Farmers & Merchants Bancorp 10Q 2024 Q2 Quarterly report

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 June 30, 2024

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number: 000-26099

FARMERS & MERCHANTS BANCORP

(Exact name of registrant as specified in its charter)

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

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

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

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	Not Applicable	Not 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 July 31, 2024, the registrant had 738,565 shares of common stock $0.01 par value per share, outstanding.

FARMERS & MERCHANTS BANCORP

FORM 10-Q

TABLE OF CONTENTS

PART I. - FINANCIAL INFORMATION			Page

	Item 1 - Financial Statements
		Unaudited Consolidated Balance Sheets	3
		Unaudited Consolidated Statements of Income	4
		Unaudited Consolidated Statements of Comprehensive Income	5
		Unaudited Consolidated Statements of Changes in Shareholders’ Equity	6
		Unaudited Consolidated Statements of Cash Flows	7
		Notes to Unaudited Consolidated Financial Statements	8

	Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		32

	Item 3 - Quantitative and Qualitative Disclosures about Market Risk		54

	Item 4 - Controls and Procedures		56

PART II. - OTHER INFORMATION

	Item 1 – Legal Proceedings		56
	Item 1A – Risk Factors		56
	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		57
	Item 3 – Defaults upon Senior Securities		57
	Item 4 – Mine Safety Disclosures		57
	Item 5 – Other Information		57
	Item 6 – Exhibits		58
	Signatures		59

Table of Contents

PART 1. FINANCIAL INFORMATION

Item 1.

Financial Statements

FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share amounts)	June 30, 2024			December 31, 2023
ASSETS
Cash and due from banks	$	70,260		$	72,267
Interest bearing deposits with banks		225,676			338,375
Total cash and cash equivalents		295,936			410,642
Securities available-for-sale, amortized cost $271,970 and $199,374, respectively		251,413			182,512
Securities held-to-maturity, fair value $638,718 and $671,585, respectively		794,797			817,688
Allowance for credit losses - securities held-to-maturity		(450	)		(450	)
Total investment securities		1,045,760			999,750
Non-marketable securities		15,549			15,549
Loans and leases held for investment, net of unearned income		3,682,370			3,654,689
Allowance for credit losses - loans and leases		(75,032	)		(74,965	)
Loans and leases held for investment, net		3,607,338			3,579,724
Bank-owned life insurance		73,654			74,931
Premises and equipment, net		51,306			51,907
Deferred income tax assets and income taxes receivable		43,821			50,071
Accrued interest receivable		27,195			28,520
Goodwill		11,183			11,183
Other intangibles		1,962			2,236
Other real estate owned		873			873
Other assets		92,908			83,542
TOTAL ASSETS	$	5,267,485		$	5,308,928

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	1,377,514		$	1,482,571
Interest bearing:
Demand		856,713			933,417
Savings and money market		1,609,334			1,607,479
Certificates of deposit		753,494			644,628
Total interest bearing		3,219,541			3,185,524
Total deposits		4,597,055			4,668,095
Subordinated debentures		10,310			10,310
Interest payable and other liabilities		83,900			80,768
TOTAL LIABILITIES		4,691,265			4,759,173

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, 739,308 and 747,971 issued and outstanding at June 30, 2024 and December 31, 2023, respectively		7			7
Additional paid-in capital		27,931			36,852
Retained earnings		563,383			525,360
Accumulated other comprehensive loss, net of taxes		(15,101	)		(12,464	)
TOTAL SHAREHOLDERS’ EQUITY		576,220			549,755
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	5,267,485		$	5,308,928

See accompanying notes to the unaudited consolidated financial statements.

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FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands, except share and per share amounts)	2024		2023		2024		2023
Interest income
Interest and fees on loans and leases	$	56,190	$	49,690	$	111,598	$	97,698
Interest and dividends on investment securities		7,424		5,445		14,127		11,108
Interest on deposits with others		6,217		5,882		10,747		11,843
Total interest income		69,831		61,017		136,472		120,649
Interest expense
Deposits		17,906		8,391		32,551		12,105
Borrowed funds		924		-		986		-
Subordinated debentures		220		204		441		400
Total interest expense		19,050		8,595		33,978		12,505
Net interest income		50,781		52,422		102,494		108,144
Provision for credit losses		-		2,557		-		4,057
Net interest income after provision for credit losses		50,781		49,865		102,494		104,087
Non-interest income
Card processing		1,764		1,712		3,393		3,303
Service charges on deposit accounts		749		690		1,497		1,324
Increase in cash surrender value of BOLI		602		506		1,197		950
Gain on BOLI death benefit		-		-		-		4,346
Net loss on sale of securities available-for-sale		-		-		-		(5,686	)
Net gain on deferred compensation benefits		414		1,302		1,572		2,198
Other		1,238		1,237		2,183		2,472
Total non-interest income		4,767		5,447		9,842		8,907
Non-interest expense
Salaries and employee benefits		17,999		17,937		35,502		37,521
Net gain on deferred compensation benefits		414		1,302		1,572		2,198
Data processing		1,535		1,307		2,990		2,567
Occupancy		1,243		1,228		2,475		2,408
Deposit insurance		702		673		1,414		1,365
Professional services		621		673		1,162		1,355
Marketing		562		425		1,042		895
Other		2,346		3,277		4,786		6,696
Total non-interest expense		25,422		26,822		50,943		55,005
INCOME BEFORE INCOME TAXES		30,126		28,490		61,393		57,989
Income tax expense		8,359		7,182		16,903		13,134
NET INCOME	$	21,767	$	21,308	$	44,490	$	44,855

Earnings per common share:
Basic	$	29.39	$	28.03	$	59.95	$	58.83
Diluted	$	29.39	$	28.03	$	59.95	$	58.83

Weighted average number of common shares
Basic		740,752		760,308		742,150		762,443
Diluted		740,752		760,308		742,150		762,443

See accompanying notes to the unaudited consolidated financial statements.

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FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2024			2023			2024			2023
Net income	$	21,767		$	21,308		$	44,490		$	44,855
Other comprehensive income
Unrealized (losses)/gains on available-for-sale securities		(1,095	)		(1,191	)		(3,695	)		1,171
Reclassification adjustment for losses on available-for-sale securities		-			-			-			5,685
Amortization of unrealized loss on securities transferred to held-to-maturity		(22	)		(47	)		(49	)		(77	)
Net unrealized (losses)/gains on available-for-sale securities		(1,117	)		(1,238	)		(3,744	)		6,779
Income tax benefit/(expense)		330			375			1,107			(2,004	)
Other comprehensive (loss)/income, net of tax		(787	)		(863	)		(2,637	)		4,775
Total comprehensive income	$	20,980		$	20,445		$	41,853		$	49,630

See accompanying notes to the unaudited consolidated financial statements.

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FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

	For the three and six months ended June 30, 2024 and 2023
(Dollars in thousands, except share amounts)	Common Shares			Amount		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive (Loss)/Income			Total
Balance as of March 31, 2024		742,770		$	7	$	31,401		$	548,123		$	(14,314	)	$	565,217
Net income		-			-		-			21,767			-			21,767
Other comprehensive loss, net of tax		-			-		-			-			(787	)		(787	)
Cash dividends declared ($8.80 per share)		-			-		-			(6,507	)		-			(6,507	)
Repurchase of common stock		(3,462	)		-		(3,470	)		-			-			(3,470	)
Balance as of June 30, 2024		739,308		$	7	$	27,931		$	563,383		$	(15,101	)	$	576,220

Balance as of March 31, 2023		762,931		$	8	$	51,615		$	473,479		$	(16,200	)	$	508,902
Net income		-			-		-			21,308			-			21,308
Other comprehensive loss, net of tax		-			-		-			-			(863	)		(863	)
Cash dividends declared ($8.30 per share)		-			-		-			(6,286	)		-			(6,286	)
Repurchase of common stock		(8,408	)		-		(8,352	)		-			-			(8,352	)
Balance as of June 30, 2023		754,523		$	8	$	43,263		$	488,501		$	(17,063	)	$	514,709

(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, 2023		747,971		$	7	$	36,852		$	525,360		$	(12,464	)	$	549,755
Cumulative change from adoption of ASU 2023-02		-			-		-			40			-			40
Net income		-			-		-			44,490			-			44,490
Other comprehensive loss, net of tax		-			-		-			-			(2,637	)		(2,637	)
Cash dividends declared ($8.80 per share)		-			-		-			(6,507	)		-			(6,507	)
Repurchase of common stock		(8,663	)		-		(8,921	)		-			-			(8,921	)
Balance as of June 30, 2024		739,308		$	7	$	27,931		$	563,383		$	(15,101	)	$	576,220

Balance as of December 31, 2022		768,337		$	8	$	57,206		$	449,932		$	(21,838	)	$	485,308
Net income		-			-		-			44,855			-			44,855
Other comprehensive income, net of tax		-			-		-			-			4,775			4,775
Cash dividends declared ($8.30 per share)		-			-		-			(6,286	)		-			(6,286	)
Repurchase of common stock		(13,814	)		-		(13,943	)		-			-			(13,943	)
Balance as of June 30, 2023		754,523		$	8	$	43,263		$	488,501		$	(17,063	)	$	514,709

See accompanying notes to the unaudited consolidated financial statements.

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FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended June 30,
(Dollars in thousands)	2024			2023
Cash flows from operating activities:
Net income	$	44,490		$	44,855
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		-			4,057
Depreciation and amortization		1,443			1,196
Net (accretion) amortization of securities premiums and discounts		(780	)		35
Increase (decrease) in cash surrender value of BOLI		1,276			(950	)
Gain on BOLI death benefit		-			(4,346	)
Decrease in deferred income taxes, net		7,854			1,773
Loss on sale of securities available-for-sale		-			5,686
Net changes in:
Other assets		(6,714	)		(2,636	)
Other liabilities		7,526			16,671
Net cash provided by operating activities		55,095			66,341
Cash flows from investing activities:
Net change in loans and leases held for investment		(27,594	)		6,388
Purchase of available-for-sale securities		(83,361	)		(4,515	)
Purchase of held-to-maturity securities		(2,028	)		(2,071	)
Proceeds from sales, maturities, calls and pay downs of available-for-sale securities		11,667			43,885
Proceeds from maturities, calls and pay downs of held-to-maturity securities		25,054			23,498
Purchase of premises and equipment		(844	)		(3,239	)
Purchase of other investments		(11,227	)		(2,166	)
Redemption of other investments		5,000			-
Proceeds from bank-owned life insurance		-			11,752
Proceeds from sale of assets		-			27
Net cash (used in) provided by investing activities		(83,333	)		73,559
Cash flows from financing activities:
Net decrease in deposits		(71,040	)		(120,956	)
Cash dividends paid		(6,507	)		(6,286	)
Net cash used in share repurchases of common stock		(8,921	)		(13,943	)
Net cash (used in) financing activities		(86,468	)		(141,185	)
Net change in cash and cash equivalents		(114,706	)		(1,285	)
Cash and cash equivalents, beginning of period		410,642			588,257
Cash and cash equivalents, end of period	$	295,936		$	586,972

Supplemental disclosures of cash flow information:
Cash paid for interest	$	34,423		$	9,907
Income taxes paid	$	7,349		$	16

Supplemental disclosures of non-cash transactions:
Net change in unrealized gains on securities available-for-sale	$	3,695		$	6,857

See accompanying notes to the unaudited consolidated financial statements.

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS

Note 1—Basis of Presentation and Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements include the accounts of Farmers & Merchants Bancorp (“FMCB” or “Bancorp”), a bank holding company incorporated in the State of Delaware and its wholly owned subsidiary, Farmers & Merchants Bank of Central 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 June 30, 2024 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, 2023 filed with the SEC on March 14, 2024 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 2023 Form 10-K. Interim results are not necessarily indicative of results for a full year or any other interim period.

Recently Adopted Accounting Standards — The Accounting Standards Codification™ (“ASC”) is the FASB officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities. Periodically, the FASB will issue Accounting Standard updates (“ASU”) to its ASC. Rules and interpretive releases of the SEC under the authority of the federal securities laws are also sources of authoritative GAAP for the Company as an SEC registrant. All other accounting literature is non-authoritative.

On January 1, 2024, the company adopted the FASB issued guidance within ASU 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendments in this ASU affect all entities that have investments in equity securities measured at fair value that are subject to a contractual sale restriction. These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The company adopted this standard on January 1, 2024, with no material impact on the Company’s Consolidated Financial Statements.

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

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

On January 1, 2024, the Company adopted 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 low income housing tax credit investments (“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. 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 Company adopted this standard to use the proportional amortization method on January 1, 2024, with a $40,000 cumulative-effect adjustment to retained earnings under the modified retrospective method. Under the proportional amortization method the amortization of the LIHTC investments, income tax credits and other income tax benefits are now recognized in the income statement as a component of income tax expense (benefit) rather than other non-interest expense.

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 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 is currently evaluating the impact this ASU will have on its disclosures.

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 currently evaluating the impact this ASU will have on its disclosures.

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

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

In December 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures”. ASU 2023-07 Requires public entities to disclose significant segment expenses, an amount and description for other segment items, the title and position of the entity’s chief operating decision maker (“CODM”) and an explanation of how the CODM uses the reported measures of profit or loss to assess segment performance, and, on an interim basis, certain segment related disclosures that previously were required only on an annual basis. ASU 2023-07 also clarifies that entities with a single reportable segment are subject to both new and existing segment reporting requirements and that an entity is permitted to disclose multiple measures of segment profit or loss, provided that certain criteria are met. ASU 2023-07 requires annual disclosures for fiscal years beginning January 1, 2024 and interim disclosures for fiscal years beginning January 1, 2025. Early adoption is permitted. The Company is required to apply the amendments in this update retrospectively to all prior periods presented in the financial statements. The Company will update its segment related disclosures upon adoption.

In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” ASU 2023-09 requires public business entities to disclose in their rate reconciliation table additional categories of information about federal, state and foreign income taxes and to provide more details about the reconciling items in some categories if items meet a quantitative threshold. ASU 2023-09 also requires all entities to disclose income taxes paid, net of refunds, disaggregated by federal, state and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold, among other things. ASU 2023-09 is effective for us on January 1, 2025, though early adoption is permitted. The Company will update its income tax disclosures upon adoption.

Note 2—Investment Securities

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

			Gross Unrealized
(Dollars in thousands)	Amortized Cost		Gains		Losses		Fair Value
As of June 30, 2024
U.S. Government-sponsored securities	$	2,885	$	12	$	15	$	2,882
Mortgage-backed securities⁽¹⁾		248,293		859		21,289		227,863
Collateralized mortgage obligations⁽¹⁾		5,712		-		106		5,606
Corporate securities		14,770		15		33		14,752
Other		310		-		-		310
Total available-for-sale securities	$	271,970	$	886	$	21,443	$	251,413

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

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 2—Investment Securities—Continued

			Gross Unrealized
(Dollars in thousands)	Amortized Cost		Gains		Losses		Fair Value
As of December 31, 2023
U.S. Government-sponsored securities	$	3,230	$	12	$	18	$	3,224
Mortgage-backed securities⁽¹⁾		180,543		3,022		19,727		163,838
Collateralized mortgage obligations⁽¹⁾		548		-		13		535
Corporate securities		14,743		41		179		14,605
Other		310		-		-		310
Total available-for-sale securities	$	199,374	$	3,075	$	19,937	$	182,512

⁽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 unrecognized gains and losses of investments classified as held-to-maturity are as follows:

			Gross Unrecognized
(Dollars in thousands)	Amortized Cost		Gains		Losses		Fair Value		Allowance for Credit Losses
As of June 30, 2024
Mortgage-backed securities⁽¹⁾	$	646,404	$	-	$	141,259	$	505,145	$	-
Collateralized mortgage obligations⁽¹⁾		71,182		-		14,306		56,876		-
Municipal securities		77,211		48		562		76,697		450
Total held-to-maturity securities	$	794,797	$	48	$	156,127	$	638,718	$	450

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

			Gross Unrecognized
(Dollars in thousands)	Amortized Cost		Gains		Losses		Fair Value		Allowance for Credit Losses
As of December 31, 2023
Mortgage-backed securities⁽¹⁾	$	664,728	$	30	$	132,043	$	532,715	$	-
Collateralized mortgage obligations⁽¹⁾		74,170		-		14,017		60,153		-
Municipal securities		78,790		107		180		78,717		450
Total held-to-maturity securities	$	817,688	$	137	$	146,240	$	671,585	$	450

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

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 2—Investment Securities—Continued

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.

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:

	June 30, 2024
	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	$	-	$	-	$	1,049	$	15	$	1,049	$	15
Mortgage-backed securities⁽¹⁾		109,045		342		74,864		20,947		183,909		21,289
Collateralized mortgage obligations⁽¹⁾		5,113		93		493		13		5,606		106
Corporate securities		9,992		33		-		-		9,992		33
Total available-for-sale securities	$	124,150	$	468	$	76,406	$	20,975	$	200,556	$	21,443

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

					December 31, 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	$	33	$	-	$	1,235	$	18	$	1,268	$	18
Mortgage-backed securities⁽¹⁾		1,629		11		80,746		19,716		82,375		19,727
Collateralized mortgage obligations⁽¹⁾		-		-		535		13		535		13
Corporate securities		-		-		9,853		179		9,853		179
Total available-for-sale securities	$	1,662	$	11	$	92,369	$	19,926	$	94,031	$	19,937

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

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 2—Investment Securities—Continued

As of June 30, 2024, the Company held 181 available-for-sale securities of which 17 were in an unrealized loss position for less than twelve months and 134 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 and it is likely that the Company will not be required to sell the securities prior to their anticipated recovery, it has been determined that there is no expected credit loss. 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:

	June 30, 2024
(Dollars in thousands)	Municipal securities		Mortgage-backed securities		Collateralized Mortgage obligations		Total
Allowance for credit losses - securities
Beginning balance	$	450	$	-	$	-	$	450
Provision for credit losses		-		-		-		-
Ending Balance	$	450	$	-	$	-	$	450

	December 31, 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

The amortized cost and estimated fair values of investment securities at June 30, 2024 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	$	358	$	358	$	2,665	$	2,660
After one year through five years		19,719		19,541		18,069		17,647
After five years through ten years		5,146		4,978		19,168		17,943
After ten years		246,747		226,536		754,895		600,468
Total	$	271,970	$	251,413	$	794,797	$	638,718

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 2—Investment Securities—Continued

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 tables summarizes the amortized cost of held-to-maturity municipal securities by credit rating as of the dates indicated:

	Held-to-Maturity
	Amortized Cost
(Dollars in thousands)	AAA/AA/A		BBB/BB/B		Not Rated		Total
June 30, 2024
Municipal securities	$	19,641	$	399	$	57,171	$	77,211
Total	$	19,641	$	399	$	57,171	$	77,211

As of June 30, 2024, there were no past due principal or interest payments associated with these securities.

	Held-to-Maturity
	Amortized Cost
(Dollars in thousands)	AAA/AA/A		BBB/BB/B			Not Rated			Total
December 31, 2023
Municipal securities	$	20,203		$	395		$	58,192		$	78,790
Total	$	20,203		$	395		$	58,192		$	78,790

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

(Dollars in thousands)	Gross Proceeds		Gross Gains		Gross Losses
Six months ended June 30, 2024	$	-	$	-	$	-
Six months ended June 30, 2023	$	30,482	$	-	$	5,686

Pledged Securities

As of June 30, 2024, investment securities carried at $741.6 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) borrowings, and other government agency deposits as required by law. This amount of investments pledged was $794.1 million at December 31, 2023.

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)	June 30, 2024			December 31, 2023
Loans and leases held for investment, net
Real estate:
Commercial	$	1,363,198		$	1,323,038
Agricultural		726,128			742,009
Residential and home equity		406,562			399,982
Construction		200,673			212,362
Total real estate		2,696,561			2,677,391
Commercial & industrial		498,844			499,373
Agricultural		312,882			313,737
Commercial leases		178,252			169,684
Consumer and other		5,698			5,212
Total gross loans and leases		3,692,237			3,665,397
Unearned income		(9,867	)		(10,708	)
Total net loans and leases		3,682,370			3,654,689
Allowance for credit losses		(75,032	)		(74,965	)
Total loans and leases held for investment, net	$	3,607,338		$	3,579,724

At June 30, 2024, the portion of loans that were approved for pledging as collateral on borrowing lines with the FHLB and the Federal Reserve Bank (“FRB”) were $1.3 billion and $1.5 billion, respectively. The borrowing capacity on these loans was $810.2 million from FHLB and $1.2 billion from the FRB at June 30, 2024.

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 3—Loans and Leases

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:

	June 30, 2024
(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	$	1,355,714	$	-	$	-	$	-	$	-	$	1,355,714
Agricultural		726,128		-		-		-		-		726,128
Residential and home equity		405,814		748		-		-		748		406,562
Construction		200,673		-		-		-		-		200,673
Total real estate		2,688,329		748		-		-		748		2,689,077
Commercial & industrial		498,344		500		-		-		500		498,844
Agricultural		312,882		-		-		-		-		312,882
Commercial leases		175,695		174		-		-		174		175,869
Consumer and other		5,686		12		-		-		12		5,698
Total loans and leases, net	$	3,680,936	$	1,434	$	-	$	-	$	1,434	$	3,682,370

	December 31, 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	$	1,314,928	$	-	$	-	$	-	$	-	$	1,314,928
Agricultural		742,009		-		-		-		-		742,009
Residential and home equity		399,946		36		-		-		36		399,982
Construction		212,362		-		-		-		-		212,362
Total real estate		2,669,245		36		-		-		36		2,669,281
Commercial & industrial		499,341		32		-		-		32		499,373
Agricultural		313,737		-		-		-		-		313,737
Commercial leases		167,086		-		-		-		-		167,086
Consumer and other		5,209		3		-		-		3		5,212
Total loans and leases, net	$	3,654,618	$	71	$	-	$	-	$	71	$	3,654,689

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 3—Loans and Leases

The Company did not enter into any loan modifications with borrowers experiencing financial difficulty during the six months ended June 30, 2024. During the six months ended June 30, 2023, we had one residential real estate loan modified in the amount of $127,000 that had the contractual interest rate decreased by 1.00% and the contractual term extended by 120 months.

When borrowers are experiencing financial difficulty, the Company may agree to modify the contractual terms of a loan to a borrower in order to assist the borrower in repaying principal and interest owed to the Company. The Company’s modifications of loans to borrowers experiencing financial difficulty are generally in the form of term extensions, repayment plans, payment deferrals, forbearance agreements, interest rate reductions, forgiveness of interest and/or fees, or any combination thereof. Commercial loans modified to borrowers experiencing financial difficulty are primarily loans that are substandard or non-accrual, where the maturity date was extended and/or the modified interest rate and payment terms are not commensurate with the current market. Modifications on personal real estate loans are primarily those placed on forbearance plans, repayment plans, or deferral plans where monthly payments are suspended for a period of time or past due amounts are paid off over a certain period of time in the future or set up as a balloon payment at maturity. Modifications to certain credit card and other small consumer loans are often modified under debt counseling programs that can reduce the contractual rate or, in certain instances, forgive certain fees and interest charges. Other consumer loans modified to borrowers experiencing financial difficulty consist of various other workout arrangements with consumer customers.

There were no loans that were modified within the last 12 months that had a payment default or were past due during the six months ended June 30, 2024.

The Company assigns a risk rating to all loans and leases and periodically performs detailed reviews of all such loans and leases over a certain threshold to identify credit risks and assess overall collectability. Risk ratings can be grouped into five major categories, defined as follows:

Pass and watch — A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management’s close attention. This category also includes “Watch” loans, which is a loan with an emerging weakness in either the individual credit or industry that requires additional attention. A credit may also be classified Watch if cash flows have not yet stabilized, such as in the case of a development project.

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 3—Loans and Leases—Continued

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

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

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

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

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

	June 30, 2024
(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	$	1,352,338	$	3,376	$	-	$	-	$	1,355,714	$	22,608
Agricultural		698,104		27,478		546		-		726,128		16,486
Residential and home equity		405,738		114		710		-		406,562		7,584
Construction		200,673		-		-		-		200,673		2,165
Total real estate		2,656,853		30,968		1,256		-		2,689,077		48,843
Commercial & industrial		493,400		4,979		465		-		498,844		10,972
Agricultural		312,126		710		46		-		312,882		6,908
Commercial leases		171,099		4,770		-		-		175,869		7,597
Consumer and other		5,490		-		208		-		5,698		712
Total loans and leases, net	$	3,638,968	$	41,427	$	1,975	$	-	$	3,682,370	$	75,032

	December 31, 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	$	1,308,717	$	6,211	$	-	$	-	$	1,314,928	$	26,093
Agricultural		729,135		12,329		545		-		742,009		7,744
Residential and home equity		399,217		-		765		-		399,982		7,770
Construction		212,362		-		-		-		212,362		4,432
Total real estate		2,649,431		18,540		1,310		-		2,669,281		46,039
Commercial & industrial		486,439		12,458		476		-		499,373		13,380
Agricultural		310,496		3,236		5		-		313,737		8,872
Commercial leases		167,080		6		-		-		167,086		6,537
Consumer and other		5,036		-		176		-		5,212		137
Total loans and leases, net	$	3,618,482	$	34,240	$	1,967	$	-	$	3,654,689	$	74,965

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 net of unearned income 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 follows:

	June 30, 2024
	Term Loans Amortized Cost Basis by Origination Year
(Dollars in thousands)	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost		Revolving Loans Converted to Term		Total
Net loans and leases held for investment
Real estate:
Commercial
Pass	$	35,410	$	119,248	$	167,224	$	218,406	$	140,794	$	314,708	$	261,582	$	94,966	$	1,352,338
Special mention		-		-		1,274		-		-		601		1,470		31		3,376
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total Commercial	$	35,410	$	119,248	$	168,498	$	218,406	$	140,794	$	315,309	$	263,052	$	94,997	$	1,355,714
Commercial
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Agricultural
Pass	$	7,854	$	36,895	$	70,359	$	39,370	$	49,397	$	163,571	$	297,948	$	32,710	$	698,104
Special mention		-		-		-		-		800		10,565		16,113		-		27,478
Substandard		-		-		-		-		-		546		-		-		546
Doubtful		-		-		-		-		-		-		-		-		-
Total Agricultural	$	7,854	$	36,895	$	70,359	$	39,370	$	50,197	$	174,682	$	314,061	$	32,710	$	726,128
Agricultural
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Residential and home equity
Pass	$	18,275	$	40,366	$	60,423	$	85,899	$	76,417	$	78,090	$	46,196	$	72	$	405,738
Special mention		-		-		-		-		-		114		-		-		114
Substandard		-		-		-		-		-		710		-		-		710
Doubtful		-		-		-		-		-		-		-		-		-
Total Residential and home equity	$	18,275	$	40,366	$	60,423	$	85,899	$	76,417	$	78,914	$	46,196	$	72	$	406,562
Residential and home equity
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Construction
Pass	$	5,799	$	-	$	1,500	$	-	$	-	$	1,576	$	191,798	$	-	$	200,673
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total construction	$	5,799	$	-	$	1,500	$	-	$	-	$	1,576	$	191,798	$	-	$	200,673
Construction
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Total Real estate	$	67,338	$	196,509	$	300,780	$	343,675	$	267,408	$	570,481	$	815,107	$	127,779	$	2,689,077

Commercial & industrial
Pass	$	16,131	$	43,309	$	23,956	$	19,431	$	5,506	$	8,150	$	349,189	$	27,728	$	493,400
Special mention		-		2,281		24		19		-		-		2,623		32		4,979
Substandard		-		-		-		38		-		427		-		-		465
Doubtful		-		-		-		-		-		-		-		-		-
Total Commercial & industrial	$	16,131	$	45,590	$	23,980	$	19,488	$	5,506	$	8,577	$	351,812	$	27,760	$	498,844
Commercial & industrial
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 3—Loans and Leases—Continued

	June 30, 2024
	Term Loans Amortized Cost Basis by Origination Year
(Dollars in thousands)	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost		Revolving Loans Converted to Term		Total
Net loans and leases held for investment
Agricultural
Pass	$	1,212	$	3,668	$	3,926	$	1,967	$	522	$	2,650	$	283,272	$	14,909	$	312,126
Special mention		-		-		48		-		-		-		619		43		710
Substandard		-		-		-		-		-		2		44		-		46
Total Agricultural	$	1,212	$	3,668	$	3,974	$	1,967	$	522	$	2,652	$	283,935	$	14,952	$	312,882
Agricultural
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Commercial leases
Pass	$	19,978	$	78,190	$	24,534	$	9,465	$	8,634	$	30,298	$	-	$	-	$	171,099
Special mention		583		-		4,187		-		-		-		-		-		4,770
Substandard		-		-		-		-		-		-		-		-		-
Total Commercial leases	$	20,561	$	78,190	$	28,721	$	9,465	$	8,634	$	30,298	$	-	$	-	$	175,869
Commercial leases
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Consumer and other
Pass	$	684	$	1,483	$	728	$	181	$	27	$	1,596	$	791	$	-	$	5,490
Special mention		-		-		-		-		-		-		-		-		-
Substandard		188		-		-		-		-		20		-		-		208
Total Consumer and other	$	872	$	1,483	$	728	$	181	$	27	$	1,616	$	791	$	-	$	5,698
Consumer and other
Current-period gross charge-offs	$	26	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	26
Total net loans and leases
Pass	$	105,343	$	323,159	$	352,650	$	374,719	$	281,297	$	600,639	$	1,430,776	$	170,385	$	3,638,968
Special mention		583		2,281		5,533		19		800		11,280		20,825		106		41,427
Substandard		188		-		-		38		-		1,705		44		-		1,975
Total net loans and leases	$	106,114	$	325,440	$	358,183	$	374,776	$	282,097	$	613,624	$	1,451,645	$	170,491	$	3,682,370
Total current-period gross charge-offs	$	26	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	26

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 3—Loans and Leases—Continued

	December 31, 2023
	Term Loans Amortized Cost Basis by Origination Year
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost		Revolving Loans Converted to Term		Total
Net loans and leases held for investment
Real estate:
Commercial
Pass	$	121,418	$	169,171	$	221,708	$	143,502	$	67,505	$	261,344	$	249,087	$	74,982	$	1,308,717
Special mention		-		2,395		-		-		-		2,216		1,600		-		6,211
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total Commercial	$	121,418	$	171,566	$	221,708	$	143,502	$	67,505	$	263,560	$	250,687	$	74,982	$	1,314,928
Commercial
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Agricultural
Pass	$	37,849	$	71,367	$	40,848	$	50,445	$	12,008	$	165,267	$	328,105	$	23,246	$	729,135
Special mention		-		-		-		594		2,020		9,715		-		-		12,329
Substandard		-		-		-		-		-		545		-		-		545
Doubtful		-		-		-		-		-		-		-		-		-
Total Agricultural	$	37,849	$	71,367	$	40,848	$	51,039	$	14,028	$	175,527	$	328,105	$	23,246	$	742,009
Agricultural
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Residential and home equity
Pass	$	41,173	$	62,505	$	88,559	$	78,810	$	13,299	$	70,339	$	44,463	$	69	$	399,217
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		765		-		-		765
Doubtful		-		-		-		-		-		-		-		-		-
Total Residential and home equity	$	41,173	$	62,505	$	88,559	$	78,810	$	13,299	$	71,104	$	44,463	$	69	$	399,982
Residential and home equity
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	14	$	-	$	-	$	14

Construction
Pass	$	-	$	2,500	$	-	$	-	$	1,575	$	-	$	208,287	$	-	$	212,362
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total construction	$	-	$	2,500	$	-	$	-	$	1,575	$	-	$	208,287	$	-	$	212,362
Construction
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Total Real estate	$	200,440	$	307,938	$	351,115	$	273,351	$	96,407	$	510,191	$	831,542	$	98,297	$	2,669,281

Commercial & industrial
Pass	$	49,162	$	25,795	$	21,695	$	7,193	$	4,123	$	6,674	$	352,502	$	19,295	$	486,439
Special mention		2,500		27		4,903		466		-		-		4,519		43		12,458
Substandard		-		-		-		-		-		476		-		-		476
Doubtful		-		-		-		-		-		-		-		-		-
Total Commercial & industrial	$	51,662	$	25,822	$	26,598	$	7,659	$	4,123	$	7,150	$	357,021	$	19,338	$	499,373
Commercial & industrial
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 3—Loans and Leases—Continued

	December 31, 2023
	Term Loans Amortized Cost Basis by Origination Year
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost		Revolving Loans Converted to Term		Total
Net loans and leases held for investment
Agricultural
Pass	$	3,013	$	4,585	$	2,296	$	688	$	1,026	$	2,116	$	292,391	$	4,381	$	310,496
Special mention		-		52		75		-		-		-		3,109		-		3,236
Substandard		-		-		-		-		5		-		-		-		5
Total Agricultural	$	3,013	$	4,637	$	2,371	$	688	$	1,031	$	2,116	$	295,500	$	4,381	$	313,737
Agricultural
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Commercial leases
Pass	$	81,287	$	31,954	$	10,786	$	9,514	$	4,667	$	28,872	$	-	$	-	$	167,080
Special mention		-		-		-		-		6		-		-		-		6
Substandard		-		-		-		-		-		-		-		-		-
Total Commercial leases	$	81,287	$	31,954	$	10,786	$	9,514	$	4,673	$	28,872	$	-	$	-	$	167,086
Commercial leases
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Consumer and other
Pass	$	1,650	$	930	$	375	$	48	$	45	$	1,400	$	588	$	-	$	5,036
Special mention		-		-		-		-		-		-		-		-		-
Substandard		152		-		-		-		-		24		-		-		176
Total Consumer and other	$	1,802	$	930	$	375	$	48	$	45	$	1,424	$	588	$	-	$	5,212
Consumer and other
Current-period gross charge-offs	$	41	$	3	$	-	$	-	$	-	$	2	$	-	$	-	$	46
Total net loans and leases
Pass	$	335,552	$	368,807	$	386,267	$	290,200	$	104,248	$	536,012	$	1,475,423	$	121,973	$	3,618,482
Special mention		2,500		2,474		4,978		1,060		2,026		11,931		9,228		43		34,240
Substandard		152		-		-		-		5		1,810		-		-		1,967
Total net loans and leases	$	338,204	$	371,281	$	391,245	$	291,260	$	106,279	$	549,753	$	1,484,651	$	122,016	$	3,654,689
Total current-period gross charge-offs	$	41	$	3	$	-	$	-	$	-	$	16	$	-	$	-	$	60

Certain directors and executive officers of the Company are defined as related parties. These related parties, including their immediate families and companies in which they are principal owners, were loan customers of the Bank during the six months ended June 30, 2024 and year ended December 31, 2023. 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 collectibility or have other unfavorable features. A summary of the changes in those loans is as follows:

	June 30,			December 31,
(Dollars in thousands)	2024			2023

Balance at beginning of the period	$	17,035		$	17,521
New loans or advances during year		250			1,706
Repayments		(1,626	)		(2,192	)
Balance at end of period	$	15,659		$	17,035

Table of Contents

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 allowance for credit losses. During the six months ended June 30, 2024, there were no significant changes to the collateral that secures the collateral dependent loans, whether due to general deterioration or with credit quality indicators like appraisal value. The following tables present the amortized cost basis for collateral dependent loans and leases by type as of June 30, 2024 and December 31, 2023, respectively:

	June 30, 2024
(Dollars in thousands)	Real Estate		Vehicles and Equipment		Total
Collateral dependent loans and leases
Real estate:
Commercial	$	-	$	-	$	-
Agricultural		546		-		546
Residential and home equity		710		-		710
Construction		-		-		-
Total real estate		1,256		-		1,256
Commercial & industrial		-		427		427
Agricultural		-		83		83
Commercial leases		-		-		-
Consumer and other		-		21		21
Total gross loans and leases	$	1,256	$	531	$	1,787

	December 31, 2023
(Dollars in thousands)	Real Estate		Vehicles and Equipment		Total
Collateral dependent loans and leases
Real estate:
Commercial	$	1,517	$	-	$	1,517
Agricultural		6,118		-		6,118
Residential and home equity		1,607		-		1,607
Construction		-		-		-
Total real estate		9,242		-		9,242
Commercial & industrial		-		473		473
Agricultural		-		5		5
Commercial leases		-		-		-
Consumer and other		-		164		164
Total gross loans and leases	$	9,242	$	642	$	9,884

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 3—Loans and Leases—Continued

Allowance for Credit Losses

The allowance for credit losses (“ACL”) is the combination of the allowance for credit losses for loan and lease losses and the allowance for credit losses for unfunded loan commitments. The ACL for unfunded loan commitments is included within “Interest payable and other liabilities” on the consolidated balance sheets.

The following tables present a summary of the activity in the ACL for loan and lease losses and ACL for unfunded loan commitments for the periods indicated:

	For the Three Months Ended June 30,
	2024								2023
(Dollars in thousands)	ACL for Loans and Leases			ACL for Unfunded Commitments		Allowance for Credit Losses			ACL for Loans and Leases			ACL for Unfunded Commitments		Allowance for Credit Losses
Balance at beginning of period	$	75,018		$	3,690	$	78,708		$	68,573		$	2,090	$	70,663
Provision for/(reversal of) credit losses		-			-		-			2,500			-		2,500
Charge-offs		(16	)		-		(16	)		(9	)		-		(9	)
Recoveries		30			-		30			48			-		48
Net (charge-offs)/recoveries		14			-		14			39			-		39
Balance at end of period	$	75,032		$	3,690	$	78,722		$	71,112		$	2,090	$	73,202

	For the Six Months Ended June 30,
	2024								2023
(Dollars in thousands)	ACL for Loans and Leases			ACL for Unfunded Commitments		Allowance for Credit Losses			ACL for Loans and Leases			ACL for Unfunded Commitments		Allowance for Credit Losses
Balance at beginning of period	$	74,965		$	3,690	$	78,655		$	66,885		$	2,090	$	68,975
Provision for/(reversal of) credit losses		-			-		-			4,000			-		4,000
Charge-offs		(26	)		-		(26	)		(32	)		-		(32	)
Recoveries		93			-		93			259			-		259
Net (charge-offs)/recoveries		67			-		67			227			-		227
Balance at end of period	$	75,032		$	3,690	$	78,722		$	71,112		$	2,090	$	73,202

Changes in the allowance for credit losses on loans and leases are as follows:

	For the Three Months Ended June 30, 2024
(Dollars in thousands)	Commercial & Agricultural R/E		Construction			Residential & Home Equity			Commercial & Agricultural			Commercial Leases		Consumer & Other			Total
ACL for loans and leases:
Balance at beginning of period	$	33,791	$	4,616		$	7,721		$	21,851		$	6,923	$	116		$	75,018
Provision for/(reversal of) credit losses		5,303		(2,451	)		(144	)		(3,991	)		674		609			-
Charge-offs		-		-			-			-			-		(16	)		(16	)
Recoveries		-		-			7			20			-		3			30
Net (charge-offs)/recoveries		-		-			7			20			-		(13	)		14
Balance at end of period	$	39,094	$	2,165		$	7,584		$	17,880		$	7,597	$	712		$	75,032

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

	For the Six Months Ended June 30, 2024
(Dollars in thousands)	Commercial & Agricultural R/E		Construction			Residential & Home Equity			Commercial & Agricultural			Commercial Leases		Consumer & Other			Total
ACL for loans and leases:
Balance at beginning of period	$	33,837	$	4,432		$	7,770		$	22,252		$	6,537	$	137		$	74,965
Provision for/(reversal of) credit losses		5,257		(2,267	)		(201	)		(4,410	)		1,060		561			-
Charge-offs		-		-			-			-			-		(26	)		(26	)
Recoveries		-		-			15			38			-		40			93
Net (charge-offs)/recoveries		-		-			15			38			-		14			67
Balance at end of period	$	39,094	$	2,165		$	7,584		$	17,880		$	7,597	$	712		$	75,032

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

Table of Contents

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)	June 30, 2024		December 31, 2023
Certificates of deposit:
Certificates of deposit less than or equal to $250,000	$	352,761	$	325,798
Certificates of deposit greater than $250,000		400,733		318,830
Total certificates of deposit	$	753,494	$	644,628

Scheduled maturities for certificates of deposit are as follows:

(Dollars in thousands)	Amount
2024	$	504,263
2025		240,066
2026		6,347
2027		1,741
2028		946
Thereafter		131
Total certificates of deposit	$	753,494

Note 5—Short-term borrowings

As of June 30, 2024 and December 31, 2023, committed lines of credit arrangements totaling $2.1 billion and $2.2 billion, respectively, were available to the Company from unaffiliated banks. The average Federal Funds interest rate as of June 30, 2024 was 5.50%.

The Company is a member of the FHLB of San Francisco and has a committed credit line of $811.8 million, which is secured by $1.0 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 5.63% as of June 30, 2024.

The Company has $1.5 billion in pledged loans with the FRB. As of June 30, 2024, the Company’s overnight borrowing capacity using the primary credit facilities from the Fed account was $1.2 billion. The borrowing rate was 5.50% as of June 30, 2024.

There were no outstanding advances on the above borrowing facilities as of June 30, 2024 or December 31, 2023.

Table of Contents

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 the Internal Revenue Service. The ERP is comprised of: (1) a Performance Component which makes contributions based upon long-term cumulative profitability and increase in market value of the Company; (2) a Salary Component which makes contributions based upon participant salary levels; and (3) an Equity Component for which contributions are discretionary and subject to Board of Directors approval. The Company maintains a Rabbi Trust to fund, in part, the ERP. The Rabbi Trust is an irrevocable grantor trust to which the Company may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. The Company may not use the assets of the Rabbi Trust for any purpose other than meeting its obligations under the ERP; however, the assets of the Rabbi Trust remain subject to the claims of its creditors and are included in the consolidated financial statements. The Company contributes cash to the Rabbi Trust from time to time for the sole purpose of funding the ERP. The Rabbi Trust will use any cash the Company contributes to purchase shares of common stock of the Company, and other financial instruments, on the open market. ERP contributions are invested in a mix of financial instruments; however, the Equity Component contributions are invested primarily in common stock of the Company.

The Company expensed $4.5 million to the ERP during the six months ended June 30, 2024 and $4.5 million during the six months ended June 30, 2023. The Company’s carrying value of the liability under the ERP was $58.8 million as of June 30, 2024 and $57.5 million as of December 31, 2023, which is included in other liabilities on the balance sheet. The Company’s shares of common stock held as investments in the Rabbi Trust of the ERP as of June 30, 2024 and December 31, 2023 totaled 49,447 and 49,276 with an historical cost basis of $31.8 million and $31.6 million, respectively. All amounts have been fully funded into the Rabbi Trust as of June 30, 2024 and December 31, 2023. 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 $1.3 million and $1.8 million at June 30, 2024 and 2023, 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 the Internal Revenue Service. All contributions are discretionary and subject to the Board of Directors approval. The Company maintains a Rabbi Trust to fund, in part, the SMRP. The Rabbi Trust is an irrevocable grantor trust to which the Company may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. The Company may not use the assets of the Rabbi Trust for any purpose other than meeting its obligations under the SMRP; however, the assets of the Rabbi Trust remain subject to the claims of its creditors and are included in the consolidated financial statements. The Company contributes cash to the Rabbi Trust from time to time for the sole purpose of funding the SMRP. The Rabbi Trust will use any cash the Company contributes to purchase shares of common stock of the Company, and other financial instruments, on the open market. Contributions to the SMRP are invested primarily in common stock of the Company.

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 6—Employee Benefit Plans—Continued

The Company expensed $2.3 million to the SMRP during the six months ended June 30, 2024 and $2.1 million for six months ended June 30, 2023. The Company’s carrying value of the liability under the SMRP was $19.0 million as of June 30, 2024 and $16.9 million as of December 31, 2023, which is included in other liabilities on the balance sheet. The Company’s shares of stock held as investments in the Rabbi Trust of the SMRP as of June 30, 2024 and December 31, 2023 totaled 19,663 and 17,806 shares with an historical cost basis of $14.7 million and $12.8 million, respectively. All amounts have been fully funded into the Rabbi Trust as of June 30, 2024 and December 31, 2023. 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 $0.2 million and $0.4 million at June 30, 2024 and 2023, 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.

Note 7—Fair Value

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.

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 7—Fair Value—Continued

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

Securities classified as available-for-sale are reported at fair value on a recurring basis utilizing Level 1, 2 and 3 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

The Company does not record all loans and leases at fair value on a recurring basis. However, from time to time, a loan or lease is considered collateral dependent and an allowance for credit losses is established. Once a loan or lease is identified as collaterally dependent, management measures an allowance for credit losses in accordance FASB ASC Topic 326.

These appraisals may utilize a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take into account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 non-recurring collateral dependent loans is primarily the sales comparison approach less estimated selling costs.

Other Real Estate Owned (“OREO”) is reported at fair value on a non-recurring basis. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take into account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 non-recurring OREO is primarily the sales comparison approach less estimated selling costs.

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 7—Fair Value—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.

June 30, 2024			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	$	2,882	$	-	$	2,882	$	-	$	2,882
Mortgage-backed securities		227,863		-		227,863		-		227,863
Collateralized mortgage obligations		5,606		-		5,606		-		5,606
Corporate securities		14,752		-		14,752		-		14,752
Other		310		-		310		-		310

Fair valued on a non-recurring basis:
Collateral dependent loans	$	1,787	$	-	$	-	$	1,787	$	1,787
Other real estate owned		873		-		-		873		873

December 31, 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	$	3,224	$	-	$	3,224	$	-	$	3,224
Mortgage-backed securities		163,838		-		163,838		-		163,838
Collateralized mortgage obligations		535		-		535		-		535
Corporate securities		14,605		-		14,605		-		14,605
Other		310		-		310		-		310

Fair valued on a non-recurring basis:
Collateral dependent loans	$	9,884	$	-	$	-	$	9,884	$	9,884
Other real estate owned		873		-		-		873		873

Collateral dependent loans

While the overall loan portfolio is not carried at fair value, the Company periodically records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral dependent loans when establishing the allowance for credit losses on loans. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. In determining the value of real estate collateral, the Company relies on external and internal appraisals of property values depending on the size and complexity of the real estate collateral. The Company maintains a list of qualified property appraisers who review appraisal reports for reasonableness. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists. Values of all loan collateral are regularly reviewed by credit administration. Unobservable inputs to these measurements, which include estimates and judgments often used in conjunction with appraisals, are not readily quantifiable. These measurements are classified as Level 3.

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 7—Fair Value—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.

June 30, 2024			Fair Value Measurements
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Financial Assets:
Cash and cash equivalents	$	295,936	$	295,936	$	-	$	-	$	295,936
Held-to-maturity securities		794,347		-		581,547		57,171		638,718
Non-marketable securities, at cost		15,549		-		15,549		-		15,549
Loans and leases, net		3,607,338		-		-		3,397,796		3,397,796

Financial Liabilities:
Total deposits	$	4,597,055	$	-	$	4,591,397	$	-	$	4,591,397
Subordinated debentures		10,310		-		12,589		-		12,589

December 31, 2023			Fair Value Measurements
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Financial Assets:
Cash and cash equivalents	$	410,642	$	410,642	$	-	$	-	$	410,642
Held-to-maturity securities		817,238		-		613,393		58,192		671,585
Non-marketable securities, at cost		15,549		-		15,549		-		15,549
Loans and leases, net		3,579,724		-		-		3,369,255		3,369,255

Financial Liabilities:
Total deposits	$	4,668,095	$	-	$	4,662,782	$	-	$	4,662,782
Subordinated debentures		10,310		-		12,763		-		12,763

Non-marketable securities include FHLB stock, Pacific Coast Bankers’ Bank (“PCBB’’) stock and The Independent BankersBank (“TIB’’) stock which are recorded at cost. Ownership of these stocks is restricted to member banks. Purchases and sales of these securities are at par value with the issuer. The fair value of these investments is equal to the carrying amount.

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 8—Commitments and Contingencies

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

(Dollars in thousands)	June 30, 2024		December 31, 2023

Commitments to extend credit, including unsecured commitments of $20,391 and $19,858
as of June 30, 2024 and December 31, 2023, respectively	$	1,002,071	$	1,150,142
Stand-by letters of credit, including unsecured commitments of $4,585 and $7,010
as of June 30, 2024 and December 31, 2023, respectively		15,082		16,858

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 allowance for credit losses for unfunded loan commitments, which amounted $3.7 million at June 30, 2024 and December 31, 2023.

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 October 2028. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

The Company has commitments to fund investments in LIHTC partnerships and limited liability companies. At June 30, 2024 and December 31, 2023, the balance of the investments in LIHTC was $40.6 million and $36.5 million, respectively. These balances are reflected in the other assets line on the consolidated balance sheets. Total unfunded commitments related to the investments in LIHTC totaled $16.8 million and $15.5 million at June 30, 2024 and December 31, 2023, respectively. These balances are reflected in the other liabilities line on the consolidated balance sheets. The Company expects to fulfill these commitments through 2041. Additionally, during the six months ended June 30, 2024 and the year ended December 31, 2023, the Company recognized tax credits from its investments in LIHTC of $1.3 million and $3.6 million, respectively.

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 FRB primarily based on deposits outstanding. Reserve requirements are offset by the Company’s vault cash and deposit balances maintained with the FRB.

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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, 2023 (“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 negative events in the banking industry in the past year, and any legislative and/or bank regulatory actions, that could potentially impact earnings, liquidity and/or the availability of capital or which could increase the cost of our deposit insurance by the FDIC;

■	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 real estate loan portfolio;

■	legislative or regulatory changes or changes in accounting principles, policies or guidelines;

■	technological changes;

■	operational risks, including processing, information systems, cybersecurity, vendor problems, business interruption, and fraud;

■	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, 2023.

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).

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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 Federal Reserve 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 was organized and incorporated in 1916 under the laws of the State of California as a non-Federal Reserve member, California state-chartered bank subject to primary regulation, supervision and examination by the Federal Deposit Insurance Corporation (“FDIC”) and by the DFPI. The Bank serves its customers through 32 convenient locations including 29 full-service branches in Galt, Linden, Manteca, Riverbank, Modesto, Sacramento, Elk Grove, Turlock, Hilmar, Stockton, Merced, Walnut Creek, Concord, Walnut Grove, Oakland and Napa.

The Company’s outstanding common stock as of June 30, 2024, consisted of 739,308 shares of common stock, $0.01 par value and no shares of preferred stock were issued or outstanding as of June 30, 2024. 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, short-term investments and interest bearing deposits at other banks, 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, return on average equity and the efficiency ratio. 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 return on average assets is calculated by dividing the Company’s net income by its total average assets and the return on average equity is calculated by dividing the Company’s net income by its shareholder equity. The efficiency ratio 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.

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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	June 30,			December 31,			June 30,
Tangible Book Value Per Common Share	2024			2023			2023
(Dollars in thousands, except per share data)
Shareholders’ equity	$	576,220		$	549,755		$	514,709
Less: Intangible assets		13,145			13,419			13,705
Tangible common equity	$	563,075		$	536,336		$	501,004

Total Assets	$	5,267,485		$	5,308,928		$	5,250,378
Less: Intangible assets		13,145			13,419			13,705
Tangible assets	$	5,254,340		$	5,295,509		$	5,236,673

Tangible common equity ratio⁽¹⁾		10.72	%		10.13	%		9.57	%
Book Value per common share⁽²⁾	$	779.40		$	735.00		$	682.16
Tangible book value per common share⁽³⁾	$	761.62		$	717.05		$	664.00
Common shares oustanding		739,308			747,971			754,523

⁽¹⁾	Tangible common equity divided by tangible assets.

⁽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 the Company’s and its subsidiaries’ performance during each of the three and six month periods ended June 30, 2024 and 2023 and the material changes in financial condition, operating income, and expense of the Company and its subsidiaries as shown in the accompanying unaudited consolidated financial statements. Information related to the comparison of the results of operations for the years ended December 31, 2023, and 2022 can be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2023 Annual Report on Form 10-K filed with the SEC on March 14, 2024.

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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, deposit insurance, marketing, professional services, and other expenses.

Earnings Performance

The following table presents performance metrics for the periods indicated:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollars in thousands, except per share amounts)	2024			2023			2024			2023
Earnings Summary:
Interest income	$	69,831		$	61,017		$	136,472		$	120,649
Interest expense		19,050			8,595			33,978			12,505
Net interest income		50,781			52,422			102,494			108,144
Provision for credit losses		-			2,557			-			4,057
Noninterest income		4,767			5,447			9,842			8,907
Noninterest expense		25,422			26,822			50,943			55,005
Income before taxes		30,126			28,490			61,393			57,989
Income tax expense		8,359			7,182			16,903			13,134
Net Income	$	21,767		$	21,308		$	44,490		$	44,855

Per Common Share Data:
Diluted earnings per common share	$	29.39		$	28.03		$	59.95		$	58.83
Book value per common share	$	779.40		$	682.16		$	779.40		$	682.16
Tangible book value per common share⁽¹⁾	$	761.62		$	664.00		$	761.62		$	664.00

Performance Ratios:
Return on average assets		1.58	%		1.65	%		1.65	%		1.73	%
Return on average equity		15.33	%		16.60	%		15.82	%		17.75	%
Net interest margin (tax equivalent)		3.91	%		4.28	%		4.02	%		4.41	%
Yield on average loans and leases (tax equivalent)		6.13	%		5.75	%		6.11	%		5.72	%
Cost of average total deposits		1.51	%		0.74	%		1.39	%		0.53	%
Efficiency ratio		45.77	%		46.35	%		45.35	%		46.99	%
Loan-to-deposit ratio		80.32	%		75.50	%		80.32	%		75.50	%
Percentage of checking deposits to total deposits		48.60	%		52.09	%		48.60	%		52.09	%

Capital Ratios Bancorp:
Common equity tier 1 capital to risk-weighted assets		13.09	%		12.22	%		13.09	%		12.22	%
Tier 1 capital to risk-weighted assets		13.32	%		12.46	%		13.32	%		12.46	%
Risk-based capital to risk-weighted assets		14.58	%		13.71	%		14.58	%		13.71	%
Tier 1 leverage capital ratio		10.66	%		10.21	%		10.66	%		10.21	%
Tangible common equity ratio⁽¹⁾		10.72	%		9.57	%		10.72	%		9.57	%

⁽¹⁾	See “Non-GAAP Measurements”

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Average Balance and Yields

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

	Three Months Ended June 30,
	2024									2023
(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	$	456,650		$	6,217			5.48	%	$	458,927		$	5,882			5.14	%
Investment securities:⁽¹⁾
Taxable securities		1,013,576			6,485			2.56	%		923,063			4,626			2.00	%
Non-taxable securities⁽²⁾		62,354			760			4.88	%		61,576			713			4.63	%
Total investment securities		1,075,930			7,245			2.69	%		984,639			5,339			2.17	%
Loans:⁽³⁾
Real estate:
Commercial		1,348,293			17,971			5.36	%		1,307,376			16,744			5.14	%
Agricultural		725,206			10,439			5.79	%		718,094			9,762			5.45	%
Residential and home equity		405,623			4,895			4.85	%		390,416			4,267			4.38	%
Construction		221,748			3,981			7.22	%		161,992			2,928			7.25	%
Total real estate		2,700,870			37,286			5.55	%		2,577,878			33,701			5.24	%
Commercial & industrial		487,082			9,147			7.55	%		475,472			8,346			7.04	%
Agricultural		318,660			6,580			8.30	%		281,321			5,613			8.00	%
Commercial leases		176,941			3,072			6.98	%		126,158			1,947			6.19	%
Consumer and other		5,728			105			7.37	%		5,531			83			6.02	%
Total loans and leases		3,689,281			56,190			6.13	%		3,466,360			49,690			5.75	%
Non-marketable securities		15,549			333			8.61	%		15,549			255			6.58	%
Total interest earning assets		5,237,410			69,985			5.37	%		4,925,475			61,166			4.98	%
Allowance for credit losses		(75,617	)								(69,800	)
Non-interest earning assets		349,942									313,671
Total average assets	$	5,511,735								$	5,169,346

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing deposits:
Demand	$	952,526			1,904			0.80	%	$	941,500			444			0.19	%
Savings and money market accounts		1,615,531			7,709			1.92	%		1,624,285			5,153			1.27	%
Certificates of deposit greater than $250,000		477,791			3,573			3.01	%		227,958			1,655			2.91	%
Certificates of deposit less than $250,000		367,401			4,720			5.17	%		261,372			1,139			1.75	%
Total interest bearing deposits		3,413,249			17,906			2.11	%		3,055,115			8,391			1.10	%
Short-term borrowings		62,637			924			5.93	%		-			-			0.00	%
Subordinated debentures		10,310			220			8.58	%		10,310			204			7.94	%
Total interest bearing liabilities		3,486,196			19,050			2.20	%		3,065,425			8,595			1.12	%
Non-interest bearing deposits		1,368,279									1,506,145
Total funding		4,854,475			19,050			1.58	%		4,571,570			8,595			0.75	%
Other non-interest bearing liabilities		89,288									84,454
Shareholders’ equity		567,972									513,322
Total average liabilities and shareholders’ equity	$	5,511,735								$	5,169,346

Net interest income and margin⁽⁴⁾				$	50,935			3.91	%				$	52,571			4.28	%
Interest rate spread								3.18	%								3.86	%
Tax equivalent adjustment					(154	)								(149	)
Net interest income				$	50,781			3.90	%				$	52,422			4.27	%

⁽¹⁾	Excludes average unrealized losses of $23.4 million and $22.5 million for the three months ended June 30, 2024, and 2023, respectively, which are included in non-interest earning assets.

⁽²⁾	Yields and interest income are calculated on a fully taxable equivalent basis using the current statutory federal tax rate of 21%.

⁽³⁾	Loan interest income includes loan fees of $1.4 million and $1.3 million for the three months ended June 30, 2024 and 2023, respectively.

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

Table of Contents

	For the Six Months Ended June 30,
	2024									2023
(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	$	394,612		$	10,747			5.48	%	$	489,865		$	11,843			4.88	%
Investment securities:⁽¹⁾
Taxable securities		991,405			12,193			2.46	%		945,258			9,431			2.00	%
Non-taxable securities⁽²⁾		62,717			1,522			4.85	%		59,556			1,417			4.76	%
Total investment securities		1,054,122			13,715			2.60	%		1,004,814			10,848			2.16	%
Loans:⁽³⁾
Real estate:
Commercial		1,335,315			35,593			5.36	%		1,293,712			33,393			5.21	%
Agricultural		725,142			20,761			5.76	%		716,921			19,376			5.45	%
Residential and home equity		403,600			9,687			4.83	%		388,901			8,362			4.34	%
Construction		223,589			7,879			7.09	%		166,428			5,865			7.11	%
Total real estate		2,687,646			73,920			5.53	%		2,565,962			66,996			5.27	%
Commercial & industrial		493,077			18,408			7.51	%		470,498			15,970			6.84	%
Agricultural		316,157			13,059			8.31	%		280,896			10,817			7.77	%
Commercial leases		172,733			6,018			7.01	%		121,579			3,752			6.22	%
Consumer and other		5,673			193			6.84	%		5,555			163			5.92	%
Total loans and leases		3,675,286			111,598			6.11	%		3,444,490			97,698			5.72	%
Non-marketable securities		15,549			721			9.32	%		15,549			556			7.21	%
Total interest earning assets		5,139,569			136,781			5.35	%		4,954,718			120,945			4.92	%
Allowance for credit losses		(75,533	)								(68,752	)
Non-interest earning assets		343,811									311,891
Total average assets	$	5,407,847								$	5,197,857

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing deposits:
Demand	$	933,572			2,792			0.60	%	$	1,004,651			888			0.18	%
Savings and money market accounts		1,617,105			14,895			1.85	%		1,593,158			7,656			0.97	%
Certificates of deposit greater than $250,000		426,878			7,410			3.49	%		188,053			2,142			2.30	%
Certificates of deposit less than $250,000		354,090			7,454			4.23	%		233,945			1,419			1.22	%
Total interest bearing deposits		3,331,645			32,551			1.96	%		3,019,807			12,105			0.81	%
Short-term borrowings		34,067			986			5.82	%		1			-			0.00	%
Subordinated debentures		10,310			441			8.60	%		10,310			400			7.82	%
Total interest bearing liabilities		3,376,022			33,978			2.02	%		3,030,118			12,505			0.83	%
Non-interest bearing deposits		1,385,832									1,584,215
Total funding		4,761,854			33,978			1.43	%		4,614,333			12,505			0.55	%
Other non-interest bearing liabilities		83,651									78,150
Shareholders’ equity		562,342									505,374
Total average liabilities and shareholders’ equity	$	5,407,847								$	5,197,857

Net interest income and margin⁽⁴⁾				$	102,803			4.02	%				$	108,440			4.41	%
Interest rate spread								3.33	%								4.09	%
Tax equivalent adjustment					(309	)								(296	)
Net interest income				$	102,494			4.01	%				$	108,144			4.40	%

⁽¹⁾	Excludes average unrealized losses of $20.9 million and $25.3 million for the six months ended June 30, 2024, and 2023, respectively, which are included in non-interest earning assets.

⁽²⁾	Yields and interest income are calculated on a fully taxable equivalent basis using the current statutory federal tax rate of 21%.

⁽³⁾	Loan interest income includes loan fees of $2.8 million and $3.3 million for the six months ended June 30, 2024 and 2023, respectively.

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

Table of Contents

Second Quarter 2024 vs. Second Quarter 2023

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 5.48% and 5.14% for the second quarter of 2024 and 2023, respectively. The increase was primarily the result of the Federal Reserve increasing rates by 50 basis points during the second quarter of 2023. Average interest-bearing deposits with banks were $456.7 million and $458.9 million for the quarter ended June 30, 2024 and 2023, respectively. Interest income on interest-bearing deposits with banks was $6.2 million and $5.9 million for the quarter ended June 30, 2024 and 2023, 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 $1.1 billion and $984.6 million for the quarter ended June 30, 2024 and 2023, respectively. The average yield on total investment securities was 2.69% and 2.17% for the quarter ended June 30, 2024 and 2023, respectively.

Average loans and leases held for investment were $3.7 billion and $3.5 billion for the quarter ended June 30, 2024 and 2023, respectively. The average yield on the loan and lease portfolio was 6.13% and 5.75% for the quarter ended June 30, 2024 and 2023, respectively. The increase in the loan yield reflects the increase in market interest rates over the last year.

Average interest-bearing deposits were $3.4 billion and $3.1 billion for the quarter ended June 30, 2024 and 2023, respectively. The average rate paid on interest-bearing deposits was 2.11% and 1.10% for the quarter ended June 30, 2024 and 2023, respectively. Total interest expense on interest-bearing deposits was $17.9 million and $8.4 million for the quarter ended June 30, 2024 and 2023, respectively, with the increases driven by increases in short-term market interest rates during the second quarter of 2023 and customers seeking higher rates on deposit products. The average rate paid on total funding costs was 1.58% and 0.75% for the quarter ended June 30, 2024 and 2023, respectively.

Six Months Ended June 30, 2024 vs. Six Months Ended June 30, 2023

Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 5.48% and 4.88% for the first six months ended of 2024 and 2023, respectively. The increase was primarily the result of the Federal Reserve increasing rates by 100 basis points during the first six months of 2023. Average interest-bearing deposits with banks were $394.6 million and $489.9 million for the six months ended June 30, 2024 and 2023, respectively. Interest income on interest-bearing deposits with banks was $10.7 million and $11.8 million for the six months ended June 30, 2024 and 2023, respectively.

Average total investment securities were $1.1 billion and $1.0 billion for the six months ended June 30, 2024 and 2023, respectively. The average yield on total investment securities was 2.60% and 2.16% for the six months ended June 30, 2024 and 2023, respectively. The increase in the yield reflects the increase in yields on purchases over the last year.

Average loans and leases held for investment were $3.7 billion and $3.4 billion for the six months ended June 30, 2024 and 2023, respectively. The average yield on the loan and lease portfolio was 6.11% and 5.72% for the six months ended June 30, 2024 and 2023, respectively. The increase in the loan yield reflects the increase in market interest rates over the last year.

Table of Contents

Average interest-bearing deposits were $3.3 billion and $3.0 billion for the six months ended June 30, 2024 and 2023, respectively. The average rate paid on interest-bearing deposits was 1.96% and 0.81% for the six months ended June 30, 2024 and 2023, respectively. Total interest expense on interest-bearing deposits was $32.6 million and $12.1 million for the six months ended June 30, 2024 and 2023, respectively, with the increases driven by increases in short-term market interest rates during the first six months of 2023 and customers seeking higher rates on deposit products. The average rate paid on total funding costs was 1.43% and 0.55% for the six months ended June 30, 2024 and 2023, 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 June 30, 2024 compared with 2023									Six Months Ended June 30, 2024 compared with 2023
	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		(31	)		366		$	335			(2,473	)		1,377		$	(1,096	)
Investment securities:
Taxable securities		486			1,373			1,859			479			2,283			2,762
Non-taxable securities		9			38			47			76			29			105
Total investment securities		495			1,411			1,906			555			2,312			2,867
Loans:
Real estate:
Commercial		513			714			1,227			1,142			1,058			2,200
Agricultural		94			583			677			234			1,151			1,385
Residential and home equity		167			461			628			332			993			1,325
Construction		1,065			(12	)		1,053			2,031			(17	)		2,014
Total real estate		1,839			1,746			3,585			3,739			3,185			6,924
Commercial & industrial		201			600			801			808			1,630			2,438
Agricultural		753			214			967			1,442			800			2,242
Commercial leases		853			272			1,125			1,744			522			2,266
Consumer and other		3			19			22			4			26			30
Total loans and leases		3,649			2,851			6,500			7,737			6,163			13,900
Non-marketable securities		-			78			78			-			165			165
Total interest income		4,113			4,706			8,819			5,819			10,017			15,836

Interest expense:
Interest bearing deposits:
Demand		5			1,455			1,460			(58	)		1,962			1,904
Savings and money market accounts		(28	)		2,584			2,556			117			7,122			7,239
Certificates of deposit greater than $250,000		1,862			56			1,918			3,738			1,530			5,268
Certificates of deposit less than $250,000		615			2,966			3,581			1,042			4,993			6,035
Total interest bearing deposits		2,454			7,061			9,515			4,839			15,607			20,446

Short-term borrowings		-			924			924			-			986			986
Subordinated debentures		-			16			16			-			41			41
Total interest expense		2,454			8,001			10,455			4,839			16,634			21,473
Net interest income	$	1,659		$	(3,295	)	$	(1,636	)	$	980		$	(6,617	)	$	(5,637	)

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Comparison of Results of Operations for the Three and Six Months Ended June 30, 2024 and 2023

	Three Months Ended June 30,				$ Better / (Worse)			% Better / (Worse)			Six Months Ended June 30,				$ Better / (Worse)			% Better / (Worse)
	Three Months Ended June 30,										Six Months Ended June 30,
(Dollars in thousands)	2024		2023								2024		2023
Selected Income Statement Information:
Interest income	$	69,831	$	61,017	$	8,814			14.45	%	$	136,472	$	120,649	$	15,823			13.11	%
Interest expense		19,050		8,595		(10,455	)		(121.64	%)		33,978		12,505		(21,473	)		(171.72	%)
Net interest income		50,781		52,422		(1,641	)		(3.13	%)		102,494		108,144		(5,650	)		(5.22	%)
Provision for credit losses		-		2,557		2,557			N/A			-		4,057		4,057			N/A
Net interest income after provision for credit losses		50,781		49,865		916			1.84	%		102,494		104,087		(1,593	)		(1.53	%)
Non-interest income		4,767		5,447		(680	)		(12.48	%)		9,842		8,907		935			10.50	%
Non-interest expense		25,422		26,822		1,400			5.22	%		50,943		55,005		4,062			7.38	%
Income before income tax expense		30,126		28,490		1,636			5.74	%		61,393		57,989		3,404			5.87	%
Income tax expense		8,359		7,182		(1,177	)		(16.39	%)		16,903		13,134		(3,769	)		(28.70	%)
Net income	$	21,767	$	21,308	$	459			2.15	%	$	44,490	$	44,855	$	(365	)		(0.81	%)

For the three and six months ended June 30, 2024, net income was $21.8 million and $44.5 million, respectively compared to $21.3 million and $44.9 million for the same periods a year ago. For the three months ended June 30, 2024 the increase in net income was primarily the result of higher interest income of $8.8 million, a $1.4 million reduction in non-interest expense and no provision for credit losses compared to $2.6 million in 2023. These increases were offset by an increase in interest expense of $10.5 million, an increase in income tax expense of $1.2 million and a decrease in non-interest income of $0.7 million.

For the six months ended June 30, 2024, the decrease in net income was primarily the result of lower net interest income of $5.7 million and a higher income tax expense of $3.8 million. In the first half of 2023, the Company also recognized in non-interest income, a $4.3 million death benefit on bank-owned life insurance (“BOLI”) which was partially offset by a $5.7 million loss on the sale of securities based on the decision to reposition the securities portfolio given the interest rate environment during the six months ended June 30, 2023. This decrease was offset by an increase in non-interest income of $1.0 million and no provision for credit losses in 2024 compared to $4.1 million in 2023.

Net Interest Income and Net Interest Margin

For the quarter ended June 30, 2024 and 2023, net interest income was $50.8 million compared with $52.4 million, respectively. The decrease is primarily the result of the net interest margin (tax equivalent basis) decreasing 37 basis points to 3.91% compared with 4.28% for the same period a year earlier. The decrease in the net interest margin was primarily the result of the increase in deposit costs due to the interest rate environment as the federal funds rate increased by 50 basis points during the second quarter of 2023 and customer expectations for higher rates on deposit products. The loan yield increased 38 basis points from 5.75% to 6.13% compared to the second quarter of 2023. The cost of interest bearing deposits increased 101 basis points from 1.10% to 2.11% and outpaced the increase in loan yield over the same period a year earlier. The cost of average total deposits increased 77 basis points from 0.74% to 1.51%.

For the six months ended June 30, 2024 and 2023, net interest income was $102.5 million compared with $108.1 million, respectively. The decrease is primarily the result of the net interest margin (tax equivalent basis) decreasing 39 basis points to 4.02% compared with 4.41% for the same period a year earlier. The decrease in the net interest margin was primarily the result of the increase in deposit costs due to the interest rate environment as the federal funds rate increase by 100 basis points during the second half of 2023 and customer expectations for higher rates on deposit products. The loan yield increased 39 basis points from 5.72% to 6.11% the first six months of 2023. The cost of interest bearing deposits increased 115 basis points from 0.81% to 1.96% and outpaced the increase in loan yield over the same period a year earlier. The cost of average total deposits increased 86 basis points from 0.53% to 1.39%.

Table of Contents

Provision for Credit Losses. The provision for credit losses in each period is a charge against earnings in that period. The provision is the amount required to maintain the allowance for credit losses at a level that, in management’s judgment, is adequate to absorb expected credit losses, over the life of the loans and leases, unfunded loan commitments and HTM securities portfolios. The Company had no provision for credit losses during the three months ended June 30, 2024 compared to $2.6 million for the same period a year ago. Net recoveries during the three months ended June 30, 2024 were $14,000 compared to net recoveries of $39,000 for the same period a year ago.

The Company had no provision for credit losses during the first half of 2024 compared to $4.1 million during the first half of 2023. Net recoveries during the first half of 2024 were $67,000 compared to net recoveries of $227,000 in the first half of 2023.

Non-interest Income

	Three Months Ended June 30,										Six Months Ended June 30,
(Dollars in thousands)	2024		2023		$ Better / (Worse)			% Better / (Worse)			2024		2023			$ Better / (Worse)			% Better / (Worse)
Non-interest income:
Card processing		1,764		1,712	$	52			3.04	%		3,393		3,303		$	90			2.72	%
Gain on BOLI death benefit		-		-		-			-			-		4,346			(4,346	)		-
Net gain on deferred compensation benefits		414		1,302		(888	)		(68.20	%)		1,572		2,198			(626	)		(28.48	%)
Service charges on deposit accounts		749		690		59			8.55	%		1,497		1,324			173			13.07	%
Increase in cash surrender value of BOLI		602		506		96			18.97	%		1,197		950			247			26.00	%
Net loss on sale of securities available-for-sale		-		-		-			-			-		(5,686	)		5,686			-
Other		1,238		1,237		1			0.08	%		2,183		2,472			(289	)		(11.69	%)
Total non-interest income	$	4,767	$	5,447	$	(680	)		(12.48	%)	$	9,842	$	8,907		$	935			10.50	%

Non-interest income was $4.8 million for the quarter ended June 30, 2024 compared with $5.4 million for the same period a year earlier. The decrease in non-interest income was primarily due to a $0.9 million decrease in net gains on deferred compensation plan investments.

The Company recorded net gains on deferred compensation plan investments of $0.4 million for the quarter ended June 30, 2024 compared with net gains of $1.3 million for the same respective period a year ago. See Note 10, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2023 Form 10-K filed on March 14, 2024 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 $0.9 million, or 10.5%, to $9.8 million for the six months ended June 30, 2024 compared with $8.9 million for the same period of 2023. The year-over-year increase in non-interest income was primarily due to no loss on sale of investment securities during 2024 compared to a $5.7 million loss on sale of investment securities during the first quarter of 2023 and no gain on BOLI death benefits in the first quarter of 2024 compared to $4.3 million gain in the first quarter of 2023 partially offset by a decrease in net gains on deferred compensation plan investments of $0.6 million.

The Company recorded net gains on deferred compensation plan investments of $1.6 million for the six months ended June 30, 2024 compared with net gains of $2.2 million for the same period a year earlier. See Note 10, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2023 Form 10-K filed on March 14, 2024 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.

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Non-interest Expense

	Three Months Ended June 30,										Six Months Ended June 30,
(Dollars in thousands)	2024		2023		$ Better / (Worse)			% Better / (Worse)			2024		2023		$ Better / (Worse)			% Better / (Worse)
Non-interest expense:
Salaries and employee benefits		17,999		17,937	$	(62	)		(0.35	%)		35,502		37,521	$	2,019			5.38	%
Data processing		1,535		1,307		(228	)		(17.44	%)		2,990		2,567		(423	)		(16.48	%)
Occupancy		1,243		1,228		(15	)		(1.22	%)		2,475		2,408		(67	)		(2.78	%)
Net gain on deferred compensation benefits		414		1,302		888			68.20	%		1,572		2,198		626			28.48	%
Deposit insurance		702		673		(29	)		(4.31	%)		1,414		1,365		(49	)		(3.59	%)
Professional services		621		673		52			7.73	%		1,162		1,355		193			14.24	%
Marketing		562		425		(137	)		(32.24	%)		1,042		895		(147	)		(16.42	%)
Other		2,346		3,277		931			28.41	%		4,786		6,696		1,910			28.52	%
Total non-interest expense	$	25,422	$	26,822	$	1,400			5.22	%	$	50,943	$	55,005	$	4,062			7.38	%

Non-interest expense decreased $1.4 million, or 5.22%, to $25.4 million for the quarter ended June 30, 2024 compared with $26.8 million for the same period a year ago. This decrease was primarily comprised of a $0.9 million decrease in net gains on deferred compensation plan investments and a $0.9 million decrease in miscellaneous expenses. The decrease in other non-interest expenses was due primarily to the adoption of ASU 2023-02 which shifts the amortization of low-income housing tax credits to the income tax line under the proportional amortization method. For the second quarter of 2024 this amounted to $1.1 million. These decreases were partially offset by a $0.2 million increase in data processing expenses and a $0.1 million increase in marketing expenses.

Net gains on deferred compensation plan obligations were $0.4 million for the quarter ended June 30, 2024 compared with net losses of $1.3 million for the same respective period. See Note 10, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2023 Form 10-K filed on March 15, 2024 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 decreased $4.1 million, or 7.38%, to $50.9 million for the six months ended June 30, 2024 compared with $55.0 million for the same period a year ago. This decrease was primarily comprised of a $2.0 million decrease in salaries and employee benefits, a $1.9 million decrease in other miscellaneous expenses and a $0.6 million decrease in net gains on deferred compensation plan investments. The decrease in salaries and employee benefits was due primarily to reduced discretionary compensation. The decrease in miscellaneous expenses was due primarily to the adoption of ASU 2023-02 which shifts the benefits of low-income housing tax credits to the income tax line under the proportional amortization method. For the first half of 2024 this amounted to $2.2 million. These decreases were partially offset by an increase of $0.4 million in data processing expenses.

The Company recorded net gains on deferred compensation plan investments of $1.6 million for the six months ended June 30, 2024 compared with net gains of $2.2 million for the same respective period. See Note 10, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2023 Form 10-K filed on March 14, 2024 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.

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Income Tax Expense

For the three and six months ended June 30, 2024, income tax expense was $8.4 million and $16.9 million, respectively compared to $7.2 million and $13.1 million for the same periods a year ago. The Company’s effective tax rate for the three and six months ended June 30, 2024 was 27.75% and 27.53%, respectively compared to 25.21% and 22.65% for the same period in 2023. The Company’s higher income tax expense and effective tax rates for the three and six months of 2024 compared to 2023 was due in part to the adoption of ASC 2023-02 which shifts the amortization of low-income housing tax credits from other non-interest expense to the income tax line under the proportional amortization method thereby increasing income tax expense resulting in an increase in the effective tax rate. The Company’s effective tax rate for the six months ended June 30, 2023 was also lower than normal due to a non-taxable BOLI death benefit of $4.3 million. The Company’s effective tax rate can also fluctuate from quarter to quarter due to changes in the mix of taxable and tax-exempt earning sources.

Balance Sheet Analysis

Total assets were $5.3 billion at June 30, 2024 consistent with December 31, 2023. Loans held for investment were $3.7 billion at June 30, 2024 consistent with December 31, 2023. Total deposits were $4.6 billion at June 30, 2024 compared with $4.7 billion at December 31, 2023, a decrease of $71.0 million or 1.52%. Our loan to deposit ratio was 80.32% and 78.52% as of June 30, 2024 and December 31, 2023, respectively.

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. Interest bearing deposits with banks totaled $225.7 million at June 30, 2024 and $338.4 million at December 31, 2023. The Company’s total cash and cash equivalents as of June 30, 2024 represents 5.6% of the Company’s total assets as compared to 7.7% as of December 31, 2023.

Investment Securities

The Company’s net investment portfolio increased by $46.0 million or 4.60% to $1.0 billion at June 30, 2024 compared to December 31, 2023. The increase was due to the purchase of $85.4 million in investments securities during the first half of 2024 offset by normal principal maturities or pay downs. During the first half of 2024 as part of managing the investment portfolio, the portfolio mix has shifted as available-for-sale securities increased from $182.5 million as of December 31, 2023 to $251.4 million as of June 30, 2024 while the held-to-maturity securities decreased from $817.7 million as of December 31, 2023 to $794.8 million as of June 30, 2024. The Company’s total investment portfolio as of June 30, 2024 represents 19.86% of the Company’s total assets as compared to 18.84% at December 31, 2023.

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

(Dollars in thousands)	June 30, 2024		December 31, 2023
Available-for-sale securities
U.S. Government-sponsored securities	$	2,882	$	3,224
Mortgage-backed securities⁽¹⁾		227,863		163,838
Collateralized mortgage obligations⁽¹⁾		5,606		535
Corporate securities		14,752		14,605
Other		310		310
Total available-for-sale securities	$	251,413	$	182,512

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

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(Dollars in thousands)	June 30, 2024		December 31, 2023
Held-to-maturity securities
Mortgage-backed securities⁽¹⁾	$	646,404	$	664,728
Collateralized mortgage obligations⁽¹⁾		71,182		74,170
Municipal securities		77,211		78,790
Total held-to-maturity securities	$	794,797	$	817,688

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

The following tables show the 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 June 30, 2024
	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	$	6		4.58	%	$	70		6.40	%	$	236		6.63	%	$	2,570		6.44	%		2,882		6.45	%
Mortgage-backed securities⁽¹⁾		42		1.79	%		4,720		2.54	%		4,742		3.79	%		218,359		4.31	%		227,863		4.26	%
Collateralized mortgage obligations⁽¹⁾		-		0.00	%		-		0.00	%		-		0.00	%		5,606		6.19	%		5,606		6.19	%
Corporate securities		-		0.00	%		14,752		5.71	%		-		0.00	%		-		0.00	%		14,752		5.71	%
Other		310		4.22	%		-		0.00	%		-		0.00	%		-		0.00	%		310		4.22	%
Total securities available-for-sale	$	358		3.94	%	$	19,542		4.95	%	$	4,978		3.92	%	$	226,535		4.38	%	$	251,413		4.41	%

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

	As of June 30, 2024
	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	%	$	1,598		0.86	%	$	10,069		1.40	%	$	493,478		1.91	%	$	505,145		1.90	%
Collateralized mortgage obligations⁽¹⁾		-		0.00	%		-		0.00	%		-		0.00	%		56,876		1.76	%		56,876		1.76	%
Municipal securities		2,659		5.99	%		16,049		3.69	%		8,171		3.17	%		49,818		3.99	%		76,697		3.24	%
Total securities held-to-maturity	$	2,659		5.99	%	$	17,647		3.43	%	$	18,240		2.19	%	$	600,172		2.07	%	$	638,718		2.05	%

⁽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, 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	$	1		5.91	%	$	99		6.47	%	$	269		6.65	%	$	2,855		6.44	%	$	3,224		6.46	%
Mortgage-backed securities⁽¹⁾		169		1.79	%		6,138		2.57	%		4,916		3.78	%		152,615		3.52	%		163,838		3.44	%
Collateralized mortgage obligations⁽¹⁾		-		0.00	%		-		0.00	%		-		0.00	%		535		2.27	%		535		2.27	%
Corporate securities		-		0.00	%		14,605		5.71	%		-		0.00	%		-		0.00	%		14,605		5.71	%
Other		310		8.20	%		-		0.00	%		-		0.00	%		-		0.00	%		310		8.20	%
Total securities available-for-sale	$	480		5.94	%	$	20,842		4.79	%	$	5,185		3.93	%	$	156,005		3.57	%	$	182,512		3.68	%

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

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	As of December 31, 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	%	$	2,058		0.78	%	$	12,418		1.41	%	$	650,252		1.90	%	$	664,728		1.88	%
Collateralized mortgage obligations⁽¹⁾		-		0.00	%		-		0.00	%		-		0.00	%		74,170		1.75	%		74,170		1.75	%
Municipal securities		875		4.01	%		15,962		4.23	%		10,703		3.76	%		51,250		3.88	%		78,790		3.93	%
Total securities held-to-maturity	$	875		4.01	%	$	18,020		3.84	%	$	23,121		2.50	%	$	775,672		2.02	%	$	817,688		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. For detailed descriptions of the various loan types offered by the Company see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC on March 14, 2024.

The Company’s loan and lease portfolio at June 30, 2024 totaled $3.7 billion, an increase of $27.7 million or 0.76% over December 31, 2023.

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

	June 30, 2024					December 31, 2023
(Dollars in thousands)	Dollars		Percent of Total			Dollars		Percent of Total
Gross Loans and Leases
Real estate:
Commercial	$	1,363,198		36.92	%	$	1,323,038		36.10	%
Agricultural		726,128		19.67	%		742,009		20.24	%
Residential and home equity		406,562		11.01	%		399,982		10.91	%
Construction		200,673		5.43	%		212,362		5.80	%
Total real estate		2,696,561		73.03	%		2,677,391		73.05	%
Commercial & industrial		498,844		13.51	%		499,373		13.62	%
Agricultural		312,882		8.47	%		313,737		8.56	%
Commercial leases		178,252		4.83	%		169,684		4.63	%
Consumer and other		5,698		0.16	%		5,212		0.14	%
Total gross loans and leases	$	3,692,237		100.00	%	$	3,665,397		100.00	%

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The following table shows the maturity distribution and interest rate sensitivity of the loan and lease portfolio of the Company as of June 30, 2024.

	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	$	84,725	$	414,070	$	828,416	$	35,987	$	1,363,198
Agricultural		60,611		169,903		447,562		48,052		726,128
Residential and home equity		85		4,875		113,275		288,327		406,562
Construction		157,569		41,472		1,632		-		200,673
Total real estate		302,990		630,320		1,390,885		372,366		2,696,561
Commercial & industrial		229,535		167,173		99,820		2,316		498,844
Agricultural		192,082		100,400		20,400		-		312,882
Commercial leases		4,228		50,422		123,602		-		178,252
Consumer and other		727		3,826		677		468		5,698
Total gross loans and leases	$	729,562	$	952,141	$	1,635,384	$	375,150	$	3,692,237
Rate structure for loans and leases
Fixed Rate	$	162,760	$	618,506	$	1,130,301	$	208,609	$	2,120,176
Adjustable Rate		566,802		333,635		505,083		166,541		1,572,061
Total gross loans and leases	$	729,562	$	952,141	$	1,635,384	$	375,150	$	3,692,237

The following table summarizes the loans for which the accrual of interest has been discontinued and loans more than 90 days past due and still accruing interest, and OREO (as hereinafter defined):

(Dollars in thousands)	June 30, 2024			December 31, 2023
Non-performing assets:
Total non-performing loans and leases	$	-		$	-
Other real estate owned (“OREO”)		873			873
Total non-performing assets	$	873		$	873

Selected ratios:
Non-performing loans to total loans and leases		0.00	%		0.00	%
Non-performing assets to total assets		0.02	%		0.02	%

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. The Company had no non-accrual loans and leases June 30, 2024 and December 31, 2023.

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 June 30, 2024, and at December 31, 2023.

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.

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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 two primary components: specific reserves related to individually evaluated loans and leases and general reserves comprised of both quantitative and qualitative factors for current expected credit losses related to loans and leases that are not collateral dependent. The Company uses the Weighted Average Remaining Maturity (“WARM”) method to calculate the ACL, as this method is deemed 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 allowance for credit losses is the combination of the allowance for credit losses on loan and lease losses and the allowance for credit losses on unfunded loan commitments. The ACL for unfunded loan commitments is included within “Interest payable and other liabilities” on the consolidated balance sheets. The following table presents information regarding the allowance for credit losses on loans and leases held for investment as of the dates indicated:

(Dollars in thousands)	June 30, 2024			December 31, 2023

Allowance for credit losses - loans and leases	$	75,032		$	74,965
Allowance for credit losses - unfunded commitments		3,690			3,690
Total allowance for credit losses	$	78,722		$	78,655

Allowance for loan and lease losses to loans and leases held for investment		2.03	%		2.05	%
Total allowance for credit losses to loans and leases held for investment		2.13	%		2.15	%

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The following table sets forth the activity in our allowance for credit losses on loans and leases held for investment for the periods indicated:

	Six Months Ended June 30,
(Dollars in thousands)	2024			2023
Allowance for credit losses:
Balance at beginning of year	$	78,655		$	68,975
Provision for credit losses:
Allowance for credit losses- loans and leases		-			4,000
Allowance for credit losses- unfunded loan commitments		-			-
Total provision for credit losses		-			4,000
Charge-offs:
Real estate:
Commercial		-			-
Agricultural		-			-
Residential and home equity		-			(14	)
Construction		-			-
Total real estate		-			(14	)
Commercial & industrial		-			-
Agricultural		-			-
Commercial leases		-			-
Consumer and other		(26	)		(18	)
Total charge-offs		(26	)		(32	)
Recoveries:
Real estate:
Commercial		-			170
Agricultural		-			-
Residential and home equity		15			31
Construction		-			-
Total real estate		15			201
Commercial & industrial		-			38
Agricultural		38			3
Commercial leases		-			-
Consumer and other		40			17
Total recoveries		93			259
Net recoveries / (charge-offs)		67			227

Balance at end of year	$	78,722		$	73,202

Selected financial information:
Net loans and leases held for investment	$	3,682,370		$	3,491,723
Average loans and leases		3,675,286			3,444,490
Non-performing loans and leases		-			375
Allowance for credit losses to non-performing loans and leases		0.00	%		N/M	⁽¹⁾
Net (recoveries)/charge-offs to average loans and leases		(0.002	%)		(0.01	%)
Provision for credit losses to average loans and leases		0.00	%		0.12	%
Allowance for credit losses to gross loans and leases held for investment		2.13	%		2.09	%

⁽¹⁾	Not meaningful

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

	June 30, 2024								December 31, 2023
(Dollars in thousands)	Dollars		Percent of Each Loan Type to Total Loans			Percent of ACL to Each Loan Type			Dollars		Percent of Each Loan Type to Total Loans			Percent of ACL to Each Loan Type
Allowance for credit losses:
Real estate:
Commercial	$	22,608		36.92	%		1.66	%	$	26,093		36.10	%		1.97	%
Agricultural		16,486		19.67	%		2.27	%		7,744		20.24	%		1.04	%
Residential and home equity		7,584		11.01	%		1.87	%		7,770		10.91	%		1.94	%
Construction		2,165		5.43	%		1.08	%		4,432		5.80	%		2.09	%
Total real estate		48,843		73.03	%		1.81	%		46,039		73.05	%		1.72	%
Commercial & industrial		10,972		13.51	%		2.20	%		13,380		13.62	%		2.68	%
Agricultural		6,908		8.47	%		2.21	%		8,872		8.56	%		2.83	%
Commercial leases		7,597		4.83	%		4.26	%		6,537		4.63	%		3.85	%
Consumer and other		712		0.16	%		12.50	%		137		0.14	%		2.63	%
Total allowance for credit losses	$	75,032		100.00	%		2.03	%	$	74,965		100.00	%		2.05	%

Deposits

Total deposits were $4.6 billion and $4.7 billion as of June 30, 2024 and December 31, 2023, respectively a decrease of $71.0 million or 1.52%. During the first quarter of 2024 the Company experienced an increase in deposits $291.5 million. The increase, during the first quarter, in deposits was primarily due to $100.0 million in a State of California certificate of deposit and $200.0 million in brokered deposits, all of which matured during the second quarter. The decrease in deposits from December 31, 2023 to June 30, 2024 was primarily attributable to the shift in customer behavior over the last year as customers seek higher yielding deposit products or other investment alternatives such as U.S. Treasuries or money market funds given the interest rate environment.

Non-interest bearing demand deposits were $1.4 billion as of June 30, 2024 and $1.5 billion at December 31, 2023. Non-interest bearing deposits were 29.97% of total deposits, as of June 30, 2024 and 31.76% as of December 31, 2023. Interest bearing deposits were $3.2 billion at June 30, 2024 and December 31, 2023. 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 primarily reflects changes in customer behavior as customers shifted from non-interest bearing accounts to other investment alternatives or higher interest earning accounts given the interest rate environment. Checking account deposits were 48.60% of total deposits as of June 30, 2024 compared to 51.76% of total deposits as of December 31, 2023.

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

	Six Months Ended June 30,
	2024							2023
(Dollars in thousands)	Average Balance		Interest Expense		Average Rate			Average Balance		Interest Expense		Average Rate
Total deposits:
Interest bearing deposits:
Demand	$	933,572	$	2,792		0.60	%	$	1,004,651	$	888		0.18	%
Savings and money market		1,617,105		14,895		1.85	%		1,593,158		7,656		0.97	%
Certificates of deposit greater than $250,000		426,878		7,410		3.49	%		188,053		2,142		2.30	%
Certificates of deposit less than $250,000		354,090		7,454		4.23	%		233,945		1,419		1.22	%
Total interest bearing deposits		3,331,645		32,551		1.96	%		3,019,807		12,105		0.81	%
Non-interest bearing deposits		1,385,832							1,584,215
Total deposits	$	4,717,477	$	32,551		1.39	%	$	4,604,022	$	12,105		0.53	%

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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 increase in short-term interest rates during 2023 and customers seeking higher yielding deposit products continued to place pressure on deposit pricing. The average cost of total deposits, including non-interest bearing deposits, increased to 1.51% for the three months ended June 30, 2024, compared to 0.74% for the same period a year ago and 1.14% as of December 31, 2023.

The following table shows deposits with a balance greater than $250,000 at June 30, 2024 and December 31, 2023:

	June 30,		December 31,
(Dollars in thousands)	2024		2023
Non-maturity deposits greater than $250,000	$	2,331,371	$	2,496,749
Certificates of deposit greater than $250,000, by maturity:
Less than 3 months		115,603		84,460
3 months to 6 months		167,884		111,866
6 months to 12 months		112,564		107,080
More than 12 months		4,682		15,423
Total certificates of deposit greater than $250,000	$	400,733	$	318,829
Total deposits greater than $250,000	$	2,732,104	$	2,815,578

Refer to the Year-To-Date Average Balances and Rate Schedules located in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information on separate deposit categories.

The Bank participates in a program wherein the State of California places time deposits with the Bank at the Bank’s option. As of June 30, 2024 and December 31, 2023, the Bank had $3.0 million of these deposits.

Total estimated uninsured deposits based on our regulatory reporting amounted to $2.2 billion at June 30, 2024 and December 31, 2023.

Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings

Lines of Credit with the Federal Home Loan Bank and FRB 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 June 30, 2024 or December 31, 2023. There were no Federal Funds purchased or advances from the FRB at June 30, 2024 or December 31, 2023. FHLB advances as of March 31, 2024 were $100.0 million which was repaid during the second quarter.

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 14, 2024. 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 September 18, 2024) and the rate was 8.45% as of June 30, 2024 and 8.49% at December 31, 2023. The average rate paid for these securities was 8.60% for the first half of 2024 and 7.82% for the first half of 2023. 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.

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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 $576.2 million at June 30, 2024 an increase of $26.4 million or 4.8% from $549.8 million at December 31, 2023.

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.

As of June 30, 2024, the Company was in compliance with all of these capital requirements and there were no restrictions on the Company’s business activity. As of June 30, 2024 the Bank met 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 as of June 30, 2024 and December 31, 2023.

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

	June 30, 2024
	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
Bancorp:
CET1 capital to risk-weighted assets	$	578,272		13.09	%	$	198,760		4.50	%		N/A		N/A
Tier 1 capital to risk-weighted assets		588,272		13.32	%		265,014		6.00	%		N/A		N/A
Risk-based capital to risk-weighted assets		643,779		14.58	%		353,352		8.00	%		N/A		N/A
Tier 1 leverage capital ratio		588,272		10.66	%		220,801		4.00	%		N/A		N/A

Bank:
CET1 capital to risk-weighted assets	$	588,783		13.33	%	$	198,758		4.50	%	$	287,095		6.50	%
Tier 1 capital to risk-weighted assets		588,783		13.33	%		265,011		6.00	%		353,348		8.00	%
Risk-based capital to risk-weighted assets		644,290		14.59	%		353,348		8.00	%		441,685		10.00	%
Tier 1 leverage capital ratio		588,783		10.67	%		220,633		4.00	%		275,791		5.00	%

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	December 31, 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
Bancorp:
CET1 capital to risk-weighted assets	$	546,045		12.30	%	$	199,724		4.50	%		N/A		N/A
Tier 1 capital to risk-weighted assets		556,045		12.53	%		266,298		6.00	%		N/A		N/A
Risk-based capital to risk-weighted assets		611,815		13.78	%		355,064		8.00	%		N/A		N/A
Tier 1 leverage capital ratio		556,045		10.38	%		214,267		4.00	%		N/A		N/A

Bank:
CET1 capital to risk-weighted assets	$	557,500		12.56	%	$	199,722		4.50	%	$	288,487		6.50	%
Tier 1 capital to risk-weighted assets		557,500		12.56	%		266,295		6.00	%		355,061		8.00	%
Risk-based capital to risk-weighted assets		613,270		13.82	%		355,061		8.00	%		443,826		10.00	%
Tier 1 leverage capital ratio		557,500		10.42	%		214,078		4.00	%		267,597		5.00	%

On November 14, 2023, the Board of Directors authorized an extension to its share repurchase program through December 31, 2024 for an additional $25.0 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.

During the first six months of 2024 the Company repurchased 8,663 shares under the Repurchase Plan, for a total of $8.9 million. As of June 30, 2024, there remains $15.7 million authorized for repurchases under the Repurchase Plan.

On May 13, 2024, the Board of Directors declared a mid-year cash dividend of $8.80 per share, a 6.0% increase over the $8.30 per share paid on July 1, 2023. The cash dividend totaling $6.5 million was paid on July 1, 2024, to shareholders of record on June 11, 2024.

Off-Balance-Sheet Arrangements

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

The following table sets forth our off-balance-sheet lending commitments as of June 30, 2024:

			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	$	1,002,071	$	456,271	$	333,897	$	30,138	$	181,765
Standby letters of credit		15,082		12,274		2,308		500		-
Total off-balance sheet commitments	$	1,017,153	$	468,545	$	336,205	$	30,638	$	181,765

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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 for unfunded loan commitments, which totaled $3.7 million at June 30, 2024 and December 31, 2023.

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 October 2028. 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 $295.9 million or 5.62% of total assets as of June 30, 2024. The majority of cash is on deposit with the FRB and amounted to $225.7 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 our ability to borrow 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 June 30, 2024:

	June 30, 2024
(Dollars in thousands)	Total Credit Line Limit		Outstanding Amount		Remaining Credit Line Available		Value of Collateral Pledged
Additional liquidity sources:
Federal Reserve Bank	$	1,157,869	$	-	$	1,157,869	$	1,478,075
Federal Home Loan Bank		811,811		-		811,811		1,047,075
US Bank Fed Funds		50,000		-		50,000		-
PCBB Fed Funds		50,000		-		50,000		-
FHLB Fed Funds		18,000		-		18,000		-
Total additional liquidity sources	$	2,087,680	$	-	$	2,087,680	$	2,525,150

We continued our focus on maintaining a strong liquidity position throughout the first six months of 2024 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 June 30, 2024, we had internal sources of liquidity comprised of $295.9 million in cash and $226.6 million unencumbered investment securities, which represented in the aggregate 9.91% of total assets. We also had $2.1 billion in external sources of liquidity as outlined in the table above bringing our total available liquidity to $2.6 billion. Our pledged collateral on short-term borrowing lines was comprised of $2.8 billion in loans and $1.7 million in investment securities. We have the option of either borrowing on our credit lines or selling these investment securities for cash flow needs.

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On a long-term basis, we intend to meet our liquidity needs 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 would 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 June 30, 2024, we had unfunded loan commitments of $1.0 billion and unfunded letters of credit of $15.1 million. At June 30, 2024 we believe that we had 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 June 30, 2024 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 14, 2024.

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. We do not have any market-risk sensitive instruments entered into for trading purposes. 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.

Management uses various asset/liability strategies to manage the re-pricing characteristics of our assets and liabilities designed to ensure that exposure to interest rate fluctuations is limited within our guidelines of acceptable levels of risk-taking. Hedging strategies, including the terms and pricing of loans and deposits, and managing the deployment of our securities, are considered to reduce mismatches in interest rate re-pricing opportunities of portfolio assets and their funding sources.

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. ALCO and management utilize a third party to assist with asset liability management including the use of simulation models.

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.

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Some loans and investment vehicles include the opportunity of prepayment (embedded options), and accordingly the simulation model uses various proprietary models 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 cash flows/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.

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. As of June 30, 2024, our loan and lease portfolio was comprised of 57.4% fixed rate and 42.6% variable rate loans. The vast majority of our variable loans also contain interest rate floors which are designed to mitigate the impact of decreases in interest rates as index rates drop.

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The following table present the projected change in the Company’s net interest income over the next twelve months and the economic value of equity at June 30, 2024, 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)
June 30, 2024
+300 bps		(1.0	%)		(10.2	%)
+200 bps		(0.8	%)		(7.3	%)
+100 bps		(0.2	%)		(2.9	%)
0 bps		-			-
-100 bps		(1.2	%)		(0.4	%)
-200 bps		(2.6	%)		(3.0	%)
-300 bps		(4.3	%)		(8.3	%)

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 been no material 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 six months ended June 30, 2024, 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, 2023.

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table reports information regarding repurchases of our common stock during the six months ended June 30, 2024:

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 be purchased under the plans or programs (In thousands) ⁽¹⁾
Total 1st Quarter 2024		5,201	$	1,038.00		5,201	$	19,140

April 1, 2024 to April 30, 2024		675	$	978.00		675	$	18,480
May 1, 2024 to May 31, 2024		2,527		994.00		2,527		15,967
June 1, 2024 to June 30, 2024		260		1,012.00		260		15,704
Total 2nd Quarter 2024		3,462	$	992.00		3,462	$	15,704
Total 2024		8,663	$	1,020.00		8,663	$	15,704

⁽¹⁾As of November 14, 2023 the Board approved an extension to the repurchase program through December 31, 2024 and for an additional $25 million of the Company’s common stock.

⁽²⁾The aggregate purchase price and weighted average price per share does not include the effect of excise tax expense incurred on net stock repurchases. For the six months ended June 30, 2024, the excise tax expense totaled $88,000.

During the first half of 2024 the Company repurchased 8,663 shares under the Repurchase Plan, for a total of $8.9 million. As of June 30, 2024, there remains $15.7 million authorized for repurchases under the Repurchase Plan. All of these shares were purchased at prices ranging from $965.00 to $1,090.00 per share, based upon the then current price on the OTCQX.

Item 3.

Defaults upon Senior Securities

Not Applicable

Item 4.

Mine Safety Disclosures

Not Applicable

Item 5.

Other Information

During the three months ended June 30, 2024, 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.

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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

4.1	Amended and Restated Rights Agreement, dated as of April 5, 2024, between Farmers & Merchants Bancorp and Computershare Trust, N.A., a federally chartered, limited purpose trust company (as successor to Registrar and Transfer Company), as Rights Agent, including Form of Right Certificate attached thereto as Exhibit B, incorporated herein by reference to Exhibit 4.3 of the Registrant’s Form 8-A/A filed on April 5, 2024.
31(a)	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31(b)	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH	Inline XBRL Taxonomy Extension Schema Document.
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*	Filed herewith

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SIGNATURES

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

	FARMERS & MERCHANTS BANCORP

Date: August 9, 2024	/s/ Kent A. Steinwert
	Kent A. Steinwert
	Director, Chairman, President and Chief Executive Officer (Principal Executive Officer)

Date: August 9, 2024	/s/ Bart R. Olson
	Bart R. Olson
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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Farmers & Merchants Bancorp (FMCB) 10-Q2024 Q2 Quarterly report

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