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


FORM 10-Q


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


For the quarterly period ended SeptemberJune 30, 20172023


or


☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.1934
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 Executiveexecutive offices) (Zip Code)


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


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

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐


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

Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller Reporting Company reporting company ☐
(Do not check if a smaller reporting company)Emerging growth 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 Act. ☐

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

Number
As of July 31, 2023, the registrant had 754,436 shares of common stock of the registrant 812,304 outstanding as of October 31, 2017.$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 (Unaudited) as of September 30, 2017, December 31, 2016 and September 30, 2016.
3
  
Unaudited Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended September 30, 2017 and 2016.
4
  
Unaudited Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2017 and 2016.
5
  
Unaudited Consolidated Statements of Changes in Shareholders'Shareholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2017 and 2016.
6
  
Unaudited Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2017 and 2016.
7
  
Notes to theUnaudited Consolidated Financial Statements (Unaudited)
8
    
 
Item 2 -
Management's Management’s Discussion and Analysis of Financial Condition and Results of Operations3527
    
 
Item 3 -
Quantitative and Qualitative Disclosures Aboutabout Market Risk5649
    
 
Item 4 -
Controls and Procedures5951
    
PART II. - OTHER INFORMATION
 
    
 
Item 1 -
– Legal Proceedings6052
 
Item 1A – Risk Factors
52
 Item 1A –
Risk Factors
60
Item 2 -– Unregistered Sales of Equity Securities and Use of Proceeds6052
 
Item 3 – Defaults upon Senior Securities
53
 
Item 3 -4 – Mine Safety Disclosures
Defaults Upon Senior Securities6053
 
Item 5 – Other Information
53
 
Item 46 – Exhibits
Mine Safety Disclosures6053
 
Item 5 -Other Information60
Item 6 -Exhibits61
Signatures
61
Index to Exhibits
6154

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 Certifications 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.

2
Table of Contents
PART I.1. FINANCIAL INFORMATION


Item 1.
Financial Statements

FARMERS & MERCHANTS BANCORP
Consolidated Balance Sheets
(in thousands except share data)
FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATED BALANCE SHEETS
Assets 
Sept. 30,
2017
(Unaudited)
  
December 31,
2016
 
  
Sept. 30,
2016
(Unaudited)
 
Cash and Cash Equivalents:         
Cash and Due from Banks $44,166  $54,896  $56,376 
Interest Bearing Deposits with Banks  149,104   43,964   42,927 
Total Cash and Cash Equivalents  193,270   98,860   99,303 
             
Investment Securities:            
Available-for-Sale  456,323   448,263   358,857 
Held-to-Maturity  55,542   58,109   58,905 
Total Investment Securities  511,865   506,372   417,762 
             
Loans & Leases:  2,216,779   2,177,601   2,079,670 
Less: Allowance for Credit Losses  50,744   47,919   44,446 
Loans & Leases, Net  2,166,035   2,129,682   2,035,224 
             
Premises and Equipment, Net  28,734   29,229   26,058 
Bank Owned Life Insurance  59,128   57,761   57,320 
Interest Receivable and Other Assets  112,743   100,217   91,899 
Total Assets $3,071,775  $2,922,121  $2,727,566 
             
Liabilities            
Deposits:            
Demand $767,162  $756,236  $672,351 
Interest Bearing Transaction  564,904   495,063   433,220 
Savings and Money Market  827,588   760,119   702,441 
Time  549,773   570,293   547,625 
Total Deposits  2,709,427   2,581,711   2,355,637 
             
Subordinated Debentures  10,310   10,310   10,310 
Interest Payable and Other Liabilities  49,409   50,119   89,221 
Total Liabilities  2,769,146   2,642,140   2,455,168 
             
Shareholders' Equity            
Preferred Stock:  No Par Value,  1,000,000 Shares Authorized, None Issued or Outstanding  -   -   - 
Common Stock:  Par Value $0.01, 7,500,000 Shares Authorized, 812,304, 807,329 and 792,387 Shares Issued and Outstanding at September 30, 2017, December 31, 2016 and September 30, 2016, Respectively  8   8   8 
Additional Paid-In Capital  93,624   90,671   82,004 
Retained Earnings  208,443   189,313   186,920 
Accumulated Other Comprehensive (Loss) Income  554   (11)  3,466 
Total Shareholders' Equity  302,629   279,981   272,398 
Total Liabilities and Shareholders' Equity $3,071,775  $2,922,121  $2,727,566 


(Dollars in thousands, except share and per share amounts) 
June 30,
2023
  
December 31,
2022
 
ASSETS      
Cash and due from banks $80,280  $73,358 
Interest bearing deposits with banks  506,692   514,899 
Total cash and cash equivalents  586,972   588,257 
Securities available-for-sale, at fair value  114,643   152,864 
Securities held-to-maturity, fair value $684,503 and $688,393 respectively
  838,446   845,346 
Allowance for credit losses - securities held-to-maturity  (450)  (393)
Total investment securities  952,639   997,817 
Non-marketable securities  15,549   15,549 
Loans and leases held-for-investment
  3,491,723   3,512,361 
Allowance for credit losses - loans and leases  (71,112)  (66,885
)
Loans held-for-investment, net  3,420,611   3,445,476 
Bank-owned life insurance  66,582   73,038 
Premises and equipment, net  51,519   49,476 
Deferred income tax assets  30,612   31,507 
Accrued interest receivable  22,116   21,602 
Goodwill  11,183   11,183 
Other intangibles  2,523   2,809 
Other real estate owned  873   873 
Other assets  89,199   89,812 
TOTAL ASSETS $5,250,378  $5,327,399 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Deposits:        
Non-interest bearing $1,495,279  $1,758,793 
Interest bearing:        
Demand  920,920   1,125,014 
Savings and money market  1,669,334   1,544,062 
Certificates of deposit  552,780   331,400 
Total interest bearing  3,143,034   3,000,476 
Total deposits  4,638,313   4,759,269 
Subordinated debentures  10,310   10,310 
Interest payable and other liabilities  87,046   72,512 
TOTAL LIABILITIES  4,735,669   4,842,091 
         
SHAREHOLDERS’ EQUITY        
Preferred shares, no par value, 1,000,000 shares authorized and, none issued or outstanding  -   - 
Common shares, $0.01 par value, 7,500,000 authorized 754,523 and 768,337 outstanding at June 30, 2023 and December 31, 2022, respectively
  8   8 
Additional paid in capital  43,263   57,206 
Retained earnings  488,501   449,932 
Accumulated other comprehensive (loss), net of taxes  (17,063)  (21,838
)
TOTAL SHAREHOLDERS’ EQUITY  514,709   485,308 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $5,250,378  $5,327,399 
The
See accompanying notes are an integral part of theseto the unaudited consolidated financial statementsstatements.

3
Table of Contents
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Income  (Unaudited)
(in thousands except per share data) 
Three Months
Ended September 30,
  
Nine Months
Ended September 30,
 
  2017  2016  2017  2016 
Interest Income            
Interest and Fees on Loans & Leases $26,491  $23,523  $76,270  $67,909 
Interest on Deposits with Banks  648   51   1,155   133 
Interest on Investment Securities:                
Taxable  2,038   1,210   6,174   4,113 
Exempt from Federal Tax  432   478   1,321   1,447 
Total Interest Income  29,609   25,262   84,920   73,602 
                 
Interest Expense                
Deposits  1,644   1,004   4,353   2,691 
Borrowed Funds  -   14   -   18 
Subordinated Debentures  115   92   320   272 
Total Interest Expense  1,759   1,110   4,673   2,981 
                 
Net Interest Income  27,850   24,152   80,247   70,621 
Provision for Credit Losses  1,600   250   2,850   2,850 
Net Interest Income After Provision for Credit Losses  26,250   23,902   77,397   67,771 
        ��        
Non-Interest Income                
Service Charges on Deposit Accounts  897   877   2,591   2,517 
Net Gain (Loss) on Sale of Investment Securities  -   3   131   (286)
Increase in Cash Surrender Value of Life Insurance  458   474   1,367   1,422 
Debit Card and ATM Fees  990   847   2,877   2,540 
Net Gain on Deferred Compensation Investments  510   1,630   1,703   1,969 
Other  783   722   3,914   1,987 
Total Non-Interest Income  3,638   4,553   12,583   10,149 
                 
Non-Interest Expense                
Salaries and Employee Benefits  10,809   10,272   34,751   32,061 
Net Gain on Deferred Compensation Investments  510   1,630   1,703   1,969 
Occupancy  864   786   2,580   2,240 
Equipment  957   853   2,970   2,552 
Marketing  329   267   867   929 
FDIC  233   320   694   960 
Gain on Sale of ORE  -   -   (414)  (5,941)
Other  2,605   2,286   8,103   8,400 
Total Non-Interest Expense  16,307   16,414   51,254   43,170 
                 
Income Before Income Taxes  13,581   12,041   38,726   34,750 
Provision for Income Taxes  5,000   4,503   14,137   12,708 
Net Income $8,581  $7,538  $24,589  $22,042 
Basic Earnings Per Common Share $10.59  $9.51  $30.39  $27.82 

FARMERS & MERCHANTS BANCORP
The
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME


 
 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
(Dollars in thousands, except share and per share amounts) 2023  2022  2023  2022 
Interest income            
Interest and fees on loans and leases $49,690  $38,570  $97,698  $76,003 
Interest and dividends on investment securities
  5,445   5,716   11,108   11,011 
Interest on deposits with others  5,882   1,409   11,843   1,775 
Total interest income  61,017   45,695   120,649   88,789 
Interest expense                
Deposits  8,391   873   12,105   1,676 
Subordinated debentures  204   103   400   185 
Total interest expense  8,595   976   12,505   1,861 
Net interest income  52,422   44,719   108,144   86,928 
Provision for credit losses  2,557   1,500   4,057   1,500 
Net interest income after provision for credit losses  49,865   43,219   104,087   85,428 
Non-interest income                
Card processing
  1,712   1,847   3,303   3,584 
Service charges on deposit accounts  690   830   1,324   1,680 
Increase in cash surrender value of BOLI  506   560   950   1,102 
Gain on BOLI death benefit
  -   -   4,346   - 
Net gain/(loss) on sale of securities available-for-sale
  -   2   (5,686)  2 
Net gain/(loss) on deferred compensation benefits
  1,302   (991)  2,198   (579)
Other  1,237   1,264   2,472   2,035 
Total non-interest income  5,447   3,512   8,907   7,824 
Non-interest expense                
Salaries and employee benefits  17,937   16,403   37,521   33,187 
Net gain/(loss) on deferred compensation benefits
  1,302   (991)  2,198   (579)
Data processing  1,307   1,233   2,567   2,448 
Occupancy  1,228   1,150   2,408   2,304 
FDIC insurance
  592   361   1,203   710 
Marketing  425   340   895   656 
Legal  264   405   524   684 
Other  3,767   4,130   7,689   7,409 
Total non-interest expense  26,822   23,031   55,005   46,819 
INCOME BEFORE INCOME TAXES
  28,490   23,700   57,989   46,433 
Income tax expense
  7,182   5,257   13,134   10,932 
NET INCOME
 $21,308  $18,443  $44,855  $35,501 
                 
Earnings per common share:                
Basic $28.03  $23.58  $58.83  $45.28 
Diluted $28.03  $23.58  $58.83  $45.28 
                 
Weighted average number of common shares                
Basic  760,308   781,880   762,443   783,976 
Diluted  760,308   781,880   762,443   783,976 

See accompanying notes are an integral part of theseto the unaudited consolidated financial statementsstatements.

4
Table of Contents
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands) 
Three Months
Ended September 30,
  
Nine Months
Ended September 30,
 
  2017  2016  2017  2016 
Net Income $8,581  $7,538  $24,589  $22,042 
                 
Other Comprehensive Income                
Change in Net Unrealized Gains (Loss) on Available-for-Sale Securities  322   (709)  1,106   4,667 
Deferred Tax (Benefit) Expense Related to Unrealized Gains  (135)  299   (465)  (1,962)
Reclassification Adjustment for Realized (Gain) Loss on Available-for-Sale Securities Included in Net Income  -   (3)  (131)  286 
Deferred Tax (Benefit) Expense Related to Reclassification Adjustment  -   (409)  55   (120)
Change in Net Unrealized Gains on Available-for-Sale Securities, Net of Tax  187   (822)  565   2,871 
                 
Total Other Comprehensive Income (Loss)  187   (822)  565   2,871 
                 
Comprehensive Income $8,768  $6,716  $25,154  $24,913 
FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
The

 
 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
(Dollars in thousands) 2023  2022  2023  2022 
Net income 
$
21,308
  
$
18,443
  
$
44,855
  
$
35,501
 
Other comprehensive income                
Unrealized (losses)/gains on available-for-sale securities
  
(1,191
)  
(11,434
)
  
1,171
   
(27,299
)
Reclassification adjustment for (gains)/losses on available-for-sale securities  
-
   
(2
)
  
5,685
   
(2
)
Amortization of unrealized loss on securities transferred to held-to-maturity  
(47
)  
(64
)  
(77
)  
(141
)
Net unrealized (losses)/gains on available-for-sale securities  (1,238)  (11,500)  6,779   (27,442)
Income tax benefit/(expense)  
375
   
3,400
   
(2,004
)
  
8,113
 
Other comprehensive (loss)/income, net of tax
  
(863
)  
(8,100
)
  
4,775
   
(19,329
)
Total comprehensive income 
$
20,445
  
$
10,343
  
$
49,630
  
$
16,172
 

See accompanying notes are an integral part of theseto the unaudited consolidated financial statements
statements.

5
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Changes in Shareholders' Equity  (Unaudited)
(in thousands except share data)
 
 
Common
Shares
Outstanding
  
Common
Stock
  
Additional
Paid-In
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income, net
  
Total
Shareholders'
Equity
 
Balance, January 1, 2016  790,787  $8  $81,164  $170,068  $595  $251,835 
Net Income      -   -   22,042   -   22,042 
Cash Dividends Declared on                      - 
Common Stock ($6.55 per share)      -   -   (5,190)  -   (5,190)
Issuance of Common Stock  1,600   -   840   -   -   840 
Change in Net Unrealized Gain on Securities Available-for-Sale, Net of Tax   -   -   -   2,871   2,871 
Balance, September 30, 2016  792,387  $8  $82,004  $186,920  $3,466  $272,398 
                         
                         
Balance, January 1, 2017  807,329  $8  $90,671  $189,313  $(11) $279,981 
Net Income          -   24,589   -   24,589 
Cash Dividends Declared on                      - 
Common Stock ($6.75 per share)      -   -   (5,459)  -   (5,459)
Issuance of Common Stock  4,975   -   2,953   -   -   2,953 
Change in Net Unrealized Gain on Securities Available-for-Sale, Net of Tax      -   -   -   565   565 
Balance, September 30, 2017  812,304  $8  $93,624  $208,443  $554  $302,629 
FARMERS & MERCHANTS BANCORP

UNAUDITEDCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
The
  For the three and six months ended June 30, 2023 and 2022
 
(Dollars in thousands, except share amounts) 
Common
Shares
  Amount
  
Additional
Paid-In
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
(Loss)/Income
  Total 
Balance as of March 31, 2023
  
762,931
  
$
8
  
$
51,615
  
$
473,479
  
$
(16,200
)
 
$
508,902
 
Net income  -   -   
-
   
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
 
                         
Balance as of March 31, 2022
  
785,146
  
$
8
  
$
73,264
  
$
404,389
  
$
(12,948
)
 
$
464,713
 
Net income  -   -   
-
   
18,443
   
-
   
18,443
 
Other comprehensive loss, net of tax  -   
-
   
-
   
-
   
(8,100
)
  
(8,100
)
Cash dividends declared ($7.85 per share)
  -   -   -   (6,110)  -   (6,110)
Repurchase of common stock
  (7,956)  -   (7,593)  -   -   (7,593)
Balance as of June 30, 2022
  
777,190
  
$
8
  
$
65,671
  
$
416,722
  
$
(21,048
)
 
$
461,353
 

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

See accompanying notes are an integral part of theseto the unaudited consolidated financial statementsstatements.

6
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Cash Flows (Unaudited)
  
Nine Months
Ended September 30,
 
(in thousands) 2017  2016 
Operating Activities:      
Net Income $24,589  $22,042 
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:        
Provision for Credit Losses  2,850   2,850 
Depreciation and Amortization  1,595   1,425 
Net Amortization of Investment Security Premiums & Discounts  1,097   1,104 
Amortization of Core Deposit Intangible  82   - 
Accretion of Discount on Acquired Loans  (163)  - 
Net (Gain) Loss on Sale of Investment Securities  (131)  286 
Net (Gain) Loss on Sale of Property & Equipment  (1,189)  4 
Net Gain on Sale of Other Real Estate  (414)  (5,941)
Net Change in Operating Assets & Liabilities:        
Net Increase in Interest Receivable and Other Assets  (2,315)  (3,821)
Net (Decrease) Increase in Interest Payable and Other Liabilities  107   2,890 
Net Cash Used in Operating Activities  26,108   20,839 
Investing Activities:        
Purchase of Investment Securities Available-for-Sale  (208,985)  (288,874)
Proceeds from Sold, Matured or Called Securities Available-for-Sale  201,001   314,726 
Purchase of Investment Securities Held-to-Maturity  (1,070)  (1,807)
Proceeds from Matured or Called Securities Held-to-Maturity  3,592   4,260 
Net Loans & Leases Paid, Originated or Acquired  (39,245)  (83,440)
Principal Collected on Loans & Leases Previously Charged Off  205   202 
Additions to Premises and Equipment  (3,215)  (912)
Purchase of Other Investments  (12,728)  (6,334)
Proceeds from Sale of Property & Equipment  3,304   - 
Proceeds from Sale of Other Real Estate  3,186   8,282 
Net Cash Used in  Investing Activities  (53,955)  (53,897)
Financing Activities:        
Net Increase in Deposits  127,716   78,105 
Cash Dividends  (5,459)  (5,190)
Net Cash Provided by Financing Activities  122,257   72,915 
Increase in Cash and Cash Equivalents  94,410   39,857 
Cash and Cash Equivalents at Beginning of Period  98,860   59,446 
Cash and Cash Equivalents at End of Period $193,270  $99,303 
Supplementary Data        
Loans Transferred to Foreclosed Assets (ORE) $-  $538 
Cash Payments Made for Income Taxes $13,142  $9,591 
Issuance of Common Stock to the Bank's Non-Qualified Retirement Plans $2,953  $840 
Interest Paid $4,586  $2,813 
FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
The

  
Six Months Ended
June 30,
 
(Dollars in thousands) 2023  2022 
Cash flows from operating activities:      
Net income $44,855  $35,501 
Adjustments to reconcile net income to net cash provided by operating activities:        
Provision for credit losses  4,057   1,500 
Depreciation and amortization  1,196   1,270 
Net amortization of securities premiums and discounts  35   275 
Increase in cash surrender value of BOLI  (950
)
  (1,102
)
Gain on BOLI death benefit
  (4,346)  - 
Decrease /(increase) in deferred income taxes, net  1,773   (1,127)
Loss/(gain) on sale of securities available-for-sale  5,686   (2)
Net changes in:        
Other assets  (2,636)  (7,797)
Other liabilities  16,671   22,823 
Net cash provided by operating activities  66,341   51,341 
Cash flows from investing activities:        
Net change in loans and leases held-for-investment  6,388   (12,568)
Purchase of available-for-sale securities  (4,515
)
  (10,090
)
Purchase of held-to-maturity securities  (2,071
)
  (168,149
)
Proceeds from sales, maturities, calls and pay downs of available-for-sale securities
  43,885   27,679 
Proceeds from maturities, calls and pay downs of held-to-maturity securities  23,498   36,641 
Purchase of premises and equipment  (3,239
)
  (526
)
Purchase of other investments  (2,166)  (3,440)
Proceeds from bank-owned life insurance  11,752   - 
Proceeds from sale of assets  27   34 
Net cash provided by (used in) investing activities  73,559   (130,419)
Cash flows from financing activities:        
Net (decrease) increase in deposits  (120,956)  129,361 
Cash dividends paid
  (6,286)  (6,110)
Net cash used in share repurchase of common stock
  (13,943)  (11,845)
Net cash (used in) provided by financing activities  (141,185)  111,406 
Net change in cash and cash equivalents  (1,285)  32,328 
Cash and cash equivalents, beginning of period
  588,257   715,460 
Cash and cash equivalents, end of period
 $586,972  $747,788 
         
Supplemental disclosures of cash flow information:        
Cash paid for interest $9,907  $2,580 
Income taxes paid
 $16  $9,343 
         
Supplemental disclosures of non-cash transactions:        
Net change in unrealized gain/(losses) on securities available-for-sale $6,857  $(27,301)

See accompanying notes are an integral part of theseto the unaudited consolidated financial statementsstatements.

7
FARMERS & MERCHANTS BANCORP
NOTES TO THEUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


1.

Note 1—Basis of Presentation and Significant Accounting Policies


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


The Company’s other subsidiaries include F & M Bancorp, Inc. and FMCB Statutory Trust I. F & M Bancorp, Inc. was created in March 2002 to protect the name F & M Bank. During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name “F & M Bank” as part of a larger effort to enhance the Company’s image and build brand name recognition. In December 2003, the Company formed a wholly owned subsidiary, FMCB Statutory Trust I, for the sole purpose of issuing Trust Preferred Securities and related subordinated debentures, in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). FMCB Statutory Trust I is a non-consolidated subsidiary.

On November 18, 2016, Farmers & Merchants Bancorp completed the acquisition of Delta National Bancorp, headquartered in Manteca, California, and the parent holding company for Delta Bank N.A., a locally owned and operated community bank established in 1973. As of the acquisition date, Delta National Bancorp had approximately $112 million in assets and four branch locations in the communities of Manteca, Riverbank, Modesto and Turlock. At the effective time of the acquisition, Delta National Bancorp was merged into Farmers & Merchants Bancorp and Delta Bank, N.A. was merged into Farmers & Merchants Bank of Central California.

The accounting and reporting policies of the Company conform to U.S. GAAP and prevailing practice within the banking industry. The following is a summary of the significant accounting and reporting policies used in preparing theThese unaudited condensed consolidated financial statements.

Basis of Presentation
The accompanying consolidated financial statements and notes thereto have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of AmericaRegulation 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, 2023 for potential recognition or disclosure. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial information.

These statementsposition and results of operations for the periods presented have been preparedincluded. Certain information and note disclosures have been condensed or omitted pursuant to the rules and regulations of the SecuritiesSEC and Exchange Commission (“SEC”)the accounting standards for interim reporting on Form 10-Q. Accordingly, certain disclosures normally presentedfinancial 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 annual consolidated financial statements prepared 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 accordance with U.S. GAAP have been omitted. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’sour Annual Report on Form 10-K for the year ended December 31, 2016. 2022 filed with the SEC on March 15, 2023 and Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations Summary of Critical Accounting Policies and Estimates included in this Quarterly Report on Form 10-Q.

The information included in this Form 10-Q should be read in conjunction with our 2022 Form 10-K. Interim results of operations for the three-month and nine-month periods ended September 30, 2017 mayare not necessarily be indicative of future operating results.results for a full year or any other interim period.


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

Modifications for Borrowers Experiencing Financial Difficulty. The Company may renegotiate the accountsterms of existing loans for a variety of reasons. When refinancing or restructuring a loan, the Company andevaluates where the Company’s wholly owned subsidiaries, F & M Bancorp, Inc. and the Bank, along with the Bank’s wholly owned subsidiaries, Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Significant inter-company transactions have been eliminated in consolidation.

The preparation of consolidatedborrower is experiencing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Certain amounts in the prior years' financial statements and related footnote disclosures have been reclassified to conform to the current-year presentation. These reclassifications had no effect on previously reported net income or total shareholders’ equity.

Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows,difficulty. In making this determination, the Company has defined cash and cash equivalents as those amounts includedconsiders whether the borrower is currently in the balance sheet captions Cash and Due from Banks, Interest Bearing Deposits with Banks, Federal Funds Sold and Securities Purchased Under Agreements to Resell. For these instruments, the carrying amount is a reasonable estimatedefault on any of fair value.

Investment Securities
Investment securities are classified at the time of purchase as held-to-maturity (“HTM”) if it is management’s intent andits debt. In addition, the Company has the ability to hold the securities until maturity. These securities are carried at cost, adjusted for amortization of premium and accretion of discount using a level yield of interest over the estimated remaining period until maturity. Losses, reflecting a decline in value judged by the Company to be other than temporary, are recognized in the period in which they occur.

Securities are classified as available-for-sale (“AFS”) if it is management’s intent, at the time of purchase, to hold the securities for an indefinite period of time and/or to use the securities as part of the Company’s asset/liability management strategy. These securities are reported at fair value with aggregate unrealized gains or losses excluded from income and included as a separate component of shareholders’ equity, net of related income taxes. Fair values are based on quoted market prices or broker/dealer price quotations on a specific identification basis. Gains or losses on the sale of these securities are computed using the specific identification method.

Trading securities, if any, are acquired for short-term appreciation and are recorded in a trading portfolio and are carried at fair value, with unrealized gains and losses recorded in non-interest income.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement; and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

Loans & Leases
Loans & leases are reported at the principal amount outstanding net of unearned discounts and deferred loan & lease fees and costs. Interest income on loans & leases is accrued daily on the outstanding balances using the simple interest method. Loan & lease origination fees are deferred and recognized over the contractual life of the loan or lease as an adjustment to the yield. Loans & leases are placed on non-accrual status when the collection of principal or interest is in doubt or when they become past due for 90 days or more unless they are both well-secured and in the process of collection. For this purpose, a loan or lease is considered well secured if it is collateralized by property having a net realizable value in excess of the amount of the loan or lease or is guaranteed by a financially capable party. When a loan or lease is placed on non-accrual status, the accrued and unpaid interest receivable is reversed and charged against current income; thereafter, interest income is recognized only as it is collected in cash. Additionally, cash would be applied to principal if all principal was not expected to be collected. Loans & leases placed on non-accrual status are returned to accrual status when the loans or leases are paid current as to principal, interest, and future payments are expected to be made in accordance with the contractual terms of the loan or lease.
A loan or lease is considered impaired when, based on current information and events, it is probable that the Company willborrower would be unable to collect all amounts due, including principalin payment default on any of its debt in the foreseeable future without the modification and interest, according to the contractual terms of the original agreement. Impaired loans & leases are either: (1) non-accrual loans & leases; or (2) restructured loans & leases that are still accruing interest. Loans or leases determined to be impaired are individually evaluated for impairment. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan or lease's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan or lease's observable market price, or the fair value of the collateral if the loan or lease is collateral dependent. A loan or lease is collateral dependent ifborrower (without the repayment of the loan or lease is expected to be provided solely by the underlying collateral.

A restructuring of a loan or lease constitutes a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the borrower’s (the term “borrower” is used herein to describe a customer who has entered into either a loan or lease transaction) financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured loans & leases typically present an elevated level of credit risk, as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans & leases that are on nonaccrual status at the time they become TDR, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removedmodification) could obtain equivalent financing from TDR status if it was restructuredanother creditor at a market rate for similar debt. Modifications of loans to borrowers in a prior calendar year andthese situations may indicated that the borrower is currently in compliance with its modified terms. However, thesefacing financial difficulty. Modifications of loans or leases continue to be classified as impaired andborrowers experiencing financial difficulty that are individually evaluated for impairment as described above.

Generally, the Company will not restructure loans or leases for borrowers unless: (1) the existing loan or lease is brought current as to principal and interest payments; and (2) the restructured loan or lease can be underwritten to reasonable underwriting standards. If these standards are not met other actions will be pursued (e.g., foreclosure) to collect outstanding loan or lease amounts. After restructure, a determination is made whether the loan or lease will be kept on accrual status based upon the underwriting and historical performance of the restructured credit.

Allowance for Credit Losses
The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company's loan & lease portfolio asform of the balance sheet date.principal forgiveness, interest rate reductions, other-than-insignificant payment delays, or a term extension (or a combination thereof) require disclosure. The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowanceCompany’s disclosures are expected to maintain the adequacy of the total allowance after credit lossesincluded in Note 3, Loans and loan & lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of three primary components: specific reserves related to impaired loans & leases; general reserves for inherent losses related to loans & leases that are not impaired; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors.Leases.

The determination of the general reserve for loans & leases that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, qualitative factors that include economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, the character of the loan & lease portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer and other; and (9) equipment leases. The allowance for credit losses attributable to each portfolio segment, which includes both individually evaluated impaired loans & leases and loans & leases that are collectively evaluated for impairment, is combined to determine the Company's overall allowance, which is included on the consolidated balance sheet.

10
8
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
The Company assigns a risk rating to all loans & leasesNote 1—Basis of Presentation and periodically performs detailed reviews of all such loans & leases over a certain threshold to identify credit risks and assess overall collectability. For smaller balance loans & leases, such as consumer and residential real estate, a credit grade is established at inception, and then updated only when the loan or lease becomes contractually delinquent or when the borrower requests a modification. For larger balance loans, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans & leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into five major categories, defined as follows:Significant Accounting Policies—Continued


Pass – A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management's close attention.

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

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

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.

Accounting Standards Pending Adoption
The general reserve componentfollowing paragraphs provide descriptions of the allowance for credit losses also consists of reserve factorsnewly issued but not yet effective accounting standards that are based on management's assessment of the following for each portfolio segment: (1) inherent credit risk; (2) historical losses; and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below:

Commercial Real Estate – Commercial real estate mortgage loans are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.

Real Estate Construction – Real estate construction loans, including land loans, are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.

Commercial – These loans are generally considered to possess a moderate inherent risk of loss because they are shorter-term; typically made to relationship customers; generally underwritten to existing cash flows of operating businesses; and may be collateralized by fixed assets, inventory and/or accounts receivable. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.
Agricultural Real Estate and Agricultural – These loans are generally considered to possess a moderate inherent risk of loss since they are typically made to relationship customers and are secured by crop production, livestock and related real estate.  These loans are vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.

Leases – Equipment leases are generally considered to possess a moderate inherent risk of loss. As lessor, the Company is subject to both the credit risk of the borrower and the residual value risk of the equipment. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

Residential 1st Mortgages and Home Equity Lines and Loans – These loans are generally considered to possess a low inherent risk of loss, although this is not always true as evidenced by the correction in residential real estate values that occurred between 2007 and 2012. The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

Consumer & Other – A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company's and Bank's regulators, including the Federal Reserve Board (“FRB”), the California Department of Business Oversight (“DBO”) and the Federal Deposit Insurance Corporation (“FDIC”), as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.

Acquired Loans
Loans acquired through purchase or through a business combination are recorded at their fair value at the acquisition date. Credit discounts, which reflect estimates of credit losses, expected to be incurred over the life of the loan, are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date.

Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures
The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off-balance-sheet commitments is included in Interest Payable and Other Liabilities on the Company’s Consolidated Balance Sheet.

Premises and Equipment
Premises, equipment, and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. Estimated useful lives of buildings range from 30 to 40 years, and for furniture and equipment from 3 to 7 years. Leasehold improvements are amortized over the lesser of the terms of the respective leases, or their useful lives, which are generally 5 to 10 years. Remodeling and capital improvements are capitalized while maintenance and repairs are charged directly to occupancy expense.
Other Real Estate
Other real estate, which is included in other assets, is expected to be sold and is comprised of properties no longer utilized for business operations and property acquired through foreclosure in satisfaction of indebtedness. These properties are recorded at fair value less estimated selling costs upon acquisition. Revised estimates to the fair value less cost to sell are reported as adjustments to the carrying amount of the asset, provided that such adjusted value is not in excess of the carrying amount at acquisition. Initial losses on properties acquired through full or partial satisfaction of debt are treated as credit losses and charged to the allowance for credit losses at the time of acquisition. Subsequent declines in value from the recorded amounts, routine holding costs, and gains or losses upon disposition, if any, are included in non-interest expense as incurred.

Income Taxes
The Company uses the liability method of accounting for income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount combined with the current taxes payable or refundable results in the income tax expense for the current year.

The Company follows the standards set forth in the “Income Taxes” topic of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This standard prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

The Company accounts for leases with Investment Tax Credits (ITC) under the deferred method as established in ASC 740-10. ITC are viewed and accounted for as a reduction of the cost of the related assets and presented as deferred income on the Company’s financial statement.

When tax returns are filed, it is certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest expense and penalties associated with unrecognized tax benefits, if any, are included in the provision for income taxes in the Consolidated Statements of Income.

Basic Earnings Per Common Share
The Company’s common stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. There are no common stock equivalent shares. Therefore, there is no presentation of diluted basic earnings per common share. See Note 6 for additional information.

Segment Reporting
The “Segment Reporting” topic of the FASB ASC requires that public companies report certain information about operating segments. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is a holding company for a community bank, which offers a wide array of products and services to its customers. Pursuant to its banking strategy, emphasis is placed on building relationships with its customers, as opposed to building specific lines of business. As a result, the Company is not organized around discernible lines of business and prefers to work as an integrated unit to customize solutions for its customers, with business line emphasis and product offerings changing over time as needs and demands change. Therefore, the Company only reports one segment.
Low Income Housing Tax Credit Investments (LIHTC)
The Company accounts for its interest in LIHTC using the cost method as established in ASC 323-740. As an investor, the Company obtains income tax credits and deductions from the operating losses of these tax credit entities. The income tax credits and deductions are allocated to the investors based on their ownership percentages and are recorded as a reduction of income tax expense (or an increase to income tax benefit) and a reduction of federal income taxes payable.

Comprehensive Income
The “Comprehensive Income” topic of the FASB ASC establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Other comprehensive income (loss) refers to revenues, expenses, gains, and losses that U.S. GAAP recognize as changes in value to an enterprise but are excluded from net income. For the Company, comprehensive income includes net income and changes in fair value of its available-for-sale investment securities.

Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that willcould have a material effect on the Company’s financial statements.position or results of operations.


Business Combinations And Related Matters
Business combinationsIn June 2022, the FASB issued guidance within ASU 2022-03, Fair Value Measurement of Equity Securities Subject to contractual Sale Restrictions. The amendments in this ASU affect all entities that have investments in equity securities measured at fair value that are accounted for undersubject to a contractual sale restriction. These amendments clarify that a contractual restriction on the acquisition methodsale of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method, the acquiring entity in a business combination recognizes 100 percentan equity security is not considered part of the acquired assetsunit of account of the equity security and, assumed liabilities,therefore, is not considered in measuring fair value. The amendments in this ASU are effective for fiscal years, beginning after December 15, 2023, including interim periods within those fiscal years.  Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance.  The adoption of this ASU is not expected to have material impact on the Company’s Consolidated Financial Statements.

In March 2023, the FASB issued ASU 2023-02, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.  ASU 2023-02 allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the percentage owned, at their estimated fair valuesprogram giving rise to the related income tax credits. The Amendments in ASU 2023-02 apply to all reporting entities that hold (1) tax equity investments that meet the conditions for and elect to account for them using the proportional amortization method or (2) an investment in a LIHTC structure through a limited liability entity that is not accounted for using the proportional amortization method and to which certain LIHTC-specific guidance removed from FASB ASC 323-740, Investments – Equity Method and Joint Ventures: Income Taxes, has been applied. ASU 2023-02 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.  Early adoption is permitted for any interim period within those fiscal years. The amendments in ASU 2023-02 must be applied on either a modified retrospective or a retrospective basis (except as of the date of acquisition. Any excess of the fair value over the purchase price of net assets and other identifiable intangible assets acquired is recorded as bargain purchase gain. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value, if the fair value can be determined during the measurement period. Results of operations of an acquired business are includeddiscussed in the statementASU for LIHTC investments not accounted for using the proportional amortization method). The adoption of operations fromthis ASU is not expected to have material impact on the date of acquisition. Acquisition-related costs, including conversion charges, are expensed as incurred. The Company applied this guidance to the acquisition of Delta National Bancorp, which was consummated on November 18, 2016. The Company's consolidated financial statements reflect the operations of Delta National Bancorp beginning November 19, 2016.Company’s Consolidated Financial Statements.

Intangible Assets
Intangible assets are comprised of core deposit intangibles acquired in the Delta National Bancorp acquisition and included in other assets. Intangible assets with definite useful lives are amortized over their respective estimated useful lives. If an event occurs that indicates the carrying amount of an intangible asset may not be recoverable, management reviews the asset for impairment.

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FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
2.

Note 2—Investment Securities


The amortized cost, fair values, and unrealized gains and losses of the securities available-for-sale are as followsfollows:
(in thousands):
Available-for-Sale Securities 
   Gross Unrealized  
 
(Dollars in thousands) 
Amortized
Cost
  Gains  Losses  
Fair Value
 
As of June 30, 2023                
U.S. Government-sponsored securities $
3,845  $
17  $
21  $
3,841 
Mortgage-backed securities (1)
  123,302   4   23,238   100,068 
Collateralized mortgage obligations (1)
  599   -   13   586 
Corporate securities  10,038   -   200   9,838 
Other  310   -   -   310 
Total available-for-sale securities $138,094  $21  $23,472  $114,643 


 Amortized  Gross Unrealized  Fair/Book 
September 30, 2017 Cost  Gains  Losses  Value 
Government Agency & Government-Sponsored Entities $3,091  $78  $-  $3,169 
US Treasury Notes  144,657   2   249   144,410 
US Govt SBA  31,732   45   86   31,691 
Mortgage Backed Securities (1)
  274,877   1,985   819   276,043 
Other  1,010   -   -   1,010 
Total $455,367  $2,110  $1,154  $456,323 

 Amortized  Gross Unrealized  Fair/Book 
December 31, 2016 Cost  Gains  Losses  Value 
Government Agency & Government-Sponsored Entities $3,127  $114  $-  $3,241 
US Treasury Notes  134,755   5   332   134,428 
US Govt SBA  36,532   42   260   36,314 
Mortgage Backed Securities (1)
  272,858   1,725   1,313   273,270 
Other  1,010   -   -   1,010 
Total $448,282  $1,886  $1,905  $448,263 

 Amortized  Gross Unrealized  Fair/Book 
September 30, 2016 Cost  Gains  Losses  Value 
Government Agency & Government-Sponsored Entities $83,129  $165  $1  $83,293 
US Treasury Notes  85,470   211   -   85,681 
Mortgage Backed Securities (1)
  183,268   5,605   -   188,873 
Other  1,010   -   -   1,010 
Total $352,877  $5,981  $1  $358,857 

(1) All Mortgage Backed Securities consist ofmortgage-backed securities and collateralized by residential real estate andmortgage obligations were issued by an agency or government sponsored entity of the U.S. government.Government.


Available-for-Sale Securities 
  Gross Unrealized  
 
(Dollars in thousands) 
Amortized
Cost
  Gains  Losses  Fair Value 
As of December 31, 2022
                
U.S. Treasury notes $4,989  $-  $25  $4,964 
U.S. Government-sponsored securities  4,430   21   24   4,427 
Mortgage-backed securities (1)
  162,314   9   29,795   132,528 
Collateralized mortgage obligations (1)
  1,085   -   31   1,054 
Corporate securities  10,043   -   462   9,581 
Other  310   -   -   310 
Total available-for-sale securities $183,171  $30  $30,337  $152,864 

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

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

Held-to-Maturity Securities 
  Gross Unrealized  
  
 
(Dollars in thousands) Amortized Cost  Gains  Losses  Fair Value  
Allowance
for Credit Losses
 
As of June 30, 2023               
Mortgage-backed securities (1)
 $685,028  $16  $138,764  $546,280  $- 
Collateralized mortgage obligations (1)
  77,290
   -
   15,022
   62,268
   -
 
Municipal securities  76,128   72   245   75,955   450 
Total held-to-maturity securities $838,446  $88  $154,031  $684,503  $450 
 Book  Gross Unrealized  Fair 
September 30, 2017 Value  Gains  Losses  Value 
Obligations of States and Political Subdivisions $55,542  $749  $-  $56,291 
Total $55,542  $749  $-  $56,291 
(1)All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.


 Book  Gross Unrealized  Fair 
December 31, 2016 Value  Gains  Losses  Value 
Obligations of States and Political Subdivisions $58,109  $339  $40  $58,408 
Total $58,109  $339  $40  $58,408 


 Book  Gross Unrealized  Fair 
September 30, 2016 Value  Gains  Losses  Value 
Obligations of States and Political Subdivisions $58,905  $1,549  $-  $60,454 
Total $58,905  $1,549  $-  $60,454 

10
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FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 2—Investment Securities—Continued

Held-to-Maturity Securities 
  Gross Unrealized  
  
 
(Dollars in thousands) 
Amortized
Cost
  Gains  Losses  Fair Value  
Allowance
for Credit Losses
 
As of December 31, 2022               
Mortgage-backed securities(1)
 $702,858  $29  $141,121  $561,766  $- 
Collateralized mortgage obligations(1)
  80,186   -   15,701   64,485   - 
Municipal securities  62,302   49   209   62,142   393 
Total held-to-maturity securities $845,346  $78  $157,031  $688,393  $393 
(1)All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.

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

Fair values are based on quoted market prices or dealer quotes. If a quoted market price or dealer quote is not available, fair value is estimated using quoted market prices for similar securities.

15
The amortized cost and estimated fair values of investment securities at September 30, 2017 by contractual maturity are shown in the following table (in thousands):

  Available-for-Sale  Held-to-Maturity 
September 30, 2017 
Amortized
Cost
  
Fair/Book
Value
  
Book
Value
  
Fair
Value
 
Within one year $111,092  $111,024  $1,985  $1,989 
After one year through five years  30,477   30,394   9,221   9,238 
After five years through ten years  13,429   13,408   13,694   13,887 
After ten years  25,492   25,454   30,642   31,177 
   180,490   180,280   55,542   56,291 
                 
Investment securities not due at a single maturity date:                
Mortgage-backed securities  274,877   276,043   -   - 
                 
Total $455,367  $456,323  $55,542  $56,291 
Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


The following tables show those investments withthe gross unrealized losses and their market value aggregated by investment category and length of timefor available-for-sale securities, for which an allowance for credit losses has not been recorded, that individual securities have been in a continuous unrealized loss position at the dates indicated (in thousands):

  Less Than 12 Months  12 Months or More  Total 
September 30, 2017 
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
 
                   
Securities Available-for-Sale
                  
US Treasury Notes $74,414  $249  $-  $-  $74,414  $249 
US Govt SBA  18,669   86   -   -   18,669   86 
Mortgage Backed Securities  122,887   819   -   -   122,887   819 
Total $215,970  $1,154  $-  $-  $215,970  $1,154 

  Less Than 12 Months  12 Months or More  Total 
December 31, 2016 
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
 
                   
Securities Available-for-Sale
                  
US Treasury Notes $99,429  $332  $-  $-  $99,429  $332 
US Govt SBA  27,483   260   -   -   27,483   260 
Mortgage Backed Securities  123,157   1,313   -   -   123,157   1,313 
Total $250,069  $1,905  $-  $-  $250,069  $1,905 
                         
Securities Held-to-Maturity
                        
Obligations of States and Political Subdivisions $7,251  $40  $-  $-  $7,251  $40 
Total $7,251  $40  $-  $-  $7,251  $40 

  Less Than 12 Months  12 Months or More  Total 
September 30, 2016 
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
 
                   
Securities Available-for-Sale
                  
Government Agency & Government-Sponsored Entities $59,993  $1  $-  $-  $59,993  $1 
Total $59,993  $1  $-  $-  $59,993  $1 

As of September 30, 2017, the Company held 485 investment securities of which 156 were in a loss position forare less than twelve months. No securities were in a loss position for twelve12 months and 12 months or more. Management periodically evaluates each investment security for other-than-temporary impairment relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities.more:


  June 30, 2023 
  Less Than 12 Months  12 Months or More  Total 
(Dollars in thousands) Fair Value  
Unrealized
Losses
  Fair Value  Unrealized
Losses		  Fair Value  
Unrealized
Losses
 
Available-for-Sale Securities                  
U.S. Government-sponsored securities 
$
267
  
$
1
  
$
1,127
  
$
20
  
$
1,394
  
$
21
 
Mortgage-backed securities(1)
  
15,374
   
480
   
83,944
   
22,758
   
99,318
   
23,238
 
Collateralized mortgage obligations(1)
  
-
   
-
   
586
   
13
   
586
   
13
 
Corporate securities  
-
   
-
   
9,838
   
200
   
9,838
   
200
 
Total available-for-sale securities 
$
15,641
  
$
481
  
$
95,495
  
$
22,991
  
$
111,136
  
$
23,472
 
 
16
Securities of Government Agency(1) All mortgage-backed securities and Government Sponsored Entities – The unrealized losses on the Company’s investment in securities of government agency and government sponsored entitiescollateralized mortgage obligations were $0, $0, and $1,000 at September 30, 2017, December 31, 2016 and September 30, 2016, respectively. The unrealized losses were caused by interest rate fluctuations. Repayment of these investments is guaranteedissued by an agency or government sponsored entity of the U.S. government. Accordingly, it is expected thatGovernment.

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

     December 31, 2022    

 Less Than 12 Months  12 Months or More  Total 
(Dollars in thousands) Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
 
Available-for-Sale Securities                  
U.S. Treasury notes
 $
4,964  $
25  $
-  $
-  $
4,964  $
25 
U.S. Government-sponsored securities 
378  
1  
1,326  
23  
1,704  
24 
Mortgage-backed securities (1)
  35,117   1,639   96,589   28,156   131,706   29,795 
Collateralized Mortgage Obligations (1)
  1,054   31   -   -   1,054   31 
Corporate securities  --   9,581   462   9,581   462 
Total available-for-sale securities $41,513  $1,696  $107,496  $28,641  $149,009  $30,337 

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

As of June 30, 2023, the Company held 182 available-for-sale securities would not be settled at a priceof which 56 were in an unrealized loss position for less than the amortized cost of the Company's investment.twelve months and 102 securities were in an unrealized loss position for twelve months or more without an allowance for credit losses. Because the decline in marketfair value is attributable to changes in interest rates and not credit quality and because the Company does not intendhave the intent to sell thethese securities and it is more likely than not that the Companyit will not havebe required to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2017, December 31, 2016, and September 30, 2016.

U.S. Treasury Notes – At September 30, 2017, six U.S. Treasury Note security investments were in a loss position for less than 12 months and none were in a loss position for 12 months or more. The unrealized losses on the Company's investment in U.S. Treasury Notes were $249,000 at September 30, 2017 and $332,000 at December 31, 2016. There were no U.S. Treasury Notes in a loss position at September 30, 2016. The unrealized losses were caused by interest rate fluctuations. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities beforeanticipated recovery, of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2017 and December 31, 2016.

U.S. Government SBA – At September 30, 2017, 94 U.S. Government SBA security investments were in a loss position for less than 12 months and none were in a loss position for 12 months or more. The unrealized losses on the Company's investment in U.S. Government SBA securities were $86,000 at September 30, 2017 and $260,000 at December 31, 2016. The unrealized losses were caused by interest rate fluctuations. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2017 and December 31, 2016. The Company did not own any U.S. Government SBA securities prior to December 2016.

Mortgage Backed Securities – At September 30, 2017, 55 mortgage backed security investments were in a loss position for less than 12 months and none were in a loss position for 12 months or more. The unrealized losses on the Company's investment in mortgage backed securities were $819,000, $1.3 million, and $0 at September 30, 2017, December 31, 2016, and September 30, 2016, respectively. The unrealized losses on the Company’s investment in mortgage-backed securities were caused by interest rate fluctuations. The contractual cash flows of these investments are guaranteed by an agency or government sponsored entity of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investmentssecurities to be other-than-temporarily impaired at September 30, 2017, December 31, 2016 and September 30, 2016, respectively.

Obligations of States and Political Subdivisions - At September 30, 2017, no obligations of states and political subdivisions wereimpaired. Management evaluates the available-for-sale securities in aan 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 less than credit losses for held-to-maturity securities by major type:

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

  December 31, 2022
 
(Dollars in thousands) 
Municipal
securities
  
Mortgage-
backed
securities
  
Collateralized
Mortgage
obligations
  Total 
Allowance for credit losses - securities            
Beginning Balance 
$
393
  
$
-
  
$
-
  
$
393
 
Provision for credit losses  
-
   
-
   
-
   
-
 
Ending Balance 
$
393
  
$
-
  
$
-
  
$
393
 

12 months. None were
Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 2—Investment Securities—Continued

The amortized cost and estimated fair values of investment securities at June 30, 2023 by contractual final maturity are shown in a loss position for 12 monthsthe 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
 $321  $321  $283  $283 
After one year through five years  18,571   18,018   12,292   12,201 
After five years through ten years  7,135   6,871   28,355   26,675 
After ten years  112,067   89,433   797,516   645,344 
Total $
138,094  $
114,643  $
838,446  $
684,503 

Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or more. Asearly redemptions that may occur. Expected maturities of September 30, 2017, over ninety-eight percent ofmortgage-backed and CMO securities may differ from contractual maturities because borrowers have the Company’s bank-qualified municipal bond portfolio is rated at either the issueright to call or issuer level, and all of these ratings are “investment grade.” prepay obligations with or without call or prepayment penalties.

The Company monitors the statuscredit quality of those held-to-maturity securities not issued by the two percentU.S. government or one of its agencies or government sponsored entities, through the portfolio that is not rateduse of credit ratings. Credit ratings are reviewed and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security.
updated quarterly. The unrealized losses on the Company’s investment in obligations of states and political subdivisions were $0, $40,000 and $0 at September 30, 2017, December 31, 2016 and September 30, 2016, respectively. Management believes that any unrealized losses on the Company's investments in obligations of states and political subdivisions were primarily caused by interest rate fluctuations. The contractual terms of these investments do not permit the issuer to settle the securities at a price less thanfollowing table summarizes the amortized cost of the investment. Because the Company does not intend to sell theheld-to-maturity municipal securities and it is more likely than not that the Company will not have to sell the securities before recoveryby credit rating at June 30, 2023:

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

As of their cost basis, the Company does not considerJune 30, 2023, there were no past due principal or interest payments associated with these investments to be other-than-temporarily impaired at December 31, 2016 and September 30, 2016.securities.


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, 2023 $30,482  $-  $5,686 
Six months ended June 30, 2022 $2,610  $2  $- 
  
Three Months
Ended September 30,
  
Nine Months
Ended September 30,
 
(in thousands) 2017  2016  2017  2016 
Proceeds $-  $1,855  $7,831  $104,750 
Gains  -   3   143   248 
Losses  -   -   12   534 


Pledged Securities

As of SeptemberJune 30, 2017,2023, securities carried at $201.8$582.2 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) borrowings, and other government agency deposits as required by law. This amount was $171.9$478.7 million at December 31, 2016,2022.

13
Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 3—Loans and $185.1 million at September 30, 2016.Leases


Investment in Unconsolidated Subsidiary
On April 5, 2017, the Company purchased 4.9%Loans and leases as of the voting sharesdates indicated consisted of the following:

(Dollars in thousands) 
June 30,
2023
  
December 31,
2022
 
Loans and leases held-for-investment, net
      
Real estate:      
Commercial $1,302,460  $1,328,691 
Agricultural  739,207   726,938 
Residential and home equity  392,754   387,753 
Construction  172,903   166,538 
Total real estate  2,607,324   2,609,920 
Commercial & industrial  479,908   478,758 
Agricultural
  282,725   314,525 
Commercial leases  126,554   112,629 
Consumer and other  5,553   5,886 
Total gross loans and leases  3,502,064   3,521,718 
Unearned income  (10,341)  (9,357)
Total net loans and leases  3,491,723   3,512,361 
Allowance for credit losses  (71,112)  (66,885)
Total loans and leases held-for-investment, net $3,420,611  $3,445,476 

At June 30, 2023, the portion of loans that were approved for pledging as collateral on borrowing lines with the Federal Home Loan Bank of Rio Vista, Rio Vista, California for $1.4 million.  On July 3, 2017,(“FHLB”) and the Federal Reserve Bank of San Francisco approved(“FRB”) were $1.3 billion and $894.4 million, respectively. The borrowing capacity on these loans was $784.1 million from FHLB and $655.0 million from the Company’s application to acquire an additional 34.55% of the voting shares for $10.5 million.  The purchase of the additional shares closed on July 20, 2017. The Company, as per requirements outlined in ASC 323-10-15-6, does not have the ability to exercise significant influence over BORV’s operating and financial policies. Accordingly, the investment in BORV is accounted for under the cost method of accounting as Other Assets.FRB.

18
3. Loans & Leases and Allowance for Credit Losses

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

September 30, 2017 
Commercial Real
Estate
  
Agricultural
Real Estate
  
Real Estate
Construction
  
Residential 1st
Mortgages
  
Home Equity
Lines & Loans
  Agricultural  Commercial  
Consumer &
Other
  Leases  Unallocated  Total 
                                  
Year-To-Date Allowance for Credit Losses:                               
Beginning Balance- January 1, 2017 $11,110  $9,450  $3,223  $865  $2,140  $7,381  $8,515  $200  $3,586  $1,449  $47,919 
Charge-Offs  (109)  -   -   -   -   (7)  -   (114)  -   -   (230)
Recoveries  110   -   -   37   6   -   6   46   -   -   205 
Provision  (14)  1,946   (473)  95   115   (14)  539   77   (392)  971   2,850 
Ending Balance- September 30, 2017 $11,097  $11,396  $2,750  $997  $2,261  $7,360  $9,060  $209  $3,194  $2,420  $50,744 
Third Quarter Allowance for Credit Losses:                                     
Beginning Balance- July 1, 2017 $11,242  $10,265  $2,687  $872  $2,170  $7,236  $9,544  $205  $2,952  $1,891  $49,064 
Charge-Offs  -   -   -   -   -   -   -   (54)  -   -   (54)
Recoveries  99   -   -   18   1   -   2   14   -   -   134 
Provision  (244)  1,131   63   107   90   124   (486)  44   242   529   1,600 
Ending Balance- September 30, 2017 $11,097  $11,396  $2,750  $997  $2,261  $7,360  $9,060  $209  $3,194  $2,420  $50,744 
Ending Balance Individually Evaluated for Impairment  385   -   -   61   17   69   231   5   -   -   768 
Ending Balance Collectively Evaluated for Impairment  10,712   11,396   2,750   936   2,244   7,291   8,829   204   3,194   2,420   49,976 
Loans & Leases:                                            
Ending Balance $683,037  $470,738  $162,167  $257,920  $33,350  $259,127  $257,951  $7,312  $85,177  $-  $2,216,779 
Ending Balance Individually Evaluated for Impairment  4,855   -   -   1,887   369   368   1,752   7   -   -   9,238 
Ending Balance Collectively Evaluated for Impairment $678,182  $470,738  $162,167  $256,033  $32,981  $258,759  $256,199  $7,305  $85,177  $-  $2,207,541 
19
December 31, 2016 
Commercial Real
Estate
  
Agricultural
Real Estate
  
Real Estate
Construction
  
Residential 1st
Mortgages
  
Home Equity
Lines & Loans
  Agricultural  Commercial  
Consumer &
Other
  Leases  Unallocated  Total 
                                  
Year-To-Date Allowance for Credit Losses:                               
Beginning Balance- January 1, 2016 $10,063  $6,881  $2,485  $789  $2,146  $6,308  $7,836  $175  $3,294  $1,546  $41,523 
Charge-Offs  -   -   -   (21)  (46)  -   -   (105)  -   -   (172)
Recoveries  2   -   -   26   103   -   47   55   -   -   233 
Provision  1,045   2,569   738   71   (63)  1,073   632   75   292   (97)  6,335 
Ending Balance- December 31, 2016 $11,110  $9,450  $3,223  $865  $2,140  $7,381  $8,515  $200  $3,586  $1,449  $47,919 
Ending Balance Individually Evaluated for Impairment  -   -   -   70   18   128   608   7   -   -   831 
Ending Balance Collectively Evaluated for Impairment  11,110   9,450   3,223   795   2,122   7,253   7,907   193   3,586   1,449   47,088 
Loans & Leases:                                            
Ending Balance $668,046  $467,685  $176,462  $242,247  $31,625  $295,325  $217,577  $6,913  $71,721  $-  $2,177,601 
Ending Balance Individually Evaluated for Impairment  1,932   1,304   -   2,126   402   625   4,464   10   -   -   10,863 
Ending Balance Collectively Evaluated for Impairment $666,114  $466,381  $176,462  $240,121  $31,223  $294,700  $213,113  $6,903  $71,721  $-  $2,166,738 

September 30, 2016 
Commercial Real
Estate
  
Agricultural
Real Estate
  
Real Estate
Construction
  
Residential 1st
Mortgages
  
Home Equity
Lines & Loans
  Agricultural  Commercial  
Consumer &
Other
  Leases  Unallocated  Total 
                                  
Year-To-Date Allowance for Credit Losses:                               
Beginning Balance- January 1, 2016 $10,063  $6,881  $2,485  $789  $2,146  $6,308  $7,836  $175  $3,294  $1,546  $41,523 
Charge-Offs  -   -   -   (7)  (46)  -   -   (77)  -   -   (130)
Recoveries  2   -   -   13   102   -   45   41   -   -   203 
Provision  57   2,490   (27)  34   (7)  (86)  (281)  40   250   380   2,850 
Ending Balance- September 30, 2016 $10,122  $9,371  $2,458  $829  $2,195  $6,222  $7,600  $179  $3,544  $1,926  $44,446 
Third Quarter Allowance for Credit Losses:                                     
Beginning Balance- July 1, 2016 $10,236  $9,501  $2,442  $837  $2,149  $6,223  $7,849  $170  $3,442  $1,269  $44,118 
Charge-Offs  -   -   -   -   -   -   -   (25)  -   -   (25)
Recoveries  -   -   -   4   69   -   16   14   -   -   103 
Provision  (114)  (130)  16   (12)  (23)  (1)  (265)  20   102   657   250 
Ending Balance- September 30, 2016 $10,122  $9,371  $2,458  $829  $2,195  $6,222  $7,600  $179  $3,544  $1,926  $44,446 
Ending Balance Individually Evaluated for Impairment  -   -   -   74   18   129   620   7   -   -   848 
Ending Balance Collectively Evaluated for Impairment  10,122   9,371   2,458   755   2,177   6,093   6,980   172   3,544   1,926   43,598 
Loans & Leases:                                            
Ending Balance $627,114  $439,972  $175,045  $238,376  $32,513  $274,704  $214,086  $6,975  $70,885  $-  $2,079,670 
Ending Balance Individually Evaluated for Impairment  4,324   513   -   2,173   409   640   4,509   11   -   -   12,579 
Ending Balance Collectively Evaluated for Impairment $622,790  $439,459  $175,045  $236,203  $32,104  $274,064  $209,577  $6,964  $70,885  $-  $2,067,091 

The ending balance of loans individually evaluated for impairment includes restructured loans in the amount of $3.0 million at September 30, 2017, $3.3 million at December 31, 2016 and $4.9 million at September 30, 2016, which are no longer classified as TDRs.
20
The following tables show the loan & lease portfolio allocated by management’s internal risk ratings at the dates indicated (in thousands):

September 30, 2017 Pass  
Special
Mention
  Substandard  
Total Loans
& Leases
 
Loans & Leases:            
Commercial Real Estate $678,083  $4,458  $496  $683,037 
Agricultural Real Estate  465,427   1,281   4,030   470,738 
Real Estate Construction  152,989   9,178   -   162,167 
Residential 1st Mortgages  256,906   43   971   257,920 
Home Equity Lines & Loans  33,297   -   53   33,350 
Agricultural  250,372   5,331   3,424   259,127 
Commercial  253,144   4,184   623   257,951 
Consumer & Other  7,142   -   170   7,312 
Leases  82,889   2,288   -   85,177 
Total $2,180,249  $26,763  $9,767  $2,216,779 

December 31, 2016 Pass  
Special
Mention
  Substandard  Total Loans 
Loans & Leases:            
Commercial Real Estate $659,694  $6,817  $1,535  $668,046 
Agricultural Real Estate  464,997   1,384   1,304   467,685 
Real Estate Construction  176,462   -   -   176,462 
Residential 1st Mortgages  241,816   47   384   242,247 
Home Equity Lines and Loans  31,558   -   67   31,625 
Agricultural  283,525   11,366   434   295,325 
Commercial  208,172   6,974   2,431   217,577 
Consumer & Other  6,705   -   208   6,913 
Leases  71,721   -   -   71,721 
Total $2,144,650  $26,588  $6,363  $2,177,601 

September 30, 2016 Pass  
Special
Mention
  Substandard  
Total Loans
& Leases
 
Loans & Leases:            
Commercial Real Estate $618,975  $7,141  $998  $627,114 
Agricultural Real Estate  437,059   1,418   1,495   439,972 
Real Estate Construction  173,556   1,489   -   175,045 
Residential 1st Mortgages  237,254   404   718   238,376 
Home Equity Lines & Loans  32,408   -   105   32,513 
Agricultural  273,184   1,070   450   274,704 
Commercial  204,119   7,105   2,862   214,086 
Consumer & Other  6,816   -   159   6,975 
Leases  70,885   -   -   70,885 
Total $2,054,256  $18,627  $6,787  $2,079,670 

See “Note 1. Significant Accounting Policies - Allowance for Credit Losses” for a description of the internal risk ratings used by the Company. There were no loans or leases outstanding at September 30, 2017, December 31, 2016, and September 30, 2016, rated doubtful or loss.
21

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

September 30, 2017 
30-59 Days
Past Due
  
60-89 Days
Past Due
  
90 Days and
Still Accruing
  Nonaccrual  
Total Past
Due
  Current  
Total
Loans & Leases
 
Loans & Leases:                     
Commercial Real Estate $-  $-  $-  $-  $-  $683,037  $683,037 
Agricultural Real Estate  -   -   -   -   -   470,738   470,738 
Real Estate Construction  -   -   -   -   -   162,167   162,167 
Residential 1st Mortgages  -   -   -   -   -   257,920   257,920 
Home Equity Lines & Loans  -   -   -   -   -   33,350   33,350 
Agricultural  -   -   -   -   -   259,127   259,127 
Commercial  -   3   -   -   3   257,948   257,951 
Consumer & Other  16   -   -   4   20   7,292   7,312 
Leases  -   -   -   -   -   85,177   85,177 
Total $16  $3  $-  $4  $23  $2,216,756  $2,216,779 



  June 30, 2023 
(Dollars in thousands) Current  
30-89 Days
Past Due
  
90+ Days
Past Due
  Non-accrual  
Total
Past Due
  Total 
Loans and leases held-for-investment, net
                  
Real estate:                  
Commercial $1,293,842  $-  $-  $375  $375  $1,294,217 
Agricultural  739,207   -   -   -   -   739,207 
Residential and home equity  392,754   -   -   -   -   392,754 
Construction  172,903   -   -   -   -   172,903 
Total real estate  2,598,706   -   -   375   375   2,599,081 
Commercial & industrial  479,729   179   -   -   179   479,908 
Agricultural  282,725   -   -   -   -   282,725 
Commercial leases  124,456   -   -   -   -   124,456 
Consumer and other  5,549   4   -   -   4   5,553 
Total loans and leases, net $3,491,165  $183  $-  $375  $558  $3,491,723 
December 31, 2016 
30-59 Days
Past Due
  
60-89 Days
Past Due
  
90 Days and
Still Accruing
  Nonaccrual  
Total Past
Due
  Current  
Total
Loans & Leases
 
Loans & Leases:                     
Commercial Real Estate $-  $-  $-  $-  $-  $668,046  $668,046 
Agricultural Real Estate  -   -   -   1,304   1,304   466,381   467,685 
Real Estate Construction  -   -   -   -   -   176,462   176,462 
Residential 1st Mortgages  -   -   -   95   95   242,152   242,247 
Home Equity Lines and Loans  -   -   -   -   -   31,625   31,625 
Agricultural  -   -   -   243   243   295,082   295,325 
Commercial  -   -   -   1,425   1,425   216,152   217,577 
Consumer & Other  10   -   -   7   17   6,896   6,913 
Leases  -   -   -   -   -   71,721   71,721 
Total $10  $-  $-  $3,074  $3,084  $2,174,517  $2,177,601 

September 30, 2016 
30-59 Days
Past Due
  
60-89 Days
Past Due
  
90 Days and
Still Accruing
  Nonaccrual  
Total Past
Due
  Current  
Total
Loans & Leases
 
Loans & Leases:                     
Commercial Real Estate $-  $-  $-  $998  $998  $626,116  $627,114 
Agricultural Real Estate  -   983   -   322   1,305   438,667   439,972 
Real Estate Construction  -   -   -   -   -   175,045   175,045 
Residential 1st Mortgages  -   -   -   55   55   238,321   238,376 
Home Equity Lines & Loans  -   -   -   -   -   32,513   32,513 
Agricultural  -   -   -   243   243   274,461   274,704 
Commercial  -   -   -   1,450   1,450   212,636   214,086 
Consumer & Other  5   -   -   7   12   6,963   6,975 
Leases  -   -   -   -   -   70,885   70,885 
Total $5  $983  $-  $3,075  $4,063  $2,075,607  $2,079,670 

 
22
14
Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 3—Loans and Leases—Continued

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



Non-accrual loans are summarized as follows:


(Dollars in thousands) 
June 30,
2023
  
December 31,
2022
 
Non-accrual loans and leases:      
Real estate:      
Commercial $375  $403 
Agricultural  -   - 
Residential and home equity  -   - 
Construction  -   168 
Total real estate  375   571 
Commercial & industrial  -   - 
Agricultural  -   - 
Commercial leases  -   - 
Consumer and other  -   - 
Total non-accrual loans and leases $375  $571 

During the six months ended June 30, 2023, we had one residential real estate loan modified in the amount of $127,000.  The following tables show information relatedcontractual interest rate of the modified loan decreased from 3.18% to impaired2.18% and the contractual term was extended from 15 years to 25 years.  There were no loans & leases formodified on or after January 1, 2023, when the periods indicated (in thousands):company adopted ASU 2022-02, through June 30, 2023 that subsequently defaulted during the period presented.

           Three Months Ended September 30, 2017  Nine Months Ended September 30, 2017 
September 30, 2017 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance recorded:                     
Commercial Real Estate $106  $107  $-  $107  $2  $121  $9 
Agricultural Real Estate  -   -   -   488   -   868   - 
Residential 1st Mortgages  399   456   -   403   3   415   6 
Home Equity Lines & Loans  -   -   -   -   -   21   - 
Agricultural  -   -   -   30   -   40   - 
Commercial  -   -   -   -   -   504   - 
  $505  $563  $-  $1,028  $5  $1,969  $15 
With an allowance recorded:                            
Commercial Real Estate $2,991  $2,977  $384  $3,000  $25   2,509  $80 
Residential 1st Mortgages  519   574   26   472   3   442   12 
Home Equity Lines & Loans  83   90   4   67   -   76   2 
Agricultural  367   367   69   499   7   588   21 
Commercial  1,760   1,752   234   1,696   14   1,624   44 
Consumer & Other  4   11   4   14   -   12   - 
  $5,724  $5,771  $721  $5,748  $49   5,251  $159 
Total $6,229  $6,334  $721  $6,776  $54  $7,220  $174 

December 31, 2016 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance recorded:               
Commercial Real Estate $184  $184  $-  $354  $7 
Residential 1st Mortgages  451   504   -   404   10 
Home Equity Lines and Loans  -   -   -   181   - 
Agricultural  -   -   -   144   5 
Commercial  3,023   3,023   -   3,053   133 
  $4,963  $5,016  $-  $4,705  $158 
With an allowance recorded:                    
Residential 1st Mortgages $430  $469  $21  $336  $13 
Home Equity Lines and Loans  90   97   5   123   4 
Agricultural  625   625   128   581   22 
Commercial  1,441   1,640   608   1,536   8 
Consumer & Other  6   13   6   12   - 
  $2,592  $2,844  $768  $2,588  $47 
Total $7,555  $7,860  $768  $7,293  $205 

           Three Months Ended September 30, 2016  Nine Months Ended September 30, 2016 
September 30, 2016 
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance recorded:                     
Commercial Real Estate $1,074  $1,071  $-  $575  $2  $248  $6 
Agricultural Real Estate  322   322   -   404   -   270   3 
Residential 1st Mortgages  414   466   -   417   3   411   7 
Home Equity Lines & Loans  -   -   -   -   -   339   - 
Agricultural  191   191   -   192   2   193   5 
Commercial  3,042   3,043   -   3,053   33   3,073   100 
Consumer & Other  -   -       1   -   1   - 
  $5,043  $5,093  $-  $4,642  $40  $4,535  $121 
With an allowance recorded:                            
Residential 1st Mortgages $430  $471  $21  $335  $3  $290  $9 
Home Equity Lines & Loans  92   98   5   93   1   142   3 
Agricultural  640   640   137   644   6   529   18 
Commercial  1,466   1,648   620   1,536   -   1,599   8 
Consumer & Other  7   13   7   8   -   18   - 
  $2,635  $2,870  $790  $2,616  $10  $2,578  $38 
Total $7,678  $7,963  $790  $7,258  $50  $7,113  $159 

 
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15
Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Total recorded investment shown in the prior tables will not equal the total ending balance of loans & leases individually evaluated for impairment on the allocation of allowance tables. This is because the calculation of recorded investment takes into account charge-offs, net unamortized loan & lease fees & costs, unamortized premium or discount,Note 3—Loans and accrued interest. This table also excludes impaired loans that were previously modified in a troubled debt restructuring, are currently performing and are no longer classified as TDRs.Leases—Continued


At September 30, 2017, the Company allocated $721,000 of specific reserves to $6.2 million of troubled debt restructured loans & leases, all of which were performing. The Company had no commitments at September 30, 2017 to lend additional amounts to customers with outstanding loans or leases that are classified as TDRs. 

During the three and nine-month periods ending September 30, 2017, there were four loans & leases modified as a troubled debt restructuring. When a loan is restructured, the modification of the terms can include one or a combination of the following: a reduction of the stated interest rate; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate were for 5 years. Modifications involving an extension of the maturity date ranged from 7 to 10 years.


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


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

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


  June 30, 2023 
  Term Loans Amortized Cost Basis by Origination Year       
(Dollars in thousands) 2023  2022  2021  2020  2019  Prior  
Revolving
Loans
Amortized
Cost
  Total 
Net loans and leases held-for-investment                        
Real estate:                        
Commercial                        
Pass $72,459  $172,866  $226,209  $146,307  $69,072  $285,957  $318,032  $1,290,902 
Special mention  -   -   -   -   -   2,340   600   2,940 
Substandard  -   -   -   -   -   375   -   375 
Doubtful  -   -   -   -   -   -   -   - 
Total Commercial $72,459  $172,866  $226,209  $146,307  $69,072  $288,672  $318,632  $1,294,217 
Commercial
                                
Current-period gross charge-offs
 $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
- 
                                 
Agricultural
                                
Pass $35,673  $74,658  $41,588  $51,985  $14,224  $174,620  $335,742  $728,490 
Special mention  -   -   -   -   -   -   -   - 
Substandard  -   -   -   -   -   6,128   4,589   10,717 
Doubtful  -   -   -   -   -   -   -   - 
Total Agricultural
 $35,673  $74,658  $41,588  $51,985  $14,224  $180,748  $340,331  $739,207 
Agricultural                                
Current-period gross charge-offs $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
- 
                                 
Residential and home equity                                
Pass $19,331  $63,975  $92,602  $82,832  $13,730  $76,970  $43,022  $392,462 
Special mention
  -   -   -   -   -   -   -   - 
Substandard  -   -   -   -   -   292   -   292 
Doubtful  -   -   -   -   -   -   -   - 
Total Residential and home equity $19,331  $63,975  $92,602  $82,832  $13,730  $77,262  $43,022  $392,754 
Residential and home equity                                
Current-period gross charge-offs $
14  $
-  $
-  $
-  $
-  $
-  $
-  $
14 
                                 
Construction                                
Pass $-  $3,000  $-  $-  $1,575  $-  $168,328  $172,903 
Special mention
  -   -   -   -   -   -   -   - 
Substandard  -   -   -   -   -   -   -   - 
Doubtful  -   -   -   -   -   -   -   - 
Total construction $-  $3,000  $-  $-  $1,575  $-  $168,328  $172,903 
Construction  




























 
Current-period gross charge-offs $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
- 
                                 
Total Real estate $127,463  $314,499  $360,399  $281,124  $98,601  $546,682  $870,313  $2,599,081 
                                 
Commercial & industrial                                
Pass $33,979  $29,326  $33,982  $10,053  $6,174  $8,715  $349,357  $471,586 
Special mention  -   -   48   -   -   517   7,518   8,083 
Substandard  -   -   -   -   -   5   234   239 
Doubtful  -   -   -   -   -   -   -   - 
Total Commercial & industrial $33,979  $29,326  $34,030  $10,053  $6,174  $9,237  $357,109  $479,908 
Commercial & industrial                                
Current-period gross charge-offs $
-  $-  $
-  $
-  $
-  $
-  $
-  $
- 
 
17
Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 3—Loans and Leases—Continued

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

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

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

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

18
Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
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 by class modifiedare based on the fair value of the collateral at the reporting date, adjusted for selling costs as troubled debt restructuredappropriate. The collateral on the loans and leases is a significant portion of what secures the collateral dependent loans or leases duringand significant changes to the threefair value of the collateral can impact the ACL. During the six months ended June 30, 2023, there were no significant changes to the collateral that secures the collateral dependent loans, whether due to general deterioration or with credit quality indicators like appraisal value. The following tables present the amortized cost basis for collateral dependent loans and nine-month periods ended Septemberleases by type as of June 30, 2017 (in thousands):2023 and December 31, 2022, respectively:

  Three Months Ended September 30, 2017  Nine Months Ended September 30, 2017 
Troubled Debt Restructurings 
Number of
Loans
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
  
Number of
Loans
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
 
Residential 1st Mortgages  1  $112  $112   1  $112  $112 
Home Equity Lines & Loans  1   32   32   1   32   32 
Commercial  2   138   138   2   138   138 
Total  4  $282  $282   4  $282  $282 



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

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

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

 

Changes in the allowance for credit losses by $13,000 for the three and nine-month periods ending September 30, 2017.

During the three and nine-months ended September 30, 2017, the twelve months ended December 31, 2016, and the three and nine-month periods ending September 30, 2016 there were no payment defaults on loans or leases modifiedare as troubled debt restructurings within twelve months following the modification. The Company considers a loan or lease to be in payment default once it is greater than 90 days contractually past due under the modified terms.

The following table presents loans by class modified as troubled debt restructured loans for the period ended December 31, 2016 (in thousands):
  December 31, 2016 
Troubled Debt Restructurings 
Number of
Loans
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
 
Commercial Real Estate  1  $112  $112 
Residential 1st Mortgages  2   289   281 
Home Equity Lines and Loans  2   305   286 
Total  5  $706  $679 
follows:
24
  For the Three Months Ended June 30, 2023 
(Dollars in thousands) 
Commercial &
Agricultural
R/E
  Construction  
Residential &
Home Equity
  
Commercial
&
Agricultural
  
Commercial
Leases
  Consumer
& Other		  Total 
Allowance for credit losses:                     
Balance at beginning of period
 $32,694  $2,785  $7,334  $23,888  $1,720  $152  $68,573 
Provision / (recapture) for credit losses  2,001   410   (176)  285   (63)
  43   2,500 
Charge-offs  -   -   -   -   -   (9)  (9)
Recoveries  -   -   21   21   -   6   48 
Net (charge-offs) / recoveries  -   -   21   21   -   (3)  39 
Balance at end of period
 $34,695  $3,195  $7,179  $24,194  $1,657  $192  $71,112 

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

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

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

20
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,
2023
  
December 31,
2022
 
Certificates of deposit:
      
Certificates of deposit less than or equal to $250,000 $286,881  $202,554 
Certificates of deposit greater than $250,000  265,899   128,846 
Total certificates of  deposit
 $552,780  $331,400 



Scheduled maturities for certificates of deposit are as follows:


(Dollars in thousands) Amount 
2023
 $205,571 
2024
  327,243 
2025
  15,007 
2026
  3,894 
2027 and beyond
  1,065 
Total certificates of  deposit
 $552,780 

Note 5—Short-term borrowings

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

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

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

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

21
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 credit lossescertain executive level employees. The ERP is a non-qualified deferred compensation plan and resultedwas developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by Internal Revenue Service regulations. The ERP is comprised of: (1) a Performance Component comprised of two contributions, one based upon profitability and a second based upon long-term cumulative profitability in charge-offsthe form of $27,000the increase in market value in excess of the increase in the book value of the Company; (2) a Salary Component which makes contributions based upon participant salary levels; and (3) an Equity Component for which contributions are discretionary and subject to Board of Directors approval.

The Company expensed $4.5 million to the twelveERP during the six months ended June 30, 2023 and $3.3 million during the six months ended June 30, 2022. The Company’s carrying value of the liability under the ERP was $58.3 million as of June 30, 2023 and $57.0 million as of December 31, 2016.

At2022. The Company’s shares of common stock held as investments in the Rabbi Trust of the ERP as of June 30, 2023 and December 31, 2016,2022 totaled 49,156 and 50,196 with an historical cost basis of $31.6 million and $31.4 million, respectively. All amounts have been fully funded into the Company allocated $736,000Rabbi Trust as of specific reservesJune 30, 2023 and December 31, 2022. The consolidated investments held in the Rabbi Trust are recorded at fair value with changes in unrealized gains or losses recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income.

Net gains on ERP plan investments were $1.8 million compared to $5.9net loss of $0.7 million of troubled debt restructured loans, of which $4.5 million were performing. at June 30, 2023 and 2022, respectively. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices.

Senior Management Retention Plan
The Company, had no commitments atthrough the Bank, sponsors a Senior Management Retention Plan (“SMRP”) for certain senior level employees. The SMRP is a non-qualified deferred compensation plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by Internal Revenue Service regulations. All contributions are discretionary and subject to the Board of Directors approval.

The Company expensed $2.1 million to the SMRP during the six months ended June 30, 2023 and $1.4 million for six months ended June 30, 2022. The Company’s carrying value of the liability under the SMRP was $16.9 million as of June 30, 2023 and $13.6 million as of December 31, 2016, to lend additional amounts to customers with outstanding loans that are classified2022. The Company’s shares of stock held as troubled debt restructurings.

Duringinvestments in the period endingRabbi Trust of the SMRP as of June 30, 2023 and December 31, 2016,2022 totaled 17,941 and 15,998 shares with an historical cost basis of $12.7 million and $10.8 million, respectively. All amounts have been fully funded into the termsRabbi Trust as of certain loans were modified as troubled debt restructurings. Modifications involving a reduction of the stated interest rate of the loan were for 5 years. Modifications involving an extension of the maturity date were for 10 years.

June 30, 2023 and December 31, 2022. The following table presents loans or leases by class modified as troubled debt restructured loans or leases during the three and nine-month periods ended September 30, 2016 (in thousands):
  Three Months Ended September 30, 2016  Nine Months Ended September 30, 2016 
Troubled Debt Restructurings Number of Loans  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
  
Number of
Loans
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
 
Residential 1st Mortgages  1  $192  $192   2  $289  $281 
Home Equity Lines & Loans  -   -   -   2   305   286 
Total  1  $192  $192   4  $594  $567 
The TDRs described above had no impact on the allowance for credit losses for the three and nine-month periods ending September 30, 2016, and resulted in charge-offs of $0 and $27,000 for the three and nine-month periods ended September 30, 2016.

At September 30, 2016, the Company allocated $758,000 of specific reserves to $6.1 million of troubled debt restructured loans & leases, of which $4.6 million were performing. The Company had no commitments at September 30, 2016 to lend additional amounts to customers with outstanding loans or leases that are classified as troubled debt restructurings.

During the three-month period ending September 30, 2016, there was one loan modified as a troubled debt restructuring. During the nine-month period ending September 30, 2016, the terms of certain loans & leases were modified as troubled debt restructurings. The modification of the terms of such loans & leases can include one or a combination of the following: a reduction of the stated interest rate; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investmentconsolidated investments held in the loan.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.


Modifications involving a reductionNet gains on SMRP plan investments were $0.4 million compared to net gains of the stated$0.1 million at June 30, 2023 and 2022, respectively. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rate were for 5 years. Modifications involving an extensionrates and stock prices.

22
Table of the maturity date were for 10 years.Contents

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



The Company follows the “Fair Value Measurement and Disclosures” topic of the FASB ASC, which establishes a framework for measuringuses fair value in U.S. GAAP and expands disclosures aboutmeasurements to record fair value measurements. This standard applies whenever other standards require, or permit,adjustments to certain financial and non-financial assets orand liabilities and to be measureddetermine fair value disclosures. Various financial instruments such as available-for-sale securities are recorded at fair value but does not expandon a recurring basis. Additionally, from time to time, the useCompany 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 in any new circumstances. In this standard,measurements has been established. The valuation hierarchy is based upon the FASB clarifiestransparency of inputs to the principle that fair value should be based on the assumptions market participants would use when pricing thevaluation of an asset or liability. In supportliability as of this principle, this standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.measurement date. The fair value hierarchy isthree levels are defined as follows:


25
Level 1 – inputs – Unadjustedto the valuation methodology are quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.in active markets.



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



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



The carrying amounts and estimated fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments withinheld 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 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 AFS 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 & leases at fair value on a recurring basis. However, from time to time, a loan or lease is considered impaired and an allowance for credit losses is established. Once a loan or lease is identified as individually impaired, management measures impairment in accordance with the “Receivable” topic of the FASB ASC. The fair value of impaired loans or leases is estimated using one of several methods, including collateral value when the loan is collateral dependent, market value of similar debt, enterprise value, and discounted cash flows. Impaired loans & leases not requiring an allowance represent loans & leases for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans & leases. Impaired loans & leases where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The fair value of collateral dependent impaired loans is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take into account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring impaired loans is primarily the sales comparison approach less selling costs of 10%.

Other Real Estate (“ORE”) is reported at fair value on a non-recurring basis. Fair valuesestimates are based on recent real estate appraisals.judgements regarding future expected loss experience, risk characteristics and economic conditions. These appraisals may use a single valuation approach or a combination of approaches including sales comparison, costestimates are subjective, involve uncertainties, and cannot be determined with precision. Changes in assumptions could significantly affect 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. estimates.



The valuation technique usedmethodologies for Level 3 nonrecurring ORE is primarily the sales comparison approach less selling costs of 10%.

At September 30, 2017, there were no formal foreclosure proceedings in process for consumer mortgage loans secured by residential real estate properties.
26
Table of Contents
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis are described in the Fair Value note in the Company’s 2022 Annual Report on Form 10-K. There have been no significant changes in these methodologies since then.

23
Table of Contents
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 7—Fair Value Measurements—Continued

The following tables summarize the carrying amount and estimated fair values of the Company’s financial assets and liabilities not carried at fair value, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated.

     
Fair Value Measurements
At September 30, 2017, Using
 
(in thousands) 
Fair Value
Total
  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Available-for-Sale Securities:            
Government Agency & Government-Sponsored Entities $3,169  $-  $3,169  $- 
US Treasury Notes  144,410   144,410   -   - 
US Govt SBA  31,691   -   31,691   - 
Mortgage Backed Securities  276,043   -   276,043   - 
Other  1,010   200   310   500 
Total Assets Measured at Fair Value On a Recurring Basis $456,323  $144,610  $311,213  $500 

June 30, 2023
    
Fair Value Measurements
 
(Dollars in thousands) 
Carrying
Amount
  Level 1  Level 2  Level 3  
Total Fair
Value
 
Financial Assets:               
Cash and cash equivalents $586,972  $586,972  $-  $-  $586,972 
Held-to-maturity securities  837,996   -   628,149   56,356   684,505 
Non-marketable securities  15,549   -   -   15,549   15,549 
Loans and leases, net  3,420,611   -   -   3,224,473   3,224,473 
Bank-owned life insurance  66,582   66,582   -   -   66,582 
                     
Financial Liabilities:                    
Total deposits $
4,638,313  $-  $4,085,533  $543,784  $4,629,317 
Subordinated debentures  10,310   -   12,717   -   12,717 


December 31, 2022
    
Fair Value Measurements
 
(Dollars in thousands) 
Carrying
Amount
  Level 1  Level 2  Level 3  
Total Fair
Value
 
Financial Assets:               
Cash and cash equivalents $588,257  $588,257  $-  $-  $588,257 
Held-to-maturity securities  844,953   -   645,859   42,534   688,393 
Non-marketable securities  15,549   -   -   15,549   15,549 
Loans and leases, net  3,445,476   -   -   3,335,042   3,335,042 
Bank-owned life insurance  73,038   73,038   -   -   73,038 
                     
Financial Liabilities:                    
Total deposits $4,759,269  $-  $4,427,869  $323,572  $4,751,441 
Subordinated debentures  10,310   -   12,211   -   12,211 
     
Fair Value Measurements
At December 31, 2016, Using
 
(in thousands) 
Fair Value
Total
  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Available-for-Sale Securities:            
Government Agency & Government-Sponsored Entities $3,241  $-  $3,241  $- 
US Treasury Notes  134,428   134,428   -   - 
US Govt SBA  36,314   -   36,314   - 
Mortgage Backed Securities  273,270   -   273,270   - 
Other  1,010   200   310   500 
Total Assets Measured at Fair Value On a Recurring Basis $448,263  $134,628  $313,135  $500 

     
Fair Value Measurements
At September 30, 2016, Using
 
(in thousands) 
Fair Value
Total
  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Available-for-Sale Securities:            
Government Agency & Government-Sponsored Entities $83,293  $-  $83,293  $- 
US Treasury Notes  85,681   85,681   -   - 
Mortgage Backed Securities  188,873   -   188,873   - 
Other  1,010   200   310   500 
Total Assets Measured at Fair Value On a Recurring Basis $358,857  $85,881  $272,476  $500 

Fair values for Level 2 available-for-sale investment securities are based on quoted market prices for similar securities. During the three and nine-months ended September 30, 2017 and 2016, there were no transfers in or out of Level 1, 2, or 3.

27
24
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Available for sale investment securities categorized as Level 3 assets for the period ended September 30, 2017, December 31, 2016, and September 30, 2016, consisted of a $500,000 investment in a limited liability company that purchases SBA loans. There were no gains or losses or transfers in or out of level 3 during the periods ended September 30, 2017, December 31, 2016, and September 30, 2016.Note 7—Fair Value Measurements—Continued


The following tables present information about the Company’s other real estateBank’s assets and impaired loans or leases, classes of assets or liabilities that the Company carriesmeasured at fair value on a recurring and non-recurring basis and indicatesindicate the fair value hierarchy of the valuation techniques utilized by the CompanyBank to determine such fair value for the periods indicated. Not all impaired loans

June 30, 2023
    
Fair Value Measurements
 
(Dollars in thousands) 
Carrying
Amount
  Level 1  Level 2  Level 3  
Total Fair
Value
 
Fair valued on a recurring basis:               
Available-for-sale securities               
U.S. Government-sponsored securities $
3,841  $
-  $
3,841  $
-  $
3,841 
Mortgage-backed securities  100,068   -   100,068   -   100,068 
Collateralized mortgage obligations  586   -   586   -   586 
Corporate securities  9,838   -   9,838   -   9,838 
Other  310   -   310   -   310 
                     
Fair valued on a non-recurring basis:                    
    Collateral Dependent loans
 $
14,030  $
-  $
-  $
14,030  $
14,030 
Other real estate owned
  
873   
-   
-   
873   
873 

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

25
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,
2023
  
December 31,
2022
 
         
Commitments to extend credit, including unsecured commitments of $19,961 and $20,401 as of June 30, 2023 and  December 31, 2022, respectively
 $1,123,756  $1,141,036 
Stand-by letters of credit, including unsecured commitments of $8,065 and $7,954 as of June 30, 2023 and December 31, 2022, respectively
  16,863   17,138 



The Company’s exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or leasesmay not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer’s creditworthiness are carried at fair value. Impaired loans or leases are onlyperformed on a case-by-case basis.The estimated exposure to loss from these commitments is included in the following tables when their fair value is based uponreserve for unfunded loan commitments which amounted to $2.1 million at June 30, 2023 and December 31, 2022.



Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a current appraisalcustomer to a third-party. Outstanding standby letters of credit have maturity dates ranging from 1 to 78 months with final expiration in January 2027. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.


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



In the ordinary course of business, the Company becomes involved in litigation arising out of its normal business activities. Management, after consultation with legal counsel, believes that the ultimate liability, if any, resulting from the disposition of such claims would not be material in relation to the financial position of the collateral,Company.



The Company may be required to maintain average reserves on deposit with the Federal Reserve Bank primarily based on deposits outstanding. Reserve requirements are offset by the Company’s vault cash and if that appraisal results in a partial charge-off ordeposit balances maintained with the establishment of a specific reserve.Federal Reserve Bank.
     
Fair Value Measurements
At September 30, 2017, Using
 
(in thousands) 
Fair Value
Total
  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Impaired Loans            
Commercial Real Estate $2,594  $-  $-  $2,594 
Residential 1st Mortgage  491   -   -   491 
Home Equity Lines and Loans  78   -   -   78 
Agricultural  298   -   -   298 
Commercial  1,519   -   -   1,519 
Total Impaired Loans  4,980   -   -   4,980 
Other Real Estate                
Real Estate Construction  873   -   -   873 
Total Other Real Estate  873   -   -   873 
Total Assets Measured at Fair Value On a Non-Recurring Basis $5,853  $-  $-  $5,853 

     
Fair Value Measurements
At December 31, 2016, Using
 
(in thousands) 
Fair Value
Total
  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Impaired Loans:            
Residential 1st Mortgage $480  $-  $-  $480 
Home Equity Lines and Loans  83   -   -   83 
Agricultural  497   -   -   497 
Commercial  833   -   -   833 
Total Impaired Loans  1,893   -   -   1,893 
Other Real Estate:                
Home Equity Lines and Loans  785   -   -   785 
Real Estate Construction  2,960   -   -   2,960 
Total Other Real Estate  3,745   -   -   3,745 
Total Assets Measured at Fair Value On a Non-Recurring Basis $5,638  $-  $-  $5,638 

28
26
Table of Contents
     
Fair Value Measurements
At September 30, 2016, Using
 
(in thousands) 
Fair Value
Total
  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Impaired Loans            
Residential 1st Mortgage $496  $-  $-  $496 
Home Equity Lines and Loans  84   -   -   84 
Agricultural  503   -   -   503 
Commercial  847   -   -   847 
Total Impaired Loans  1,930   -   -   1,930 
Other Real Estate                
Home Equity Lines and Loans  785   -   -   785 
Total Other Real Estate  785   -   -   785 
Total Assets Measured at Fair Value On a Non-Recurring Basis $2,715  $-  $-  $2,715 
The Company’s property appraisals are primarily based on the sales comparison approach and the income approach methodologies, which consider recent sales of comparable properties, including their income generating characteristics, and then make adjustments to reflect the general assumptions that a market participant would make when analyzing the property for purchase. These adjustments may increase or decrease an appraised value and can vary significantly depending on the location, physical characteristics and income producing potential of each property. Additionally, the quality and volume of market information available at the time of the appraisal can vary from period to period and cause significant changes to the nature and magnitude of comparable sale adjustments. Given these variations, comparable sale adjustments are generally not a reliable indicator for how fair value will increase or decrease from period to period. Under certain circumstances, management discounts are applied based on specific characteristics of an individual property.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at September 30, 2017:

(in thousands) Fair Value Valuation TechniqueUnobservable InputsRange, Weighted Avg. 
Impaired Loans       
Commercial Real Estate $2,594 Income ApproachDiscount Rate3.25% - 3.25%, 3.25 % 
Residential 1st Mortgage $491       Sales Comparison ApproachAdjustment for Difference Between Comparable Sales1% - 4%, 3 % 
Home Equity Lines and Loans $78       Sales Comparison ApproachAdjustment for Difference Between Comparable Sales1% - 2%, 2 % 
Agricultural $298 Income ApproachDiscount Rate7.50% - 7.50%, 7.50 % 
Commercial $1,519 Income ApproachDiscount Rate2.00% - 9.00%, 3.00 % 
         
Other Real Estate        
Real Estate Construction $873       Sales Comparison ApproachAdjustment for Difference Between Comparable Sales10% - 10%, 10 %
29
5. Fair Value of Financial Instruments

U.S. GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. In some cases, book value is a reasonable estimate of fair value due to the relatively short period of time between origination of the instrument and its expected realization.

The following tables summarize the book value and estimated fair value of financial instruments for the periods indicated:
     Fair Value of Financial Instruments Using    
September 30, 2017
(in thousands)
 
Carrying
Amount
  
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Total
Estimated
Fair Value
 
Assets:               
Cash and Cash Equivalents $193,270  $193,270  $-  $-  $193,270 
                     
Investment Securities Available-for-Sale:                    
Government Agency & Government-Sponsored Entities  3,169   -   3,169   -   3,169 
U.S. Govt SBA  31,691   -   31,691   -   31,691 
U.S. Treasury Notes  144,410   144,410   -   -   144,410 
Mortgage Backed Securities  276,043   -   276,043   -   276,043 
Other  1,010   200   310   500   1,010 
Total Investment Securities Available-for-Sale  456,323   144,610   311,213   500   456,323 
                     
Investment Securities Held-to-Maturity:                    
Obligations of States and Political Subdivisions  55,542   -   39,254   17,037   56,292 
Total Investment Securities Held-to-Maturity  55,542   -   39,254   17,037   56,292 
                     
FHLB Stock  10,342   N/A   N/A   N/A   N/A 
Loans & Leases, Net of Deferred Fees & Allowance:                    
Commercial Real Estate  671,940   -   -   665,566   665,566 
Agricultural Real Estate  459,342   -   -   446,684   446,684 
Real Estate Construction  159,417   -   -   159,131   159,131 
Residential 1st Mortgages  256,923   -   -   258,256   258,256 
Home Equity Lines and Loans  31,089   -   -   31,869   31,869 
Agricultural  251,767   -   -   249,995   249,995 
Commercial  248,891   -   -   247,344   247,344 
Consumer & Other  7,103   -   -   7,067   7,067 
Leases  81,983   -   -   85,032   85,032 
Unallocated Allowance  (2,420)  -   -   (2,420)  (2,420)
Total Loans & Leases, Net of Deferred Fees & Allowance  2,166,035   -   -   2,148,524   2,148,524 
Accrued Interest Receivable  11,498   -   11,498   -   11,498 
                     
Liabilities:                    
Deposits:                    
Demand  767,162   767,162   -   -   767,162 
Interest Bearing Transaction  564,904   564,904   -   -   564,904 
Savings and Money Market  827,588   827,588   -   -   827,588 
Time  549,773   -   547,796   -   547,796 
Total Deposits  2,709,427   2,159,654   547,796   -   2,707,450 
Subordinated Debentures  10,310   -   6,589   -   6,589 
Accrued Interest Payable  939   -   939   -   939 
     Fair Value of Financial Instruments Using    
December 31, 2016
(in thousands)
 
Carrying
Amount
  
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Total
Estimated
Fair Value
 
Assets:               
Cash and Cash Equivalents $98,960  $98,960  $-  $-  $98,960 
                     
Investment Securities Available-for-Sale:                    
Government Agency & Government-Sponsored Entities  3,241   -   3,241   -   3,241 
U.S. Govt SBA  36,314   -   36,314   -   36,314 
U.S. Treasury Notes  134,428   134,428   -   -   134,428 
Mortgage Backed Securities  273,270   -   273,270   -   273,270 
Other  1,010   200   310   500   1,010 
Total Investment Securities Available-for-Sale  448,263   134,628   313,135   500   448,263 
                     
Investment Securities Held-to-Maturity:                    
Obligations of States and Political Subdivisions  58,109   -   40,415   17,993   58,408 
Total Investment Securities Held-to-Maturity  58,109   -   40,415   17,993   58,408 
                     
FHLB Stock  8,872   N/A   N/A   N/A   N/A 
Loans & Leases, Net of Deferred Fees & Allowance:                    
Commercial Real Estate  656,936   -   -   651,877   651,877 
Agricultural Real Estate  458,235   -   -   444,393   444,393 
Real Estate Construction  173,239   -   -   172,682   172,682 
Residential 1st Mortgages  241,382   -   -   241,174   241,174 
Home Equity Lines and Loans  29,485   -   -   30,495   30,495 
Agricultural  287,944   -   -   286,074   286,074 
Commercial  209,062   -   -   207,215   207,215 
Consumer & Other  6,713   -   -   6,706   6,706 
Leases  68,135   -   -   67,893   67,893 
Unallocated Allowance  (1,449)  -   -   (1,449)  (1,449)
Total Loans & Leases, Net of Deferred Fees & Allowance  2,129,682   -   -   2,107,060   2,107,060 
Accrued Interest Receivable  10,047   -   10,047   -   10,047 
                     
Liabilities:                    
Deposits:                    
Demand  756,236   756,236   -   -   756,236 
Interest Bearing Transaction  495,063   495,063   -   -   495,063 
Savings and Money Market  760,119   760,119   -   -   760,119 
Time  570,293   -   569,183   -   569,183 
Total Deposits  2,581,711   2,011,418   569,183   -   2,580,601 
Subordinated Debentures  10,310   -   6,578   -   6,578 
Accrued Interest Payable  852   -   852   -   852 
     Fair Value of Financial Instruments Using    
September 30, 2016
(in thousands)
 
Carrying
Amount
  
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Total
Estimated
Fair Value
 
Assets:               
Cash and Cash Equivalents $99,303  $99,303  $-  $-  $99,303 
                     
Investment Securities Available-for-Sale:                    
Government Agency & Government-Sponsored Entities  83,293   -   83,293   -   83,293 
US Treasury Notes  85,681   85,681   -   -   85,681 
Mortgage Backed Securities  188,873   -   188,873   -   188,873 
Other  1,010   200   310   500   1,010 
Total Investment Securities Available-for-Sale  358,857   85,881   272,476   500   358,857 
                     
Investment Securities Held-to-Maturity:                    
Obligations of States and Political Subdivisions  58,905   -   42,675   17,779   60,454 
Total Investment Securities Held-to-Maturity  58,905   -   42,675   17,779   60,454 
                     
FHLB Stock  8,872   N/A   N/A   N/A   N/A 
Loans & Leases, Net of Deferred Fees & Allowance:                    
Commercial Real Estate  616,992   -   -   620,655   620,655 
Agricultural Real Estate  430,601   -   -   422,056   422,056 
Real Estate Construction  172,587   -   -   172,358   172,358 
Residential 1st Mortgages  237,547   -   -   241,703   241,703 
Home Equity Lines and Loans  30,318   -   -   31,397   31,397 
Agricultural  268,482   -   -   267,101   267,101 
Commercial  206,486   -   -   205,769   205,769 
Consumer & Other  6,796   -   -   6,832   6,832 
Leases  67,341           69,408   69,408 
Unallocated Allowance  (1,926)  -   -   (1,926)  (1,926)
Total Loans & Leases, Net of Deferred Fees & Allowance  2,035,224   -   -   2,035,353   2,035,353 
Accrued Interest Receivable  10,116   -   10,116   -   10,116 
                     
Liabilities:                    
Deposits:                    
Demand  672,351   672,351   -   -   672,351 
Interest Bearing Transaction  433,220   433,220   -   -   433,220 
Savings and Money Market  702,441   702,441   -   -   702,441 
Time  547,625   -   547,145   -   547,145 
Total Deposits  2,355,637   1,808,012   547,145   -   2,355,157 
Subordinated Debentures  10,310   -   6,606   -   6,606 
Accrued Interest Payable  681   -   681   -   681 
Fair value estimates presented herein are based on pertinent information available to management as of September 30, 2017, December 31, 2016, and September 30, 2016. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purpose of these financial statements since that date, and; therefore, current estimates of fair value may differ significantly from the amounts presented above. The methods and assumptions used to estimate the fair value of each class of financial instrument listed in the table above are explained below.

Cash and Cash Equivalents - The carrying amounts reported in the balance sheet for cash and due from banks, interest-bearing deposits with banks, federal funds sold, and securities purchased under agreements to resell are a reasonable estimate of fair value. All cash and cash equivalents are classified as Level 1.

Investment Securities - Fair values for investment securities 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. Based on the available market information the classification level could be 1, 2, or 3.

Federal Home Loan Bank Stock - It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Loans & Leases, Net of Deferred Loan & Lease Fees & Allowance - Fair values of loans & leases are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans & leases are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans & leases are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans & leases do not necessarily represent an exit price.

Deposit Liabilities - The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for fixed-maturity certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Subordinated Debentures - The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Accrued Interest Receivable and Payable - The carrying amount of accrued interest receivable and payable approximates their fair value resulting in a Level 2 classification.

6. Dividends and Basic Earnings Per Common Share

Farmers & Merchants Bancorp common stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. On May 9, 2017, the Board of Directors of Farmers & Merchants Bancorp announced a mid-year cash dividend of $6.75 per share, a 3.1% increase over the $6.55 per share paid on July 1, 2016. The cash dividend was paid on July 1, 2017, to shareholders of record on June 9, 2017.
Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. The Company has no securities or other contracts, such as stock options, that could require the issuance of common stock.   Accordingly, diluted earnings per share are not presented. The following table calculates the basic earnings per common share for the three and nine months ended September 30, 2017 and 2016.

  
Three Months
Ended September 30,
  
Nine Months
Ended September 30,
 
(net income in thousands) 2017  2016  2017  2016 
Net Income $8,581  $7,538  $24,589  $22,042 
Weighted Average Number of Common Shares Outstanding  810,291   792,387   809,002   792,223 
Basic Earnings Per Common Share Amount $10.59  $9.51  $30.39  $27.82 

7. Shareholders’ Equity

During the first and third quarters of 2017, the Company issued a combined total 4,975 shares of common stock to the Bank’s non-qualified defined contribution retirement plans. These shares were issued at prices ranging from $590.00 to $595.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital.

During the first quarter of 2016, the Company issued 1,600 shares of common stock to the Bank’s non-qualified defined contribution retirement plans. These shares were issued at a price of $525 per share based upon a valuation completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(2) of the Securities Act of 1933, as amended, the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital.

8. Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU will require the earlier recognition of credit losses on loans and other financial instruments based on an expected loss model, replacing the incurred loss model that is currently in use. Under the new guidance, an entity will measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The expected loss model will apply to loans and leases, unfunded lending commitments, held-to maturity debt securities and other debt instruments measured at amortized cost. The impairment model for available-for-sale debt securities will require the recognition of credit losses through a valuation allowance when fair value is less than amortized cost, regardless of whether the impairment is considered to be other-than-temporary. The new guidance is effective on January 1, 2020, with early adoption permitted on January 1, 2019. The Company is currently evaluating the provisions of this ASU and has created a cross-functional team to begin its implementation efforts of this new guidance. While the Company has not quantified the impact of this ASU, it is evaluating historical loan level data requirements necessary for the implementation of the model, consulting with outside professionals, evaluating our current IT system, as well as various methodologies for determining expected credit losses. The Company does not intend to early adopt this ASU.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard is being issued to increase the transparency and comparability around lease obligations. Previously unrecorded off-balance sheet obligations will now be brought more prominently to light by presenting lease liabilities on the face of the balance sheet, accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements. This ASU applies to leasing arrangements exceeding a twelve-month term. ASU 2016-02 is effective for annual periods, including interim periods within those annual periods beginning after December 15, 2018 and requires a modified retrospective method upon adoption. Early application of the amendments is permitted. The Company is currently evaluating the provisions of this ASU to determine the potential impact the new standard will have on the Company’s consolidated financial statements. While the Company has not quantified the impact to its balance sheet, it does expect the adoption of this ASU will result in a gross-up in its balance sheet as a result of recording a right-of-use asset and a lease liability for these leases. The Company does not intend to early adopt this ASU.
In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers (Topic 606).  As a result of the deferral, the guidance in ASU 2014-09 will be effective for the Company for reporting periods beginning after December 15, 2017. The Update modifies the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations. The Company is currently evaluating the impact the adoption of this update will have on the consolidated financial statements. As a financial institution, the Company’s largest component of revenue, interest income, is excluded from the scope of this ASU. The Company is currently performing an overall assessment of revenue streams potentially affected by the ASU, including certain deposit related fees and interchange fees, to determine the potential impact of this guidance on our consolidated financial statements. The Company does not intend to early adopt this ASU.

Item 2.Management’s Discussion Andand Analysis Ofof Financial Condition Andand Results Ofof Operations


The following discussion is management’s discussion and analysisintended to provide a more comprehensive review of the major factors that influenced ourCompany’s operating results and financial performance for the three and nine months ended September 30, 2017. This analysiscondition. The information contained in this section should be read in conjunction with our 2016 Annualthe Unaudited Consolidated Financial Statements and the accompanying Notes to Unaudited Consolidated Financial Statements in this Quarterly Report to Shareholders on Form 10-K, and with the unaudited financial statements and notes as set forth10-Q included in this report.“Part I. Item 1. Financial Statements.”


Forward–Looking StatementsFORWARD-LOOKING INFORMATION


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

These forward-looking statements involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the Company provides“Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and other parts of this report and the following cautionary statement identifying important factors whichCompany’s Annual Report on Form 10-K for the year ended December 31, 2022 (“Form 10-K”), could cause the actual results of events to differ materially from those set forthanticipated in or implied by thethese forward-looking statements. The following is a non-exclusive list of factors which could cause actual results to differ materially from forward-looking statements and related assumptions.

Such factors include the following: (1) economic conditions in the Central Valley of California; (2) significant changes in interest rates and loan prepayment speeds; (3) credit risks of lending and investment activities; (4) changes in federal and state banking laws or regulations; (5) competitive pressure in the banking industry; (6) changes in governmental fiscal or monetary policies; (7) uncertainty regarding the economic outlook resulting from the continuing war on terrorism, as well as actions taken or to be taken by the U.S. or other governments as a result of further acts or threats of terrorism; (8) water management issues in California and the resulting impact on the Company’s agricultural customers; (9) expansion into new geographic markets and new lines of business; and (10) other factors discussed in Item 1A. Risk Factors located in the Company’s 2016 Annualthis Quarterly Report on Form 10-K.10-Q:


■
changes in general economic conditions, either nationally, in California, or in our local markets;
■inflation, changes in interest rates, securities market volatility and monetary fluctuations;
■increases in competitive pressures among financial institutions and businesses offering similar products and services;
■risks associated with recent negative events in the banking industry, and any legislative and/or bank regulatory actions, that could potentially impact earnings, liquidity and/or the availability of capital;
■higher defaults in our loan and lease portfolio than we expect;
■changes in management’s estimate of the adequacy of the allowance for credit losses;
■risks associated with our growth and expansion strategy and related costs;
■increased lending risks associated with our high concentration of real estate loans;
■legislative or regulatory changes or changes in accounting principles, policies or guidelines;
■technological changes;
■regulatory or judicial proceedings; and
■other factors and risks including those described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Readers are cautioned not to place undue reliance onShould 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 which speak only as of the date hereof. of this Form 10-Q (or documents incorporated by reference, if applicable).

27
Table of Contents
The Company undertakes nodoes not undertake any obligation to publicly correct or update any forward-looking statements if it later becomes aware that actual results are likely to reflect events or circumstances arising after the date on which they are made.differ materially from those expressed in such forward-looking statements, except as required by law.


IntroductionOverview


Farmers & Merchants Bancorp (the “Company” or the Company,“FMCB”) is a Delaware registered bank holding company formed March 10,organized in 1999. Its subsidiary, Farmers & Merchants Bank of Central California, or the Bank, isAs a California state-chartered bank formed in 1916. Banking services are provided in twenty-seven locations in the Company's service area. The service area includes Sacramento, San Joaquin, Stanislaus, Merced and Contra Costa Counties with branches in Sacramento, Elk Grove, Galt, Lodi, Stockton, Linden, Modesto, Turlock, Hilmar, Merced, Manteca, Riverbank, Walnut Creek and Concord.
As aregistered bank holding company, the CompanyFMCB is subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System (“FRB”). As a California, state-chartered, non-fed member bank, the Bank is subject to regulation and examination by the California Department of Business OversightFinancial Protection and Innovation (“DBO”DFPI”). The Company’s principal business is to serve as a holding company for Farmers & Merchants Bank of Central California (the “Bank” or “F&M Bank”) the Bank and for other banking or banking related subsidiaries, which the Federal Deposit Insurance Corporation (“FDIC”).Company may establish or acquire. As a legal entity separate and distinct from its subsidiary, the Company’s principal source of funds is, and will continue to be, dividends paid by and other funds received from the Bank. Legal limitations are imposed on the amount of dividends that may be paid and loans that may be made by the Bank to the Company.


Overview

AlthoughF & M Bancorp, Inc. was created in March 2002 to protect the name “F & M Bank.” During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name, “F & M Bank,” as part of a larger effort to enhance the Company’s image and build brand name recognition. Since 2002, the Company has initiated effortsconverted all of its daily operating and image advertising to expand its geographic footprint into the East Bay area of San Francisco, California,“F & M Bank” name and the Company’s logo, slogan and signage were redesigned to incorporate the trade name, “F & M Bank”.

The Company’s outstanding common stock as of June 30, 2023, consisted of 754,523 shares of common stock, $0.01 par value and no shares of preferred stock were issued or outstanding. The common stock of the Company is not widely held or listed on any exchange. However, trades are reported on the OTCQX under the symbol “FMCB.”

The primary service area remainssource of funding for the mid Central ValleyCompany’s growth has been the generation of California, a region that can be significantly impactedcore 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 seasonal needsCompany’s seasoned relationship managers and supporting associates who provide outstanding service and responsiveness to the Company’s clients.

The Company’s results of operations are largely dependent on net interest income. Net interest income is the difference between interest income earned on interest earning assets, which are comprised of loans and leases, investment securities and short-term investments, and the interest the Company pays on interest bearing liabilities, which are primarily deposits, and, to a lesser extent, other borrowings. Management strives to match the re-pricing characteristics of the agricultural industry. Accordingly, discussioninterest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve.

The Company measures its performance by calculating the net interest margin, return on average assets, and return on average equity. Net interest margin is calculated by dividing net interest income, which is the difference between interest income on interest earning assets and interest expense on interest bearing liabilities, by average interest earning assets. Net interest income is the Company’s largest source of revenue. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to affect net interest income. The Company also measures its performance by the efficiency ratio, which is calculated by dividing non-interest expense by the sum of net interest income and non-interest income.

28
Table of Contents
Critical Accounting Policies and Estimates

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

Our critical accounting policies and estimates are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations is influenced byincluded in our Form 10-K.

Impact of Recently Issued Accounting Standards

See Note 1. “Basis of Presentation and Significant Accounting Policies” to the seasonal banking needsUnaudited 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 its agricultural customers (e.g., duringsuch financial performance.  The methodology for determining these non-GAAP measures may differ among companies. We used the spring and summer customers draw down their deposit balances and increase loan borrowing to fund the purchasefollowing non-GAAP measures in this Form 10-Q:


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

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

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

29
Table of equipment and plantingContents
Results of crops. Correspondingly, deposit balances are replenished and loans repaid in late fall and winter as crops are harvested and sold).Operations


The Statefollowing discussion and analysis is intended to provide a better understanding of California experienced drought conditions from 2013 through most of 2016.  Although significant levels of rain and snow in late 2016 and early 2017 have alleviated drought conditions in many areas of California, including the Company’s primary service area, the long-term risks associated with the availability of water continue to exist.

For the three and nine months ended September 30, 2017, Farmers & Merchants Bancorp reported net incomeand its subsidiaries’ financial condition at June 30, 2023 and December 31, 2022 and results of $8,581,000 and $24,589,000, earnings per share of $10.59 and $30.39 and return on average assets of 1.13% and 1.10%, respectively. Return on average shareholders’ equity was 11.54% and 11.28% foroperations during the three and ninesix months ended SeptemberJune 30, 2017.2023 and 2022, respectively. Information related to the comparison of the results of operations for the years ended December 31, 2022, and 2021 can be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2022 Annual Report on Form 10-K filed with the SEC on March 15, 2023.


ForFactors that determine the three and nine months ended September 30, 2016, Farmers & Merchants Bancorp reportedlevel of net income include the volume of $7,538,000earning assets and $22,042,000, earnings per shareinterest bearing liabilities, yields earned and rates paid, fee income, non-interest expense, the level of $9.51non-performing loans and $27.82other non-earning assets, and returnthe amount of non-interest bearing liabilities supporting earning assets. Non-interest income includes card processing fees, service charges on average assetsdeposit accounts, bank-owned life insurance income, gains/losses on the sale of 1.14%investment securities, and 1.13%, respectively. Returngains/losses on average shareholders’ equity was 11.22%deferred compensation plan investments. Non-interest expense consists primarily of salaries and 11.16% for the threeemployee benefits, cost of deferred compensation benefits, occupancy, data processing, FDIC insurance, marketing, legal and nine months ended September 30, 2016.other expenses.


Earnings Performance

The following is a summary of the financial resultstable presents performance metrics for the nine-month period ended September 30, 2017 compared to September 30, 2016.periods indicated:


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

·
(1)
Net income increased 11.6% to $24.6 million from $22.0 million.See "Non-GAAP Measurements"

·Earnings per share increased 9.2% to $30.39 from $27.82.


·Total assets increased 12.6% to $3.1 billion from $2.7 billion.

·Total loans & leases increased 6.6% to $2.2 billion from $2.1 billion.

·Total deposits increased 15.0% to $2.7 billion from $2.4 billion.

The primary reasons for the Company’s $4.0 million or 11.4% increase in pre-tax income in the first nine months of 2017 as compared to the same period of 2016 were:

·A $9.63 million increase in net interest income related to the growth in earning assets.

·A $1.17 million increase in the gain on sale of fixed assets related to the disposition of one of the Company’s properties.

·A $417,000 increase in gain on sale of investment securities.
·A $919,000 reduction in non-interest expense related to the Delta Bancorp acquisition that took place in 2016.
3630
These positive impacts were partially offset by:

·A $5.53 million increase in non-interest expense related to a non-recurring gain on sale of ORE that took place in the first quarter of the prior year (2016) and was recorded as a reduction to non-interest expense.

·A $2.69 million increase in salaries and employee benefits.
Results of Operations

Net Interest Income / Net Interest MarginAverage Balance and Yields
The tables on the following pages reflect the Company'stable sets forth a summary of average balance sheets and volume and rate analysis for the three and nine-month periods ended September 30, 2017 and 2016.

The average yields on earning assets and average rates paid on interest-bearing liabilities have been computed on an annualized basis for purposes of comparabilitybalances with full year data. Average balance amounts for assets and liabilities are the computed average of daily balances.

Net interest income is the amount by which the interest and fees on loans & leases and other interest earning assets exceed the interest paid on interest bearing sources of funds. For the purpose of analysis, the interest earned on tax-exempt investments and municipal loans is adjusted to an amount comparable to interest subject to normal income taxes.  This adjustment is referred to as “taxable equivalent” and is noted wherever applicable.

The Volume and Rate Analysis of Net Interest Income summarizes the changes incorresponding interest income and interest expense based on changes inas well as average assetyield, cost and liabilitynet interest margin information for the periods presented. Average balances (volume) and changes in average rates (rate). For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to: (1) changes in volume (change in volume multiplied by initial rate); (2) changes in rate (change in rate multiplied by initial volume); and (3) changes in rate/volume, also called  “changes in mix” (allocated in proportion to the respective volume and rate components).are derived from daily balances.


  Three Months Ended June 30, 
  2023  2022 
(Dollars in thousands) 
Average
Balance
  
Interest
Income /
Expense
  
Average
Yield /
Rate
  
Average
Balance
  
Interest
Income /
Expense
  
Average
Yield / Rate
 
ASSETS                  
Interest earnings deposits in other banks and federal funds sold 
$
458,927
  
$
5,882
   
5.14
%
 
$
683,655
  
$
1,409
   
0.83
%
Investment Securities:(1)
                        
Taxable securities  
923,063
   
4,626
   
2.00
%
  
1,090,507
   
5,107
   
1.87
%
Non-taxable securities(2)
  
61,576
   
564
   
3.66
%
  
48,339
   
391
   
3.24
%
Total investment securities  
984,639
   
5,190
   
2.11
%
  
1,138,846
   
5,498
   
1.94
%
Loans:(3)
                        
Real estate:                        
Commercial  
1,307,376
   
16,744
   
5.14
%
  
1,158,892
   
13,531
   
4.68
%
Agricultural  
718,094
   
9,762
   
5.45
%
  
701,905
   
8,509
   
4.86
%
Residential and home equity  
390,416
   
4,267
   
4.38
%
  
365,872
   
3,591
   
3.94
%
Construction  
161,992
   
2,928
   
7.25
%
  
205,491
   
2,535
   
4.95
%
Total real estate  
2,577,878
   
33,701
   
5.24
%
  
2,432,160
   
28,166
   
4.64
%
Commercial & industrial  
475,472
   
8,346
   
7.04
%
  
439,137
   
4,891
   
4.47
%
Agricultural  
281,321
   
5,613
   
8.00
%
  
264,791
   
2,988
   
4.53
%
Commercial leases  
126,158
   
1,947
   
6.19
%
  
90,855
   
1,377
   
6.08
%
Consumer and other  
5,531
   
83
   
6.02
%
  
21,457
   
1,148
   
21.46
%
Total loans and leases  
3,466,360
   
49,690
   
5.75
%
  
3,248,400
   
38,570
   
4.76
%
Non-marketable securities  
15,549
   
255
   
6.58
%
  
15,549
   
218
   
5.62
%
Total interest earning assets  
4,925,475
   
61,017
   
4.97
%
  
5,086,450
   
45,695
   
3.60
%
Allowance for credit losses  
(69,800
)
          
(61,439
)
        
Non-interest earning assets  
313,671
           
317,066
         
Total average assets 
$
5,169,346
          
$
5,342,077
         
                         
LIABILITIES AND SHAREHOLDERS' EQUITY                        
Interest bearing deposits:                        
Demand 
$
941,500
   
444
   
0.19
%
 
$
1,117,283
   
319
   
0.11
%
Savings and money market accounts  
1,624,285
   
5,153
   
1.27
%
  
1,544,753
   
361
   
0.09
%
Certificates of deposit greater than $250,000  
227,958
   
1,655
   
2.91
%
  
165,944
   
106
   
0.26
%
Certificates of deposit less than $250,000  
261,372
   
1,139
   
1.75
%
  
219,157
   
87
   
0.16
%
Total interest bearing deposits  
3,055,115
   
8,391
   
1.10
%
  
3,047,137
   
873
   
0.11
%
Short-term borrowings  
-
   
-
   
0.00
%
  
-
   
-
   
0.00
%
Subordinated debentures  
10,310
   
204
   
7.94
%
  
10,310
   
103
   
4.01
%
Total interest bearing liabilities  
3,065,425
   
8,595
   
1.12
%
  
3,057,447
   
976
   
0.13
%
Non-interest bearing deposits  
1,506,145
           
1,735,258
         
Total funding  
4,571,570
   
8,595
   
0.75
%
  
4,792,705
   
976
   
0.08
%
Other non-interest bearing liabilities  
84,454
           
86,550
         
Shareholders' equity  
513,322
           
462,822
         
Total average liabilities and shareholders' equity 
$
5,169,346
          
$
5,342,077
         
                         
Net interest income     
$
52,422
          
$
44,719
     
Interest rate spread          
3.84
%
          
3.48
%
Net interest margin(4)
          
4.27
%
          
3.53
%
The Company’s earning assets and rate sensitive liabilities are subject to repricing at different times, which exposes the Company to income fluctuations when interest rates change. In order to minimize income fluctuations, the Company attempts to match asset and liability maturities. However, some maturity mismatch is inherent in the asset and liability mix. See “Item 3. Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Risk.”

37
(1)
Excludes average unrealized (losses) of ($22.5) million and ($24.7) million for the three months ended June 30, 2023, and 2022, respectively, which are included in non-interest earning assets.
(2)
The average yield does not include the federal tax benefits at an assumed effective yield of 26% related to income earned on tax-exempt municipal securities totaling $149,000 and $103,000 for the three months ended June 30, 2023, and 2022, respectively.
(3)
Loan interest income includes loan fees of $1.3 million and $3.3 million for the three months ended June 30, 2023 and 2022, respectively.
(4)
Net interest margin is computed by dividing net interest income by average interest earning assets.

31
  For the Six Months Ended June 30, 
  2023  2022 
(Dollars in thousands) 
Average
Balance
  
Interest
Income /
Expense
  
Average
Yield /
Rate
  
Average
Balance
  
Interest
Income /
Expense
  
Average
Yield / Rate
 
ASSETS                  
Interest earnings deposits in other banks and federal funds sold 
$
489,865
  
$
11,843
   
4.88
%
 
$
721,656
  
$
1,775
   
0.50
%
Investment Securities:(1)
                        
Taxable securities  
945,258
   
9,431
   
2.00
%
  
1,056,670
   
9,695
   
1.84
%
Non-taxable securities(2)
  
59,556
   
1,121
   
3.76
%
  
49,164
   
793
   
3.23
%
Total investment securities  
1,004,814
   
10,552
   
2.10
%
  
1,105,834
   
10,488
   
1.90
%
Loans:(3)
                        
Real estate:                        
Commercial  
1,293,712
   
33,393
   
5.21
%
  
1,155,271
   
26,807
   
4.68
%
Agricultural  
716,921
   
19,376
   
5.45
%
  
691,128
   
16,302
   
4.76
%
Residential and home equity  
388,901
   
8,362
   
4.34
%
  
359,656
   
6,892
   
3.86
%
Construction  
166,428
   
5,865
   
7.11
%
  
198,626
   
4,607
   
4.68
%
Total real estate  
2,565,962
   
66,996
   
5.27
%
  
2,404,681
   
54,608
   
4.58
%
Commercial & industrial  
470,498
   
15,970
   
6.84
%
  
431,907
   
9,690
   
4.52
%
Agricultural  
280,896
   
10,817
   
7.77
%
  
256,648
   
5,743
   
4.51
%
Commercial leases  
121,579
   
3,752
   
6.22
%
  
92,844
   
2,793
   
6.07
%
Consumer and other  
5,555
   
163
   
5.92
%
  
36,683
   
3,169
   
17.42
%
Total loans and leases  
3,444,490
   
97,698
   
5.72
%
  
3,222,763
   
76,003
   
4.76
%
Non-marketable securities  
15,549
   
556
   
7.21
%
  
15,549
   
523
   
6.78
%
Total interest earning assets  
4,954,718
   
120,649
   
4.91
%
  
5,065,802
   
88,789
   
3.53
%
Allowance for credit losses  
(68,752
)
          
(61,232
)
        
Non-interest earning assets  
311,891
           
315,037
         
Total average assets 
$
5,197,857
          
$
5,319,607
         
                         
LIABILITIES AND SHAREHOLDERS' EQUITY                        
Interest bearing deposits:                        
Demand 
$
1,004,651
   
888
   
0.18
%
 
$
1,116,436
   
578
   
0.10
%
Savings and money market accounts  
1,593,158
   
7,656
   
0.97
%
  
1,531,069
   
703
   
0.09
%
Certificates of deposit greater than $250,000  
188,053
   
2,142
   
2.30
%
  
166,725
   
203
   
0.25
%
Certificates of deposit less than $250,000  
233,945
   
1,419
   
1.22
%
  
221,487
   
192
   
0.17
%
Total interest bearing deposits  
3,019,807
   
12,105
   
0.81
%
  
3,035,717
   
1,676
   
0.11
%
Short-term borrowings  
1
   
-
   
0.00
%
  
1
   
-
   
0.00
%
Subordinated debentures  
10,310
   
400
   
7.82
%
  
10,310
   
185
   
3.62
%
Total interest bearing liabilities  
3,030,118
   
12,505
   
0.83
%
  
3,046,028
   
1,861
   
0.12
%
Non-interest bearing deposits  
1,584,215
           
1,728,962
         
Total funding  
4,614,333
   
12,505
   
0.55
%
  
4,774,990
   
1,861
   
0.08
%
Other non-interest bearing liabilities  
78,150
           
80,413
         
Shareholders' equity  
505,374
           
464,204
         
Total average liabilities and shareholders' equity 
$
5,197,857
          
$
5,319,607
         
                         
Net interest income     
$
108,144
          
$
86,928
     
Interest rate spread          
4.08
%
          
3.41
%
Net interest margin(4)
          
4.40
%
          
3.46
%
Farmers & Merchants Bancorp
Quarterly Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)

  
Three Months Ended Sept 30,
2017
  
Three Months Ended Sept 30,
2016
 
Assets Balance  Interest  Rate  Balance  Interest  Rate 
Interest Bearing Deposits with Banks $189,647  $648   1.36% $39,523  $51   0.51%
Investment Securities:                        
U.S. Treasuries  80,985   224   1.11%  65,719   157   0.96%
U.S. Govt SBA  32,458   162   2.00%  -   -   0.00%
Government Agency & Government-Sponsored Entities  3,098   22   2.84%  31,186   33   0.42%
Obligations of States and Political Subdivisions - Non-Taxable  56,036   663   4.73%  60,401   735   4.87%
Mortgage Backed Securities  282,477   1,623   2.30%  195,840   1,014   2.07%
Other  1,010   6   2.38%  1,010   5   1.98%
Total Investment Securities  456,064   2,700   2.37%  354,156   1,944   2.20%
                         
Loans & Leases:                        
Real Estate  1,565,218   18,889   4.79%  1,477,705   17,208   4.62%
Home Equity Lines & Loans  32,705   430   5.22%  32,064   401   4.96%
Agricultural  260,398   3,083   4.70%  272,799   2,846   4.14%
Commercial  258,574   3,041   4.67%  215,727   2,246   4.13%
Consumer  5,872   73   4.93%  4,957   64   5.12%
Other  1,678   9   2.13%  1,968   11   2.22%
Leases  80,629   966   4.75%  70,088   747   4.23%
Total Loans & Leases  2,205,074   26,491   4.77%  2,075,308   23,523   4.50%
Total Earning Assets  2,850,785  $29,839   4.15%  2,468,987  $25,518   4.10%
                         
Unrealized (Loss) Gain on Securities Available-for-Sale  1,334           1,051         
Allowance for Credit Losses  (49,889)          (44,245)        
Cash and Due From Banks  45,084           45,559         
All Other Assets  198,054           174,043         
Total Assets $3,045,368          $2,645,395         
                         
Liabilities & Shareholders' Equity                        
Interest Bearing Deposits:                        
Interest Bearing DDA $553,394  $321   0.23% $433,733  $149   0.14%
Savings and Money Market  812,749   340   0.17%  714,597   269   0.15%
Time Deposits  579,527   982   0.67%  522,397   586   0.45%
Total Interest Bearing Deposits  1,945,670   1,643   0.34%  1,670,727   1,004   0.24%
Federal Home Loan Bank Advances  -   -   0.00%  11,814   14   0.47%
Subordinated Debentures  10,310   115   4.43%  10,310   92   3.54%
Total Interest Bearing Liabilities  1,955,980  $1,758   0.36%  1,692,851  $1,110   0.26%
Interest Rate Spread          3.80%          3.84%
Demand Deposits (Non-Interest Bearing)  741,839           633,487         
All Other Liabilities  50,210           50,291         
Total Liabilities  2,748,029           2,376,629         
                         
Shareholders' Equity  297,339           268,766         
Total Liabilities & Shareholders' Equity $3,045,368          $2,645,395         
Impact of Non-Interest Bearing Deposits and Other Liabilities          0.11%          0.08%
Net Interest Income and Margin on Total Earning Assets      28,081   3.91%      24,408   3.92%
Tax Equivalent Adjustment      (231)          (256)    
Net Interest Income     $27,850   3.88%     $24,152   3.88%
Notes:  Yields on municipal securities have been calculated on a fully taxable equivalent basis.  Loan interest income includes fee income and unearned discount in the amount of $1.4 million and $1.6 million for the quarters ended September 30, 2017 and 2016, respectively. Yields on securities available-for-sale are based on historical cost.

38
(1)
Excludes average unrealized (losses) of ($25.3) million and ($15.9) million for the six months ended June 30, 2023, and 2022, respectively, which are included in non-interest earning assets.
(2)
The average yield does not include the federal tax benefits at an assumed effective yield of 26% related to income earned on tax-exempt municipal securities totaling $296,000 and $210,000 for the six months ended June 30, 2023, and 2022, respectively.
(3)
Loan interest income includes loan fees of $3.3 million and $7.2 million for the six months ended June 30, 2023 and 2022, respectively.
(4)
Net interest margin is computed by dividing net interest income by average interest earning assets.

32
Farmers & Merchants BancorpSecond Quarter 2023 vs. Second Quarter 2022
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)

  
Nine Months Ended Sept. 30,
2017
  
Nine Months Ended Sept. 30,
2016
 
Assets Balance  Interest  Rate  Balance  Interest  Rate 
Interest Bearing Deposits with Banks $142,717  $1,155   1.08% $34,974  $133   0.51%
Investment Securities:                        
U.S. Treasuries  82,441   665   1.08%  54,518   384   0.94%
U.S. Govt SBA  34,125   412   1.61%  -   -   0.00%
Government Agency & Government-Sponsored Entities  3,109   66   2.83%  27,191   166   0.81%
Obligations of States and Political Subdivisions - Non-Taxable  56,945   2,026   4.74%  61,067   2,222   4.85%
Mortgage Backed Securities  291,179   5,013   2.30%  215,878   3,551   2.19%
Other  1,010   17   2.24%  679   11   2.16%
Total Investment Securities  468,809   8,199   2.33%  359,333   6,334   2.35%
                         
Loans & Leases:                        
Real Estate  1,561,675   55,021   4.71%  1,444,164   49,637   4.60%
Home Equity Lines & Loans  32,109   1,217   5.07%  31,931   1,181   4.95%
Agricultural  266,205   9,015   4.53%  264,346   8,100   4.10%
Commercial  233,853   8,064   4.61%  218,069   6,641   4.07%
Consumer  5,592   221   5.28%  4,977   211   5.67%
Other  1,679   28   2.23%  1,968   33   2.24%
Leases  77,508   2,704   4.66%  66,964   2,106   4.20%
Total Loans & Leases  2,178,621   76,270   4.68%  2,032,419   67,909   4.47%
Total Earning Assets  2,790,147  $85,624   4.10%  2,426,726  $74,376   4.10%
                       �� 
Unrealized Gain on Securities Available-for-Sale  746           5,294         
Allowance for Credit Losses  (48,887)          (43,329)        
Cash and Due From Banks  44,896           43,274         
All Other Assets  190,732           171,397         
Total Assets $2,977,634          $2,603,362         
                         
Liabilities & Shareholders' Equity                        
Interest Bearing Deposits:                        
Interest Bearing DDA $516,867  $723   0.19% $413,782  $385   0.12%
Savings and Money Market  802,778   954   0.16%  723,480   811   0.15%
Time Deposits  584,773   2,675   0.61%  497,795   1,495   0.40%
Total Interest Bearing Deposits  1,904,418   4,352   0.31%  1,635,057   2,691   0.22%
Federal Home Loan Bank Advances  1   -   0.00%  5,235   18   0.46%
Subordinated Debentures  10,310   320   4.15%  10,310   272   3.53%
Total Interest Bearing Liabilities  1,914,729  $4,672   0.33%  1,650,602  $2,981   0.24%
Interest Rate Spread          3.78%          3.86%
Demand Deposits (Non-Interest Bearing)  721,808           639,376         
All Other Liabilities  50,394           49,992         
Total Liabilities  2,686,931           2,339,970         
                         
Shareholders' Equity  290,703           263,392         
Total Liabilities & Shareholders' Equity $2,977,634          $2,603,362         
Impact of Non-Interest Bearing Deposits and Other Liabilities          0.10%          0.08%
Net Interest Income and Margin on Total Earning Assets      80,952   3.88%      71,395   3.93%
Tax Equivalent Adjustment      (705)          (774)    
Net Interest Income     $80,247   3.85%     $70,621   3.89%
Notes:  Yields on municipal securities have been calculated on a fully taxable equivalent basis.  Loan interest income includes fee income and unearned discount in the amount of $3.6 million and $3.8 million for the nine months ended September 30, 2017 and 2016, respectively. Yields on securities available-for-sale are based on historical cost.
Farmers & Merchants Bancorp
Volume and Rate Analysis of Net Interest Revenue

(in thousands)
Three Months Ended
Sept. 30, 2017 compared to Sept. 30, 2016
  Nine Months Ended
Sept. 30, 2017 compared to Sept. 30, 2016
 
Interest Earning Assets Volume  Rate  Net Chg.  Volume  Rate  Net Chg. 
Interest Bearing Deposits with Banks $417  $180  $597   749   273  $1,022 
Investment Securities:                        
U.S. Treasuries  40   27   67   219   62   281 
U.S. Govt SBA  162   -   162   412   -   412 
Government Agency & Government-Sponsored Entities  (52)  41   (11)  (243)  143   (100)
Obligations of States and Political Subdivisions - Non-Taxable  (52)  (21)  (73)  (148)  (48)  (196)
Mortgage Backed Securities  488   121   609   1,289   173   1,462 
Other  -   1   1   6   -   6 
Total Investment Securities  586   169   755   1,535   330   1,865 
                         
Loans & Leases:                        
Real Estate  1,042   639   1,681   4,117   1,267   5,384 
Home Equity Lines & Loans  9   20   29   8   29   36 
Agricultural  (133)  370   237   58   857   915 
Commercial  481   314   795   503   920   1,423 
Consumer  11   (2)  9   25   (15)  10 
Other  (2)  -   (2)  (6)  -   (5)
Leases  120   99   219   353   245   598 
Total Loans & Leases  1,528   1,440   2,968   5,058   3,303   8,361 
Total Earning Assets  2,531   1,789   4,320   7,342   3,906   11,248 
                         
Interest Bearing Liabilities                        
Interest Bearing Deposits:                        
Interest Bearing DDA  49   123   172   112   226   338 
Savings and Money Market  39   32   71   93   51   143 
Time  70   326   396   296   884   1,180 
Total Interest Bearing Deposits  158   481   639   501   1,161   1,661 
Other Borrowed Funds  (7)  (7)  (14)  (18)  -   (18)
Subordinated Debentures  -   23   23   -   48   48 
Total Interest Bearing Liabilities  151   497   648   483   1,209   1,691 
Total Change on a Tax Equivalent Basis $2,380  $1,292  $3,672  $6,859  $2,697  $9,557 

Notes:  Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total "net change."  The above figures have been rounded to the nearest whole number.
Third Quarter 2017 vs. Third Quarter 2016
Net interest income for the third quarter of 2017 increased 15.3% or $3.7 million to $27.9 million. On a fully taxable equivalent basis, net interest income increased 15.1% and totaled $28.1 million for the third quarter of 2017. As more fully discussed below, the increase in net interest income was due primarily to a $381.8 million increase in average earning assets.

Net interest income on a taxable equivalent basis, expressed as a percentage of average total earning assets, is referred to as the net interest margin. For the quarter ended September 30, 2017, the Company’s net interest margin was 3.91% compared to 3.92% for the quarter ended September 30, 2016. This decrease in net interest margin was due primarily to mix changes that occurred from the Company’s deposit growth outstripping loan growth, thereby resulting in a decrease in loans as a percentage of average earning assets.

Average loans & leases totaled $2.2 billion for the quarter ended September 30, 2017; an increase of $129.8 million compared to the average balance for the quarter ended September 30, 2016. Loans & leases decreased from 84.1% of average earning assets at September 30, 2016 to 77.1% at September 30, 2017. The annualized yield on the Company’s loan & lease portfolio increased to 4.77% for the quarter ended September 30, 2017, compared to 4.50% for the quarter ended September 30, 2016. Overall, the positive impact on interest revenue from the increase in loan & lease balances and rising yields resulted in interest revenue from loans & leases increasing 12.6% to $26.5 million for quarter ended September 30, 2017. The Company has been experiencing aggressive competitor pricing for loans & leases to which it may need to continue to respond in order to retain key customers. This could place even greater negative pressure on future loan & lease yields and net interest margin.

The investment portfolio is the other main component of the Company’s earning assets. Since the risk factor for investments is typically lower than that of loans & leases, the yield earned on investments is generally less than that of loans & leases. Average investment securities totaled $456.1 million for the quarter ended September 30, 2017; an increase of $101.9 million compared to the average balance for the quarter ended September 30, 2016. Tax equivalent interest income on securities increased $755,000 to $2.7 million for the quarter ended September 30, 2017, compared to $1.9 million for the quarter ended September 30, 2016. The average investment portfolio yield, on a tax equivalent basis, was 2.37% for the quarter ended September 30, 2017, compared to 2.20% for the quarter ended September 30, 2016. See “Financial Condition – Investment Securities” for a discussion of the Company’s investment strategy in 2017. Net interest income on the Schedule of Year-to-Date Average Balances and Interest Rates is shown on a tax equivalent basis, which is higher than net interest income as reflected on the Consolidated Statement of Income because of adjustments that relate to income on securities that are exempt from federal income taxes.

Interest bearingInterest-bearing deposits with banks and overnight investments in Federal Funds SoldReserve balances are additional earning assets available to the Company.  Average interest bearinginterest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earnearned an average interest atrate of 5.14% and 0.83% for the Fed Funds rate, which increased to 1.25% in June 2017. second quarter of 2023 and 2022, respectively. The increase was primarily the result of the FRB increasing rates by 350 basis points from the second quarter of 2022 and the first six months of 2023. Average interest bearinginterest-bearing deposits with bankswere $458.9 million and $683.7 million for the quarter ended SeptemberJune 30, 2017, were $189.62023 and 2022, respectively. Interest income on interest-bearing deposits with banks was $5.9 million an increase of $150.1and $1.4 million compared to the average balance for the quarter ended SeptemberJune 30, 2016. Interest income on interest bearing deposits with banks for the quarter ended September 30, 2017, increased $597,000 to $648,000 compared to the quarter ended September 30, 2016.2023 and 2022, respectively.

Average interest-bearing liabilities increased $263.1 million or 15.5% during the third quarter of 2017. Of that increase: (1) interest-bearing transaction deposits increased $119.7 million; (2) savings and money market deposits increased $98.2 million; (3) time deposits increased $57.1 million; (4) Federal Home Loan Bank (“FHLB”) Advances decreased $11.8 million (see “Financial Condition – Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings”); and (5) subordinated debt remained unchanged (see “Financial Condition – Subordinated Debentures”).

Total interest expense on interest bearing deposits was $1.6 million for the third quarter of 2017 as compared to $1.0 million for the third quarter of 2016. The average rate paid on interest-bearing deposits was 0.34% for the third quarter of 2017 compared to 0.24% for the third quarter of 2016.
Nine Months Ending September 30, 2017 vs. Nine Months Ending September 30, 2016
During the first nine months of 2017, net interest income increased 13.6% to $80.2 million, compared to $70.6 million at September 30, 2016. On a fully taxable equivalent basis, net interest income increased 13.4% and totaled $81.0 million at September 30, 2017, compared to $71.4 million at September 30, 2016. The increase in net interest income was due primarily to a $363.4 million increase in average earning assets.

For the nine months ended September 30, 2017, the Company’s net interest margin was 3.88% compared to 3.93% for the same period in 2016. This decrease in net interest margin was due primarily to mix changes that occurred from the Company’s deposit growth outstripping loan growth, thereby resulting in a decrease in loans as a percentage of average earning assets.

The average balance of loans & leases increased by $146.2 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The yield on the loan & lease portfolio increased 21 basis points to 4.68% for the nine months ended September 30, 2017 compared to 4.47% for the nine months ended September 30, 2016. This increase in yield was enhanced by the increase in the average balance of loans resulting in interest income from loans & leases increasing 12.3% or $8.4 million for the first nine months of 2017.

Average investment securities were $468.8 million for the nine months ended September 30, 2017 compared to $359.3 million for the same period in 2016. The average tax equivalent yield for the nine months ended September 30, 2017 was 2.33% compared to 2.35% for the nine months ended September 30, 2016. Despite this decrease in yield, because of the increase in balances, interest income increased $1.9 million or 29.4%, for the nine months ended September 30, 2017.

Average interest bearing deposits with banks consisted of FRB deposits. Deposits with the FRB earn interest at the Fed Funds rate, which increased to 1.25% in June 2017. Average interest bearing deposits with banks for the nine-months ended September 30, 2017, was $142.7 million, an increase of $107.7 million compared to the average balance for the nine-months ended September 30, 2016. Interest income on interest bearing deposits with banks for the nine-months ended September 30, 2017, increased $1.0 million to $1.2 million compared to the nine-months ended September 30, 2016.

Average interest-bearing liabilities increased $264.1 million or 16.0% during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. Of that increase: (1) interest-bearing deposits increased $269.4 million; (2) FHLB advances decreased $5.2 million; and (3) subordinated debentures remained unchanged.

Total interest expense on interest bearing deposits was $4.4 million for the first nine months of 2017 as compared to $2.7 million for the first nine months of 2016. The average rate paid on interest-bearing deposits was 0.31% in the first nine months of 2017 and 0.22% in the first nine months of 2016.

Provision and Allowance for Credit Losses
As a financial institution that assumes lending and credit risks as a principal element of its business, credit losses will be experienced in the normal course of business. The Company has established credit management policies and procedures that govern both the approval of new loans & leases and the monitoring of the existing portfolio. The Company manages and controls credit risk through comprehensive underwriting and approval standards, dollar limits on loans & leases to one borrower (the term “borrower” is used herein to describe a customer who has entered into either a loan or lease transaction), and by restricting loans & leases made primarily to its principal market area where management believes it is best able to assess the applicable risk. Additionally, management has established guidelines to ensure the diversification of the Company’s credit portfolio such that even within key portfolio sectors such as real estate or agriculture, the portfolio is diversified across factors such as location, building type, crop type, etc. Management reports regularly to the Board of Directors regarding trends and conditions in the loan & lease portfolio and regularly conducts credit reviews of individual loans & leases. Loans & leases that are performing but have shown some signs of weakness are subject to more stringent reporting and oversight.
Allowance for Credit Losses
The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company's loan & lease portfolio as of the balance sheet date. The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan & lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of three primary components: specific reserves related to impaired loans & leases; general reserves for inherent losses related to loans & leases that are not impaired; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors.

A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Loans & leases determined to be impaired are individually evaluated for impairment. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s or lease's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s or lease's observable market price, or the fair value of the collateral if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral.

A restructuring of a loan or lease constitutes a troubled debt restructuring (“TDR”) under ASC 310-40, if the Company for economic or legal reasons related to the borrower's financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured loans or leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans & leases that are on nonaccrual status at the time they become TDR, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms. However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment.

The determination of the general reserve for loans or leases that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors that include economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, the character of the loan & lease portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer & other; and (9) equipment leases. See “Financial Condition – Loans & Leases” for examples of loans & leases made by the Company. The allowance for credit losses attributable to each portfolio segment, which includes both impaired loans & leases and loans & leases that are not impaired, is combined to determine the Company's overall allowance, which is included on the consolidated balance sheet.

The Company assigns a risk rating to all loans & leases and periodically performs detailed reviews of all such loans & leases over a certain threshold to identify credit risks and assess overall collectability. For smaller balance loans & leases, such as consumer and residential real estate, a credit grade is established at inception, and then updated only when the loan or lease becomes contractually delinquent or when the borrower requests a modification. For larger balance loans, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans & leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into five major categories, defined as follows:
Pass – A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management's close attention.

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 position at some future date. Special mention loans & leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

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

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 Bank will estimate its probable loss and immediately charge-off some or all of the balance.

The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management's assessment of the following for each portfolio segment: (1) inherent credit risk; (2) historical losses; and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below:

Commercial Real Estate – Commercial real estate mortgage loans are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.

Real Estate Construction – Real estate construction loans, including land loans, are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.

Commercial – These loans are generally considered to possess a moderate inherent risk of loss because they are shorter-term; typically made to relationship customers; generally underwritten to existing cash flows of operating businesses; and may be collateralized by fixed assets, inventory and/or accounts receivable. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

Agricultural Real Estate and Agricultural – These loans are generally considered to possess a moderate inherent risk of loss since they are typically made to relationship customers and are secured by crop production, livestock and related real estate.  These loans are vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.

Leases – Equipment leases are generally considered to possess a moderate inherent risk of loss. As Lessor, the company is subject to both the credit risk of the borrower and the residual value risk of the equipment. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan.
Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.
Residential 1st Mortgages and Home Equity Lines and Loans – These loans are generally considered to possess a low inherent risk of loss, although this is not always true as evidenced by the correction in residential real estate values that occurred between 2007 and 2012. The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

Consumer & Other – A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

Provision for Credit Losses
Changes in the provision for credit losses between years are the result of management’s evaluation, based upon information currently available, of the adequacy of the allowance for credit losses relative to factors such as the credit quality of the loan & lease portfolio, loan & lease growth, current credit losses, and the prevailing economic climate and its effect on borrowers’ ability to repay loans & leases in accordance with the terms of the notes.

The Central Valley of California was one of the hardest hit areas in the country during the recession. In many areas, housing prices declined as much as 60% and unemployment reached 15% or more. Although the economy has strengthened throughout most of the Central Valley, for the most part housing prices remain below peak levels and unemployment rates remain above those in other areas of the state and country. While, in management’s opinion, the Company’s levels of net charge-offs and non-performing assets as of September 30, 2017, compare very favorably to our peers at the present time, carefully managing credit risk remains a key focus of the Company.

The State of California experienced drought conditions from 2013 through most of 2016.  Although significant levels of rain and snow in late 2016 and early 2017 have alleviated drought conditions in many areas of California, including the Company’s primary service area, the long-term risks associated with the availability of water continue to exist.

The Company made a $2.9 million provision for credit losses during the first nine months of both 2017 and 2016. Net charge-offs during the first nine months of 2017 were $25,000 compared to net recoveries of $73,000 in the first nine months of 2016. See “Overview – Looking Forward: 2017 and Beyond”, “Critical Accounting Policies and Estimates – Allowance for Credit Losses” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk-Credit Risk” located in the Company’s 2016 Annual Report on Form 10-K.

After reviewing all factors above, based upon information currently available, management concluded that the allowance for credit losses as of September 30, 2017, was adequate.

  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
(in thousands) 2017  2016  2017  2016 
Balance at Beginning of Period $49,064  $44,118  $47,919  $41,523 
Charge-Offs  (54)  (25)  (230)  (130)
Recoveries  134   103   205   203 
Provision  1,600   250   2,850   2,850 
Balance at End of Period $50,744  $44,446  $50,744  $44,446 
The table below breaks out current quarter activity by portfolio segment (in thousands):
September 30, 2017 
Commercial
Real Estate
  
Agricultural
Real Estate
  
Real Estate
Construction
  
Residential 1st
Mortgages
  
Home Equity
Lines & Loans
  Agricultural  Commercial  
Consumer &
Other
  Leases  Unallocated  Total 
                                  
Year-To-Date Allowance for Credit Losses:                               
Beginning Balance- January 1, 2017 $11,110  $9,450  $3,223  $865  $2,140  $7,381  $8,515  $200  $3,586  $1,449  $47,919 
Charge-Offs  (109)  -   -   -   -   (7)  -   (114)  -   -   (230)
Recoveries  110   -   -   37   6   -   6   46   -   -   205 
Provision  (14)  1,946   (473)  95   115   (14)  539   77   (392)  971   2,850 
Ending Balance- September 30, 2017 $11,097  $11,396  $2,750  $997  $2,261  $7,360  $9,060  $209  $3,194  $2,420  $50,744 
Third Quarter Allowance for Credit Losses:                                     
Beginning Balance- July 1, 2017 $11,242  $10,265  $2,687  $872  $2,170  $7,236  $9,544  $205  $2,952  $1,891  $49,064 
Charge-Offs  -   -   -   -   -   -   -   (54)  -   -   (54)
Recoveries  99   -   -   18   1   -   2   14   -   -   134 
Provision  (244)  1,131   63   107   90   124   (486)  44   242   529   1,600 
Ending Balance- September 30, 2017 $11,097  $11,396  $2,750  $997  $2,261  $7,360  $9,060  $209  $3,194  $2,420  $50,744 
The Allowance for Credit Losses at September 30, 2017 increased $2.8 million from December 31, 2016. The allowance allocated to the following portfolio segments changed materially during the first nine months of 2017:

·Agricultural and Agricultural Real Estate allowance balances increased $1.9 million due primarily to an increase of $6.8 million in substandard loans related to one borrower offset somewhat by a decrease in Agricultural loan balances.

·Real Estate Construction allowance balances decreased $473,000 due to a decrease in loan balances combined with a decline in the overall risk of the portfolio as several major projects moved out of the construction phase and into lease-up.

·Commercial allowance balances increased $545,000 million due to an increase in loan balances.

·Lease allowance balances decreased $392,000 due to the Company’s assessment that approximately five years of experience in this financing segment supported the elimination of the qualitative factor for “new market segments” in the loan loss allowance.

·Residential 1st mortgage and home equity balances increased $253,000 due to an increase in loan balances.

·The unallocated allowance balance increased $971,000 from December 31, 2016. The unallocated allowance is established to provide for probable losses that have been incurred as of the reporting date but not reflected in the allocated allowance. Included in the unallocated allowance is the Company’s estimate of the risk of losses that are attributable to national or local economic, political, or industry trends, which have occurred but have not yet been recognized in loan charge-off history.

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

See “Note 3. Allowance for Credit Losses” for additional details regarding the provision and allowance for credit losses.

Non-Interest Income
Non-interest income includes: (1) service charges and fees from deposit accounts; (2) net gains and losses from investment securities; (3) increases in the cash surrender value of bank owned life insurance; (4) debit card and ATM fees; (5) net gains and losses on non-qualified deferred compensation plans; and (6) fees from other miscellaneous business services.
Third Quarter 2017 vs. Third Quarter 2016
Non-interest income decreased $914,000 or 20.1% for the three months ended September 30, 2017, compared to the same period of 2016. This decrease was primarily due to a $1.1 million decrease in the net gain on deferred compensation investments for the third quarter of 2017 compared to the same period in 2016.

Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although Generally Accepted Accounting Principles require these investment gains/losses be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no effect on the Company’s net income.

Nine Months Ending September 30, 2017 vs. Nine Months Ending September 30, 2016
Non‑interest income increased $2.4 million or 24.0% for the nine months ended September 30, 2017 compared to the same period of 2016. This increase was primarily due to: (1) a $417,000 increase in the net gain on the sale of investment securities; (2) a $337,000 increase in debit card and ATM fees; (3) a $1.2 million increase in the gain on sale of fixed assets related to the disposition of one of the Company’s properties; and (4) $453,000 in non-recurring fees from certain loan customers. These increases were partially offset by a $266,000 decrease in the net gain on deferred compensation investments.

Non-Interest Expense
Non-interest expense for the Company includes expenses for: (1) salaries and employee benefits; (2) net gains and losses on non-qualified deferred compensation plan investments; (3) occupancy; (4) equipment; (5) supplies; (6) legal fees; (7) professional services; (8) data processing; (9) marketing; (10) deposit insurance; (11) ORE carrying costs and gains/losses on sale; and (12) other miscellaneous expenses.

Third Quarter 2017 vs. Third Quarter 2016
Overall, non-interest expense decreased $107,000 or 0.7% for the three months ended September 30, 2017, compared to the same period in 2016. This decrease was primarily comprised of a $1.1 million decrease in the net gain on deferred compensation investments offset by: (1) a $537,000 increase in salaries and employee benefits primarily related to salary increases that took place in July 2017 and increased contributions to retirement and profit sharing plans; (2) a $182,000 increase in occupancy and equipment; and (3) a $195,000 write-off of capitalized development costs for a branch construction project that has been postponed.

Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although Generally Accepted Accounting Principles require these investment gains/losses be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no effect on the Company’s net income.

Nine Months Ending September 30, 2017 vs. Nine Months Ending September 30, 2016
Non-interest expense increased $8.1 million or 18.7% for the nine months ended September 30, 2017, compared to the same period of 2016. This increase was primarily comprised of: (1) a $2.7 million increase in salaries and employee benefits primarily related to salary increases that took place in July 2017 and increased contributions to retirement and profit sharing plans; (2) occupancy and equipment increases in the amount of $758,000, which related to occupancy, repairs & maintenance for various locations; and (3) a $5.5 million gain on the sale of ORE property that took place in the prior year (2016) and was recorded as a reduction to non-interest expense. These increases were partially offset by: (1) a $266,000 decrease in the net gain on deferred compensation investments; (2) a $266,000 decrease in FDIC insurance expense; and (3) a $919,000 decrease in legal, consulting and other professional services related to the Delta Bancorp acquisition that took place in 2016.

Income Taxes
The provision for income taxes increased 11.0% to $5.0 million for the third quarter of 2017. The Company’s effective tax rate was 36.8% for the third quarter of 2017 and 37.4% for the third quarter of 2016.
The provision for income taxes increased 11.2% to $14.1 million for the first nine months of 2017. The Company’s effective tax rate for the first nine months of 2017 was 36.5% compared to 36.6% for the same period in 2016.

The Company’s effective tax rate fluctuates from quarter to quarter due primarily to changes in the mix of taxable and tax-exempt earning sources. The effective rates were lower than the statutory rate of 42% due primarily to benefits regarding the cash surrender value of life insurance; credits associated with low income housing tax credit investments (LIHTC); and tax-exempt interest income on municipal securities and loans.

Current tax law causes the Company’s current taxes payable to approximate or exceed the current provision for taxes on the income statement. Three provisions have had a significant effect on the Company’s current income tax liability: (1) the restrictions on the deductibility of credit losses; (2) deductibility of retirement and other long-term employee benefits only when paid; and (3) the statutory deferral of deductibility of California franchise taxes on the Company’s federal return.

Financial Condition

This section discusses material changes in the Company’s balance sheet at September 30, 2017, as compared to December 31, 2016 and to September 30, 2016. As previously discussed (see “Overview”) the Company’s financial condition can be influenced by the seasonal banking needs of its agricultural customers.

Investment Securities and Federal Funds Sold
The investment portfolio provides the Company with an income alternative to loans & leases. The debt securities inis also a component of the Company’s investment portfolio have historically been comprisedearning assets.  Historically, the company invested primarily of:in: (1) mortgage-backed securities issued by federal government-sponsored entities; (2) debt securities issued by USthe 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 57 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity without subjectingmaturity. Since the Company torisk factor for these types of investments is generally lower than that of loans and leases, the interest rate risk associated with mortgage-backed securities. Additionally, duringyield earned on investments is generally less than that of loans and leases.

Average total investment securities were $984.6 million and $1.1 billion for the first nine months of 2017quarter ended June 30, 2023 and 2022, respectively. The average yield on total investment securities was 2.11% and 1.94% for the Company invested $11.9 millionquarter ended June 30, 2023 and 2022, respectively.

Average loans and leases held for investment were $3.5 billion and $3.2 billion for the quarter ended June 30, 2023 and 2022, respectively. The average yield on the loan and lease portfolio was 5.75% and 4.76% for the quarter ended June 30, 2023 and 2022, respectively. The increase in the voting shares of Bank of Rio Vista.

The Company’s investment portfolio at September 30, 2017 was $511.9 million compared to $506.4 million atloan yield reflects the end of 2016, an increase of $5.5 million or 1.1%. At September 30, 2016, the investment portfolio totaled $417.8 million. To protect against future increases in market interest rates while atover the last year.

Average interest-bearing deposits were $3.1 billion and $3.1 billion for the quarter ended June 30, 2023 and 2022, respectively. The average rate paid on interest-bearing deposits was 1.10% and 0.11% for the quarter ended June 30, 2023 and 2022, respectively. Total interest expense on interest-bearing deposits was $8.4 million and $0.9 million for the quarter ended June 30, 2023 and 2022, respectively, as a result of increases in short-term market interest rates during 2022 and the first half of 2023. The average rate paid on total funding costs was 0.75% and 0.08% for the quarter ended June 30, 2023 and 2022, respectively. Industry competition for deposits remains challenging which has the potential to increase future deposit costs in order to retain key customers, which could place negative pressure on the net interest margin looking forward.

Six Months Ended June 30, 2023 vs. Six Months Ended June 30, 2022
Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 4.88% and 0.50% for the first six months ended of 2023 and 2022, respectively. The increase was primarily the result of the FRB increasing rates by 500 basis points during 2022 and the first six months of 2023. Average interest-bearing deposits were $489.9 million and $721.7 million for the six months ended June 30, 2023 and 2022, respectively. Interest income on interest-bearing deposits with banks was $11.8 million and $1.8 million for the six months ended June 30, 2023 and 2022, respectively.

Average total investment securities were $1.0 billion and $1.1 billion for the six months ended June 30, 2023 and 2022, respectively. The average yield on total investment securities was 2.10% and 1.90% for the six months ended June 30, 2023 and 2022, respectively.

Average loans and leases held for investment were $3.4 billion and $3.2 billion for the six months ended June 30, 2023 and 2022, respectively. The average yield on the loan and lease portfolio was 5.72% and 4.76% for the six months ended June 30, 2023 and 2022, respectively. The increase in the loan yield reflects the increase in market interest rates over the last year.

33
Average interest-bearing deposits were $3.0 billion and $3.0 billion for the six months ended June 30, 2023 and 2022, respectively. The average rate paid on interest-bearing deposits was 0.81% and 0.11% for the six months ended June 30, 2023 and 2022, respectively. Total interest expense on interest-bearing deposits was $12.1 million and $1.7 million for the six months ended June 30, 2023 and 2022, respectively, as a result of increases in short-term market interest rates during 2022 and the first six months of 2023. The average rate paid on total funding costs was 0.55% and 0.08% for the six months ended June 30, 2023 and 2022, respectively.

Rate/Volume Analysis
The following table shows the change in interest income and interest expense and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates. For purposes of this table, the change in interest due to both volume and rate has been allocated to change due to volume and rate in proportion to the relationship of absolute dollar amounts of change in each.

  
Three Months Ended June 30,
2023 compared with 2022
  
Six Months Ended June 30,
2023 compared with 2022
 
  Increase (Decrease) Due to:  Increase (Decrease) Due to: 
(Dollars in thousands) Volume  Rate  Net  Volume  Rate  Net 
Interest income:                  
Interest earnings deposits in other banks and federal funds sold  
(609
)
  
5,082
  
$
4,473
   
(756
)
  
10,824
  
$
10,068
 
Investment securities:                        
Taxable securities  
(822
)
  
341
   
(481
)
  
(1,071
)
  
807
   
(264
)
Non-taxable securities  
117
   
56
   
173
   
183
   
145
   
328
 
Total investment securities  
(705
)
  
397
   
(308
)
  
(888
)
  
952
   
64
 
Loans:                        
Real estate:                        
Commercial  
1,829
   
1,384
   
3,213
   
3,399
   
3,187
   
6,586
 
Agricultural  
200
   
1,053
   
1,253
   
626
   
2,448
   
3,074
 
Residential and home equity  
251
   
425
   
676
   
588
   
882
   
1,470
 
Construction  
(617
)
  
1,010
   
393
   
(849
)
  
2,107
   
1,258
 
Total real estate  
1,664
   
3,871
   
5,535
   
3,764
   
8,624
   
12,388
 
Commercial & industrial  
434
   
3,021
   
3,455
   
932
   
5,348
   
6,280
 
Agricultural  
197
   
2,428
   
2,625
   
588
   
4,486
   
5,074
 
Commercial leases  
544
   
26
   
570
   
885
   
74
   
959
 
Consumer and other(1)
  
(541
)
  
(524
)
  
(1,065
)
  
(1,690
)
  
(1,316
)
  
(3,006
)
Total loans and leases  
2,299
   
8,821
   
11,120
   
4,479
   
17,216
   
21,695
 
Non-marketable securities  
-
   
37
   
37
   
-
   
33
   
33
 
Total interest income  
985
   
14,337
   
15,322
   
2,835
   
29,025
   
31,860
 
                         
Interest expense:                        
Interest bearing deposits:                        
Demand  
(57
)
  
182
   
125
   
(64
)
  
374
   
310
 
Savings and money market accounts  
20
   
4,772
   
4,792
   
30
   
6,923
   
6,953
 
Certificates of deposit greater than $250,000  
54
   
1,495
   
1,549
   
29
   
1,910
   
1,939
 
Certificates of deposit less than $250,000  
20
   
1,032
   
1,052
   
11
   
1,216
   
1,227
 
Total interest bearing deposits  
37
   
7,481
   
7,518
   
7
   
10,422
   
10,429
 
Short-term borrowings  
-
   
-
   
-
   
-
   
-
   
-
 
Subordinated debentures  
-
   
101
   
101
   
-
   
215
   
215
 
Total interest expense  
37
   
7,582
   
7,619
   
7
   
10,637
   
10,644
 
Net interest income 
$
948
  
$
6,755
  
$
7,703
  
$
2,828
  
$
18,388
  
$
21,216
 

(1)
Consumer and other - These decreases represent the end of the PPP loans which were $0 and $6.8 million as of June 30, 2023 and 2022 respectively.

34
Comparison of Results of Operations for the Three and Six Months Ended June 30, 2023 and 2022
  
Three Months Ended
June 30,
        
Six Months Ended
June 30,
       
(Dollars in thousands) 2023  2022  
$ Better /
(Worse)
  % Better /
(Worse)		  2023  2022  
$ Better /
(Worse)
  
% Better /
(Worse)
 
Selected Income Statement Information:                        
Interest income 
$
61,017
  
$
45,695
  
$
15,322
   
33.53
%
 
$
120,649
  
$
88,789
  
$
31,860
   
35.88
%
Interest expense  
8,595
   
976
   
(7,619
)
  
(780.64
%)
  
12,505
   
1,861
   
(10,644
)
  
(571.95
%)
Net interest income  
52,422
   
44,719
   
7,703
   
17.23
%
  
108,144
   
86,928
   
21,216
   
24.41
%
Provision for credit losses  
2,557
   
1,500
   
(1,057
)
  
(70.47
%)
  
4,057
   
1,500
   
(2,557
)
  
(170.47
%)
Net interest income after provision for credit losses  
49,865
   
43,219
   
6,646
   
15.38
%
  
104,087
   
85,428
   
18,659
   
21.84
%
Non-interest income  
5,447
   
3,512
   
1,935
   
55.10
%
  
8,907
   
7,824
   
1,083
   
13.84
%
Non-interest expense  
26,822
   
23,031
   
(3,791
)
  
(16.46
%)
  
55,005
   
46,819
   
(8,186
)
  
(17.48
%)
Income before income tax expense  
28,490
   
23,700
   
4,790
   
20.21
%
  
57,989
   
46,433
   
11,556
   
24.89
%
Income tax expense  
7,182
   
5,257
   
(1,925
)
  
(36.62
%)
  
13,134
   
10,932
   
(2,202
)
  
(20.14
%)
Net income 
$
21,308
  
$
18,443
  
$
2,865
   
15.53
%
 
$
44,855
  
$
35,501
  
$
9,354
   
26.35
%

For the three and six months ended June 30, 2023, net income was $21.3 million and $44.9 million, respectively compared to $18.4 million and $35.5 million for the same time generating some reasonable levelperiods a year ago. For the three months ended June 30, 2023 the increase in net income was primarily the result of current yields,higher net interest income of $7.7 million and an increase in non-interest income of $1.9 million. These increases were offset by an increase in non-interest expense of $3.8 million, higher provision for credit losses of $1.1 million and higher income tax expense of $1.9 million.

For the six months ended June 30, 2023, the increase in net income was primarily the result of higher net interest income of $21.2 million. The Company currently invests mostalso recognized in non-interest income, a $4.3 million death benefit on bank-owned life insurance (“BOLI”) during the six months ended June 30, 2023 that was not present during the six months ended June 30, 2022. This increase was offset by an increase in non-interest expense of its available funds in either shorter term U.S. Treasury, government agency & government-sponsored entity securities$8.2 million, higher provision for credit losses of $2.5 million and higher income tax expense of $2.2 million.
Net Interest Income and Net Interest Margin.
For the quarter ended June 30, 2023, net interest income increased $7.7 million, or shorter term (10, 15, and 20 year) mortgage-backed securities.  As part17.23%, to $52.4 million compared with $44.7 million for the same period a year earlier. The increase is primarily the result of the acquisitionnet interest margin increasing 74 basis points to 4.27% compared with 3.53% for the same period a year earlier. The increase in the net interest margin was primarily the result of Delta National Bancorp that took placethe FRB increasing the federal funds rate by 350 basis points from the second quarter of 2022 and the first half of 2023. The yield on interest earning assets increased 137 basis points to 4.97% compared to 3.60% for the second quarter of 2022 as the yield on interest bearing liabilities increased 99 basis points to 1.12% compared to .13% for the second quarter of 2022.

For the six months ended June 30, 2023, net interest income increased $21.2 million, or 24.41%, to $108.1 million compared with $86.9 million for the same period a year earlier. The increase is primarily the result of the net interest margin increasing 94 basis points to 4.40% compared with 3.46% for the same period a year earlier. The increase in November 2016, the Company now owns $31.7 millionnet interest margin was primarily the result of floatingthe FRB increasing the federal funds rate U.S. Government SBA securities.by 350 basis points from the second quarter of 2022 and the first six months of 2023. The loan yield increased 96 basis points compared to the first six months of 2022 and outpaced the increase in deposit yield of 71 basis points compared to the same period a year earlier.


Provision for Credit Losses
The Company's total investmentCompany made a $2.6 million provision for credit losses during the three months ended June 30, 2023 compared to $1.5 million for the same period a year ago. Net recoveries during the three months ended June 30, 2023 were $39,000 compared to net charge-offs of $59,000 for the same period a year ago.

The Company made a $4.1 million provision for credit losses during the first half of 2023 compared to $1.5 million during the first half of 2022. Net recoveries during the first half of 2023 were $227,000 compared to net charge-offs of $34,000 in the first half of 2022. The increase in ACL during the first six months of 2023 was primarily related to higher expected probable losses inherent in the loan and lease portfolio currently represents 16.7%that was directly related to quantitative and qualitative factors associated with the current economic environment.

35
Non-interest Income
Non-interest income increased $1.9 million, or 55.1%, to $5.4 million for the quarter ended June 30, 2023 compared with $3.5 million for the same period a year earlier. The increase in non-interest income was primarily due to a $2.3 million increase in net gains on deferred compensation plan investments.

The Company recorded net gains on deferred compensation plan investments of $1.3 million for the quarter ended June 30, 2023 compared with net losses of $1.0 million for the same respective period a year ago. See Note 11, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s total assets asDecember 31, 2022 Form 10-K filed on March 15, 2023 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these investment gains/losses to be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no net-effect on the Company’s net income.

Non-interest income increased $1.1 million, or 13.8%, to $8.9 million for the six months ended June 30, 2023 compared with $7.8 million for the same period of 2022. The year-over-year increase in non-interest income was primarily due to a $4.3 million BOLI death benefit and a $2.8 million increase in net gains on deferred compensation plan investments. These increases were partially off-set by a $5.7 million net loss on the sale of investment securities in the first quarter of 2023 to reposition the investment portfolio.

The Company recorded net gains on deferred compensation plan investments of $2.2 million for the six months ended June 30, 2023 compared with net losses of $0.6 million for the same respective period. See Note 11, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2022 Form 10-K filed on March 15, 2023 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these investment gains/losses to be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no net-effect on the Company’s net income.

Non-interest Expense
Non-interest expense increased $3.8 million, or 16.46%, to $26.8 million for the quarter ended June 30, 2023 compared with $23.0 million for the same period a year ago. This increase was primarily comprised of a $2.3 million increase in net gains on deferred compensation plan investments, a $1.1 million increase in salaries and a $0.4 million increase in employee benefits.

Net gains on deferred compensation plan obligations were $1.3 million for the quarter ended June 30, 2023 compared with net losses of $1.0 million for the same respective period. See Note 11, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2022 Form 10-K filed on March 15, 2023 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these gains on obligations to be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no net-effect on the Company’s net income.

Non-interest expense increased $8.2 million, or 17.48%, to $55.0 million for the six months ended June 30, 2023 compared with $46.8 million for the same period a year ago. This increase was primarily comprised of a $2.8 million increase in net gains on deferred compensation plan investments, a $2.2 million increase in salaries, a $2.1 million increase in employee benefits, a $0.6 million increase in other expenses and a $0.5 million increase in FDIC insurance.

36
The Company recorded net gains on deferred compensation plan investments of $2.2 million for the six months ended June 30, 2023 compared with net losses of $0.6 million for the same respective period. See Note 11, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2022 Form 10-K filed on March 15, 2023 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these gains on obligations to be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no net-effect on the Company’s net income.

Income Tax Expense
For the three and six months ended June 30, 2023, income tax expense was $7.2 million and $13.1 million, respectively compared to 17.3%$5.3 million and $10.9 million for the same periods a year ago. The Company’s effective tax rate for the three and six months ended June 30, 2023 was 25.21% and 22.65%, respectively compared to 22.18% and 23.54% for the same period in 2022. The Company’s effective tax rate for the six months ended June 30, 2023 was lower than its historical effective tax rate primarily due to a non-taxable BOLI death benefit of $4.3 million recognized during the six months ended June 30, 2023. The Company’s effective tax rate can fluctuate from quarter to quarter due primarily to changes in the mix of taxable and tax-exempt earning sources. The effective rates were lower than the combined Federal and State statutory rate of 30% due primarily to BOLI death benefits, the cash surrender value of life insurance; credits associated with low income housing tax credit investments (LIHTC); and tax-exempt interest income on municipal securities and loans.

Balance Sheet Analysis

Total assets were $5.3 billion at June 30, 2023, a decrease of $77.0 million or 1.45% compared to December 31, 2022. Loans held for investment were $3.5 billion at June 30, 2023, a decrease of $20.6 million, or 0.59% compared to December 31, 2022. Total deposits were $4.6 billion at June 30, 2023 compared with $4.8 billion at December 31, 2016,2022, a decrease of $121.0 million or 2.54%.

Cash and 15.7% at September 30, 2016.Cash Equivalents


AsThe Company’s cash and cash equivalents consists of September 30, 2017, the Company held $55.5 million of municipal investments, of which $38.5 million were bank-qualified municipal bonds, all classified as HTM. In order to comply with Section 939A of the Dodd-Frank Act, the Company: (1) only invests in bonds rated AA or better; and (2) performs its own credit analysis on new purchases of municipal bonds. As of September 30, 2017, ninety-eight percent of the Company’s bank-qualified municipal bond portfolio is rated at either the issue or issuer level, and all of these ratings are “investment grade.” The Company monitors the status of all municipal investments with particular attention paid to the approximately two percent ($420,000) of the portfolio that is not rated, and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security.

Not included in the investment portfolio are interest bearing deposits with banks and overnight investments in Federal Funds Sold.Reserve balances. Interest bearing deposits with banks consisted primarily of FRB deposits. The FRB currently pays interest on the deposits that banks maintain in their FRB accounts, whereas historically banks had to sell these Federal Funds to other banks in order to earn interest. Since balances at the FRB are effectively risk free, the Company elected to maintain its excess cash at the FRB. Interest bearing deposits with banks totaled $149.1$506.7 million at SeptemberJune 30, 2017, $44.02023 and $514.9 million at December 31, 20162022. The Company’s total cash and $42.9cash equivalents as of June 30, 2023 represents 11.2% of the Company’s total assets as compared to 11.0% as of December 31, 2022.

Investment Securities

The Company’s net investment portfolio decreased by $45.2 million or 4.53% to $952.6 million at SeptemberJune 30, 2016.2023 compared to December 31, 2022. This decrease is net of the impact of $36.2 million in available for sale securities sold for interest rate risk management purposes. The Company uses its investment portfolio to manage interest rate and liquidity risks. The Company's total investment portfolio as of June 30, 2023 represents 18.14% of the Company’s total assets as compared to 18.72% at December 31, 2022.

The Company classifies its investmentsinvestment securities as HTM, trading,either held-to-maturity (“HTM”) or AFS.available-for-sale (“AFS”). Securities are classified as HTM and are carried at amortized cost, net of an allowance for credit losses, when the Company has the intent and ability to hold the securities to maturity. Trading securities are securities acquired for short-term appreciation and are carried at fair value, with unrealized gains and losses recordedSee Note 2 “Investment Securities” to the Unaudited Consolidated Financial Statements in non-interest income. As of September 30, 2017, December 31, 2016 and September 30, 2016, there were no securities“Item 1. Financial Statements” in the trading portfolio.this Quarterly Report on Form 10-Q.  Securities classified as AFS include securities, which may be sold to effectively manage interest rate risk exposure, prepayment risk, satisfy liquidity demands and other factors. These securities are reported at fair value with aggregate, unrealized gains or losses excluded from income and included as a separate component of shareholders’ equity, as accumulated other comprehensive income(loss), net of related income taxes. As of June 30, 2023, the Company held no investment securities from any issuer (other than the U.S. Treasury or an agency of the U.S. government or a government sponsored entity) that totaled over 10% of our shareholders’ equity.


Loans & Leases
37
The carrying value of our portfolio of investment securities was as follows:

(Dollars in thousands) 
June 30,
2023
  
December 31,
2022
 
Available-for-Sale Securities      
U.S. Treasury notes 
$
-
  
$
4,964
 
U.S. Government-sponsored securities  
3,841
   
4,427
 
Mortgage-backed securities(1)
  
100,068
   
132,528
 
Collateralized mortgage obligations(1)
  
586
   
1,054
 
Corporate securities  
9,838
   
9,581
 
Other  
310
   
310
 
Total available-for-sale securities 
$
114,643
  
$
152,864
 

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

(Dollars in thousands) 
June 30,
2023
  
December 31,
2022
 
Held-to-Maturity Securities      
Mortgage-backed securities(1)
 
$
685,028
  
$
702,858
 
Collateralized mortgage obligations(1)
  
77,290
   
80,186
 
Municipal securities(2)
  
76,128
   
61,909
 
Total held-to-maturity securities 
$
838,446
  
$
844,953
 

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

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

  As of June 30, 2023 
  Within One Year  
After One but Within
Five Years
  
After Five but
Within Ten Years
  After Ten Years  Total 
(Dollars in thousands) Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield 
Securities available-for-sale                              
U.S. Government-sponsored securities 
$
-
   
0.00
%
 
$
80
   
6.35
%
 
$
271
   
6.19
%
 
$
3,490
   
5.91
%
 
$
3,841
   
5.94
%
Mortgage-backed securities(1)
  
10
   
2.56
%
  
8,100
   
2.52
%
  
6,600
   
3.58
%
  
85,358
   
1.95
%
  
100,068
   
2.11
%
Collateralized mortgage obligations(1)
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
586
   
2.28
%
  
586
   
2.28
%
Corporate securities  
-
   
0.00
%
  
9,838
   
5.31
%
  
-
   
0.00
%
  
-
   
0.00
%
  
9,838
   
5.31
%
Other  
310
   
3.90
%
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
310
   
3.90
%
Total securities available-for-sale 
$
320
   
3.86
%
 
$
18,018
   
4.06
%
 
$
6,871
   
3.68
%
 
$
89,434
   
2.11
%
 
$
114,643
   
2.52
%

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

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

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

38
  As of December 31, 2022 
  Within One Year  
After One but Within
Five Years
  
After Five but
Within Ten Years
  After Ten Years  Total 
(Dollars in thousands) Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield 
Securities available-for-sale                              
U.S. Treasury notes 
$
4,964
   
2.37
%
 
$
-
   
0.00
%
 
$
-
   
0.00
%
 
$
-
   
0.00
%
 
$
4,964
   
2.37
%
U.S. Government-sponsored securities  
3
   
2.17
%
  
53
   
2.29
%
  
380
   
4.52
%
  
3,991
   
4.52
%
  
4,427
   
4.29
%
Mortgage-backed securities(1)
  
13
   
2.82
%
  
16,460
   
2.31
%
  
15,156
   
2.41
%
  
100,899
   
1.82
%
  
132,528
   
1.95
%
Collateralized mortgage obligations(1)
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
1,054
   
2.35
%
  
1,054
   
2.35
%
Corporate securities  
-
   
0.00
%
  
9,581
   
3.13
%
  
-
   
0.00
%
  
-
   
0.00
%
  
9,581
   
3.13
%
Other  
310
   
4.60
%
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
310
   
4.60
%
Total securities available-for-sale 
$
5,290
   
2.50
%
 
$
26,094
   
2.61
%
 
$
15,536
   
2.46
%
 
$
105,944
   
1.93
%
 
$
152,864
   
2.11
%

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

  As of December 31, 2022 
  Within One Year  
After One but Within
Five Years
  
After Five but
Within Ten Years
  After Ten Years  Total 
(Dollars in thousands) Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield 
Securities held-to-maturity                              
Mortgage-backed securities(1)
 
$
-
   
0.00
%
 
$
-
   
0.00
%
 
$
18,197
   
1.22
%
 
$
684,661
   
1.90
%
 
$
702,858
   
1.88
%
Collateralized mortgage obligations(1)
  
-
   
0.00
%
  
-
   
0.00
%
  
-
   
0.00
%
  
80,186
   
1.80
%
  
80,186
   
1.80
%
Municipal securities  
883
   
5.92
%
  
8,058
   
3.98
%
  
15,670
   
3.70
%
  
37,691
   
4.83
%
  
62,302
   
4.45
%
Total securities held-to-maturity 
$
883
   
5.92
%
 
$
8,058
   
3.98
%
 
$
33,867
   
2.37
%
 
$
802,538
   
2.03
%
 
$
845,346
   
2.07
%

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

Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Expected maturities of mortgage-backed and CMO securities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without penalties. The Company evaluates securities for expected credit losses at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

Loans &and Leases

Loans and leases can be categorized by borrowing purpose and use of funds. Common examples of loans &and leases made by the Company include:

Commercial and Agricultural Real Estate - – These are loans secured by farmland, commercialowner-occupied real estate, non-owner-occupied real estate, owner-occupied farmland, and multifamily residential properties, and other non-farm, non-residential properties generally within our market area.properties. Commercial mortgage term loans can be made if the property is either income producing or scheduled to become income producing based upon acceptable pre-leasing, andor the income will be the Bank's primary source of repayment for the loan. Loans are made both on owner occupied and investor properties; maturities generally do not exceed 1015 years (and may have pricing adjustments on a shorter timeframe) amortizations of up to 25 years (30 years for multifamily residential properties); have debt service coverage ratios of 1.00 or better with a target of greater than 1.25;1.25 or greater; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.

Real Estate Construction - – These are loans for acquisition, development and construction (the Company generally requires the borrower to fund the land acquisition) and are secured by commercial or residential real estate. These loans are generally made only to experienced local developers with whom the Bank has a successful track record; for projects in our service area; with Loan Toto Value (LTV) below 75%; and where the property can be developed and sold within 2 years. Commercial construction loans are generally made only when there is a writtenan approved take-out commitment from the Bank or an acceptable financial institution or government agency. Most acquisition, development and construction loans are tied to the prime rate or LIBOR with an appropriate spread based on the amount of perceived risk in the loan.

Single Family Residential 1st Mortgages -Real Estate – These are loans primarily made on owner occupied residences; generally underwritten to income and LTV guidelines similar to those used by FNMA and FHLMC; however, weFHLMC. However, the Company will make loans on rural residential properties up to 4041 acres. Most residential loans have terms from ten to twentythirty years and carry fixed or variable rates priced off ofto treasury rates. The Company has always underwritten mortgage loans based upon traditional underwriting criteria and does not make loans that are known in the industry as “subprime,” “no or low doc,” or “stated income.”income” loans.

39
Home Equity Lines and Loans - – These are loans made to individuals for home improvements and other personal needs. Generally, amounts do not exceed $250,000;$500,000; but can be made for up to $1,000,000 in high cost counties. Combined Loan Toto Value (CLTV) does not exceed 80%75%; FICO scores are at or above 670; Total Debt Ratios do not exceed 43%; and in some situations the Company is in a 1st lien position.


Agricultural - – These are non-real estate loans and lines of credit made to farmers to finance agricultural production. Lines of credit are extended to finance the seasonal needs of farmers during peak growing periods; are usually established for periods no longer than 12 to 36 months; are often secured by general filing liens on livestock, crops, crop proceeds and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a processing plant, or orchard/vineyard development; have maturities from five to seven years; and fixed rates that are most often tied to treasury indices or variable rates tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan.

49
Commercial - – These are non-real estate loans and lines of credit to businesses that are sole proprietorships, partnerships, LLC’s and corporations. Lines of credit are extended to finance the seasonal working capital needs of customers during peak business periods; are usually established for periods no longer than 12 to 2436 months; are often secured by general filing liens on accounts receivable, inventory and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a plant or purchase of a business; have maturities from fivethree to seven years; and fixed rates that are most often tied to treasury indices or variable rates tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan.


Consumer - – These are loans to individuals for personal use, and primarily include loans to purchase automobiles or recreational vehicles, and unsecured lines of credit. The Company has a very minimal consumer loan portfolio, and loans are primarily made as an accommodation to deposit customers.portfolio.

Commercial Leases –These – These are leases primarily to businesses or individuals,and farmers for the purpose of financing the acquisition of equipment. They can be either “finance leases” where the lessee retains the tax benefits of ownership but obtains 100% financing on their equipment purchases; or “true tax leases” where the Company, as lessor, places reliance on equipment residual value and in doing so obtains the tax benefits of ownership. Leases typically have a maturity of three to ten years, and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use ofwith qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.


The Company accounts for leases with Investment Tax Credits (ITC)(“ITC”) under the deferred method as established in ASC 740-10. ITCITCs are viewed and accounted for as a reduction of the cost of the related assets and presented as deferred income on the Company’s financial statement.

See “Item 3. Quantitative and Qualitative Disclosures About Market Risk-Credit Risk” for a discussion about the credit risks the Company assumes and its overall credit risk management practices.


Each loan or lease type involves risks specific to the: (1) borrower; (2) collateral; and (3) loan &or lease structure. See “Results of Operations - Provision and Allowance for Credit Losses” for a more detailed discussion of risks by loan &and lease type. The Company’s current underwriting policies and standards are designed to mitigate the risks involved in each loan &and lease type. The Company’s policies require that loans &and leases arebe approved only to those borrowers exhibiting a clear source of repayment and the ability to service existing and proposed debt. The Company’s underwriting procedures for all loan &and lease types require careful consideration of the borrower, the borrower’s financial condition, the borrower’s management capability, the borrower’s industry, and the economic environment affecting the loan or lease.


40
Most loans &and leases made by the Company are secured, but collateral is the secondary or tertiary source of repayment; cash flow is our primary source of repayment. The quality and liquidity of collateral are important and must be confirmed before the loan or lease is made.


In order to be responsive to borrower needs, the Company prices loans &and leases: (1) on both a fixed rate and adjustable rate basis; (2) over different terms; and (3) based upon different rate indices;indices as long as these structures are consistent with the Company’s interest rate risk management policies and procedures (see Itemprocedures. See “Item 3. Quantitative and Qualitative Disclosures Aboutabout Market Risk-Interest Rate Risk).Risk” in this Report on Form 10-Q for further details.


Overall, the Company's loan &and lease portfolio at SeptemberJune 30, 20172023 totaled $2.2$3.5 billion, an increasea decrease of $137.1$20.6 million or 6.6% over September 30, 2016. This increase has occurred as a result of: (1) the Company’s intensified business development efforts directed toward credit-qualified borrowers; (2) entry into the equipment leasing business; and (3) expansion of our service area into Walnut Creek and Concord.  No assurances can be made that this growth in the loan & lease portfolio will continue.

Loans & leases at September 30, 2017 increased $39.2 million from $2.2 billion at0.59% compared to December 31, 2016, primarily as a result of growth in real estate and commercial segments offset to some extent by normal seasonal pay downs of loans made to the Company’s agricultural customer customers.2022.
The following table sets forth the distribution of the loan &and lease portfolio by type and percent at the end of each period presented:

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

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

  Loan Contractual Maturity 
(Dollars in thousands) 
One Year or
Less
  
After One But
Within Five
Years
  
After Five
Years But
Within Fifteen
Years
  After Fifteen
Years		  Total 
Gross loan and leases:               
Real estate:               
Commercial 
$
36,189
  
$
396,249
  
$
835,140
  
$
34,882
  
$
1,302,460
 
Agricultural  
21,047
   
188,361
   
452,673
   
77,126
   
739,207
 
Residential and home equity  
33
   
4,310
   
118,004
   
270,407
   
392,754
 
Construction  
100,220
   
72,683
   
-
   
-
   
172,903
 
Total real estate  
157,489
   
661,603
   
1,405,817
   
382,415
   
2,607,324
 
Commercial & industrial  
164,160
   
217,555
   
92,166
   
6,027
   
479,908
 
Agricultural  
139,259
   
117,908
   
23,858
   
1,700
   
282,725
 
Commercial leases  
5,083
   
43,476
   
77,995
   
-
   
126,554
 
Consumer and other  
858
   
3,589
   
1,106
   
-
   
5,553
 
Total gross loans and leases 
$
466,849
  
$
1,044,131
  
$
1,600,942
  
$
390,142
  
$
3,502,064
 
Rate Structure for Loans                    
Fixed Rate 
$
97,118
  
$
586,584
  
$
1,166,360
  
$
231,022
  
$
2,081,084
 
Adjustable Rate  
369,731
   
457,547
   
434,582
   
159,120
   
1,420,980
 
Total gross loans and leases 
$
466,849
  
$
1,044,131
  
$
1,600,942
  
$
390,142
  
$
3,502,064
 

41
The following table summarizes the periods indicated.loans for which the accrual of interest has been discontinued and loans more than 90 days past due and still accruing interest, and OREO (as hereinafter defined):


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

Loan & Lease Portfolio September 30, 2017  December 31, 2016  September 30, 2016 
(in thousands) $  %  $  %  $  % 
Commercial Real Estate $689,732   31.0% $674,445   30.9% $632,484   30.2%
Agricultural Real Estate  470,738   21.2%  467,685   21.4%  439,972   21.1%
Real Estate Construction  162,167   7.3%  176,462   8.1%  175,045   8.4%
Residential 1st Mortgages  257,920   11.6%  242,247   11.1%  238,376   11.4%
Home Equity Lines and Loans  33,350   1.5%  31,625   1.4%  32,513   1.6%
Agricultural  259,127   11.7%  295,325   13.5%  274,704   13.2%
Commercial  257,951   11.6%  217,577   10.0%  214,086   10.3%
Consumer & Other  7,312   0.3%  6,913   0.3%  6,975   0.3%
Leases  84,485   3.8%  70,986   3.3%  70,129   3.4%
Total Gross Loans & Leases  2,222,782   100.0%  2,183,265   100.0%  2,084,284   100.0%
Less: Unearned Income  6,003       5,664       4,614     
Subtotal  2,216,779       2,177,601       2,079,670     
Less: Allowance for Credit Losses  50,744       47,919       44,446     
Net Loans & Leases $2,166,035      $2,129,682      $2,035,224     
Classified Loans & Leases and Non-Performing Assets
All loans & leases are assigned a credit risk grade using grading standards developed by bank regulatory agencies. See “Results of Operations - Provision and Allowance for Credit Losses” for more detail on risk grades. The Company utilizes the services of a third-party independent loan review firm to perform evaluations of individual loans & leases and review the credit risk grades the Company places on loans & leases. Loans & leases that are judged to exhibit a higher risk profile are referred to as “classified loans & leases,” and these loans & leases receive increased management attention. As of September 30, 2017, classified loans totaled $9.8 million compared to $6.4 million at December 31, 2016 and $6.8 million at September 30, 2016.

Classified loans & leases with higher levels of credit risk can be further designated as “impaired” loans & leases. A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. See “Results of Operations - Provision and Allowance for Credit Losses” for further details. Impaired loans & leases consist of: (1) non-accrual loans & leases; and/or (2) restructured loans & leases that are still performing (i.e., accruing interest).

Non-Accrual Loans &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. As of September 30, 2017, non-accrualNon-accrual loans &and leases totaled $4,000. At$375,000 and $571,000 at June 30, 2023 and December 31, 20162022, respectively.

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, 2023, and September 30, 2016, non-accrual loans & leases totaled $3.1 million and $3.1 million, respectively.

Restructured Loans & Leases - A restructuring of a loan or lease constitutes a TDR under ASC 310-40, if the Company for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider. Restructured loans or leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans & leases that are on nonaccrual status at the time they become TDR loans, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms. However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment.
As of September 30, 2017, restructured loans & leases on accrual totaled $6.2 million as compared to $6.0 million at December 31, 2016. Restructured loans on accrual at September 30, 2016 were $4.6 million.2022.

Other Real Estate - Loans where the collateral has been repossessed are classified as other real estate ("ORE") or, if the collateral is personal property, the loan is classified as other assets on the Company's financial statements.

The following table sets forth the amount of the Company's non-performing loans & leases (defined as non-accrual loans & leases plus accruing loans & leases past due 90 days or more) and ORE as of the dates indicated.

Non-Performing Assets
(in thousands) September 30, 2017  Dec. 31, 2016  September 30, 2016 
Non-Performing Loans & Leases $4  $3,074  $3,074 
Other Real Estate  873   3,745   785 
Total Non-Performing Assets $877  $6,819  $3,859 
             
Non-Performing Loans & Leases as a % of Total Loans & Leases  0.00%  0.14%  0.15%
Restructured Loans & Leases (Performing) $6,202  $4,462  $4,597 


Although management believes that non-performing loans &and leases are generally well-secured and that potential losses are provided for in the Company’s allowance for credit losses, there can be no assurance that future deterioration in economic conditions and/or collateral values will not result in future credit losses. Specific reservesSee Note 3. “Loans and Leases”, located in “Item 1. Financial Statements” in this Quarterly Report on Form 10-Q for an allocation of $4,000, $631,000,the allowance classified to collateral dependent loans and $643,000 have been establishedleases.

Except for non-performing loans & leases at September 30, 2017, December 31, 2016 and September 30, 2016, respectively.

Foregone interest income on non-accrual loans & leases, which would have been recognized during the period, if all such loans & leases had been current in accordance with their original terms, totaled $483 for the nine months ended September 30, 2017, $127,000 for the year ended December 31, 2016, and $99,000 for the nine months ended September 30, 2016.

The Company reported $873,000 of ORE at September 30, 2017, $3.7 million at December 31, 2016, and $785,000 at September 30, 2016.

Except for those classified and non-performing loans & leases discussed above, the Company’s management is not aware of any loans &and leases as of SeptemberJune 30, 2017,2023, for which known financial problems of the borrower would cause serious doubts as to the ability of these borrowers to materially comply with their present loan or lease repayment terms, or any known events that would result in the loan or lease being designated as non-performing at some future date. However:However, the State of California has routinely experienced drought conditions such as from 2013 through 2016 and 2020-2022. Although the availability of water in our primary service area was not an issue for the 2022 growing season, the weather patterns over the past nine years further reinforce the fact that the long-term risks associated with the availability of water are significant.
·The Central Valley was one of the hardest hit areas in the country during the recession. In many areas housing prices declined as much as 60% and unemployment reached 15% or more. Although the economy has strengthened throughout most of the Central Valley, for the most part housing prices remain below peak levels and unemployment levels remain above those in other areas of the state and country.

·The State of California experienced drought conditions from 2013 through most of 2016.  Although significant levels of rain and snow in late 2016 and early 2017 have alleviated drought conditions in many areas of California, including the Company’s primary service area, the long-term risks associated with the availability of water continue to exist.

5242
·The agricultural industry is facing challenges associated with: (1) weakness in export markets due to a stronger dollar and proposed changes in trade policies; (2) tight labor markets and higher wages due to legislative changes at the state and federal levels; and (3) proposed changes in immigration policy and the resulting impact on the labor pool.

In additionLoan Modifications/Restructurings – A modification/restructuring of a loan or lease happens when the Company makes certain concessions to a borrower experiencing financial difficulty.  These concessions either stem from an agreement between the Company and the borrower or is imposed by law or a court; some of these concessions include: term extension, principle forgiveness, rate reduction, or a combination of any of those.  The Company has granted a concession when, as a result of the modification/restructuring, it does not expect to collect all amounts due, including interest accrued at the original contract rate.  ASU 2022-02 requires certain disclosure of loans and leases that have been modified or restructured within the past 12 months and the effects that said modifications had on the loans or leases.  Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses and because of the measurement methodologies used to estimate the allowance, a change to the other information set forthallowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness that is deemed to be uncollectable; therefore, that portion of the loan is written off, resulting in this report, readers should carefully considera reduction of the factors discussed in “Part I, Item 1A. Risk Factors”amortized cost basis and a corresponding adjustment to the allowance for credit losses.

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

The Company maintains an allowance for credit losses (“ACL”) under ASC Topic 326, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“CECL”). The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan and lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of three primary components: specific reserves related to collateral dependent loans and leases; general reserves for current expected credit losses related to loans and leases that are not collateral dependent; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors. The Company uses the Weighted Average Remaining Maturity (“WARM”) method to calculate the ACL as this method is the most appropriate given the Company’s 2016 Annual Report on Form 10-K.current size and complexity. See “Summary of Critical Accounting Policies and Estimates - Allowance for Credit Losses – Loans and Leases.”


43
The following table sets forth the activity in our ACL for loans and leases for the periods indicated:

  Six Months Ended June 30, 
(Dollars in thousands) 2023  2022 
Allowance for credit losses:      
Balance at beginning of year 
$
66,885
  
$
61,007
 
Provision for credit losses  
4,000
   
1,107
 
Charge-offs:        
Real estate:        
Commercial  
-
   
-
 
Agricultural  
-
   
-
 
Residential and home equity  
(14
)
  
-
 
Construction  
-
   
-
 
Total real estate  
(14
)
  
(276
)
Commercial & industrial  
-
   
-
 
Agricultural  
-
   
-
 
Commercial leases  
-
   
-
 
Consumer and other  
(18
)
  
(18
)
Total charge-offs  
(32
)
  
(294
)
 Recoveries:        
Real estate:        
Commercial  
170
   
-
 
Agricultural  
-
   
-
 
Residential and home equity  
31
   
119
 
Construction  
-
   
-
 
Total real estate  
201
   
119
 
Commercial & industrial  
38
   
131
 
Agricultural  
3
   
4
 
Commercial leases  
-
   
-
 
Consumer and other  
17
   
6
 
Total recoveries  
259
   
260
 
Net recoveries / (charge-offs)  
227
   
(34
)
         
Balance at end of year 
$
71,112
  
$
62,080
 
         
Selected financial information:        
Net loans and leases held-for-investment 
$
3,491,723
  
$
3,249,886
 
Average loans and leases  
3,444,490
   
3,222,763
 
Non-performing loans and leases  
375
   
3,028
 
Allowance for credit losses to non-performing loans and leases  
18963.20
%
  
2050.20
%
Net (recoveries)/charge-offs to average loans and leases  
(0.01
%)
  
0.00
%
Provision for credit losses to average loans and leases  
0.12
%
  
0.03
%
Allowance for credit losses to gross loans and leases held-for-investment  
2.03
%
  
1.91
%

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

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

44
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,
2023
  
December 31,
2022
 
(Dollars in thousands) Dollars  
Percent of
Each Loan
Type to Total
Loans
  Dollars  
Percent of
Each Loan
Type to Total
Loans
 
Allowance for credit losses:            
Real estate:            
Commercial 
$
24,787
   
37.19
%
 
$
18,055
   
37.73
%
Agricultural  
9,908
   
21.11
%
  
14,496
   
20.64
%
Residential and home equity  
7,179
   
11.21
%
  
7,508
   
11.01
%
Construction  
3,195
   
4.94
%
  
3,026
   
4.73
%
Total real estate  
45,069
   
74.45
%
  
43,085
   
74.11
%
Commercial & industrial  
11,291
   
13.71
%
  
11,503
   
13.59
%
Agricultural  
12,903
   
8.07
%
  
10,202
   
8.93
%
Commercial leases  
1,657
   
3.61
%
  
1,924
   
3.20
%
Consumer and other  
192
   
0.16
%
  
171
   
0.17
%
Total allowance for credit losses 
$
71,112
   
100.00
%
 
$
66,885
   
100.00
%

Deposits
One
Total deposits were $4.6 billion and $4.8 billion as of the key sourcesJune 30, 2023 and December 31, 2022, respectively a decrease of funds$121.0 million or 2.5% due in part to support earning assets is the generation of deposits from the Company’s customerseasonality within our agriculture client base. The ability to growCompany experienced a decrease in deposits in the customerfirst quarter of 2023 of $220.1 million or 4.6% while during the second quarter of 2023, deposits increased $99.1 million or 2.2%. The increase in deposits during the second of 2023 reflects seasonality within our agricultural client base and subsequently deposits, is a significant element in the performance of the Company.

The Company's deposit balances at September 30, 2017 have increased $353.8 million or 15.0% compared to September 30, 2016. In addition to the Company’s ongoingCompany focus on business development activities for deposits.

Non-interest bearing demand deposits the following factors positively impacted year-over-year deposit growth: (1) the Company’s strong financial resultswere $1.50 billion as of June 30, 2023 and position and F&M Bank’s reputation as one$1.76 billion at December 31, 2022. Non-interest bearing deposits were 32.24% of the most safe and sound banks in its market area; (2) the Company’s expansion of its service area into Walnut Creek and Concord; and (3) $103.7 million in deposits from the acquisition of Delta National Bank. The Company expects that, at some point, deposit customers may begin to diversify how they invest their money (e.g., move funds back into the stock market or other investments) and this could impact future deposit growth.

Although total deposits, have increased 15.0% since Septemberas of June 30, 2016, importantly, low cost transaction accounts continue to grow at a strong pace2023 and 36.96% as well:

·Demand and interest-bearing transaction accounts increased $226.5 million or 20.5% since September 30, 2016.

·Savings and money market accounts have increased $125.1 million or 17.8% since September 30, 2016.

·Time deposit accounts have increased $2.1 million or 0.4% since September 30, 2016.

The Company's deposit balances at September 30, 2017 have increased $127.7 million or 5.0% compared toof December 31, 2016. Savings2022. Interest bearing deposits were $3.1 billion as of June 30, 2023 and money market$3.0 billion as of December 31, 2022. Interest bearing deposits increased 8.9% or $67.5 million while demand andare comprised of interest-bearing transaction accounts, increased by $80.7 million or 6.5%money market accounts, regular savings accounts, and time deposit accounts decreased by $20.5 million or 3.6%.  Thiscertificates of deposit. The decrease in timenon-interest bearing deposits and the increase in interest-bearing deposits reflects customer behavior in shifting from non-interest bearing accounts to higher interest earning accounts given the current interest rate environment.

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

  Six Months Ended June 30, 
  2023  2022 
(Dollars in thousands) Average
Balance		  
Interest
Expense
  
Average
Rate
  
Average
Balance
  
Interest
Expense
  
Average
Rate
 
Total deposits:                  
Interest bearing deposits:                  
Demand 
$
1,004,651
  
$
888
   
0.18
%
 
$
1,116,436
  
$
578
   
0.10
%
Savings and money market  
1,593,158
   
7,656
   
0.97
%
  
1,531,069
   
703
   
0.09
%
Certificates of deposit greater than $250,000  
188,053
   
2,142
   
2.30
%
  
166,725
   
203
   
0.25
%
Certificates of deposit less than $250,000  
233,945
   
1,419
   
1.22
%
  
221,487
   
192
   
0.17
%
Total interest bearing deposits  
3,019,807
   
12,105
   
0.81
%
  
3,035,717
   
1,676
   
0.11
%
Non-interest bearing deposits  
1,584,215
           
1,728,962
         
Total deposits 
$
4,604,022
  
$
12,105
   
0.53
%
 
$
4,764,679
  
$
1,676
   
0.07
%

45
Deposits are gathered from individuals and businesses in our market areas. The interest rates paid are competitively priced for each particular deposit accounts was dueproduct and structured to meet our funding requirements.

The significant increase in short-term interest rates during 2022 and into 2023 has placed pressure on deposit pricing, and we will continue to manage this ongoing impact through careful deposit pricing.  The average cost of deposits, including non-interest bearing deposits, increased to 0.74% for the Company’s decision notthree months ended June 30, 2023, compared to renew $35 million0.32% for the three months ended March 31, 2023 and 0.53% for the six months ended June 30, 2023 compared with 0.07% for the same period a year ago.

The Bank participates in high rate public funds time deposit accounts froma program wherein the State of California. Deposit trends inCalifornia places time deposits with the first nine monthsBank at the Bank’s option.  At June 30, 2023 and December 31, 2022, the Bank had $3.0 million, of the year can be impacted by the seasonal needs of our agricultural customers.these deposits.


Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings

Lines of creditCredit with the Federal Reserve Bank and the Federal Home Loan Bank are other key sources of funds to support earning assets.assets and liquidity. These sources of funds are also used to manage the Company’s interest rate risk exposure,exposure; and, as opportunities arise, to borrow and invest the proceeds at a positive spread through the investment portfolio. There were no FHLB Advancesadvances at SeptemberJune 30, 2017,2023 or December 31, 2016, or September 30, 2016.2022. There were no Federal Funds purchased or advances from the FRB at SeptemberJune 30, 2017,2023 or December 31, 2016 or September 30, 2016.2022.

As of September 30, 2017, the Company has additional borrowing capacity of $422.8 million with the Federal Home Loan Bank and $377.4 million with the Federal Reserve Bank. Any borrowings under these lines would be collateralized with loans that have been accepted for pledging at the FHLB and FRB.
Long-Term Subordinated Debentures

On December 17, 2003, the Company raised $10$10.0 million through the sale of subordinated debentures to an offeringoff-balance-sheet trust and its sale of trust-preferred securities (“TPS”).securities. See Note 149. “Long-Term Subordinated Debentures” located in “Item 8. Financial Statements and Supplementary Data” of the Company’s 2016in our Annual Report on Form 10-K.10-K filed with the SEC on March 15, 2023. Although this amount is reflected as subordinated debt on the Company’s balance sheet, under current regulatory guidelines, our TPSTrust Preferred Securities will continue to qualify as regulatory capital (See “Capital”). capital.

These securities accrue interest at a variable rate based upon 3-month LIBOR plus 2.85%. Interest rates reset quarterly (the next reset is September 18, 2023) and were 4.17%the rate was 8.36% as of SeptemberJune 30, 2017, 3.84%2023 and 7.59% at December 31, 2016 and 3.71% at September 30, 2016.2022. The average rate paid for these securities was 7.82% for the first nine monthshalf of 2017 was 4.15%2023 and 3.53%3.62% for the first nine monthshalf of 2016.2022. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on the Company’s common stock.


Capital Resources

The Company relies primarily on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to insure depositor protection. Shareholders’ Equity totaled $302.6$514.7 million at SeptemberJune 30, 2017, $280.02023, and $485.3 million at December 31, 2016, and $272.4 million at September 30, 2016.2022.


The Company and the Bank are subject to various federal regulatory capital requirementsadequacy guidelines as outlined under Part 324 of the Basel III Capital Rules.FDIC Rules and Regulations. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The implementation of Basel III requirements will increase the required capital levels that the Company and the Bank must maintain. The final rules include new minimum risk-based capital and leverage ratios, which would be phased in over time. The new minimum capital level requirements applicable to the Company and the Bank under the final rules will be: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets (“RWA”); (ii) a Tier 1 capital ratio of 6% of RWA; (iii) a total capital ratio of 8% of RWA; and (iv) a Tier 1 leverage ratio of 4% of total assets. The final rules also establish a "capital conservation buffer" of 2.5% above each of the new regulatory minimum capital ratios, which would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0% of RWA; (ii) a Tier 1 capital ratio of 8.5% of RWA; and (iii) a total capital ratio of 10.5% of RWA. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. The final rules also permit the Company’s subordinated debentures issued in 2003 to continue to be counted as Tier 1 capital.

The final rules became effective as applied to the Company and the Bank on January 1, 2015, with a phase in period through January 1, 2019. The Company believes that it is currently in compliance with all of these new capital requirements (as fully phased-in) and that they will not result in any restrictions on the Company’s business activity.

In addition, Management believes that the most recent notification fromBank meets the FDICrequirements to be categorized the Bank as “well capitalized” under the FDIC regulatory framework for prompt corrective action. To be categorized as well“well capitalized,” the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since that notification that management believes have changed the Bank’s category.

(in thousands) Actual  
Current
Regulatory
Capital
Requirements
  
Well Capitalized
Under Prompt
Corrective Action
 
The Company: Amount  Ratio  Amount  Ratio  Amount  Ratio 
As of September 30, 2017                  
Total Capital Ratio $343,361   13.19% $208,312   8.0%  N/A   N/A 
Common Equity Tier 1 Capital Ratio $300,802   11.55% $117,176   4.5%  N/A   N/A 
Tier 1 Capital Ratio $310,584   11.93% $156,234   6.0%  N/A   N/A 
Tier 1 Leverage Ratio $310,584   10.20% $121,790   4.0%  N/A   N/A 

5446
(in thousands)
 Actual  
Current
Regulatory
Capital
Requirements
  
Well Capitalized
Under Prompt
Corrective Action
 
The Bank: Amount  Ratio  Amount  Ratio  Amount  Ratio 
As of September 30, 2017                  
Total Capital Ratio $331,392   12.79% $207,336   8.0% $259,170   10.0%
Common Equity Tier 1 Capital Ratio $298,766   11.53% $116,627   4.5% $168,461   6.5%
Tier 1 Capital Ratio $298,766   11.53% $155,502   6.0% $207,336   8.0%
Tier 1 Leverage Ratio $298,766   9.85% $121,336   4.0% $151,670   5.0%
The Company’s and Bank’s actual and required capital amounts and ratios are as follows:


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

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

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

The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.

In 1998, the Board approved the Company’s first common stock repurchase program. This program has been extended and expanded several times since then, and most recently, on August 11, 2015,November 8, 2022, the Board of Directors approvedauthorized an extension of the $20 million stockto its share repurchase program over the three-year period ending September 30, 2018. See “Item 5. Marketthrough December 31, 2024 for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”an additional$20.0 million of the Company’s 2016 Annual Reportcommon stock (“Repurchase Plan”), which represents approximately 4% of outstanding shareholders’ equity. Repurchases by the Company under the Repurchase Plan may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means. The Inflation Reduction Act of 2022 signed into law in August 2022 includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions. The excise tax became effective on Form 10-K for additional information.January 1, 2023.


There were no stock repurchases duringDuring the first ninesix months of 2017 or 2016. The remaining dollar value of2023 the Company repurchased 13,814 shares that may yet be purchased under the Company’s Common Stock Repurchase Plan, for a total of $13.9 million. The Company has repurchased a total of 14,616 shares or $14.6 million under the current Repurchase Plan.

47
Off-Balance-Sheet Arrangements

Off-balance-sheet arrangements are any contractual arrangement to which an unconsolidatedentity is approximately $20 million.

On August 5, 2008, the Board of Directors approved a Share Purchase Rights Plan (the “Rights Plan”), pursuant toparty, under which the Company entered intohas: (1) any obligation under a Rights Agreement dated August 5, 2008, with Computershare as Rights Agent. The Rights Plan was set to expire on August 5, 2018.  On November 19, 2015, the Board of Directors approvedguarantee contract; (2) a seven-year extension of the term of the Rights Plan.  Pursuantretained or contingent interest in assets transferred to an Amendmentunconsolidated 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 Rights Agreement dated February 18, 2016,Company, or engages in leasing, hedging, or research and development services with the term of the Rights Plan was extended from August 5, 2018 to August 5, 2025.  The extension of the term of the Rights Plan was intended as a means to continue to guard against abusive takeover tactics and was not in response to any particular proposal. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of the Company’s 2016 Annual Report on Form 10-K for further explanation.

During the first and third quarters of 2017, the Company issued a combined total 4,975 shares of common stock to the Bank’s non-qualified defined contribution retirement plans. These shares were issued at a prices ranging from $590.00 to $595.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital.
Critical Accounting Policies and Estimates
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In preparing the Company’s financial statements management makes estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These judgments govern areas such as the allowance for credit losses, the fair value of financial instruments and accounting for income taxes.

For a full discussion of the Company’s critical accounting policies and estimates see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2016 Annual Report on Form 10-K.

Off Balance Sheet Commitments
In the normal course of business, the Company enters into financial instruments with off balance sheet risks in order to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit, letters of credit and other types of financial guarantees.Company. The Company had the following off balance sheet commitments as of the dates indicated.

(in thousands) September 30, 2017  December 31, 2016  September 30, 2016 
Commitments to Extend Credit $700,747  $609,653  $618,102 
Letters of Credit  19,225   20,444   15,595 
Performance Guarantees Under Interest Rate Swap Contracts Entered Into Between Our Borrowing Customers and Third Parties  1,479   1,835   5,305 
The following table sets forth our off-balance-sheet lending commitments as of June 30, 2023:

     Amount of Commitment Expiration per Period 
(Dollars in thousands) 
Total
Committed
Amount
  
Less than
One Year
  
One to
Three
Years
  
Three to
Five Years
  
After Five
Years
 
Off-balance sheet commitments               
Commitments to extend credit 
$
1,123,756
  
$
422,126
  
$
465,434
  
$
41,354
  
$
194,842
 
Standby letters of credit  
16,863
   
10,800
   
4,593
   
1,470
   
-
 
Total off-balance sheet commitments 
$
1,140,619
  
$
432,926
  
$
470,027
  
$
42,824
  
$
194,842
 

The Company's exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer's creditworthiness are performed on a case-by-case basis. Additionally, the Company maintains an allowance for credit losses – unfunded loan commitments, for off-balance-sheet commitments, which totaled $2.1 million at June 30, 2023 and December 31, 2022.


Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third party.third-party. Most standby letters of credit are issued for 12have maturity dates ranging from 1 to 78 months or less.with final expiration in January 2027. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Additionally,

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 Company maintainsform of cash which is primarily on deposit with the FRB and amounted to $506.7 million as of June 30, 2023. Potential sources of liquidity also include investment securities in our available-for-sale securities portfolio, our ability to sell loans in the secondary market, and to secure borrowings from the FRB and FHLB. Our diversified deposit portfolio has historically provided us with a reservelong-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 off balance sheet commitments, which totaled $267,000 at September 30, 2017, December 31, 2016, and September 30, 2016. We do not anticipate any material losses assale securities, is a result of our operating, investing and financing activities and related cash flows. In order to ensure funds are available at all times, we devote resources to projecting the amount of funds that will be required and we maintain relationships with a diversified client base so funds are accessible. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets.

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

  June 30, 2023 
(Dollars in thousands) 
Total Credit
Line Limit
  
Current
Credit Line
Available
  
Outstanding
Amount
  
Remaining
Credit Line
Available
  
Value of
Collateral
Pledged
 
Additional liquidity sources:               
Federal Home Loan Bank 
$
784,138
  
$
784,138
  
$
-
  
$
784,138
  
$
1,267,719
 
Federal Reserve BIC  
655,017
   
655,017
   
-
   
655,017
   
894,400
 
FHLB Fed Funds  
18,000
   
18,000
   
-
   
18,000
   
-
 
US Bank Fed Funds  
50,000
   
50,000
   
-
   
50,000
   
-
 
PCBB Fed Funds  
50,000
   
50,000
   
-
   
50,000
   
-
 
Total additional liquidity sources 
$
1,557,155
  
$
1,557,155
  
$
-
  
$
1,557,155
  
$
2,162,119
 

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


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

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, 2023, we had unfunded loan commitments of $1.1 billion and unfunded letters of credit of $16.9 million. We anticipate that we will have sufficient funds available to meet current loan commitments.

ITEMItem 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures about Market Risk

Risk Management
The Company has adoptedCompany’s assessment of market risk management policies and procedures, which aim to ensure the proper control and management of all risk factors inherentat June 30, 2023 indicates there have been no material changes in the operation ofquantitative and qualitative disclosures from those made in the Company, most importantly credit risk, interest rate risk and liquidity risk. These risk factors are not mutually exclusive. It is recognized that any product or service offered byCompany’s Annual Report on Form 10-K filed with the Company may expose the Company to one or more of these risk factors.SEC on March 15, 2023.


Credit Risk
CreditMarket risk is the risk to earnings or capitalof loss in a financial instrument arising from an obligor’s failureadverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Our market risk arises primarily from interest rate risk inherent in our lending and deposit taking activities. Management actively monitors and manages our interest rate risk exposure. In monitoring interest rate risk we continually analyze and manage our earning assets and funding liabilities based on their payment streams and interest rates, the timing of their maturities and/or prepayments, and their sensitivity to meet the terms of any contractactual or otherwise fail to perform as agreed. Credit risk is foundpotential changes in all activities where success depends on counterparty, issuer, or borrower performance.market interest rates.

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

5649
Since our earnings are primarily dependent on our ability to generate net interest income, we focus on actively monitoring and managing the effects of adverse changes in interest rates on our net interest income. Our Asset Liability Management Committee (“ALCO”), which is comprised of members of the Board of Directors and executive officers, manages market risk. ALCO monitors interest rate risk by analyzing the potential impact on net interest income from potential changes in interest rates, and considers the impact of alternative strategies or changes in balance sheet structure. ALCO manages our balance sheet in part to maintain the potential impact of changes in interest rates on net interest income within acceptable ranges despite changes in interest rates.
Our exposure to interest rate risk is reviewed on at least a quarterly basis by ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in net interest income in the event of hypothetical changes in interest rates. If potential changes to net interest income resulting from hypothetical interest rate changes are not within risk tolerances determined by ALCO, and approved by the full Board of Directors, Management may make adjustments to the Company’s asset and liability mix to bring interest rate risk levels within the Board approved limits.
Net Interest Income Simulation.In order to control credit risk in the loan & lease portfolio the Company has established credit management policies and procedures that govern both the approval of new loans & leases and the monitoring of the existing portfolio. The Company manages and controls credit risk through comprehensive underwriting and approval standards, dollar limits on loans & leases to one borrower, and by restricting loans & leases made primarily to its principal market area where management believes it is best able to assess the applicable risk. Additionally, management has established guidelines to ensure the diversification of the Company’s credit portfolio such that even within key portfolio sectors such as real estate or agriculture, the portfolio is diversified across factors such as location, building type, crop type, etc. However, as a financial institution that assumes credit risks as a principal element of its business, credit losses will be experienced in the normal course of business. The allowance for credit losses is maintained at a level considered by management to be adequate to provide for risks inherent in the loan & lease portfolio. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs.

The Company’s methodology for assessing the appropriateness of the allowance is applied on a regular basis and considers all loans & leases. The systematic methodology consists of three parts.

Part 1 - includes a detailed analysis of the loan & lease portfolio in two phases. The first phase is conducted in accordance with the “Receivables” topic of the FASB ASC. Individual loans & leases are reviewed to identify them for impairment. A loan or lease is impaired when principal and interest are deemed uncollectible in accordance with the original contractual terms of the loan or lease. Impairment is measured as either the expected future cash flows discounted at each loan’s or lease’s effectivemeasure 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 fair value of the loan’s or lease’s collateral if the loan or lease is collateral dependent, or an observabledifference between net interest income forecasted using a rising and a falling interest rate scenario and a net interest income forecast using a base market price of the loan or lease, if one exists. Upon measuring the impairment, the Company will ensure an appropriate level of allowance is present or established.

Central to the first phase of the analysis of the loan & lease portfolio is the risk rating system. The originating credit officer assigns each borrower an initial risk rating, which is based primarily on a thorough analysis of that borrower’s financial position in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior credit administration personnel. Credits are monitored by credit administration personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary. Risk ratings are reviewed by both the Company’s independent third-party credit examiners and bank examinersinterest rate derived from the DBO and FDIC.

Based oncurrent treasury yield curve. The income simulation model includes various assumptions regarding the risk rating system, specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates that the loan or lease is impaired and there is a probability of loss. Management performs a detailed analysis of these loans & leases, including, but not limited to, cash flows, appraisals of the collateral, conditions of the marketplace for liquidating the collateral, and assessment of the guarantors. Management then determines the inherent loss potential and allocates a portion of the allowance for losses as a specific allowancere-pricing relationships for each of our products. Many of our assets are floating rate loans, which are assumed to re-price immediately, and to the same extent as the change in market rates according to their contracted index.
Some loans and investment vehicles include the opportunity of prepayment (embedded options), and accordingly the simulation model uses national indexes to estimate these credits.

The second phase is conducted by segmentingprepayments and assumes the loan & lease portfolio by risk rating and into groups of loans & leases with similar characteristics in accordance with the “Contingency” topicreinvestment of the FASB ASC. In this second phase, groupsproceeds 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 loans & leases withchanges in net interest income for the given set of rate changes and assumptions. It assumes the balance sheet size remains static throughout the simulation horizon by replacing existing cashflows/amortization into similar characteristics are reviewedproducts at current rates to try and capture the appropriate allowance factor is applied based on the historical average charge-off rate for each particular group of loans or leases.

Part 2 - considers qualitative internal and external factors that may affect a loan or lease’s collectability, is based upon management’s evaluation of various conditions, the effects of which are not directly measured in the determination of the historical and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the second element of the analysis of the allowance include, but are not limited to the following conditions that existed asongoing activity of the balance sheet date:

§general economic and business conditions affecting the key service areas of the Company;
§credit quality trends (including trends in collateral values, delinquencies and non-performing loans & leases);
§loan & lease volumes, growth rates and concentrations;
§loan & lease portfolio seasoning;
§specific industry and crop conditions;
§recent loss experience; and
§duration of the current business cycle.
Part 3 - An unallocated allowance often occurs duegrowth. It does not account for all factors that affect this analysis, including changes by management to the imprecision in estimating and allocating allowance balances associated with macro factors such as: (1) the continuing sluggish economic conditions in the Central Valley; and (2) the long term impact of drought conditions currently being experienced in California.

Management reviews all of these conditions in discussion with the Company’s senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable impaired credit or portfolio segment as of the evaluation date, management’s estimate ofmitigate the effect of interest rate changes or secondary impacts such condition may be reflected as a specific allowance applicablechanges to suchour credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable impaired credit or portfolio segment as of the evaluation date, management’s evaluation of the inherent loss related to such condition is reflected in the second element of the allowance or in the unallocated allowance.

Management believes, that based upon the preceding methodology, and using information currently available, the allowance for credit losses at September 30, 2017 was adequate. No assurances can be given that future events may not result in increases in delinquencies, non-performing loans & leases, or net loan & lease charge-offs that would require increases in the provision for credit losses and thereby adversely affect the results of operations.

Interest Rate Risk
The mismatch between maturities of interest sensitive assets and liabilities results in uncertainty in the Company’s earnings and economic value and is referred torisk profile as interest rates change.

Furthermore, loan prepayment-rate estimates and spread relationships change regularly. Interest rate risk. The Company does not attempt to predictchanges 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 ratesincome.
For the rising and positions the balance sheet in a manner, which seeks to minimize, to the extent possible, the effects of changing interest rates.

The Company measuresfalling interest rate risk in termsscenarios, 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 potentialEquity (“EVE”). Under NII at Risk, the impact on both its economic value and earnings. The methods for governing the amount of interest rate risk include: (1) analysis of asset and liability mismatches (Gap analysis); (2) the utilization of a simulation model; and (3) limits on maturities of investment, loan & lease, and deposit products, which reduces the market volatility of those instruments.

The Gap analysis measures, at specific time intervals, the divergence between earning assets and interest bearing liabilities for which repricing opportunities will occur. A positive difference, or Gap, indicates that earning assets will reprice faster than interest-bearing liabilities. This will generally produce a greater net interest margin during periods of rising interest rates and a lower net interest margin during periods of declining interest rates. Conversely, a negative Gap will generally produce a lower net interest margin during periods of rising interest rates and a greater net interest margin during periods of decreasing interest rates.

The interest rates paid on deposit accounts do not always move in unison withincome from the rates charged on loans & leases. In addition, the magnitude of changes in the rates charged on loans & leases is not always proportionate to the magnitude of changes in the rate paid for deposits. Consequently, changes in interest rates do not necessarily resulton 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 an increase or decrease in the economic value of the Company under various interest rate scenarios. In some ways, the economic value approach provides a broader scope than net income volatility approach since it captures all anticipated cash flows.
Based on our quarterly simulations, our net interest margin solelyexposure 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 result of the differences between repricing opportunities of earning assets or interest bearingfaster pace than rates paid on our interest-bearing liabilities.


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The Company also utilizesratio of variable to fixed-rate loans in our loan portfolio, the resultsratio of short-term (maturing at a dynamic simulation modelgiven time within 12 months) to quantifylong-term loans, and the estimated exposureratio 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 sustainedchanges 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. changes to have a greater impact on our net interest margin.

The sensitivity offollowing table present the projected change in the Company’s net interest income is measured over a rolling one-year horizon.

The simulation model estimates the impact of changing interest rates on interest income from all interest-earning assetsnext twelve months and the interest expense paid on all interest-bearing liabilities reflected on the Company’s balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given a 200 basis point upward and a 100 basis point downward shift in interest rates. A shift in rates over a 12-month period is assumed. Resultseconomic value of equity at June 30, 2023, that exceed policy limits, if any, are analyzed for risk tolerance and reported to the Board with appropriate recommendations. At September 30, 2017, the Company’s estimated net interest income sensitivity to changeswould occur upon an immediate change in interest rates, as a percent of net interest income was an increase in net interest income of 3.63% if rates increase by 200 basis points and a decrease in net interest income of 4.75% if rates decline 100 basis points. Comparatively, at December 31, 2016, the Company’s estimated net interest income sensitivitybut without giving effect to changes in interest rates, as a percent of net interest income was an increase in net interest income of 5.26% if rates increase by 200 basis points and a decrease in net interest income of 3.22% if rates decline 100 basis points.any steps that management might take to counteract that change:

The estimated sensitivity does not necessarily represent a Company forecast and the results may not be indicative of actual changes to the Company’s net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape; prepayments on loans & leases and securities; pricing strategies on loans & leases and deposits; replacement of asset and liability cash flows; and other assumptions. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change.
  
Estimated Change in
Net Interest Income (NII)
(as a % of NII)
 
Estimated Change in
Market Value of Equity
(MVE) (as a % of MVE)
June 30, 2023    
+300 bps 3.44% (10.50%)
+200 bps 2.09% (7.31%)
+100 bps 1.19% (2.99%)
0 bps  -  -
-100 bps (3.43%) (0.65%)
-200 bps (7.18%) (3.90%)
-300 bps (11.21%) (9.50%)


Liquidity Risk
Liquidity risk is the risk to earnings or capital resulting from the Company’s inability to meet its obligations when they come due without incurring unacceptable losses. It includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect the Company’s ability to liquidate assets or acquire funds quickly and with minimum loss of value. The Company endeavors to maintain a cash flow adequate to fund operations, handle fluctuations in deposit levels, respond to the credit needs of borrowers, and to take advantage of investment opportunities as they arise.

The Company’s principal operating sources of liquidity include (see “Item 8. Financial Statements and Supplementary Data – Consolidated Statements of Cash Flows” of the Company’s 2016 Annual Report on Form 10-K) cash and cash equivalents, cash provided by operating activities, principal payments on loans & leases, proceeds from the maturity or sale of investments, and growth in deposits. To supplement these operating sources of funds the Company maintains Federal Funds credit lines of $77 million and repurchase lines of $130 million with major banks. As of September 30, 2017, the Company has additional borrowing capacity of $422.8 million with the FHLB and $377.4 million with the FRB. Borrowings under these lines are collateralized with loans or securities that have been accepted for pledging at the FHLB and FRB.

At September 30, 2017, the Company had available sources of liquidity, which included cash and cash equivalents and unpledged investment securities AFS of approximately $441 million, which represents 14.4% of total assets.

ITEMItem 4.CONTROLS AND PROCEDURESControls and Procedures


Evaluation of Disclosure Controls and Procedures
The Company maintains
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 designed to ensure(as required by Exchange Act Rules 240.13a-15(b) and 15d-14(a)). Based on that information is recordedevaluation, the CEO and reported in all filings of financial reports. Such information is reported to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer to allow timely and accurate disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e). In designing these controls and procedures, management recognizesCFO have concluded that they can only provide reasonable assurance of achieving the desired control objectives. Management also evaluated the cost-benefit relationship of possible controls and procedures.

Asas of the end of the period covered by this report,Report, the Company carried out an evaluation of the effectiveness of Company’s 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 supervisionExchange Act are recorded, processed, summarized and withtimely reported as provided in the participation of the Chief Executive Officer, the Chief Financial OfficerSEC’s rules and other senior management of the Company. The evaluation was based,forms.

Changes in part, upon reports and affidavits provided by a number of executives. Based on the foregoing, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.Internal Controls


There have not been no significantany changes in the Company’s internal controls or in other factors that could significantly affect the internal controlscontrol over financial reporting subsequent(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the six months ended June 30, 2023, to which this report relates that have materially affected, or are reasonably likely to materially affect, the date the Company completed its evaluation.Company’s internal control over financial reporting.

5951
PART II.II – OTHER INFORMATION


Item 1.Legal Proceedings
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
ITEM 1A. Risk Factors

See “Item 1A. Risk Factors” in the Company’s 2016 Annual Report to Shareholders on Form 10-K. In management’s opinion, thereThere have been no material changes in the risk factors sincepreviously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the filing of the 2016 Form 10-K.year ended December 31, 2022.

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

The following table reports information regarding repurchases of Equity Securities and Use of Proceeds

There were no shares repurchased by Farmers & Merchants Bancorpour common stock during the first ninesix months ended June 30, 2023:

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

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

On November 8, 2022, the Board of 2017. The remaining dollar valueDirectors authorized an extension to its share repurchase program through December 31, 2024 for an additional$20.0 million of shares that may yet be purchased under the Company’s Stock Repurchase Plan is approximately $20.0 million.

The common stock of Farmers & Merchants Bancorp is not widely held or listed on any exchange. However, trades are reported on the OTCQX under the symbol “FMCB.” Additionally, management is aware that there are private transactions in the Company’s common stock.stock (“Repurchase Plan”), which represents approximately 4% of outstanding shareholders’ equity. Repurchases by the Company under the Repurchase Plan may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means. The Inflation Reduction Act of 2022 signed into law in August 2022 includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions. The excise tax became effective on January 1, 2023.


During the first and third quartershalf of 2017,2023 the Company issuedrepurchased 13,814 shares under the Repurchase Plan, for a combined total 4,975 shares of common stock to the Bank’s non-qualified defined contribution retirement plans. These$13.9 million.  All of these shares were issuedpurchased at prices ranging from $590.00$967.00 to $595.00$1,082.00 per share, based upon valuations completed during the quarterthen current price on the OTCQX. The Company has repurchased a total of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon14,616 shares or $14.6 million under the exemption in Section 4(a)(2)current Repurchase Plan.

52

During the first quarter of 2016, the Company issued 1,600 shares of common stock to the Bank’s non-qualified defined contribution retirement plans. These shares were issued at a price of $525 per share based upon a valuation completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(2) of the Securities Act of 1933, as amended, the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital.

Item 3.Defaults upon Senior Securities
ITEM 3. Defaults Upon Senior Securities


Not applicableApplicable


Item 4.Mine Safety Disclosures
ITEM 4. Mine Safety Disclosures


Not applicableApplicable


Item 5.Other Information

During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

ITEM 5. Other Information

None
Item 6.Exhibits
ITEM 6. Exhibits

List of Financial Statements and Financial Statement Schedules
See “Index
(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 Exhibits”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
31(a)
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31(b)
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INSInline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCHInline XBRL Taxonomy Extension Schema Document.
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.
101.LABInline XBRL Taxonomy Extension Label Linkbase Document.
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document.
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*Filed herewith

53
SIGNATURES


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

 
FARMERS & MERCHANTS BANCORP
  
Date:  NovemberAugust 8, 20172023
/s/ Kent A. Steinwert
Kent A. Steinwert
Chairman, President
 & Chief Executive Officer
 (Principal Executive Officer)

Date:  November 8, 2017/s/ Stephen W. Haley
Stephen W. Haley
Executive Vice President and
Chief Financial Officer
(Principal Financial & Accounting Officer)

Index to Exhibits
Exhibit No.
Description
 
Kent A. Steinwert
 Certification of theDirector, Chairman, President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(Principal Executive Officer)

Date:  August 8, 2023
/s/ Bart R. Olson
 
31(b)Bart R. Olson
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 Certifications of the Chief Executive OfficerVice President 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.INSXBRL Instance Document
101.SCHXBRL Schema Document
101.CALXBRL Calculation Linkbase Document
101.LABXBRL Label Linkbase Document
101.PREXBRL Presentation Linkbase Document
101.DEFXBRL Definition Linkbase Document
(Principal Financial Officer)


61
54