~~FARMERS & MERCHANTS BANCORP~~

~~UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

Nine Months Ended
September 30,

(Dollars in thousands) 2022 2021
Cash flows from operating activities:
Net income $ 55,037 $ 50,368
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 3,000 1,250
Depreciation and amortization 1,849 1,971
Net amortization of securities premiums and discounts 341 1,133
Increase in cash surrender value of BOLI (1,666
)
(1,616
)
Decrease /(increase) in deferred income taxes, net 2,356 (456 )
Loss/(gains) on sale of securities available-for-sale 2,985 (2,554
)
Net changes in:
Other assets (2,362 ) (8,772 )
Other liabilities 18,134 10,738
Net cash provided by operating activities 79,674 52,062
Cash flows from investing activities:
Net change in loans held for investment (86,401
)
(39,956 )
Purchase of available-for-sale securities (10,135
)
(257,228
)
Purchase of held-to-maturity securities (168,634
)
(194,332
)
Proceeds from sales, maturities, calls and pay downs of available-for-sale securities
62,979 397,454
Proceeds from maturities, calls and pay downs of held-to-maturity securities 52,884 29,042
Purchase of premises and equipment (3,318
)
(1,001
)
Purchase of other investments (5,300 ) (4,516
)
Redemption of other investments - 2,556
Proceeds from bank-owned life insurance 511 -
Proceeds from sale of assets 73 635
Net cash used in investing activities (157,341
)
(67,346 )
Cash flows from financing activities:
Net increase in deposits 269,105 508,127
Cash dividends paid
(6,110
)
(5,915 )
Net cash used in share repurchase of common stock
(17,905 ) -
Net provided by financing activities 245,090 502,212
Net change in cash and cash equivalents 167,423 486,928
Cash and cash equivalents, beginning of period
715,460 383,837
Cash and cash equivalents, end of period
$ 882,883 $ 870,765

Supplemental disclosures of cash flow information:
Cash paid for interest $ 3,832 $ 4,369
Income taxes paid
$ 11,451 $ 22,530

Supplemental disclosures of non-cash transactions:
Investment securities available-for-sale transferred to held-to-maturity $ - $ 316,925
Lease Liabilities Arising from Obtaining Right-of-Use Assets $ - $ 302

~~Table of Contents~~

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS

Note 1—Basis of Presentation and Significant Accounting Policies

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

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In preparing these financial statements, the Company has evaluated events and transactions subsequent to ~~September 30, 2022~~March 31, 2023 for potential recognition or disclosure. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and note disclosures have been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements. ~~Certain reclassifications have been made to the 2021 Consolidated Financial Statements and/or schedules to conform to the 2022 presentation.~~ All significant intercompany transactions and balances have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are significant to an understanding of Bank’s financial statements. These policies relate to: (i) the methodology for the recognition of interest income; (ii) the determination of the provision and allowance for credit losses; (iii) the valuation of financial assets and liabilities recorded at fair value; (iv) the valuation of intangibles, such as goodwill and core deposit intangibles (“CDI”); (v) the valuation of other real estate owned (“OREO”); and (vi) the valuation or recognition of deferred tax assets and liabilities. These policies and judgments, estimates and assumptions are described in greater detail in subsequent notes to the Unaudited Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, Summary of Critical Accounting Policies and Estimates, in our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 filed with the SEC on March 15, ~~2022~~2023 and Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations Summary of Critical Accounting Policies and Estimates included in this Quarterly Report on Form 10-Q.

The information included in this Form 10-Q should be read in conjunction with our ~~2021~~2022 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~~Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 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~~reform. ASU 2020-04 was effective upon issuance and, based upon the ~~issuance of this guidance, the publication cessation of the U.S. dollar LIBOR has been extended to June 30, 2023.~~amendments provided in ASU 2022-06 discussed below, can generally be applied through December 31, 2024. We have not elected to apply these amendments. However, we will assess the ~~applicability~~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.

Table of Contents

FARMERS & MERCHANTS BANCORP

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

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

In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). The main amendments in this ASU are intended to clarify certain optional expedients and scope of derivative instruments. The amendments are elective and effective immediately upon issuance of this ASU. ~~Amendments may~~ASU 2021-01 was effective upon issuance and, based upon the amendments provided in ASU 2022-06 discussed below, can generally be ~~elected~~applied through December 31, ~~2022.~~2024. We have not elected to apply amendments; 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.

ASU No. 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848.” ASU 2022-06 extends the period of time preparers can utilize the reference rate reform relief guidance provided by ASU 2020-04 and ASU 2021-01, which are discussed above. ASU 2022-06, which was effective upon issuance, defers the sunset date of this prior guidance from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief guidance in Topic 848. 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 eliminate~~the current troubled debt restructuring (TDR) recognition and measurement guidance and, instead, require that a creditor evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.

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

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

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

In June 2022, the FASB issued guidance within ASU 2022-03, Fair Value Measurement of Equity Securities Subject to contractual Sale Restrictions. The amendments in this ASU affect all entities that have investments in equity securities measured at fair value that are subject to a contractual sale restriction. These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.

The amendments in this ASU are effective for fiscal years, beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The adoption of this ASU is not expected to have material impact on the Company’s Consolidated Financial Statements.

In March 2023, the FASB issued ASU 2023-02, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. ASU 2023-02 allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The Amendments in ASU 2023-02 apply to all reporting entities that hold (1) tax equity investments that meet the conditions for and elect to account for them using the proportional amortization method or (2) an investment in a LIHTC structure through a limited liability entity that is not accounted for using the proportional amortization method and to which certain LIHTC-specific guidance removed from FASB ASC 323-740, Investments – Equity Method and Joint Ventures: Income Taxes, has been applied.

ASU 2023-02 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for any interim period within those fiscal years. The amendments in ASU 2023-02 must be applied on either a modified retrospective or a retrospective basis (except as discussed in the ASU for LIHTC investments not accounted for using the proportional amortization method). The Company is currently evaluating the provisions of this ASU to determine the potential impact the new standard will have on the Company’s consolidated financial statements.

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

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

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.

~~Table of Contents~~

~~FARMERS & MERCHANTS BANCORP~~

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

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

On January 1, ~~2022,~~2023, the ~~Company~~company adopted the ~~Financial Accounting Standards Board (“FASB”) Accounting Standards Update (ASU) 2016-13,~~FASB issued guidance within ASU 2022-02, Financial Instruments -– Credit Losses (Topic 326)~~, Measurement~~: Troubled Debt Restructurings and Vintage Disclosures. The amendments in this ASU eliminate the 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 ~~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~~existing loan. The amendments also introduce new requirements related to ~~as CECL.~~certain modifications of receivables made to borrowers experiencing financial difficulty.

~~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~~

These amendments require vintage disclosures including current-period gross write-offs by year of ~~CECL did not result in any material change~~origination for financing receivables. Gross write-off information must be included in the ~~calculation~~vintage disclosures in accordance with ASC 326-20-50-6, which requires disclosure of the ~~Company’s December 31, 2021 Allowance for Credit Losses, therefore, no adjustment to Shareholders’ Equity was made as~~amortized cost basis of ~~January 1, 2022.~~financing receivables by credit quality indicator and class of financing receivable by year of origination.

The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The ASU affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial asset not excluded from the scope that have the contractual right to receive cash. The ASU replaces the incurred loss impairment methodology in previous GAAP with CECL, a methodology that reflects current expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This ASU broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements.

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

January-2022

(Dollars in thousands)
Reported
under
ASC 326

Reported
Pre-
Adoption

Impact of
ASC 326
Adoption

Allowance for credit losses:
Real estate:
Commercial $ (17,379
)
$ (28,536
)
$ 11,157
Agricultural (14,580
)
(9,613
)
(4,967
)
Residential and home equity (5,879
)
(2,847
)
(3,032
)
Construction (3,311
)
(1,456
)
(1,855
)
Total real estate (41,149
)
(42,452
)
1,303
Commercial & industrial (11,417
)
(11,489
)
72
Agricultural (6,363
)
(5,465
)
(898 )
Commercial leases (1,567
)
(938
)
(629
)
Consumer and other (511
)
(663
)
152
Total allowance for credit losses $ (61,007
)
$ (61,007
)
$ -

~~Table of Contents~~

~~FARMERS & MERCHANTS BANCORP~~

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

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

~~Subsequent events~~—~~The Company has evaluated events occurring subsequent to September 30, 2022 fordisclosure in the consolidated financial statements.~~

Note 2—~~Risks and Uncertainties~~

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

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

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

~~Table of Contents~~

~~FARMERS & MERCHANTS BANCORP~~

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

N~~ote 3—~~2—Investment Securities

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

Available-for-Sale Securities			Gross Unrealized								Gross Unrealized
(Dollars in thousands)	Amortized Cost		Gains		Losses		Fair Value		Amortized Cost		Gains		Losses		Fair Value
As of September 30, 2022
U.S. Treasury notes	$	4,979	$	-	$	38	$	4,941
As of March 31, 2023
U.S. Government-sponsored securities		4,695		27		24		4,698	$	4,117	$	18	$	23	$	4,112
Mortgage-backed securities⁽¹⁾		194,600		16		38,163		156,453		125,610		41		21,954		103,697
Collateralized mortgage obligations⁽¹⁾		1,499		-		41		1,458		620		-		13		607
Corporate securities		10,046		-		452		9,594		10,041		-		330		9,711
Other		310		-		-		310		310		-		-		310
Total available-for-sale securities	$	216,129	$	43	$	38,718	$	177,454	$	140,698	$	59	$	22,320	$	118,437

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

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

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

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 2—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

Allowance
for Credit
Losses

As of September 30, 2022
Municipal securities $ 60,827 $ - $ 735 $ 60,092 $ 393
Mortgage-backed securities⁽¹⁾
709,541 - 145,836 563,705 -
Collateralized mortgage obligations⁽¹⁾
82,297
-
15,172
67,125
-

Total held-to-maturity securities $ 852,665 $ - $ 161,743 $ 690,922 $ 393

Held-to-Maturity Securities				Gross Unrealized
(Dollars in thousands)	Amortized Cost			Gains			Losses			Fair Value			Allowance for Credit Losses
As of March 31, 2023
Municipal securities		$	76,260		$	98		$	96		$	76,262		$	393
Mortgage-backed securities⁽¹⁾			695,083			59			130,405			564,737			-
Collateralized mortgage obligations⁽¹⁾			79,044			-			14,134			64,910			-
Total held-to-maturity securities		$	850,387		$	157		$	144,635		$	705,909		$	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
(Dollars in thousands)	Amortized Cost			Gains			Losses			Fair Value			Allowance for Credit Losses
As of December 31, 2022
Municipal securities		$	62,302		$	49		$	209		$	62,142		$	393
Mortgage-backed securities⁽¹⁾			702,858			29			141,121			561,766			-
Collateralized mortgage obligations⁽¹⁾			80,186			-			15,701			64,485			-
Total held-to-maturity securities		$	845,346		$	78		$	157,031		$	688,393		$	393

~~Table of Contents~~

~~FARMERS & MERCHANTS BANCORP~~

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

~~Note 3—Investment Securities—Continued~~

Gross Unrealized
(Dollars in thousands) Amortized Cost Gains Losses
Fair
Value

Allowance
for Credit
Losses

As of December 31, 2021
Municipal securities $ 66,496 $ 701 $ - $ 67,197 $ -
Mortgage-backed securities⁽¹⁾
596,775 45 11,764 585,056 -
Collateralized mortgage obligations⁽¹⁾
73,781 36 229 73,588 -
Total held-to-maturity securities $ 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.

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

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

Table of September 30, 2022, the Company held 200 available-for-sale investment securities of which 86 were in an unrealized loss position for less than twelve months and 77 securities were in an unrealized loss position for twelve months or more without an allowance for credit losses. Management evaluates the available-for-sale investment securities in an unrealized loss position, relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities.Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 2—Investment Securities—Continued

The following tables show the gross unrealized losses for available-for-sale securities, for which an allowance for credit losses has not been recorded, that are less than 12 months and 12 months or more:

Available-for-Sale Securities
As of September 30, 2022

Less Than 12 Months 12 Months or More Total
(Dollars in thousands) Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses

As of September 30, 2022

U.S. Treasury notes
$
4,941 $
38 $
- $
- $
4,941 $
38
U.S. Government-sponsored securities
128
1
1,409
23
1,537
24
Mortgage-backed securities⁽¹⁾
37,141 1,928 117,680 36,235 154,821 38,163
Collateralized mortgage obligations⁽¹⁾
1,458 41 - - 1,458 41
Corporate securities
9,594 452 - - 9,594 452
Total available-for-sale securities $ 53,262 $ 2,460 $ 119,089 $ 36,258 $ 172,351 $ 38,718

Available-for-Sale Securities							March 31, 2023
	Less Than 12 Months						12 Months or More						Total
(Dollars in thousands)	Fair Value			Unrealized Losses			Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
As of March 31, 2023
U.S. Government-sponsored securities		$	330		$	1		$	1,246		$	22		$	1,576		$	23
Mortgage-backed securities⁽¹⁾			12,450			343			86,844			21,611			99,294			21,954
Collateralized mortgage obligations⁽¹⁾			-			-			607			13			607			13
Corporate securities			-			-			9,711			330			9,711			330
Total available-for-sale securities		$	12,780		$	344		$	98,408		$	21,976		$	111,188		$	22,320

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

As of December 31, 2021

Less Than 12 Months 12 Months or More Total
(Dollars in thousands) Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses

As of December 31, 2021

U.S. Government-sponsored securities $ 183 $ - $ 2,007 $ 39 $ 2,190 $ 39
Mortgage-backed securities⁽¹⁾
61,469 1,192 104,489 4,188 165,958 5,380
Total available-for-sale securities $ 61,652 $ 1,192 $ 106,496 $ 4,227 $ 168,148 $ 5,419

Available-for-Sale Securities							December 31, 2022
	Less Than 12 Months						12 Months or More						Total
(Dollars in thousands)	Fair Value			Unrealized Losses			Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
As of December 31, 2022
U.S. Treasury notes		$	4,964		$	25		$	-		$	-		$	4,964		$	25
U.S. Government-sponsored securities			378			1			1,326			23			1,704			24
Mortgage-backed securities⁽¹⁾			35,117			1,639			96,589			28,156			131,706			29,795
Collateralized Mortgage Obligations⁽¹⁾			1,054			31			-			-			1,054			31
Corporate securities			-			-			9,581			462			9,581			462
Total available-for-sale securities		$	41,513		$	1,696		$	107,496		$	28,641		$	149,009		$	30,337

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

~~Table~~As of ~~Contents~~

~~FARMERS & MERCHANTS BANCORP~~

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

~~Note 3—Investment Securities—Continued~~March 31, 2023, the Company held 183 available-for-sale securities of which 61 were in an unrealized loss position for less than twelve months and 97 securities were in an unrealized loss position for twelve months or more without an allowance for credit losses. Because the decline in fair value is attributable to changes in interest rates and not credit quality and because the Company does not have the intent to sell these securities and it is more likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be impaired. Management evaluates the available-for-sale debt securities in an unrealized loss position, relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations.

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

	March 31, 2023
(Dollars in thousands)	Municipal securities			Mortgage- backed securities			Collateralized Mortgage obligations			Total
Allowance for credit losses - securities
Beginning Balance		$	393		$	-		$	-		$	393
Provision for credit losses			-			-			-			-
Ending Balance		$	393		$	-		$	-		$	393

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

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

~~U.S. Government-sponsored securities.~~ ~~The unrealized losses were caused by interest rate fluctuations. The decline in market value is attributable to changes in interest rates and not credit quality.~~

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

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

~~Obligations of states and political subdivisions.~~ The Company’s bank-qualified municipal bond portfolio is comprised of two different segments: (1) publicly issued debt of $18.4 million purchased on the open market, all rated at either the issue or issuer level and all of these ratings are “investment grade”; and (2) municipal debt of $42.4 million purchased directly from the Bank’s customers, all of which is monitored through quarterly or annual financial reviews of the issuer. The Company monitors the status of all municipal investments in the portfolio and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security.

The Company does not intend to sell the held-to-maturity investments and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost basis.

1512

Table of Contents

FARMERS & MERCHANTS BANCORP

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

Note 3—2—Investment Securities—Continued

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

The amortized cost and estimated fair values of ~~investment~~debt securities at ~~September 30, 2022~~March 31, 2023 by contractual final maturity are shown in the following ~~table~~table:

	Available-for-Sale				Held-to-Maturity
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities maturing in:
One year or less	$	335	$	335	$	283	$	283
After one year through five years		19,386		18,756		11,174		11,155
After five years through ten years		6,114		5,913		30,348		28,835
After ten years		114,863		93,433		808,582		665,636
Total	$	140,698	$	118,437	$	850,387	$	705,909

Available-for-Sale Held-to-Maturity
(Dollars in thousands)
Amortized Cost Fair Value Amortized Cost Fair Value
Securities maturing in:

One year or less
$ 5,312 $ 5,274 $ 883 $ 883
After one year through five years 21,418 20,600 7,484 7,324
After five years through ten years 25,492 23,196 28,907 26,852
After ten years 163,907 128,384 815,391 655,863
Total $
216,129 $
177,454 $
852,665 $
690,922

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

The Company monitors the credit quality of those ~~available-for-sale and~~ held-to-maturity debt securities not issued by the U.S. government or one of its agencies or government sponsored entities, through the use of credit ratings. Credit ratings are reviewed and updated quarterly. The following table summarizes the ~~fair value of available-for-sale and~~ amortized cost of held-to-maturity municipal debt securities by credit rating at ~~September 30, 2022:~~March 31, 2023:

	Held-to-Maturity
	Amortized Cost
(Dollars in thousands)	AAA/AA/A			BBB/BB/B			Not Rated			Total
March 31, 2023
Municipal securities		$	19,380		$	390		$	56,490		$	76,260
Total		$	19,380		$	390		$	56,490		$	76,260

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

Breakdown by Category:
U.S. Treasury notes
$ 4,941 $ - $ - $ - $ - $ -
U.S. Government-sponsored securities - - 4,698 - - -
Mortgage-backed securities⁽¹⁾
- - 156,453 - - 709,541
Collateralized mortgage obligations⁽¹⁾
- - 1,458 - - 82,297
Municipal securities
-

-

-

18,025

386

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

As of March 31, 2023, there were no past due principal or interest payments associated with these securities.

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

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 2—Investment Securities—Continued

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

(Dollars in thousands) Gross Proceeds Gross Gains Gross Losses
Nine months ended September 30, 2022 $ 31,394 $ 2 $ 2,987
Nine months ended September 30, 2021 $ 301,320 $ 5,570 $ 3,016

(Dollars in thousands)	Gross Proceeds		Gross Gains		Gross Losses
Three months ended March 31, 2023	$	30,482	$	-	$	5,686
Three months ended March 31, 2022	$	2,190	$	-	$	-

Pledged Securities

As of ~~September 30, 2022,~~March 31, 2023, securities carried at ~~$493.8~~$498 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) borrowings, and other government agency deposits as required by law. This amount was ~~$426~~$479 million at December 31, ~~2021.~~

~~Table of Contents~~

~~FARMERS & MERCHANTS BANCORP~~

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

2022.

Note 4—3—Loans and Leases

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

(Dollars in thousands)	September 30, 2022			December 31, 2021			March 31, 2023			December 31, 2022
Loans and leases held for investment, net
Loans and leases held-for-investment, net
Real estate:
Commercial	$	1,246,805		$	1,167,516		$	1,312,745		$	1,328,691
Agricultural		722,448			672,830			707,412			726,938
Residential and home equity		377,249			350,581			387,370			387,753
Construction		169,624			177,163			153,394			166,538
Total real estate		2,516,126			2,368,090			2,560,921			2,609,920
Commercial & industrial		454,185			427,799			472,189			478,758
Agricultural		260,296			276,684			275,785			314,525
Commercial leases		94,089			96,971			123,314			112,629
Consumer and other⁽¹⁾		7,776			78,367			5,382			5,886
Total gross loans and leases		3,332,472			3,247,911			3,437,591			3,521,718
Unearned income		(8,610	)		(10,734	)		(10,458	)		(9,357	)
Total net loans and leases		3,323,862			3,237,177			3,427,133			3,512,361
Allowance for credit losses		(63,617	)		(61,007	)		(68,573	)		(66,885	)
Total loans and leases held for investment, net	$	3,260,245		$	3,176,170
Total loans and leases held-for-investment, net							$	3,358,560		$	3,445,476

⁽¹⁾ ~~Includes SBA PPP loans.~~

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

At ~~September 30, 2022,~~March 31, 2023, the portion of loans that were approved for pledging as collateral on borrowing lines with the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“FRB”) were $1.2 billion and ~~$890.6~~$881.5 million, respectively. The borrowing capacity on these loans was ~~$766~~$770.7 million from FHLB and ~~$657~~$656.5 million from the FRB.

1714

Table of Contents

FARMERS & MERCHANTS BANCORP

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

Note 4—3—Loans and Leases—Continued

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

	September 30, 2022												March 31, 2023
(Dollars in thousands)	Current		30-89 Days Past Due		90+ Days Past Due		Non- accrual		Total Past Due		Total		Current		30-89 Days Past Due		90+ Days Past Due		Non-accrual		Total Past Due		Total
Loans and leases held for investment, net
Loans and leases held-for-investment, net
Real estate:
Commercial	$	1,238,110	$	170	$	-	$	411	$	581	$	1,238,691	$	1,304,052	$	-	$	-	$	387	$	387	$	1,304,439
Agricultural		722,448		-		-		-		-		722,448		707,412		-		-		-		-		707,412
Residential and home equity		377,224		25		-		-		25		377,249		387,370		-		-		-		-		387,370
Construction		169,624		-		-		-		-		169,624		153,394		-		-		-		-		153,394
Total real estate		2,507,406		195		-		411		606		2,508,012		2,552,228		-		-		387		387		2,552,615
Commercial & industrial		454,185		-		-		-		-		454,185		472,189		-		-		-		-		472,189
Agricultural		260,296		-		-		-		-		260,296		275,785		-		-		-		-		275,785
Commercial leases		93,593		-		-		-		-		93,593		121,162		-		-		-		-		121,162
Consumer and other		7,766		10		-		-		10		7,776		5,357		25		-		-		25		5,382
Total loans and leases, net	$	3,323,246	$	205	$	-	$	411	$	616	$	3,323,862	$	3,426,721	$	25	$	-	$	387	$	412	$	3,427,133

	December 31, 2021												December 31, 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	$	1,156,879	$	459	$	-	$	-	$	459	$	1,157,338	$	1,319,911	$	-	$	-	$	403	$	403	$	1,320,314
Agricultural		672,812		-		-		18		18		672,830		726,938		-		-		-		-		726,938
Residential and home equity		350,492		89		-		-		89		350,581		387,753		-		-		-		-		387,753
Construction		177,163		-		-		-		-		177,163		166,370		-		-		168		168		166,538
Total real estate		2,357,346		548		-		18		566		2,357,912		2,600,972		-		-		571		571		2,601,543
Commercial & industrial		427,799		-		-		-		-		427,799		478,758		-		-		-		-		478,758
Agricultural		276,186		-		-		498		498		276,684		314,525		-		-		-		-		314,525
Commercial leases		96,415		-		-		-		-		96,415		111,649		-		-		-		-		111,649
Consumer and other		78,363		4		-		-		4		78,367		5,789		97		-		-		97		5,886
Total loans and leases, net	$	3,236,109	$	552	$	-	$	516	$	1,068	$	3,237,177	$	3,511,693	$	97	$	-	$	571	$	668	$	3,512,361

1815

Table of Contents

FARMERS & MERCHANTS BANCORP

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

Note 4—3—Loans and Leases—Continued

Non-accrual loans are summarized as follows:

(Dollars in thousands)	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Non-accrual loans and leases:
Non-accrual loans and leases, not TDRs
Non-accrual loans and leases
Real estate:
Commercial	$	411	$	-	$	387	$	403
Agricultural		-		18		-		-
Residential and home equity		-		-		-		-
Construction		-		-		-		168
Total real estate		411		18		387		571
Commercial & industrial		-		-
Commercial & Industrial						-		-
Agricultural		-		-		-		-
Commercial leases		-		-		-		-
Consumer and other		-		-		-		-
Subtotal		411		18
Non-accrual loans and leases, are TDRs
Real estate:
Commercial	$	-	$	-
Agricultural		-		-
Residential and home equity		-		-
Construction		-		-
Total real estate		-		-
Commercial & industrial		-		-
Agricultural		-		498
Commercial leases		-		-
Consumer and other		-		-
Subtotal		-		498
Total non-accrual loans and leases	$	411	$	516	$	387	$	571

The Company did not enter into any loan modifications with borrowers experiencing financial difficulty during the three months ended March 31, 2023.

1916

Table of Contents

FARMERS & MERCHANTS BANCORP

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

Note ~~4—Loans and Leases—Continued~~

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

(Dollars in thousands)
September 30,
2022

December 31,
2021

Troubled debt restructured loans and leases:
Accruing TDR loans and leases
Real estate:
Commercial $ - $ 41
Agricultural - -
Residential and home equity 1,319 1,522
Construction - -
Total real estate 1,319 1,563
Commercial & industrial 6 260
Agricultural - -
Commercial leases - -
Consumer and other - 1
Subtotal 1,325 1,824
Non-accruing TDR loans and leases
Real estate:
Commercial $
- $
-
Agricultural - -
Residential and home equity - -
Construction - -
Total real estate - -
Commercial & industrial - -
Agricultural - 498
Commercial leases - -
Consumer and other - -
Subtotal - 498
Total TDR loans and leases $ 1,325 $ 2,322

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

September 30, 2022
(Dollars in thousands)
# of Accruing
TDR

$ of Accruing
TDR

# of Non-
Accruing TDR

$ of Non-
Accruing TDR
# of Total TDR $ of Total TDR
Loan and lease TDRs
2022 - $ - - $ - - $ -
2021 - - - - - -
2020 4 260 - - 4 260
2019 - - - - - -
Prior
8 1,065 - - 8 1,065
Total 12 $ 1,325 - $ - 12 $ 1,325

~~The Company did not enter into any troubled debt restructuring with borrowers during the nine months ended September 30, 2022 and 2021, respectively.~~

~~Table of Contents~~

~~FARMERS & MERCHANTS BANCORP~~

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

~~Note 4—Loans and Leases—Continued~~

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

September 30, 2022
(Dollars in thousands) Pass
Special
Mention

Sub-
standard
Doubtful
Total Loans
& Leases

Total
Allowance
for Credit
Losses

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

December 31, 2021
(Dollars in thousands) Pass Special
Mention
Sub-
standard
Doubtful
Total Loans
& Leases

Total
Allowance
for Credit
Losses

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

~~Table of Contents~~

~~FARMERS & MERCHANTS BANCORP~~

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

~~Note 4—~~3—Loans and Leases—Continued

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

	March 31, 2023
(Dollars in thousands)	Pass		Special Mention		Sub- standard		Doubtful		Total Loans & Leases		Total Allowance for Credit Losses
Loans and leases held-for-investment, net
Real estate:
Commercial	$	1,301,094	$	2,958	$	387	$	-	$	1,304,439	$	24,253
Agricultural		688,406		12,875		6,131		-		707,412		8,441
Residential and home equity		387,006		-		364		-		387,370		7,334
Construction		153,394		-		-		-		153,394		2,785
Total real estate		2,529,900		15,833		6,882		-		2,552,615		42,813
Commercial & industrial		471,348		594		247		-		472,189		11,346
Agricultural		271,307		4,467		11		-		275,785		12,542
Commercial leases		121,099		63		-		-		121,162		1,720
Consumer and other		5,251		-		131		-		5,382		152
Total loans and leases, net	$	3,398,905	$	20,957	$	7,271	$	-	$	3,427,133	$	68,573

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

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 3—Loans and Leases—Continued

The following table presents outstanding loan and lease balances held-for-investment by segment and class, credit quality indicators, ~~and~~ vintage year by class of financing receivable, and current period gross charge-offs by year of origination as of ~~September 3~~0~~, 2022:~~March 31, 2023:

September 30, 2022
Term Loans Amortized Cost Basis by Origination Year
(Dollars in thousands) 2022 2021 2020 2019 2018 Prior
Revolving
Loans
Amortized
Cost
Total
Net loans and leases held for investment
Real estate:
Commercial
Pass $ 140,036 $ 236,947 $ 153,480 $ 72,167 $ 86,063 $ 227,146 $ 313,998 $ 1,229,837
Special mention - - - - 3,844 - 3,476 7,320
Substandard - - - - - 1,534 - 1,534
Doubtful - - - - - - - -
Total Commercial $ 140,036 $ 236,947 $ 153,480 $ 72,167 $ 89,907 $ 228,680 $ 317,474 $ 1,238,691
Commercial

Current-period gross charge-offs
$
- $
- $
- $
- $
- $
- $
- $
-

Agricultural

Pass $ 54,480 $ 43,117 $ 56,965 $ 15,297 $ 51,194 $ 151,470 $ 332,881 $ 705,404
Special mention - - - 2,636 - - 8,255 10,891
Substandard - - - - 119 6,034 - 6,153
Doubtful - - - - - - - -
Total Agricultural
$ 54,480 $ 43,117 $ 56,965 $ 17,933 $ 51,313 $ 157,504 $ 341,136 $ 722,448
Agricultural
Current-period gross charge-offs $
- $
- $
- $
- $
- $
- $
- $
-

Residential and home equity
Pass $ 51,888 $ 97,973 $ 88,214 $ 14,851 $ 6,910 $ 78,458 $ 38,727 $ 377,021
Special mention - - - - - - - -
Substandard - - - - - 144 84 228
Doubtful - - - - - - - -
Total Residential and home equity $ 51,888 $ 97,973 $ 88,214 $ 14,851 $ 6,910 $ 78,602 $ 38,811 $ 377,249
Residential and home equity
Current-period gross charge-offs $
- $
- $
- $
- $
- $
- $
- $
-

Construction
Pass $ - $ - $ - $ 1,575 $ - $ 62 $ 167,987 $ 169,624
Special mention - - - - - - - -
Substandard - - - - - - - -
Doubtful - - - - - - - -
Total construction $ - $ - $ - $ 1,575 $ - $ 62 $ 167,987 $ 169,624
Construction
Current-period gross charge-offs $
- $
- $
- $
- $
- $
- $
- $
-

Total Real estate $ 246,404 $ 378,037 $ 298,659 $ 106,526 $ 148,130 $ 464,848 $ 865,408 $ 2,508,012

Commercial & industrial
Pass $ 24,852 $ 41,476 $ 13,975 $ 10,646 $ 8,774 $ 6,386 $ 347,723 $ 453,832
Special mention - 69 - - - 1 - 70
Substandard - - - - 6 6 271 283
Doubtful - - - - - - - -
Total Commercial & industrial $ 24,852 $ 41,545 $ 13,975 $ 10,646 $ 8,780 $ 6,393 $ 347,994 $ 454,185
Commercial & industrial
Current-period gross charge-offs $
- $ - $
- $
246 $
78 $
- $
- $
324

Agricultural
Pass $ 4,387 $ 3,789 $ 1,082 $ 1,617 $ 731 $ 2,211 $ 239,737 $ 253,554
Special mention - - - - - 7 6,719 6,726
Substandard - - - 13 3 - - 16
Doubtful - - - - - - - -
Total Agricultural $ 4,387 $ 3,789 $ 1,082 $ 1,630 $ 734 $ 2,218 $ 246,456 $ 260,296
Agricultural
Current-period gross charge-offs $
- $
- $
- $
- $
- $
- $
- $
-

Commercial leases
Pass $ 11,541 $ 16,541 $ 13,664 $ 7,643 $ 21,387 $ 22,717 $ - $ 93,493
Special mention - - - 100 - - - 100
Substandard - - - - - - - -
Doubtful - - - - - - - -
Total Commercial leases $ 11,541 $ 16,541 $ 13,664 $ 7,743 $ 21,387 $ 22,717 $ - $ 93,593
Commercial leases
Current-period gross charge-offs $
- $ - $
- $
- $
- $
- $
- $
-

Consumer and other
Pass $ 965 $ 2,463 $ 359 $ 235 $ 386 $ 2,481 $ 694 $ 7,583
Special mention - - - - - - - -
Substandard 193 - - - - - - 193
Doubtful - - - - - - - -
Total Consumer and other $ 1,158 $ 2,463 $ 359 $ 235 $ 386 $ 2,481 $ 694 $ 7,776
Consumer and other
Current-period gross charge-offs $
25 $
5 $
4 $
1 $
3 $
- $
- $
38

Total net loans and leases $ 288,342 $ 442,375 $ 327,739 $ 126,780 $ 179,417 $ 498,657 $ 1,460,552 $ 3,323,862

	March 31, 2023
	Term Loans Amortized Cost Basis by Origination Year
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost		Total
Net loans and leases held-for-investment
Real estate:
Commercial
Pass	$	51,123	$	176,639	$	227,251	$	149,007	$	69,798	$	301,459	$	325,817	$	1,301,094
Special mention		-		-		-		-		-		2,358		600		2,958
Substandard		-		-		-		-		-		387		-		387
Doubtful		-		-		-		-		-		-		-		-
Total Commercial	$	51,123	$	176,639	$	227,251	$	149,007	$	69,798	$	304,204	$	326,417	$	1,304,439
Commercial
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Agricultural
Pass	$	14,274	$	75,313	$	41,782	$	53,027	$	14,264	$	176,639	$	313,107	$	688,406
Special mention		-		-		-		-		-		-		12,875		12,875
Substandard		-		-		-		-		-		6,131		-		6,131
Doubtful		-		-		-		-		-		-		-		-
Total Agricultural	$	14,274	$	75,313	$	41,782	$	53,027	$	14,264	$	182,770	$	325,982	$	707,412
Agricultural
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Residential and home equity
Pass	$	7,062	$	65,050	$	94,458	$	85,239	$	14,222	$	79,905	$	41,070	$	387,006
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		284		80		364
Doubtful		-		-		-		-		-		-		-		-
Total Residential and home equity	$	7,062	$	65,050	$	94,458	$	85,239	$	14,222	$	80,189	$	41,150	$	387,370
Residential and home equity
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	14	$	-	$	14

Construction
Pass	$	-	$	2,003	$	-	$	-	$	1,575	$	-	$	149,816	$	153,394
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Total construction	$	-	$	2,003	$	-	$	-	$	1,575	$	-	$	149,816	$	153,394
Construction
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Total Real estate	$	72,459	$	319,005	$	363,491	$	287,273	$	99,859	$	567,163	$	843,365	$	2,552,615

Commercial & industrial
Pass	$	11,960	$	30,234	$	35,318	$	11,131	$	7,195	$	10,318	$	365,192	$	471,348
Special mention		-		-		55		-		-		539		-		594
Substandard		-		-		-		-		-		6		241		247
Doubtful		-		-		-		-		-		-		-		-
Total Commercial & industrial	$	11,960	$	30,234	$	35,373	$	11,131	$	7,195	$	10,863	$	365,433	$	472,189
Commercial & industrial
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

2218

Table of Contents

FARMERS & MERCHANTS BANCORP

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

Note 4—3—Loans and Leases—Continued

	March 31, 2023
	Term Loans Amortized Cost Basis by Origination Year
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost		Total
Agricultural
Pass	$	170	$	5,179	$	2,755	$	918	$	1,135	$	2,448	$	258,702	$	271,307
Special mention		-		-		-		-		-		-		4,467		4,467
Substandard		-		-		-		-		10		1		-		11
Doubtful		-		-		-		-		-		-		-		-
Total Agricultural	$	170	$	5,179	$	2,755	$	918	$	1,145	$	2,449	$	263,169	$	275,785
Agricultural
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Commercial leases
Pass	$	33,959	$	15,132	$	12,359	$	5,537	$	33,433	$	20,679	$	-	$	121,099
Special mention		-		-		-		-		63		-		-		63
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Total Commercial leases	$	33,959	$	15,132	$	12,359	$	5,537	$	33,496	$	20,679	$	-	$	121,162
Commercial leases
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Consumer and other
Pass	$	318	$	1,476	$	575	$	213	$	121	$	1,922	$	626	$	5,251
Special mention		-		-		-		-		-		-		-		-
Substandard		131		-		-		-		-		-		-		131
Doubtful		-		-		-		-		-		-		-		-
Total Consumer and other	$	449	$	1,476	$	575	$	213	$	121	$	1,922	$	626	$	5,382
Consumer and other
Current-period gross charge-offs	$	8	$	1	$	-	$	-	$	-	$	1	$	-	$	10

Total net loans and leases	$	118,997	$	371,026	$	414,553	$	305,072	$	141,816	$	603,076	$	1,472,593	$	3,427,133

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

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

	March 31,			December 31,
(Dollars in thousands)	2023			2022

Balance at beginning of the period	$	17,521		$	18,128
New loans or advances during year		130			523
Repayments		(372	)		(1,130	)
Balance at end of period	$	17,279		$	17,521

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

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

2319

Table of Contents

FARMERS & MERCHANTS BANCORP

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

Note 4—3—Loans and Leases—Continued

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

	March 31, 2023
(Dollars in thousands)	Real Estate		Vehicles and Equipment		Total
Collateral dependent loans and leases
Real estate:
Commercial	$	1,492	$	-	$	1,492
Agricultural		10,751		-		10,751
Residential and home equity		1,658		-		1,658
Construction		-		-		-
Total real estate		13,901		-		13,901
Commercial & industrial		-		-		-
Agricultural		-		11		11
Commercial leases		-		-		-
Consumer and other		-		153		153
Total gross loans and leases	$	13,901	$	164	$	14,065

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

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 3—Loans and Leases—Continued

Changes in the allowance for credit losses are as follows:

	For the three Months Ended September 30, 2022																				For the Three Months Ended March 31, 2023
(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:
Beginning balance	$	34,716		$	2,876	$	6,874		$	15,808		$	1,645		$	161		$	62,080
Balance at beginning of period																					$	32,551		$	3,026		$	7,508		$	21,705	$	1,924		$	171		$	66,885
Provision / (recapture) for credit losses		(1,616	)		119		(15	)		3,063			(57	)		5			1,499			(27	)		(241	)		(170	)		2,163		(204	)		(21	)		1,500
Charge-offs		-			-		-			(48	)		-			(20	)		(68	)		-			-			(14	)		-		-			(10	)		(24	)
Recoveries		-			-		6			92			-			8			106			170			-			10			20		-			12			212
Net (charge-offs) / recoveries		-			-		6			44			-			(12	)		38			170			-			(4	)		20		-			2			188
Ending balance	$	33,100		$	2,995	$	6,865		$	18,915		$	1,588		$	154		$	63,617
Balance at end of period																					$	32,694		$	2,785		$	7,334		$	23,888	$	1,720		$	152		$	68,573

	For the Three Months Ended March 31, 2022
(Dollars in thousands)	Commercial & Agricultural R/E			Construction		Residential & Home Equity		Commercial & Agricultural			Commercial Leases			Consumer & Other			Total
Allowance for credit losses:
Balance at beginning of period, 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	)		-
Provision / (recapture) for credit losses		552			466		866		(1,700	)		(101	)		(83	)		-
Charge-offs		-			-		-		-			-			(9	)		(9	)
Recoveries		-			-		14		18			-			2			34
Net (charge-offs) / recoveries		-			-		14		18			-			(7	)		25
Balance at end of period	$	32,511		$	3,777	$	6,759	$	16,098		$	1,466		$	421		$	61,032

For the Nine Months Ended September 30, 2022
(Dollars in thousands)
Commercial &
Agricultural
R/E
Construction
Residential &
Home Equity

Commercial
&
Agricultural

Commercial
Leases

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

Note 5—4—Deposits

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

(Dollars in thousands)	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Certificates of deposit:
Certificates of deposit less than or equal to $250,000	$	208,242	$	223,620	$	218,375	$	202,554
Certificates of deposit greater than $250,000		152,142		168,865		167,755		128,846
Total certificates of deposit	$	360,384	$	392,485	$	386,130	$	331,400

Scheduled maturities for certificates of deposit are as follows:

(Dollars in thousands)	Amount		Amount
2022	$	107,966
2023		224,552	$	237,695
2024		22,362		131,935
2025		2,783		12,059
2026 and beyond		2,721
2026				3,029
2027 and beyond				1,412
Total certificates of deposit	$	360,384	$	386,130

2421

Table of Contents

FARMERS & MERCHANTS BANCORP

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

Note ~~6—Shareholders’ Equity~~5—Short-term borrowings

~~The Company~~As of March 31, 2023 and ~~the Bank are subject~~December 31, 2022, committed lines of credit arrangements totaling $1.55 billion and $1.51 billion were available to various regulatory capital adequacy guidelines as outlined under Part 324 of the FDIC Rules and Regulations. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Company ~~and the Bank’s assets, liabilities, and certain off-balance-sheet items~~from unaffiliated banks, respectively. The average Federal Funds interest rate 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.

of March 31, 2023 was 5.00%.

The Company ~~believes that it~~ is ~~currently~~a member of the FHLB of San Francisco and has a committed credit line of $772.7 million, which is secured by $1.2 billion in ~~compliance~~various real estate loans and investment securities pledged as collateral. Borrowings generally provide for interest at the then current published rate, which was 5.08% as of March 31, 2023.

The Company has $881.5 million in pledged loans with ~~all~~the Federal Reserve Bank (the “Fed”). As of ~~these capital requirements and that they will not result in any restrictions~~March 31, 2023, the Company’s overnight borrowing capacity using the primary credit facilities from the Fed account was $656.5 million. The borrowing rate was 5.00% as of March 31, 2023.

There were no outstanding advances on the ~~Company’s business activity.~~above borrowing facilities as of March 31, 2023 and December 31, 2022.

Note 6—Earnings Per Share

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

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

September 30, 2022
Actual
Minimum to be
Categorized as
“Adequately Capitalized”

Minimum to be
Categorized as
“Well Capitalized”

(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
Farmers & Merchants Bancorp
CET1 capital to risk-weighted assets $ 482,053 11.82
%
$ 183,537 4.50
%
N/A N/A
Tier 1 capital to risk-weighted assets 492,053 12.06
%
244,716 6.00
%
N/A N/A
Risk-based capital to risk-weighted assets 543,218 13.32
%
326,288 8.00
%
N/A N/A
Tier 1 leverage capital ratio 492,053 9.12
%
215,702 4.00
%
N/A N/A

Farmers & Merchants Bank
CET1 capital to risk-weighted assets $ 491,237 12.04
%
$ 183,531 4.50
%
$ 265,101 6.50
%
Tier 1 capital to risk-weighted assets 491,237 12.04
%
244,708 6.00
%
326,278 8.00
%
Risk-based capital to risk-weighted assets 542,400 13.30
%
326,278 8.00
%
407,847 10.00
%
Tier 1 leverage capital ratio 491,237 9.12
%
215,498 4.00
%
269,372 5.00
%

~~Table of Contents~~

~~FARMERS & MERCHANTS BANCORP~~

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

~~Note 6—Shareholders’ Equity—Continued~~

December 31, 2021
Actual
Minimum to be
Categorized as
“Adequately Capitalized”

Minimum to be
Categorized as
“Well Capitalized”

(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
Farmers & Merchants Bancorp
CET1 capital to risk-weighted assets $ 450,687 11.68
%
$ 173,674 4.50
%
N/A N/A
Tier 1 capital to risk-weighted assets 460,687 11.94
%
231,566 6.00
%
N/A N/A
Risk-based capital to risk-weighted assets 509,091 13.19
%
308,755 8.00
%
N/A N/A
Tier 1 leverage capital ratio 460,687 8.92
%
206,606 4.00
%
N/A N/A

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

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

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

Three Months Ended
September 30,

(Dollars in thousands, except share and per share amounts) 2022 2021
Numerator
Net income $ 19,536 $ 17,502

Denominator
Weighted average number of common shares outstanding 775,109 789,646
Weighted average number of dilutive shares outstanding 775,109 789,646

Basic earnings per common share $ 25.20 $ 22.16
Diluted earnings per common share $ 25.20 $ 22.16

	Nine Months Ended September 30,				Three Months Ended March 31,
(Dollars in thousands, except share and per share amounts)	2022		2021		2023		2022
Numerator
Net income	$	55,037	$	50,368	$	23,547	$	17,058

Denominator
Weighted average number of common shares outstanding		780,988		789,646		764,603		786,096
Weighted average number of dilutive shares outstanding		780,988		789,646		764,603		786,096

Basic earnings per common share	$	70.47	$	63.79	$	30.80	$	21.70
Diluted earnings per common share	$	70.47	$	63.79
Diluted earning per common share					$	30.80	$	21.70

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

~~During the first nine months of 2022 the Company repurchased 18,824 shares under the Repurchase Plan, for a total of $17.9 million.~~

2622

Table of Contents

FARMERS & MERCHANTS BANCORP

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

Note 7—Employee Benefit Plans

Executive Retirement Plan

The Company, through the Bank, sponsors an Executive Retirement Plan (“ERP”) for certain executive level employees. The ERP is a non-qualified deferred compensation plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by Internal Revenue Service regulations. The ERP is comprised of: (1) a Performance Component which makes contributions based upon long-term cumulative profitability and increase in market value of the Company; (2) a Salary Component which makes contributions based upon participant salary levels; and (3) an Equity Component for which contributions are discretionary and subject to Board of Directors approval.

The Company expensed $2.3 million to the ERP during the three months ended March 31, 2023 and $1.8 million during the three months ended March 31, 2022. The Company’s carrying value of the liability under the ERP was $55.1 million as of March 31, 2023 and $57.0 million as of December 31, 2022. The Company’s shares of common stock held as investments in the Rabbi Trust of the ERP as of March 31, 2023 and December 31, 2022 totaled 48,055 and 50,196 with an historical cost basis of $30.0 million and $31.4 million, respectively. All amounts have been fully funded into the Rabbi Trust as of March 31, 2023 and December 31, 2022. The consolidated investments held in the Rabbi Trust are recorded at fair value with changes in unrealized gains or losses recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income.

Net gains on ERP plan investments were $0.7 million compared to net gains of $0.3 million at March 31, 2023 and 2022, respectively. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices.

Senior Management Retention Plan

The Company, through the Bank, sponsors a Senior Management Retention Plan (“SMRP”) for certain senior level employees. The SMRP is a non-qualified deferred compensation plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by Internal Revenue Service regulations. All contributions are discretionary and subject to the Board of Directors approval.

The Company expensed $1.2 million to the SMRP during the three months ended March 31, 2023 and $0.7 million for three months ended March 31, 2022. The Company’s carrying value of the liability under the SMRP was $15.4 million as of March 31, 2023 and $13.6 million as of December 31, 2022. The Company’s shares of stock held as investments in the Rabbi Trust of the SMRP as of March 31, 2023 and December 31, 2022 totaled 16,629 and 15,998 shares with an historical cost basis of $11.5 million and $10.8 million, respectively. All amounts have been fully funded into the Rabbi Trust as of March 31, 2023 and December 31, 2022. The consolidated investments held in the Rabbi Trust are recorded at fair value with changes in unrealized gains or losses recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income.

Net gains on SMRP plan investments were $0.2 million compared to net gains of $0.1 million at March 31, 2023 and 2022, respectively. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices.

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 7—8—Fair Value ~~Measurements~~

The Company follows the “Fair Value Measurement and Disclosures” topic of the FASB ASC Topic 820, 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:~~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~~Collateral dependent loans ~~and leases at~~represent certain loans held for investment that are subject to a fair value onmeasurement under U.S. GAAP because they are individually evaluated using 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~~fair value measurement, such 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~~the underlying collateral. Credit loss is ~~estimated~~measured using ~~one of several methods, including collateral value when~~a market approach based on the ~~loan is collateral dependent, market~~fair value of ~~similar debt, enterprise value, and discounted cash flows.~~the collateral, less estimated costs to dispose, for loans the Company considers to be collateral dependent. 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 and leases is generally based on recent real estate appraisals.

~~Table of Contents~~

~~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 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~~non-recurring collateral dependent loans and leasesis primarily the sales comparison approach less estimatedselling ~~costs of 10%.~~costs.

~~OREO~~

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 8—Fair Value—Continued

Other Real Estate Owned (“OREO”) is reported at fair value on a non-recurring basis. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take 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~~non-recurring OREO is primarily the sales comparison approach lessestimated selling ~~costs of 10%.~~costs.

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

September 30, 2022			Fair Value
March 31, 2023													Fair Value Measurements
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value		Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Financial Assets:
Cash and cash equivalents	$	882,883	$	882,883	$	-	$	-	$	882,883	$	529,593	$	529,593	$	-	$	-	$	529,593
Investment securities available-for-sale		177,454		4,941		172,513		-		177,454
Investment securities held-to-maturity		852,272		-		663,285		42,416		705,701
Held-to-maturity securities												849,994		-		649,419		56,490		705,909
Non-marketable securities		15,549		-		-		15,549		15,549		15,549		-		-		15,549		15,549
Loans and leases, net		3,260,245		-		-		3,203,611		3,203,611		3,358,560		-		-		3,207,754		3,207,754
Bank-owned life insurance		72,566		72,566		-		-		72,566		66,076		66,076		-		-		66,076

Financial Liabilities:
Total deposits	$	4,909,257	$	-	$	4,548,873	$	352,319	$	4,901,192	$	4,539,162	$	-	$	4,153,033	$	377,969	$	4,531,002
Subordinated debentures		10,310		-		9,707		-		9,707		10,310		-		12,830		-		12,830

December 31, 2021			Fair Value
December 31, 2022													Fair Value Measurements
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value		Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Financial Assets:
Cash and cash equivalents	$	715,460	$	715,460	$	-	$	-	$	715,460	$	588,257	$	588,257	$	-	$	-	$	588,257
Investment securities available-for-sale		270,454		10,214		260,240		-		270,454
Investment securities held-to-maturity		737,052		-		681,588		44,446		726,034
Held-to-maturity securities												844,953		-		645,859		42,534		688,393
Non-marketable securities		15,549		-		-		15,549		15,549		15,549		-		-		15,549		15,549
Loans and leases, net		3,176,170		-		-		3,179,857		3,179,857		3,445,476		-		-		3,335,042		3,335,042
Bank-owned life insurance		71,411		71,411		-		-		71,411		73,038		73,038		-		-		73,038

Financial Liabilities:
Total deposits	$	4,640,152	$	-	$	4,247,666	$	391,732	$	4,639,398	$	4,759,269	$	-	$	4,427,869	$	323,572	$	4,751,441
Subordinated debentures		10,310		-		6,890		-		6,890		10,310		-		12,211		-		12,211

~~Table of Contents~~

~~FARMERS & MERCHANTS BANCORP~~

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

~~Note 7—Fair Value Measurements—Continued~~

Non-recurring Measurements: collateral dependent loans and leases and OREO are classified with Level 3 of the fair value hierarchy. The estimated fair value of collateral dependent loans and leases 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.~~loan or lease. The key inputs used to determine the fair value of collateral dependent loans and leases include selling costs, and adjustment to comparable collateral. There were no transfers into or out of Level 3.

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 8—Fair Value—Continued

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 or leasesmay occur.

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

September 30, 2022			Fair Value
March 31, 2023													Fair Value Measurements
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value		Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Fair valued on a recurring basis:
Investment securities available-for-sale
U.S. Treasury notes	$	4,941	$	4,941	$	-	$	-	$	4,941
Available-for-sale securities
U.S. Government-sponsored securities		4,698		-		4,698		-		4,698	$	4,112	$	-	$	4,112	$	-	$	4,112
Mortgage-backed securities		156,453		-		156,453		-		156,453		103,697		-		103,697		-		103,697
Collateralized mortgage obligations		1,458		-		1,458		-		1,458		607		-		607		-		607
Corporate securities		9,594		-		9,594		-		9,594		9,711		-		9,711		-		9,711
Other		310		-		310		-		310		310		-		310		-		310

Fair valued on a non-recurring basis:
Other real estate	$	873	$	-	$	-	$	873	$	873
Collateral Dependent loans											$	14,065	$	-	$	-	$	14,065	$	14,065
Other real estate owned												873		-		-		873		873

December 31, 2021			Fair Value
December 31, 2022													Fair Value Measurements
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value		Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Fair valued on a recurring basis:
Investment securities available-for-sale
Available-for-sale securities
U.S. Treasury notes	$	10,089	$	10,089	$	-	$	-	$	10,089	$	4,964	$	4,964	$	-	$	-	$	4,964
U.S. Government-sponsored securities		6,374		-		6,374		-		6,374		4,427		-		4,427		-		4,427
Mortgage-backed securities		251,120		-		251,120		-		251,120		132,528		-		132,528		-		132,528
Collateralized mortgage obligations		2,436		-		2,436		-		2,436		1,054		-		1,054		-		1,054
Corporate securities												9,581		-		9,581		-		9,581
Other		435		125		310		-		435		310		-		310		-		310

Fair valued on a non-recurring basis:
Individually evaluated loans	$	2,562	$	-	$	-	$	2,562	$	2,562
Other real estate		873		-		-		873		873
Collateral Dependent loans											$	14,473	$	-	$	-	$	14,473	$	14,473
Other real estate owned												873		-		-		873		873

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FARMERS & MERCHANTS BANCORP

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

Note 8—9—Commitments and Contingencies

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

(Dollars in thousands)
September 30,
2022

December 31,
2021

Commitments to extend credit, including unsecured commitments of $20,552 and $21,036 as of September 30, 2022 and December 31, 2021, respectively
$ 1,128,340 $ 937,009
Stand-by letters of credit, including unsecured commitments of $7,352 and $9,091 as of September 30, 2022 and December 31, 2021, respectively
16,629 17,880
Performance guarantees under interest rate swap contracts entered into with our clients and third-parties - 1,433

(Dollars in thousands)	March 31, 2023		December 31, 2022

Commitments to extend credit, including unsecured commitments of $20,114 and $20,401 as of March 31, 2023 and December 31, 2022, respectively	$	1,174,664	$	1,141,036
Stand-by letters of credit, including unsecured commitments of $8,059 and $7,954 as of March 31, 2023 and December 31, 2022, respectively		16,821		17,138

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

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

The Company has commitments to fund investments in LIHTC partnerships and limited liability companies. At March 31, 2023, the remaining commitments to the LIHTC partnerships and limited liability companies were approximately $18.8 million. At December 31, 2022, the remaining commitments to the LIHTC partnerships and the limited liability companies were $19.7 million.

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

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

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Item 2.

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

The following discussion is intended to provide a more comprehensive review of the Company’s operating results and financial ~~condition than can be obtained from reading the Unaudited Consolidated Financial Statements alone.~~condition. The ~~discussion~~information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the ~~notes thereto~~accompanying Notes to Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q included in “Part I. Item 1. Financial Statements.”

FORWARD-LOOKING ~~STATEMENTS~~INFORMATION

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

These forward-looking statements involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections inand other parts of this report and the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 (“Form 10-K”), ~~and other parts of this report that~~ could cause actual results to differ materially from those anticipated in these forward-looking statements. The following is a non-exclusive list of factors which could cause actual results to differ materially from forward-looking statements in this Quarterly Report on Form 10-Q:

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

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

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

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

■	risks associated with recent negative events in the banking industry, and any legislative and/or bank regulatory actions, that could potentially impact earnings, liquidity and/or the availability of capital;

■	higher defaults in our loan and lease portfolio than we expect;

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

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

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

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

■	technological changes; ~~and~~

■	failure to raise the debt limit on U.S. debt;

■	regulatory or judicial ~~proceedings.~~proceedings;

■	the future impact of the COVID-19 virus or variants thereof; and

■	other factors and risks including those described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

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

Please take into account that forward-looking statements speak only as of the date of this Form ~~10-Q. 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~~(or documents incorporated by ~~law.~~reference, if applicable).

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The Company does not undertake any obligation to publicly correct or update any forward-looking statements if it later becomes aware that actual results are likely to differ materially from those expressed in such forward-looking statements, except as required by law.

Overview

Farmers & Merchants Bancorp 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 ~~September 30, 2022,~~March 31, 2023, consisted of ~~770,822~~762,931 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 the Company’s ~~asset~~ growth has been the generation of core deposits, which the Company raises through its existing branch locations, newly opened branch locations, or through acquisitions. ~~Recent loan~~Loan growth over the years is the result of organic growth generated by the Company’s seasoned relationship managers and supporting associates who provide outstanding service and responsiveness to the Company’s clients.

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

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

~~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.

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~~Management believes the judgments, estimates~~Critical Accounting Policies 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 criticalEstimates

Our accounting policies ~~the use~~are fundamental to understanding management’s discussion and analysis of ~~other judgments, estimates and assumptions could result in material differences in our~~ results of operations orand financial condition. ~~Further, subsequent changes in economic or market conditions could have a material impact on these~~We identify critical policies and 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~~as those that require management to make ~~estimates~~particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and judgments that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis, management evaluates the estimates used. Estimates are based upon historical experience, current economic conditions and other factors that management considers reasonable under the circumstances and the actual results may differ from these estimates under different assumptions. The allowance for credit losses, deferred income taxes, and fair values of financial instruments are estimates, which are particularly subject to change.

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

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

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

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

~~Table of Contents~~

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

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

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

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

Management has determined to use a “through-the-cycle” historical credit loss experience as its baseline for historical credit losses. Management has determined a representative period for a full credit cyclematerially different amounts would be ~~from 2008~~reported under different conditions or using different assumptions. These policies and estimates relate to 2022 (fifteen-year credit cycle). Management has collected historical loss information on its own loan portfolio as well as peer group information by the seventeen loan segments over this time horizon using information available from Federal Regulators on the Uniform Bank Performance Report (“UBPR”).

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

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

~~Table of Contents~~

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.

~~Table of Contents~~

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

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

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

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

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

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

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

~~Table of Contents~~

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

~~Only tax positions that meet the more likely than not recognition threshold~~

Our critical accounting policies and estimates are ~~recognized. The benefit~~described in Item 7. Management’s Discussion and Analysis of ~~a tax position is recognized~~Financial Condition and Results of Operations included in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that, the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest expense and penalties associated with unrecognized tax benefits are classified as income tax expense in the consolidated statements of income.our Form 10-K.

Impact of Recently Issued Accounting Standards

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

Results of Operations

The following discussion and analysis is intended to provide a better understanding of Farmers & Merchants Bancorp and its subsidiaries’ financial condition at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 and results of operations during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021, respectively.~~2022. Information related to the comparison of the results of operations for the three years ended December 31, 2022, 2021, ~~2020,~~ and ~~2019~~2020 can be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the ~~2021~~2022 Annual Report on Form 10-K filed with the SEC on March 15, ~~2022.~~2023.

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

3730

Table of Contents

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

For the Three Months Ended September 30,

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
$
718,794

$
4,159

2.30
%

$
856,159

$
328

0.15
%
Securities:⁽¹⁾

Taxable securities
1,063,166

5,091

1.92
%

786,983

3,282

1.67
%
Non-taxable securities⁽²⁾

47,005

386

3.28
%

49,616

399

3.22
%
Total investment securities
1,110,171

5,477

1.96
%

836,599

3,681

1.76
%
Loans:⁽³⁾

Real estate:
Commercial
1,224,689

15,179

4.92
%

1,046,626

11,255

4.27
%
Agricultural
715,286

9,243

5.13
%

640,330

8,301

5.14
%
Residential and home equity
375,699

3,836

4.05
%

338,520

3,858

4.52
%
Construction
164,664

2,468

5.95
%

175,906

2,300

5.19
%
Total real estate
2,480,338

30,726

4.91
%

2,201,382

25,714

4.63
%
Commercial & industrial
438,761

5,770

5.22
%

374,162

4,111

4.36
%
Agricultural
259,345

3,607

5.52
%

236,071

2,637

4.43
%
Commercial leases
93,051

1,365

5.82
%

96,690

1,363

5.59
%
Consumer and other
8,929

400

17.77
%

155,182

2,263

5.79
%
Total loans and leases
3,280,424

41,868

5.06
%

3,063,487

36,088

4.67
%
Non-marketable securities
15,549

209

5.33
%

15,549

244

6.23
%
Total interest earning assets
5,124,938

51,713

4.00
%

4,771,794

40,341

3.35
%
Allowance for credit losses
(63,107
)

(60,268
)

Non-interest earning assets
318,078

324,057

Total average assets
$
5,379,909

$
5,035,583

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits:
Demand
$
1,101,830

445

0.16
%

$
1,068,707

293

0.11
%
Savings and money market accounts
1,588,234

476

0.12
%

1,385,430

346

0.10
%
Certificates of deposit greater than $250,000
156,110

96

0.24
%

168,714

143

0.34
%
Certificates of deposit less than $250,000
212,036

105

0.20
%

230,532

147

0.25
%
Total interest bearing deposits
3,058,210

1,122

0.15
%

2,853,383

929

0.13
%
Short-term borrowings
-

-

0.00
%

-

-

0.00
%
Subordinated debentures
10,310

134

5.16
%

10,310

78

3.00
%
Total interest bearing liabilities
3,068,520

1,256

0.16
%

2,863,693

1,007

0.14
%
Non-interest bearing deposits
1,764,266

1,655,738

Total funding
4,832,786

1,256

0.10
%

4,519,431

1,007

0.09
%
Other non-interest bearing liabilities
77,389

68,564

Shareholders' equity
469,734

447,588

Total average liabilities and shareholders' equity
$
5,379,909

$
5,035,583

Net interest income
$
50,457

$
39,334

Interest rate spread
3.84
%

3.21
%
Net interest margin⁽⁴⁾

3.95
%

3.26
%

	Three Months Ended March 31,
	2023								2022
(Dollars in thousands)	Average Balance			Interest Income / Expense		Average Yield / Rate			Average Balance			Interest Income / Expense		Average Yield / Rate
ASSETS
Interest earnings deposits in other banks and federal funds sold	$	521,147		$	5,961		4.64	%	$	760,080		$	366		0.20	%
Investment Securities:⁽¹⁾
Taxable securities		967,699			4,805		2.01	%		1,022,457			4,588		1.82	%
Non-taxable securities⁽²⁾		57,513			557		3.87	%		49,997			402		3.22	%
Total investment securities		1,025,212			5,362		2.12	%		1,072,454			4,990		1.89	%
Loans:⁽³⁾
Real estate:
Commercial		1,280,959			16,649		5.27	%		1,151,611			13,276		4.68	%
Agricultural		715,756			9,614		5.45	%		680,230			7,793		4.65	%
Residential and home equity		387,369			4,095		4.29	%		353,371			3,301		3.79	%
Construction		169,913			2,937		7.01	%		191,684			2,072		4.38	%
Total real estate		2,553,997			33,295		5.29	%		2,376,896			26,442		4.51	%
Commercial & industrial		465,383			7,624		6.64	%		424,598			4,799		4.58	%
Agricultural		280,467			5,204		7.52	%		248,414			2,755		4.50	%
Commercial leases		116,948			1,805		6.26	%		94,855			1,416		6.05	%
Consumer and other		5,580			80		5.81	%		52,078			2,021		15.74	%
Total loans and leases		3,422,375			48,008		5.69	%		3,196,841			37,433		4.75	%
Non-marketable securities		15,549			301		7.85	%		15,549			305		7.96	%
Total interest earning assets		4,984,283			59,632		4.85	%		5,044,924			43,094		3.46	%
Allowance for credit losses		(67,691	)							(61,022	)
Non-interest earning assets		311,140								314,932
Total average assets	$	5,227,732							$	5,298,834

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing deposits:
Demand	$	1,068,504			444		0.17	%	$	1,115,578			259		0.09	%
Savings and money market accounts		1,561,684			2,503		0.65	%		1,517,234			342		0.09	%
Certificates of deposit greater than $250,000		147,704			487		1.34	%		167,515			97		0.23	%
Certificates of deposit less than $250,000		206,214			280		0.55	%		223,842			105		0.19	%
Total interest bearing deposits		2,984,106			3,714		0.50	%		3,024,169			803		0.11	%
Short-term borrowings		3			-		0.00	%		3			-		0.00	%
Subordinated debentures		10,310			196		7.71	%		10,310			82		3.23	%
Total interest bearing liabilities		2,994,419			3,910		0.53	%		3,034,482			885		0.12	%
Non-interest bearing deposits		1,663,152								1,722,597
Total funding		4,657,571			3,910		0.34	%		4,757,079			885		0.08	%
Other non-interest bearing liabilities		72,710								76,061
Shareholders’ equity		497,451								465,694
Total average liabilities and shareholders’ equity	$	5,227,732							$	5,298,834

Net interest income				$	55,722							$	42,209
Interest rate spread							4.32	%							3.35	%
Net interest margin⁽⁴⁾							4.53	%							3.39	%

⁽¹⁾Excludes average unrealized (losses) ~~gains~~ of ($~~28.5)~~28.2) million and $2($7.0) million for the three months ended ~~September 30,~~March 31, 2023, and 2022, ~~and 2021,~~ respectively, which are included in non-interest earning assets.

⁽²⁾The average yield does not include the federal tax benefits at an assumed effective yield of 26% related to income earned on tax-exempt municipal securities totaling ~~$102,000~~$147,000 and ~~$104,000~~$106,000 for the three months ended ~~September 30,~~March 31, 2023, and 2022, ~~and 2021,~~ respectively.

⁽³⁾Loan interest income includes loan fees of ~~$2.6~~$2.0 million and ~~$3.5~~$3.9 million for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively.

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

3831

Table of Contents

For the Nine Months Ended September 30,

2022 2021
(Dollars in thousands)
Average
Balance

Interest
Income /
Expense

Average
Yield / Rate

Average
Balance

Interest
Income /
Expense

Average
Yield / Rate

ASSETS
Interest earnings deposits in other banks and federal funds sold
$
720,692

$
5,934

1.10
%

$
620,757

$
595

0.13
%
Securities:⁽¹⁾

Taxable securities
1,058,859

14,786

1.86
%

819,747

10,780

1.75
%
Non-taxable securities⁽²⁾

48,436

1,179

3.25
%

52,816

1,238

3.13
%
Total investment securities
1,107,295

15,965

1.92
%

872,563

12,018

1.84
%
Loans:⁽³⁾

Real estate:
Commercial
1,178,731

41,986

4.76
%

1,005,970

36,602

4.86
%
Agricultural
699,205

25,545

4.88
%

633,874

22,884

4.83
%
Residential and home equity
365,062

10,728

3.93
%

337,307

10,191

4.04
%
Construction
187,181

7,075

5.05
%

186,337

6,447

4.63
%
Total real estate
2,430,179

85,334

4.69
%

2,163,488

76,124

4.70
%
Commercial & industrial
434,217

15,460

4.76
%

365,744

12,567

4.59
%
Agricultural
257,555

9,350

4.85
%

229,862

7,758

4.51
%
Commercial leases
92,914

4,158

5.98
%

100,347

4,135

5.51
%
Consumer and other
27,330

3,569

17.46
%

203,683

9,255

6.08
%
Total loans and leases
3,242,195

117,871

4.86
%

3,063,124

109,839

4.79
%
Non-marketable securities
15,549

732

6.29
%

14,451

646

5.98
%
Total interest earning assets
5,085,731

140,502

3.69
%

4,570,895

123,098

3.60
%
Allowance for credit losses
(61,864
)

(59,971
)

Non-interest earning assets
314,520

315,582

Total average assets
$
5,338,387

$
4,826,506

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits:
Demand
$
1,111,513

1,023

0.12
%

$
1,002,267

869

0.12
%
Savings and money market accounts
1,550,334

1,179

0.10
%

1,336,826

1,136

0.11
%
Certificates of deposit greater than $250,000
163,148

299

0.25
%

169,545

587

0.46
%
Certificates of deposit less than $250,000
218,302

297

0.18
%

239,185

608

0.34
%
Total interest bearing deposits
3,043,297

2,798

0.12
%

2,747,823

3,200

0.16
%
Short-term borrowings
1

-

0.00
%

-

-

0.00
%
Subordinated debentures
10,310

319

4.14
%

10,310

236

3.06
%
Total interest bearing liabilities
3,053,608

3,117

0.14
%

2,758,133

3,436

0.17
%
Non-interest bearing deposits
1,740,859

1,567,089

Total funding
4,794,467

3,117

0.09
%

4,325,222

3,436

0.11
%
Other non-interest bearing liabilities
77,953

64,439

Shareholders' equity
465,967

436,845

Total average liabilities and shareholders' equity
$
5,338,387

$
4,826,506

Net interest income
$
137,385

$
119,662

Interest rate spread
3.56
%

3.43
%
Net interest margin⁽⁴⁾

3.61
%

3.50
%

⁽¹⁾~~Excludes average unrealized (losses) gains of ($20.1) million and $5.4 million for the nine months ended September 30, 2022, and 2021, respectively, which are included in non-interest earning assets.~~

⁽²⁾The average yield does not include the federal tax benefits at an assumed effective yield of 26% related to income earned on tax-exempt municipal securities totaling $312,000 and $324,000 for the nine months ended September 30, 2022, and 2021, respectively.

⁽³⁾~~Loan interest income includes loan fees of $9.8 million and $13.1 million for the nine months ended September 30, 2022 and 2021, respectively.~~

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

~~Table of Contents~~

~~Third Quarter 2022 vs. Third Quarter 2021~~

Interest-bearing deposits with banks and Federal Reserve balances are earning assets available to the Company. Average interest-bearing deposits with banksconsisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of ~~2.30%~~4.64% and ~~0.15%~~0.20% for the three months ended March 31, 2023 and 2022, respectively. The increase was primarily the result of the FRB increasing rates by 475 basis points during 2022 and the ~~third~~first quarter of ~~2022 and 2021, respectively.~~ 2023. Average interest-bearing deposits ~~with banks~~ were ~~$719~~$521 million and ~~$856~~$760 million for the ~~quarter~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. Interest income on interest-bearing deposits with banks was ~~$4.2~~$6.0 million and ~~$0.3~~$0.4 million for the ~~quarter~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively.

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

~~Total~~

Average total investment securities ~~averaged~~were $1.0 billion and $1.1 billion ~~and $836.6 million~~ for the ~~quarter~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively. Total interest income on investments was $5.5 million and $3.7 million for the quarter ended September 30, 2022 and 2021,~~ respectively. The average yield on total investment securities was ~~1.96%~~2.12% and ~~1.76%~~1.89% for the ~~quarter~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. ~~See “Investment Securities and Federal Reserve balances” for a discussion of the Company’s investment strategy in 2022.~~

Loans and leases held for investment averaged $3.3 billion and $3.1 billion for the quarter ended September 30, 2022 and 2021, respectively. Total interest income on loans was $41.9 million and $36.1 million for the quarter ended September 30, 2022 and 2021, respectively. The average yield on the loan & lease portfolio was 5.06% and 4.67% for the quarter ended September 30, 2022 and 2021, respectively. The Company continues to experience aggressive competitor pricing for loans and leases to which it may need to respond in order to retain key customers. This could continue to place negative pressure on future loan & lease yields and net interest margin.

Interest-bearing liabilities averaged $3.1 billion and $2.9 billion for the quarter ended September 30, 2022 and 2021, respectively. Total interest expense on interest-bearing deposits was $1.1 million, $.9 million for the quarter ended September 30, 2022 and 2021, respectively. The average rate paid on interest-bearing liabilities was 0.15% and 0.13% for the quarter ended September 30, 2022 and 2021, respectively. 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.

~~Nine Months Ended September 30, 2022 vs. Nine Months Ended September 30, 2021~~

~~Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB~~ earned an average interest rate of 1.10% and 0.13% for the first nine months ended September 30, 2022 and 2021, respectively. Average interest-bearing deposits were $721 million and $621 million for the nine months ended September 30, 2022 and 2021, respectively. Interest income on interest-bearing deposits with banks was $5.9 million and $0.6 million for the nine months ended September 30, 2022 and 2021, respectively.

Average total investment securities were $1.1 billion and $873 million for the nine months ended September 30, 2022 and 2021, respectively. Total interest income on investments was $16.0 million and $12.0 million for the nine months ended September 30, 2022 and 2021, respectively. The average yield on total investment securities were 1.92% and 1.84% for the nine months ended September 30, 2022 and 2021, respectively. See “Investment Securities and Federal Reserve balances” for a discussion of the Company’s investment strategy in 2022.

~~Table of Contents~~

Average loans and leases held for investment were ~~$3.2~~$3.4 billion and ~~$3.1~~$3.2 billion for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively. Total interest income on loans was $117.9 million and $109.8 million for the nine months ended September 30, 2022 and 2021,~~ respectively. The average yield on the loan &and lease portfolio was ~~4.86%~~5.69% and ~~4.79%~~4.75% for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. The increase in the loan yield reflects the increase in market interest rates over the last year.

Average interest-bearing liabilities were ~~$3.1 billion and $2.8~~$3.0 billion for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022. The average rate paid on interest-bearing liabilities was 0.53% and 0.12% for the three months ended March 31, 2023 and 2022, ~~and 2021,~~ respectively. Total interest expense on interest-bearing deposits was ~~$2.8~~$3.7 million and ~~$3.2~~$0.8 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, respectively, as a result of increases in short-term market interest rates during 2022 and ~~2021, respectively.~~the first quarter of 2023. The ~~average rate paid~~Company is experiencing deposit pricing pressures as competition for deposits increases which may increase future deposit costs in order to retain key customers, which could place negative pressure on ~~interest-bearing liabilities was 0.14% and 0.17% for~~ the ~~nine months ended September 30, 2022 and 2021, respectively.~~net interest margin looking forward.

Table of Contents

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

Three Months Ended
September 30, 2022
compared with 2021
Nine Months Ended
September 30, 2022
compared with 2021

Increase (Decrease) Due to: Increase (Decrease) Due to:
(Dollars in thousands) Volume Rate Net Volume Rate Net
Interest income:
Interest earnings deposits in other banks and federal funds sold
$
(370
)

$
4,201

$
3,831

$
111

$
5,228

$
5,339

Securities:
Taxable securities
1,272

537

1,809

3,305

701

4,006

Non-taxable securities
(57
)

44

(13
)

(127
)

68

(59
)
Total securities
1,214

582

1,796

3,178

769

3,947

Loans:
Real estate:
Commercial
2,069

1,855

3,924

6,630

(1,246
)

5,384

Agricultural
1,122

(180
)

942

2,384

277

2,661

Residential and home equity
1,625

(1,647
)

(22
)

962

(425
)

537

Construction
(761
)

929

168

29

599

628

Total real estate
4,055

957

5,012

10,006

(796
)

9,210

Commercial & industrial
775

884

1,659

2,424

469

2,893

Agricultural
278

692

970

978

614

1,592

Commercial leases
(210
)

212

2

(429
)

452

23

Consumer and other
(12,215
)

10,352

(1,863
)

(16,453
)

10,767

(5,686
)
Total loans
(7,316
)

13,096

5,780

(3,474
)

11,506

8,032

Non-marketable securities
0

(35
)

(35
)

51

35

86

Total interest income
(6,472
)

17,844

11,372

(135
)

17,539

17,404

Interest expense:
Interest bearing deposits:
Demand
9

143

152

98

56

154

Savings and money market accounts
55

75

130

218

(175
)

43

Certificates of deposit greater than $250,000
(10
)

(37
)

(47
)

(21
)

(267
)

(288
)
Certificates of deposit less than $250,000
(11
)

(31
)

(42
)

(49
)

(262
)

(311
)
Total interest bearing deposits
43

150

193

246

(648
)

(402
)
Short-term borrowings
-

-

-

-

-

-

Subordinated debentures
-

56

56

-

83

83

Total interest expense
43

206

249

246

(565
)

(319
)
Net interest income
$
(6,515
)

$
17,638

$
11,123

$
(381
)

$
18,104

$
17,723

	Three Months Ended March 31, 2023 compared with 2022
	Increase (Decrease) Due to:
(Dollars in thousands)	Volume			Rate			Net
Interest income:
Interest earnings deposits in other banks and federal funds sold	$	(844	)	$	6,439		$	5,595
Investment securities:
Taxable securities		(1,254	)		1,471			217
Non-taxable securities		66			89			155
Total investment securities		(1,188	)		1,560			372
Loans:
Real estate:
Commercial		1,580			1,793			3,373
Agricultural		423			1,398			1,821
Residential and home equity		335			459			794
Construction		(1,467	)		2,332			865
Total real estate		872			5,981			6,853
Commercial & industrial		497			2,328			2,825
Agricultural		394			2,055			2,449
Commercial leases		340			49			389
Consumer and other⁽¹⁾		(1,138	)		(803	)		(1,941	)
Total loans and leases		965			9,610			10,575
Non-marketable securities		-			(4	)		(4	)
Total interest income		(1,067	)		17,605			16,538

Interest expense:
Interest bearing deposits:
Demand		(75	)		260			185
Savings and money market accounts		10			2,151			2,161
Certificates of deposit greater than $250,000		(81	)		471			390
Certificates of deposit less than $250,000		(57	)		232			175
Total interest bearing deposits		(203	)		3,114			2,911
Subordinated debentures		-			114			114
Total interest expense		(203	)		3,228			3,025
Net interest income	$	(864	)	$	14,377		$	13,513

⁽¹⁾ Consumer and other - These decreases respresent the end of the PPP loans which were $0 and $26,126 as of March 31, 2023 and 2022 respectively.

Net interest income ~~increased by $17.7~~was $55.7 million ~~or 14.81% to $137.4~~and $42.2 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~compared to $119.7 million for the same period one year earlier.~~respectively. The increase in net interest income was driven primarily by increased interest ~~rates.~~rates as the increase in the loan yield outpaced the increase in deposit costs.

4133

Table of Contents

Comparison of Results of Operations for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

Three Months Ended
September 30,
Nine Months Ended
September 30,
(Dollars in thousands) 2022 2021
$ Better /
(Worse)

% Better /
(Worse)
2022 2021
$ Better /
(Worse)

% Better /
(Worse)

Selected Income Statement Information:
Interest income
$
51,713

$
40,341

$
11,372

28.19
%

$
140,502

$
123,098

$
17,404

14.14
%
Interest expense
1,256

1,007

(249
)

(24.73
%)

3,117

3,436

319

9.28
%
Net interest income
50,457

39,334

11,123

28.28
%

137,385

119,662

17,723

14.81
%
Provision for credit losses
1,500

-

(1,500
)
N/A
3,000

1,250

(1,750
)

(140.00
%)
Net interest income after provision for credit losses
48,957

39,334

9,623

24.46
%

134,385

118,412

15,973

13.49
%
Non-interest income
1,559

4,617

(3,058
)

(66.23
%)

9,383

16,292

(6,909
)

(42.41
%)
Non-interest expense
24,375

20,585

(3,790
)

(18.41
%)

71,194

67,732

(3,462
)

(5.11
%)
Income before income tax expense
26,141

23,366

2,775

11.88
%

72,574

66,972

5,602

8.36
%
Income tax expense
6,605

5,864

(741
)

(12.64
%)

17,537

16,604

(933
)

(5.62
%)
Net income
$
19,536

$
17,502

$
2,034

11.62
%

$
55,037

$
50,368

$
4,669

9.27
%

	Three Months Ended March 31,
(Dollars in thousands)	2023		2022		$ Better / (Worse)			% Better / (Worse)
Selected Income Statement Information:
Interest income	$	59,632	$	43,094	$	16,538			38.38	%
Interest expense		3,910		885		(3,025	)		(341.81	%)
Net interest income		55,722		42,209		13,513			32.01	%
Provision for credit losses		1,500		-		(1,500	)	N/A
Net interest income after provision for credit losses		54,222		42,209		12,013			28.46	%
Non-interest income		3,460		4,312		(852	)		(19.76	%)
Non-interest expense		28,183		23,788		(4,395	)		(18.48	%)
Income before income tax expense		29,499		22,733		6,766			29.76	%
Income tax expense		5,952		5,675		(277	)		(4.88	%)
Net income	$	23,547	$	17,058	$	6,489			38.04	%

Net Income. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~Farmers & Merchants Bancorp reported~~ net income was $23.5 million compared with $17.1 million, respectively. The increase in net income was primarily the result of ~~$19.5~~higher net interest income of $13.5 million. The Company also recognized in non-interest income, a $4.3 million death benefit on bank-owned life insurance (“BOLI”) during the three months ended March 31, 2023 that was not present during the three months ended March 31, 2022. This increase was offset by an increase in non-interest expense of $4.4 million, higher provision for credit losses of $1.5 million, a decrease in non-interest income of $0.8 million and ~~$55 million, earnings per share~~higher income tax expense of ~~$25.20 and $70.47 and return on average assets of 1.45% and 1.37%, respectively. Return on average shareholders’ equity was 16.64% and 15.75% for the three and nine months ended September 30, 2022.~~$.3 million.

For the three and nine months ended September 30, 2021, Farmers & Merchants Bancorp reported net income of $17.5 million and $50.4 million, earnings per share of $22.16 and $63.79 and return on average assets of 1.39% and 1.39%, respectively. Return on average shareholders’ equity was 15.64% and 15.37% for the three and nine months ended September 30, 2021.

Net Interest Income and Net Interest Margin. For the ~~quarter~~three months ended ~~September 30, 2022,~~March 31, 2023, net interest income increased ~~$11.1~~$13.5 million, or ~~28.28%~~32.01%, to ~~$50.5~~$55.7 million compared with ~~$39.3~~$42.2 million for the same ~~quarter~~period a year earlier. The increase is primarily the result ~~of: (1) average~~of the net interest ~~earning assets~~margin increasing ~~$353 million, or 7.40%~~114 basis points to ~~$5.1 billion~~4.53% compared with ~~$4.8 billion~~3.39% for the same period a year ~~earlier; and (2)~~earlier. The increase in the net interest margin was primarily the result of the FRB increasing the federal funds rate by 69475 basis ~~point~~points during 2022 and the first quarter of 2023. The loan yield increased 94 basis points compared to ~~3.95% for~~ the first quarter ~~ended September 30,~~of 2022 and outpaced the increase in deposit yield of 41 basis points compared ~~with 3.26% for~~to the same period a year earlier.

Net interest income for the nine months ended September 30, 2022 increased by $17.7 million, or 14.81%, to $137.4 million, compared to $119.7 million at September 30, 2021. The increase in net interest income was primarily due to a $515 million increase in average earning assets and an 11 basis point increase in the net interest margin. For the nine months ended September 30, 2022, the Company’s net interest margin was 3.61% compared to 3.50% for the same period in 2021.

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 loan and HTM securities portfolios.

The Company made a ~~$3.0~~$1.5 million provision for credit losses during the first ~~nine~~three months of ~~2022~~2023 compared to ~~$1.3 million~~no provision for credit losses the same period ~~in 2021. Net~~a year earlier. For the three month ended March 31, 2023 net recoveries ~~during the first nine months of 2022~~ were ~~$4,000~~$188,000 compared to net recoveries of ~~$191,000 in~~$25,000 for the ~~first nine months of 2021.~~same period a year earlier.

Non-interest Income. Non-interest income decreased ~~$3.0~~$0.9 million, or ~~66.23%~~19.76%, to ~~$1.6~~$3.5 million for the ~~quarter~~three months ended ~~September 30, 2022~~March 31, 2023 compared with ~~$4.6~~$4.3 million for the same period a year earlier. ~~This~~The year-over-year decrease in non-interest income was primarily due to a ~~$3.0~~$5.7 million loss on sale of investment ~~securities~~securities. This decrease was off-set by a $4.3 million BOLI death benefit and a ~~$0.2~~$0.5 million ~~decrease~~increase in ~~service charges~~net gains on ~~deposit accounts. Service charges on deposit accounts dropped because the Company eliminated NSF fees during the quarter ended September 30, 2022.~~deferred compensation plan investments.

~~Table of Contents~~

The Company recorded net gains on deferred compensation plan investments of ~~$0.3~~$0.9 million for the ~~quarter~~three months ended ~~September 30, 2022~~March 31, 2023 compared with net gains of ~~$0.6~~$0.4 million for the same ~~respective period.~~period a year earlier. See Note ~~12,~~11, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, ~~2021~~2022 Form 10-K filed on March 15, ~~2022~~2023 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these investment gains/losses to be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no net-effect on the Company’s net income.

Table of Contents

Non-interest ~~income decreased $6.9~~Expense. Non-interest expense increased $4.4 million, or ~~42.41%~~18.48%, to ~~$9.4~~$28.2 million for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 compared with ~~$16.3~~$23.8 million for the same period ~~of 2021. The~~a year ago. This year-over-year ~~decrease in non-interest income~~increase was primarily ~~due to~~comprised of: (1) a ~~$3.0~~$1.6 million ~~loss on sale of investment securities during the third quarter of 2022,~~increase in employee benefits; (2) a ~~$2.5~~$1.2 million ~~reduction~~increase in ~~gain on sale of investment securities recorded~~salaries; (3) a $0.6 million increase in ~~the first quarter of 2021 and~~other miscellaneous expenses; (4) a ~~$2.0~~$0.5 million ~~decline~~increase in ~~gains/(losses)~~net gains on deferred compensation plan ~~investments. These reductions were partially off-set by~~investments; (5) a ~~$0.4~~$0.3 million increase in ~~services charges~~FDIC insurance; and ~~processing fees received on deposit accounts and an increase of~~(6) a $0.2 million increase in ~~other non-interest income.~~marketing expenses.

~~The Company recorded net losses~~

Net gains on deferred compensation plan ~~investments of $0.2~~obligations were $0.9 million for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 compared with net gains of ~~$1.8~~$0.4 million for the same respective period. See Note ~~12,~~11, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, ~~2021~~2022 Form 10-K filed on March 15, ~~2022~~2023 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these ~~investment gains/losses to be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no net-effect on the Company’s net income.~~

~~Non-interest Expense.~~ Non-interest expense increased $3.8 million, or 18.41%, to $24.4 million for the quarter ended September 30, 2022 compared with $20.6 million for the same period a year ago. This increase was primarily comprised of: (1) a $1.5 million increase in salaries and employee benefits; (2) a $1.0 million increase in provision for unused commitments; (3) a $0.7 million increase in other miscellaneous expenses; (4) a $0.4 million increase in recruitment and relocation expenses; and (5) an increase of $0.2 in marketing expenses. These increases were partially off-set by a $0.3 million decline in gains/(losses) on deferred compensation plan investments.

~~The Company recorded net~~ gains on deferred compensation plan investments of $0.3 million for the quarter ended September 30, 2022 compared with net gains of $0.6 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 plan investmentsobligations to be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no net-effect on the Company’s net income.

~~Non-interest expense increased $3.5 million, or 5.11%, to $71.2 million for~~

Income Tax Expense. For the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023, income tax expense was $6.0 million compared ~~with $67.7~~to $5.7 million for the same period a year ago. This increase was primarily comprised of: (1) a $1.8 million increase in salaries and employee benefits; (2) a $1.0 million increase in provision for unused commitments; (3) a $0.6 million increase in recruitment and relocation expenses; (4) a $0.4 million increase in professional fees; (5) a $0.5 million increase in marketing and legal expenses; and (6) a $0.7 million increase in other miscellaneous expenses. These increases were partially off-set by a $2.0 million decline in gains/(losses) on deferred compensation plan investments.

~~The Company recorded net losses on deferred compensation plan investments of $0.2 million for~~earlier. For the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023, the effective tax rate was 20.18% compared ~~with net gains of $1.8 million~~to 24.96% 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.

~~Table of Contents~~

~~Income Tax Expense.~~ ~~The Bank’s provision for income taxes increased 5.62% to $17.5 million for the first nine months of 2022 compared to the first nine months of 2021.~~year earlier. The Company’s effective tax rate for the ~~first nine~~three months ended March 31, 2023 was lower than its historical effective tax rate primarily due to a non-taxable BOLI death benefit of ~~2022 was 24.16% compared to 24.79% for~~$4.3 million recognized during the ~~same period in 2021.~~three months ended March 31, 2023. The Company’s effective tax rate can fluctuate from quarter to quarter due primarily to changes in the mix of taxable and tax-exempt earning sources. The effective rates were lower than the combined Federal and State statutory rate of 30% due primarily to BOLI death benefits, ~~regarding~~ the cash surrender value of life insurance; credits associated with low income housing tax credit investments (LIHTC); and tax-exempt interest income on municipal securities and loans.

Financial Condition

Total assets ~~grew $289 million, or 5.58%, to $5.5~~were $5.1 billion at ~~September 30, 2022~~March 31, 2023 compared with ~~$5.2~~$5.3 billion at December 31, ~~2021.~~2022, a decrease of $193.6 million or 3.63%. Loans held for investment were ~~$3.3~~$3.4 billion at ~~September 30, 2022, an increase~~March 31, 2023, a decrease of ~~$86.7~~$85.2 million, or ~~2.68%~~2.43% compared with ~~$3.2~~$3.5 billion at December 31, 2021. Exclusive of SBA PPP loans, the loan portfolio grew $145.0 million, or 4.56%, over December 31, 2021. This data constitutes non-GAAP financial data. The Company believes that excluding the temporary effect of the PPP loans furnishes useful information regarding the Company’s growth.2022. Total deposits ~~grew $269 million, or 5.80%, to $4.9~~were $4.5 billion at ~~September 30, 2022~~March 31, 2023 compared with ~~$4.6~~$4.8 billion at December 31, ~~2021. The increase in total assets and deposits was primarily the result~~2022, a decrease of ~~continued strong organic deposit growth.~~$220.1 million or 4.62%.

Investment Securities and Federal Reserve Balances

The Company’s net investment portfolio ~~increased $23~~decreased by $29.4 million or ~~2.24%,~~2.95% to ~~$1.0 billion~~$968.4 million at ~~September 30, 2022~~March 31, 2023 compared to December 31, ~~2021.~~2022. This ~~increase~~decrease is net of the impact of ~~$30.8~~$36.2 million ~~that the Company~~in available for sale securities sold for interest rate risk management purposes. The Company uses its investment portfolio to manage interest rate and liquidity risks. 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~~as of March 31, 2023 represents ~~18.84%~~18.86% of the Company’s total assets ~~at September 30, 2022~~ as compared ~~with 19.46%~~to 18.72% at December 31, ~~2021.~~ 2022.

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

~~The FRB currently pays interest on the deposits that banks maintain in their FRB accounts, whereas historically banks had to sell these Federal Funds to other banks in order to earn interest.~~ Since balances at the FRB are effectively risk free, the Company elected to maintain its excess cash at the FRB. Interest bearing deposits with banks totaled ~~$800~~$461.3 million at ~~September 30, 2022~~March 31, 2023 and ~~$663~~$514.9 million at December 31, ~~2021.~~2022.

The Company classifies its investment securities as either held-to-maturity (“HTM”) or available-for-sale (“AFS”). Securities are classified as ~~held-to-maturity~~HTM and are carried at amortized cost, net of an allowance for credit losses, when the Company has the intent and ability to hold the securities to maturity. See Note 32 “Investment Securities” to the Unaudited Consolidated Financial Statements in “Item 1. Financial Statements” in this ~~quarterly~~Quarterly Report on Form 10-Q. Securities classified as AFS include securities, which may be sold to effectively manage interest rate risk exposure, prepayment risk, satisfy liquidity demands and other factors. These securities are reported at fair value with aggregate, unrealized gains or losses excluded from income and included as a separate component of shareholders’ equity, as accumulated other comprehensive income(loss), net of related income taxes. As of ~~September 30, 2022,~~March 31, 2023, the Company held no investment securities from any issuer (other than the U.S. Treasury or an agency of the U.S. government or a government sponsored entity) that totaled over 10% of our shareholders’ equity.

4435

Table of Contents

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

(Dollars in thousands)
September 30,
2022

December 31,
2021

Available-for-Sale Securities
U.S. Treasury notes
$
4,941

$
10,089

U.S. Government-sponsored securities
4,698

6,374

Mortgage-backed securities⁽¹⁾

156,453

251,120

Collateralized mortgage obligations⁽¹⁾

1,458

2,436

Corporate securities
9,594

-

Other
310

435

Total available-for-sale securities
$
177,454

$
270,454

(Dollars in thousands)	March 31, 2023		December 31, 2022
Available-for-Sale Securities
U.S. Treasury notes	$	-	$	4,964
U.S. Government-sponsored securities		4,112		4,427
Mortgage-backed securities⁽¹⁾		103,697		132,528
Collateralized mortgage obligations⁽¹⁾		607		1,054
Corporate securities		9,711		9,581
Other		310		310
Total available-for-sale securities	$	118,437	$	152,864

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

(Dollars in thousands)
September 30,
2022

December 31,
2021

Held-to-Maturity Securities
Mortgage-backed securities⁽¹⁾

$
709,541

$
596,775

Collateralized mortgage obligations⁽¹⁾

82,297

73,781

Municipal securities⁽²⁾

60,434

66,496

Total held-to-maturity securities
$
852,272

$
737,052

(Dollars in thousands)	March 31, 2023		December 31, 2022
Held-to-Maturity Securities
Mortgage-backed securities⁽¹⁾	$	695,083	$	702,858
Collateralized mortgage obligations⁽¹⁾		79,044		80,186
Municipal securities⁽²⁾		75,867		61,909
Total held-to-maturity securities	$	849,994	$	844,953

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

⁽²⁾ Municipal securities are net of allowance for credit losses of $393 and ~~$0,~~$393, respectively.

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

As of September 30, 2022

Within One Year
After One but
Within Five Years

After Five but
Within Ten Years
After Ten Years Total
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Securities available-for-sale
U.S. Treasury notes
$
4,941

2.38
%

$
-

0.00
%

$
-

0.00
%

$
-

0.00
%

$
4,941

2.38
%
U.S. Government-sponsored securities
7

1.74
%

81

3.97
%

436

3.01
%

4,174

2.79
%

4,698

2.83
%
Mortgage-backed securities⁽¹⁾

16

3.13
%

15,725

2.27
%

17,961

2.40
%

122,751

1.74
%

156,453

1.87
%
Collateralized mortgage obligations⁽¹⁾

-

0.00
%

-

0.00
%

-

0.00
%

1,458

2.35
%

1,458

2.35
%
Corporate securities
-

0.00
%

4,795

1.59
%

4,799

1.72
%

-

0.00
%

9,594

1.65
%
Other
310

2.99
%

-

0.00
%

-

0.00
%

-

0.00
%

310

2.99
%
Total securities available-for-sale
$
5,274

2.42
%

$
20,601

2.12
%

$
23,196

2.27
%

$
128,383

1.78
%

$
177,454

1.90
%

	As of March 31, 2023
	Within One Year					After One but Within Five Years					After Five but Within Ten Years					After Ten Years					Total
(Dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities available-for-sale
U.S. Government-sponsored securities	$	1		2.23	%	$	86		5.89	%	$	305		5.78	%	$	3,720		5.44	%	$	4,112		5.47	%
Mortgage-backed securities⁽¹⁾		24		2.83	%		8,959		2.49	%		5,608		3.29	%		89,106		1.98	%		103,697		2.09	%
Collateralized mortgage obligations⁽¹⁾		-		0.00	%		-		0.00	%		-		0.00	%		607		2.29	%		607		2.29	%
Corporate securities		-		0.00	%		9,711		4.58	%		-		0.00	%		-		0.00	%		9,711		4.58	%
Other		310		1.85	%		-		0.00	%		-		0.00	%		-		0.00	%		310		1.85	%
Total securities available-for-sale	$	335		1.92	%	$	18,756		3.59	%	$	5,913		3.42	%	$	93,433		2.12	%	$	118,437		2.42	%

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

	As of March 31, 2023
	Within One Year					After One but Within Five Years					After Five but Within Ten Years					After Ten Years					Total
(Dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities held-to-maturity
Mortgage-backed securities⁽¹⁾	$	-		0.00	%	$	-		0.00	%	$	17,265		1.28	%	$	677,818		1.90	%	$	695,083		1.88	%
Collateralized mortgage obligations⁽¹⁾		-		0.00	%		-		0.00	%		-		0.00	%		79,044		1.73	%		79,044		1.73	%
Municipal securities		283		0.69	%		11,174		2.77	%		13,083		3.56	%		51,720		1.28	%		76,260		1.89	%
Total securities held-to-maturity	$	283		0.69	%	$	11,174		2.77	%	$	30,348		2.06	%	$	808,582		1.84	%	$	850,387		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.

Table of Contents

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

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

As of September 30, 2022

Within One Year
After One but
Within Five Years

After Five but
Within Ten Years
After Ten Years Total
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Securities held-to-maturity
Mortgage-backed securities⁽¹⁾

$
-

0.00
%

$
-

0.00
%

$
13,906

0.89
%

$
695,635

1.88
%

$
709,541

1.86
%
Collateralized Mortgage Obligations⁽¹⁾

-

0.00
%

-

0.00
%

-

0.00
%

82,297

1.80
%

82,297

1.80
%
Municipal securities
883

4.93
%

7,484

3.40
%

15,000

3.43
%

37,460

3.52
%

60,827

3.50
%
Total securities held-to-maturity
$
883

4.93
%

$
7,484

3.40
%

$
28,906

2.06
%

$
815,392

1.95
%

$
852,665

1.97
%

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

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

~~Table of Contents~~

As of December 31, 2021
Within One Year
After One but
Within Five Years

After Five but
Within Ten Years
After Ten Years Total
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Securities available-for-sale
U.S. Treasury notes
$
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
%
Mortgage-backed securities⁽¹⁾

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
%
Other
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
%

⁽¹⁾ ~~All~~

Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Expected maturities of mortgage-backed ~~securities~~ and ~~collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.~~

As of December 31, 2021
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
%

$
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
%
Municipal securities
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
%

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

~~Expected maturities~~ may differ from contractual maturities because ~~issuers may~~borrowers have the right to call or prepay obligations with or without penalties. The Company evaluates securities for expected credit losses at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

Loans and Leases

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

Commercial and Agricultural Real Estate – These are loans secured by owner-occupied real estate, non-owner-occupied real estate, owner-occupied farmland, and multifamily residential properties. Commercial mortgage term loans can be made if the property is either income producing or scheduled to become income producing based upon acceptable pre-leasing, or the income will be the ~~Bank's~~Bank’s primary source of repayment for the loan. Loans are made both on owner occupied and investor properties; maturities generally do not exceed 15 years (and may have pricing adjustments on a shorter timeframe) amortizations of up to 25 years (30 years for multifamily residential properties); have debt service coverage ratios of 1.00 or better with a target of 1.25 or greater; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.

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

Single Family Residential Real Estate – These are loans primarily made on owner occupied residences; generally underwritten to income and LTV guidelines similar to those used by FNMA and FHLMC. However, the Company will make loans on rural residential properties up to 41 acres. Most residential loans have terms from ten to thirty years and carry fixed or variable rates priced to treasury rates. The Company has always underwritten mortgage loans based upon traditional underwriting criteria and does not make loans that are known in the industry as “subprime,” “no or low doc,” or “stated income” loans.

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Table of Contents

Home Equity Lines and Loans – These are loans made to individuals for home improvements and other personal needs. Generally, amounts do not exceed $500,000; but can be made for up to $1,000,000 in high cost counties. Combined Loan Toto Value (CLTV) does not exceed 75%; FICO scores are at or above 670; Total Debt Ratios do not exceed 43%; and in some situations the Company is in a 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 or variable rates tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan.

Commercial – These are non-real estate loans and lines of credit to businesses that are sole proprietorships, partnerships, LLC’s and corporations. Lines of credit are extended to finance the seasonal working capital needs of customers during peak business periods; are usually established for periods no longer than 12 to 36 months; are often secured by general filing liens on accounts receivable, inventory and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a plant or purchase of a business; have maturities from five to seven years; and fixed rates that are most often tied to treasury indices or variable rates tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan.

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

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

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

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

~~Table of Contents~~

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

Table of Contents

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 &and lease portfolio at ~~September 30, 2022~~March 31, 2023 totaled ~~$3.3~~$3.4 billion, ~~an increase~~a decrease of ~~$86.7~~$85.2 million or 2.43% over December 31, 2021. Exclusive of SBA PPP loans, the loan portfolio grew $145.0 million, or 4.56%, over December 31, 2021. This increase in the non-PPP loans occurred as a result of: (1) the Company’s business development efforts directed toward credit-qualified borrowers; and (2) expansion of our service area into the East Bay of San Francisco and Napa. This data constitutes non-GAAP financial data. The Company believes that excluding the temporary effect of the PPP loans furnishes useful information regarding the Company’s growth.2022.

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

September 30, 2022 December 31, 2021
(Dollars in thousands) Dollars
Percent
of Total
Dollars
Percent
of Total

Gross Loans and Leases
Real estate:
Commercial
$
1,246,805

37.41
%

$
1,167,516

35.95
%
Agricultural
722,448

21.68
%

672,830

20.72
%
Residential and home equity
377,249

11.32
%

350,581

10.79
%
Construction
169,624

5.09
%

177,163

5.45
%
Total real estate
2,516,126

75.50
%

2,368,090

72.91
%
Commercial & industrial
454,185

13.63
%

427,799

13.17
%
Agricultural
260,296

7.81
%

276,684

8.52
%
Commercial leases
94,089

2.83
%

96,971

2.99
%
Consumer and other⁽¹⁾

7,776

0.23
%

78,367

2.41
%
Total gross loans and leases
$
3,332,472

100.00
%

$
3,247,911

100.00
%

⁽¹⁾ ~~Includes SBA PPP loans which were $1.8 million and $70.8 million at September 30, 2022 and December 31, 2021, respectively.~~

	March 31, 2023					December 31, 2022
(Dollars in thousands)	Dollars		Percent of Total			Dollars		Percent of Total
Gross Loans and Leases
Real estate:
Commercial	$	1,312,745		38.19	%	$	1,328,691		37.73	%
Agricultural		707,412		20.58	%		726,938		20.64	%
Residential and home equity		387,370		11.27	%		387,753		11.01	%
Construction		153,394		4.46	%		166,538		4.73	%
Total real estate		2,560,921		74.50	%		2,609,920		74.11	%
Commercial & industrial		472,189		13.74	%		478,758		13.59	%
Agricultural		275,785		8.02	%		314,525		8.93	%
Commercial leases		123,314		3.59	%		112,629		3.20	%
Consumer and other		5,382		0.15	%		5,886		0.17	%
Total gross loans and leases	$	3,437,591		100.00	%	$	3,521,718		100.00	%

Table of Contents

The following table shows the maturity distribution and interest rate sensitivity of the loan and lease portfolio of the Company as of ~~September 30, 2022.~~March 31, 2023.

Loan Contractual Maturity
(Dollars in thousands) One Year or Less
After One But
Within Five
Years

After Five Years
But Within
Fifteen Years

After Fifteen
Years
Total
Gross loan and leases:
Real estate:
Commercial
$
54,825

$
300,999

$
853,261

$
37,720

$
1,246,805

Agricultural
26,331

155,660

466,352

74,105

722,448

Residential and home equity
407

4,616

117,436

254,790

377,249

Construction
105,343

64,281

-

-

169,624

Total real estate
186,906

525,556

1,437,049

366,615

2,516,126

Commercial & industrial
180,294

206,003

61,714

6,174

454,185

Agricultural
164,616

79,574

16,106

-

260,296

Commercial leases
7,299

32,471

54,319

-

94,089

Consumer and other⁽¹⁾

707

5,639

1,430

-

7,776

Total gross loans and leases
$
539,822

$
849,243

$
1,570,618

$
372,789

$
3,332,472

Rate Structure for Loans
Fixed Rate
$
87,323

$
354,357

$
1,188,033

$
241,872

$
1,871,585

Adjustable Rate
452,499

494,886

382,585

130,917

1,460,887

Total gross loans and leases
$
539,822

$
849,243

$
1,570,618

$
372,789

$
3,332,472

⁽¹⁾ ~~Includes SBA PPP loans.~~

	Loan Contractual Maturity
(Dollars in thousands)	One Year or Less		After One But Within Five Years		After Five Years But Within Fifteen Years		After Fifteen Years		Total
Gross loan and leases:
Real estate:
Commercial	$	49,850	$	360,141	$	866,582	$	36,172	$	1,312,745
Agricultural		21,983		188,884		420,950		75,595		707,412
Residential and home equity		359		4,209		117,774		265,028		387,370
Construction		65,460		87,934		-		-		153,394
Total real estate		137,652		641,168		1,405,306		376,795		2,560,921
Commercial & industrial		184,852		211,857		69,404		6,076		472,189
Agricultural		158,681		97,633		19,471		-		275,785
Commercial leases		6,125		45,975		71,214		-		123,314
Consumer and other		865		3,457		1,060		-		5,382
Total gross loans and leases	$	488,175	$	1,000,090	$	1,566,455	$	382,871	$	3,437,591
Rate Structure for Loans
Fixed Rate	$	230,809	$	506,642	$	840,918	$	188,726	$	1,767,095
Adjustable Rate		257,366		493,448		725,537		194,145		1,670,496
Total gross loans and leases	$	488,175	$	1,000,090	$	1,566,455	$	382,871	$	3,437,591

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

(Dollars in thousands)	March 31, 2023			December 31, 2022
Non-performing assets:
Non-accrual loans and leases
Real estate:
Commercial	$	387		$	403
Agricultural		-			-
Residential and home equity		-			-
Construction		-			168
Total real estate		387			571
Commercial & industrial		-			-
Agricultural		-			-
Commercial leases		-			-
Consumer and other		-			-
Total non-performing loans and leases	$	387		$	571
Other real estate owned (“OREO”)	$	873		$	873
Total non-performing assets	$	1,260		$	1,444

Selected ratios:
Non-performing loans to total loans and leases		0.01	%		0.02	%
Non-performing assets to total assets		0.02	%		0.03	%

Table of Contents

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 ~~$411,000~~$387,000 and ~~$516,000~~$571,000 at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

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

At September 30, 2022, restructured loans totaled $1.3 million compared with $2.3 million at December 31, 2021, all of which were performing. See Note 4 “Loans and Leases” to the Unaudited Consolidated Financial Statements in “Item 1. Financial Statements” in this quarterly Report on Form 10-Q.

Other Real Estate Owned –OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower. The Company records all OREO properties at amounts equal to or less than the fair market value of the properties based on current independent appraisals reduced by estimated selling costs. The Company reported $873,000 of foreclosed OREO at ~~September 30, 2022,~~March 31, 2023, and at December 31, ~~2021.~~2022.

~~Table of Contents~~

Not included in the table below, but relevant to a discussion of asset quality are loans that were granted some form of relief because of COVID-19 and are not considered TDRs because of the CARES Act and H.R. 133. Since April 2020, the Company has restructured $304 million of loans under the CARES Act and H.R. 133 guidelines. At September 30, 2022, all loans that were restructured as part of the CARES Act have returned to the contractual terms and conditions of the loans, without exception.

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

(Dollars in thousands)
September 30,
2022

December 31,
2021

Non-performing assets:
Non-accrual loans and leases, not TDRs
Real estate:
Commercial
$
411

$
-

Agricultural
-

18

Residential and home equity
-

-

Construction
-

-

Total real estate
411

18

Commercial & industrial
-

-

Agricultural
-

-

Commercial leases
-

-

Consumer and other
-

-

Subtotal
411

18

Non-accrual loans and leases, are TDRs
Real estate:
Commercial
-

-

Agricultural
-

498

Residential and home equity
-

-

Construction
-

-

Total real estate
-

498

Commercial & industrial
-

-

Agricultural
-

-

Commercial leases
-

-

Consumer and other
-

-

Subtotal
-

498

Total non-performing loans and leases
$
411

$
516

Other real estate owned ("OREO")
$
873

$
873

Total non-performing assets
$
1,284

$
1,389

Performing TDRs
$
1,325

$
1,824

Although management believes that non-performing loans and leases are generally well-secured and that potential losses are provided for in the Company’s allowance for credit losses, there can be no assurance that future deterioration in economic conditions and/or collateral values will not result in future credit losses. See Note 4.3. “Loans and Leases”, located in “Item 1. Financial Statements” in this Quarterly Report on Form 10-Q for an allocation of the allowance classified to collateral dependent loans and leases.

Except for non-performing loans and leases discussed above, the Company’s management is not aware of any loans and leases as of ~~September 30, 2022,~~March 31, 2023, for which known financial problems of the borrower would cause serious doubts as to the ability of these borrowers to materially comply with their present loan or lease repayment terms, or any known events that would result in the loan or lease being designated as non-performing at some future date. ~~However:~~

~~Table of Contents~~

~~The~~However, the State of California has routinely experienced drought conditions such as from 2013 through ~~most of 2016. After~~ 2016 ~~reasonable levels of rain~~ and ~~snow alleviated drought conditions in our primary service area, but the winters of 2020-2021 and 2021-2022 were once again dry. Despite this,~~2020-2022. Although the availability of water in our primary service area was not an issue for the 2022 growing ~~season. However,~~season, the weather patterns over the past ~~eight~~nine 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~~

Loan Modifications/Restructurings – A modification/restructuring of a ~~vaccine,~~loan or lease happens when the ~~effects~~Company makes certain concessions to a borrower experiencing financial difficulty. These concessions either stem from an agreement between the Company and the borrower or is imposed by law or a court; some of ~~COVID-19 are still with us, and~~these concessions include: term extension, principle forgiveness, rate reduction, or a combination of any of those. The Company has granted a concession when, as a result of the modification/restructuring, it ~~is impossible~~does not expect to ~~predict~~collect all amounts due, including interest accrued at the ~~ultimate impact on classified and non-performing~~original contract rate. ASU 2022-02 requires certain disclosure of loans and leases ~~(see Part I. Note 2).~~that have been modified or restructured within the past 12 months and the effects that had on the loans or leases modified. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

The Company did not enter into any loan modifications with borrowers experiencing financial difficulty during the three months ended March 31, 2023.

Table of Contents

Allowance for Credit Losses—Loans and Leases

The Company maintains an allowance for credit losses (“ACL”) under the guidance of Financial Accounting Standards Board Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on ~~loans based on current expected credit losses as of the balance sheet date.~~Financial Instruments (“CECL”). The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan &and lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of three primary components: specific reserves related to collateral dependent loans and leases; general reserves for current expected credit losses related to loans and leases that are not collateral dependent; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors. See “Summary of Critical Accounting Policies and Estimates - Allowance for Credit Losses—~~Loans.~~ – Loans and Leases.”

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

Nine Months Ended
September 30,

(Dollars in thousands) 2022 2021
Allowance for credit losses:
Balance at beginning of year
$
61,007

$
58,862

Provision / (recapture) for credit losses
2,606

1,250

Charge-offs:
Real estate:
Commercial
-

-

Agricultural
-

-

Residential and home equity
-

-

Construction
-

-

Total real estate
-

-

Commercial & industrial
(324
)

-

Agricultural
-

-

Commercial leases
-

-

Consumer and other
(38
)

(33
)
Total charge-offs
(362
)

(33
)
Recoveries:
Real estate:
Commercial
-

-

Agricultural
-

-

Residential and home equity
125

91

Construction
-

-

Total real estate
125

91

Commercial & industrial
176

83

Agricultural
51

29

Commercial leases
-

-

Consumer and other
14

21

Total recoveries
366

224

Net recoveries / charge-offs
4

191

Balance at end of period
$
63,617

$
60,303

Selected financial information:
Gross loans held for investment
$
3,332,472

$
3,151,508

Average loans
3,242,195

3,063,124

Non-performing loans
411

516

Allowance for credit losses to non-performing loans
15478.59
%

11686.63
%
Net (recoveries)/charge-offs to average loans
0.00
%

(0.01
)%
Provision for credit losses to average loans
0.08
%

0.04
%
Allowance for credit losses to loans held for investment
1.91
%

1.91
%

	Three Months Ended March 31,
(Dollars in thousands)	2023			2022
Allowance for credit losses:
Balance at beginning of year	$	66,885		$	61,007
Provision for credit losses		1,500			-
Charge-offs:
Real estate:
Commercial		-			-
Agricultural		-			-
Residential and home equity		(14	)		-
Construction		-			-
Total real estate		(14	)		-
Commercial & industrial		-			-
Agricultural		-			-
Commercial leases		-			-
Consumer and other		(10	)		(9	)
Total charge-offs		(24	)		(9	)
Recoveries:
Real estate:
Commercial		170			-
Agricultural		-			-
Residential and home equity		10			14
Construction		-			-
Total real estate		180			14
Commercial & industrial		19			16
Agricultural		1			2
Commercial leases		-			-
Consumer and other		12			2
Total recoveries		212			34
Net recoveries / (charge-offs)		188			25

Balance at end of year	$	68,573		$	61,032

Selected financial information:
Net loans and leases held for investment	$	3,427,133		$	3,237,619
Average loans and leases		3,422,375			3,196,841
Non-performing loans and leases		387			437
Allowance for credit losses to non-performing loans and leases		17719.12	%		13966.13	%
Net (recoveries)/charge-offs to average loans and leases		(0.01	%)		0.00	%
Provision for credit losses to average loans and leases		0.04	%		0.00	%
Allowance for credit losses to gross loans and leases held-for-investment		1.99	%		1.88	%

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

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Table of Contents

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

September 30, 2022 December 31, 2021
(Dollars in thousands) Dollars
Percent of
Total
Dollars
Percent
of Total

Allowance for credit losses:
Real estate:
Commercial
$
16,540

37.41
%

$
28,536

35.95
%
Agricultural
16,560

21.68
%

9,613

20.72
%
Residential and home equity
6,865

11.32
%

2,847

10.79
%
Construction
2,995

5.09
%

1,456

5.45
%
Total real estate
42,960

75.50
%

42,452

72.91
%
Commercial & Industrial
10,392

13.63
%

11,489

13.17
%
Agricultural
8,523

7.81
%

5,465

8.52
%
Commercial leases
1,588

2.83
%

938

2.99
%
Consumer and other
154

0.23
%

663

2.41
%
Total allowance for credit losses
$
63,617

100.00
%

$
61,007

100.00
%

	March 31, 2023					December 31, 2022
(Dollars in thousands)	Dollars		Percent of Each Loan Type to Total Loans			Dollars		Percent of Each Loan Type to Total Loans
Allowance for credit losses:
Real estate:
Commercial	$	24,253		38.19	%	$	18,055		37.73	%
Agricultural		8,441		20.58	%		14,496		20.64	%
Residential and home equity		7,334		11.27	%		7,508		11.01	%
Construction		2,785		4.46	%		3,026		4.73	%
Total real estate		42,813		74.50	%		43,085		74.11	%
Commercial & industrial		11,346		13.74	%		11,503		13.59	%
Agricultural		12,542		8.02	%		10,202		8.93	%
Commercial leases		1,720		3.59	%		1,924		3.20	%
Consumer and other		152		0.15	%		171		0.17	%
Total allowance for credit losses	$	68,573		100.00	%	$	66,885		100.00	%

Deposits

Total deposits were ~~$4.9~~$4.5 billion and ~~$4.6~~$4.8 billion as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021, respectively. In addition~~2022, respectively a decrease of 4.62% due in part to traditional seasonality related to the ~~Company’s ongoing~~cyclical nature of our agricultural customers. Despite the slight decrease in deposits during the first quarter, the Company is highly focused on business development activities for deposits, ~~in management’s opinion~~and the following factors contributed positively ~~impacted year-over-year~~to our deposit ~~growth:~~gathering abilities: (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.

Non-interest bearing demand deposits ~~increased by $52.3 million and~~ were ~~$1.8~~$1.55 billion as of ~~September 30, 2022~~March 31, 2023 and $1.76 billion at December 31, ~~2021.~~2022. Non-interest bearing deposits were ~~36.72%~~34.19% of total deposits, as of ~~September 30, 2022~~March 31, 2023 and ~~37.72%~~36.96% as of December 31, ~~2021.~~2022. Interest bearing deposits are comprised of interest-bearing transaction accounts, money market accounts, regular savings accounts, and certificates of deposit.

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

Nine Months Ended September 30,

2022 2021
(Dollars in thousands) Average Balance Interest Expense
Average
Rate
Average Balance Interest Expense
Average
Rate

Total deposits:
Interest bearing deposits:
Demand
$
1,111,513

1,023

0.12
%

$
1,002,267

$
869

0.12
%
Savings and money market
1,550,334

1,179

0.10
%

1,336,826

1,136

0.11
%
Certificates of deposit greater than $250,000
163,148

299

0.25
%

169,545

587

0.46
%
Certificates of deposit less than $250,000
218,302

297

0.18
%

239,185

608

0.34
%
Total interest-bearing deposits
3,043,297

2,798

0.12
%

2,747,823

3,200

0.16
%
Non-interest bearing deposits
1,740,859

1,567,089

Total deposits
$
4,784,156

$
2,798

0.08
%

$
4,314,912

$
3,200

0.10
%

	Three Months Ended March 31,
	2023							2022
(Dollars in thousands)	Average Balance		Interest Expense		Average Rate			Average Balance		Interest Expense		Average Rate
Total deposits:
Interest bearing deposits:
Demand	$	1,068,504	$	444		0.17	%	$	1,115,578	$	259		0.09	%
Savings and money market		1,561,684		2,503		0.65	%		1,517,234		342		0.09	%
Certificates of deposit greater than $250,000		147,704		487		1.34	%		167,515		97		0.23	%
Certificates of deposit less than $250,000		206,214		280		0.55	%		223,842		105		0.19	%
Total interest bearing deposits		2,984,106		3,714		0.50	%		3,024,169		803		0.11	%
Non-interest bearing deposits		1,663,152							1,722,597
Total deposits	$	4,647,258	$	3,714		0.32	%	$	4,746,766	$	803		0.07	%

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. WeThe significant increase in short-term interest rates during 2022 and into 2023 has placed pressure on deposit pricing, and we will continue to manage ~~interest expense~~this ongoing impact through careful deposit pricing. The average cost of deposits, including non-interest bearing deposits, ~~declined~~increased to ~~0.08%~~0.32% for the ~~nine~~three months ended ~~September 2022~~March 31, 2023 compared with ~~0.10%~~0.07% for the same period a year ago.

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The following table shows deposits with a balance greater than $250,000 at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:

September 30, December 31,
(Dollars in thousands) 2022 2021
Deposits greater than $250,000
$
2,990,165

$
2,708,576

Certificates of deposit greater than $250,000, by maturity:
Less than 3 months
58,384

59,591

3 months to 6 months
38,722

37,182

6 months to 12 months
43,161

59,945

More than 12 months
11,875

12,147

Total certificates of deposit greater than $250,000
$
152,142

$
168,865

Total deposits greater than $250,000
$
3,142,307

$
2,877,441

	March 31,		December 31,
(Dollars in thousands)	2023		2022
Non-Maturity Deposits greater than $250,000	$	2,549,674	$	2,872,754
Certificates of deposit greater than $250,000, by maturity:
Less than 3 months		38,866		45,078
3 months to 6 months		30,924		30,426
6 months to 12 months		81,347		44,189
More than 12 months		16,618		9,153
Total certificates of deposit greater than $250,000	$	167,755	$	128,846
Total deposits greater than $250,000	$	2,717,429	$	3,001,600

Refer to the Year-To-Date Average Balances and Rate Schedules located in this ~~"Item 7. Management's~~“Item 2. 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 ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Bank had $3.0 million, of these deposits.

Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings

Lines of Credit with the Federal Reserve Bank and Federal Home Loan Bank are other key sources of funds to support earning ~~assets.~~assets and liquidity. These sources of funds are also used to manage the Company’s interest rate risk exposure; and, as opportunities arise, to borrow and invest the proceeds at a positive spread through the investment portfolio. There were no FHLB advances at ~~September 30, 2022~~March 31, 2023 or December 31, ~~2021.~~2022. There were no Federal Funds purchased or advances from the FRB at ~~September 30, 2022~~March 31, 2023 or December 31, ~~2021.~~2022.

Long-Term Subordinated Debentures

On December 17, 2003, the Company raised $10.0 million through the sale of subordinated debentures to an ~~off-balance sheet~~off-balance-sheet trust and its sale of trust-preferred securities. See Note ~~10.~~9. “Long-Term Subordinated Debentures” located in “Item 8. Financial Statements and Supplementary Data” in our Annual Report on Form 10-K filed with the SEC on March 15, ~~2022.~~2023. Although this amount is reflected as subordinated debt on the Company’s balance sheet, under current regulatory guidelines, our Trust Preferred Securities will continue to qualify as regulatory capital.

These securities accrue interest at a variable rate based upon 3-month LIBOR plus 2.85%. Interest rates reset quarterly (the next reset is ~~December 19, 2022)~~June 18, 2023) and the rate was ~~6.38%~~7.76% as of ~~September 30, 2022~~March 31, 2023 and ~~2.97%~~7.59% at ~~September 30, 2021.~~December 31, 2022. The average rate paid for these securities was ~~4.14%~~7.71% for the first ~~nine~~three months of ~~2022~~2023 and ~~3.06%~~3.23% for the first ~~nine~~three months of ~~2021.~~2022. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on the Company’s common stock.

Capital Resources

The Company relies primarily on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to insure depositor protection. Shareholders’ Equity totaled ~~$468~~$508.9 million at ~~September 30, 2022,~~March 31, 2023, and ~~$463~~$485.3 million at December 31, ~~2021.~~2022.

5445

Table of Contents

The Company and the Bank are subject to various regulatory capital adequacy guidelines as outlined under Part 324 of the FDIC Rules and Regulations. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the ~~Bank's~~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~~Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the ~~Bank's~~Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

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

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

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

(Dollars in thousands)
Minimum to be
Categorized as
"Well Capitalized"

Minimum to be
Categorized as
"Adequately
Capitalized"

September 30,
2022

December 31,
2021

Farmers & Merchants Bancorp
CET1 capital to risk-weighted assets
N/A

4.50
%

11.82
%

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

6.00
%

12.06
%

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

8.00
%

13.32
%

13.19
%
Tier 1 leverage capital ratio
N/A

4.00
%

9.12
%

8.92
%

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

4.50
%

12.04
%

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

6.00
%

12.04
%

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

8.00
%

13.30
%

13.17
%
Tier 1 leverage capital ratio
5.00
%

4.00
%

9.12
%

8.91
%

	March 31, 2023
	Actual					Required for Capital Adequacy Purposes					Minimum to be Categorized as “Well Capitalized” Under Prompt Corrective Action Regulation
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Farmers & Merchants Bancorp
CET1 capital to risk-weighted assets	$	510,441		12.19	%	$	188,435		4.50	%		N/A		N/A
Tier 1 capital to risk-weighted assets		520,441		12.43	%		251,247		6.00	%		N/A		N/A
Risk-based capital to risk-weighted assets		573,015		13.68	%		334,996		8.00	%		N/A		N/A
Tier 1 leverage capital ratio		520,441		9.94	%		209,497		4.00	%		N/A		N/A

Farmers & Merchants Bank
CET1 capital to risk-weighted assets	$	521,449		12.45	%	$	188,432		4.50	%	$	272,179		6.50	%
Tier 1 capital to risk-weighted assets		521,449		12.45	%		251,242		6.00	%		334,990		8.00	%
Risk-based capital to risk-weighted assets		574,022		13.71	%		334,990		8.00	%		418,737		10.00	%
Tier 1 leverage capital ratio		521,449		9.96	%		209,405		4.00	%		261,756		5.00	%

	December 31, 2022
	Actual					Required for Capital Adequacy Purposes					Minimum to be Categorized as “Well Capitalized” Under Prompt Corrective Action Regulation
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Farmers & Merchants Bancorp
CET1 capital to risk-weighted assets	$	493,438		11.57	%	$	191,984		4.50	%		N/A		N/A
Tier 1 capital to risk-weighted assets		503,438		11.80	%		255,978		6.00	%		N/A		N/A
Risk-based capital to risk-weighted assets		556,964		13.06	%		341,305		8.00	%		N/A		N/A
Tier 1 leverage capital ratio		503,438		9.36	%		215,201		4.00	%		N/A		N/A

Farmers & Merchants Bank
CET1 capital to risk-weighted assets	$	502,838		11.79	%	$	191,970		4.50	%	$	277,290		6.50	%
Tier 1 capital to risk-weighted assets		502,838		11.79	%		255,960		6.00	%		341,280		8.00	%
Risk-based capital to risk-weighted assets		556,361		13.04	%		341,280		8.00	%		426,600		10.00	%
Tier 1 leverage capital ratio		502,838		9.35	%		215,018		4.00	%		268,772		5.00	%

Table of Contents

On November ~~15, 2021,~~8, 2022, the Board of Directors ~~reauthorized the Company’s~~authorized an extension to its share repurchase program through December 31, 2024 for ~~up to $20.0~~an additional$20.0 million of the Company’s common stock (“Repurchase Plan”), ~~representing~~which represents approximately 4% of outstanding shareholders’ equity. Repurchases by the Company under the Repurchase Plan may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means.

During the first ~~nine~~three months of ~~2022~~2023 the Company repurchased ~~18,824~~5,406 shares under the Repurchase Plan, for a total of ~~$17.9~~$5.6 million.

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.

~~Table of Contents~~

The following table sets forth our ~~off-balance sheet~~off-balance-sheet lending commitments as of ~~September 30, 2022:~~March 31, 2023:

Amount of Commitment Expiration per Period
(Dollars in thousands)
Total
Committed
Amount

Less than
One Year

One to
Three
Years

Three to
Five Years

After Five
Years

Off-balance sheet commitments
Commitments to extend credit
$
1,128,340

$
401,604

$
477,113

$
46,626

$
202,997

Standby letters of credit
16,629

10,403

4,326

1,470

430

Total off-balance sheet commitments
$
1,144,969

$
412,007

$
481,439

$
48,096

$
203,427

			Amount of Commitment Expiration per Period
(Dollars in thousands)	Total Committed Amount		Less than One Year		One to Three Years		Three to Five Years		After Five Years
Off-balance sheet commitments
Commitments to extend credit	$	1,174,664	$	410,299	$	202,048	$	521,370	$	40,947
Standby letters of credit		16,821		12,317		2,604		1,470		430
Total off-balance sheet commitments	$	1,191,485	$	422,616	$	204,652	$	522,840	$	41,377

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

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

Table of Contents

Liquidity

The ability to have readily available funds sufficient to repay maturing liabilities is of primary importance to depositors, creditors and regulators. In an effort to satisfy our liquidity needs, we actively manage our assets and liabilities. We have access to immediate liquid resources in the form of cash which is primarily on deposit with the FRB and amounted to $461.3 million as of March 31, 2023. Potential sources of liquidity also include investment securities in our available-for-sale securities portfolio, our ability to sell loans in the secondary market, and to secure borrowings from the FRB and FHLB. Our diversified deposit portfolio has historically provided us with a long-term source of stable low cost funding. Maturities and payments on outstanding loans and investment securities also provide a steady flow of funds. Our liquidity, represented by cash borrowing lines, federal funds and available for sale securities, is a result of our operating, investing and financing activities and related cash flows. In order to ensure funds are available at all times, we devote resources to projecting the amount of funds that will be required and we maintain relationships with a diversified client base so funds are accessible. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets. We had the following borrowing lines available at ~~September 30, 2022:~~March 31, 2023:

September 30, 2022
(Dollars in thousands)
Total Credit
Line Limit

Current
Credit Line
Available

Outstanding
Amount

Remaining
Credit Line
Available

Value of
Collateral
Pledged

Additional liquidity sources:
Federal Home Loan Bank
$
766,011

$
766,011

$
-

$
766,011

$
1,183,540

Federal Reserve BIC
657,350

657,350

-

657,350

890,564

FHLB Fed Funds
18,000

18,000

-

18,000

-

US Bank Fed Funds
35,000

35,000

-

35,000

-

MUFG Union Bank Fed Funds
15,000

15,000

-

15,000

-

PCBB Fed Funds
50,000

50,000

-

50,000

-

Total additional liquidity sources
$
1,541,361

$
1,541,361

$
-

$
1,541,361

$
2,074,104

	March 31, 2023
(Dollars in thousands)	Total Credit Line Limit		Current Credit Line Available		Outstanding Amount		Remaining Credit Line Available		Value of Collateral Pledged
Additional liquidity sources:
Federal Home Loan Bank	$	772,741	$	772,741	$	-	$	772,741	$	1,234,519
Federal Reserve BIC		656,531		656,531		-		656,531		881,475
FHLB Fed Funds		18,000		18,000		-		18,000		-
US Bank Fed Funds		50,000		50,000		-		50,000		-
PCBB Fed Funds		50,000		50,000		-		50,000		-
Total additional liquidity sources	$	1,547,272	$	1,547,272	$	-	$	1,547,272	$	2,115,994

We continued our focus on maintaining a strong liquidity position throughout the first three months of 2023 and we believe our liquid assets and short-term borrowing credit lines are adequate to meet our cash flow needs for loan and lease funding and deposit cash withdrawal for the foreseeable future. As of ~~September 30, 2022,~~March 31, 2023, we had ~~$1.3 billion~~$898.1 million in cash and unencumbered investment ~~securities; $2.2~~securities, which is 17.49% of total assets. We also had $2.1 million in investment securities and $2.1 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 and lease volumes, or selling or encumbering assets. Further, we will increase liquidity by soliciting higher levels of deposit accounts through promotional activities and/or borrowing from our correspondent banks as well as the FHLB. At the current time, our long-term liquidity needs primarily relate to funds required to support loan and lease originations and commitments and deposit withdrawals.

~~Table~~We believe we can meet all of ~~Contents~~these needs from existing liquidity sources.

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

Our primary investing activities are the origination of loans and lease and purchases and sales of investment securities. As of ~~September 30, 2022,~~March 31, 2023, we had ~~outstanding~~unfunded loan commitments of $1.1 billion and ~~outstanding~~unfunded letters of credit of ~~$16.6~~$16.8 million. We anticipate that we will have sufficient funds available to meet current loan commitments.

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

Table of Contents

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

The Company’s assessment of market risk at ~~September 30, 2022~~March 31, 2023 indicates there have been no material changes in the quantitative and qualitative disclosures from those made in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, ~~2022.~~2023.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

~~The~~

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer ~~have reviewed and evaluated~~(“CFO”), of the effectiveness of the ~~Company’s~~ disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(a)) ~~at September 30, 2022.~~. Based on that evaluation, the ~~Chief Executive Officer~~CEO and ~~Chief Financial Officer~~CFO have concluded that as of the ~~Company’s current~~end of the period covered by this Report, the disclosure controls and procedures are effective ~~and timely, providing them with material~~to provide reasonable assurance that the information ~~relating to the Company~~ required to be disclosed ~~in the reports~~by the Company ~~files~~in reports that are filed or ~~submits~~submitted under the Exchange ~~Act.~~Act are recorded, processed, summarized and timely reported as provided in the SEC’s rules and forms.

Changes in Internal Controls

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

~~The Company is involved in various~~

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

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

Item 1A.

Risk Factors

There have been no material changes in the risk factors previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

~~Table of Contents~~

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

During the first ~~nine~~three months of ~~2022~~2023 the Company repurchased ~~18,824~~5,406 shares under the Repurchase Plan, for a total of ~~$17.905~~$5.6 million. All of these shares were purchased at prices ranging from ~~$925.00~~$1,000.00 to ~~$975.00~~$1,082.00 per share, based upon the then current price on the OTCQX.

Table of Contents

Item 3.

Defaults upon Senior Securities

Not Applicable

Item 4.

Mine Safety Disclosures

Not Applicable

Item 5.

Other Information

Not Applicable

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.

~~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

~~10.11~~10.21	Employment Agreement effective ~~August 1, 2022,~~March 27, 2023, between Farmers & Merchants Bank of Central California and ~~Kyle Koelbel,~~Bart R. Olson, filed on Registrant’s Form 10-Q for the quarter ended ~~September 30, 2022.~~March 31, 2023.
10.22	Employment Agreement effective April 1, 2023, between Farmers & Merchants Bank of Central California and John W. Weubbe, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2023.
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~~

*Filed herewith

Table of Contents

SIGNATURES

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

	FARMERS & MERCHANTS BANCORP

Date: ~~November 7, 2022~~May 9, 2023	/s/ Kent A. Steinwert
	Kent A. Steinwert
	Director, Chairman, President and Chief Executive Officer (Principal Executive Officer)


Date: ~~November 7, 2022~~May 9, 2023	/s/ ~~Stephen W. Haley~~Bart R. Olson
	~~Stephen W. Haley~~Bart R. Olson
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)

5951

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

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	Not Applicable	Not Applicable

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

PART I. - FINANCIAL INFORMATION		Page

	Item 1 - Financial Statements
		Unaudited Consolidated ~~Statements of Financial Condition~~Balance Sheets	43
		Unaudited Consolidated Statements of Income	54
		Unaudited Consolidated Statements of Comprehensive Income	65
		Unaudited Consolidated Statements of Changes in Shareholders’ Equity	76
		Unaudited Consolidated Statements of Cash Flows	87
		Notes to Unaudited Consolidated Financial Statements	98

	Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	31 28
		Overview	3229
		Results of Operations	3730
		Results of Financial Condition	4435

	Item 3 - Quantitative and Qualitative Disclosures about Market Risk	5749

	Item 4 - Controls and Procedures	5749

PART II. - OTHER INFORMATION

	Item 1 – Legal Proceedings	5749
	Item 1A – Risk Factors	5749
	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	5849
	Item 3 – Defaults upon Senior Securities	5850
	Item 4 – Mine Safety Disclosures	5850
	Item 5 – Other Information	5850
	Item 6 – Exhibits	5850
	Signatures	59 51

	Three Months Ended September 30,					Nine Months Ended September 30,
(Dollars in thousands, except share and per share amounts)	2022			2021		2022			2021
Interest income
Interest and fees on loans and leases	$	41,868		$	36,088	$	117,871		$	109,839
Interest and dividends on investments		5,686			3,925		16,697			12,664
Interest on deposits with others		4,159			328		5,934			595
Total interest income		51,713			40,341		140,502			123,098
Interest expense
Deposits		1,122			929		2,798			3,200
Subordinated debentures		134			78		319			236
Total interest expense		1,256			1,007		3,117			3,436
Net interest income		50,457			39,334		137,385			119,662
Provision for credit losses		1,500			-		3,000			1,250
Net interest income after provision for credit losses		48,957			39,334		134,385			118,412
Non-interest income
Card processing		1,791			1,788		5,375			5,173
Service charges on deposit accounts		638			808		2,318			2,125
Increase in cash surrender value of BOLI		566			549		1,668			1,616
Net (loss)/gain on sale of investment securities available-for-sale		(2,987	)		-		(2,985	)		2,554
Net gain/(loss) on deferred compensation benefits		352			615		(227	)		1,828
Other		1,199			857		3,234			2,996
Total non-interest income		1,559			4,617		9,383			16,292
Non-interest expense
Salaries and employee benefits		15,994			14,453		49,181			47,375
Net gain/(loss) on deferred compensation benefits		352			615		(227	)		1,828
Occupancy		1,196			1,145		3,500			3,554
Data Processing		1,250			1,251		3,698			3,688
FDIC insurance		366			317		1,076			902
Marketing		303			63		959			669
Legal		49			85		733			485
Other		4,865			2,656		12,274			9,231
Total non-interest expense		24,375			20,585		71,194			67,732
INCOME BEFORE INCOME TAXES		26,141			23,366		72,574			66,972
Income tax expense		6,605			5,864		17,537			16,604
NET INCOME	$	19,536		$	17,502	$	55,037		$	50,368

Earnings per common share:
Basic	$	25.20		$	22.16	$	70.47		$	63.79
Diluted	$	25.20		$	22.16	$	70.47		$	63.79

Weighted average number of common shares
Basic		775,109			789,646		780,988			789,646
Diluted		775,109			789,646		780,988			789,646

	For the three months ended March 31, 2023 and 2022
(Dollars in thousands, except share amounts)	Common Shares			Amount		Additional Paid In Capital			Retained Earnings		Accumulated Other Comprehensive Income/(Loss)			Total
Balance as of December 31, 2021		789,646		$	8	$	77,516		$	387,331	$	(1,719	)	$	463,136
Net income		-			-		-			17,058		-			17,058
Other comprehensive (loss), net of tax		-			-		-			-		(11,229	)		(11,229	)
Repurchase of common stock		(4,500	)		-		(4,252	)		-		-			(4,252	)
Balance as of March 31, 2022		785,146		$	8	$	73,264		$	404,389	$	(12,948	)	$	464,713

Balance as of December 31, 2022		768,337		$	8	$	57,206		$	449,932	$	(21,838	)	$	485,308
Net income		-			-		-			23,547		-			23,547
Other comprehensive income, net of tax		-			-		-			-		5,638			5,638
Repurchase of common stock		(5,406	)		-		(5,591	)		-		-			(5,591	)
Balance as of March 31, 2023		762,931		$	8	$	51,615		$	473,479	$	(16,200	)	$	508,902

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

	September 30, 2022
(Dollars in thousands)	# of Accruing TDR		$ of Accruing TDR		# of Non- Accruing TDR		$ of Non- Accruing TDR		# of Total TDR		$ of Total TDR
Loan and lease TDRs
2022		-	$	-		-	$	-		-	$	-
2021		-		-		-		-		-		-
2020		4		260		-		-		4		260
2019		-		-		-		-		-		-
Prior		8		1,065		-		-		8		1,065
Total		12	$	1,325		-	$	-		12	$	1,325

	September 30, 2022
	Actual					Minimum to be Categorized as “Adequately Capitalized”					Minimum to be Categorized as “Well Capitalized”
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Farmers & Merchants Bancorp
CET1 capital to risk-weighted assets	$	482,053		11.82	%	$	183,537		4.50	%		N/A		N/A
Tier 1 capital to risk-weighted assets		492,053		12.06	%		244,716		6.00	%		N/A		N/A
Risk-based capital to risk-weighted assets		543,218		13.32	%		326,288		8.00	%		N/A		N/A
Tier 1 leverage capital ratio		492,053		9.12	%		215,702		4.00	%		N/A		N/A

Farmers & Merchants Bank
CET1 capital to risk-weighted assets	$	491,237		12.04	%	$	183,531		4.50	%	$	265,101		6.50	%
Tier 1 capital to risk-weighted assets		491,237		12.04	%		244,708		6.00	%		326,278		8.00	%
Risk-based capital to risk-weighted assets		542,400		13.30	%		326,278		8.00	%		407,847		10.00	%
Tier 1 leverage capital ratio		491,237		9.12	%		215,498		4.00	%		269,372		5.00	%

	For the Nine Months Ended September 30,
	2022								2021
(Dollars in thousands)	Average Balance			Interest Income / Expense		Average Yield / Rate			Average Balance			Interest Income / Expense		Average Yield / Rate
ASSETS
Interest earnings deposits in other banks and federal funds sold	$	720,692		$	5,934		1.10	%	$	620,757		$	595		0.13	%
Securities:⁽¹⁾
Taxable securities		1,058,859			14,786		1.86	%		819,747			10,780		1.75	%
Non-taxable securities⁽²⁾		48,436			1,179		3.25	%		52,816			1,238		3.13	%
Total investment securities		1,107,295			15,965		1.92	%		872,563			12,018		1.84	%
Loans:⁽³⁾
Real estate:
Commercial		1,178,731			41,986		4.76	%		1,005,970			36,602		4.86	%
Agricultural		699,205			25,545		4.88	%		633,874			22,884		4.83	%
Residential and home equity		365,062			10,728		3.93	%		337,307			10,191		4.04	%
Construction		187,181			7,075		5.05	%		186,337			6,447		4.63	%
Total real estate		2,430,179			85,334		4.69	%		2,163,488			76,124		4.70	%
Commercial & industrial		434,217			15,460		4.76	%		365,744			12,567		4.59	%
Agricultural		257,555			9,350		4.85	%		229,862			7,758		4.51	%
Commercial leases		92,914			4,158		5.98	%		100,347			4,135		5.51	%
Consumer and other		27,330			3,569		17.46	%		203,683			9,255		6.08	%
Total loans and leases		3,242,195			117,871		4.86	%		3,063,124			109,839		4.79	%
Non-marketable securities		15,549			732		6.29	%		14,451			646		5.98	%
Total interest earning assets		5,085,731			140,502		3.69	%		4,570,895			123,098		3.60	%
Allowance for credit losses		(61,864	)							(59,971	)
Non-interest earning assets		314,520								315,582
Total average assets	$	5,338,387							$	4,826,506

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits:
Demand	$	1,111,513			1,023		0.12	%	$	1,002,267			869		0.12	%
Savings and money market accounts		1,550,334			1,179		0.10	%		1,336,826			1,136		0.11	%
Certificates of deposit greater than $250,000		163,148			299		0.25	%		169,545			587		0.46	%
Certificates of deposit less than $250,000		218,302			297		0.18	%		239,185			608		0.34	%
Total interest bearing deposits		3,043,297			2,798		0.12	%		2,747,823			3,200		0.16	%
Short-term borrowings		1			-		0.00	%		-			-		0.00	%
Subordinated debentures		10,310			319		4.14	%		10,310			236		3.06	%
Total interest bearing liabilities		3,053,608			3,117		0.14	%		2,758,133			3,436		0.17	%
Non-interest bearing deposits		1,740,859								1,567,089
Total funding		4,794,467			3,117		0.09	%		4,325,222			3,436		0.11	%
Other non-interest bearing liabilities		77,953								64,439
Shareholders' equity		465,967								436,845
Total average liabilities and shareholders' equity	$	5,338,387							$	4,826,506

Net interest income				$	137,385							$	119,662
Interest rate spread							3.56	%							3.43	%
Net interest margin⁽⁴⁾							3.61	%							3.50	%

	Three Months Ended September 30, 2022 compared with 2021									Nine Months Ended September 30, 2022 compared with 2021
	Increase (Decrease) Due to:									Increase (Decrease) Due to:
(Dollars in thousands)	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Interest earnings deposits in other banks and federal funds sold	$	(370	)	$	4,201		$	3,831		$	111		$	5,228		$	5,339
Securities:
Taxable securities		1,272			537			1,809			3,305			701			4,006
Non-taxable securities		(57	)		44			(13	)		(127	)		68			(59	)
Total securities		1,214			582			1,796			3,178			769			3,947
Loans:
Real estate:
Commercial		2,069			1,855			3,924			6,630			(1,246	)		5,384
Agricultural		1,122			(180	)		942			2,384			277			2,661
Residential and home equity		1,625			(1,647	)		(22	)		962			(425	)		537
Construction		(761	)		929			168			29			599			628
Total real estate		4,055			957			5,012			10,006			(796	)		9,210
Commercial & industrial		775			884			1,659			2,424			469			2,893
Agricultural		278			692			970			978			614			1,592
Commercial leases		(210	)		212			2			(429	)		452			23
Consumer and other		(12,215	)		10,352			(1,863	)		(16,453	)		10,767			(5,686	)
Total loans		(7,316	)		13,096			5,780			(3,474	)		11,506			8,032
Non-marketable securities		0			(35	)		(35	)		51			35			86
Total interest income		(6,472	)		17,844			11,372			(135	)		17,539			17,404

Interest expense:
Interest bearing deposits:
Demand		9			143			152			98			56			154
Savings and money market accounts		55			75			130			218			(175	)		43
Certificates of deposit greater than $250,000		(10	)		(37	)		(47	)		(21	)		(267	)		(288	)
Certificates of deposit less than $250,000		(11	)		(31	)		(42	)		(49	)		(262	)		(311	)
Total interest bearing deposits		43			150			193			246			(648	)		(402	)
Short-term borrowings		-			-			-			-			-			-
Subordinated debentures		-			56			56			-			83			83
Total interest expense		43			206			249			246			(565	)		(319	)
Net interest income	$	(6,515	)	$	17,638		$	11,123		$	(381	)	$	18,104		$	17,723

	As of September 30, 2022
	Within One Year					After One but Within Five Years					After Five but Within Ten Years					After Ten Years					Total
(Dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities available-for-sale
U.S. Treasury notes	$	4,941		2.38	%	$	-		0.00	%	$	-		0.00	%	$	-		0.00	%	$	4,941		2.38	%
U.S. Government-sponsored securities		7		1.74	%		81		3.97	%		436		3.01	%		4,174		2.79	%		4,698		2.83	%
Mortgage-backed securities⁽¹⁾		16		3.13	%		15,725		2.27	%		17,961		2.40	%		122,751		1.74	%		156,453		1.87	%
Collateralized mortgage obligations⁽¹⁾		-		0.00	%		-		0.00	%		-		0.00	%		1,458		2.35	%		1,458		2.35	%
Corporate securities		-		0.00	%		4,795		1.59	%		4,799		1.72	%		-		0.00	%		9,594		1.65	%
Other		310		2.99	%		-		0.00	%		-		0.00	%		-		0.00	%		310		2.99	%
Total securities available-for-sale	$	5,274		2.42	%	$	20,601		2.12	%	$	23,196		2.27	%	$	128,383		1.78	%	$	177,454		1.90	%

	Nine Months Ended September 30,
	2022							2021
(Dollars in thousands)	Average Balance		Interest Expense		Average Rate			Average Balance		Interest Expense		Average Rate
Total deposits:
Interest bearing deposits:
Demand	$	1,111,513		1,023		0.12	%	$	1,002,267	$	869		0.12	%
Savings and money market		1,550,334		1,179		0.10	%		1,336,826		1,136		0.11	%
Certificates of deposit greater than $250,000		163,148		299		0.25	%		169,545		587		0.46	%
Certificates of deposit less than $250,000		218,302		297		0.18	%		239,185		608		0.34	%
Total interest-bearing deposits		3,043,297		2,798		0.12	%		2,747,823		3,200		0.16	%
Non-interest bearing deposits		1,740,859							1,567,089
Total deposits	$	4,784,156	$	2,798		0.08	%	$	4,314,912	$	3,200		0.10	%

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

(Dollars in thousands)	Minimum to be Categorized as "Well Capitalized"			Minimum to be Categorized as "Adequately Capitalized"			September 30, 2022			December 31, 2021
Farmers & Merchants Bancorp
CET1 capital to risk-weighted assets		N/A			4.50	%		11.82	%		11.68	%
Tier 1 capital to risk-weighted assets		N/A			6.00	%		12.06	%		11.94	%
Risk-based capital to risk-weighted assets		N/A			8.00	%		13.32	%		13.19	%
Tier 1 leverage capital ratio		N/A			4.00	%		9.12	%		8.92	%

Farmers & Merchants Bank
CET1 capital to risk-weighted assets		6.50	%		4.50	%		12.04	%		11.91	%
Tier 1 capital to risk-weighted assets		8.00	%		6.00	%		12.04	%		11.91	%
Risk-based capital to risk-weighted assets		10.00	%		8.00	%		13.30	%		13.17	%
Tier 1 leverage capital ratio		5.00	%		4.00	%		9.12	%		8.91	%

			Amount of Commitment Expiration per Period
(Dollars in thousands)	Total Committed Amount		Less than One Year		One to Three Years		Three to Five Years		After Five Years
Off-balance sheet commitments
Commitments to extend credit	$	1,128,340	$	401,604	$	477,113	$	46,626	$	202,997
Standby letters of credit		16,629		10,403		4,326		1,470		430
Total off-balance sheet commitments	$	1,144,969	$	412,007	$	481,439	$	48,096	$	203,427

	September 30, 2022
(Dollars in thousands)	Total Credit Line Limit		Current Credit Line Available		Outstanding Amount		Remaining Credit Line Available		Value of Collateral Pledged
Additional liquidity sources:
Federal Home Loan Bank	$	766,011	$	766,011	$	-	$	766,011	$	1,183,540
Federal Reserve BIC		657,350		657,350		-		657,350		890,564
FHLB Fed Funds		18,000		18,000		-		18,000		-
US Bank Fed Funds		35,000		35,000		-		35,000		-
MUFG Union Bank Fed Funds		15,000		15,000		-		15,000		-
PCBB Fed Funds		50,000		50,000		-		50,000		-
Total additional liquidity sources	$	1,541,361	$	1,541,361	$	-	$	1,541,361	$	2,074,104