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 September 30, 2023

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)

Delaware94-3327828
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

111 W. Pine Street, Lodi, California95240
(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 October 31, 2023, the registrant had 751,095 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
3
4
5
6
7
8
28
50
52
PART II. - OTHER INFORMATION
53
Item 1A – Risk Factors
53
53
54
54
54
Item 6 – Exhibits
54
55

2

PART 1. FINANCIAL INFORMATION

Item 1.
Financial Statements

FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share amounts) 
September 30,
2023
  
December 31,
2022
 
ASSETS      
Cash and due from banks $70,622  $73,358 
Interest bearing deposits with banks  597,739   514,899 
Total cash and cash equivalents  668,361   588,257 
Securities available-for-sale, amortized cost $135,125 and $183,171 respectively
  106,493   152,864 
Securities held-to-maturity, fair value $636,623 and $688,393 respectively
  826,015   845,346 
Allowance for credit losses - securities held-to-maturity  (450)  (393)
Total investment securities  932,058   997,817 
Non-marketable securities  15,549   15,549 
Loans and leases held-for-investment, net of unearned income
  3,557,203   3,512,361 
Allowance for credit losses - loans and leases  (74,159)  (66,885
)
Loans held-for-investment, net  3,483,044   3,445,476 
Bank-owned life insurance  67,094   73,038 
Premises and equipment, net  52,091   49,476 
Deferred income tax assets  32,306   31,507 
Accrued interest receivable  25,804   21,602 
Goodwill  11,183   11,183 
Other intangibles  2,380   2,809 
Other real estate owned  873   873 
Other assets  84,632   89,812 
TOTAL ASSETS $5,375,375  $5,327,399 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Deposits:        
Non-interest bearing $1,470,590  $1,758,793 
Interest bearing:        
Demand  985,408   1,125,014 
Savings and money market  1,670,688   1,544,062 
Certificates of deposit  622,081   331,400 
Total interest bearing  3,278,177   3,000,476 
Total deposits  4,748,767   4,759,269 
Subordinated debentures  10,310   10,310 
Interest payable and other liabilities  85,675   72,512 
TOTAL LIABILITIES  4,844,752   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 752,013 and 768,337 outstanding at September 30, 2023 and December 31, 2022, respectively
  7   8 
Additional paid-in capital  40,813   57,206 
Retained earnings  510,535   449,932 
Accumulated other comprehensive (loss), net of taxes  (20,732)  (21,838
)
TOTAL SHAREHOLDERS’ EQUITY  530,623   485,308 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $5,375,375  $5,327,399 

See accompanying notes to the unaudited consolidated financial statements.

3

FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME


 
 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
(Dollars in thousands, except share and per share amounts) 2023  2022  2023  2022 
Interest income            
Interest and fees on loans and leases $52,153  $41,868  $149,851  $117,871 
Interest and dividends on investment securities
  5,485   5,686   16,593   16,697 
Interest on deposits with others  8,075   4,159   19,918   5,934 
Total interest income  65,713   51,713   186,362   140,502 
Interest expense                
Deposits  12,051   1,122   24,156   2,798 
Subordinated debentures  221   134   621   319 
Total interest expense  12,272   1,256   24,777   3,117 
Net interest income  53,441   50,457   161,585   137,385 
Provision for credit losses  3,000   1,500   7,057   3,000 
Net interest income after provision for credit losses  50,441   48,957   154,528   134,385 
Non-interest income                
Card processing
  1,693   1,791   4,996   5,375 
Service charges on deposit accounts  722   638   2,046   2,318 
Increase in cash surrender value of BOLI  512   566   1,462   1,668 
Gain on BOLI death benefit
  -   -   4,346   - 
Net loss on sale of securities available-for-sale
  -   (2,987)  (5,686)  (2,985)
Net (loss)/gain on deferred compensation benefits
  (304)  352   1,894   (227)
Other  983   1,199   3,455   3,234 
Total non-interest income  3,606   1,559   12,513   9,383 
Non-interest expense                
Salaries and employee benefits  17,172   15,994   54,693   49,181 
Net (loss)/gain on deferred compensation benefits
  (304)  352   1,894   (227)
Data processing  1,254   1,250   3,821   3,698 
Occupancy  1,191   1,196   3,599   3,500 
FDIC insurance
  582   366   1,785   1,076 
Marketing  440   303   1,335   959 
Legal  256   49   780   733 
Other  3,877   4,865   11,566   12,274 
Total non-interest expense  24,468   24,375   79,473   71,194 
INCOME BEFORE INCOME TAXES
  29,579   26,141   87,568   72,574 
Income tax expense
  7,545   6,605   20,679   17,537 
NET INCOME
 $22,034  $19,536  $66,889  $55,037 
                 
Earnings per common share:                
Basic $29.23  $25.20  $88.06  $70.47 
Diluted $29.23  $25.20  $88.06  $70.47 
                 
Weighted average number of common shares                
Basic  753,780   775,109   759,600   780,988 
Diluted  753,780   775,109   759,600   780,988 

See accompanying notes to the unaudited consolidated financial statements.

4

FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


 
 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
(Dollars in thousands) 2023  2022  2023  2022 
Net income 
$
22,034
  
$
19,536
  
$
66,889
  
$
55,037
 
Other comprehensive income                
Unrealized (losses) on available-for-sale securities
  
(5,181
)  
(12,378
)
  
(4,010
)
  
(39,677
)
Reclassification adjustment for losses on available-for-sale securities  
-
   
2,987
   
5,685
   
2,985
 
Amortization of unrealized loss on securities transferred to held-to-maturity  
(28
)  
(52
)  
(105
)  
(193
)
Net unrealized (losses)/gains on available-for-sale securities  (5,209)  (9,443)  1,570   (36,885)
Income tax benefit/(expense)  
1,540
   
2,792
   
(464
)
  
10,905
 
Other comprehensive (loss)/income, net of tax
  
(3,669
)  
(6,651
)
  
1,106
   
(25,980
)
Total comprehensive income 
$
18,365
  
$
12,885
  
$
67,995
  
$
29,057
 

See accompanying notes to the unaudited consolidated financial statements.

5

FARMERS & MERCHANTS BANCORP
UNAUDITEDCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

  For the three and nine months ended September 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 June 30, 2023  
754,523
  
$
8
  
$
43,263
  
$
488,501
  
$
(17,063
)
 
$
514,709
 
Net income  -   -   
-
   
22,034
   
-
   
22,034
 
Other comprehensive loss, net of tax  -   
-
   
-
   
-
   
(3,669
)
  
(3,669
)
Repurchase of common stock  (2,510)  (1)  (2,450)  -   -   (2,451)
Balance as of September 30, 2023
  
752,013
  
$
7
  
$
40,813
  
$
510,535
  
$
(20,732
)
 
$
530,623
 
                         
Balance as of June 30, 2022  
777,190
  
$
8
  
$
65,671
  
$
416,722
  
$
(21,048
)
 
$
461,353
 
Net income  -   -   
-
   
19,536
   
-
   
19,536
 
Other comprehensive loss, net of tax  -   
-
   
-
   
-
   
(6,651
)
  
(6,651
)
Repurchase of common stock
  (6,368)  -   (6,060)  -   -   (6,060)
Balance as of September 30, 2022
  
770,822
  
$
8
  
$
59,611
  
$
436,258
  
$
(27,699
)
 
$
468,178
 

(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  -   -   
-
   
66,889
   
-
   
66,889
 
Other comprehensive gain, net of tax  -   
-
   
-
   
-
   
1,106
   
1,106
 
Cash dividends declared ($8.30 per share)
  -   -   -   (6,286)  -   (6,286)
Repurchase of common stock  (16,324)  (1)  (16,393)  -   -   (16,394)
Balance as of September 30, 2023
  
752,013
  
$
7
  
$
40,813
  
$
510,535
  
$
(20,732
)
 
$
530,623
 
                         
Balance as of December 31, 2021  
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
 

See accompanying notes to the unaudited consolidated financial statements.

6

FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

  
Nine Months Ended
September 30,
 
(Dollars in thousands) 2023  2022 
Cash flows from operating activities:      
Net income $66,889  $55,037 
Adjustments to reconcile net income to net cash provided by operating activities:        
Provision for credit losses  7,057   3,000 
Depreciation and amortization  1,833   1,849 
Net amortization of securities premiums and discounts  11   341 
Increase in cash surrender value of BOLI  (1,462
)
  (1,668
)
Gain on BOLI death benefit
  (4,346)  - 
(Increase)/decrease in deferred income taxes, net  (1,994)  2,356 
Loss on sale of securities available-for-sale  5,686   2,985 
Net changes in:        
Other assets  2,368   (2,362)
Other liabilities  18,297   18,134 
Net cash provided by operating activities  94,339   79,672 
Cash flows from investing activities:        
Net change in loans and leases held-for-investment  (59,022)  (86,401)
Purchase of available-for-sale securities  (4,515
)
  (10,135
)
Purchase of held-to-maturity securities  (3,814
)
  (168,634
)
Proceeds from sales, maturities, calls and pay downs of available-for-sale securities
  46,751   62,979 
Proceeds from maturities, calls and pay downs of held-to-maturity securities  37,524   52,884 
Purchase of premises and equipment  (4,493
)
  (3,318
)
Purchase of other investments  (5,263)  (5,300)
Proceeds from bank-owned life insurance  11,752   513 
Proceeds from sale of assets  27   73 
Net cash provided by (used in) investing activities  18,947   (157,339)
Cash flows from financing activities:        
Net (decrease) increase in deposits  (10,502)  269,105 
Cash dividends paid
  (6,286)  (6,110)
Net cash used in share repurchase of common stock
  (16,394)  (17,905)
Net cash (used in) provided by financing activities  (33,182)  245,090 
Net change in cash and cash equivalents  80,104   167,423 
Cash and cash equivalents, beginning of period
  588,257   715,460 
Cash and cash equivalents, end of period
 $668,361  $882,883 
         
Supplemental disclosures of cash flow information:        
Cash paid for interest $18,664  $3,832 
Income taxes paid
 $16  $11,451 
         
Supplemental disclosures of non-cash transactions:        
Net change in unrealized gain/(losses) on securities available-for-sale $1,676  $(36,692)

See accompanying notes to the unaudited consolidated financial statements.

FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS


Note 1—Basis of Presentation and Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements include the accounts of Farmers & Merchants Bancorp (“FMCB” or “Bancorp”), a bank holding company incorporated in the State of Delaware and its wholly owned subsidiary, Farmers & Merchants Bank of Central California (“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 September 30, 2023 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. 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, 2022 filed with the SEC on March 15, 2023 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 2022 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 June 2022, the Financial Accounting Standards Board (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.

In March 2023, the FASB issued 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 the program giving rise to the related income tax credits. The Amendments in ASU 2023-02 apply to all reporting entities that hold (1) tax equity investments that meet the conditions for and 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 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 have material impact on the Company’s Consolidated Financial Statements.

In July 2023, the FASB issued ASU 2023-03, Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718). This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.

In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Updated and Simplification Initiative. ASU 2023-06 amends the disclosure or presentation requirements related to various subtopics in the FASB Accounting Standards Codification (the “Codification”). The ASU was issued in response to the SEC’s August 2018 final rule that updated and simplified disclosure requirements that the SEC believed were “redundant, duplicative, overlapping, outdated, or superseded.” The new guidance is intended to align U.S. GAAP requirements with those of the SEC and to facilitate the application of U.S. GAAP for all entities. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company is evaluating the impacts of this ASU and has not yet determined whether this ASU will have a material impact on its consolidated financial statements.
9

Table of contents

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

Note 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  
 
(Dollars in thousands) 
Amortized
Cost
  Gains  Losses  
Fair Value
 
As of September 30, 2023                
U.S. Government-sponsored securities $
3,614  $
15  $
20  $
3,609 
Mortgage-backed securities (1)
  120,588   7   28,477   92,118 
Collateralized mortgage obligations (1)
  579   -   16   563 
Corporate securities  10,034   -   141   9,893 
Other  310   -   -   310 
Total available-for-sale securities $135,125  $22  $28,654  $106,493 

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

Available-for-Sale Securities 
  Gross Unrealized  
 
(Dollars in thousands) 
Amortized
Cost
  Gains  Losses  Fair Value 
As of December 31, 2022
                
U.S. Treasury notes $4,989  $-  $25  $4,964 
U.S. Government-sponsored securities  4,430   21   24   4,427 
Mortgage-backed securities (1)
  162,314   9   29,795   132,528 
Collateralized mortgage obligations (1)
  1,085   -   31   1,054 
Corporate securities  10,043   -   462   9,581 
Other  310   -   -   310 
Total available-for-sale securities $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  
  
 
(Dollars in thousands) Amortized Cost  Gains  Losses  Fair Value  
Allowance
for Credit Losses
 
As of September 30, 2023               
Mortgage-backed securities (1)
 $673,924  $-  $170,743  $503,181  $- 
Collateralized mortgage obligations (1)
  75,507
   -
   17,676
   57,831
   -
 
Municipal securities  76,584   1   974   75,611   450 
Total held-to-maturity securities $826,015  $1  $189,393  $636,623  $450 
(1)All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.
10

Table of contents

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


Held-to-Maturity Securities 
  Gross Unrealized  
  
 
(Dollars in thousands) 
Amortized
Cost
  Gains  Losses  Fair Value  
Allowance
for Credit Losses
 
As of December 31, 2022               
Mortgage-backed securities(1)
 $702,858  $29  $141,121  $561,766  $- 
Collateralized mortgage obligations(1)
  80,186   -   15,701   64,485   - 
Municipal securities  62,302   49   209   62,142   393 
Total held-to-maturity securities $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.
11


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


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:


  September 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 
$
223
  
$
1
  
$
1,121
  
$
19
  
$
1,344
  
$
20
 
Mortgage-backed securities(1)
  
4,930
   
231
   
86,461
   
28,246
   
91,391
   
28,477
 
Collateralized mortgage obligations(1)
  
-
   
-
   
563
   
16
   
563
   
16
 
Corporate securities  
-
   
-
   
9,893
   
141
   
9,893
   
141
 
Total available-for-sale securities 
$
5,153
  
$
232
  
$
98,038
  
$
28,422
  
$
103,191
  
$
28,654
 
(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.

12

Table of contents

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 September 30, 2023, the Company held 179 available-for-sale securities of which 13 were in an unrealized loss position for less than twelve months and 143 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.

The following table presents the activity in the allowance for credit losses for held-to-maturity securities by major type:

   September 30, 2023 
(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  57   -   -   57 
Ending Balance $450  $-  $-  $450 


  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
 

13

Table of contents

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

The amortized cost and estimated fair values of investment securities at September 30, 2023 by contractual final maturity are shown in the following table:


 Available-for-Sale  Held-to-Maturity 
(Dollars in thousands)
 
Amortized
Cost
  Fair Value  
Amortized
Cost
  Fair Value 
Securities maturing in:
                
One year or less
 $387  $386  $450  $450 
After one year through five years  17,771   17,321   16,910   16,335 
After five years through ten years  6,561   6,121   24,031   21,844 
After ten years  110,406   82,665   784,624   597,994 
Total $
135,125  $
106,493  $
826,015  $
636,623 

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 held-to-maturity 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 amortized cost of held-to-maturity municipal securities by credit rating at September 30, 2023:

  Held-to-Maturity 
  Amortized Cost 
(Dollars in thousands) AAA/AA/A  BBB/BB/B  Not Rated  Total 
September 30, 2023            
Municipal securities $19,381  $393  $56,810  $76,584 
Total $19,381  $393  $56,810  $76,584 

As of September 30, 2023, there were no past due principal or interest payments associated with held-to-maturity municipal securities.


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

(Dollars in thousands) Gross Proceeds  Gross Gains  Gross Losses 
Nine months ended September 30, 2023 $30,482  $-  $5,686 
Nine months ended September 30, 2022 $31,394  $2  $2,987 

Pledged Securities

As of September 30, 2023, investment securities carried at $757.2 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) borrowings, and other government agency deposits as required by law. This amount was $478.7 million at December 31, 2022.

14

Table of contents

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

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

(Dollars in thousands) 
September 30,
2023
  
December 31,
2022
 
Loans and leases held-for-investment, net
      
Real estate:      
Commercial $1,297,380  $1,328,691 
Agricultural  753,353   726,938 
Residential and home equity  398,990   387,753 
Construction  192,745   166,538 
Total real estate  2,642,468   2,609,920 
Commercial & industrial  489,772   478,758 
Agricultural
  301,951   314,525 
Commercial leases  128,063   112,629 
Consumer and other  5,553   5,886 
Total gross loans and leases  3,567,807   3,521,718 
Unearned income  (10,604)  (9,357)
Total net loans and leases  3,557,203   3,512,361 
Allowance for credit losses  (74,159)  (66,885)
Total loans and leases held-for-investment, net $3,483,044  $3,445,476 

At September 30, 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 $1.3 billion and $1.5 billion, respectively. The borrowing capacity on these loans was $794.9 million from FHLB and $1.2 billion from the FRB.

15

Table of contents

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

Note 3—Loans and Leases—Continued


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


  September 30, 2023 
(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 $1,287,872  $954  $-  $363  $1,317  $1,289,189 
Agricultural  749,259   -   -   4,094   4,094   753,353 
Residential and home equity  398,769   221   -   -   221   398,990 
Construction  192,745   -   -   -   -   192,745 
Total real estate  2,628,645   1,175   -   4,457   5,632   2,634,277 
Commercial & industrial  489,653   80   -   39   119   489,772 
Agricultural  301,951   -   -   -   -   301,951 
Commercial leases  124,508   1,142   -   -   1,142   125,650 
Consumer and other  5,541   12   -   -   12   5,553 
Total loans and leases, net $3,550,298  $2,409  $-  $4,496  $6,905  $3,557,203 



  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,
2023
  
December 31,
2022
 
Non-accrual loans and leases:      
Real estate:      
Commercial $363  $403 
Agricultural  4,094   - 
Residential and home equity  -   - 
Construction  -   168 
Total real estate  4,457   571 
Commercial & industrial  39   - 
Agricultural  -   - 
Commercial leases  -   - 
Consumer and other  -   - 
Total non-accrual loans and leases $4,496  $571 

16

Table of contents

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

Note 3—Loans and Leases—Continued

During the nine months ended September 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 September 30, 2023 that subsequently defaulted during the period presented.


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


  September 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 $1,271,547  $17,279  $363  $-  $1,289,189  $26,724 
Agricultural  736,338   6,793   10,222   -   753,353   7,241 
Residential and home equity  398,216   -   774   -   398,990   7,458 
Construction  192,745   -   -   -   192,745   3,612 
Total real estate  2,598,846   24,072   11,359   -   2,634,277   45,035 
Commercial & industrial  477,474   11,710   588   -   489,772   17,903 
Agricultural  297,946   3,998   7   -   301,951   9,082 
Commercial leases  125,625   25   -   -   125,650   1,967 
Consumer and other  5,337   -   216   -   5,553   172 
Total loans and leases, net $3,505,228  $39,805  $12,170  $-  $3,557,203  $74,159 


  
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 

 
17

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, vintage year by class of financing receivable, and current period gross charge-offs by year of origination as of September 30, 2023:


  September 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 $94,553  $171,741  $209,733  $144,704  $68,258  $270,620  $311,938  $1,271,547 
Special mention  -   -   14,527   -   -   1,797   955   17,279 
Substandard  -   -   -   -   -   363   -   363 
Doubtful  -   -   -   -   -   -   -   - 
Total Commercial $94,553  $171,741  $224,260  $144,704  $68,258  $272,780  $312,893  $1,289,189 
Commercial
                                
Current-period gross charge-offs
 $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
- 
                                 
Agricultural
                                
Pass $40,919  $74,346  $41,434  $50,996  $12,164  $168,019  $348,460  $736,338 
Special mention  -   -   -   594   2,020   4,179   -   6,793 
Substandard  -   -   -   -   -   6,128   4,094   10,222 
Doubtful  -   -   -   -   -   -   -   - 
Total Agricultural
 $40,919  $74,346  $41,434  $51,590  $14,184  $178,326  $352,554  $753,353 
Agricultural                                
Current-period gross charge-offs $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
- 
                                 
Residential and home equity                                
Pass $33,656  $63,154  $90,089  $80,757  $13,514  $72,734  $44,312  $398,216 
Special mention
  -   -   -   -   -   -   -   - 
Substandard  -   -   -   -   -   774   -   774 
Doubtful  -   -   -   -   -   -   -   - 
Total Residential and home equity $33,656  $63,154  $90,089  $80,757  $13,514  $73,508  $44,312  $398,990 
Residential and home equity                                
Current-period gross charge-offs $
-  $
-  $
-  $
-  $
-  $
14  $
-  $
14 
                                 
Construction                                
Pass $-  $3,000  $-  $-  $1,575  $-  $188,170  $192,745 
Special mention
  -   -   -   -   -   -   -   - 
Substandard  -   -   -   -   -   -   -   - 
Doubtful  -   -   -   -   -   -   -   - 
Total construction $-  $3,000  $-  $-  $1,575  $-  $188,170  $192,745 
Construction  




























 
Current-period gross charge-offs $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
- 
                                 
Total Real estate $169,128  $312,241  $355,783  $277,051  $97,531  $524,614  $897,929  $2,634,277 
                                 
Commercial & industrial                                
Pass $47,471  $27,835  $23,821  $8,612  $5,357  $7,741  $356,637  $477,474 
Special mention  -   -   4,878   -   -   -   6,832   11,710 
Substandard  -   -   -   -   -   499   89   588 
Doubtful  -   -   -   -   -   -   -   - 
Total Commercial & industrial $47,471  $27,835  $28,699  $8,612  $5,357  $8,240  $363,558  $489,772 
Commercial & industrial                                
Current-period gross charge-offs $
-  $-  $
-  $
-  $
-  $
-  $
-  $
- 
 
18

Table of contents

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

  September 30, 2023 
  Term Loans Amortized Cost Basis by Origination Year         
(Dollars in thousands) 2023  2022  2021  2020  2019  Prior  
Revolving
Loans
Amortized
Cost
  Total 
Agricultural                                
Pass $3,311  $4,770  $2,279  $709  $1,100  $2,158  $283,619  $297,946 
Special mention  -   -   75   -   -   -   3,923   3,998 
Substandard  -   -   -   -   7   -   -   7 
Doubtful  -   -   -   -   -   -   -   - 
Total Agricultural $3,311  $4,770  $2,354  $709  $1,107  $2,158  $287,542  $301,951 
Agricultural                                
Current-period gross charge-offs $-  $-  $-  $-  $-  $-  $-  $- 
                                 
Commercial leases                                
Pass $35,681  $33,040  $11,381  $9,943  $4,994  $30,586  $-  $125,625 
Special mention  -   -   -   -   25   -   -   25 
Substandard  -   -   -   -   -   -   -   - 
Doubtful  -   -   -   -   -   -   -   - 
Total Commercial leases $35,681  $33,040  $11,381  $9,943  $5,019  $30,586  $-  $125,650 
Commercial leases                                
Current-period gross charge-offs $-  $-  $-  $-  $-  $-  $-  $- 
                                 
Consumer and other                                
Pass $1,470  $1,078  $466  $105  $67  $1,552  $599  $5,337 
Special mention  -   -   -   -   -   -   -   - 
Substandard  191   -   -   -   -   25   -   216 
Doubtful  -   -   -   -   -   -   -   - 
Total Consumer and other $1,661  $1,078  $466  $105  $67  $1,577  $599  $5,553 
Consumer and other                                
Current-period gross charge-offs $30  $3  $-  $-  $-  $-  $-  $33 
Total net loans and leases
                                
Pass
 $
257,061  $
378,964  $
379,203  $
295,826  $
107,029  $
553,410  $
1,533,735  $
3,505,228 
Special mention
  -   -   19,480   594   2,045   5,976   11,710   39,805 
Substandard
  191   -   -   -   7   7,789   4,183   12,170 
Doubtful
  -   -   -   -   -   -   -   - 
Total net loans and leases $257,252  $378,964  $398,683  $296,420  $109,081  $567,175  $1,549,628  $3,557,203 
Total current-period gross charge-offs
 $30  $3  $-  $-  $-  $14  $-  $47 

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 nine months ended September 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:

  September 30,  December 31, 
(Dollars in thousands) 2023
  2022
 

      
Balance at beginning of the period $17,521  $18,128 
New loans or advances during year  1,706   523 
Repayments  (1,655)  (1,130)
Balance at end of period $17,572  $17,521 

19

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FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (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 nine months ended September 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 September 30, 2023 and December 31, 2022, respectively:


  September 30, 2023 
(Dollars in thousands) Real Estate  
Vehicles and
Equipment
  Total 
Collateral dependent loans and leases         
Real estate:         
Commercial $1,450  $-  $1,450 
Agricultural  10,222   -   10,222 
Residential and home equity  1,630   -   1,630 
Construction  -   -   - 
Total real estate  13,302   -   13,302 
Commercial & industrial  89   495   584 
Agricultural  -   7   7 
Commercial leases  -   -   - 
Consumer and other  -   171   171 
Total collateral dependent, gross loans and leases $13,391  $673  $14,064 


  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 collateral dependent, gross loans and leases $14,302  $171  $14,473 

20

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



Changes in the allowance for credit losses are as follows:

  For the Three Months Ended September 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
 $34,695  $3,195  $7,179  $24,194  $1,657  $192  $71,112 
Provision / (recapture) for credit losses  (730)  417   268   2,748   310   (13)  3,000 
Charge-offs  -   -   -   -   -   (15)  (15)
Recoveries  -   -   11   43   -   8   62 
Net (charge-offs) / recoveries  -   -   11   43   -   (7)  47 
Balance at end of period
 $33,965  $3,612  $7,458  $26,985  $1,967  $172  $74,159 

  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:                     
Balance at beginning
 $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 
Balance at end of period
 $33,100  $2,995  $6,865  $18,915  $1,588  $154  $63,617 

  For the Nine Months Ended September 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  1,244   586   (78)  5,196   43  9   7,000 
Charge-offs  -   -   (14)  -   -   (33)  (47)
Recoveries  170   -   42   84   -   25   321 
Net (charge-offs) / recoveries  170   -   28   84   -   (8)  274 
Balance at end of period
 $33,965  $3,612  $7,458  $26,985  $1,967  $172  $74,159 

  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:                     
Balance at beginning of period $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 
Balance at end of period
 $33,100  $2,995  $6,865  $18,915  $1,588  $154  $63,617 

21

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

Note 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,
2023
  
December 31,
2022
 
Certificates of deposit:
      
Certificates of deposit less than or equal to $250,000 $308,171  $202,554 
Certificates of deposit greater than $250,000  313,910   128,846 
Total certificates of  deposit
 $622,081  $331,400 



Scheduled maturities for certificates of deposit are as follows:


(Dollars in thousands) Amount 
2023
 $131,282 
2024
  461,680 
2025
  23,267 
2026
  4,494 
2027 and beyond
  1,358 
Total certificates of deposit
 $622,081 

Note 5—Short-term borrowings

As of September 30, 2023 and December 31, 2022, committed lines of credit arrangements totaling $2.2 billion and $1.5 billion were available to the Company from unaffiliated banks, respectively. The average Federal Funds interest rate as of September 30, 2023 was 5.25%.

The Company is a member of the FHLB of San Francisco and has a committed credit line of $796.7 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 5.70% as of September 30, 2023.

The Company has $1.5 billion in pledged loans and $147.7 million in pledged securities at par value with the Federal Reserve Bank (the “Fed”). As of September 30, 2023, the Company’s overnight borrowing capacity using the primary credit facilities from the Fed account was $1.3 billion. The borrowing rate was 5.50% as of September 30, 2023.

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

22

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FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 6—Employee Benefit Plans

Executive Retirement Plan
The Company, through 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 Board of Directors approval.

The Company expensed $6.8 million to the ERP during the nine months ended September 30, 2023 and $5.2 million during the nine months ended September 30, 2022. The Company’s carrying value of the liability under the ERP was $57.0 million as of September 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 September 30, 2023 and December 31, 2022 totaled 49,121 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 September 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 $1.6 million compared to net loss of $0.5 million at September 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 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. All contributions are discretionary and subject to the Board of Directors approval.

The Company expensed $3.1 million to the SMRP during the nine months ended September 30, 2023 and $2.2 million for nine months ended September 30, 2022. The Company’s carrying value of the liability under the SMRP was $17.1 million as of September 30, 2023 and $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 September 30, 2023 and December 31, 2022 totaled 18,161 and 15,998 shares with an historical cost basis of $13.0 million and $10.8 million, respectively. All amounts have been fully funded into the Rabbi Trust as of September 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 SMRP plan investments were $0.3 million compared to net gains of $0.3 million at September 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.

23

Table of contents

FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 7—Fair Value Measurements


The Company uses 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 Company 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 is 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 asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. For accounting disclosure purposes, a three-level valuation hierarchy of fair value measurements has been established. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:


Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.


Level 2 – inputs to the valuation 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 that are observable for the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds).


Level 3 – inputs to 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 financial 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 discount that could 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 could significantly affect the estimates.



The valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis are 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 methodologies since then.

24

Table of contents

FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 7—Fair Value Measurements—Continued

The following tables summarize the carrying amount and estimated fair values of the Company’s financial assets and liabilities not 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, 2023
    
Fair Value Measurements
 
(Dollars in thousands) 
Carrying
Amount
  Level 1  Level 2  Level 3  
Total Fair
Value
 
Financial Assets:               
Cash and cash equivalents $668,361  $668,361  $-  $-  $668,361 
Held-to-maturity securities  825,565   -   579,814   56,809   636,623 
Non-marketable securities  15,549   -   -   15,549   15,549 
Loans and leases, net  3,483,044   -   -   3,263,858   3,263,858 
Bank-owned life insurance  67,094   67,094   -   -   67,094 
                     
Financial Liabilities:                    
Total deposits $
4,748,767  $-  $4,126,686  $614,257  $4,740,943 
Subordinated debentures  10,310   -   12,206   -   12,206 

December 31, 2022
    
Fair Value Measurements
 
(Dollars in thousands) 
Carrying
Amount
  Level 1  Level 2  Level 3  
Total Fair
Value
 
Financial Assets:               
Cash and cash equivalents $588,257  $588,257  $-  $-  $588,257 
Held-to-maturity securities  844,953   -   645,859   42,534   688,393 
Non-marketable securities  15,549   -   -   15,549   15,549 
Loans and leases, net  3,445,476   -   -   3,335,042   3,335,042 
Bank-owned life insurance  73,038   73,038   -   -   73,038 
                     
Financial Liabilities:                    
Total deposits $4,759,269  $-  $4,427,869  $323,572  $4,751,441 
Subordinated debentures  10,310   -   12,211   -   12,211 

25


FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 7—Fair Value Measurements—Continued

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, 2023
    
Fair Value Measurements
 
(Dollars in thousands) 
Carrying
Amount
  Level 1  Level 2  Level 3  
Total Fair
Value
 
Fair valued on a recurring basis:               
Available-for-sale securities               
U.S. Government-sponsored securities $
3,609  $
-  $
3,609  $
-  $
3,609 
Mortgage-backed securities  92,118   -   92,118   -   92,118 
Collateralized mortgage obligations  563   -   563   -   563 
Corporate securities  9,893   -   9,893   -   9,893 
Other  310   -   310   -   310 
                     
Fair valued on a non-recurring basis:                    
   Collateral Dependent loans
 $
13,480  $
-  $
-  $
13,480  $
13,480 
Other real estate owned
  
873   
-   
-   
873   
873 

December 31, 2022    Fair Value Measurements 
(Dollars in thousands) 
Carrying
Amount
  Level 1  Level 2  Level 3  
Total Fair
Value
 
Fair valued on a recurring basis:               
Available-for-sale securities               
U.S. Treasury notes $4,964  $4,964  $-  $-  $4,964 
U.S. Government-sponsored securities  4,427   -   4,427   -   4,427 
Mortgage-backed securities  132,528   -   132,528   -   132,528 
Collateralized mortgage obligations  1,054   -   1,054   -   1,054 
       Corporate securities  9,581   -   9,581   -   9,581 
Other  310   -   310   -   310 
                     
Fair valued on a non-recurring basis:                    
   Collateral Dependent loans $14,473  $-  $-  $14,473  $14,473 
Other real estate owned
  873   -   -   873   873 

26


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

Note 8—Commitments and Contingencies



In the normal course of business, the Company enters into financial instruments with off balance sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These instruments include commitments to extend credit, letters of credit, and other types of financial guarantees. The Company had the following off balance sheet commitments as of the dates indicated.


(Dollars in thousands) 
September 30,
2023
  
December 31,
2022
 
         
Commitments to extend credit, including unsecured commitments of $19,816 and $20,401 as of September 30, 2023 and  December 31, 2022, respectively
 $1,156,479  $1,141,036 
Stand-by letters of credit, including unsecured commitments of $7,970 and $7,954 as of September 30, 2023 and December 31, 2022, respectively
  16,802   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 September 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 60 months with final expiration in January 2027. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.


The Company has commitments to fund investments in LIHTC partnerships and limited liability companies. At September 30, 2023, the remaining commitments to the LIHTC partnerships and limited liability companies were approximately $17.5 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.

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

FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10–Q may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act. These forward-looking statements reflect our current views and are not historical facts. These statements may include statements regarding projected performance for periods following the date of this report. These statements can generally be identified by use of phrases such as “believe,” “expect,” “will,” “seek,” “should,” “anticipate,” “estimate,” “intend,” “plan,” “target,” “project,” “commit” or other words of similar import. Similarly, statements that describe our future financial condition, results of operations, objectives, strategies, plans, goals or future performance and business are also forward-looking statements. Statements that project future financial conditions, results of operations, and shareholder value are not guarantees of performance and many of the factors that will determine these results and values are beyond our ability to control or predict. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and other parts of this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (“Form 10-K”), 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:

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;
regulatory or judicial proceedings; and
other factors and risks including those described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this 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 (or documents incorporated by reference, if applicable).

The Company does not undertake any obligation to publicly correct 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, except as required by law.

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.

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 September 30, 2023, consisted of 752,013 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 growth has been the generation of core deposits, which the Company raises through its existing branch locations, newly opened branch locations, or through acquisitions. Loan 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.

Critical Accounting Policies and Estimates

Our accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. We identify critical policies and estimates as those that require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies and estimates relate to the allowance for credit losses on loans and leases held-for-investment, investment securities, the carrying value of goodwill and other intangible assets, fair value measurements and the realization of deferred income tax assets and liabilities.

Our critical accounting policies and estimates are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in 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
Tangible Book Value Per Common Share
  
September 30,
2023
    
September 30,
2022
  
(Dollars in thousands, except per share data)      
Shareholders’ equity $530,623  $468,178 
Less:  Intangible assets  13,563   14,140 
Tangible common equity $517,060  $454,038 
         
Total Assets $5,375,375  $5,466,781 
Less:  Intangible assets  13,563   14,140 
Tangible assets $5,361,812  $5,452,641 
         
Tangible common equity ratio(1)
  9.64%  8.33%
Book value per common share(2)
 $705.60  $607.37 
Tangible book value per common share(3)
 $687.57  $589.03 
Common shares outstanding
  752,013   770,822 

(1)
Tangible common equity divided by tangibleassets
(2)
Total common equity divided by common shares outstanding.
(3)Tangible common equity divided by common shares outstanding.

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 September 30, 2023 and December 31, 2022 and results of operations during the three and nine months ended September 30, 2023 and 2022, respectively. Information related to the comparison of the results of operations for the years ended December 31, 2022, and 2021 can be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2022 Annual Report on Form 10-K filed with the SEC on March 15, 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

The following table presents performance metrics for the periods indicated:

    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
(dollars in thousands, except per share amounts) 2023  2022  2023  2022 
Earnings Summary:            
Interest income $65,713  $51,713  $186,362  $140,502 
Interest expense  12,272   1,256   24,777   3,117 
Net interest income  53,441   50,457   161,585   137,385 
Provision for credit losses  3,000   1,500   7,057   3,000 
Non-interest income  3,606   1,559   12,513   9,383 
Non-interest expense  24,468   24,375   79,473   71,194 
Income before taxes  29,579   26,141   87,568   72,574 
Income tax expense  7,545   6,605   20,679   17,537 
Net Income $22,034  $19,536  $66,889  $55,037 
                 
Per Common Share Data:                
Diluted earnings per common share $29.23  $25.20  $88.06  $70.47 
Book value per common share $705.60  $607.37  $705.60  $607.37 
Tangible book value per common share(1)
 $687.57  $589.03  $687.57  $589.03 
                 
Performance Ratios:                
Return on average assets  1.65%  1.45%  1.70%  1.37%
Return on average equity  16.80%  16.64%  17.43%  15.75%
Net interest margin (tax equivalent)  4.17%  3.91%  4.33%  3.62%
Yield on average loans and leases (tax equivalent)  5.87%  5.06%  5.77%  4.86%
Cost of average total deposits  1.01%  0.09%  0.70%  0.08%
Efficiency ratio  42.89%  46.86%  45.65%  48.51%
Loan-to-deposit ratio  75.13%  67.71%  75.13%  67.71%
Percentage of checking deposits to total deposits  51.72%  60.32%  51.72%  60.32%
                 
Capital Ratios Bancorp:                
Common equity tier 1 capital to risk-weighted assets  12.48%  11.82%  12.48%  11.82%
Tier 1 capital to risk-weighted assets  12.72%  12.06%  12.72%  12.06%
Risk-based capital to risk-weighted assets  13.97%  13.32%  13.97%  13.32%
Tier 1 leverage capital ratio  10.22%  9.12%  10.22%  9.12%
Tangible common equity ratio(1)
  9.64%  8.33%  9.64%  8.33%

(1)See “Non-GAAP Measurements”

Average Balance and Yields
The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield, cost and net interest margin information for the periods presented. Average balances are derived from daily balances.

  Three Months Ended September 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 $592,012  $8,075   5.41% $718,794  $4,159   2.30%
Investment securities:(1)
                        
Taxable securities  908,591   4,588   2.02%  1,063,166   5,091   1.92%
Non-taxable securities(2)
  61,580   575   3.73%  47,005   386   3.28%
Total investment securities  970,171   5,163   2.13%  1,110,171   5,477   2.00%
Loans:(3)
                        
Real estate:                        
Commercial  1,290,892   16,990   5.22%  1,224,689   15,179   4.92%
Agricultural  749,899   10,497   5.55%  715,286   9,243   5.13%
Residential and home equity  394,500   4,527   4.55%  375,699   3,836   4.05%
Construction  180,658   3,168   6.96%  164,664   2,468   5.95%
Total real estate  2,615,949   35,182   5.34%  2,480,338   30,726   4.91%
Commercial & industrial  479,113   8,729   7.23%  438,761   5,770   5.22%
Agricultural  296,973   6,138   8.20%  259,345   3,607   5.52%
Commercial leases  127,383   2,018   6.29%  93,051   1,365   5.82%
Consumer and other  5,432   86   6.28%  8,929   400   17.77%
Total loans and leases  3,524,850   52,153   5.87%  3,280,424   41,868   5.06%
Non-marketable securities  15,549   322   8.22%  15,549   209   5.33%
Total interest earning assets  5,102,582   65,713   5.11%  5,124,938   51,713   4.00%
Allowance for credit losses  (72,639)          (63,107)        
Non-interest earning assets  324,105           318,078         
Total average assets $5,354,048          $5,379,909         
               





    
LIABILITIES AND SHAREHOLDERS’ EQUITY                        
Interest bearing deposits:                        
Demand $973,380   741   0.30% $1,101,830   445   0.16%
Savings and money market accounts  1,691,933   6,919   1.62%  1,588,234   476   0.12%
Certificates of deposit greater than $250,000  285,741   2,495   3.46%  156,110   96   0.24%
Certificates of deposit less than $250,000  302,826   1,896   2.48%  212,036   105   0.20%
Total interest bearing deposits  3,253,880   12,051   1.47%  3,058,210   1,122   0.15%
Short-term borrowings  -   -   0.00%  -   -   0.00%
Subordinated debentures  10,310   221   8.50%  10,310   134   5.16%
Total interest bearing liabilities  3,264,190   12,272   1.49%  3,068,520   1,256   0.16%
Non-interest bearing deposits  1,474,752           1,764,266         
Total funding  4,738,942   12,272   1.03%  4,832,786   1,256   0.10%
Other non-interest bearing liabilities  90,510           77,389         
Shareholders’ equity  524,596           469,734         
Total average liabilities and shareholders’ equity $5,354,048          $5,379,909         
                         
Net interest income     $53,441          $50,457     
Interest rate spread          3.62%          3.84%
Net interest margin(4)
          4.16%          3.91%

(1)Excludes average unrealized losses of ($24.4) million and ($28.5) million for the three months ended September 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 $152,000 and $102,000 for the three months ended September 30, 2023, and 2022, respectively.
(3)Loan interest income includes loan fees of $1.3 million and $2.6 million for the three months ended September 30, 2023 and 2022, respectively.
(4)Net interest margin is computed by dividing net interest income by average interest earning assets.

  For the Nine Months Ended September 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 $524,288  $19,918   5.08% $720,692  $5,934   1.10%
Investment securities:(1)
                        
Taxable securities  932,901   14,019   2.00%  1,058,859   14,786   1.86%
Non-taxable securities(2)
  60,238   1,696   3.75%  48,436   1,179   3.25%
Total investment securities  993,139   15,715   2.11%  1,107,295   15,965   1.92%
Loans:(3)
                        
Real estate:                        
Commercial  1,292,817   50,383   5.21%  1,178,731   41,986   4.76%
Agricultural  728,035   29,873   5.49%  699,205   25,545   4.88%
Residential and home equity  390,788   12,889   4.41%  365,062   10,728   3.93%
Construction  171,223   9,033   7.05%  187,181   7,075   5.05%
Total real estate  2,582,863   102,178   5.29%  2,430,179   85,334   4.69%
Commercial & industrial  473,346   24,699   6.98%  434,217   15,460   4.76%
Agricultural  286,314   16,955   7.92%  257,555   9,350   4.85%
Commercial leases  123,534   5,770   6.24%  92,914   4,158   5.98%
Consumer and other  5,514   249   6.04%  27,330   3,569   17.46%
Total loans and leases  3,471,571   149,851   5.77%  3,242,195   117,871   4.86%
Non-marketable securities  15,549   878   7.55%  15,549   732   6.29%
Total interest earning assets  5,004,547   186,362   4.98%  5,085,731   140,502   3.69%
Allowance for credit losses  (70,062)          (61,864)        
Non-interest earning assets  314,924           314,520         
Total average assets $5,249,409          $5,338,387         
               




     
LIABILITIES AND SHAREHOLDERS’ EQUITY                        
Interest bearing deposits:                        
Demand $994,113   1,629   0.22% $1,111,513   1,023   0.12%
Savings and money market accounts  1,626,444   14,575   1.20%  1,550,334   1,179   0.10%
Certificates of deposit greater than $250,000  220,973   4,637   2.81%  163,148   299   0.25%
Certificates of deposit less than $250,000  257,158   3,315   1.72%  218,302   297   0.18%
Total interest bearing deposits  3,098,688   24,156   1.04%  3,043,297   2,798   0.12%
Short-term borrowings  1   -   0.00%  1   -   0.00%
Subordinated debentures  10,310   621   8.05%  10,310   319   4.14%
Total interest bearing liabilities  3,108,999   24,777   1.07%  3,053,608   3,117   0.14%
Non-interest bearing deposits  1,547,327           1,740,859         
Total funding  4,656,326   24,777   0.71%  4,794,467   3,117   0.09%
Other non-interest bearing liabilities  81,348           77,953         
Shareholders’ equity  511,735           465,967         
Total average liabilities and shareholders’ equity $5,249,409          $5,338,387         
                         
Net interest income     $161,585          $137,385     
Interest rate spread          3.91%          3.56%
Net interest margin(4)
          4.32%          3.61%

(1)Excludes average unrealized losses of ($25.0) million and ($20.1) million for the nine months ended September 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 $448,000 and $312,000 for the nine months ended September 30, 2023, and 2022, respectively.
(3)Loan interest income includes loan fees of $4.6 million and $9.8 million for the nine months ended September 30, 2023 and 2022, respectively.
(4)Net interest margin is computed by dividing net interest income by average interest earning assets.

Third Quarter 2023 vs. Third Quarter 2022
Interest-bearing deposits with banks and Federal Reserve balances are earning assets available to the Company.  Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 5.41% and 2.30% for the third quarter of 2023 and 2022, respectively. The increase was primarily the result of the FRB increasing rates by 225 basis points from the third quarter of 2022 and the first nine months of 2023. Average interest-bearing deposits were $592.0 million and $718.8 million for the quarter ended September 30, 2023 and 2022, respectively. Interest income on interest-bearing deposits with banks was $8.1 million and $4.2 million for the quarter ended September 30, 2023 and 2022, respectively.

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

Average total investment securities were $970.2 million and $1.1 billion for the quarter ended September 30, 2023 and 2022, respectively. The average yield on total investment securities was 2.13% and 2.00% for the quarter ended September 30, 2023 and 2022, respectively.

Average loans and leases held-for-investment were $3.5 billion and $3.3 billion for the quarter ended September 30, 2023 and 2022, respectively. The average yield on the loan and lease portfolio was 5.87% and 5.06% for the quarter ended September 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 $3.3 billion and $3.1 billion for the quarter ended September 30, 2023 and 2022, respectively. The average rate paid on interest-bearing deposits was 1.47% and 0.15% for the quarter ended September 30, 2023 and 2022, respectively. Total interest expense on interest-bearing deposits was $12.1 million and $1.1 million for the quarter ended September 30, 2023 and 2022, respectively, as a result of increases in short-term market interest rates during 2022 and the first nine months of 2023. The average rate paid on total funding costs was 1.03% and 0.10% for the quarter ended September 30, 2023 and 2022, respectively. Industry competition for deposits continues, which has the potential to increase future deposit costs in order to retain key customers, which could place negative pressure on the net interest margin looking forward.

Nine Months Ended September 30, 2023 vs. Nine Months Ended September 30, 2022
Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 5.08% and 1.10% for the first nine months ended of 2023 and 2022, respectively. The increase was primarily the result of the FRB increasing rates by 525 basis points during 2022 and the first nine months of 2023. Average interest-bearing deposits were $524.3 million and $720.7 million for the nine months ended September 30, 2023 and 2022, respectively. Interest income on interest-bearing deposits with banks was $19.9 million and $5.9 million for the nine months ended September 30, 2023 and 2022, respectively.

Average total investment securities were $1.0 billion and $1.1 billion for the nine months ended September 30, 2023 and 2022, respectively. The average yield on total investment securities was 2.11% and 1.92% for the nine months ended September 30, 2023 and 2022, respectively.

Average loans and leases held-for-investment were $3.5 billion and $3.2 billion for the nine months ended September 30, 2023 and 2022, respectively. The average yield on the loan and lease portfolio was 5.77% and 4.86% for the nine months ended September 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 $3.0 billion for the nine months ended September 30, 2023 and 2022, respectively. The average rate paid on interest-bearing deposits was 1.04% and 0.12% for the nine months ended September 30, 2023 and 2022, respectively. Total interest expense on interest-bearing deposits was $24.2 million and $2.8 million for the nine months ended September 30, 2023 and 2022, respectively, as a result of increases in short-term market interest rates during 2022 and the first nine months of 2023. The average rate paid on total funding costs was 0.71% and 0.09% for the nine months ended September 30, 2023 and 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, 2023
compared with 2022
  Nine Months Ended September 30,
2023 compared with 2022
 
  Increase (Decrease) Due to:  Increase (Decrease) Due to: 
(Dollars in thousands) Volume  Rate  Net  Volume  Rate  Net 
Interest income:                  
Interest earnings deposits in other banks and federal funds sold  (837)  4,753  $3,916   (2,035)  16,019  $13,984 
Investment securities:                        
Taxable securities  (770)  267   (503)  (1,841)  1,074   (767)
Non-taxable securities  131   58   189   315   202   517 
Total investment securities  (638)  324   (314)  (1,526)  1,276   (250)
Loans:                        
Real estate:                        
Commercial  844   967   1,811   4,258   4,139   8,397 
Agricultural  461   793   1,254   1,086   3,242   4,328 
Residential and home equity  199   492   691   790   1,371   2,161 
Construction  255   445   700   (648)  2,606   1,958 
Total real estate  1,759   2,697   4,456   5,485   11,359   16,844 
Commercial & industrial  570   2,389   2,959   1,498   7,741   9,239 
Agricultural  582   1,949   2,531   1,143   6,462   7,605 
Commercial leases  537   116   653   1,423   189   1,612 
Consumer and other(1)
  (118)  (196)  (314)  (1,825)  (1,495)  (3,320)
Total loans and leases  3,329   6,956   10,285   7,725   24,255   31,980 
Non-marketable securities  -   113   113   -   146   146 
Total interest income  1,853   12,147   14,000   4,164   41,696   45,860 
                         
Interest expense:                        
Interest bearing deposits:                        
Demand  (56)  352   296   (119)  725   606 
Savings and money market accounts  33   6,410   6,443   61   13,335   13,396 
Certificates of deposit greater than $250,000  142   2,257   2,399   142   4,196   4,338 
Certificates of deposit less than $250,000  64   1,727   1,791   62   2,956   3,018 
Total interest bearing deposits  182   10,747   10,929   146   21,212   21,358 
Short-term borrowings  -   -   -   -   -   - 
Subordinated debentures  -   87   87   -   302   302 
Total interest expense  182   10,834   11,016   146   21,514   21,660 
Net interest income $1,671  $1,313  $2,984  $4,017  $20,183  $24,200 

(1) Consumer and other - These decreases represent the end of the PPP loans which were $0 and $1.8 million as of September 30, 2023 and 2022 respectively.

Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2023 and 2022
  
Three Months Ended
September 30,
        
Nine Months Ended
September 30,
       
(Dollars in thousands) 2023  2022  
$ Better /
(Worse)
  
% Better /
(Worse)
  2023  2022  
$ Better /
(Worse)
  
% Better /
(Worse)
 
Selected Income Statement Information:                        
Interest income $65,713  $51,713  $14,000   27.07% $186,362  $140,502  $45,860   32.64%
Interest expense  12,272   1,256   (11,016)  (877.07%)  24,777   3,117   (21,660)  (694.90%)
Net interest income  53,441   50,457   2,984   5.91%  161,585   137,385   24,200   17.61%
Provision for credit losses  3,000   1,500   (1,500)  (100.00%)  7,057   3,000   (4,057)  (135.23%)
Net interest income after provision for credit losses  50,441   48,957   1,484   3.03%  154,528   134,385   20,143   14.99%
Non-interest income  3,606   1,559   2,047   131.30%  12,513   9,383   3,130   33.36%
Non-interest expense  24,468   24,375   (93)  (0.38%)  79,473   71,194   (8,279)  (11.63%)
Income before income tax expense  29,579   26,141   3,438   13.15%  87,568   72,574   14,994   20.66%
Income tax expense  7,545   6,605   (940)  (14.23%)  20,679   17,537   (3,142)  (17.92%)
Net income $22,034  $19,536  $2,498   12.79% $66,889  $55,037  $11,852   21.53%
For the three and nine months ended September 30, 2023, net income was $22.0 million and $66.9 million, respectively compared to $19.5 million and $55.0 million for the same periods a year ago. For the three months ended September 30, 2023 the increase in net income was primarily the result of higher net interest income of $3.0 million and an increase in non-interest income of $2.0 million. These increases were offset by a higher provision for credit losses of $1.5 million and higher income tax expense of $0.9 million.

For the nine months ended September 30, 2023, the increase in net income was primarily the result of higher net interest income of $24.2 million. The Company also recognized in non-interest income, a $4.3 million death benefit on bank-owned life insurance (“BOLI”) during the nine months ended September 30, 2023 that was not present during the nine months ended September 30, 2022. This increase was offset by an increase in non-interest expense of $8.3 million, higher provision for credit losses of $4.1 million and higher income tax expense of $3.1 million.
Net Interest Income and Net Interest Margin.
For the quarter ended September 30, 2023, net interest income increased $3.0 million, or 5.91%, to $53.4 million compared with $50.5 million for the same period a year earlier. The increase is primarily the result of the net interest margin increasing 25 basis points to 4.16% compared with 3.91% for the same period a year earlier. The increase in the net interest margin was primarily the result of the FRB increasing the federal funds rate by 225 basis points from the third quarter of 2022 and the first nine months of 2023. The yield on interest earning assets increased 111 basis points to 5.11% compared to 4.00% for the third quarter of 2022 while the yield on interest bearing liabilities increased 133 basis points to 1.49% compared to 0.16% for the third quarter of 2022.

For the nine months ended September 30, 2023, net interest income increased $24.2 million, or 17.61%, to $161.6 million compared with $137.4 million for the same period a year earlier. The increase is primarily the result of the net interest margin increasing 71 basis points to 4.32% compared with 3.61% for the same period a year earlier. The increase in the net interest margin was primarily the result of the FRB increasing the federal funds rate by 225 basis points from the third quarter of 2022 and the first nine months of 2023. The loan yield increased 91 basis points compared to the first nine months of 2022 and the deposit yield increased 93 basis points compared to the same period a year earlier.

Provision for Credit Losses
The Company made a $3.0 million provision for credit losses during the three months ended September 30, 2023 compared to $1.5 million for the same period a year ago. Net recoveries during the three months ended September 30, 2023 were $47,000 compared to net recoveries of $38,000 for the same period a year ago.

The Company made a $7.1 million provision for credit losses during the first nine months of 2023 compared to $3.0 million during the first nine months of 2022. Net recoveries during the first nine months of 2023 were $274,000 compared to net recoveries of $4,000 in the first nine months of 2022. The increase in ACL during the first nine 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.

Non-interest Income
Non-interest income increased $2.0 million, or 131.30%, to $3.6 million for the quarter ended September 30, 2023 compared with $1.6 million for the same period a year earlier. The increase in non-interest income was primarily due to a $3.0 million net loss on sales of securities during 2022 and a $0.7 million increase in net losses on deferred compensation plan investments compared to a net gain during the same period in 2022.

The Company recorded net losses on deferred compensation plan investments of $0.3 million for the quarter ended September 30, 2023 compared with net gains of $0.4 million for the same respective period a year ago. See Note 11, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2022 Form 10-K filed on March 15, 2023 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 increased $3.1 million, or 33.36%, to $12.5 million for the nine months ended September 30, 2023 compared with $9.4 million for the same period of 2022. The year-over-year increase in non-interest income was primarily due to a $4.3 million BOLI death benefit gain and a $2.1 million increase in net gains on deferred compensation plan investments. These increases were partially off-set by a $2.7 million increase in net losses on the sale of investment securities in the first quarter of 2023 to reposition the investment portfolio.

The Company recorded net gains on deferred compensation plan investments of $1.9 million for the nine months ended September 30, 2023 compared with net losses of $0.2 million for the same respective period. See Note 11, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2022 Form 10-K filed on March 15, 2023 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these investment gains/losses to be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no net-effect on the Company’s net income.

Non-interest Expense
Non-interest expense increased $0.1 million, or 0.38%, to $24.5 million for the quarter ended September 30, 2023 compared with $24.4 million for the same period a year ago. This increase was primarily comprised of a $1.2 million increase in salaries and employee benefits partially off-set by a $1.0 million decrease in other expenses.

Net losses on deferred compensation plan obligations were $0.3 million for the quarter ended September 30, 2023 compared with net gains of $0.4 million for the same respective period. See Note 11, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2022 Form 10-K filed on March 15, 2023 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 gains on obligations 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 $8.3 million, or 11.63%, to $79.5 million for the nine months ended September 30, 2023 compared with $71.2 million for the same period a year ago. This increase was primarily comprised of a $5.5 million increase in salaries and employee benefits, a $2.1 million increase in net gains on deferred compensation plan investments, a $0.7 million increase in FDIC insurance.

The Company recorded net gains on deferred compensation plan investments of $1.9 million for the nine months ended September 30, 2023 compared with net losses of $0.2 million for the same respective period. See Note 11, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2022 Form 10-K filed on March 15, 2023 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 gains on obligations to be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no net-effect on the Company’s net income.

Income Tax Expense
For the three and nine months ended September 30, 2023, income tax expense was $7.5 million and $20.7 million, respectively compared to $6.6 million and $17.5 million for the same periods a year ago. The Company’s effective tax rate for the three and nine months ended September 30, 2023 was 25.51% and 23.61%, respectively compared to 25.27% and 24.16% for the same period in 2022. The Company’s effective tax rate for the nine months ended September 30, 2023 was lower than its historical effective tax rate primarily due to a non-taxable BOLI death benefit gain of $4.3 million recognized during the nine months ended September 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, 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.

Balance Sheet Analysis

Total assets grew by $48.0 million, or 0.90%, to $5.4 billion at September 30, 2023 compared with $5.3 billion at December 31, 2022. Loans held-for-investment were $3.6 billion at September 30, 2023, an increase of $44.8 million, or 1.28% compared to December 31, 2022. Total deposits were $4.75 billion at September 30, 2023 compared with $4.76 billion at December 31, 2022, a decrease of $10.5 million or 0.22%.

Cash and Cash Equivalents

The Company’s cash and cash equivalents consists of interest bearing deposits with banks and overnight investments in Federal Reserve balances. Interest bearing deposits with banks consisted primarily of FRB deposits. 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 $597.7 million at September 30, 2023 and $514.9 million at December 31, 2022. The Company’s total cash and cash equivalents as of September 30, 2023 represents 12.4% 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 $65.8 million or 6.59% to $932.1 million at September 30, 2023 compared to December 31, 2022. During the first quarter of 2023, $36.2 million in available for sale securities were 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 September 30, 2023 represents 17.35% of the Company’s total assets as compared to 18.74% 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 HTM 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 2 “Investment Securities” to the Unaudited Consolidated Financial Statements in “Item 1. Financial Statements” in this Quarterly Report on Form 10-Q.  Securities classified as AFS include securities, which may be sold to effectively manage interest rate risk exposure, prepayment risk, satisfy liquidity demands and other factors. These securities are reported at fair value with aggregate, unrealized gains or losses excluded from income and included as a separate component of shareholders’ equity, as accumulated other comprehensive income(loss), net of related income taxes. As of September 30, 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.

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

(Dollars in thousands) 
September 30,
2023
  
December 31,
2022
 
Available-for-Sale Securities      
U.S. Treasury notes $-  $4,964 
U.S. Government-sponsored securities  3,609   4,427 
Mortgage-backed securities(1)
  92,118   132,528 
Collateralized mortgage obligations(1)
  563   1,054 
Corporate securities  9,893   9,581 
Other  310   310 
Total available-for-sale securities $106,493  $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.

(Dollars in thousands) 
September 30,
2023
  
December 31,
2022
 
Held-to-Maturity Securities      
Mortgage-backed securities(1)
 $673,924  $702,858 
Collateralized mortgage obligations(1)
  75,507   80,186 
Municipal securities(2)
  76,134   61,909 
Total held-to-maturity securities $825,565  $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) Municipal securities are net of allowance for credit losses of $450 and $393, respectively.

The following tables 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, 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 available-for-sale                              
U.S. Government-sponsored securities $-   0.00% $107   6.28% $228   6.55% $3,274   6.17% $3,609   6.19%
Mortgage-backed securities(1)
  76   1.85%  7,321   2.54%  5,893   3.59%  78,828   1.98%  92,118   2.12%
Collateralized mortgage obligations(1)
  -   0.00%  -   0.00%  -   0.00%  563   2.28%  563   2.28%
Corporate securities  -   0.00%  9,893   5.74%  -   0.00%  -   0.00%  9,893   5.74%
Other  310   5.99%  -   0.00%  -   0.00%  -   0.00%  310   5.99%
Total securities available-for-sale $386   5.18% $17,321   4.39% $6,121   3.70% $82,665   2.14% $106,493   2.61%

(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, 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% $2,260   0.74% $13,107   1.38% $658,557   1.91% $673,924   1.89%
Collateralized mortgage obligations(1)
  -   0.00%  -   0.00%  -   0.00%  75,507   1.78%  75,507   1.78%
Municipal securities  450   4.01%  14,650   4.14%  10,924   3.68%  50,560   3.86%  76,584   3.89%
Total securities held-to-maturity $450   4.01% $16,910   3.69% $24,031   2.43% $784,624   2.02% $826,015   2.07%

(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, 2022 
  Within One Year  
After One but Within
Five Years
  
After Five but
Within Ten Years
  After Ten Years  Total 
(Dollars in thousands) Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield 
Securities available-for-sale                              
U.S. Treasury notes $4,964   2.37% $-   0.00% $-   0.00% $-   0.00% $4,964   2.37%
U.S. Government-sponsored securities  3   2.17%  53   2.29%  380   4.52%  3,991   4.52%  4,427   4.29%
Mortgage-backed securities(1)
  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%  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  310   4.60%  -   0.00%  -   0.00%  -   0.00%  310   4.60%
Total securities available-for-sale $5,290   2.50% $26,094   2.61% $15,536   2.46% $105,944   1.93% $152,864   2.11%
(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, 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% $18,197   1.22% $684,661   1.90% $702,858   1.88%
Collateralized mortgage obligations(1)
  -   0.00%  -   0.00%  -   0.00%  80,186   1.80%  80,186   1.80%
Municipal securities  883   5.92%  8,058   3.98%  15,670   3.70%  37,691   4.83%  62,302   4.45%
Total securities held-to-maturity $883   5.92% $8,058   3.98% $33,867   2.37% $802,538   2.03% $845,346   2.07%
(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 and CMO securities may differ from contractual maturities because borrowers 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 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.
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 to 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 three 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.

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 September 30, 2023 totaled $3.6 billion, an increase of $44.8 million or 1.28% compared to December 31, 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, 2023  December 31, 2022 
(Dollars in thousands) Dollars  Percent of
Total
  Dollars  Percent of
 Total
 
Gross loans and leases            
Real estate:            
Commercial $1,297,380   36.36% $1,328,691   37.73%
Agricultural  753,353   21.12%  726,938   20.64%
Residential and home equity  398,990   11.18%  387,753   11.01%
Construction  192,745   5.40%  166,538   4.73%
Total real estate  2,642,468   74.06%  2,609,920   74.11%
Commercial & industrial  489,772   13.73%  478,758   13.59%
Agricultural  301,951   8.46%  314,525   8.93%
Commercial leases  128,063   3.59%  112,629   3.20%
Consumer and other  5,553   0.16%  5,886   0.17%
Total gross loans and leases $3,567,807   100.00% $3,521,718   100.00%

The following table shows the maturity distribution and interest rate sensitivity of the loan and lease portfolio of the Company as of September 30, 2023.

  Loan Contractual Maturity 
(Dollars in thousands) 
One Year or
Less
  
After One But
Within Five
Years
  
After Five
Years But
Within Fifteen
Years
  
After Fifteen
Years
  Total 
Gross loan and leases:               
Real estate:               
Commercial $25,332  $400,168  $837,301  $34,579  $1,297,380 
Agricultural  19,394   193,583   465,169   75,207   753,353 
Residential and home equity  124   4,316   114,246   280,304   398,990 
Construction  114,543   78,202   -   -   192,745 
Total real estate  159,393   676,269   1,416,716   390,090   2,642,468 
Commercial & industrial  177,231   215,299   91,261   5,981   489,772 
Agricultural  154,486   126,216   19,561   1,688   301,951 
Commercial leases  2,574   48,447   77,042   -   128,063 
Consumer and other  730   3,573   1,250   -   5,553 
Total gross loans and leases $494,414  $1,069,804  $1,605,830  $397,759  $3,567,807 
Rate structure for loans and leases                    
Fixed Rate $85,475  $617,148  $1,152,734  $228,707  $2,084,064 
Adjustable Rate  408,939   452,656   453,096   169,052   1,483,743 
Total gross loans and leases $494,414  $1,069,804  $1,605,830  $397,759  $3,567,807 

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) 
September 30,
2023
  
December 31,
2022
 
Non-performing assets:      
Non-accrual loans and leases      
Real estate:      
Commercial $363  $403 
Agricultural  4,094   - 
Residential and home equity  -   - 
Construction  -   168 
Total real estate  4,457   571 
Commercial & industrial  39   - 
Agricultural  -   - 
Commercial leases  -   - 
Consumer and other  -   - 
Total non-performing loans and leases $4,496  $571 
Other real estate owned (“OREO”) $873  $873 
Total non-performing assets $5,369  $1,444 
         
Selected ratios:        
Non-performing loans to total loans and leases  0.13%  0.02%
Non-performing assets to total assets  0.10%  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 $4.5 million and $571,000 at September 30, 2023 and December 31, 2022, respectively. The increase was primarily due to one borrower.

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 September 30, 2023, and at December 31, 2022.

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 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.

Loan Modifications to Borrowers Experiencing Financial DifficultiesIn the normal course of business, the Company may execute loan modifications to borrowers experiencing financial difficulties.  Some of these modifications include: term extension, principle forgiveness, rate reduction, other-than-insignificant payment delay, or any combination of those.  ASU 2022-02 requires certain disclosure of loans and leases that have been modified within the past 12 months and the effects that those modifications had on the modified loans and 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 nine months ended September 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 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 and Leases.”

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

  
Nine Months Ended
September 30,
 
(Dollars in thousands) 2023  2022 
Allowance for credit losses:      
Balance at beginning of year $66,885  $61,007 
Provision for credit losses  7,000   2,606 
Charge-offs:        
Real estate:        
Commercial  -   - 
Agricultural  -   - 
Residential and home equity  (14)  - 
Construction  -   - 
Total real estate  (14)  - 
  Commercial & industrial  -   (324)
  Agricultural  -   - 
  Commercial leases  -   - 
  Consumer and other  (33)  (38)
Total charge-offs  (47)  (362)
 Recoveries:        
Real estate:        
Commercial  170   - 
Agricultural  -   - 
Residential and home equity  42   125 
Construction  -   - 
Total real estate  212   125 
Commercial & industrial  57   176 
Agricultural  27   51 
Commercial leases  -   - 
Consumer and other  25   14 
Total recoveries  321   366 
Net recoveries / (charge-offs)  274   4 
Balance at end of year $74,159  $63,617 
         
Selected financial information:        
Net loans and leases held-for-investment $3,557,203  $3,323,862 
Average loans and leases  3,471,571   3,242,195 
Non-performing loans and leases  4,496   411 
Allowance for credit losses to non-performing loans and leases  1649.44%  15478.59%
Net (recoveries)/charge-offs to average loans and leases  (0.01%)  0.00%
Provision for credit losses to average loans and leases  0.20%  0.08%
Allowance for credit losses to gross loans and leases held-for-investment  2.08%  1.91%

The increase in ACL during the first nine 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 $76.2 million which includes the allowance for loan and lease losses of $74.1 million and the reserve for unfunded loan commitments of $2.1 million.

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, 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 $26,724   36.36% $18,055   37.73%
Agricultural  7,241   21.12%  14,496   20.64%
Residential and home equity  7,458   11.18%  7,508   11.01%
Construction  3,612   5.40%  3,026   4.73%
Total real estate  45,035   74.06%  43,085   74.11%
Commercial & industrial  17,903   13.73%  11,503   13.59%
Agricultural  9,082   8.46%  10,202   8.93%
Commercial leases  1,967   3.59%  1,924   3.20%
Consumer and other  172   0.16%  171   0.17%
Total allowance for credit losses $74,159   100.00% $66,885   100.00%

Deposits

Total deposits were $4.75 billion and $4.76 billion as of September 30, 2023 and December 31, 2022, respectively a decrease of $10.5 million or 0.22%. The Company experienced a decrease in deposits in the first quarter of 2023 of $220.1 million followed by an increase of $99.1 million and an increase of $110.5 million in the second and third quarters, respectively. The fluctuations during the year were due in part to seasonality within our agriculture client base and customer behavior in a changing interest rate environment. The Company’s continuous focus on business development activities for deposits, contributed to the increases in the second and third quarters of 2023.

Non-interest bearing demand deposits were $1.47 billion as of September 30, 2023 and $1.76 billion at December 31, 2022. Non-interest bearing deposits were 30.97% of total deposits, as of September 30, 2023 and 36.96% as of December 31, 2022. Interest bearing deposits were $3.28 billion as of September 30, 2023 and $3.00 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 balances and average rate paid on the categories of deposits for each of the periods presented:

  Nine Months Ended September 30, 
  2023  2022 
(Dollars in thousands) 
Average
Balance
  
Interest
Expense
  Average
Rate
  
Average
Balance
  
Interest
Expense
  
Average
Rate
 
Total deposits:                  
Interest bearing deposits:                  
Demand $994,113  $1,629   0.22% $1,111,513  $1,023   0.12%
Savings and money market  1,626,444   14,575   1.20%  1,550,334   1,179   0.10%
Certificates of deposit greater than $250,000  220,973   4,637   2.81%  163,148   299   0.25%
Certificates of deposit less than $250,000  257,158   3,315   1.72%  218,302   297   0.18%
Total interest bearing deposits  3,098,688   24,156   1.04%  3,043,297   2,798   0.12%
Non-interest bearing deposits  1,547,327           1,740,859         
Total deposits $4,646,015  $24,156   0.70% $4,784,156  $2,798   0.08%

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.

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 this ongoing impact through careful deposit pricing.  The average cost of deposits, including non-interest bearing deposits, increased to 1.01% for the three months ended September 30, 2023, compared to 0.74% for the three months ended June 30, 2023 and 0.70% for the nine months ended September 30, 2023 compared with 0.08% for the same period a year ago.

The Bank participates in a program wherein the State of California places time deposits with the Bank at the Bank’s option.  As of September 30, 2023 and December 31, 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 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 September 30, 2023 or December 31, 2022. There were no Federal Funds purchased or advances from the FRB at September 30, 2023 or December 31, 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-sheet trust and its sale of trust-preferred securities. See Note 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, 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 SOFR plus 2.85%. Interest rates reset quarterly (the next reset is December 18, 2023) and the rate was 8.52% as of September 30, 2023 and 7.59% at December 31, 2022. The average rate paid for these securities was 8.05% for the first nine months of 2023 and 4.14% for the first nine months of 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 $530.6 million at September 30, 2023, and $485.3 million at December 31, 2022.

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 capitalized,” the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables.

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

  September 30, 2023 
  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 $537,981   12.48% $193,910   4.50%  N/A   N/A 
Tier 1 capital to risk-weighted assets  547,981   12.72%  258,546   6.00%  N/A   N/A 
Risk-based capital to risk-weighted assets  602,126   13.97%  344,728   8.00%  N/A   N/A 
Tier 1 leverage capital ratio  547,981   10.22%  214,463   4.00%  N/A   N/A 
                         
Farmers & Merchants Bank                        
CET1 capital to risk-weighted assets $548,020   12.72% $193,906   4.50% $280,087   6.50%
Tier 1 capital to risk-weighted assets  548,020   12.72%  258,542   6.00%  344,723   8.00%
Risk-based capital to risk-weighted assets  602,165   13.97%  344,723   8.00%  430,903   10.00%
Tier 1 leverage capital ratio  548,020   10.22%  214,390   4.00%  267,987   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 8, 2022, the Board of Directors authorized an extension to its share repurchase program through December 31, 2024 for an additional$20.0 million of the Company’s common stock (“Repurchase Plan”), which represented approximately 4% of outstanding shareholders’ equity at the time of approval. 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 nine months of 2023 the Company repurchased 16,324 shares under the Repurchase Plan, for a total of $16.4 million. The Company has repurchased a total of 17,126 shares or $17.0 million under the current Repurchase Plan.

Off-Balance-Sheet Arrangements

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

The following table sets forth our off-balance-sheet lending commitments as of September 30, 2023:

     Amount of Commitment Expiration per Period 
(Dollars in thousands) 
Total
Committed
Amount
  
Less than
One Year
  
One to
Three
Years
  
Three to
Five Years
  
After Five
Years
 
Off-balance sheet commitments               
Commitments to extend credit $1,156,479  $541,321  $376,208  $45,504  $193,446 
Standby letters of credit  16,802   13,782   1,950   1,070   - 
Total off-balance sheet commitments $1,173,281  $555,103  $378,158  $46,574  $193,446 

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 September 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 60 months with final expiration in January 2027. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

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 totaled $668.4 million or 12.4% of total assets as of September 30, 2023. The majority of cash is on deposit with the FRB and amounted to $597.7 million. 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 secured 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.

We had the following borrowing lines available at September 30, 2023:

  September 30, 2023 
(Dollars in thousands) 
Total Credit
Line Limit
  
Current
Credit Line
Available
  Outstanding
Amount
  
Remaining
Credit Line
Available
  
Value of
Collateral
Pledged
 
Additional liquidity sources:               
Federal Reserve BIC $1,165,853  $1,165,853  $-  $1,165,853  $1,526,304 
Federal Home Loan Bank  796,666   796,666   -   796,666   1,272,566 
FRB Bank Term Funding Program  147,655   147,655   -   147,655   147,655 
US Bank Fed Funds  50,000   50,000   -   50,000   - 
PCBB Fed Funds  50,000   50,000   -   50,000   - 
FHLB Fed Funds  18,000   18,000   -   18,000   - 
Total additional liquidity sources $2,228,174  $2,228,174  $-  $2,228,174  $2,946,525 

We continued our focus on maintaining a strong liquidity position throughout the first nine 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 September 30, 2023, we had internal sources of liquidity comprised of $668.4 million in cash and $256.7 million unencumbered investment securities, which is 17.21% of total assets. We also had $2.23 billion in external sources of liquidity as outlined in the table above bringing our total available liquidity to $3.15 billion. Our pledged collateral on short-term borrowing lines is comprised of $2.8 billion in loans, $148 million in investment securities pledged at par value and $2.0 million in investment securities held at market value. We have the option of either borrowing on our credit lines or selling these investment securities for cash flow needs.

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

We believe we can meet all of 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 September 30, 2023, we had unfunded loan commitments of $1.2 billion and unfunded letters of credit of $16.8 million. We anticipate that we will have sufficient funds available to meet current loan commitments.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

The Company’s assessment of market risk at September 30, 2023 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, 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.

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.
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 September 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
Economic Value of Equity
(EVE)
(as a % of EVE)
 
September 30, 2023      
+300 bps  3.6%  (10.7%)
+200 bps  2.1%  (7.5%)
+100 bps  1.2%  (3.0%)
0 bps  -   - 
-100 bps  (3.1%)  0.5%
-200 bps  (6.5%)  (1.5%)
-300 bps  (10.1%)  (5.8%)

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An 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 (“CFO”), of the effectiveness of the disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(a)). Based on that evaluation, the CEO and CFO have concluded that as of the end of the period covered by this Report, the disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed by the Company in reports that are filed or submitted under the Exchange Act are recorded, processed, summarized and timely reported as provided in the SEC’s rules and forms.

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 nine months ended September 30, 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.

PART II – OTHER INFORMATION

Item 1.Legal Proceedings

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

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

Item 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, 2022.

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

The following table reports information regarding repurchases of our common stock during the nine months ended September 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 
Total 2nd Quarter 2023  8,408   983.49   8,408   5,413 
                 
July 1, 2023 to July 31, 2023  87  $975.86   87  $5,328 
August 1, 2023 to August 31, 2023  903   963.94   903   4,457 
September 1, 2023 to September 30, 2023  1,520   967.60   1,520   2,987 
Total 3rd Quarter 2023  2,510  $966.57   2,510  $2,987 
                 
Total 2023  16,324  $994.31   16,324  $2,987 

(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 nine months ended September 30, 2023, the excise tax expense accrual totaled $162,000.

On November 8, 2022, the Board of Directors authorized an extension to its share repurchase program through December 31, 2024 for an additional$20.0 million of the Company’s common stock (“Repurchase Plan”), which 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 months of 2023 the Company repurchased 16,324 shares under the Repurchase Plan, for a total of $16.4 million.  All of these shares were purchased at prices ranging from $949.00 to $1,082.00 per share, based upon the then current price on the OTCQX. The Company has repurchased a total of 17,126 shares or $17.0 million under the current Repurchase Plan.

Item 3.Defaults upon Senior Securities

Not Applicable

Item 4.Mine Safety Disclosures

Not Applicable

Item 5Other Information

During the three months ended September 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
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.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

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 3, 2023/s/ Kent A. Steinwert
Kent A. Steinwert
Director, Chairman, President and Chief Executive Officer
(Principal Executive Officer)

Date:  November 3, 2023/s/ Bart R. Olson
Bart R. Olson
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)


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