6,892
   
3.86
%
Construction  
166,428
   
5,865
   
7.11
%
  
198,626
   
4,607
   
4.68
%
Total real estate  
2,565,962
   
66,996
   
5.27
%
  
2,404,681
   
54,608
   
4.58
%
Commercial & industrial  
470,498
   
15,970
   
6.84
%
  
431,907
   
9,690
   
4.52
%
Agricultural  
280,896
   
10,817
   
7.77
%
  
256,648
   
5,743
   
4.51
%
Commercial leases  
121,579
   
3,752
   
6.22
%
  
92,844
   
2,793
   
6.07
%
Consumer and other  
5,555
   
163
   
5.92
%
  
36,683
   
3,169
   
17.42
%
Total loans and leases  
3,444,490
   
97,698
   
5.72
%
  
3,222,763
   
76,003
   
4.76
%
Non-marketable securities  
15,549
   
556
   
7.21
%
  
15,549
   
523
   
6.78
%
Total interest earning assets  
4,954,718
   
120,649
   
4.91
%
  
5,065,802
   
88,789
   
3.53
%
Allowance for credit losses  
(68,752
)
          
(61,232
)
        
Non-interest earning assets  
311,891
           
315,037
         
Total average assets 
$
5,197,857
          
$
5,319,607
         
                         
LIABILITIES AND SHAREHOLDERS' EQUITY                        
Interest bearing deposits:                        
Demand 
$
1,004,651
   
888
   
0.18
%
 
$
1,116,436
   
578
   
0.10
%
Savings and money market accounts  
1,593,158
   
7,656
   
0.97
%
  
1,531,069
   
703
   
0.09
%
Certificates of deposit greater than $250,000  
188,053
   
2,142
   
2.30
%
  
166,725
   
203
   
0.25
%
Certificates of deposit less than $250,000  
233,945
   
1,419
   
1.22
%
  
221,487
   
192
   
0.17
%
Total interest bearing deposits  
3,019,807
   
12,105
   
0.81
%
  
3,035,717
   
1,676
   
0.11
%
Short-term borrowings  
1
   
-
   
0.00
%
  
1
   
-
   
0.00
%
Subordinated debentures  
10,310
   
400
   
7.82
%
  
10,310
   
185
   
3.62
%
Total interest bearing liabilities  
3,030,118
   
12,505
   
0.83
%
  
3,046,028
   
1,861
   
0.12
%
Non-interest bearing deposits  
1,584,215
           
1,728,962
         
Total funding  
4,614,333
   
12,505
   
0.55
%
  
4,774,990
   
1,861
   
0.08
%
Other non-interest bearing liabilities  
78,150
           
80,413
         
Shareholders' equity  
505,374
           
464,204
         
Total average liabilities and shareholders' equity 
$
5,197,857
          
$
5,319,607
         
                         
Net interest income     
$
108,144
          
$
86,928
     
Interest rate spread          
4.08
%
          
3.41
%
Net interest margin(4)
          
4.40
%
          
3.46
%

39
(1)
Excludes average unrealized (losses) of ($25.3) million and ($15.9) million for the six months ended June 30, 2023, and 2022, 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 $296,000 and $210,000 for the six months ended June 30, 2023, and 2022, respectively.
(3)
Loan interest income includes loan fees of $3.3 million and $7.2 million for the six months ended June 30, 2023 and 2022, respectively.
(4)
Net interest margin is computed by dividing net interest income by average interest earning assets.

32
ThirdSecond Quarter 20222023 vs. ThirdSecond Quarter 20212022
Interest-bearing deposits with banks and Federal Reserve balances are earning assets available to the Company.  Average interest-bearing deposits with banksconsisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 2.30%5.14% and 0.15% during0.83% for the thirdsecond quarter of 2023 and 2022, respectively. The increase was primarily the result of the FRB increasing rates by 350 basis points from the second quarter of 2022 and 2021, respectively. the first six months of 2023. Average interest-bearing deposits with banks were $719$458.9 million and $856$683.7 million for the quarter ended SeptemberJune 30, 20222023 and 2021,2022, respectively. Interest income on interest-bearing deposits with banks was $4.2$5.9 million and $0.3$1.4 million for the quarter ended SeptemberJune 30, 20222023 and 2021,2022, respectively.

The investment securities portfolio consistsis also a component of the Company’s earning assets.  Historically, the company invested primarily of:in: (1) mortgage-backed securities issued by government-sponsored entities; (2) debt securities issued by the U.S. Treasury, government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, at certain times the Company 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.

TotalAverage total investment securities averagedwere $984.6 million and $1.1 billion and $836.6 million for the quarter ended SeptemberJune 30, 20222023 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 was 1.96%2.11% and 1.76%1.94% for the quarter ended SeptemberJune 30, 2023 and 2022, and 2021, respectively. See “Investment Securities and Federal Reserve balances” for a discussion of the Company’s investment strategy in 2022.

LoansAverage loans and leases held for investment averaged $3.3were $3.5 billion and $3.2 billion for the quarter ended June 30, 2023 and 2022, respectively. The average yield on the loan and lease portfolio was 5.75% and 4.76% for the quarter ended June 30, 2023 and 2022, respectively. The increase in the loan yield reflects the increase in market interest rates over the last year.

Average interest-bearing deposits were $3.1 billion and $3.1 billion for the quarter ended SeptemberJune 30, 2023 and 2022, respectively. The average rate paid on interest-bearing deposits was 1.10% and 2021, respectively. Total interest income on loans was $41.9 million and $36.1 million0.11% for the quarter ended SeptemberJune 30, 20222023 and 2021, respectively. The average yield on the loan & lease portfolio was 5.06% and 4.67% for the quarter ended 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.

Interest-bearing liabilities averaged $3.1 billion and $2.9 billion for the quarter ended September 30, 2022 and 2021, respectively. Total interest expense on interest-bearing deposits was $1.1$8.4 million $.9and $0.9 million for the quarter ended SeptemberJune 30, 2023 and 2022, and 2021, respectively. The average rate paid on interest-bearing liabilities was 0.15% and 0.13% for the quarter ended September 30, 2022 and 2021, respectively. Asrespectively, as a result of recent increases in short-term market interest rates during 2022 and the Company is experiencing more aggressive competitor ratesfirst half of 2023. The average rate paid on interest bearingtotal funding costs was 0.75% and 0.08% for the quarter ended June 30, 2023 and 2022, respectively. Industry competition for deposits remains challenging which it may needhas the potential to meetincrease future deposit costs in order to retain key customers.  Thiscustomers, which could place negative pressure on future deposit rates andthe net interest margin.margin looking forward.

NineSix Months Ended SeptemberJune 30, 20222023 vs. NineSix Months Ended SeptemberJune 30, 20212022
Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 1.10%4.88% and 0.13%0.50% for the first ninesix months ended September 30,of 2023 and 2022, respectively. The increase was primarily the result of the FRB increasing rates by 500 basis points during 2022 and 2021, respectively. the first six months of 2023. Average interest-bearing deposits were $721$489.9 million and $621$721.7 million for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. Interest income on interest-bearing deposits with banks was $5.9$11.8 million and $0.6$1.8 million for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively.

Average total investment securities were $1.0 billion and $1.1 billion and $873 million for the ninesix months ended SeptemberJune 30, 20222023 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 average yield on total investment securities were 1.92%was 2.10% and 1.84%1.90% for the ninesix months ended SeptemberJune 30, 2023 and 2022, and 2021, respectively. See “Investment Securities and Federal Reserve balances” for a discussion of the Company’s investment strategy in 2022.
40
Average loans and leases held for investment were $3.2$3.4 billion and $3.1$3.2 billion for the ninesix months ended SeptemberJune 30, 20222023 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 &and lease portfolio was 4.86%5.72% and 4.79%4.76% for the ninesix months ended SeptemberJune 30, 2023 and 2022, and 2021, respectively. The increase in the loan yield reflects the increase in market interest rates over the last year.

33
Average interest-bearing liabilitiesdeposits were $3.1$3.0 billion and $2.8$3.0 billion for the ninesix months ended SeptemberJune 30, 2023 and 2022, respectively. The average rate paid on interest-bearing deposits was 0.81% and 2021,0.11% for the six months ended June 30, 2023 and 2022, respectively. Total interest expense on interest-bearing deposits was $2.8$12.1 million and $3.2$1.7 million for the ninesix months ended SeptemberJune 30, 2023 and 2022, respectively, as a result of increases in short-term market interest rates during 2022 and 2021, respectively.the first six months of 2023. The average rate paid on interest-bearing liabilitiestotal funding costs was 0.14%0.55% and 0.17%0.08% for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, 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
September 30, 2022
compared with 2021
  Nine Months Ended
September 30, 2022
compared with 2021		  
Three Months Ended June 30,
2023 compared with 2022
  
Six Months Ended June 30,
2023 compared with 2022
 
 Increase (Decrease) Due to: Increase (Decrease) Due to:  Increase (Decrease) Due to: Increase (Decrease) Due to: 
(Dollars in thousands) Volume  Rate  Net  Volume  Rate  Net  Volume  Rate  Net  Volume  Rate  Net 
Interest income:                          
Interest earnings deposits in other banks and federal funds sold 
$
(370
)
 
$
4,201
 
$
3,831
 
$
111
 
$
5,228
 
$
5,339
   
(609
)
  
5,082
  
$
4,473
   
(756
)
  
10,824
  
$
10,068
 
Securities:             
Investment securities:                        
Taxable securities 
1,272
 
537
 
1,809
 
3,305
 
701
 
4,006
   
(822
)
  
341
   
(481
)
  
(1,071
)
  
807
   
(264
)
Non-taxable securities  
(57
)
 
44
 
(13
)
 
(127
)
 
68
 
(59
)
  
117
   
56
   
173
   
183
   
145
   
328
 
Total securities 
1,214
 
582
 
1,796
 
3,178
 
769
 
3,947
 
Total investment securities  
(705
)
  
397
   
(308
)
  
(888
)
  
952
   
64
 
Loans:                                     
Real estate:                                     
Commercial 
2,069
 
1,855
 
3,924
 
6,630
 
(1,246
)
 
5,384
   
1,829
   
1,384
   
3,213
   
3,399
   
3,187
   
6,586
 
Agricultural 
1,122
 
(180
)
 
942
 
2,384
 
277
 
2,661
   
200
   
1,053
   
1,253
   
626
   
2,448
   
3,074
 
Residential and home equity 
1,625
 
(1,647
)
 
(22
)
 
962
 
(425
)
 
537
   
251
   
425
   
676
   
588
   
882
   
1,470
 
Construction  
(761
)
 
929
 
168
 
29
 
599
 
628
   
(617
)
  
1,010
   
393
   
(849
)
  
2,107
   
1,258
 
Total real estate 
4,055
 
957
 
5,012
 
10,006
 
(796
)
 
9,210
   
1,664
   
3,871
   
5,535
   
3,764
   
8,624
   
12,388
 
Commercial & industrial 
775
 
884
 
1,659
 
2,424
 
469
 
2,893
   
434
   
3,021
   
3,455
   
932
   
5,348
   
6,280
 
Agricultural 
278
 
692
 
970
 
978
 
614
 
1,592
   
197
   
2,428
   
2,625
   
588
   
4,486
   
5,074
 
Commercial leases 
(210
)
 
212
 
2
 
(429
)
 
452
 
23
   
544
   
26
   
570
   
885
   
74
   
959
 
Consumer and other(1)  
(12,215
)
 
10,352
 
(1,863
)
 
(16,453
)
 
10,767
 
(5,686
)
  
(541
)
  
(524
)
  
(1,065
)
  
(1,690
)
  
(1,316
)
  
(3,006
)
Total loans 
(7,316
)
 
13,096
 
5,780
 
(3,474
)
 
11,506
 
8,032
 
Total loans and leases  
2,299
   
8,821
   
11,120
   
4,479
   
17,216
   
21,695
 
Non-marketable securities  
0
 
(35
)
 
(35
)
 
51
 
35
 
86
   
-
   
37
   
37
   
-
   
33
   
33
 
Total interest income 
(6,472
)
 
17,844
 
11,372
 
(135
)
 
17,539
 
17,404
   
985
   
14,337
   
15,322
   
2,835
   
29,025
   
31,860
 
                                     
Interest expense:                                     
Interest bearing deposits:                                     
Demand 
9
 
143
 
152
 
98
 
56
 
154
   
(57
)
  
182
   
125
   
(64
)
  
374
   
310
 
Savings and money market accounts 
55
 
75
 
130
 
218
 
(175
)
 
43
   
20
   
4,772
   
4,792
   
30
   
6,923
   
6,953
 
Certificates of deposit greater than $250,000 
(10
)
 
(37
)
 
(47
)
 
(21
)
 
(267
)
 
(288
)
  
54
   
1,495
   
1,549
   
29
   
1,910
   
1,939
 
Certificates of deposit less than $250,000  
(11
)
 
(31
)
 
(42
)
 
(49
)
 
(262
)
 
(311
)
  
20
   
1,032
   
1,052
   
11
   
1,216
   
1,227
 
Total interest bearing deposits 
43
 
150
 
193
 
246
 
(648
)
 
(402
)
  
37
   
7,481
   
7,518
   
7
   
10,422
   
10,429
 
Short-term borrowings 
-
 
-
 
-
 
-
 
-
 
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Subordinated debentures  
-
 
56
 
56
 
-
 
83
 
83
   
-
   
101
   
101
   
-
   
215
   
215
 
Total interest expense  
43
 
206
 
249
 
246
 
(565
)
 
(319
)
  
37
   
7,582
   
7,619
   
7
   
10,637
   
10,644
 
Net interest income 
$
(6,515
)
 
$
17,638
 
$
11,123
 
$
(381
)
 
$
18,104
 
$
17,723
  
$
948
  
$
6,755
  
$
7,703
  
$
2,828
  
$
18,388
  
$
21,216
 

Net interest income increased by $17.7 million, or 14.81% to $137.4 million for the nine months ended September 30, 2022 compared to $119.7 million for the same period one year earlier. The increase in net interest income was driven primarily by increased interest rates.
(1)
Consumer and other - These decreases represent the end of the PPP loans which were $0 and $6.8 million as of June 30, 2023 and 2022 respectively.

4134
Comparison of Results of Operations for the Three and NineSix Months Ended SeptemberJune 30, 20222023 and 20212022
 
  
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)
 
Selected Income Statement Information:                        
Interest income 
$
51,713
  
$
40,341
  
$
11,372
   
28.19
%
 
$
140,502
  
$
123,098
  
$
17,404
   
14.14
%
Interest expense  
1,256
   
1,007
   
(249
)
  
(24.73
%)
  
3,117
   
3,436
   
319
   
9.28
%
Net interest income  
50,457
   
39,334
   
11,123
   
28.28
%
  
137,385
   
119,662
   
17,723
   
14.81
%
Provision for credit losses  
1,500
   
-
   
(1,500
)
 N/A   
3,000
   
1,250
   
(1,750
)
  
(140.00
%)
Net interest income after provision for credit losses  
48,957
   
39,334
   
9,623
   
24.46
%
  
134,385
   
118,412
   
15,973
   
13.49
%
Non-interest income  
1,559
   
4,617
   
(3,058
)
  
(66.23
%)
  
9,383
   
16,292
   
(6,909
)
  
(42.41
%)
Non-interest expense  
24,375
   
20,585
   
(3,790
)
  
(18.41
%)
  
71,194
   
67,732
   
(3,462
)
  
(5.11
%)
Income before income tax expense  
26,141
   
23,366
   
2,775
   
11.88
%
  
72,574
   
66,972
   
5,602
   
8.36
%
Income tax expense  
6,605
   
5,864
   
(741
)
  
(12.64
%)
  
17,537
   
16,604
   
(933
)
  
(5.62
%)
Net income 
$
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 September 30, 2022, 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 16.64% and 15.75% for the three and nine months ended September 30, 2022.
  
Three Months Ended
June 30,
        
Six Months Ended
June 30,
       
(Dollars in thousands) 2023  2022  
$ Better /
(Worse)
  % Better /
(Worse)		  2023  2022  
$ Better /
(Worse)
  
% Better /
(Worse)
 
Selected Income Statement Information:                        
Interest income 
$
61,017
  
$
45,695
  
$
15,322
   
33.53
%
 
$
120,649
  
$
88,789
  
$
31,860
   
35.88
%
Interest expense  
8,595
   
976
   
(7,619
)
  
(780.64
%)
  
12,505
   
1,861
   
(10,644
)
  
(571.95
%)
Net interest income  
52,422
   
44,719
   
7,703
   
17.23
%
  
108,144
   
86,928
   
21,216
   
24.41
%
Provision for credit losses  
2,557
   
1,500
   
(1,057
)
  
(70.47
%)
  
4,057
   
1,500
   
(2,557
)
  
(170.47
%)
Net interest income after provision for credit losses  
49,865
   
43,219
   
6,646
   
15.38
%
  
104,087
   
85,428
   
18,659
   
21.84
%
Non-interest income  
5,447
   
3,512
   
1,935
   
55.10
%
  
8,907
   
7,824
   
1,083
   
13.84
%
Non-interest expense  
26,822
   
23,031
   
(3,791
)
  
(16.46
%)
  
55,005
   
46,819
   
(8,186
)
  
(17.48
%)
Income before income tax expense  
28,490
   
23,700
   
4,790
   
20.21
%
  
57,989
   
46,433
   
11,556
   
24.89
%
Income tax expense  
7,182
   
5,257
   
(1,925
)
  
(36.62
%)
  
13,134
   
10,932
   
(2,202
)
  
(20.14
%)
Net income 
$
21,308
  
$
18,443
  
$
2,865
   
15.53
%
 
$
44,855
  
$
35,501
  
$
9,354
   
26.35
%

For the three and ninesix months ended SeptemberJune 30, 2021, Farmers & Merchants Bancorp reported2023, net income of $17.5was $21.3 million and $50.4$44.9 million, earnings per share of $22.16respectively compared to $18.4 million 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%$35.5 million for the same periods a year ago. For the three and nine months ended SeptemberJune 30, 2021.2023 the increase in net income was primarily the result of higher net interest income of $7.7 million and an increase in non-interest income of $1.9 million. These increases were offset by an increase in non-interest expense of $3.8 million, higher provision for credit losses of $1.1 million and higher income tax expense of $1.9 million.

For the six months ended June 30, 2023, the increase in net income was primarily the result of higher net interest income of $21.2 million. The Company also recognized in non-interest income, a $4.3 million death benefit on bank-owned life insurance (“BOLI”) during the six months ended June 30, 2023 that was not present during the six months ended June 30, 2022. This increase was offset by an increase in non-interest expense of $8.2 million, higher provision for credit losses of $2.5 million and higher income tax expense of $2.2 million.
Net Interest Income and Net Interest Margin.
For the quarter ended SeptemberJune 30, 2022,2023, net interest income increased $11.1$7.7 million, or 28.28%17.23%, to $50.5$52.4 million compared with $39.3$44.7 million for the same quarterperiod a year earlier. The increase is primarily the result of: (1) averageof the net interest earning assetsmargin increasing $353 million, or 7.40%74 basis points to $5.1 billion4.27% compared with $4.8 billion3.53% for the same period a year earlier; and (2)earlier. The increase in the net interest margin was primarily the result of the FRB increasing the federal funds rate by 69350 basis pointpoints from the second quarter of 2022 and the first half of 2023. The yield on interest earning assets increased 137 basis points to 3.95%4.97% compared to 3.60% for the second quarter of 2022 as the yield on interest bearing liabilities increased 99 basis points to 1.12% compared to .13% for the second quarter of 2022.

For the six months ended SeptemberJune 30, 2022,2023, net interest income increased $21.2 million, or 24.41%, to $108.1 million compared with 3.26%$86.9 million for the same period a year earlier.
Net The increase is primarily the result of the net interest incomemargin increasing 94 basis points to 4.40% compared with 3.46% 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.same period a year earlier. The increase in net interest income was primarily due to a $515 million increase in average earning assets and an 11 basis point increase in the net interest margin. Formargin was primarily the nineresult of the FRB increasing the federal funds rate by 350 basis points from the second quarter of 2022 and the first six months of 2023. The loan yield increased 96 basis points compared to the first six months of 2022 and outpaced the increase in deposit yield of 71 basis points compared to the same period a year earlier.

Provision for Credit Losses
The Company made a $2.6 million provision for credit losses during the three months ended SeptemberJune 30, 2022, the Company’s net interest margin was 3.61%2023 compared to 3.50%$1.5 million for the same period in 2021.
Provisiona year ago. Net recoveries during the three months ended June 30, 2023 were $39,000 compared to net charge-offs of $59,000 for Credit Losses. The provision for credit losses in eachthe same 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 loan and HTM securities portfolios.year ago.

The Company made a $3.0$4.1 million provision for credit losses during the first nine monthshalf of 20222023 compared to $1.3$1.5 million forduring the same period in 2021.first half of 2022. Net recoveries during the first nine monthshalf of 20222023 were $4,000$227,000 compared to net recoveriescharge-offs of $191,000$34,000 in the first ninehalf of 2022. The increase in ACL during the first six months of 2021.2023 was primarily related to higher expected probable losses inherent in the loan and lease portfolio that was directly related to quantitative and qualitative factors associated with the current economic environment.

35
Non-interest Income.Income
Non-interest income decreased $3.0increased $1.9 million, or 66.23%55.1%, to $1.6$5.4 million for the quarter ended SeptemberJune 30, 20222023 compared with $4.6$3.5 million for the same period a year earlier. This decreaseThe increase in non-interest income was primarily due to a $3.0$2.3 million lossincrease in net gains on sale of investment securities and a $0.2 million decrease in service charges on deposit accounts.  Service charges on deposit accounts dropped because the Company eliminated NSF fees during the quarter ended September 30, 2022.deferred compensation plan investments.

42
The Company recorded net gains on deferred compensation plan investments of $0.3$1.3 million for the quarter ended SeptemberJune 30, 20222023 compared with net gainslosses of $0.6$1.0 million for the same respective period.period a year ago. See Note 12,11, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 20212022 Form 10-K filed on March 15, 20222023 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 income decreased $6.9increased $1.1 million, or 42.41%13.8%, to $9.4$8.9 million for the ninesix months ended SeptemberJune 30, 20222023 compared with $16.3$7.8 million for the same period of 2021.2022. The year-over-year decreaseincrease in non-interest income was primarily due to a $3.0$4.3 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 2021BOLI death benefit and a $2.0$2.8 million declineincrease in gains/(losses)net gains on deferred compensation plan investments. These reductionsincreases were partially off-set by a $0.4$5.7 million increasenet loss on the sale of investment securities in services charges and processing fees received on deposit accounts and an increasethe first quarter of $0.2 million in other non-interest income.2023 to reposition the investment portfolio.

The Company recorded net lossesgains on deferred compensation plan investments of $0.2$2.2 million for the ninesix months ended SeptemberJune 30, 20222023 compared with net gainslosses of $1.8$0.6 million for the same respective period. See Note 12,11, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 20212022 Form 10-K filed on March 15, 20222023 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.Expense
Non-interest expense increased $3.8 million, or 18.41%16.46%, to $24.4$26.8 million for the quarter ended SeptemberJune 30, 20222023 compared with $20.6$23.0 million for the same period a year ago. This increase was primarily comprised of: (1)of a $1.5$2.3 million 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 plan investments.

The Company recorded net gains on deferred compensation plan investments, of $0.3a $1.1 million increase in salaries and a $0.4 million increase in employee benefits.

Net gains on deferred compensation plan obligations were $1.3 million for the quarter ended SeptemberJune 30, 20222023 compared with net gainslosses of $0.6$1.0 million for the same respective period. See Note 12,11, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 20212022 Form 10-K filed on March 15, 20222023 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)these gains on deferred compensation plan investmentsobligations 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.

Non-interest expense increased $3.5$8.2 million, or 5.11%17.48%, to $71.2$55.0 million for the ninesix months ended SeptemberJune 30, 20222023 compared with $67.7$46.8 million for the same period a year ago. This increase was primarily comprised of: (1)of a $1.8$2.8 million increase in net gains on deferred compensation plan investments, a $2.2 million increase in salaries, and employee benefits; (2) a $1.0$2.1 million increase in provision for unused commitments; (3)employee benefits, a $0.6 million increase in recruitmentother expenses 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.FDIC insurance.

36
The Company recorded net lossesgains on deferred compensation plan investments of $0.2$2.2 million for the ninesix months ended SeptemberJune 30, 20222023 compared with net gainslosses of $1.8$0.6 million for the same period of 2021.respective period. See Note 12,11, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 20212022 Form 10-K filed on March 15, 20222023 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)these gains on deferred compensation plan investmentsobligations 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.

43
Income Tax Expense. The Bank’s provision forExpense
For the three and six months ended June 30, 2023, income taxes increased 5.62%tax expense was $7.2 million and $13.1 million, respectively compared to $17.5$5.3 million and $10.9 million for the first nine months of 2022 compared to the first nine months of 2021.same periods a year ago. The Company’s effective tax rate for the first ninethree and six months of 2022ended June 30, 2023 was 24.16%25.21% and 22.65%, respectively compared to 24.79%22.18% and 23.54% for the same period in 2021.2022. The Company’s effective tax rate for the six months ended June 30, 2023 was lower than its historical effective tax rate primarily due to a non-taxable BOLI death benefit of $4.3 million recognized during the six months ended June 30, 2023. 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 BOLI death 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 ConditionBalance Sheet Analysis

Total assets grew $289were $5.3 billion at June 30, 2023, a decrease of $77.0 million or 5.58%,1.45% compared to $5.5 billion at September 30, 2022 compared with $5.2 billion at December 31, 2021.2022. Loans held for investment were $3.3$3.5 billion at SeptemberJune 30, 2022, an increase2023, a decrease of $86.7$20.6 million, or 2.68%0.59% compared to December 31, 2022. Total deposits were $4.6 billion at June 30, 2023 compared with $3.2$4.8 billion at December 31, 2021. Exclusive2022, a decrease of SBA PPP loans, the loan portfolio grew $145.0$121.0 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 $269 million, or 5.80%, to $4.9 billion at September 30, 2022 compared with $4.6 billion at December 31, 2021. The increase in total assets2.54%.

Cash and deposits was primarily the result of continued strong organic deposit growth.
Investment Securities and Federal Reserve BalancesCash Equivalents

The Company’s investment portfolio increased $23 million, or 2.24%, to $1.0 billion at September 30, 2022 compared to December 31, 2021. This increase is netcash and cash equivalents consists 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 total investment portfolio currently represents 18.84% of the Company’s total assets at 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 $800$506.7 million at SeptemberJune 30, 20222023 and $663$514.9 million at December 31, 2021.2022. The Company’s total cash and cash equivalents as of June 30, 2023 represents 11.2% of the Company’s total assets as compared to 11.0% as of December 31, 2022.

Investment Securities

The Company’s net investment portfolio decreased by $45.2 million or 4.53% to $952.6 million at June 30, 2023 compared to December 31, 2022. This decrease is net of the impact of $36.2 million in available for sale securities sold for interest rate risk management purposes. The Company uses its investment portfolio to manage interest rate and liquidity risks. The Company's total investment portfolio as of June 30, 2023 represents 18.14% of the Company’s total assets as compared to 18.72% at December 31, 2022.

The Company classifies its investment securities as either held-to-maturity (“HTM”) or available-for-sale (“AFS”). Securities are classified as held-to-maturityHTM 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 32 “Investment Securities” to the Unaudited Consolidated Financial Statements in “Item 1. Financial Statements” in this quarterlyQuarterly 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, as accumulated other comprehensive income(loss), net of related income taxes. As of SeptemberJune 30, 2022,2023, the 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.

4437
The carrying value of our portfolio of investment securities was as follows:

(Dollars in thousands) 
September 30,
2022
  
December 31,
2021
 
Available-for-Sale Securities      
U.S. Treasury notes 
$
4,941
  
$
10,089
 
U.S. Government-sponsored securities  
4,698
   
6,374
 
Mortgage-backed securities(1)
  
156,453
   
251,120
 
Collateralized mortgage obligations(1)
  
1,458
   
2,436
 
Corporate securities  
9,594
   
-
 
Other  
310
   
435
 
Total available-for-sale securities 
$
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.
(Dollars in thousands) 
September 30,
2022
  
December 31,
2021
  
June 30,
2023
  
December 31,
2022
 
Held-to-Maturity Securities      
Available-for-Sale Securities      
U.S. Treasury notes 
$
-
 
$
4,964
 
U.S. Government-sponsored securities 
3,841
 
4,427
 
Mortgage-backed securities(1)
 
$
709,541
 
$
596,775
  
100,068
 
132,528
 
Collateralized mortgage obligations(1)
 
82,297
 
73,781
  
586
 
1,054
 
Municipal securities(2)
  
60,434
 
66,496
 
Total held-to-maturity securities 
$
852,272
 
$
737,052
 
Corporate securities 
9,838
 
9,581
 
Other  
310
 
310
 
Total available-for-sale securities 
$
114,643
 
$
152,864
 

(1)
All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.
(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.
(Dollars in thousands) 
June 30,
2023
  
December 31,
2022
 
Held-to-Maturity Securities      
Mortgage-backed securities(1)
 
$
685,028
  
$
702,858
 
Collateralized mortgage obligations(1)
  
77,290
   
80,186
 
Municipal securities(2)
  
76,128
   
61,909
 
Total held-to-maturity securities 
$
838,446
  
$
844,953
 

(1)
All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.
(2)
(2)
Municipal securities are net of allowance for credit losses of $450 and $393, and $0, respectively.

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

 As of September 30, 2022  As of June 30, 2023 
 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 
$
4,941
 
2.38
%
 
$
-
 
0.00
%
 
$
-
 
0.00
%
 
$
-
 
0.00
%
 
$
4,941
 
2.38
%
U.S. Government-sponsored securities 
7
 
1.74
%
 
81
 
3.97
%
 
436
 
3.01
%
 
4,174
 
2.79
%
 
4,698
 
2.83
%
 
$
-
 
0.00
%
 
$
80
 
6.35
%
 
$
271
 
6.19
%
 
$
3,490
 
5.91
%
 
$
3,841
 
5.94
%
Mortgage-backed securities(1)
 
16
 
3.13
%
 
15,725
 
2.27
%
 
17,961
 
2.40
%
 
122,751
 
1.74
%
 
156,453
 
1.87
%
 
10
 
2.56
%
 
8,100
 
2.52
%
 
6,600
 
3.58
%
 
85,358
 
1.95
%
 
100,068
 
2.11
%
Collateralized mortgage obligations(1)
 
-
 
0.00
%
 
-
 
0.00
%
 
-
 
0.00
%
 
1,458
 
2.35
%
 
1,458
 
2.35
%
 
-
 
0.00
%
 
-
 
0.00
%
 
-
 
0.00
%
 
586
 
2.28
%
 
586
 
2.28
%
Corporate securities 
-
 
0.00
%
 
4,795
 
1.59
%
 
4,799
 
1.72
%
 
-
 
0.00
%
 
9,594
 
1.65
%
 
-
 
0.00
%
 
9,838
 
5.31
%
 
-
 
0.00
%
 
-
 
0.00
%
 
9,838
 
5.31
%
Other  
310
 
2.99
%
  
-
 
0.00
%
  
-
 
0.00
%
  
-
 
0.00
%
  
310
 
2.99
%
  
310
 
3.90
%
  
-
 
0.00
%
  
-
 
0.00
%
  
-
 
0.00
%
  
310
 
3.90
%
Total securities available-for-sale 
$
5,274
 
2.42
%
 
$
20,601
 
2.12
%
 
$
23,196
 
2.27
%
 
$
128,383
 
1.78
%
 
$
177,454
 
1.90
%
 
$
320
 
3.86
%
 
$
18,018
 
4.06
%
 
$
6,871
 
3.68
%
 
$
89,434
 
2.11
%
 
$
114,643
 
2.52
%
(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 September 30, 2022 
 
 Within One Year  
After One but
Within Five Years
  
After Five but
Within Ten Years
  After Ten Years  Total 
(Dollars in thousands) Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield 
Securities held-to-maturity                              
Mortgage-backed securities(1)
 
$
-
   
0.00
%
 
$
-
   
0.00
%
 
$
13,906
   
0.89
%
 
$
695,635
   
1.88
%
 
$
709,541
   
1.86
%
Collateralized Mortgage Obligations(1)
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
82,297
   
1.80
%
  
82,297
   
1.80
%
Municipal securities  
883
   
4.93
%
  
7,484
   
3.40
%
  
15,000
   
3.43
%
  
37,460
   
3.52
%
  
60,827
   
3.50
%
Total securities held-to-maturity 
$
883
   
4.93
%
 
$
7,484
   
3.40
%
 
$
28,906
   
2.06
%
 
$
815,392
   
1.95
%
 
$
852,665
   
1.97
%

(1)
(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 June 30, 2023 
  Within One Year  
After One but Within
Five Years
  
After Five but
Within Ten Years
  After Ten Years  Total 
(Dollars in thousands) Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield 
Securities held-to-maturity                              
Mortgage-backed securities(1)
 
$
-
   
0.00
%
 
$
-
   
0.00
%
 
$
16,315
   
1.27
%
 
$
668,713
   
1.91
%
 
$
685,028
   
1.89
%
Collateralized mortgage obligations(1)
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
77,290
   
1.77
%
  
77,290
   
1.77
%
Municipal securities  
283
   
1.93
%
  
12,292
   
2.49
%
  
12,040
   
3.65
%
  
51,513
   
3.34
%
  
76,128
   
3.24
%
Total securities held-to-maturity 
$
283
   
1.93
%
 
$
12,292
   
2.49
%
 
$
28,355
   
2.28
%
 
$
797,516
   
1.99
%
 
$
838,446
   
2.00
%

45
(1)
All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.

38
 As of December 31, 2021  As of December 31, 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 
$
5,028
 
2.33
%
 
$
5,061
 
2.38
%
 
$
-
 
0.00
%
 
$
-
 
0.00
%
 
$
10,089
 
2.36
%
 
$
4,964
   
2.37
%
 
$
-
   
0.00
%
 
$
-
   
0.00
%
 
$
-
   
0.00
%
 
$
4,964
   
2.37
%
U.S. Government-sponsored securities 
2
 
1.80
%
 
148
 
2.29
%
 
512
 
1.55
%
 
5,712
 
1.26
%
 
6,374
 
1.30
%
  
3
   
2.17
%
  
53
   
2.29
%
  
380
   
4.52
%
  
3,991
   
4.52
%
  
4,427
   
4.29
%
Mortgage-backed securities(1)
 
13
 
1.50
%
 
21,155
 
2.36
%
 
50,554
 
2.36
%
 
179,398
 
1.61
%
 
251,120
 
1.83
%
  
13
   
2.82
%
  
16,460
   
2.31
%
  
15,156
   
2.41
%
  
100,899
   
1.82
%
  
132,528
   
1.95
%
Collateralized mortgage obligations(1)
 
-
 
0.00
%
 
-
 
0.00
%
 
-
 
0.00
%
 
2,436
 
2.30
%
 
2,436
 
2.30
%
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
1,054
   
2.35
%
  
1,054
   
2.35
%
Corporate securities  
-
   
0.00
%
  
9,581
   
3.13
%
  
-
   
0.00
%
  
-
   
0.00
%
  
9,581
   
3.13
%
Other  
435
 
3.31
%
  
-
 
0.00
%
  
-
 
0.00
%
  
-
 
0.00
%
  
435
 
3.31
%
  
310
   
4.60
%
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
310
   
4.60
%
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
%
 
$
5,290
   
2.50
%
 
$
26,094
   
2.61
%
 
$
15,536
   
2.46
%
 
$
105,944
   
1.93
%
 
$
152,864
   
2.11
%

(1)
(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  As of December 31, 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
%
 
$
10,641
 
0.41
%
 
$
586,134
 
1.72
%
 
$
596,775
 
1.70
%
 
$
-
   
0.00
%
 
$
-
   
0.00
%
 
$
18,197
   
1.22
%
 
$
684,661
   
1.90
%
 
$
702,858
   
1.88
%
Collateralized Mortgage Obligations(1)
 
-
 
0.00
%
 
-
 
0.00
%
 
-
 
0.00
%
 
73,781
 
1.71
%
 
73,781
 
1.71
%
Collateralized mortgage obligations(1)
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
80,186
   
1.80
%
  
80,186
   
1.80
%
Municipal securities  
308
 
1.10
%
  
8,487
 
2.19
%
  
18,433
 
3.42
%
  
39,268
 
4.52
%
  
66,496
 
3.90
%
  
883
   
5.92
%
  
8,058
   
3.98
%
  
15,670
   
3.70
%
  
37,691
   
4.83
%
  
62,302
   
4.45
%
Total securities held-to-maturity 
$
308
 
1.10
%
 
$
8,487
 
2.19
%
 
$
29,074
 
2.32
%
 
$
699,183
 
1.88
%
 
$
737,052
 
1.90
%
 
$
883
   
5.92
%
 
$
8,058
   
3.98
%
 
$
33,867
   
2.37
%
 
$
802,538
   
2.03
%
 
$
845,346
   
2.07
%

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

Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Expected maturities of mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.
Expected maturitiesCMO securities may differ from contractual maturities because issuers mayborrowers have the right to call or prepay obligations with or without penalties. 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.

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 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 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 generally made only when there is 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, the Company will make loans on rural residential properties up to 41 acres. Most residential loans have terms from ten to 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.
 
4639
Home Equity Lines and Loans – These are loans made to individuals for home improvements and other personal needs. Generally, amounts do not exceed $500,000; but can be made for up to $1,000,000 in high cost counties. Combined Loan Toto Value (CLTV) does not exceed 75%; FICO scores are at or above 670; Total Debt Ratios do not exceed 43%; and in some situations the Company is in a 1st lien position.

Agricultural – These are non-real estate loans and lines of credit made to farmers to finance agricultural production. Lines of credit are extended to finance the seasonal needs of farmers during peak growing periods; are usually established for periods no longer than 12 to 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 36 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 fivethree 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.

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.

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 &or lease structure. See “Results of Operations - Provision and Allowance for Credit Losses” for a more detailed discussion of risks by loan &and lease type. The Company’s current underwriting policies and standards are designed to mitigate the risks involved in each loan &and 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 &and 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.

4740
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 or lease 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 loan &and lease portfolio at SeptemberJune 30, 20222023 totaled $3.3$3.5 billion, an increasea decrease of $86.7$20.6 million overor 0.59% compared to December 31, 2021. Exclusive of SBA PPP loans, the loan portfolio grew $145.0 million, or 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.2022.

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

 
 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 which were $1.8 million and $70.8 million at September 30, 2022 and December 31, 2021, respectively.

48
  
June 30,
2023
  
December 31,
2022
 
(Dollars in thousands) Dollars  
Percent of
Total
  Dollars  
Percent of
Total
 
Gross Loans and Leases            
Real estate:            
Commercial 
$
1,302,460
   
37.19
%
 
$
1,328,691
   
37.73
%
Agricultural  
739,207
   
21.11
%
  
726,938
   
20.64
%
Residential and home equity  
392,754
   
11.21
%
  
387,753
   
11.01
%
Construction  
172,903
   
4.94
%
  
166,538
   
4.73
%
Total real estate  
2,607,324
   
74.45
%
  
2,609,920
   
74.11
%
Commercial & industrial  
479,908
   
13.71
%
  
478,758
   
13.59
%
Agricultural  
282,725
   
8.07
%
  
314,525
   
8.93
%
Commercial leases  
126,554
   
3.61
%
  
112,629
   
3.20
%
Consumer and other  
5,553
   
0.16
%
  
5,886
   
0.17
%
Total gross loans and leases 
$
3,502,064
   
100.00
%
 
$
3,521,718
   
100.00
%
Table of Contents
The following table shows the maturity distribution and interest rate sensitivity of the loan and lease portfolio of the Company as of SeptemberJune 30, 2022.2023.

 Loan Contractual Maturity  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  
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
  
$
36,189
 
$
396,249
 
$
835,140
 
$
34,882
 
$
1,302,460
 
Agricultural 
26,331
 
155,660
 
466,352
 
74,105
 
722,448
  
21,047
 
188,361
 
452,673
 
77,126
 
739,207
 
Residential and home equity 
407
 
4,616
 
117,436
 
254,790
 
377,249
  
33
 
4,310
 
118,004
 
270,407
 
392,754
 
Construction  
105,343
 
64,281
 
-
 
-
 
169,624
   
100,220
 
72,683
 
-
 
-
 
172,903
 
Total real estate 
186,906
 
525,556
 
1,437,049
 
366,615
 
2,516,126
  
157,489
 
661,603
 
1,405,817
 
382,415
 
2,607,324
 
Commercial & industrial 
180,294
 
206,003
 
61,714
 
6,174
 
454,185
  
164,160
 
217,555
 
92,166
 
6,027
 
479,908
 
Agricultural 
164,616
 
79,574
 
16,106
 
-
 
260,296
  
139,259
 
117,908
 
23,858
 
1,700
 
282,725
 
Commercial leases 
7,299
 
32,471
 
54,319
 
-
 
94,089
  
5,083
 
43,476
 
77,995
 
-
 
126,554
 
Consumer and other(1)
  
707
 
5,639
 
1,430
 
-
 
7,776
   
858
 
3,589
 
1,106
 
-
 
5,553
 
Total gross loans and leases 
$
539,822
 
$
849,243
 
$
1,570,618
 
$
372,789
 
$
3,332,472
  
$
466,849
 
$
1,044,131
 
$
1,600,942
 
$
390,142
 
$
3,502,064
 
Rate Structure for Loans                      
Fixed Rate 
$
87,323
 
$
354,357
 
$
1,188,033
 
$
241,872
 
$
1,871,585
  
$
97,118
 
$
586,584
 
$
1,166,360
 
$
231,022
 
$
2,081,084
 
Adjustable Rate  
452,499
 
494,886
 
382,585
 
130,917
 
1,460,887
   
369,731
 
457,547
 
434,582
 
159,120
 
1,420,980
 
Total gross loans and leases 
$
539,822
 
$
849,243
 
$
1,570,618
 
$
372,789
 
$
3,332,472
  
$
466,849
 
$
1,044,131
 
$
1,600,942
 
$
390,142
 
$
3,502,064
 
(1) Includes SBA PPP loans.
41
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, and OREO (as hereinafter defined):

(Dollars in thousands) 
June 30,
2023
  
December 31,
2022
 
Non-performing assets:      
Non-accrual loans and leases      
Real estate:      
Commercial 
$
375
  
$
403
 
Agricultural  
-
   
-
 
Residential and home equity  
-
   
-
 
Construction  
-
   
168
 
Total real estate  
375
   
571
 
Commercial & industrial  
-
   
-
 
Agricultural  
-
   
-
 
Commercial leases  
-
   
-
 
Consumer and other  
-
   
-
 
Total non-performing loans and leases 
$
375
  
$
571
 
Other real estate owned ("OREO") 
$
873
  
$
873
 
Total non-performing assets 
$
1,248
  
$
1,444
 
         
Selected ratios:        
Non-performing loans to total loans and leases  
0.01
%
  
0.02
%
Non-performing assets to total assets  
0.02
%
  
0.03
%

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 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 $411,000$375,000 and $516,000$571,000 at SeptemberJune 30, 20222023 and December 31, 2021,2022, 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 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 September 30, 2022, restructured loans totaled $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. 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 SeptemberJune 30, 2022,2023, and at December 31, 2021.2022.

49
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, the Company has restructured $304 million of loans under the CARES Act and H.R. 133 guidelines.  At 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.

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

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 4.3. “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.

Except for non-performing loans and leases discussed above, the Company’s management is not aware of any loans and leases as of SeptemberJune 30, 2022,2023, 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:

50
TheHowever, the State of California has routinely experienced drought conditions such as 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,2020-2022. Although the availability of water in our primary service area was not an issue for the 2022 growing season. However,season, the weather patterns over the past eightnine 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
42
Loan Modifications/Restructurings – A modification/restructuring of a vaccine,loan or lease happens when the effectsCompany makes certain concessions to a borrower experiencing financial difficulty.  These concessions either stem from an agreement between the Company and the borrower or is imposed by law or a court; some of COVID-19 are still with us, andthese concessions include: term extension, principle forgiveness, rate reduction, or a combination of any of those.  The Company has granted a concession when, as a result of the modification/restructuring, it is impossibledoes not expect to predictcollect all amounts due, including interest accrued at the ultimate impact on classified and non-performingoriginal contract rate.  ASU 2022-02 requires certain disclosure of loans and leases (see Part I. Note 2).that have been modified or restructured within the past 12 months and the effects that said modifications had on the loans or leases.  Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses and because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness that is deemed to be uncollectable; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

The Company modified one residential real estate loan in the amount of $127,000, during the three months ended June 30, 2023.
Allowance for Credit Losses—Loans and Leases

The Company maintains an allowance for credit losses (“ACL”) under ASC Topic 326, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on loans based on current expected credit losses as of the balance sheet date.Financial Instruments (“CECL”). 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 &and 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. The Company uses the Weighted Average Remaining Maturity (“WARM”) method to calculate the ACL as this method is the most appropriate given the Company’s current size and complexity. See “Summary of Critical Accounting Policies and Estimates - Allowance for Credit Losses—Loans. – Loans and Leases.”

5143
The following table sets forth the activity in our ACL for loans and leases for the periods indicated:

 
Nine Months Ended
September 30,
  Six Months Ended June 30, 
(Dollars in thousands) 2022  2021  2023  2022 
Allowance for credit losses:          
Balance at beginning of year 
$
61,007
 
$
58,862
  
$
66,885
  
$
61,007
 
Provision / (recapture) for credit losses 
2,606
 
1,250
 
Provision for credit losses  
4,000
   
1,107
 
Charge-offs:             
Real estate:             
Commercial 
-
 
-
   
-
   
-
 
Agricultural 
-
 
-
   
-
   
-
 
Residential and home equity 
-
 
-
   
(14
)
  
-
 
Construction  
-
 
-
   
-
   
-
 
Total real estate 
-
 
-
   
(14
)
  
(276
)
Commercial & industrial 
(324
)
 
-
   
-
   
-
 
Agricultural 
-
 
-
   
-
   
-
 
Commercial leases 
-
 
-
   
-
   
-
 
Consumer and other  
(38
)
 
(33
)
  
(18
)
  
(18
)
Total charge-offs 
(362
)
 
(33
)
  
(32
)
  
(294
)
Recoveries:             
Real estate:             
Commercial 
-
 
-
   
170
   
-
 
Agricultural 
-
 
-
   
-
   
-
 
Residential and home equity 
125
 
91
   
31
   
119
 
Construction  
-
 
-
   
-
   
-
 
Total real estate 
125
 
91
   
201
   
119
 
Commercial & industrial 
176
 
83
   
38
   
131
 
Agricultural 
51
 
29
   
3
   
4
 
Commercial leases 
-
 
-
   
-
   
-
 
Consumer and other  
14
 
21
   
17
   
6
 
Total recoveries  
366
 
224
   
259
   
260
 
Net recoveries / charge-offs 
4
 
191
 
Net recoveries / (charge-offs)  
227
   
(34
)
              
Balance at end of period 
$
63,617
 
$
60,303
 
Balance at end of year 
$
71,112
  
$
62,080
 
             
Selected financial information:             
Gross loans held for investment 
$
3,332,472
 
$
3,151,508
 
Average loans 
3,242,195
 
3,063,124
 
Non-performing loans 
411
 
516
 
Allowance for credit losses to non-performing loans 
15478.59
%
 
11686.63
%
Net (recoveries)/charge-offs to average loans 
0.00
%
 
(0.01
)%
Provision for credit losses to average loans 
0.08
%
 
0.04
%
Allowance for credit losses to loans held for investment 
1.91
%
 
1.91
%
Net loans and leases held-for-investment 
$
3,491,723
  
$
3,249,886
 
Average loans and leases  
3,444,490
   
3,222,763
 
Non-performing loans and leases  
375
   
3,028
 
Allowance for credit losses to non-performing loans and leases  
18963.20
%
  
2050.20
%
Net (recoveries)/charge-offs to average loans and leases  
(0.01
%)
  
0.00
%
Provision for credit losses to average loans and leases  
0.12
%
  
0.03
%
Allowance for credit losses to gross loans and leases held-for-investment  
2.03
%
  
1.91
%

The increase in ACL during the first six months of 2023 was primarily related to higher expected probable losses inherent in the loan and lease portfolio that was directly related to quantitative and qualitative factors associated with the current economic environment.

The allowance for credit losses in total is $73.2 million which includes the allowance for loan and lease losses of $71.1 million and the reserve for unfunded loan commitments of $2.1 million.

5244
The following table indicates management’s allocation of the ACL for loans and leases 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
%

  
June 30,
2023
  
December 31,
2022
 
(Dollars in thousands) Dollars  
Percent of
Each Loan
Type to Total
Loans
  Dollars  
Percent of
Each Loan
Type to Total
Loans
 
Allowance for credit losses:            
Real estate:            
Commercial 
$
24,787
   
37.19
%
 
$
18,055
   
37.73
%
Agricultural  
9,908
   
21.11
%
  
14,496
   
20.64
%
Residential and home equity  
7,179
   
11.21
%
  
7,508
   
11.01
%
Construction  
3,195
   
4.94
%
  
3,026
   
4.73
%
Total real estate  
45,069
   
74.45
%
  
43,085
   
74.11
%
Commercial & industrial  
11,291
   
13.71
%
  
11,503
   
13.59
%
Agricultural  
12,903
   
8.07
%
  
10,202
   
8.93
%
Commercial leases  
1,657
   
3.61
%
  
1,924
   
3.20
%
Consumer and other  
192
   
0.16
%
  
171
   
0.17
%
Total allowance for credit losses 
$
71,112
   
100.00
%
 
$
66,885
   
100.00
%

Deposits

Total deposits were $4.9$4.6 billion and $4.6$4.8 billion as of SeptemberJune 30, 20222023 and December 31, 2021, respectively. In addition2022, respectively a decrease of $121.0 million or 2.5% due in part to seasonality within our agriculture client base. The Company experienced a decrease in deposits in the Company’s ongoingfirst quarter of 2023 of $220.1 million or 4.6% while during the second quarter of 2023, deposits increased $99.1 million or 2.2%. The increase in deposits during the second of 2023 reflects seasonality within our agricultural client base and the Company focus on 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.deposits.

Non-interest bearing demand deposits increased by $52.3 million and were $1.8$1.50 billion as of SeptemberJune 30, 20222023 and $1.76 billion at December 31, 2021.2022. Non-interest bearing deposits were 36.72%32.24% of total deposits, as of SeptemberJune 30, 20222023 and 37.72%36.96% as of December 31, 2021.2022. Interest bearing deposits were $3.1 billion as of June 30, 2023 and $3.0 billion as of December 31, 2022. Interest bearing deposits are comprised of interest-bearing transaction accounts, money market accounts, regular savings accounts, and certificates of deposit. The decrease in non-interest bearing deposits and the increase in interest-bearing deposits reflects customer behavior in shifting from non-interest bearing accounts to higher interest earning accounts given the current interest rate environment.

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

 Nine Months Ended September 30,  Six Months Ended June 30, 
 2022 2021  2023 2022 
(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:                          
Demand 
$
1,111,513
 
1,023
 
0.12
%
 
$
1,002,267
 
$
869
 
0.12
%
 
$
1,004,651
 
$
888
 
0.18
%
 
$
1,116,436
 
$
578
 
0.10
%
Savings and money market 
1,550,334
 
1,179
 
0.10
%
 
1,336,826
 
1,136
 
0.11
%
 
1,593,158
 
7,656
 
0.97
%
 
1,531,069
 
703
 
0.09
%
Certificates of deposit greater than $250,000 
163,148
 
299
 
0.25
%
 
169,545
 
587
 
0.46
%
 
188,053
 
2,142
 
2.30
%
 
166,725
 
203
 
0.25
%
Certificates of deposit less than $250,000  
218,302
 
297
 
0.18
%
  
239,185
 
608
 
0.34
%
  
233,945
 
1,419
 
1.22
%
  
221,487
 
192
 
0.17
%
Total interest-bearing deposits 
3,043,297
 
2,798
 
0.12
%
 
2,747,823
 
3,200
 
0.16
%
Total interest bearing deposits 
3,019,807
 
12,105
 
0.81
%
 
3,035,717
 
1,676
 
0.11
%
Non-interest bearing deposits  
1,740,859
      
1,567,089
       
1,584,215
      
1,728,962
     
Total deposits 
$
4,784,156
 
$
2,798
 
0.08
%
 
$
4,314,912
 
$
3,200
 
0.10
%
 
$
4,604,022
 
$
12,105
 
0.53
%
 
$
4,764,679
 
$
1,676
 
0.07
%

45
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

The significant increase in short-term interest rates during 2022 and into 2023 has placed pressure on deposit pricing, and we will continue to manage interest expensethis ongoing impact through careful deposit pricing.  The average cost of deposits, including non-interest bearing deposits, declinedincreased to 0.08%0.74% for the ninethree months ended September 2022June 30, 2023, compared to 0.32% for the three months ended March 31, 2023 and 0.53% for the six months ended June 30, 2023 compared with 0.10%0.07% for the same period a year ago.

53
The following table shows deposits with a balance greater than $250,000 at September 30, 2022 and December 31, 2021:

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

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

The Bank participates in a program wherein the State of California places time deposits with the Bank at the Bank’s option.  At SeptemberJune 30, 20222023 and December 31, 2021,2022, 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.assets and liquidity. 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 SeptemberJune 30, 20222023 or December 31, 2021.2022. There were no Federal Funds purchased or advances from the FRB at SeptemberJune 30, 20222023 or December 31, 2021.2022.

Long-Term Subordinated Debentures

On December 17, 2003, the Company raised $10.0 million through the sale of subordinated debentures to an off-balance sheetoff-balance-sheet trust and its sale of trust-preferred securities. See Note 10.9. “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, 2022.2023. 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 December 19, 2022)September 18, 2023) and the rate was 6.38%8.36% as of SeptemberJune 30, 20222023 and 2.97%7.59% at September 30, 2021.December 31, 2022. The average rate paid for these securities was 4.14%7.82% for the first nine monthshalf of 20222023 and 3.06%3.62% for the first nine monthshalf of 2021.2022. 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 $468$514.7 million at SeptemberJune 30, 2022,2023, and $463$485.3 million at December 31, 2021.2022.

54
The Company and the Bank are subject to various regulatory capital adequacy guidelines as outlined under Part 324 of the FDIC Rules and Regulations. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have 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“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.

46
The following table sets forth ourCompany’s and Bank’s actual and required capital amounts and ratios and the related regulatory guidelines:are as follows:

 June 30, 2023 
 Actual  
Required for Capital
Adequacy Purposes
  
Minimum to be Categorized
as "Well Capitalized" Under
Prompt Corrective Action
Regulation
 
(Dollars in thousands) 
Minimum to be
Categorized as
"Well Capitalized"
  
Minimum to be
Categorized as
"Adequately
Capitalized"
  
September 30,
2022
  
December 31,
2021
  Amount  Ratio  Amount  Ratio  Amount  Ratio 
Farmers & Merchants Bancorp                      
CET1 capital to risk-weighted assets 
N/A
 
4.50
%
 
11.82
%
 
11.68
%
 
$
518,285
   
12.22
%
 
$
190,829
   
4.50
%
  
N/A
   
N/A
 
Tier 1 capital to risk-weighted assets 
N/A
 
6.00
%
 
12.06
%
 
11.94
%
  
528,285
   
12.46
%
  
254,439
   
6.00
%
  
N/A
   
N/A
 
Risk-based capital to risk-weighted assets 
N/A
 
8.00
%
 
13.32
%
 
13.19
%
  
581,548
   
13.71
%
  
339,252
   
8.00
%
  
N/A
   
N/A
 
Tier 1 leverage capital ratio 
N/A
 
4.00
%
 
9.12
%
 
8.92
%
  
528,285
   
10.21
%
  
206,998
   
4.00
%
  
N/A
   
N/A
 
                                 
Farmers & Merchants Bank                                 
CET1 capital to risk-weighted assets 
6.50
%
 
4.50
%
 
12.04
%
 
11.91
%
 
$
528,826
   
12.47
%
 
$
190,821
   
4.50
%
 
$
275,630
   
6.50
%
Tier 1 capital to risk-weighted assets 
8.00
%
 
6.00
%
 
12.04
%
 
11.91
%
  
528,826
   
12.47
%
  
254,428
   
6.00
%
  
339,238
   
8.00
%
Risk-based capital to risk-weighted assets 
10.00
%
 
8.00
%
 
13.30
%
 
13.17
%
  
582,087
   
13.73
%
  
339,238
   
8.00
%
  
424,047
   
10.00
%
Tier 1 leverage capital ratio 
5.00
%
 
4.00
%
 
9.12
%
 
8.91
%
  
528,826
   
10.23
%
  
206,821
   
4.00
%
  
258,527
   
5.00
%

  December 31, 2022 
  Actual  
Required for Capital
Adequacy Purposes
  
Minimum to be Categorized
as "Well Capitalized" Under
Prompt Corrective Action
Regulation
 
(Dollars in thousands) Amount  Ratio  Amount  Ratio  Amount  Ratio 
Farmers & Merchants Bancorp                  
CET1 capital to risk-weighted assets 
$
493,438
   
11.57
%
 
$
191,984
   
4.50
%
  
N/A
   
N/A
 
Tier 1 capital to risk-weighted assets  
503,438
   
11.80
%
  
255,978
   
6.00
%
  
N/A
   
N/A
 
Risk-based capital to risk-weighted assets  
556,964
   
13.06
%
  
341,305
   
8.00
%
  
N/A
   
N/A
 
Tier 1 leverage capital ratio  
503,438
   
9.36
%
  
215,201
   
4.00
%
  
N/A
   
N/A
 
                         
Farmers & Merchants Bank                        
CET1 capital to risk-weighted assets 
$
502,838
   
11.79
%
 
$
191,970
   
4.50
%
 
$
277,290
   
6.50
%
Tier 1 capital to risk-weighted assets  
502,838
   
11.79
%
  
255,960
   
6.00
%
  
341,280
   
8.00
%
Risk-based capital to risk-weighted assets  
556,361
   
13.04
%
  
341,280
   
8.00
%
  
426,600
   
10.00
%
Tier 1 leverage capital ratio  
502,838
   
9.35
%
  
215,018
   
4.00
%
  
268,772
   
5.00
%

On November 15, 2021,8, 2022, the Board of Directors reauthorized the Company’sauthorized an extension to its share repurchase program through December 31, 2024 for up to $20.0an additional$20.0 million of the Company’s common stock (“Repurchase Plan”), representingwhich represents 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.The Inflation Reduction Act of 2022 signed into law in August 2022 includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions. The excise tax became effective on January 1, 2023.

During the first ninesix months of 20222023 the Company repurchased 18,82413,814 shares under the Repurchase Plan, for a total of $17.9$13.9 million. The Company has repurchased a total of 14,616 shares or $14.6 million under the current Repurchase Plan.

47
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.

55
The following table sets forth our off-balance sheetoff-balance-sheet lending commitments as of SeptemberJune 30, 2022:2023:

   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 
$
1,128,340
 
$
401,604
 
$
477,113
 
$
46,626
 
$
202,997
  
$
1,123,756
 
$
422,126
 
$
465,434
 
$
41,354
 
$
194,842
 
Standby letters of credit  
16,629
 
10,403
 
4,326
 
1,470
 
430
   
16,863
 
10,800
 
4,593
 
1,470
 
-
 
Total off-balance sheet commitments 
$
1,144,969
 
$
412,007
 
$
481,439
 
$
48,096
 
$
203,427
  
$
1,140,619
 
$
432,926
 
$
470,027
 
$
42,824
 
$
194,842
 

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. Additionally, the Company maintains an allowance for credit losses – unfunded loan commitments, for off-balance-sheet commitments, which totaled $2.1 million at June 30, 2023 and December 31, 2022.

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 6078 months with final expiration in January 2027. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Liquidity

The ability to have readily available funds sufficient to repay maturing liabilities is of primary importance to depositors, creditors and regulators. In an effort to satisfy our liquidity needs, we actively manage our assets and liabilities. We have access to immediate liquid resources in the form of cash which is primarily on deposit with the FRB and amounted to $506.7 million as of June 30, 2023. Potential sources of liquidity also include investment securities in our available-for-sale securities portfolio, our ability to sell loans in the secondary market, and to secure borrowings from the FRB and FHLB. Our diversified deposit portfolio has historically provided us with a long-term source of stable low cost funding. Maturities and payments on outstanding loans and investment securities also provide a steady flow of funds. 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 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.

48
We had the following borrowing lines available at SeptemberJune 30, 2022:2023:

 September 30, 2022  June 30, 2023 
(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 
$
766,011
 
$
766,011
 
$
-
 
$
766,011
 
$
1,183,540
  
$
784,138
  
$
784,138
  
$
-
  
$
784,138
  
$
1,267,719
 
Federal Reserve BIC 
657,350
 
657,350
 
-
 
657,350
 
890,564
   
655,017
   
655,017
   
-
   
655,017
   
894,400
 
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
 
-
   
50,000
   
50,000
   
-
   
50,000
   
-
 
MUFG Union Bank Fed Funds 
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 
$
1,541,361
 
$
1,541,361
 
$
-
 
$
1,541,361
 
$
2,074,104
  
$
1,557,155
  
$
1,557,155
  
$
-
  
$
1,557,155
  
$
2,162,119
 

We continued our focus on maintaining a strong liquidity position throughout the first six months of 2023 and we believe our liquid assets and short-term borrowing credit lines are adequate to meet our cash flow needs for loan and lease funding and deposit cash withdrawal for the foreseeable future. As of SeptemberJune 30, 2022,2023, we had $1.3 billion$835.6 million in cash and unencumbered investment securities; $2.2securities, which is 15.91% of total assets. We also had $2.0 million in investment securities and $2.1$2.2 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. We also have additional loans which are available to pledge which would further increase our borrowing capacity.

On a long-term basis, our liquidity will be met by changing the relative distribution of our asset portfolios by reducing our investment or loan and lease 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 and lease originations and commitments and deposit withdrawals.
56
these needs from existing liquidity sources. Our liquidity is comprised of three primary classifications: cash flows from or used in operating activities; cash flows from or used in investing activities; and cash flows from or used in financing activities. Net cash provided by or used in operating activities has consisted primarily of net income adjusted for certain non-cash income and expense items such as the credit loss provision, investment and other amortization and depreciation.

Our primary investing activities are the origination of loans and lease and purchases and sales of investment securities. As of SeptemberJune 30, 2022,2023, we had outstandingunfunded loan commitments of $1.1 billion and outstandingunfunded letters of credit of $16.6$16.9 million. We anticipate that we will have sufficient funds available to meet current loan commitments.

Net cash provided by financing activities has been impacted significantly by higher deposit levels. At September 30, 2022 and 2021, deposits increased $269 million and $508 million compared to December 31, 2021 and 2020, respectively.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

The Company’s assessment of market risk at SeptemberJune 30, 20222023 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, 2022.2023.

Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Our market risk arises primarily from interest rate risk inherent in our lending and deposit taking activities. Management actively monitors and manages our interest rate risk exposure. In monitoring interest rate risk we continually analyze and manage our earning assets and funding liabilities based on their payment streams and interest rates, the timing of their maturities and/or prepayments, and their sensitivity to actual or potential changes in market interest rates.

49
Since our earnings are primarily dependent on our ability to generate net interest income, we focus on actively monitoring and managing the effects of adverse changes in interest rates on our net interest income. Our Asset Liability Management Committee (“ALCO”), which is comprised of members of the Board of Directors and executive officers, manages market risk. ALCO monitors interest rate risk by analyzing the potential impact on net interest income from potential changes in interest rates, and considers the impact of alternative strategies or changes in balance sheet structure. ALCO manages our balance sheet in part to maintain the potential impact of changes in interest rates on net interest income within acceptable ranges despite changes in interest rates.
Our exposure to interest rate risk is reviewed on at least a quarterly basis by ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in net interest income in the event of hypothetical changes in interest rates. If potential changes to net interest income resulting from hypothetical interest rate changes are not within risk tolerances determined by ALCO, and approved by the full Board of Directors, Management may make adjustments to the Company’s asset and liability mix to bring interest rate risk levels within the Board approved limits.
Net Interest Income Simulation. In order to measure interest rate risk, we use a simulation model to project changes in net interest income that result from forecasted changes in interest rates. This analysis calculates the difference between net interest income forecasted using a rising and a falling interest rate scenario and a net interest income forecast using a base market interest rate derived from the current treasury yield curve. The income simulation model includes various assumptions regarding the re-pricing relationships for each of our products. Many of our assets are floating rate loans, which are assumed to re-price immediately, and to the same extent as the change in market rates according to their contracted index.
Some loans and investment vehicles include the opportunity of prepayment (embedded options), and accordingly the simulation model uses national indexes to estimate these prepayments and assumes the reinvestment of the proceeds at current yields. Our non-term deposit products re-price more slowly, usually changing less than the change in market rates and at our discretion.
This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions. It assumes the balance sheet size remains static throughout the simulation horizon by replacing existing cashflows/amortization into similar products at current rates to try and capture the ongoing activity of the balance sheet without forecasting any level of growth. It does not account for all factors that affect this analysis, including changes by management to mitigate the effect of interest rate changes or secondary impacts such as changes to our credit risk profile as interest rates change.

Furthermore, loan prepayment-rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in this analysis. Changes that vary significantly from the assumptions may have significant effects on our net interest income.
For the rising and falling interest rate scenarios, the base market interest rate forecast was increased or decreased, on an instantaneous and sustained basis, by 100, 200 and 300 basis points. We then evaluate the simulation results using two approaches: Net Interest Income at Risk (“NII at Risk”) and Economic Value of Equity (“EVE”). Under NII at Risk, the impact on net interest income from the changes in interest rates on interest-earning assets and interest-bearing liabilities is modeled using various assumptions of assets and liabilities. EVE measures the period end present value of assets minus the present value of liabilities. Management uses this value to measure the changes in the economic value of the Company under various interest rate scenarios. In some ways, the economic value approach provides a broader scope than net income volatility approach since it captures all anticipated cash flows.
Based on our quarterly simulations, our net interest margin exposure related to these hypothetical changes in market interest rates was within the current guidelines established by us.  Our simulation model highlights the fact that our balance sheet is asset sensitive, which means that our net interest income rises in a rising interest rate environment as rates earned on our interest-bearing assets reprice higher at a faster pace than rates paid on our interest-bearing liabilities.

50
The ratio of variable to fixed-rate loans in our loan portfolio, the ratio of short-term (maturing at a given time within 12 months) to long-term loans, and the ratio of our demand, money market and savings deposits to CDs (and their time periods), are the primary factors affecting the sensitivity of our net interest income to changes in market interest rates. Our short-term loans are typically priced at prime plus a margin, and our long-term loans are typically priced based on a specific term of the Treasury Curve for comparable maturities, plus a margin. The composition of our rate-sensitive assets or liabilities is subject to change and could result in a more unbalanced position that would cause market rate changes to have a greater impact on our net interest margin.

The following table present the projected change in the Company’s net interest income over the next twelve months and the economic value of equity at June 30, 2023, that would occur upon an immediate change in interest rates, but without giving effect to any steps that management might take to counteract that change:

  
Estimated Change in
Net Interest Income (NII)
(as a % of NII)
 
Estimated Change in
Market Value of Equity
(MVE) (as a % of MVE)
June 30, 2023    
+300 bps 3.44% (10.50%)
+200 bps 2.09% (7.31%)
+100 bps 1.19% (2.99%)
0 bps  -  -
-100 bps (3.43%) (0.65%)
-200 bps (7.18%) (3.90%)
-300 bps (11.21%) (9.50%)

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

TheAn evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer have reviewed and evaluated(“CFO”), of 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 September 30, 2022.. Based on that evaluation, the Chief Executive OfficerCEO and Chief Financial OfficerCFO have concluded that as of the Company’s currentend of the period covered by this Report, the disclosure controls and procedures are effective and timely, providing them with materialto provide reasonable assurance that the information relating to the Company required to be disclosed in the reportsby the Company filesin reports that are filed or submitssubmitted under the Exchange Act.Act are recorded, processed, summarized and timely reported as provided in the SEC’s rules and forms.

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 ninesix months ended SeptemberJune 30, 2022,2023, to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1.Legal Proceedings

The Company is involved in variousCertain lawsuits and claims legal actions, and complaints that arisearising in the ordinary course of business. In the Company’s opinion, all such matters are adequately covered by insurance, are without meritbusiness have been filed or are pending against the Company or its subsidiaries. Based upon information available to the Company, its review of such kind, or involve such amounts, that unfavorable dispositionlawsuits and claims and consultation with its counsel, the Company believes the liability relating to these actions, if any, would not have a material adverse effect on its consolidated financial statements.

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

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, 2021.2022.

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

The following table reports information regarding repurchases of our common stock during the six months ended June 30, 2023:

Period 
Total number
of shares
 purchased
  
Average price
paid per share(2)
  
Total number of shares
purchased as part of
 publicly announced
plans or programs
  
Maximum number (or
approximate dollar
value) of shares that
may yet purchased
under the plans or
programs (In
thousands) (1)
 
Total 1st Quarter 2023  5,406  $1,024.02   5,406  $13,682 
                 
April 1, 2023 to April 30, 2023  538  $997.40   538  $13,145 
May 1, 2023 to May 31, 2023  20   982.49   20   12,830 
June 1, 2023 to June 30, 2023  7,850   982.54   7,850   5,413 
Total 2nd Quarter 2023  8,408  $983.49   8,408  $5,413 
                 
Total 2023  13,814  $999.35   13,814  $5,413 

(1)
As of November 8, 2022 the Board approved an extension to the repurchase program through December 31, 2024 and for an additional $20 million of the Company's common stock.
(2)
The aggregate purchase price and weighted average price per share does not include the effect of excise tax expense incurred on net stock repurchases. For the six months ended June 30, 2023, excise tax expense totaled $138,000.

On November 15, 2021,8, 2022, the Board of Directors reauthorized the Company’sauthorized an extension to its share repurchase program through December 31, 2024 for up to $20.0an additional$20.0 million of the Company’s common stock (“Repurchase Plan”), representingwhich represents 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.The Inflation Reduction Act of 2022 signed into law in August 2022 includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions. The excise tax became effective on January 1, 2023.

During the first nine monthshalf of 20222023 the Company repurchased 18,82413,814 shares under the Repurchase Plan, for a total of $17.905$13.9 million.  All of these shares were purchased at prices ranging from $925.00$967.00 to $975.00$1,082.00 per share, based upon the then current price on the OTCQX. The Company has repurchased a total of 14,616 shares or $14.6 million under the current Repurchase Plan.

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Item 3.Defaults upon Senior Securities

Not Applicable

Item 4.Mine Safety Disclosures

Not Applicable

Item 5.Other Information

Not ApplicableDuring the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

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

Exhibit
Number
Description
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.INSInline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCHInline XBRL Taxonomy Extension Schema Document.
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.
101.LABInline XBRL Taxonomy Extension Label Linkbase Document.
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document.
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*
Filed herewith

5853
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:  November 7, 2022August 8, 2023
/s/ Kent A. Steinwert
 
Kent A. Steinwert
 
Director, Chairman, President and Chief Executive Officer
(Principal Executive Officer)

Date:  November 7, 2022August 8, 2023
/s/ Stephen W. HaleyBart R. Olson
 
Stephen W. HaleyBart R. Olson
 
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)


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