PART I. - FINANCIAL INFORMATION			Page

	Item 1 - Financial Statements
		Unaudited Consolidated Statements of Financial Condition	4
		Unaudited Consolidated Statements of Income	5
		Unaudited Consolidated Statements of Comprehensive Income	6
		Unaudited Consolidated Statements of Changes in Shareholders’ Equity	7
		Unaudited Consolidated Statements of Cash Flows	8
		Notes to Unaudited Consolidated Financial Statements	9

	Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		33 32
		Overview	3433
		Results of Operations	39 38
		Results of Financial Condition	4445

	Item 3 - Quantitative and Qualitative Disclosures about Market Risk		59

	Item 4 - Controls and Procedures		59

PART II. - OTHER INFORMATION

	Item 1 – Legal Proceedings		59
	Item 1A – Risk Factors		59
	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		59
	Item 3 – Defaults upon Senior Securities		59
	Item 4 – Mine Safety Disclosures		5960
	Item 5 – Other Information		5960
	Item 6 – Exhibits		60
	Signatures		61

Special Note Regarding Forward-Looking Statements

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

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

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

PART 1. FINANCIAL INFORMATION

Item 1.

Financial Statements

FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands, except share and per share amounts)	March 31, 2022			December 31, 2021			June 30, 2022			December 31, 2021
ASSETS
Cash and due from banks	$	68,774		$	52,499		$	67,136		$	52,499
Interest bearing deposits with banks		772,312			662,961			680,652			662,961
Total cash and cash equivalents		841,086			715,460			747,788			715,460
Securities available for sale, at fair value		251,375			270,454
Securities held to maturity, at amortized cost		876,257			737,052
Securities available-for-sale, at fair value								225,338			270,454
Securities held-to-maturity, net of allowance for credit losses of $393 and $0, respectively, fair value $754,834 and $725,841, respectively								867,990			737,052
Total investment securities		1,127,632			1,007,506			1,093,328			1,007,506
Non-marketable securities		15,549			15,549			15,549			15,549
Loans and leases held for investment		3,237,619			3,237,177			3,249,886			3,237,177
Allowance for credit losses		(61,032	)		(61,007	)		(62,080	)		(61,007	)
Loans held for investment, net		3,176,587			3,176,170			3,187,806			3,176,170
Bank-owned life insurance		71,953			71,411			72,513			71,411
Premises and equipment, net		47,423			47,730			46,970			47,730
Deferred income tax assets		30,361			25,542			34,839			25,542
Accrued interest receivable		14,473			18,098			18,231			18,098
Goodwill		11,183			11,183			11,183			11,183
Other intangibles		3,254			3,402			3,106			3,402
Other real estate owned		873			873			873			873
Other assets		83,802			84,796			94,495			84,796
TOTAL ASSETS	$	5,424,176		$	5,177,720		$	5,326,681		$	5,177,720

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing	$	1,764,857		$	1,750,330
Non-interest bearing							$	1,753,633		$	1,750,330
Interest bearing:
Demand		1,124,470			1,097,337			1,059,651			1,097,337
Savings and money market		1,557,332			1,400,000			1,577,599			1,400,000
Certificate of deposits		390,780			392,485			378,630			392,485
Total interest bearing		3,072,582			2,889,822			3,015,880			2,889,822
Total deposits		4,837,439			4,640,152			4,769,513			4,640,152
Subordinated debentures		10,310			10,310			10,310			10,310
Interest payable and other liabilities		111,714			64,122			85,505			64,122
TOTAL LIABILITIES		4,959,463			4,714,584			4,865,328			4,714,584

SHAREHOLDERS’ EQUITY
Preferred shares, 0 par value, 1,000,000 shares authorized and, NaN issued or outstanding		0			0			0			0
Common shares, $0.01 par value, 7,500,000 authorized 785,146 and 789,646 outstanding at March 31, 2022 and December 31, 2021, respectively		8			8
Additional paid in capital		73,264			77,516
Common shares, $0.01 par value, 7,500,000 authorized 777,190 and 789,646 outstanding at June 30, 2022 and December 31, 2021, respectively								8			8
Additional paid-in capital								65,671			77,516
Retained earnings		404,389			387,331			416,722			387,331
Accumulated other comprehensive (loss), net of taxes		(12,948	)		(1,719	)
Accumulated other comprehensive (loss) / income, net of taxes								(21,048	)		(1,719	)
TOTAL SHAREHOLDERS’ EQUITY		464,713			463,136			461,353			463,136
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	5,424,176		$	5,177,720		$	5,326,681		$	5,177,720

FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended June 30,					Six Months Ended June 30,
(Dollars in thousands, except share and per share amounts)	2022			2021		2022			2021
Interest income
Interest and fees on loans and leases	$	38,570		$	36,664	$	76,003		$	73,751
Interest and dividends on investments		5,716			4,322		11,011			8,739
Interest on deposits with others		1,409			164		1,775			267
Total interest income		45,695			41,150		88,789			82,757
Interest expense
Deposits		873			1,034		1,676			2,271
Subordinated debentures		103			79		185			158
Total interest expense		976			1,113		1,861			2,429
Net interest income		44,719			40,037		86,928			80,328
Provision for credit losses		1,500			0		1,500			1,250
Net interest income after provision for credit losses		43,219			40,037		85,428			79,078
Non-interest income
Card processing		1,847			1,806		3,584			3,385
Service charges on deposit accounts		830			679		1,680			1,317
Increase in cash surrender value of BOLI		560			541		1,102			1,067
Gain on sale of investment securities		2			714		2			2,554
Net (loss)/gain on deferred compensation benefits		(991	)		492		(579	)		1,213
Other		1,264			727		2,035			2,139
Total non-interest income		3,512			4,959		7,824			11,675
Non-interest expense
Salaries and employee benefits		16,403			16,182		33,187			32,922
Net (loss)/gain on deferred compensation benefits		(991	)		492		(579	)		1,213
Occupancy		1,150			1,178		2,304			2,409
Data Processing		1,233			1,213		2,448			2,437
FDIC insurance		361			298		710			585
Marketing		340			418		656			606
Legal		405			289		684			400
Other		4,130			3,533		7,409			6,575
Total non-interest expense		23,031			23,603		46,819			47,147
INCOME BEFORE INCOME TAXES		23,700			21,393		46,433			43,606
Income tax expense		5,257			5,240		10,932			10,740
NET INCOME	$	18,443		$	16,153	$	35,501		$	32,866

Earnings per common share:
Basic	$	23.58		$	20.45	$	45.28		$	41.62
Diluted	$	23.58		$	20.45	$	45.28		$	41.62

Weighted average number of common shares
Basic		781,880			789,646		783,976			789,646
Diluted		781,880			789,646		783,976			789,646

Three Months Ended
March 31,

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

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

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

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

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

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

FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2022			2021			2022			2021
Net income	$	18,443		$	16,153		$	35,501		$	32,866
Other comprehensive income
Unrealized holding (losses)/gains on securities available-for-sale		(11,434	)		3,957			(27,299	)		(14,609	)
Reclassification adjustment for (gains)/losses on available-for-sale securities		(2	)		(714	)		(2	)		(2,554	)
Amortization of unrealized loss on securities transferred to held-to-maturity		(64	)		(180	)		(141	)		(238	)
Net unrealized holding (losses)/gains on securities available-for-sale		(11,500	)		3,063			(27,442	)		(17,401	)
Income tax benefit/(expense)		3,400			(905	)		8,113			5,144
Other comprehensive (loss)/income, net of tax		(8,100	)		2,158			(19,329	)		(12,257	)
Total comprehensive income	$	10,343		$	18,311		$	16,172		$	20,609

Three Months Ended
March 31,

(Dollars in thousands) 2022
2021

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

FARMERS & MERCHANTS BANCORP

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

For the three and six months ended June 30, 2022 and 2021

(Dollars in thousands, except share amounts)	Common Shares			Amount		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive (Loss)/Income			Total
Balance as of April 1, 2022		785,146		$	8	$	73,264		$	404,389		$	(12,948	)	$	464,713
Net income		-			0		0			18,443			0			18,443
Other comprehensive loss, net of tax		-			0		0			0			(8,100	)		(8,100	)
Cash dividends declared ($7.85 per share)		-			0		0			(6,110	)		0			(6,110	)
Repurchase of common stock		(7,956	)		0		(7,593	)		0			0			(7,593	)
Balance as of June 30, 2022		777,190		$	8	$	65,671		$	416,722		$	(21,048	)	$	461,353
Balance as of April 1, 2021		789,646		$	8	$	77,516		$	349,790		$	(1,344	)	$	425,970
Net income		-			0		0			16,153			0			16,153
Other comprehensive loss, net of tax		-			0		0			0			2,158			2,158
Cash dividends declared ($7.50 per share)		-			0		0			(5,922	)		0			(5,922	)
Balance as of June 30, 2021		789,646		$	8	$	77,516		$	360,021		$	814		$	438,359

(Dollars in thousands, except share amounts)	Common Shares			Amount		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive (Loss)/Income			Total
Balance as of January 1, 2022		789,646		$	8	$	77,516		$	387,331		$	(1,719	)	$	463,136
Net income		-			0		0			35,501			0			35,501
Other comprehensive loss, net of tax		-			0		0			0			(19,329	)		(19,329	)
Cash dividends declared ($7.85 per share)		-			0		0			(6,110	)		0			(6,110	)
Repurchase of common stock		(12,456	)		0		(11,845	)		0			0			(11,845	)
Balance as of June 30, 2022		777,190		$	8	$	65,671		$	416,722		$	(21,048	)	$	461,353
Balance as of January 1, 2021		789,646		$	8	$	77,516		$	333,070		$	13,071		$	423,665
Net income		-			0		0			32,866			0			32,866
Other comprehensive loss, net of tax		-			0		0			0			(12,257	)		(12,257	)
Cash dividends declared ($7.50 per share)		-			0		0			(5,922	)		0			(5,922	)
Cash dividends returned		-			0		0			7			0			7
Balance as of June 30, 2021		789,646		$	8	$	77,516		$	360,021		$	814		$	438,359

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

Retained
Earnings

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

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

FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended March 31,						Six Months Ended June 30,
(Dollars in thousands)	2022			2021			2022			2021
Cash flows from operating activities:
Net income	$	17,058		$	16,713		$	35,501		$	32,866
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		0			1,250			1,500			1,250
Depreciation and amortization		656			660			1,270			1,318
Net amortization of securities premiums and discounts		176			407			275			797
Increase in cash surrender value of BOLI		(542	)		(527	)		(1,102	)		(1,067	)
(Increase)/decrease in deferred income taxes, net		(113	)		4,714
Gains on sale of securities available for sale		0			(1,840	)
Increase in deferred income taxes, net								(1,127	)		(1,178	)
Gains on sale of securities available-for-sale								(2	)		(2,554	)
Net changes in:
Other assets		4,709			6,258			(7,797	)		(18,274	)
Other liabilities		6,966			1,386			22,823			14,280
Net cash provided by operating activities		28,910			29,021			51,341			27,438
Cash flows from investing activities:
Net change in loans held for investment		(374	)		(11,340	)		(12,568	)		66,550
Purchase of available for sale securities		(10,067	)		(199,440	)
Purchase of held to maturity securities		(118,162	)		(3,211	)
Maturities/sales of available for sale securities		13,097			110,388
Maturities of held to maturity securities		19,516			3,930
Purchase of available-for-sale securities								(10,090	)		(257,225	)
Purchase of held-to-maturity securities								(168,149	)		(124,070	)
Maturities/sales of available-for-sale securities								27,679			381,117
Maturities of held-to-maturity securities								36,641			13,140
Purchase of premises and equipment		(363	)		(100	)		(526	)		(377	)
Purchase of other investments		0			(632	)		(3,440	)		(1,656	)
Proceeds from sale of assets		34			0			34			74
Net cash used in investing activities		(96,319	)		(100,405	)
Net cash provided by investing activities								(130,419	)		77,553
Cash flows from financing activities:
Net increase in deposits		197,287			180,947			129,361			351,797
Net cash used in share repurchase program		(4,252	)		0
Cash dividends returned		0			7
Cash dividends paid								(6,110	)		(5,915	)
Net cash used in share repurchase of common stock								(11,845	)		0
Net provided by financing activities		193,035			180,954			111,406			345,882
Net change in cash and cash equivalents		125,626			109,570			32,328			450,873
Cash and cash equivalents, beginning of period		715,460			383,837			715,460			383,837
Cash and cash equivalents, end of period	$	841,086		$	493,407		$	747,788		$	834,710

Supplemental disclosures of cash flow information:
Cash paid for interest	$	951		$	1,943		$	2,580		$	3,220
Income taxes paid							$	9,343		$	19,181

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

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS

Note 1—Basis of Presentation and Significant Accounting Policies

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

These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In preparing these financial statements, the Company has evaluated events and transactions subsequent to ~~March 31,~~June 30, 2022 for potential recognition or disclosure. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and note disclosures have been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements. Certain reclassifications have been made to the 2021 Consolidated Financial Statements and/or schedules to conform to the 2022 presentation. All significant intercompany transactions and balances have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are significant to an understanding of Bank’s financial statements. These policies relate to: (i) the methodology for the recognition of interest income; (ii) the determination of the provision and allowance for credit losses; (iii) the valuation of financial assets and liabilities recorded at fair value; (iv) the valuation of intangibles, such as goodwill and core deposit intangibles (“CDI”); (v) the valuation of other real estate owned (“OREO”); and (vi) the valuation or recognition of deferred tax assets and liabilities. These policies and judgments, estimates and assumptions are described in greater detail in subsequent notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, Summary of Critical Accounting Policies and Estimates, in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 15, 2022 and Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations Summary of Critical Accounting Policies and Estimates included in this Quarterly Report on Form 10-Q.

The information included in this Form 10-Q should be read in conjunction with our 2021 Form 10-K. Interim results are not necessarily indicative of results for a full year or any other interim period.

Accounting Standards Pending Adoption — The following paragraphs provide descriptions of newly issued but not yet effective accounting standards that could have a material effect on the Company’s financial position or results of operations.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The amendments in this ASU are elective and provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Since the issuance of this guidance, the publication cessation of the U.S. dollar LIBOR has been extended to June 30, 2023. We have not elected to apply these amendments. However, we will assess the applicability of the ASU to us and continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations.

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

In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). The main amendments in this ASU are intended to clarify certain optional expedients and scope of derivative instruments. The amendments are elective and effective immediately upon issuance of this ASU. Amendments may be elected through December 31, 2022. We have not elected to apply amendments at this time, however, will assess the applicability of this ASU to us as we continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations.

In March 2022, the FASB issued guidance within ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments in this ASU eliminatethe current troubled debt restructuring (TDR) recognition and measurement guidance and, instead, require that a creditor evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.

These amendments require vintage disclosures including current-period gross write-offs by year of origination for financing receivables. Gross write-off information must be included in the vintage disclosures in accordance with ASC 326-20-50-6, which requires disclosure of the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination.

The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years since the Company previously adopted the amendments in ASU 2016-13, which is commonly referred to as the current expected credit loss methodology, on January 1, 2020. These amendments should be applied prospectively, though for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption.

Early adoption is permitted, including adoption in an interim period. If an entity elects to early adopt in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to the vintage disclosures. The adoption of this ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.

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

910

~~FARMERS & MERCHANTS BANCORP~~

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

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

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

The implementation of the WARM method did not result in any material change in the calculation of the Company’s December 31, 2021 Allowance for Credit Losses, therefore, no adjustment to Shareholders’ Equity was made as of January 1, 2022.

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

1011

~~FARMERS & MERCHANTS BANCORP~~

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

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

Note 2—Risks and Uncertainties

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

Through the CARES Act and H.R. 133, as well as related federal and state regulatory actions, the federal government has taken extraordinary efforts to provide financial assistance to individuals and companies to help them move through these difficult times. However, there are no guarantees how long the COVID-19 virus may continue to impact our economy, and therefore, the Company.

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

1112

~~FARMERS & MERCHANTS BANCORP~~

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

~~Note~~Note 3—Investment Securities

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

Available-for-Sale Securities			Gross Unrealized								Gross Unrealized
(Dollars in thousands)	Amortized Cost		Gains		Losses		Fair Value		Amortized Cost		Gains		Losses		Fair Value
As of March 31, 2022
As of June 30, 2022
U.S. Treasury notes	$	9,955	$	41	$	0	$	9,996	$	4,968	$	0	$	16	$	4,952
U.S. Government-sponsored securities		5,771		54		36		5,789		5,402		65		26		5,441
Mortgage-backed securities⁽¹⁾		241,585		370		18,054		223,901		232,368		116		28,877		203,607
Collateralized mortgage obligations⁽¹⁾		1,549		0		5		1,544		1,525		0		23		1,502
Corporate securities		10,051		0		216		9,835		10,049		0		523		9,526
Other		310		0		0		310		310		0		0		310
Total available-for-sale securities	$	269,221	$	465	$	18,311	$	251,375	$	254,622	$	181	$	29,465	$	225,338

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

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

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

1213

~~FARMERS & MERCHANTS BANCORP~~

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

Note 3—Investment Securities—Continued

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

Held-to-Maturity Securities
Gross Unrealized

(Dollars in thousands) Amortized
Cost Gains Losses
Fair
Value

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

Held-to-Maturity Securities			Gross Unrealized
(Dollars in thousands)	Amortized Cost		Gains		Losses		Fair Value			Allowance for Credit Losses
As of June 30, 2022
Municipal securities	$	62,459	$	33	$	151	$	62,341	$	393
Mortgage-backed securities⁽¹⁾		721,510		0		104,726		616,784		0
Collateralized mortgage obligations⁽¹⁾		84,414		0		8,705		75,709		0
Total held-to-maturity securities	$	868,383	$	33	$	113,582	$	754,834	$	393

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

Held-to-Maturity Securities			Gross Unrealized
											Gross Unrealized
(Dollars in thousands)	Amortized Cost		Gains		Losses		Fair Value		Amortized Cost		Gains		Losses		Fair Value
As of December 31, 2021
Municipal securities	$	66,496	$	701	$	0	$	67,197	$	66,496	$	701	$	0	$	67,197
Mortgage-backed securities⁽¹⁾		596,775		45		11,764		585,056		596,775		45		11,764		585,056
Collateralized mortgage obligations⁽¹⁾		73,781		36		229		73,588		73,781		36		229		73,588
Total held-to-maturity securities	$	737,052	$	782	$	11,993	$	725,841	$	737,052	$	782	$	11,993	$	725,841

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

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

~~FARMERS & MERCHANTS BANCORP~~

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

~~Note 3—Investment Securities—Continued~~

As of ~~March 31,~~June 30, 2022, the Company held ~~585~~556 investment securities of which ~~102~~148 were in an unrealized loss position for less than twelve months and ~~100~~101 securities were in an unrealized loss position for twelve 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.

Note 3—Investment Securities—Continued

The ~~following~~following tables show the gross unrealized losses for available-for-sale securities that are less than 12 months and 12 months or more:

Available-for-Sale Securities					As of March 31, 2022													As of June 30, 2022
	Less Than 12 Months				12 Months or More				Total				Less Than 12 Months					12 Months or More						Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
As of March 31, 2022
As of June 30, 2022
U.S. Treasury notes													$	4,952		$	16		$	0		$	0		$	4,952		$	16
U.S. Government-sponsored securities	$	15	$	0	$	1,992	$	36	$	2,007	$	36		46			0			1,623			26			1,669			26
Mortgage-backed securities⁽¹⁾		81,711		3,753		114,391		14,301		196,102		18,054		90,670			6,663			103,737			22,214			194,407			28,877
Collateralized Mortgage Obligations⁽¹⁾		1,544		5		0		0		1,544		5
Collateralized mortgage obligations⁽¹⁾														1,501			23			0			0			1,501			23
Corporate securities		9,835		216		0		0		9,835		216		9,526			523			0			0			9,526			523
Total available-for-sale securities	$	93,105	$	3,974	$	116,383	$	14,337	$	209,488	$	18,311	$	106,695		$	7,225		$	105,360		$	22,240		$	212,055		$	29,465

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

Available-for-Sale Securities					As of December 31, 2021
																	As of December 31, 2021
	Less Than 12 Months				12 Months or More				Total				Less Than 12 Months				12 Months or More				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
As of December 31, 2021
As of December 31, 2021
U.S. Government-sponsored securities	$	183	$	0	$	2,007	$	39	$	2,190	$	39	$	183	$	0	$	2,007	$	39	$	2,190	$	39
Mortgage-backed securities⁽¹⁾		61,469		1,192		104,489		4,188		165,958		5,380		61,469		1,192		104,489		4,188		165,958		5,380
Total available-for-sale securities	$	61,652	$	1,192	$	106,496	$	4,227	$	168,148	$	5,419	$	61,652	$	1,192	$	106,496	$	4,227	$	168,148	$	5,419

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

~~FARMERS & MERCHANTS BANCORP~~

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

~~Note 3—Investment Securities—Continued~~

The following tables show the gross unrealized losses for held-to-maturity securities that are less than 12 months and 12 months or more:

Held-to-Maturity Securities					As of March 31, 2022												As of June 30, 2022
													Less Than 12 Months				12 Months or More				Total
(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total				Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
As of March 31, 2022
As of June 30, 2022
Municipal securities	$	1,034	$	65	$	0	$	0	$	1,034	$	65	$	6,862	$	151	$	0	$	0	$	6,862	$	151
Mortgage-backed securities⁽¹⁾		398,924		31,318		234,460		29,332		633,384		60,650		404,026		57,850		212,758		46,876		616,784		104,726
Collateralized mortgage obligations⁽¹⁾		73,221		4,795		0		0		73,221		4,795		73,221		8,705		0		0		73,221		8,705
Total held-to-maturity securities	$	473,179	$	36,178	$	234,460	$	29,332	$	707,639	$	65,510	$	484,109	$	66,706	$	212,758	$	46,876	$	696,867	$	113,582

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

Held-to-Maturity Securities					As of December 31, 2021
																	As of December 31, 2021
													Less Than 12 Months				12 Months or More				Total
(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total				Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
As of December 31, 2021
Mortgage-backed securities⁽¹⁾	$	570,119	$	11,764	$	0	$	0	$	570,119	$	11,764	$	570,119	$	11,764	$	0	$	0	$	570,119	$	11,764
Collateralized mortgage obligations⁽¹⁾		58,977		229		0		0		58,977		229		58,977		229		0		0		58,977		229
Total held-to-maturity securities	$	629,096	$	11,993	$	0	$	0	$	629,096	$	11,993	$	629,096	$	11,993	$	0	$	0	$	629,096	$	11,993

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

Note 3—Investment Securities—Continued

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

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

Corporate securities. Changes in the prices of corporate securities are primarily influenced by: (1) changes in market interest rates; (2) changes in perceived credit risk in the general economy or in particular industries; (3) changes in the perceived credit risk of a particular company; and (4) day to day trading supply, demand and liquidity. The Company monitors the status of each of our corporate securities and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security. The Company does not intend to sell the securities and it is more likely than not that the Company would not have to sell the securities before recovery of their amortized cost basis.

~~FARMERS & MERCHANTS BANCORP~~

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

~~Note 3—Investment Securities—Continued~~

Obligations of states and political subdivisions.The Company’s bank-qualified municipal bond portfolio ~~was~~is comprised of 2 different segments: (1) publicly issued debt of $19.4 million purchased on the open market, all rated at either the issue or issuer level and all of these ratings are “investment ~~grade.”~~grade”; and (2) municipal debt of $43 million purchased directly from the Bank’s customers, all of which is monitored through quarterly or annual financial reviews of the issuer. The Company monitors the status of all municipal investments in the portfolio and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security.

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

	Available-for-Sale				Held-to-Maturity				Available-for-Sale				Held-to-Maturity
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
(Dollars in thousands)									Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities maturing in:
One year or less	$	10,268	$	10,310	$	908	$	908	$	5,290	$	5,274	$	700	$	700
After one year through five years		5,160		5,073		7,118		7,113		5,120		4,842		7,089		7,074
After five years through ten years		5,455		5,326		16,690		16,846		5,411		5,168		15,948		15,926
After ten years		5,204		5,221		38,865		38,811		4,908		4,945		38,722		38,641
	$	26,087	$	25,930	$	63,581	$	63,678	$	20,729	$	20,229	$	62,459	$	62,341

Securities not due at a single maturity date:
Mortgage-backed securities		241,585		223,901		695,249		634,599		232,368		203,607		721,510		616,784
Collateralized Mortgage Obligations		1,549		1,544		117,427		112,632
Collateralized mortgage obligations										1,525		1,502		84,414		75,709
Total	$	269,221	$	251,375	$	876,257	$	810,909	$	254,622	$	225,338	$	868,383	$	754,834

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

Note 3—Investment Securities—Continued

The Company monitors the credit quality of those available-for-sale and held-to-maturity debt securities not issued by the U.S. government or one of its agencies or government sponsored entities, through the use of credit ~~rating.~~ratings. Credit ratings are reviewed and updated quarterly. The following table summarizes the fair value of available-for-sale and amortized cost of held-to-maturity debt securities by credit rating at ~~March 31,~~June 30, 2022:

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

Breakdown by Category:
U.S. Treasury notes⁽¹⁾	$	0	$	0	$	9,996	$	0	$	0	$	0	$	0	$	0	$	4,952	$	0	$	0	$	0
U.S. Government-sponsored securities		0		0		5,789		0		0		0		0		0		5,441		0		0		0
Mortgage-backed securities⁽¹⁾		0		0		223,901		0		0		695,249		0		0		203,607		0		0		721,510
Collateralized mortgage obligations⁽¹⁾		0		0		1,544		0		0		117,427		0		0		1,502		0		0		84,414
Obligations of States and Political Subdivisions		0		0		0		19,715		134		43,732
Municipal securities														0		0		0		19,271		149		43,039
Corporate securities		9,835		0		0		0		0		0		4,738		4,788		0		0		0		0
Other		0		0		310		0		0		0		0		0		310		0		0		0

Total Investment Grade	$	9,835	$	0	$	241,540	$	19,715	$	134	$	856,408	$	4,738	$	4,788	$	215,812	$	19,271	$	149	$	848,963

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

~~FARMERS & MERCHANTS BANCORP~~

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

Note 4—Loans and Leases

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

(Dollars in thousands)	March 31, 2022			December 31, 2021			June 30, 2022			December 31, 2021
Loans and leases held-for-investment, net
Loans and leases held for investment, net
Real estate:
Commercial	$	1,172,804		$	1,167,516		$	1,210,195		$	1,167,516
Agricultural		695,565			672,830			709,624			672,830
Residential and home equity		359,214			350,581			371,874			350,581
Construction		204,794			177,163			162,713			177,163
Total real estate		2,432,377			2,368,090			2,454,406			2,368,090
Commercial & industrial		437,199			427,799			439,455			427,799
Agricultural⁽¹⁾		251,469			276,684
Agricultural								261,856			276,684
Commercial leases		92,445			96,971			89,095			96,971
Consumer and other⁽²⁾⁽¹⁾		33,255			78,367			13,588			78,367
Total gross loans and leases		3,246,745			3,247,911			3,258,400			3,247,911
Unearned income		(9,126	)		(10,734	)		(8,514	)		(10,734	)
Total net loans and leases		3,237,619			3,237,177			3,249,886			3,237,177
Allowance for credit losses		(61,032	)		(61,007	)		(62,080	)		(61,007	)
Total loans and leases held-for-investment, net	$	3,176,587		$	3,176,170
Total loans and leases held for investment, net							$	3,187,806		$	3,176,170

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

Includes SBA PPP loans.

~~FARMERS & MERCHANTS BANCORP~~

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

Note 4—Loans and Leases—Continued

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

	March 31, 2022												June 30, 2022
(Dollars in thousands)	Current		30-89 Days Past Due		90+ Days Past Due		Non- accrual		Total Past Due		Total		Current		30-89 Days Past Due		90+ Days Past Due		Non- accrual		Total Past Due		Total
Loans and leases held-for-investment, net
Loans and leases held for investment, net
Real estate:
Commercial	$	1,162,528	$	1,251	$	0	$	437	$	1,688	$	1,164,216	$	1,200,516	$	0	$	0	$	1,674	$	1,674	$	1,202,190
Agricultural		695,565		0		0		0		0		695,565		709,149		0		0		475		475		709,624
Residential and home equity		358,849		365		0		0		365		359,214		371,847		27		0		0		27		371,874
Construction		204,794		0		0		0		0		204,794		162,713		0		0		0		0		162,713
Total real estate		2,421,736		1,616		0		437		2,053		2,423,789		2,444,225		27		0		2,149		2,176		2,446,401
Commercial & Industrial		437,199		0		0		0		0		437,199
Commercial & industrial														439,258		197		0		0		197		439,455
Agricultural		250,669		800		0		0		800		251,469		260,977		0		0		879		879		261,856
Commercial leases		91,907		0		0		0		0		91,907		88,586		0		0		0		0		88,586
Consumer and other		33,208		47		0		0		47		33,255		13,578		10		0		0		10		13,588
Total loans and leases, net	$	3,234,719	$	2,463	$	0	$	437	$	2,900	$	3,237,619	$	3,246,624	$	234	$	0	$	3,028	$	3,262	$	3,249,886

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

1819

~~FARMERS & MERCHANTS BANCORP~~

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

Note 4—Loans and Leases—Continued

Non-accrual loans are summarized as follows:

(Dollars in thousands)	March 31, 2022		December 31, 2021		June 30, 2022		December 31, 2021
Non-accrual loans and leases:
Non-accrual loans and leases, not TDRs
Real estate:
Commercial	$	437	$	0	$	1,674	$	0
Agricultural		0		18		475		18
Residential and home equity		0		0		0		0
Construction		0		0		0		0
Total real estate		437		18		2,149		18
Commercial & Industrial		0		0
Commercial & industrial						0		0
Agricultural		0		0		879		0
Commercial leases		0		0		0		0
Consumer and other		0		0		0		0
Subtotal		437		18		3,028		18
Non-accrual loans and leases, are TDRs
Real estate:
Commercial	$	0	$	0	$	0	$	0
Agricultural		0		0		0		0
Residential and home equity		0		0		0		0
Construction		0		0		0		0
Total real estate		0		0		0		0
Commercial & Industrial		0		0
Commercial & industrial						0		0
Agricultural		0		498		0		498
Commercial leases		0		0		0		0
Consumer and other		0		0		0		0
Subtotal		0		498		0		498
Total non-accrual loans and leases	$	437	$	516	$	3,028	$	516

1920

~~FARMERS & MERCHANTS BANCORP~~

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

Note 4—Loans and Leases—Continued

The following table lists total troubled debt restructured loans that the Company is either accruing or not accruing interest by loan category:

(Dollars in thousands)
March 31,
2022

December 31,
2021

Troubled debt restructured loans and leases:
Accruing TDR loans and leases
Real estate:
Commercial $ 0 $ 41
Agricultural 0 0
Residential and home equity 1,347 1,522
Construction 0 0
Total real estate 1,347 1,563
Commercial & Industrial 255 260
Agricultural 0 0
Commercial leases 0 0
Consumer and other 1 1
Subtotal 1,603 1,824
Non-accruing TDR loans and leases
Real estate:
Commercial 0 0
Agricultural 0 0
Residential and home equity 0 0
Construction 0 0
Total real estate 0 0
Commercial & Industrial 0 0
Agricultural 0 498
Commercial leases 0 0
Consumer and other 0 0
Subtotal 0 498
Total TDR loans and leases $ 1,603 $ 2,322

~~FARMERS & MERCHANTS BANCORP~~

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

~~Note 4—Loans and Leases—Continued~~

(Dollars in thousands)	June 30, 2022		December 31, 2021
Troubled debt restructured loans and leases:
Accruing TDR loans and leases
Real estate:
Commercial	$	0	$	41
Agricultural		0		0
Residential and home equity		1,334		1,522
Construction		0		0
Total real estate		1,334		1,563
Commercial & industrial		55		260
Agricultural		0		0
Commercial leases		0		0
Consumer and other		0		1
Subtotal		1,389		1,824
Non-accruing TDR loans and leases
Real estate:
Commercial	$	0	$	0
Agricultural		0		0
Residential and home equity		0		0
Construction		0		0
Total real estate		0		0
Commercial & industrial		0		0
Agricultural		0		498
Commercial leases		0		0
Consumer and other		0		0
Subtotal		0		498
Total TDR loans and leases	$	1,389	$	2,322

The below table summarize TDRs outstanding as of ~~March 31,~~June 30, 2022, by year of occurrence:

	March 31, 2022												June 30, 2022
(Dollars in thousands)	# of Accruing TDR		$ of Accruing TDR		# of Non- Accruing TDR		$ of Non- Accruing TDR		# of Total TDR		$ of Total TDR		# of Accruing TDR		$ of Accruing TDR		# of Non- Accruing TDR		$ of Non- Accruing TDR		# of Total TDR		$ of Total TDR
Loan and lease TDRs
2022		0	$	0		0	$	0		0	$	0		0	$	0		0	$	0		0	$	0
2021		1		48		0		0		1		48		1		48		0		0		1		48
2020		5		468		0		0		5		468		4		266		0		0		4		266
2019		0		0		0		0		0		0		0		0		0		0		0		0
Thereafter		9		1,087		0		0		9		1,087		8		1,075		0		0		8		1,075
Total		15	$	1,603		0	$	0		15	$	1,603		13	$	1,389		0	$	0		13	$	1,389

The Company did 0t enter into any troubled debt restructuring with borrowers during the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021, respectively.

~~FARMERS & MERCHANTS BANCORP~~

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

Note 4—Loans and Leases—Continued

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

	March 31, 2022												June 30, 2022
(Dollars in thousands)	Pass		Special Mention		Sub- standard		Doubtful		Total Loans & Leases		Total Allowance for Credit Losses		Pass		Special Mention		Sub- standard		Doubtful		Total Loans & Leases		Total Allowance for Credit Losses
Loans and leases held-for-investment, net
Loans and leases held for investment, net
Real estate:
Commercial	$	1,153,584	$	6,878	$	3,754	$	0	$	1,164,216	$	17,920	$	1,187,461	$	8,629	$	6,100	$	0	$	1,202,190	$	17,879
Agricultural		683,415		5,996		6,154		0		695,565		14,591		697,994		5,003		6,627		0		709,624		16,837
Residential and home equity		358,847		0		367		0		359,214		6,759		371,494		0		380		0		371,874		6,874
Construction		204,794		0		0		0		204,794		3,777		160,787		1,926		0		0		162,713		2,876
Total real estate		2,400,640		12,874		10,275		0		2,423,789		43,047		2,417,736		15,558		13,107		0		2,446,401		44,466
Commercial & Industrial		427,109		9,437		653		0		437,199		10,361
Commercial & industrial														431,441		7,459		555		0		439,455		10,139
Agricultural		249,972		1,477		20		0		251,469		5,737		260,079		880		897		0		261,856		5,669
Commercial leases		91,772		135		0		0		91,907		1,466		88,468		118		0		0		88,586		1,645
Consumer and other		33,081		0		174		0		33,255		421		13,391		0		197		0		13,588		161
Total loans and leases, net	$	3,202,574	$	23,923	$	11,122	$	0	$	3,237,619	$	61,032	$	3,211,115	$	24,015	$	14,756	$	0	$	3,249,886	$	62,080

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

~~FARMERS & MERCHANTS BANCORP~~

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

Note 4—Loans and Leases—Continued

The following table represents outstanding loan balances by credit quality indicators and vintage year by class of financing receivable as of ~~March 31,~~June 30, 2022:

	March 31, 2022																June 30, 2022
	Term Loans Amortized Cost Basis by Origination Year																Term Loans Amortized Cost Basis by Origination Year
(Dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost		Total		2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost		Total
Net loans and leases held-for-investment
Net loans and leases held for investment
Real estate:
Commercial
Pass	$	25,293	$	247,149	$	164,009	$	82,890	$	95,039	$	254,266	$	284,938	$	1,153,584	$	64,720	$	239,840	$	161,165	$	73,041	$	87,035	$	237,333	$	324,326	$	1,187,461
Special mention		0		0		0		0		3,888		840		2,150		6,878		0		0		0		0		3,866		834		3,929		8,629
Substandard		0		0		0		0		0		3,104		650		3,754		0		0		0		0		0		4,203		1,897		6,100
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total commercial	$	25,293	$	247,149	$	164,009	$	82,890	$	98,927	$	258,210	$	287,738	$	1,164,216
Total Commercial																	$	64,720	$	239,840	$	161,165	$	73,041	$	90,901	$	242,370	$	330,152	$	1,202,190

Agricultural real estate
Agricultural
Pass	$	12,121	$	43,482	$	58,501	$	15,393	$	56,374	$	159,386	$	338,158	$	683,415	$	34,325	$	43,251	$	58,263	$	15,341	$	53,916	$	157,648	$	335,250	$	697,994
Special mention		0		0		2,382		2,636		143		0		835		5,996		0		0		2,367		2,636		0		0		0		5,003
Substandard		0		0		0		0		118		6,036		0		6,154		0		0		0		0		118		6,034		475		6,627
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total agricultural real estate	$	12,121	$	43,482	$	60,883	$	18,029	$	56,635	$	165,422	$	338,993	$	695,565
Total Agricultural																	$	34,325	$	43,251	$	60,630	$	17,977	$	54,034	$	163,682	$	335,725	$	709,624

Residential and home equity
Pass	$	21,332	$	101,603	$	93,842	$	16,431	$	7,719	$	88,166	$	29,754	$	358,847	$	40,868	$	100,298	$	90,939	$	15,957	$	7,140	$	82,590	$	33,702	$	371,494
Special mention		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Substandard		0		0		0		0		0		220		147		367		0		0		0		0		0		235		145		380
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total residential and home equity	$	21,332	$	101,603	$	93,842	$	16,431	$	7,719	$	88,386	$	29,901	$	359,214
Total Residential and home equity																	$	40,868	$	100,298	$	90,939	$	15,957	$	7,140	$	82,825	$	33,847	$	371,874

Construction
Pass	$	0	$	0	$	0	$	2,275	$	0	$	122	$	202,397	$	204,794	$	0	$	0	$	0	$	2,272	$	0	$	92	$	158,423	$	160,787
Special mention		0		0		0		0		0		0		0		0		0		0		0		0		0		0		1,926		1,926
Substandard		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total construction	$	0	$	0	$	0	$	2,275	$	0	$	122	$	202,397	$	204,794	$	0	$	0	$	0	$	2,272	$	0	$	92	$	160,349	$	162,713

Total real estate	$	58,746	$	392,234	$	318,734	$	119,625	$	163,281	$	512,140	$	859,029	$	2,423,789
Total Real estate																	$	139,913	$	383,389	$	312,734	$	109,247	$	152,075	$	488,969	$	860,073	$	2,446,401

Commercial & industrial
Pass	$	4,368	$	45,633	$	16,791	$	15,010	$	11,515	$	9,983	$	323,809	$	427,109	$	8,395	$	44,225	$	15,482	$	12,734	$	10,126	$	9,183	$	331,296	$	431,441
Special mention		0		82		0		0		0		4		9,351		9,437		0		76		0		0		0		3		7,380		7,459
Substandard		0		0		0		0		38		31		584		653		0		0		0		0		0		30		525		555
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total commercial & industrial	$	4,368	$	45,715	$	16,791	$	15,010	$	11,553	$	10,018	$	333,744	$	437,199
Total Commercial & industrial																	$	8,395	$	44,301	$	15,482	$	12,734	$	10,126	$	9,216	$	339,201	$	439,455

Agriculture
Agricultural
Pass	$	1,236	$	4,736	$	1,353	$	1,624	$	834	$	2,358	$	237,831	$	249,972	$	3,547	$	4,532	$	1,194	$	1,626	$	776	$	2,273	$	246,131	$	260,079
Special mention		0		0		0		0		0		98		1,379		1,477		0		0		0		0		0		12		868		880
Substandard		0		0		0		15		5		0		0		20		0		0		0		14		4		79		800		897
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total Agriculture	$	1,236	$	4,736	$	1,353	$	1,639	$	839	$	2,456	$	239,210	$	251,469
Total Agricultural																	$	3,547	$	4,532	$	1,194	$	1,640	$	780	$	2,364	$	247,799	$	261,856

Commercial leases
Pass	$	3,635	$	14,816	$	14,904	$	9,041	$	22,133	$	27,243	$	0	$	91,772	$	1,566	$	17,129	$	14,293	$	8,473	$	21,686	$	25,320	$	0	$	88,468
Special mention		0		0		0		135		0		0		0		135		0		0		0		118		0		0		0		118
Substandard		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total commercial leases	$	3,635	$	14,816	$	14,904	$	9,176	$	22,133	$	27,243	$	0	$	91,907
Total Commercial leases																	$	1,566	$	17,129	$	14,293	$	8,591	$	21,686	$	25,320	$	0	$	88,586

Consumer and other
Pass	$	612	$	26,679	$	967	$	425	$	656	$	2,870	$	872	$	33,081	$	901	$	7,589	$	475	$	350	$	531	$	2,713	$	832	$	13,391
Special mention		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Substandard		0		0		0		0		0		47		127		174		197		0		0		0		0		0		0		197
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total consumer and other	$	612	$	26,679	$	967	$	425	$	656	$	2,917	$	999	$	33,255
Total Consumer and other																	$	1,098	$	7,589	$	475	$	350	$	531	$	2,713	$	832	$	13,588

Total net loans and leases	$	68,597	$	484,180	$	352,749	$	145,875	$	198,462	$	554,774	$	1,432,982	$	3,237,619	$	154,519	$	456,941	$	344,178	$	132,563	$	185,198	$	528,583	$	1,447,905	$	3,249,886

~~FARMERS & MERCHANTS BANCORP~~

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

Note 4—Loans and Leases—Continued

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

	March 31, 2022						June 30, 2022
(Dollars in thousands)	Real Estate		Vehicles		Total		Real Estate		Vehicles		Total
Collateral dependent loans and leases
Real estate:
Commercial	$	1	$	0	$	1	$	0	$	0	$	0
Agricultural		5,560		0		5,560		5,533		0		5,533
Residential and home equity		235		0		235		216		0		216
Construction		0		0		0		0		0		0
Total real estate		5,796		0		5,796
Commercial & Industrial		0		0		0
Total Real estate								5,749		0		5,749
Commercial & industrial								0		0		0
Agricultural		0		0		0		0		0		0
Commercial leases		0		0		0		0		0		0
Consumer and other		0		169		169		0		165		165
Total gross loans and leases	$	5,796	$	169	$	5,965	$	5,749	$	165	$	5,914

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

~~FARMERS & MERCHANTS BANCORP~~

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

Note 4—Loans and Leases—Continued

Changes in the allowance for credit losses are as follows:

	For the Three Months Ended March 31, 2022																			For the Three Months Ended June 30, 2022
(Dollars in thousands)	Commercial & Agricultural R/E			Construction		Residential & Home Equity		Commercial & Agricultural			Commercial Leases			Consumer & Other			Total			Commercial & Agricultural R/E		Construction			Residential & Home Equity		Commercial & Agricultural			Commercial Leases		Consumer & Other			Total
Allowance for credit losses:
Balance at beginning of period, prior to adoption of ASC 326	$	38,149		$	1,456	$	2,847	$	16,954		$	938		$	663		$	61,007
Impact of adopting ASC 326		(6,190	)		1,855		3,032		826			629			(152	)		0
Beginning balance																				$	32,511	$	3,777		$	6,759	$	16,098		$	1,466	$	421		$	61,032
Provision / (recapture) for credit losses		552			466		866		(1,700	)		(101	)		(83	)		0			2,205		(901	)		10		(131	)		179		(255	)		1,107
Charge-offs		0			0		0		0			0			(9	)		(9	)		0		0			0		(276	)		0		(9	)		(285	)
Recoveries		0			0		14		18			0			2			34			0		0			105		117			0		4			226
Net (charge-offs) / recoveries		0			0		14		18			0			(7	)		25			0		0			105		(159	)		0		(5	)		(59	)
Balance at end of period	$	32,511		$	3,777	$	6,759	$	16,098		$	1,466		$	421		$	61,032
Ending balance																				$	34,716	$	2,876		$	6,874	$	15,808		$	1,645	$	161		$	62,080

	For the Three Months Ended March 31, 2021																			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			Commercial & Agricultural R/E			Construction			Residential & Home Equity		Commercial & Agricultural			Commercial Leases		Consumer & Other			Total
Allowance for credit losses:
Balance at beginning of period	$	36,312	$	1,643	$	2,984		$	14,775		$	1,731		$	1,417		$	58,862
Beginning balance																				$	38,149		$	1,456		$	2,847	$	16,954		$	938	$	663		$	61,007
Impact of Adopting ASC 326																					(6,190	)		1,855			3,032		826			629		(152	)		0
Provision / (recapture) for credit losses		1,802		4		(135	)		(584	)		(57	)		220			1,250			2,757			(435	)		876		(1,831	)		78		(338	)		1,107
Charge-offs		0		0		0			0			0			(8	)		(8	)		0			0			0		(276	)		0		(18	)		(294	)
Recoveries		0		0		32			32			0			7			71			0			0			119		135			0		6			260
Net (charge-offs) / recoveries		0		0		32			32			0			(1	)		63			0			0			119		(141	)		0		(12	)		(34	)
Balance at end of period	$	38,114	$	1,647	$	2,881		$	14,223		$	1,674		$	1,636		$	60,175
Ending balance																				$	34,716		$	2,876		$	6,874	$	15,808		$	1,645	$	161		$	62,080

~~FARMERS & MERCHANTS BANCORP~~

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

Note ~~5 —~~ 5—Deposits

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

(Dollars in thousands)	March 31, 2022		December 31, 2021		June 30, 2022		December 31, 2021
Certificate of deposits:
Certificates of deposits less than or equal to $250,000		221,904		223,620	$	216,390	$	223,620
Certificates of deposits greater than $250,000		168,876		168,865		162,240		168,865
Total certificates of deposits		390,780		392,485	$	378,630	$	392,485

Scheduled maturities for certificates of deposit are as follows:

(Dollars in thousands)	Amount		Amount
2022	$	291,366	$	217,575
2023		89,678		147,620
2024		5,633		8,788
2025		1,818		2,270
2026 and beyond		2,285		2,377
Total time deposits	$	390,780	$	378,630

2625

~~FARMERS & MERCHANTS BANCORP~~

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

Note 6—Shareholders’ Equity

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

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

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

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

	March 31, 2022															June 30, 2022
	Actual					Minimum Capital Requirement					Well Capitalized Requirment					Actual					Minimum to be Categorized as “Adequately Capitalized”					Minimum to be Categorized as “Well Capitalized”
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
Farmers & Merchants Bancorp
CET1 capital to risk-weighted assets	$	463,607		11.63	%	$	179,354		4.50	%		N/A		N/A		$	468,463		11.55	%	$	182,499		4.50	%		N/A		N/A
Tier 1 capital to risk-weighted assets		473,607		11.88	%		239,139		6.00	%		N/A		N/A			478,463		11.80	%		243,332		6.00	%		N/A		N/A
Risk-based capital to risk-weighted assets		523,580		13.14	%		318,851		8.00	%		N/A		N/A			529,311		13.05	%		324,442		8.00	%		N/A		N/A
Tier 1 leverage capital ratio		473,607		8.45	%		224,315		4.00	%		N/A		N/A			478,463		8.94	%		214,167		4.00	%		N/A		N/A

Farmers & Merchants Bank
CET1 capital to risk-weighted assets	$	472,965		11.87	%	$	179,339		4.50	%	$	259,046		6.50	%	$	475,077		11.72	%	$	182,470		4.50	%	$	263,567		6.50	%
Tier 1 capital to risk-weighted assets		472,965		11.87	%		239,119		6.00	%		318,826		8.00	%		475,077		11.72	%		243,293		6.00	%		324,391		8.00	%
Risk-based capital to risk-weighted assets		522,934		13.12	%		318,826		8.00	%		398,532		10.00	%		525,918		12.97	%		324,391		8.00	%		405,488		10.00	%
Tier 1 leverage capital ratio		472,965		8.94	%		211,642		4.00	%		264,552		5.00	%		475,077		8.89	%		213,871		4.00	%		267,339		5.00	%

2726

~~FARMERS & MERCHANTS BANCORP~~

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

Note 6—Shareholders’ Equity—Continued

	December 31, 2021															December 31, 2021
	Actual					Minimum Capital Requirement					Well Capitalized Requirment					Actual					Minimum to be Categorized as “Adequately Capitalized”					Minimum to be Categorized as “Well Capitalized”
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
Farmers & Merchants Bancorp
CET1 capital to risk-weighted assets	$	450,687		11.68	%	$	173,674		4.50	%		N/A		N/A		$	450,687		11.68	%	$	173,674		4.50	%		N/A		N/A
Tier 1 capital to risk-weighted assets		460,687		11.94	%		231,566		6.00	%		N/A		N/A			460,687		11.94	%		231,566		6.00	%		N/A		N/A
Risk-based capital to risk-weighted assets		509,091		13.19	%		308,755		8.00	%		N/A		N/A			509,091		13.19	%		308,755		8.00	%		N/A		N/A
Tier 1 leverage capital ratio		460,687		8.92	%		206,606		4.00	%		N/A		N/A			460,687		8.92	%		206,606		4.00	%		N/A		N/A

Farmers & Merchants Bank
CET1 capital to risk-weighted assets	$	459,813		11.91	%	$	173,664		4.50	%	$	250,847		6.50	%	$	459,813		11.91	%	$	173,664		4.50	%	$	250,847		6.50	%
Tier 1 capital to risk-weighted assets		459,813		11.91	%		231,551		6.00	%		308,735		8.00	%		459,813		11.91	%		231,551		6.00	%		308,735		8.00	%
Risk-based capital to risk-weighted assets		508,215		13.17	%		308,735		8.00	%		385,919		10.00	%		508,215		13.17	%		308,735		8.00	%		385,919		10.00	%
Tier 1 leverage capital ratio		459,813		8.91	%		206,426		4.00	%		258,033		5.00	%		459,813		8.91	%		206,426		4.00	%		258,033		5.00	%

Basic and diluted earnings per common share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period.

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

	Three Months Ended June 30,
(Dollars in thousands, except share and per share amounts)	2022		2021
Numerator
Net income	$	18,443	$	16,153

Denominator
Weighted average number of common shares outstanding		781,880		789,646
Weighted average number of dilutive shares outstanding		781,880		789,646

Basic earnings per common share	$	23.58	$	20.45
Diluted earning per common share	$	23.58	$	20.45

	Three Months Ended March 31,				Six Months Ended June 30,
(Dollars in thousands, except share and per share amounts)	2022		2021		2022			2021
Numerator
Net income	$	17,058	$	16,713	$	35,501		$	32,866

Denominator
Weighted average number of common shares outstanding		786,096		789,646		783,976			789,646
Weighted average number of dilutive shares outstanding		786,096		789,646		783,976			789,646
							��
Basic earnings per common share	$	21.70	$	21.17	$	45.28		$	41.62
Diluted earning per common share	$	21.70	$	21.17	$	45.28		$	41.62

2827

~~FARMERS & MERCHANTS BANCORP~~

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

Note 7—Fair Value Measurements

The Company follows the “Fair Value Measurement and Disclosures” topic of the FASB ASC, which establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. U.S. GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. This standard applies whenever other standards require, or permit assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, this standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

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

Level 2 inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

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

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

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

The Company does not record all loans and leases at fair value on a recurring basis. However, from time to time, a loan or lease is considered collateral dependent and an allowance for credit losses is established. Once a loan or lease is identified as collaterally dependent, management measures impairment in accordance with the “Receivable” topic of the FASB ASC. The fair value of collateral dependent loans or leases is estimated using one of several methods, including collateral value when the loan is collateral dependent, market value of similar debt, enterprise value, and discounted cash flows. Collateral dependent loans and leases not requiring an allowance represent loans and leases for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans and leases. Collateral dependent loans and leases where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The fair value of collateral dependent loans is generally based on recent real estate appraisals.

2928

~~FARMERS & MERCHANTS BANCORP~~

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

Note 7—Fair Value Measurements—Continued

These appraisals may utilize a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take ~~in to~~into account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring collateral dependent loans is primarily the sales comparison approach less selling costs of 10%.

OREO is reported at fair value on a non-recurring basis. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take in to account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring OREO is primarily the sales comparison approach less selling costs of 10%.

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

March 31, 2022			Fair Value
June 30, 2022													Fair Value
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value		Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Financial Assets:
Cash and cash equivalents	$	841,086	$	841,086	$	0	$	0	$	841,086	$	747,788	$	747,788	$	0	$	0	$	747,788
Investment securities available-for-sale		251,375		9,996		241,379		0		251,375		225,338		4,952		220,386		0		225,338
Investment securities held-to-maturity		876,257		0		771,971		43,732		815,703		867,990		0		720,108		43,039		763,147
Non-marketable securities		15,549		0		0		15,549		15,549		15,549		0		0		15,549		15,549
Loans and leases, net		3,176,587		0		0		3,184,796		3,184,796		3,187,806		0		0		3,180,540		3,180,540
Bank-owned life insurance		71,953		71,953		0		0		71,953		72,513		72,513		0		0		72,513

Financial Liabilities:
Total deposits		4,837,439	$	4,446,659	$	0	$	387,625	$	4,834,284	$	4,769,513	$	0	$	4,390,883	$	373,285	$	4,764,168
Subordinated debentures		10,310		0		9,766		0		9,766		10,310		0		9,181		0		9,181

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

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

3029

~~FARMERS & MERCHANTS BANCORP~~

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

Note 7—Fair Value Measurements—Continued

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

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

March 31, 2022			Fair Value Measurements
June 30, 2022													Fair Value
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value		Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Fair valued on a recurring basis:
Investment securities available-for-sale
U.S. Treasury notes	$	9,996	$	9,996	$	0	$	0	$	9,996	$	4,952	$	4,952	$	0	$	0	$	4,952
U.S. Government-sponsored securities		5,789		0		5,789		0		5,789		5,441		0		5,441		0		5,441
Mortgage-backed securities		223,901		0		223,901		0		223,901		203,607		0		203,607		0		203,607
Collateralized mortgage obligations		1,544		0		1,544		0		1,544		1,502		0		1,502		0		1,502
Corporate securities		9,835		0		9,835		0		9,835		9,526		0		9,526		0		9,526
Other		310		0		310		0		310		310		0		310		0		310

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

December 31, 2021	Fair Value Measurements												Fair Value
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value		Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Fair valued on a recurring basis:
Investment securities available-for-sale
U.S. Treasury notes	$	10,089	$	10,089	$	0	$	0	$	10,089	$	10,089	$	10,089	$	0	$	0	$	10,089
U.S. Government-sponsored securities		6,374		0		6,374		0		6,374		6,374		0		6,374		0		6,374
Mortgage-backed securities		251,120		0		251,120		0		251,120		251,120		0		251,120		0		251,120
Collateralized mortgage obligations		2,436		0		2,436		0		2,436		2,436		0		2,436		0		2,436
Other		435		125		310		0		435		435		125		310		0		435

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

3130

~~FARMERS & MERCHANTS BANCORP~~

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

Note 8—Commitments and Contingencies

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

(Dollars in thousands)	March 31, 2022		December 31, 2021		June 30, 2022		December 31, 2021

Commitments to extend credit, including unsecured commitments of $20,907 and $21,036 as of March 31, 2022 and December 31, 2021, respectively	$	987,423	$	937,009
Commitments to extend credit, including unsecured commitments of $20,787 and $21,036 as of June 30, 2022 and December 31, 2021, respectively					$	995,795	$	937,009

Stand-by letters of credit, including unsecured commitments of $8,361 and $9,091 as of March 31, 2022 and December 31, 2021, respectively		16,250		17,880
Stand-by letters of credit, including unsecured commitments of $7,409 and $9,091 as of June 30, 2022 and December 31, 2021, respectively						16,484		17,880

Performance guarantees under interest rate swap contracts entered into with our clients and third-parties		191		1,433		0		1,433

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

Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third-party. Outstanding standby letters of credit have maturity dates ranging from 1 to 60 months with final expiration in January 2027. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

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

The Company may be required to maintain average reserves on deposit with the Federal Reserve Bank primarily based on deposits outstanding. Reserve requirements are offset by the Company’s vault cash and deposit balances maintained with the Federal Reserve Bank.

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

Item 2.

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

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

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10–Q may contain certain forward-looking statements within the meaning of Section 27A the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect the Company’s current views and are not historical facts. These statements can generally be identified by use of phrases such as “believe,” “expect,” “will,” “seek,” “should,” “anticipate,” “estimate,” “intend,” “plan,” “target,” “project,” “commit” or other words of similar import. Similarly, statements that describe the Company’s future financial condition, results of operations, objectives, strategies, plans, goals or future performance and business are also forward-looking statements. Statements that project future financial conditions, results of operations, and shareholder value are not guarantees of performance and many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (“Form 10-K”), and other parts of this report that could cause actual results to differ materially from those anticipated in these forward-looking statements. The following is a non-exclusive list of factors which could cause actual results to differ materially from forward-looking statements in this Quarterly Report on Form 10-Q:

■◾	the pendency, duration, and impact of the COVID-19 pandemic;

■◾	changes in general economic conditions, either nationally, in California, or in our local markets;

■◾	inflation, changes in interest rates, securities market volatility and monetary fluctuations;

■◾	increases in competitive pressures among financial institutions and businesses offering similar products and services;

■◾	higher defaults in our loan portfolio than we expect;

■◾	changes in management’s estimate of the adequacy of the allowance for credit losses;

■◾	risks associated with our growth and expansion strategy and related costs;

■◾	increased lending risks associated with our high concentration of real estate loans;

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

■◾	technological changes; and

■◾	regulatory or judicial proceedings.

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed.

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

3332

Overview

Farmers & Merchants Bancorp is a Delaware registered bank holding company organized in 1999. As a registered bank holding company, FMCB is subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System (“FRB”) and by the California Department of Financial Protection and Innovation (“DFPI”). The Company’s principal business is to serve as a holding company for the Bank and for other banking or banking related subsidiaries, which the Company may establish or acquire. As a legal entity separate and distinct from its subsidiary, the Company’s principal source of funds is, and will continue to be, dividends paid by and other funds received from the Bank. Legal limitations are imposed on the amount of dividends that may be paid and loans that may be made by the Bank to the Company.

The Company’s outstanding common stock as of ~~March 31,~~June 30, 2022, consisted of ~~785,146~~777,190 shares of common stock, $0.01 par value and no shares of preferred stock were issued or outstanding. The common stock of Farmers & Merchants Bancorp is not widely held or listed on any exchange. However, trades are reported on the OTCQX under the symbol “FMCB.”

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

The primary source of funding for our asset growth has been the generation of core deposits, which we raise through our existing branch locations, newly opened branch locations, or through acquisitions. Our recent loan growth is primarily the result of organic growth generated by our seasoned relationship managers and supporting associates who provide outstanding service and responsiveness to our clients or through acquisitions.

Our results of operations are largely dependent on net interest income. Net interest income is the difference between interest income we earn on interest earning assets, which are comprised of loans, investment securities and short-term investments, and the interest we pay on our interest bearing liabilities, which are primarily deposits, and, to a lesser extent, other borrowings. Management strives to match the re-pricing characteristics of the interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve.

We measure our performance by calculating our net interest margin, return on average assets, and return on average equity. Net interest margin is calculated by dividing net interest income, which is the difference between interest income on interest earning assets and interest expense on interest bearing liabilities, by average interest earning assets. Net interest income is our 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. We also measure our performance by our efficiency ratio, which is calculated by dividing non-interest expense by the sum of net interest income and non-interest income.

Summary of Critical Accounting Policies and Estimates

In the opinion of management, the accompanying Consolidated Statements of Financial Condition and related Consolidated Statements of Income, Comprehensive Income, Changes in Shareholders’ Equity and Cash Flows reflect all adjustments (which include reclassification and normal recurring adjustments) that are necessary for a fair presentation in conformity with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements.

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified certain accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our financial statements.

Management believes the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate based on the factual circumstances at the time. However, given the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition. Further, subsequent changes in economic or market conditions could have a material impact on these estimates and our financial condition and operating results in future periods. For additional information concerning critical accounting policies, see the Selected Notes to the Consolidated Financial Statements and the following:

Use of Estimates — The preparation of our financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis, management evaluates the estimates used. Estimates are based upon historical experience, current economic conditions and other factors that management considers reasonable under the circumstances and the actual results may differ from these estimates under different assumptions. The allowance for credit losses, deferred income taxes, and fair values of financial instruments are estimates, which are particularly subject to change.

Allowance for Credit Losses — Loans — The methodology for determining the allowance for credit losses (“ACL”) on loans is considered a critical accounting policy by Management because of the high degree of judgment involved. The subjectivity of the assumptions used and the potential for changes in the economic environment could result in changes to the amount of the recorded ACL. Among the material estimates required to establish the ACL are: (i) a reasonable and supportable forecast; (ii) a reasonable and supportable forecast period and the reversion period; (iii) value of collateral; strength of guarantors; (iv) the amount and timing of future cash flows for loans individually evaluated; and (v) the determination of the qualitative loss factors. All of these estimates are susceptible to significant change.

The Company has established systematic methodologies for the determination of the adequacy of the ACL. The methodologies are set forth in a formal policy and take into consideration the need for a valuation allowance for loans evaluated on a collective (pool) basis, which have similar risk characteristics as well as allowances to individual loans that do not share risk characteristics.

The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The provision for credit losses reflects the amount required to maintain the ACL at an appropriate level based upon management’s evaluation of the adequacy of loss reserves. The Company increases its ACL by charging provisions for credit losses on its consolidated statement of income. Losses related to specific assets are applied as a reduction of the carrying value of the assets and charged against the ACL when management believes a loan balance is uncollectable. Recoveries on previously charged off loans are credited to the ACL.

Management estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience, either internal or peer information, provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made, using qualitative factors, when management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The ACL is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. These factors include, among others, changes in the size and composition of the loan portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions.

3534

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

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

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

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

Management has determined to use a “through-the-cycle” historical credit loss experience as its baseline for historical credit losses. Management has determined a representative period for a full credit cycle would be from 2008 to 2022 (fifteen-year credit cycle). Management has collected historical loss information on its own loan portfolio as well as peer group information by the seventeen loan segments over this time horizon using information available from Federal Regulators on the Uniform Bank Performance Report (“UBPR”) at ~~www.ffiec.gov~~.

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

Management ~~evaluated~~evaluates macro and micro economic information as well as internal trends in credit performance on our loan portfolio to determine at where we believe we are in an economic credit cycle. Depending upon our estimation of what point in the credit cycle the current economy may exist, we adjust, on a quantitative basis, historical loss rates either upwards or downwards from the mean. If Management believes we are nearing the end on a credit cycle, we may adjust historical losses in increments higher from the mean (e.g. one standard deviation from the mean). If the Company believes that we are in the recovery stage of a credit cycle, we may adjust historical losses downwards from the mean. Management understands that historical credit losses may not exactly follow a normal bell-shaped curve, but that the approach provides consistency across all loan segments as well as a measured probability of credit loss coverage.

Management evaluated current economic metrics as its basis to determine that we believe that we are at the beginning of an economic recession. Based on this determination, management has used a one-standard deviation from the mean to capture 68.2% of all credit losses over the 15-year economic cycle.

Management used the duration of each loan segment to estimate the remaining life of loans to ensure that the model covers credit losses over the expect life of such loans.

Management will continue to employ the use of qualitative factors as defined by the Interagency Policy Statement on the Allowance for Loan and Lease Losses (“SR 2006-17”). Management will consider qualitative or environmental factors that are likely to cause estimated credit losses associated with our existing portfolio to differ from historical loss experience, as defined in the Interagency Guidance, including but not limited to:

■

Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses.

■

Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments.

■

Changes in the nature and volume of the portfolio and in the terms of loans.

■

Changes in the experience, ability, and depth of lending management and other relevant staff.

■

Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans.

■

Changes in the quality of the institution’s loan review system.

■

Changes in the value of underlying collateral for collateral-dependent loans.

■

The existence and effect of any concentrations of credit, and changes in the level of such concentrations.

■

The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.

These qualitative factors are applied primarily to our agriculture and agricultural real estate loan exposure.

Investment Securities — Investment securities are classified as held-to-maturity (“HTM”) when the Company has the positive intent and ability to hold the securities to maturity. Investment securities are classified as available-for-sale (“AFS”) when the Company has the intent of holding the security for an indefinite period of time, but not necessarily to maturity. The Company determines the appropriate classification at the time of purchase, and periodically thereafter. Investment securities classified at HTM are carried at amortized cost. Investment securities classified at AFS are reported at fair value. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Debt securities classified as held-to-maturity are carried at cost, net of the allowance for credit losses - securities, adjusted for amortization of premiums and discounts to the earliest callable date. Debt securities classified as available-for-sale are measured at fair value. Unrealized holding gains and losses on debt securities classified as available-for-sale are excluded from earnings and are reported net of tax as accumulated other comprehensive income (AOCI), a component of shareholders’ equity, until realized. When AFS securities, specifically identified, are sold, the unrealized gain or loss is reclassified from AOCI to non-interest income.

3736

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

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If the Company intends to sell the security or it is more likely than not that, the Company will be required to sell the security before recovering its cost basis; the entire impairment loss would be recognized in earnings. If the Company does not intend to sell the security and it is not more likely than not that, the Company will be required to sell the security the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized costs, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. Projected cash flows are discounted by the current effective interest rate. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to AOCI.

Changes in the allowance for credit losses-securities are recorded as provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the non-collectability of an available-for-sale security is confirmed or when either criteria regarding intent of requirement to sell is met.

Goodwill — Goodwill represents the excess of the purchase considerations paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination it is not amortized but is reviewed annually, or more frequently as current circumstances and conditions warrant, for impairment. An assessment of qualitative factors is completed to determine if it is more likely than not that, the fair value of a reporting unit is less than its carrying amount. If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed. The quantitative goodwill impairment compares the reporting ~~unit’s~~unit's estimated fair values, including goodwill, to its carrying amount. If the carrying amount exceeds its reporting unit’s fair value, then an impairment loss would be recognized as a charge to earnings, but is limited by the amount of goodwill allocated to that reporting unit.

Other Intangible Assets — Other intangible assets consists primarily of core deposit intangibles (“CDI”), which are amounts recorded in business combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the client relationships associated with the deposits. Core deposit intangibles are amortized over the estimated useful lives of such deposits. These assets are reviewed at least annually for events or circumstances that could affect their recoverability. These events could include loss of the underlying core deposits, increased competition or adverse changes in the economy. The amortization of our CDI is recorded in other non-interest expense. To the extent other identifiable intangible assets are deemed unrecoverable; impairment losses are recorded in other non-interest expense to reduce the carrying amount of the assets.

Fair Value Measurements — The Company discloses the fair value of financial instruments and the methods and significant assumptions used to estimate those fair values. The Company, using available market information and appropriate valuation methodologies has determined the estimated fair value amounts. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. In some cases, book value is a reasonable estimate of fair value due to the relatively short period between origination of the instrument and its expected realization.

Income Taxes — Income taxes are filed on a consolidated basis with our subsidiaries and allocate income tax expense (benefit) based on each entity’s proportionate share of the consolidated provision for income taxes. Deferred income tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their respective tax bases.

Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The determination of the amount of deferred income tax assets, that are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred income tax asset will not be realized. “More likely than not” is defined as greater than a 50% probability. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed.

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

Impact of Recently Issued Accounting Standards

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

Results of Operations

The following discussion and analysis is intended to provide a better understanding of Farmers & Merchants Bancorp and its subsidiaries’ financial condition at ~~March 31,~~June 30, 2022 and December 31, 2021 and results of operations during the three and six months ended ~~March 31,~~June 30, 2022 and 2021, respectively. Information related to the comparison of the results of operations for the three years ended December 31, 2021, 2020, and 2019 can be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2021 Annual Report on Form 10-K filed with the SEC on March 15, 2022.

Factors that determine the level of net income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, fee income, non-interest expense, the level of non-performing loans and other non-earning assets, and the amount of non-interest bearing liabilities supporting earning assets. Non-interest income includes card processing fees, service charges on deposit accounts, bank-owned life insurance income, gains/losses on the sale of investment securities, and gains/losses on deferred compensation investments. Non-interest expense consists primarily of salaries and employee benefits, cost of deferred compensation benefits, occupancy, data processing, FDIC insurance, marketing, legal and other expenses.

3938

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

	Three Months Ended March 31,																For the Three Months Ended June 30,
	2022								2021								2022								2021
(Dollars in thousands)	Average Balance			Interest Income / Expense		Average Yield / Rate			Average Balance			Interest Income / Expense		Average Yield / Rate			Average Balance			Interest Income / Expense		Average Yield / Rate			Average Balance			Interest Income / Expense		Average Yield / Rate
ASSETS
Interest earnings deposits in other banks and federal funds sold	$	760,080		$	366		0.20	%	$	410,276		$	103		0.10	%	$	683,655		$	1,409		0.83	%	$	590,936		$	164		0.11	%
Securities:⁽¹⁾
Taxable securities		1,022,457			4,588		1.82	%		834,831			3,804		1.85	%		1,090,507			5,107		1.87	%		839,121			3,694		1.76	%
Non-taxable securities⁽²⁾		49,997			402		3.22	%		55,078			423		3.07	%		48,339			391		3.24	%		53,813			416		3.09	%
Total securities		1,072,454			4,990		1.89	%		889,909			4,227		1.93	%
Total investment securities																		1,138,846			5,498		1.94	%		892,934			4,110		1.84	%
Loans:⁽³⁾
Real estate:
Commercial		1,151,611			13,276		4.68	%		965,249			10,977		4.61	%		1,158,892			13,373		4.63	%		1,005,143			12,370		4.94	%
Agricultural		680,230			7,793		4.65	%		638,292			7,136		4.53	%		701,905			8,415		4.81	%		622,977			7,447		4.79	%
Residential and home equity		353,371			3,301		3.79	%		335,573			4,571		5.52	%		365,872			3,539		3.88	%		337,796			3,662		4.35	%
Construction		191,684			2,072		4.38	%		193,366			2,097		4.40	%		205,491			2,508		4.90	%		189,930			2,150		4.54	%
Total real estate		2,376,896			26,442		4.51	%		2,132,480			24,781		4.71	%		2,432,160			27,835		4.59	%		2,155,846			25,629		4.77	%
Commercial & industrial		424,598			4,799		4.58	%		365,881			4,111		4.56	%		439,137			4,546		4.15	%		357,098			4,345		4.88	%
Agricultural		248,414			2,755		4.50	%		226,200			2,564		4.60	%		264,791			2,988		4.53	%		227,206			2,557		4.51	%
Commercial leases		94,855			1,416		6.05	%		102,566			1,344		5.31	%		90,855			1,377		6.08	%		101,848			1,428		5.62	%
Consumer and other		52,078			2,021		15.74	%		232,845			4,287		7.47	%		21,457			1,824		34.10	%		223,877			2,705		4.85	%
Total loans and leases		3,196,841			37,433		4.75	%		3,059,972			37,087		4.92	%		3,248,400			38,570		4.76	%		3,065,875			36,664		4.80	%
Non-marketable securities		15,549			305		7.96	%		12,693			190		6.07	%		15,549			218		5.62	%		15,078			212		5.64	%
Total interest earning assets		5,044,924			43,094		3.46	%		4,372,850			41,607		3.86	%		5,086,450			45,695		3.60	%		4,564,823			41,150		3.62	%
Allowance for credit losses		(61,022	)							(59,431	)							(61,439	)							(60,204	)
Non-interest earning assets		314,932								306,261								317,066								315,846
Total average assets	$	5,298,834							$	4,619,680							$	5,342,077							$	4,820,465

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits:
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits:
Demand	$	1,115,578			259		0.09	%	$	943,635			294		0.13	%	$	1,117,283			319		0.11	%	$	993,084			282		0.11	%
Savings and money market accounts		1,517,234			342		0.09	%		1,291,214			418		0.13	%		1,544,753			361		0.09	%		1,332,799			372		0.11	%
Certificates of deposit greater than $250,000		167,515			97		0.23	%		171,501			256		0.61	%		165,944			106		0.26	%		168,450			188		0.45	%
Certificates of deposit less than $250,000		223,842			105		0.19	%		247,416			269		0.44	%		219,157			87		0.16	%		239,792			192		0.32	%
Total interest bearing deposits		3,024,169			803		0.11	%		2,653,766			1,237		0.19	%		3,047,137			873		0.11	%		2,734,125			1,034		0.15	%
Short-term borrowings		3			-		0.00	%		4			-		0.00	%		-			-		0.00	%		-			-		0.00	%
Subordinated debentures		10,310			82		3.23	%		10,310			79		3.11	%		10,310			103		4.01	%		10,310			79		3.07	%
Total interest bearing liabilities		3,034,482			885		0.12	%		2,664,080			1,316		0.20	%		3,057,447			976		0.13	%		2,744,435			1,113		0.16	%
Non-interest bearing deposits		1,722,597								1,469,741								1,735,258								1,573,743
Total funding		4,757,079			885		0.08	%		4,133,821			1,316		0.13	%		4,792,705			976		0.08	%		4,318,178			1,113		0.10	%
Other non-interest bearing liabilities		76,061								56,268								86,550								69,049
Shareholders’ equity		465,694								429,591
Total average liabilities and shareholders’ equity	$	5,298,834							$	4,619,680

Shareholders' equity																		462,822								433,238
Total average liabilities and shareholders' equity																	$	5,342,077							$	4,820,465
Net interest income				$	42,209							$	40,291							$	44,719							$	40,037
Interest rate spread							3.35	%							3.66	%							3.48	%							3.45	%
Net interest margin⁽⁴⁾							3.39	%							3.74	%							3.53	%							3.52	%

~~(1)~~

~~Excludes average unrealized (losses) gains of ($7.0) million and $12.9 million for the three months ended March 31, 2022, and 2021, respectively, which are included in non-interest earning assets.~~

~~(2)~~

The average yield does not include the federal tax benefits at an assumed effective yield of 25% related to income earned on tax-exempt municipal securities totaling $106,000 and $111,000 for the three months ended March 31, 2022, and 2021, respectively.

~~(3)~~

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

~~(4)~~

⁽¹⁾Excludes average unrealized (losses) gains of ($24.7) million and $.3 million for the three months ended June 30, 2022, and 2021, respectively, which are included in non-interest earning assets.

⁽²⁾The average yield does not include the federal tax benefits at an assumed effective yield of 26% related to income earned on tax-exempt municipal securities totaling $103,000 and $109,000 for the three months ended June 30, 2022, and 2021, respectively.

⁽³⁾Loan interest income includes loan fees of $3.3 million and $4.4 million for the three months ended June 30, 2022 and 2021, respectively.

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

	For the Six Months Ended June 30,
	2022								2021
(Dollars in thousands)	Average Balance			Interest Income / Expense		Average Yield / Rate			Average Balance			Interest Income / Expense		Average Yield / Rate
ASSETS
Interest earnings deposits in other banks and federal funds sold	$	721,656		$	1,775		0.50	%	$	501,105		$	267		0.11	%
Securities:⁽¹⁾
Taxable securities		1,056,670			9,695		1.84	%		836,501			7,498		1.79	%
Non-taxable securities⁽²⁾		49,164			793		3.23	%		54,442			839		3.08	%
Total investment securities		1,105,834			10,488		1.90	%		890,943			8,337		1.87	%
Loans:⁽³⁾
Real estate:
Commercial		1,155,271			26,649		4.65	%		985,307			25,347		5.19	%
Agricultural		691,128			16,208		4.73	%		630,592			14,583		4.66	%
Residential and home equity		359,656			6,840		3.84	%		336,691			6,333		3.79	%
Construction		198,626			4,580		4.65	%		191,638			4,147		4.36	%
Total real estate		2,404,681			54,277		4.55	%		2,144,228			50,410		4.74	%
Commercial & industrial		431,907			9,345		4.36	%		361,465			8,456		4.72	%
Agricultural		256,648			5,743		4.51	%		226,706			5,121		4.56	%
Commercial leases		92,844			2,793		6.07	%		102,205			2,772		5.47	%
Consumer and other		36,683			3,845		21.14	%		228,336			6,992		6.18	%
Total loans and leases		3,222,763			76,003		4.76	%		3,062,940			73,751		4.86	%
Non-marketable securities		15,549			523		6.78	%		13,892			402		5.84	%
Total interest earning assets		5,065,802			88,789		3.53	%		4,468,880			82,757		3.73	%
Allowance for credit losses		(61,232	)							(59,820	)
Non-interest earning assets		315,037								310,629
Total average assets	$	5,319,607							$	4,719,689

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits:
Demand	$	1,116,436			578		0.10	%	$	968,496			576		0.12	%
Savings and money market accounts		1,531,069			703		0.09	%		1,312,122			790		0.12	%
Certificates of deposit greater than $250,000		166,725			203		0.25	%		169,967			444		0.53	%
Certificates of deposit less than $250,000		221,487			192		0.17	%		243,583			461		0.38	%
Total interest bearing deposits		3,035,717			1,676		0.11	%		2,694,168			2,271		0.17	%
Short-term borrowings		1			-		0.00	%		2			-		0.00	%
Subordinated debentures		10,310			185		3.62	%		10,310			158		3.09	%
Total interest bearing liabilities		3,046,028			1,861		0.12	%		2,704,480			2,429		0.18	%
Non-interest bearing deposits		1,728,962								1,522,029
Total funding		4,774,990			1,861		0.08	%		4,226,509			2,429		0.12	%
Other non-interest bearing liabilities		80,413								61,662
Shareholders' equity		464,204								431,518
Total average liabilities and shareholders' equity	$	5,319,607							$	4,719,689

Net interest income				$	86,928							$	80,328
Interest rate spread							3.41	%							3.55	%
Net interest margin⁽⁴⁾							3.46	%							3.62	%

⁽¹⁾Excludes average unrealized (losses) gains of ($15.9) million and $7.1 million for the six months ended June 30, 2022, and 2021, respectively, which are included in non-interest earning assets.

⁽²⁾The average yield does not include the federal tax benefits at an assumed effective yield of 26% related to income earned on tax-exempt municipal securities totaling $210,000 and $220,000 for the six months ended June 30, 2022, and 2021, respectively.

⁽³⁾Loan interest income includes loan fees of $7.2 million and $9.6 million for the six months ended June 30, 2022 and 2021, respectively.

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

Second Quarter 2022 vs. Second Quarter 2021

Interest-bearing deposits with banks and Federal Reserve balances ~~are additional earning assets available to the Company.~~ ~~Average interest-bearing deposits with banks~~ consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of ~~0.20%~~0.83% and ~~0.10% for~~0.11% during the ~~three months ended March 31,~~second quarter of 2022 and 2021, respectively. Average interest-bearing deposits ~~was $760~~with banks were $684 million and ~~$410~~$591 million for the ~~three months ended March 31,~~quarter June 30, 2022 and 2021, respectively. Interest income on interest-bearing deposits with banks was ~~$0.4~~$1.4 million and ~~$0.1~~$0.2 million for the ~~three months~~quarter ended ~~March 31,~~June 30, 2022 and 2021, respectively.

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

~~Average total~~Total investment securities ~~were~~averaged $1.1 billion and ~~$890~~$893 million for the ~~three months~~quarter ended ~~March 31,~~June 30, 2022 and 2021, respectively. The average yield on total investment securities ~~were 1.89%~~was 1.94% and ~~1.93%~~1.84% for the ~~three months~~quarter ended ~~March 31,~~June 30, 2022 and 2021, respectively. See “Investment Securities and Federal Reserve balances” for a discussion of the Company’s investment strategy in 2022.

~~Average loans~~Loans and leases held for investment ~~were~~averaged $3.2 billion and $3.1 billion for the ~~three months~~quarter ended ~~March 31,~~June 30, 2022 and 2021, respectively. The yield on the loan & lease portfolio was ~~4.75%~~4.76% and ~~4.92%~~4.80% for the ~~three months~~quarter ended ~~March 31,~~June 30, 2022 and 2021, respectively. The Company continues to experience aggressive competitor pricing for loans and leases to which it may need to respond in order to retain key customers. This could continue to place negative pressure on future loan & lease yields and net interest margin.

Interest-bearing liabilities averaged $3.1 billion and $2.7 billion for the quarter ended June 30, 2022 and 2021, respectively. Total interest expense on interest-bearing deposits was $0.9 million, $1.0 million for the quarter ended June 30, 2022 and 2021, respectively. The average rate paid on interest-bearing liabilities was 0.13% and 0.16% for the quarter ended June 30, 2022 and 2021, respectively. As a result of recent increases in short-term market interest rates, the Company is experiencing more aggressive competitor rates on interest bearing deposits, which it may need to meet in order to retain key customers. This could place negative pressure on future deposit rates and net interest margin.

Six Months Ended June 30, 2022 vs. Six Months Ended June 30, 2021

Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 0.50% and 0.11% for the first six months ended June 30, 2022 and 2021, respectively. Average interest-bearing deposits were $722 million and $501 million for the six months ended June 30, 2022 and 2021, respectively. Interest income on interest-bearing deposits with banks was $1.8 million and $0.3 million for the six months ended June 30, 2022 and 2021, respectively.

Average total investment securities were $1.1 billion and $891 million for the six months ended June 30, 2022 and 2021, respectively. The average yield on total investment securities were 1.90% and 1.87% for the six months ended June 30, 2022 and 2021, respectively. See “Investment Securities and Federal Reserve balances” for a discussion of the Company’s investment strategy in 2022.

Average loans and leases held for investment were $3.2 billion and $3.1 billion for the six months ended June 30, 2022 and 2021, respectively. The yield on the loan & lease portfolio was 4.76% and 4.86% for the six months ended June 30, 2022 and 2021, respectively.

Average interest-bearing liabilities were $3.0 billion and $2.7 billion for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021, respectively. Total interest expense on interest-bearing deposits was ~~$0.8~~$1.7 million, ~~$1.2~~$2.3 million for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021, respectively. The average rate paid on interest-bearing liabilities was 0.12% and ~~0.20%~~0.18% for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021, respectively. ~~The decline was primarily the result of the FRB lowering rates to near zero due to the pandemic.~~

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

	Three Months Ended March 31, 2022 compared with 2021									Three Months Ended June 30, 2022 compared with 2021									Six Months Ended June 30, 2022 compared with 2021
	Increase (Decrease) Due to:									Increase (Decrease) Due to:									Increase (Decrease) Due to:
(Dollars in thousands)	Volume			Rate			Net			Volume			Rate			Net			Volume			Rate			Net
Interest income:
Interest earnings deposits in other banks and federal funds sold	$	127		$	136		$	263		$	30		$	1,215		$	1,245		$	164		$	1,344		$	1,508
Securities:
Taxable securities		1,174			(390	)		784			1,165			248			1,413			2,016			181			2,197
Non-taxable securities		(119	)		98			(21	)		(123	)		98			(25	)		(137	)		91			(46	)
Total securities		1,055			(292	)		763			1,042			346			1,388			1,879			272			2,151
Loans:
Real estate:
Commercial		2,146			153			2,299			5,108			(4,105	)		1,003			7,420			(6,118	)		1,302
Agricultural		477			180			657			946			22			968			1,417			208			1,625
Residential and home equity		1,499			(2,769	)		(1,270	)		1,325			(1,448	)		(123	)		436			71			507
Construction		(18	)		(7	)		(25	)		183			175			358			155			278			433
Total real estate		4,105			(2,444	)		1,661			7,562			(5,356	)		2,206			9,428			(5,561	)		3,867
Commercial & industrial		664			24			688			3,275			(3,074	)		201			2,491			(1,602	)		889
Agricultural		525			(334	)		191			424			7			431			762			(140	)		622
Commercial leases		(507	)		579			72			(559	)		508			(51	)		(547	)		568			21
Consumer and other		(16,806	)		14,540			(2,266	)		(17,178	)		16,297			(881	)		(18,389	)		15,242			(3,147	)
Total loans		(12,020	)		12,366			346			(6,477	)		8,383			1,906			(6,257	)		8,509			2,252
Non-marketable securities		48			67			115			10			(4	)		6			51			70			121
Total interest income		(10,790	)		12,277			1,487			(5,395	)		9,940			4,545			(4,162	)		10,194			6,032

Interest expense:
Interest-bearing deposits:
Interest bearing deposits:
Demand		239			(274	)		(35	)		35			2			37			164			(162	)		2
Savings and money market accounts		349			(425	)		(76	)		235			(246	)		(11	)		276			(363	)		(87	)
Certificates of deposit greater than $250,000		(6	)		(153	)		(159	)		(3	)		(79	)		(82	)		(8	)		(233	)		(241	)
Certificates of deposit less than $250,000		(24	)		(140	)		(164	)		(15	)		(90	)		(105	)		(39	)		(230	)		(269	)
Total interest bearing deposits		558			(992	)		(434	)		252			(413	)		(161	)		393			(988	)		(595	)
Short-term borrowings											-			-			-			-			-			-
Subordinated debentures		-			3			3			-			24			24			-			27			27
Total interest expense		558			(989	)		(431	)		252			(389	)		(137	)		393			(961	)		(568	)
Net interest income	$	(11,348	)	$	13,266		$	1,918		$	(5,647	)	$	10,329		$	4,682		$	(4,556	)	$	11,156		$	6,600

Net interest income ~~was $42.2~~increased by $6.6 million, ~~and $40.3~~or 8.22% to $86.9 million for the ~~three~~six months ended ~~March 31,~~June 30, 2022 ~~and 2021, respectively.~~compared to $40.0 million for the same quarter one year earlier. The increase in net interest income was driven by primarily by strong deposit growth, which we were able to partially deploy into growing our loan portfolio. The remaining increase in deposits was held in ~~interest earning deposits~~Fed Funds sold and investment securities.

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

	Three Months Ended March 31,										Three Months Ended June 30,										Six Months Ended June 30,
(Dollars in thousands)	2022		2021		$ Better / (Worse)			% Better / (Worse)			2022		2021		$ Better / (Worse)			% Better / (Worse)			2022		2021		$ Better / (Worse)			% Better / (Worse)
Selected Income Statement Information:
Interest income	$	43,094	$	41,607	$	1,487			3.57	%	$	45,695	$	41,150	$	4,545			11.04	%	$	88,789	$	82,757	$	6,032			7.29	%
Interest expense		885		1,316		431			32.75	%		976		1,113		137			12.31	%		1,861		2,429		568			23.38	%
Net interest income		42,209		40,291		1,918			4.76	%		44,719		40,037		4,682			11.69	%		86,928		80,328		6,600			8.22	%
Provision for credit losses		-		1,250		1,250			100.00	%		1,500		-		(1,500	)		0.00	%		1,500		1,250		(250	)		(20.00	%)
Net interest income after provision for credit losses		42,209		39,041		3,168			8.11	%		43,219		40,037		3,182			7.95	%		85,428		79,078		6,350			8.03	%
Non-interest income		4,312		9,535		(5,223	)		-54.78	%		3,512		4,959		(1,447	)		(29.18	%)		7,824		11,675		(3,851	)		(32.99	%)
Non-interest expense		23,788		26,363		2,575			9.77	%		23,031		23,603		572			2.42	%		46,819		47,147		328			0.70	%
Income before income tax expense		22,733		22,213		520			2.34	%		23,700		21,393		2,307			10.78	%		46,433		43,606		2,827			6.48	%
Income tax expense		5,675		5,500		(175	)		-3.18	%		5,257		5,240		(17	)		(0.32	%)		10,932		10,740		(192	)		(1.79	%)
Net income	$	17,058	$	16,713	$	345			2.06	%	$	18,443	$	16,153	$	2,290			14.18	%	$	35,501	$	32,866	$	2,635			8.02	%

Net Income. For the three and six months ended ~~March 31,~~June 30, 2022, ~~and 2021,~~Farmers & Merchants Bancorp reported net income of $18.4 million and $35.5 million, earnings per share of $23.58 and $45.28 and return on average assets of 1.38% and 1.33%, respectively. Return on average shareholders’ equity was ~~$17.1 million compared with $16.7 million, respectively. The increase in~~15.94% and 15.30% for the three and six months ended June 30, 2022.

For the three and six months ended June 30, 2021, Farmers & Merchants Bancorp reported net income ~~was primarily the result~~ of ~~higher net interest income of $1.9 million, lower non-interest expense of $2.6~~$16.2 million and ~~lower provision~~$32.9 million, earnings per share of $20.45 and $41.62 and return on average assets of 1.34% and 1.39%, respectively. Return on average shareholders’ equity was 14.91% and 15.23% for ~~credit losses of $1.3 million. These increases were offset by lower non-interest income of $5.2 million~~the three and ~~higher income tax expense of $0.2 million.~~six months ended June 30, 2021.

Net Interest Income and Net Interest Margin. For the ~~three months~~quarter ended ~~March 31,~~June 30, 2022, net interest income increased ~~$1.9~~$4.7 million, or ~~4.8%~~11.7%, to ~~$42.2~~$44.7 million compared with ~~$40.3~~$40.0 million for the same ~~period~~quarter a year earlier. The increase is primarily the result of average interest earning assets increasing ~~$679~~$522 million, or ~~14.7%~~11.4% to ~~$5.3~~$5.1 billion compared with $4.6 billion for the same period a year earlier. ~~Higher interest earning assets was driven by strong growth in the Company’s total deposits.~~ Total deposits grew ~~$623~~$475 million, or ~~15.11%~~12.31%, to ~~$4.7~~$4.8 billion compared with ~~$4.2~~$4.3 billion for the same a year ago. ~~The strong growth in the Company’s balance sheet was offset by narrowing net interest margins.~~ Net interest margins ~~narrowed 35~~increased slightly by 1 basis ~~points~~point to ~~3.39%~~3.53% for ~~all of~~the quarter ended June 30, 2022, compared with ~~3.74%~~3.52% for the same period a year earlier. ~~Narrow~~

Net interest income for the six months ended June 30, 2022 increased by $6.6 million, or 8.22%, to $86.9 million, compared to $80.3 million at June 30, 2001. The increase in net interest ~~margins~~income was primarily due to a $597 million increase in average earning assets offset by a 16 basis point decrease in the ~~result~~net interest margin. For the six months ended June 30, 2022, the Company’s net interest margin was 3.46% compared to 3.62% for the same period in 2021. This decrease in net interest margin was due primarily to a decrease of 20 basis points in the ~~FRB lowering interest rates to near zero over~~yield received on earning assets offset somewhat by a 6 basis point decrease in the ~~past two years.~~cost of interest-bearing liabilities.

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

The Company ~~did not record any~~made a $1.5 million provision for credit losses ~~for~~during the ~~three months ended March 31,~~first half of 2022 compared ~~with~~to $1.3 million ~~for~~during the ~~same period a year ago. For~~first half of 2021. Net charge-offs during the ~~three months ended March 31,~~first half of 2022 ~~the Company incurred~~were $34,000 compared to net recoveries of ~~$25,000 compared with net recoveries~~$117,000 in the first half of ~~$63,000 for the same period a year earlier.~~2021.

Non-interest Income. Non-interest income decreased ~~$5.2~~$1.4 million, or ~~54.8%~~29.2%, to ~~$4.3~~$3.5 million for the ~~three months~~quarter ended ~~March 31,~~June 30, 2022 compared with ~~$9.5~~$5.0 million for the same period a year earlier. ~~The year-over-year~~This decrease in non-interest income was primarily due to a ~~$3.1~~$1.5 million decline in gains/(losses) loss on deferred compensation investments and ~~$1.8~~a $0.7 million reduction in gain on sale of investment securities recorded in the first quarter of 2021. This decrease in non-interest income was partially off-set by an increase of $.4 million in other investment income.

The Company recorded net ~~gains~~losses on deferred compensation plan investments of ~~$0.4~~$1 million for the ~~three months~~quarter ended ~~March 31,~~June 30, 2022 compared with net gains of ~~$3.5~~$0.5 million for the same respective period. See Note 12, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2021 Form 10-K filed on March 15, 2022 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP ~~require~~requires these investment gains/losses to be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no net-effect on the Company’s net income.

Non-interest income decreased $3.9 million, or 33%, to $7.8 million for the six months ended June 30, 2022 compared with $11.7 million for the same period of 2021. The year-over-year decrease in non-interest income was primarily due to a $1.8 million reduction in gain on sale of investment securities recorded in the first quarter of 2021and a $2.5 million decline in gains/(losses) on deferred compensation plan investments. These reductions were primarily off-set by a $0.4 million increase in services charges received on deposit accounts. The Company recorded net losses on deferred compensation plan investments of $0.6 million for the six months ended June 30, 2022 compared with net gains of $1.2 million for the same respective period. See Note 12, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2021 Form 10-K filed on March 15, 2022 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these investment gains/losses to be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no net-effect on the Company’s net income.

Non-interest Expense. Non-interest expense decreased ~~$2.6~~$0.6 million, or ~~9.8%~~2.4%, to ~~$23.8~~$23 million for the quarter ended June 30, 2022 compared with ~~$26.4~~$23.6 million for the same period a year ago. ~~The year-over-year~~This decrease was primarily due to the ~~$3.1~~$1.5 million ~~change~~decline in gains/(losses) on deferred compensation ~~obligations.~~

plan investments. This decrease was partially off-set by a $0.5 million increase in outside professional fees, a $0.2 million increase in salaries and employee benefits and a $0.1 million increase in legal expenses. The Company recorded net ~~gains~~losses on deferred compensation plan ~~obligations~~investments of ~~$0.4~~$1.0 million for the ~~three months~~quarter ended ~~March 31,~~June 30, 2022 compared with net gains of ~~$3.5~~$0.5 million for the same respective period. See Note 12, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2021 Form 10-K filed on March 15, 2022 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires gains/(losses) on deferred compensation ~~obligations~~plan investments to be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no net-effect on the Company’s net income.

Non-interest expense decreased $.3 million, or 0.7%, to $46.8 million for the six months ended June 30, 2022 compared with $47.1 million for the same period a year ago. This decrease was primarily due to the $1.8 million decline in gains/(losses) on deferred compensation plan investments. This decrease was off-set by a $0.4 million increase in accounting expenses, a $0.3 million increase in legal expenses and a $0.3 million increase in employee salaries and benefits. The Company recorded net losses on deferred compensation plan investments of $0.6 million for the six months ended June 30, 2022 compared with net gains of $1.2 million for the same period of 2021. See Note 12, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2021 Form 10-K filed on March 15, 2022 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices.

Although GAAP requires gains/(losses) on deferred compensation plan investments to be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no net-effect on the Company’s net income.

Income Tax Expense. ~~For~~The Bank’s provision for income taxes increased 1.79% to $10.9 million for the ~~three~~first six months ~~ended March 31,~~of 2022 ~~income~~compared to the first six months of 2021. The Company’s effective tax ~~expense~~rate for the first six months of 2022 was ~~$5.7 million,~~23.54% compared ~~with $5.5 million~~to 24.63% for the same period ~~a year earlier. For the three months ended March 31, 2022, the~~in 2021. The Company’s effective tax rate ~~was 24.96% compared~~can fluctuate from quarter to quarter due primarily to changes in the mix of taxable and tax-exempt earning sources. The effective rates were lower than the combined Federal and State statutory rate of 30% due primarily to benefits regarding the cash surrender value of life insurance; credits associated with ~~24.76% for the same period a year ago.~~low income housing tax credit investments (LIHTC); and tax-exempt interest income on municipal securities and loans.

Financial Condition

Total assets grew ~~$246~~$149 million, or ~~4.76%~~2.88%, to ~~$5.4~~$5.3 billion at ~~March 31,~~June 30, 2022 compared with $5.2 billion at December 31, 2021. Loans held for investment ~~remained flat at~~were $3.2 billion at ~~both March 31,~~June 30, 2022, ~~and~~an increase of $12.7 million, or .39% compared to December 31, 2021. Total deposits grew ~~$197~~$129 million, or ~~4.25%~~2.8%, to $4.8 billion at ~~March 31,~~June 30, 2022 compared with $4.6 billion at December 31, 2021. The increase in total assets and deposits was primarily the result of continued strong organic deposit growth.

Investment Securities and Federal Reserve Balances

The Company’s investment portfolio increased ~~$120~~$86 million, or ~~11.92%~~8.56%, to $1.1 billion at ~~March 31,~~June 30, 2022 compared to $1.0 billion at December 31, 2021. The Company uses its investment portfolio to manage interest rate and liquidity risks. Accordingly, when market rates are increasing it invests most of its funds in shorter-term Treasury and Agency securities or shorter-term (10, 15 and 20 year) mortgage-backed securities. Conversely, when rates are falling, 30-year mortgage-backed securities or longer term Treasury and Agency securities may be increased. The ~~Company’s~~Company's total investment portfolio currently represents ~~20.79%~~20.53% of the Company’s total assets at ~~March 31,~~June 30, 2022 as compared with 19.46% at December 31, 2021.

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

The FRB currently pays interest on the deposits that banks maintain in their FRB accounts, whereas historically banks had to sell these Federal Funds to other banks in order to earn interest. Since balances at the FRB are effectively risk free, the Company elected to maintain its excess cash at the FRB. Interest bearing deposits with banks totaled ~~$772~~$681 million at ~~March 31,~~June 30, 2022 and $663 million at December 31, 2021.

The Company classifies its investment securities as either held-to-maturity (“HTM”) or available-for-sale (“AFS”). Securities are classified as held-to-maturity and are carried at amortized cost when the Company has the intent and ability to hold the securities to maturity. Securities classified as AFS include securities, which may be sold to effectively manage interest rate risk exposure, prepayment risk, satisfy liquidity demands and other factors. These securities are reported at fair value with aggregate, unrealized gains or losses excluded from income and included as a separate component of shareholders’ equity, net of related income taxes. As of ~~March 31,~~June 30, 2022, we held no investment securities from any issuer that totaled over 10% of our shareholders’ equity.

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

(Dollars in thousands)	March 31, 2022		December 31, 2021		June 30, 2022		December 31, 2021
Available-for-Sale Securities
U.S. Treasury notes	$	9,996	$	10,089	$	4,952	$	10,089
U.S. Government-sponsored securities		5,789		6,374		5,441		6,374
Mortgage-backed securities⁽¹⁾		223,901		251,120		203,607		251,120
Collateralized mortgage obligations⁽¹⁾		1,544		2,436		1,502		2,436
Corporate securities		9,835		-		9,526		-
Other		310		435		310		435
Total available-for-sale securities	$	251,375	$	270,454	$	225,338	$	270,454

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

(Dollars in thousands)	March 31, 2022		December 31, 2021		June 30, 2022		December 31, 2021
Held-to-Maturity Securities
Mortgage-backed securities⁽¹⁾	$	695,249	$	596,775	$	721,510	$	596,775
Collateralized mortgage obligations⁽¹⁾		117,427		73,781		84,414		73,781
Municipal securities		63,581		66,496		62,459		66,496
Total held-to-maturity securities	$	876,257	$	737,052	$	868,383	$	737,052

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

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

Investment Securities	As of March 31, 2022
																										As of June 30, 2022
	Within One Year					After One but Within Five Years					After Five but Within Ten Years					After Ten Years					Total					Within One Year					After One but Within Five Years					After Five but Within Ten Years					After Ten Years					Total
(Dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities available-for-sale
U.S. Treasury notes	$	9,996		2.36	%	$	-		0.00	%	$	-		0.00	%	$	-		0.00	%	$	9,996		2.36	%	$	4,952		2.39	%	$	-		0.00	%	$	-		0.00	%	$	-		0.00	%	$	4,952		2.39	%
U.S. Government-sponsored securities		3		2.57	%		142		2.36	%		423		1.42	%		5,221		1.27	%		5,789		1.30	%		12		1.09	%		104		2.90	%		380		1.70	%		4,945		1.52	%		5,441		1.56	%
Mortgage-backed securities⁽¹⁾		1		1.39	%		26,319		2.31	%		37,271		2.40	%		160,310		1.67	%		223,901		1.83	%		-		0.00	%		24,553		2.36	%		34,650		2.40	%		144,403		1.72	%		203,607		1.91	%
Collateralized Mortgage Obligations⁽¹⁾		-		0.00	%		-		0.00	%		-		0.00	%		1,544		2.26	%		1,544		2.30	%
Collateralized mortgage obligations⁽¹⁾																											-		0.00	%		-		0.00	%		-		0.00	%		1,502		2.30	%		1,502		2.30	%
Corporate securities		-		0.00	%		4,932		0.68	%		4,903		0.81	%		-		0.00	%		9,835		0.00	%		-		0.00	%		4,738		0.78	%		4,788		0.90	%		-		0.00	%		9,526		0.84	%
Other		310		0.01	%		-		0.00	%		-		0.00	%		-		0.00	%		310		3.31	%		310		1.72	%		-		0.00	%		-		0.00	%		-		0.00	%		310		1.72	%
Total securities available-for-sale	$	10,310		2.29	%	$	31,393		2.05	%	$	42,597		2.21	%	$	167,075		1.66	%	$	251,375		1.77	%	$	5,273		2.35	%	$	29,395		2.10	%	$	39,818		2.21	%	$	150,851		1.72	%	$	225,338		1.87	%

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

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
%

$
15,820

0.72
%

$
679,429

1.80
%

$
695,249

1.70
%
Collateralized Mortgage Obligations⁽¹⁾

-

0.00
%

-

0.00
%

-

0.00
%

117,427

1.17
%

117,427

1.71
%
Municipal securities
908

1.41
%

7,118

2.20
%

16,690

3.34
%

38,865

1.22
%

63,581

3.90
%
Total securities held-to-maturity
$
908

1.41
%

$
7,118

2.20
%

$
32,510

2.06
%

$
835,721

1.68
%

$
876,257

1.86
%

	As of June 30, 2022
	Within One Year					After One but Within Five Years					After Five but Within Ten Years					After Ten Years					Total
(Dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities held-to-maturity
Mortgage-backed securities⁽¹⁾	$	-		0.00	%	$	-		0.00	%	$	14,693		7.90	%	$	706,817		1.87	%	$	721,510		1.85	%
Collateralized Mortgage Obligations⁽¹⁾		-		0.00	%		-		0.00	%		-		0.00	%		84,414		1.88	%		84,414		1.88	%
Municipal securities		700		1.51	%		7,089		2.81	%		15,948		3.40	%		38,723		2.38	%		62,460		2.68	%
Total securities held-to-maturity	$	700		1.51	%	$	7,089		2.81	%	$	30,641		2.06	%	$	829,954		1.90	%	$	868,383		1.91	%

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

Investment Securities	As of December 31, 2021
																										As of December 31, 2021
	Within One Year					After One but Within Five Years					After Five but Within Ten Years					After Ten Years					Total					Within One Year					After One but Within Five Years					After Five but Within Ten Years					After Ten Years					Total
(Dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities available for sale
Securities available-for-sale
U.S. Treasury notes	$	5,028		2.33	%	$	5,061		2.38	%	$	-		0.00	%	$	-		0.00	%	$	10,089		2.36	%	$	5,028		2.33	%	$	5,061		2.38	%	$	-		0.00	%	$	-		0.00	%	$	10,089		2.36	%
U.S. Government-sponsored securities		2		1.80	%		148		2.29	%		512		1.55	%		5,712		1.26	%		6,374		1.30	%		2		1.80	%		148		2.29	%		512		1.55	%		5,712		1.26	%		6,374		1.30	%
Mortgage-backed securities⁽¹⁾		13		1.50	%		21,155		2.36	%		50,554		2.36	%		179,398		1.61	%		251,120		1.83	%		13		1.50	%		21,155		2.36	%		50,554		2.36	%		179,398		1.61	%		251,120		1.83	%
Collateralized Mortgage Obligations⁽¹⁾		-		0.00	%		-		0.00	%		-		0.00	%		2,436		2.30	%		2,436		2.30	%
Collateralized mortgage obligations⁽¹⁾																											-		0.00	%		-		0.00	%		-		0.00	%		2,436		2.30	%		2,436		2.30	%
Municipal securities																											-		0.00	%		-		0.00	%		-		0.00	%		-		0.00	%		-		0.00	%
Corporate securities		-		0.00	%		-		0.00	%		-		0.00	%		-		0.00	%		-		0.00	%		-		0.00	%		-		0.00	%		-		0.00	%		-		0.00	%		-		0.00	%
Other		435		3.31	%		-		0.00	%		-		0.00	%		-		0.00	%		435		3.31	%		435		3.31	%		-		0.00	%		-		0.00	%		-		0.00	%		435		3.31	%
Total securities available for sale	$	5,478		2.41	%	$	26,364		2.36	%	$	51,066		2.35	%	$	187,546		1.61	%	$	270,454		1.84	%
Total securities available-for-sale																										$	5,478		2.41	%	$	26,364		2.36	%	$	51,066		2.35	%	$	187,546		1.61	%	$	270,454		1.84	%

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

																										As of December 31, 2021
	Within One Year					After One but Within Five Years					After Five but Within Ten Years					After Ten Years					Total					Within One Year					After One but Within Five Years					After Five but Within Ten Years					After Ten Years					Total
(Dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities held to maturity
Securities held-to-maturity
Mortgage-backed securities⁽¹⁾		-		0.00	%		-		0.00	%		10,641		0.41	%		586,134		1.72	%		596,775		1.70	%	$	-		0.00	%	$	-		0.00	%	$	10,641		0.41	%	$	586,134		1.72	%	$	596,775		1.70	%
Collateralized Mortgage Obligations⁽¹⁾		-		0.00	%		-		0.00	%		-		0.00	%		73,781		1.71	%		73,781		1.71	%		-		0.00	%		-		0.00	%		-		0.00	%		73,781		1.71	%		73,781		1.71	%
Municipal securities		308		1.10	%		8,487		2.19	%		18,433		3.42	%		39,268		4.52	%		66,496		3.90	%		308		1.10	%		8,487		2.19	%		18,433		3.42	%		39,268		4.52	%		66,496		3.90	%
Total securities held to maturity	$	308		1.10	%	$	8,487		2.19	%	$	29,074		2.32	%	$	699,183		1.88	%	$	737,052		1.90	%
Total securities held-to-maturity																										$	308		1.10	%	$	8,487		2.19	%	$	29,074		2.32	%	$	699,183		1.88	%	$	737,052		1.90	%

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

Expected maturities may differ from contractual maturities because issuers may have the right to call obligations with or without penalties. We evaluate 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 owner-occupied real estate, non-owner-occupied real estate, farmland, and multifamily residential properties. Commercial mortgage term loans can be made if the property is either income producing or scheduled to become income producing based upon acceptable pre-leasing, or the income will be the ~~Bank’s~~Bank's primary source of repayment for the loan. Loans are made both on owner occupied and investor properties; generally do not exceed 15 years (and may have pricing adjustments on a shorter timeframe); have debt service coverage ratios of 1.00 or better with a target of greater than 1.25; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.

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

Single Family Residential Real Estate – These are loans primarily made on owner occupied residences; generally underwritten to income and LTV guidelines similar to those used by FNMA and FHLMC. However, we will make loans on rural residential properties up to 40 acres. Most residential loans have terms from ten to twenty years and carry fixed rates priced to treasury rates. The Company has always underwritten mortgage loans based upon traditional underwriting criteria and does not make loans that are known in the industry as “subprime,” “no or low doc,” or “stated income” loans.

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

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

Commercial – These are non-real estate loans and lines of credit to businesses that are sole proprietorships, partnerships, LLC’s and corporations. Lines of credit are extended to finance the seasonal working capital needs of customers during peak business periods; are usually established for periods no longer than 12 to 24 months; are often secured by general filing liens on accounts receivable, inventory and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a plant or purchase of a business; have maturities from five to seven years; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.

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

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

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

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

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

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

Overall, the ~~Company’s~~Company's loan & lease portfolio at ~~March 31,~~June 30, 2022 totaled $3.2 billion, an increase of ~~$0.4~~$13 million over December 31, 2021. Exclusive of SBA PPP loans, the loan portfolio grew ~~$43.0~~$66 million, or ~~1.37%~~2.08%, over December 31, 2021. This increase in the non-PPP loans occurred as a result of: (1) the Company’s business development efforts directed toward credit-qualified borrowers; and (2) expansion of our service area into the East Bay of San Francisco and Napa. This data constitutes non-GAAP financial data. The Company believes that excluding the temporary effect of the PPP loans furnishes useful information regarding the Company’s growth.

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

	March 31, 2022					December 31, 2021					June 30, 2022					December 31, 2021

(Dollars in thousands)	Dollars		Percent of Total			Dollars		Percent of Total			Dollars		Percent of Total			Dollars		Percent of Total
Gross Loans and Leases
Real estate:
Commercial	$	1,172,804		36.12	%	$	1,167,516		35.95	%	$	1,210,195		37.14	%	$	1,167,516		35.95	%
Agricultural		695,565		21.42	%		672,830		20.72	%		709,624		21.78	%		672,830		20.72	%
Residential and home equity		359,214		11.06	%		350,581		10.79	%		371,874		11.41	%		350,581		10.79	%
Construction		204,794		6.31	%		177,163		5.45	%		162,713		4.99	%		177,163		5.45	%
Total real estate		2,432,377		74.91	%		2,368,090		72.91	%		2,454,406		75.32	%		2,368,090		72.91	%
Commercial		437,199		13.47	%		427,799		13.17	%
Commercial & industrial												439,455		13.49	%		427,799		13.17	%
Agricultural		251,469		7.75	%		276,684		8.52	%		261,856		8.04	%		276,684		8.52	%
Commercial leases		92,445		2.85	%		96,971		2.99	%		89,095		2.73	%		96,971		2.99	%
Consumer and other⁽¹⁾		33,255		1.02	%		78,367		2.41	%		13,588		0.42	%		78,367		2.41	%
Total gross loans and leases		3,246,745		100.00	%		3,247,911		100.00	%	$	3,258,400		100.00	%	$	3,247,911		100.00	%

⁽¹⁾ Includes SBA PPP loans.

The following table shows the maturity distribution and interest rate sensitivity of the loan portfolio of the Company as of ~~March 31,~~June 30, 2022.

	Loan Contractual Maturity										Loan Contractual Maturity
(Dollars in thousands)	One Year or Less		After One But Within Five Years		After Five Years But Within Fifteen Years		After Fifteen Years		Total		One Year or Less		After One But Within Five Years		After Five Years But Within Fifteen Years		After Fifteen Years		Total
Gross loan and leases:
Real estate:
Commercial	$	89,814	$	249,435	$	798,092	$	35,463	$	1,172,804	$	89,939	$	267,837	$	818,910	$	33,509	$	1,210,195
Agricultural		41,641		153,198		429,832		70,894		695,565		34,682		154,188		447,414		73,340		709,624
Residential and home equity		197		3,371		117,347		238,299		359,214		120		4,023		118,208		249,523		371,874
Construction		140,600		63,397		797		-		204,794		115,397		47,316		-		-		162,713
Total real estate		272,252		469,401		1,346,068		344,656		2,432,377		240,138		473,364		1,384,532		356,372		2,454,406
Commercial & Industrial		153,153		238,138		39,932		5,976		437,199
Commercial & industrial												163,698		222,395		47,140		6,222		439,455
Agricultural		153,586		85,412		12,471		-		251,469		160,447		86,559		14,850		-		261,856
Commercial leases		6,743		33,387		52,315		-		92,445		6,870		31,772		50,453		-		89,095
Consumer and other⁽¹⁾		1,233		29,970		2,052		-		33,255		952		10,766		1,870		-		13,588
Total gross loans and leases	$	586,967	$	856,308	$	1,452,838	$	350,632	$	3,246,745	$	572,105	$	824,856	$	1,498,845	$	362,594	$	3,258,400
Rate Structure for Loans
Fixed Rate	$	112,960	$	370,873	$	1,130,743	$	234,582	$	1,849,158	$	481,614	$	492,971	$	396,902	$	123,043	$	1,494,530
Adjustable Rate		474,007		485,435		322,095		116,050		1,397,587		90,491		331,885		1,101,943		239,551		1,763,870
Total gross loans and leases	$	586,967	$	856,308	$	1,452,838	$	350,632	$	3,246,745	$	572,105	$	824,856	$	1,498,845	$	362,594	$	3,258,400

⁽¹⁾ Includes SBA PPP loans.

Non-Accrual Loans and Leases - Accrual of interest on loans and leases is generally discontinued when a loan or lease becomes contractually past due by 90 days or more with respect to interest or principal. When loans and leases are 90 days past due, but in ~~management’s~~management's judgment are well secured and in the process of collection, they may not be classified as non-accrual. When a loan or lease is placed on non-accrual status, all interest previously accrued but not collected is reversed. Income on such loans and leases is then recognized only to the extent that cash is received and where the future collection of principal is probable. Non-accrual loans and leases totaled ~~$437,000~~$3.0 million and $516,000 at ~~March 31,~~June 30, 2022 and December 31, 2021, respectively.

Restructured Loans and Leases - A restructuring of a loan or lease constitutes a TDR under ASC 310-40, if the Company for economic or legal reasons related to the ~~debtor’s~~debtor's financial difficulties grants a concession to the borrower that it would not otherwise consider, except when subject to the CARES Act and H.R. 133. Restructured loans or leases typically present an elevated level of credit risk, as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans and leases that are on nonaccrual status at the time they become TDR loans or leases, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms. However, these loans or leases continue to be classified as collateral dependent and are individually evaluated for impairment.

At ~~March 31,~~June 30, 2022, restructured loans totaled ~~$1.6~~$1.4 million compared with $2.3 million at December 31, 2021, all of which were performing. See Note 4 “Loans and Leases” to the Unaudited Consolidated Financial Statements in “Item 1. Financial Statements” in this quarterly Report on Form 10-Q.

Other Real Estate Owned –OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower. We record all OREO properties at amounts equal to or less than the fair market value of the properties based on current independent appraisals reduced by estimated selling costs. The Company reported $873,000 of foreclosed OREO at ~~March 31,~~June 30, 2022, and at December 31, 2021.

Not included in the table below, but relevant to a discussion of asset quality are loans that were granted some form of relief because of COVID-19 and are not considered TDRs because of the CARES Act and H.R. 133. Since April 2020, we have restructured $278 million of loans under the CARES Act and H.R. 133 guidelines. At ~~March 31,~~June 30, 2022, all loans that were restructured as part of the CARES Act have returned to the contractual terms and conditions of the loans, without exception.

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

(Dollars in thousands)	March 31, 2022			December 31, 2021			June 30, 2022			December 31, 2021
Non-performing assets:
Non-accrual loans and leases, not TDRs
Real estate:
Commercial	$	437		$	-		$	1,674		$	-
Agricultural		-			18			475			18
Residential and home equity		-			-			-			-
Construction		-			-			-			-
Total real estate		437			18			2,149			18
Commercial & Industrial		-			-
Commercial & industrial								-			-
Agricultural		-			-			879			-
Commercial leases		-			-			-			-
Consumer and other		-			-			-			-
Subtotal		437			18			3,028			18
Non-accrual loans and leases, are TDRs
Real estate:
Commercial		-			-			-			-
Agricultural		-			498			-			498
Residential and home equity		-			-			-			-
Construction		-			-			-			-
Total real estate		-			498			-			498
Commercial & Industrial		-			-
Commercial & industrial								-			-
Agricultural		-			-			-			-
Commercial leases		-			-			-			-
Consumer and other		-			-			-			-
Subtotal		-			498			-			498
Total non-performing loans and leases	$	437		$	516		$	3,028		$	516
Other real estate owned (“OREO”)	$	873		$	873
Other real estate owned ("OREO")							$	873		$	873
Total non-performing assets	$	1,310		$	1,389		$	3,901		$	1,389
Performing TDRs	$	1,603		$	1,824		$	1,389		$	1,824

Selected ratios:
Non-performing loans to total loans		0.01	%		0.02	%		0.09	%		0.02	%
Non-performing assets to total assets		0.02	%		0.03	%		0.07	%		0.03	%

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

Except for non-performing loans and leases discussed above, the Company’s management is not aware of any loans and leases as of ~~March 31,~~June 30, 2022, for which known financial problems of the borrower would cause serious doubts as to the ability of these borrowers to materially comply with their present loan or lease repayment terms, or any known events that would result in the loan or lease being designated as non-performing at some future date. However:

The State of California experienced drought conditions from 2013 through most of 2016. After 2016, reasonable levels of rain and snow alleviated drought conditions in our primary service area, but the winters of 2020-2021 and 2021-2022 were once again dry. Despite this, the availability of water in our primary service area was not an issue for the 2021 growing season. However, the weather patterns over the past eight years further reinforce the fact that the long-term risks associated with the availability of water are significant.

While tremendous strides have been made in fighting the COVID-19 virus, particularly with the development of a vaccine, the ~~lingering~~ effects of COVID-19 are still with us, and it is impossible to predict the ultimate impact on classified and non-performing loans and leases (see Part I. ~~“Introduction - COVID-19 (Coronavirus) Disclosure”)~~Note 2).

Allowance for Credit Losses—Loans and Leases

The Company maintains an allowance for credit losses (“ACL”) on loans based on current expected credit losses as of the balance sheet date. The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan & lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of three primary components: specific reserves related to collateral dependent loans and leases; general reserves for current expected credit losses related to loans and leases that are not collateral dependent; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors. See “Summary of Critical Accounting Policies and Estimates - Allowance for Credit Losses—Loans.”

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

	Three Months Ended March 31,						Six Months Ended June 30,
(Dollars in thousands)	2022			2021			2022			2021
Allowance for credit losses:
Balance at beginning of year	$	61,007		$	58,862		$	61,007		$	58,862
Provision / (recapture) for credit losses		-			1,250			1,107			1,250
Charge-offs:
Real estate:
Commercial		-			-			-			-
Agricultural		-			-			-			-
Residential and home equity		-			-			-			-
Construction		-			-			-			-
Total real estate		-			-			-			-
Commercial & Industrial		-			-
Commercial & industrial								(276	)		-
Agricultural		-			-			-			-
Commercial leases		-			-			-			-
Consumer and other		(9	)		(8	)		(18	)		(16	)
Total charge-offs		(9	)		(8	)		(294	)		(16	)
Recoveries:
Real estate:
Commercial		-			-			-			-
Agricultural		-			-			-			-
Residential and home equity		14			32			119			70
Construction		-			-			-			-
Total real estate		14			32			119			70
Commercial & Industrial		16			29
Commercial & industrial								131			45
Agricultural		2			3			4			5
Commercial leases		-			-			-			-
Consumer and other		2			7			6			13
Total recoveries		34			71			260			133
Net recoveries / charge-offs		25			63			(34	)		117

Balance at end of year	$	61,032		$	60,175
Balance at end of period							$	62,080		$	60,229

Selected financial information:
Net loans held for investment	$	3,237,619		$	3,111,011
Gross loans held for investment							$	3,258,400		$	3,046,492
Average loans		3,196,841			3,059,972			3,222,763			3,062,940
Non-performing loans		437			493			3,028			548
Allowance for credit losses to non-performing loans		13966.13	%		12205.88	%		2050.20	%		10990.69	%
Net (recoveries)/charge-offs to average loans		0.00	%		0.00	%		0.00	%		0.00	%
Provision for credit losses to average loans		0.00	%		0.04	%		0.03	%		0.04	%
Allowance for credit losses to loans held for investment		1.89	%		1.93	%		1.91	%		1.98	%

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

	March 31, 2022					December 31, 2021					June 30, 2022					December 31, 2021
(Dollars in thousands)	Dollars		Percent of Total			Dollars		Percent of Total			Dollars		Percent of Total			Dollars		Percent of Total
Allowance for credit losses:
Real estate:
Commercial	$	17,920		36.12	%	$	28,536		35.95	%	$	17,879		37.14	%	$	28,536		35.95	%
Agricultural		14,591		21.42	%		9,613		20.72	%		16,837		21.78	%		9,613		20.72	%
Residential and home equity		6,759		11.06	%		2,847		10.79	%		6,874		11.41	%		2,847		10.79	%
Construction		3,777		6.31	%		1,456		5.45	%		2,876		4.99	%		1,456		5.45	%
Total real estate		43,047		74.91	%		42,452		72.91	%		44,466		75.32	%		42,452		72.91	%
Commercial & Industrial		10,361		13.47	%		11,489		13.17	%		10,139		13.49	%		11,489		13.17	%
Agricultural		5,737		7.75	%		5,465		8.52	%		5,669		8.04	%		5,465		8.52	%
Commercial leases		1,466		2.85	%		938		2.99	%		1,645		2.73	%		938		2.99	%
Consumer and other		421		1.02	%		663		2.41	%		161		0.42	%		663		2.41	%
Total allowance for credit losses	$	61,032		100.00	%	$	61,007		100.00	%	$	62,080		100.00	%	$	61,007		100.00	%

Deposits

Total deposits were ~~$4.84~~$4.8 billion and $4.64 billion as of ~~March 31,~~June 30, 2022 and December 31, 2021, respectively. In addition to the Company’s ongoing business development activities for deposits, in management’s opinion the following factors positively impacted year-over-year deposit growth: (1) the Company’s strong financial results and position and F&M Bank’s reputation as one of the most safe and sound banks in its market area; and (2) the Company’s expansion of its service area into Walnut Creek, Oakland, Concord and ~~Napa; and (3) borrowers under the SBA PPP depositing loan proceeds into their deposit accounts with the Bank until those funds are used for operating expenses.~~Napa.

Non-interest bearing demand deposits increased ~~to $1.76~~slightly by $0.3 million and were $1.75 billion ~~or 36.48%~~as of June 30, 2022 and December 31, 2021. Non-interest bearing deposits were 36.77% of total deposits, as of ~~March 31,~~June 30, 2022 ~~from $1.75 billion, or~~and 37.72% ~~of total deposits,~~ as of December 31, 2021. Interest bearing deposits are comprised of interest-bearing transaction accounts, money market accounts, regular savings accounts, and certificates of deposit.

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

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

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

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

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

	Three Months Ended March 31,														Six Months Ended June 30,
	2022							2021							2022							2021
(Dollars in thousands)	Average Balance		Interest Expense		Average Rate			Average Balance		Interest Expense		Average Rate			Average Balance		Interest Expense		Average Rate			Average Balance		Interest Expense		Average Rate
Total deposits:
Interest-bearing deposits:
Interest bearing deposits:
Demand	$	1,115,578		259		0.09	%	$	943,635		294		0.13	%	$	1,116,436		578		0.10	%	$	968,496	$	576		0.12	%
Savings and Money Market		1,517,234		342		0.09	%		1,291,214		418		0.13	%
Savings and money market																1,531,069		703		0.09	%		1,312,122		790		0.12	%
Certificates of deposit greater than $250,000		167,515		97		0.23	%		171,501		256		0.61	%		166,725		203		0.25	%		169,967		444		0.53	%
Certificates of deposit less than $250,000		223,842		105		0.19	%		247,416		269		0.44	%		221,487		192		0.17	%		243,583		461		0.38	%
Total interest bearing deposits		3,024,169		803		0.11	%		2,653,766		1,237		0.19	%
Total interest-bearing deposits																3,035,717		1,676		0.11	%		2,694,168		2,271		0.17	%
Non-interest bearing deposits		1,722,597							1,469,741							1,728,962							1,522,029
Total deposits	$	4,746,766	$	803		0.07	%	$	4,123,507	$	1,237		0.12	%	$	4,764,679	$	1,676		0.07	%	$	4,216,197	$	2,271		0.11	%

Deposits are gathered from individuals and businesses in our market areas. The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements. We will continue to manage interest expense through deposit pricing. The average cost of deposits, including non-interest bearing deposits, declined to 0.07% for the ~~three~~six months ended ~~March~~June 2022 compared with ~~0.12%~~0.11% for the same period a year ~~ago, as overall interest rates were lowered to near zero by the Federal Reserve.~~ago.

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

	March 31,		December 31,		June 30,		December 31,
(Dollars in thousands)	2022		2021		2022		2021
Deposits greater than $250,000	$	2,860,003	$	2,708,576	$	2,817,460	$	2,708,576
Certificates of deposit greater $250,000, by maturity:
Less than 3 months		48,962		59,591		58,135		59,591
3 months to 6 months		48,130		37,182		46,841		37,182
6 months to 12 months		61,890		59,945		50,299		59,945
More than 12 months		9,881		12,147		6,965		12,147
Total Time Deposits greater than $250,000	$	168,863	$	168,865
Total time deposits greater than $250,000					$	162,240	$	168,865
Total deposits greater than $250,000	$	3,028,866	$	2,877,441	$	2,979,700	$	2,877,441

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

The Bank participates in a program wherein the State of California places time deposits with the Bank at the Bank’s option. At ~~March 31,~~June 30, 2022 and December 31, 2021, the Bank had $3.0 million, of these deposits.

Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings

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

Long-Term Subordinated Debentures

On December 17, 2003, the Company raised $10.0 million through the sale of subordinated debentures to an off-balance sheet trust and its sale of trust-preferred securities. See Note 10. “Long-Term Subordinated Debentures” located in “Item 8. Financial Statements and Supplementary Data” in our Annual Report on Form 10-K filed with the SEC on March 15, 2022. Although this amount is reflected as subordinated debt on the Company’s balance sheet, under current regulatory guidelines, our Trust Preferred Securities will continue to qualify as regulatory capital.

These securities accrue interest at a variable rate based upon 3-month LIBOR plus 2.85%. Interest rates reset quarterly (the next reset is ~~June~~September 17, 2022) and the rate was ~~3.77%~~4.88% as of ~~March 31, 2022.~~June 30, 2022 and 2.97% at June 30, 2021. The average rate paid for these securities was ~~3.23% in~~3.62% for the first half of 2022 and ~~3.11%~~3.09% for the first half of in 2021. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on the Company’s common stock.

Capital Resources

The Company relies primarily on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to insure depositor protection. Shareholders’ Equity totaled ~~$465~~$461 million at ~~March 31,~~June 30, 2022, and $463 million at December 31, 2021.

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

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

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

(Dollars in thousands)
Basel III
Regulatory Well
Capitalized
Requirement
March 31, 2022 December 31, 2021
Farmers & Merchants Bancorp
CET1 capital to risk-weighted assets
N/A

11.63
%

11.68
%
Tier 1 capital to risk-weighted assets
N/A

11.88
%

11.94
%
Risk-based capital to risk-weighted assets
N/A

13.14
%

13.19
%
Tier 1 leverage capital ratio
N/A

8.45
%

8.92
%

Farmers & Merchants Bank
CET1 capital to risk-weighted assets
6.50
%

11.87
%

11.91
%
Tier 1 capital to risk-weighted assets
8.00
%

11.87
%

11.91
%
Risk-based capital to risk-weighted assets
10.00
%

13.12
%

13.17
%
Tier 1 leverage capital ratio
5.00
%

8.94
%

8.91
%

~~FMB met the definition of a “well-capitalized” institution as of March 31, 2022 and December 31, 2021 for federal regulatory purposes.~~

(Dollars in thousands)	Minimum to be Categorized as "Well Capitalized"			Minimum to be Categorized as "Adequately Capitalized"			June 30, 2022			December 31, 2021
Farmers & Merchants Bancorp
CET1 capital to risk-weighted assets		N/A			4.50	%		11.55	%		11.68	%
Tier 1 capital to risk-weighted assets		N/A			6.00	%		11.80	%		11.94	%
Risk-based capital to risk-weighted assets		N/A			8.00	%		13.05	%		13.19	%
Tier 1 leverage capital ratio		N/A			4.00	%		8.94	%		8.92	%

Farmers & Merchants Bank
CET1 capital to risk-weighted assets		6.50	%		4.50	%		11.72	%		11.91	%
Tier 1 capital to risk-weighted assets		8.00	%		6.00	%		11.72	%		11.91	%
Risk-based capital to risk-weighted assets		10.00	%		8.00	%		12.97	%		13.17	%
Tier 1 leverage capital ratio		5.00	%		4.00	%		8.89	%		8.91	%

Off-Balance-Sheet Arrangements

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

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

			Amount of Commitment Expiration per Period										Amount of Commitment Expiration per Period
(Dollars in thousands)	Total Committed Amount		Less than One Year		One to Three Years		Three to Five Years		After Five Years		Total Committed Amount		Less than One Year		One to Three Years		Three to Five Years		After Five Years
Off-balance sheet commitments
Commitments to extend credit	$	987,423	$	387,129	$	436,860	$	19,049	$	144,385	$	995,795	$	402,558	$	410,901	$	27,166	$	155,170
Standby letters of credit		16,250		6,964		6,040		2,970		276		16,484		7,076		7,662		1,470		276
Performance guarantees		191		71		25		2		93
Total off-balance sheet commitments	$	1,003,864	$	394,164	$	442,925	$	22,021	$	144,754	$	1,012,279	$	409,634	$	418,563	$	28,636	$	155,446

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

Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third-party. Most standby letters of credit have maturity dates ranging from 1 to 60 months with final expiration in January 2027. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Liquidity

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

	March 31, 2022										June 30, 2022
(Dollars in thousands)	Total Credit Line Limit		Current Credit Line Available		Outstanding Amount		Remaining Credit Line Available		Value of Collateral Pledged		Total Credit Line Limit		Current Credit Line Available		Outstanding Amount		Remaining Credit Line Available		Value of Collateral Pledged
Additional liquidity sources:
Federal Home Loan Bank	$	815,060	$	815,060	$	-	$	815,060	$	1,154,080	$	796,368	$	796,368	$	-	$	796,368	$	1,169,949
Federal Reserve BIC	$	664,437	$	664,437	$	-	$	664,437	$	860,206		656,756		656,756		-		656,756		869,376
FHLB Fed Funds	$	18,000	$	18,000	$	-	$	18,000	$	-		18,000		18,000		-		18,000		-
US Bank Fed Funds	$	35,000	$	35,000	$	-	$	35,000	$	-		35,000		35,000		-		35,000		-
MUFG Union Bank Fed Funds	$	15,000	$	15,000	$	-	$	15,000	$	-		15,000		15,000		-		15,000		-
PCBB Fed Funds	$	50,000	$	50,000	$	-	$	50,000	$	-		50,000		50,000		-		50,000		-
Total additional liquidity sources	$	1,597,497	$	1,597,497	$	-	$	1,597,497	$	2,014,286	$	1,571,124	$	1,571,124	$	-	$	1,571,124	$	2,039,325

We believe our liquid assets and short-term borrowing credit lines are adequate to meet our cash flow needs for loan funding and deposit cash withdrawal for the ~~next 60 to 90 days.~~foreseeable future. As of ~~March 31,~~June 30, 2022, we had ~~$1.4~~$1.3 billion in cash and unencumbered investment securities; ~~$2.7~~$2.5 million in investment securities and $2.0 billion in loans pledged as collateral on short-term borrowing credit lines. We have the option of either borrowing on our credit lines or selling these investment securities for cash flow needs.

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

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

Our liquidity is comprised of three primary classifications: cash flows from or used in operating activities; cash flows from or used in investing activities; and cash flows from or used in financing activities. Net cash provided by or used in operating activities has consisted primarily of net income adjusted for certain non-cash income and expense items such as the credit loss provision, investment and other amortization and depreciation.

Our primary investing activities are the origination of ~~real estate, commercial & industrial, consumer~~ loans and purchases and sales of investment securities. As of ~~March 31,~~June 30, 2022, we had outstanding loan commitments of ~~$987~~$996 million and outstanding letters of credit of ~~$16.3~~$16.5 million. We anticipate that we will have sufficient funds available to meet current loan commitments.

Net cash provided by financing activities has been impacted significantly by higher deposit levels. At ~~March 31,~~June 30, 2022 and 2021, deposits increased ~~$197~~$151 million and ~~$181~~$352 million compared to December 31, 2021 and 2020, respectively.

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

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

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

~~Item 4. Controls and Procedures~~

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(a)) at ~~March 31,~~June 30, 2022. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective and timely, providing them with material information relating to the Company required to be disclosed in the reports the Company files or submits under the Exchange Act.

Changes in Internal Controls

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the ~~three~~six months ended ~~March 31,~~June 30, 2022, to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

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

Item 1.

Legal Proceedings

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

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

Item 1A.

Risk Factors

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

~~Item 2.~~

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

On November 15, 2021, the Board of Directors reauthorized the Company’s share repurchase program for up to $20.0 million of the Company’s common stock (“Repurchase Plan”), representing approximately 4% of outstanding shareholders’ equity. Repurchases by the Company under the Repurchase Plan may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means.

~~Not Applicable~~During the first half of 2022 the Company repurchased 12,456 shares under the Repurchase Plan, for a total of $11.845 million. All of these shares were purchased at prices ranging from $925.00 to $966.00 per share, based upon the then current price on the OTCQX.

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

Item 3.

Defaults upon Senior Securities

Not Applicable

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

Item 4.

Mine Safety Disclosures

Not Applicable

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

Item 5.

Other Information

Not Applicable

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

Item 6.

Exhibits

List of Financial Statements and Financial Statement Schedules

(a)

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

(1)

Financial Statements and

(2)

Financial Statement schedules required to be filed by Item 1 of this Quarterly Report on Form 10-Q.

(3)

The following exhibits are required by Item 601 of Regulation S-K and are included as part of this Quarterly Report on Form 10-Q:

Exhibit
Number	Description

31(a)	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31(b)	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH	Inline XBRL Taxonomy Extension Schema Document.
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*Filed herewith