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

FORM 10-Q

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

For the quarterly period ended March 31,June 30, 2023

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________

Commission File Number:  000-26099

FARMERS & MERCHANTS BANCORP
(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of April 30,July 31, 2023, the registrant had 762,393754,436 shares of common stock $0.01 par value per share, outstanding.

FARMERS & MERCHANTS BANCORP
FORM 10-Q

TABLE OF CONTENTS

PART I. - FINANCIAL INFORMATION
Page
   
 Item 1 - Financial Statements 
 
Unaudited Consolidated Balance Sheets
3
 
Unaudited Consolidated Statements of Income
4
 
Unaudited Consolidated Statements of Comprehensive Income
5
 
Unaudited Consolidated Statements of Changes in Shareholders’ Equity
6
 
Unaudited Consolidated Statements of Cash Flows
7
 
Notes to Unaudited Consolidated Financial Statements
8
   
 
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
27
 
Overview
29
Results of Operations
30
Results of Financial Condition
35
   
 
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
49
   
 
Item 4 - Controls and Procedures
4951
   
PART II. - OTHER INFORMATION
 
   
 
Item 1 – Legal Proceedings
4952
 
Item 1A – Risk Factors
4952
 
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
4952
 
Item 3 – Defaults upon Senior Securities
50
53
 
Item 4 – Mine Safety Disclosures
5053
 
Item 5 – Other Information
5053
 
Item 6 – Exhibits
5053
 
Signatures
5154


2
Table of Contents
PART 1. FINANCIAL INFORMATION

Item 1.
Financial Statements

FARMERS & MERCHANTS BANCORP 
UNAUDITED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share amounts) 
March 31,
2023
  
December 31,
2022
  
June 30,
2023
  
December 31,
2022
 
ASSETS            
Cash and due from banks $68,278  $73,358  $80,280  $73,358 
Interest bearing deposits with banks  461,315   514,899   506,692   514,899 
Total cash and cash equivalents  529,593   588,257   586,972   588,257 
Securities available-for-sale, at fair value  118,437   152,864   114,643   152,864 
Securities held-to-maturity, fair value $705,909 and $688,393 respectively
  850,387   845,346 
Securities held-to-maturity, fair value $684,503 and $688,393 respectively
  838,446   845,346 
Allowance for credit losses - securities held-to-maturity  (393)  (393)  (450)  (393)
Total investment securities  968,431   997,817   952,639   997,817 
Non-marketable securities  15,549   15,549   15,549   15,549 
Loans and leases held-for-investment
  3,427,133   3,512,361   3,491,723   3,512,361 
Allowance for credit losses - loans and leases  (68,573)  (66,885
)
  (71,112)  (66,885
)
Loans held-for-investment, net  3,358,560   3,445,476   3,420,611   3,445,476 
Bank-owned life insurance  66,076   73,038   66,582   73,038 
Premises and equipment, net  50,423   49,476   51,519   49,476 
Deferred income tax assets  29,427   31,507   30,612   31,507 
Accrued interest receivable  16,818   21,602   22,116   21,602 
Goodwill  11,183   11,183   11,183   11,183 
Other intangibles  2,666   2,809   2,523   2,809 
Other real estate owned  873   873   873   873 
Other assets  84,172   89,812   89,199   89,812 
TOTAL ASSETS $5,133,771  $5,327,399  $5,250,378  $5,327,399 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Deposits:                
Non-interest bearing $1,551,906  $1,758,793  $1,495,279  $1,758,793 
Interest bearing:                
Demand  985,088   1,125,014   920,920   1,125,014 
Savings and money market  1,616,038   1,544,062   1,669,334   1,544,062 
Certificates of deposit  386,130   331,400   552,780   331,400 
Total interest bearing  2,987,256   3,000,476   3,143,034   3,000,476 
Total deposits  4,539,162   4,759,269   4,638,313   4,759,269 
Subordinated debentures  10,310   10,310   10,310   10,310 
Interest payable and other liabilities  75,397   72,512   87,046   72,512 
TOTAL LIABILITIES  4,624,869   4,842,091   4,735,669   4,842,091 
                
SHAREHOLDERS’ EQUITY                
Preferred shares, no par value, 1,000,000 shares authorized and, none issued or outstanding  -   -   -   - 
Common shares, $0.01 par value, 7,500,000 authorized 762,931 and 768,337 outstanding at March 31, 2023 and December 31, 2022, respectively
  8   8 
Common shares, $0.01 par value, 7,500,000 authorized 754,523 and 768,337 outstanding at June 30, 2023 and December 31, 2022, respectively
  8   8 
Additional paid in capital  51,615   57,206   43,263   57,206 
Retained earnings  473,479   449,932   488,501   449,932 
Accumulated other comprehensive (loss), net of taxes  (16,200)  (21,838
)
  (17,063)  (21,838
)
TOTAL SHAREHOLDERS’ EQUITY  508,902   485,308   514,709   485,308 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $5,133,771  $5,327,399  $5,250,378  $5,327,399 

See accompanying notes to the unaudited consolidated financial statements.

3
Table of Contents
FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

  
Three Months Ended
March 31,
 
(Dollars in thousands, except share and per share amounts) 2023
  2022
 
Interest income      
Interest and fees on loans and leases $48,008  $37,433 
Interest and dividends on investment securities  5,663   5,295 
Interest on deposits with others  5,961   366 
Total interest income  59,632   43,094 
         
Interest expense        
Deposits  3,714   803 
Subordinated debentures  196   82 
Total interest expense  3,910   885 
Net interest income  55,722   42,209 
Provision for credit losses  1,500   - 
Net interest income after provision for credit losses  54,222   42,209 
Non-interest income        
Card processing  1,591   1,737 
Service charges on deposit accounts  634   850 
Increase in cash surrender value of BOLI  444   542 
Gain on BOLI death benefit  4,346   - 
Net loss on sale of securities available-for-sale  (5,686)  - 
Net gain on deferred compensation benefits  896   412 
Other  1,235   771 
Total non-interest income  3,460   4,312 
Non-interest expense        
Salaries and employee benefits  19,584   16,784 
Net gain on deferred compensation benefits  896   412 
Occupancy  1,180   1,154 
Data processing  1,260   1,215 
FDIC insurance  611   349 
Marketing  470   316 
Legal  260   279 
Other  3,922   3,279 
Total non-interest expense  28,183   23,788 
INCOME BEFORE INCOME TAXES  29,499   22,733 
Income tax expense  5,952   5,675 
NET INCOME $23,547  $17,058 
         
Earnings per common share:        
Basic $30.80  $21.70 
Diluted $30.80  $21.70 
         
Weighted average number of common shares        
Basic  764,603   786,096 
Diluted  764,603   786,096 

See accompanying notes to the unaudited consolidated financial statements.
4
Table of Contents
FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATED STATEMENTSSTATEMENTS OF COMPREHENSIVE INCOME

  
Three Months Ended
March 31,
 
(Dollars in thousands) 2023
  2022
 
Net income $23,547  $17,058 
Other comprehensive income        
Unrealized holding gains/(losses) on available-for-sale securities
  2,362   (15,865)
Reclassification adjustment for losses on available-for-sale securities  5,685   - 
Amortization of unrealized loss on securities transferred to held-to-maturity  (30)  (77)
Net unrealized holding gains/(losses) on available-for-sale securities
  8,017   (15,942)
Income tax (expense)/benefit  (2,379)  4,713 
Other comprehensive income/(loss), net of tax  5,638   (11,229)
Total comprehensive income $29,185  $5,829 

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

See accompanying notes to the unaudited consolidated financial statements.

54
Table of Contents
FARMERS & MERCHANTS BANCORP
UNAUDITUNAUDITED CONSOLIDATED ED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYCOMPREHENSIVE INCOME

                  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 

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

See accompanying notes to the unaudited consolidated financial statements.

5
Table of Contents
FARMERS & MERCHANTS BANCORP
UNAUDITEDCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

  For the three and six months ended June 30, 2023 and 2022
 
(Dollars in thousands, except share amounts) 
Common
Shares
  Amount
  
Additional
Paid-In
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
(Loss)/Income
  Total 
Balance as of March 31, 2023
  
762,931
  
$
8
  
$
51,615
  
$
473,479
  
$
(16,200
)
 
$
508,902
 
Net income  -   -   
-
   
21,308
   
-
   
21,308
 
Other comprehensive loss, net of tax  -   
-
   
-
   
-
   
(863
)
  
(863
)
Cash dividends declared ($8.30 per share)
  -
   -   -   (6,286)  -   (6,286)
Repurchase of common stock  (8,408)  -   (8,352)  -   -   (8,352)
Balance as of June 30, 2023
  
754,523
  
$
8
  
$
43,263
  
$
488,501
  
$
(17,063
)
 
$
514,709
 
                         
Balance as of March 31, 2022
  
785,146
  
$
8
  
$
73,264
  
$
404,389
  
$
(12,948
)
 
$
464,713
 
Net income  -   -   
-
   
18,443
   
-
   
18,443
 
Other comprehensive loss, net of tax  -   
-
   
-
   
-
   
(8,100
)
  
(8,100
)
Cash dividends declared ($7.85 per share)
  -   -   -   (6,110)  -   (6,110)
Repurchase of common stock
  (7,956)  -   (7,593)  -   -   (7,593)
Balance as of June 30, 2022
  
777,190
  
$
8
  
$
65,671
  
$
416,722
  
$
(21,048
)
 
$
461,353
 

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

See accompanying notes to the unaudited consolidated financial statements.

6
Table of Contents
FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 
Three Months Ended
March 31,
  
Six Months Ended
June 30,
 
(Dollars in thousands) 2023  2022  2023  2022 
Cash flows from operating activities:            
Net income $23,547  $17,058  $44,855  $35,501 
Adjustments to reconcile net income to net cash provided by operating activities:                
Provision for credit losses  1,500   -   4,057   1,500 
Depreciation and amortization  596   656   1,196   1,270 
Net amortization of securities premiums and discounts  33   176   35   275 
Increase in cash surrender value of BOLI  (444
)
  (542
)
  (950
)
  (1,102
)
Gain on BOLI death benefit
  (4,346)  -   (4,346)  - 
Decrease /(increase) in deferred income taxes, net  3,933   (113)  1,773   (1,127)
Loss on sale of securities available-for-sale  5,686   - 
Loss/(gain) on sale of securities available-for-sale  5,686   (2)
Net changes in:                
Other assets  6,307   4,709   (2,636)  (7,797)
Other liabilities  4,864   6,966   16,671   22,823 
Net cash provided by operating activities  41,676   28,910   66,341   51,341 
Cash flows from investing activities:                
Net change in loans held-for-investment  70,927   (374)
Net change in loans and leases held-for-investment  6,388   (12,568)
Purchase of available-for-sale securities  (3,585
)
  (10,067
)
  (4,515
)
  (10,090
)
Purchase of held-to-maturity securities  (1,350
)
  (118,162
)
  (2,071
)
  (168,149
)
Proceeds from sales, maturities, calls and pay downs of available-for-sale securities
  40,348   13,097   43,885   27,679 
Proceeds from maturities, calls and pay downs of held-to-maturity securities  10,817   19,516   23,498   36,641 
Purchase of premises and equipment  (1,543
)
  (363
)
  (3,239
)
  (526
)
Purchase of other investments  (2,008)  -   (2,166)  (3,440)
Proceeds from bank-owned life insurance  11,752   -   11,752   - 
Proceeds from sale of assets  -   34   27   34 
Net cash provided (used in) by investing activities  125,358   (96,319)
Net cash provided by (used in) investing activities  73,559   (130,419)
Cash flows from financing activities:                
Net (decrease) increase in deposits  (220,107)  197,287   (120,956)  129,361 
Cash dividends paid
  (6,286)  (6,110)
Net cash used in share repurchase of common stock
  (5,591)  (4,252)  (13,943)  (11,845)
Net cash (used in) provided by financing activities  (225,698)  193,035   (141,185)  111,406 
Net change in cash and cash equivalents  (58,664)  125,626   (1,285)  32,328 
Cash and cash equivalents, beginning of period
  588,257   715,460   588,257   715,460 
Cash and cash equivalents, end of period
 $529,593  $841,086  $586,972  $747,788 
                
Supplemental disclosures of cash flow information:                
Cash paid for interest $3,389  $951  $9,907  $2,580 
Income Taxes Paid
 $1  $- 
Income taxes paid
 $16  $9,343 
                
Supplemental disclosures of non-cash transactions:                
Security purchases settled in subsequent period $-  $(40,626)
Unrealized gain/(losses) on securities available-for-sale $8,048  $(15,865)
Net change in unrealized gain/(losses) on securities available-for-sale $6,857  $(27,301)

See accompanying notes to the unaudited consolidated financial statements.

7
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 (“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 March 31,June 30, 2023 for potential recognition or disclosure. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and note disclosures have been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements. All significant intercompany transactions and balances have been eliminated.

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

The information included in this Form 10-Q should be read in conjunction with our 2022 Form 10-K. Interim results are not necessarily indicative of results for a full year or any other interim period.

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

Modifications for Borrowers Experiencing Financial Difficulty. The Company may renegotiate the terms of existing loans for a variety of reasons. When refinancing or restructuring a loan, the Company evaluates where the borrower is experiencing financial difficulty. In making this determination, the Company considers whether the borrower is currently in default on any of its debt. In addition, the Company evaluates whether it is probable that the borrower would be in payment default on any of its debt in the foreseeable future without the modification and if the borrower (without the current modification) could obtain equivalent financing from another creditor at a market rate for similar debt. Modifications of loans to borrowers in these situations may indicated that the borrower is facing financial difficulty. Modifications of loans to borrowers experiencing financial difficulty that are in the form of principal forgiveness, interest rate reductions, other-than-insignificant payment delays, or a term extension (or a combination thereof) require disclosure. The Company’s disclosures are included in Note 3, Loans and Leases.

8
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 1—Basis of Presentation and Significant Accounting Policies—Continued

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

In March 2020, the 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. ASU 2020-04 was effective upon issuance and, based upon the 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 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.

8
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (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. ASU 2021-01 was effective upon issuance and, based upon the amendments provided in ASU 2022-06 discussed below, can generally be applied through December 31, 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 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 provisionsadoption of this ASU is not expected to determine the potentialhave material impact the new standard will have on the Company’s consolidated financial statements.Consolidated Financial Statements.

9
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.

On January 1, 2023, the company adopted 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.


NoteNote 2—Investment Securities

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

Available-for-Sale Securities 
   Gross Unrealized  
 
(Dollars in thousands) 
Amortized
Cost
  Gains  Losses  
Fair
Value
 
As of March 31, 2023                
U.S. Government-sponsored securities $4,117  $18  $23  $4,112 
Mortgage-backed securities (1)
  125,610   41   21,954   103,697 
Collateralized mortgage obligations (1)
  620   -   13   607 
Corporate securities  10,041   -   330   9,711 
Other  310   -   -   310 
Total available-for-sale securities $140,698  $59  $22,320  $118,437 
Available-for-Sale Securities 
   Gross Unrealized  
 
(Dollars in thousands) 
Amortized
Cost
  Gains  Losses  
Fair Value
 
As of June 30, 2023                
U.S. Government-sponsored securities $
3,845  $
17  $
21  $
3,841 
Mortgage-backed securities (1)
  123,302   4   23,238   100,068 
Collateralized mortgage obligations (1)
  599   -   13   586 
Corporate securities  10,038   -   200   9,838 
Other  310   -   -   310 
Total available-for-sale securities $138,094  $21  $23,472  $114,643 

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

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

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

10
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 June 30, 2023               
Mortgage-backed securities (1)
 $685,028  $16  $138,764  $546,280  $- 
Collateralized mortgage obligations (1)
  77,290
   -
   15,022
   62,268
   -
 
Municipal securities  76,128   72   245   75,955   450 
Total held-to-maturity securities $838,446  $88  $154,031  $684,503  $450 

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. GovernmentGovernment..

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 


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

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


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


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


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


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


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 

  June 30, 2023 
  Less Than 12 Months  12 Months or More  Total 
(Dollars in thousands) Fair Value  
Unrealized
Losses
  Fair Value  Unrealized
Losses		  Fair Value  
Unrealized
Losses
 
Available-for-Sale Securities                  
U.S. Government-sponsored securities 
$
267
  
$
1
  
$
1,127
  
$
20
  
$
1,394
  
$
21
 
Mortgage-backed securities(1)
  
15,374
   
480
   
83,944
   
22,758
   
99,318
   
23,238
 
Collateralized mortgage obligations(1)
  
-
   
-
   
586
   
13
   
586
   
13
 
Corporate securities  
-
   
-
   
9,838
   
200
   
9,838
   
200
 
Total available-for-sale securities 
$
15,641
  
$
481
  
$
95,495
  
$
22,991
  
$
111,136
  
$
23,472
 


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

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

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


As of March 31,June 30, 2023, the Company held 183182 available-for-sale securities of which 6156 were in an unrealized loss position for less than twelve months and 97102 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 securities by major 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 

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

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

12
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 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 debtinvestment securities at March 31,June 30, 2023 by contractual final maturity are shown in the following table:


 Available-for-Sale  Held-to-Maturity 
(Dollars in thousands) 
Amortized
Cost
  
Fair
Value
  
Amortized
Cost
  
Fair
Value
 
Securities maturing in:
                
One year or less $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
 $321  $321  $283  $283 
After one year through five years  18,571   18,018   12,292   12,201 
After five years through ten years  7,135   6,871   28,355   26,675 
After ten years  112,067   89,433   797,516   645,344 
Total $
138,094  $
114,643  $
838,446  $
684,503 

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

The Company monitors the credit quality of those held-to-maturity 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 amortized cost of held-to-maturity municipal debt securities by credit rating at March 31,June 30, 2023:


Held-to-Maturity    Held-to-Maturity 
Amortized Cost    Amortized Cost 
(Dollars in thousands)AAA/AA/A BBB/BB/B Not Rated Total  AAA/AA/A  BBB/BB/B  Not Rated  Total 
March 31, 2023        
June 30, 2023            
Municipal securities $19,380  $390  $56,490  $76,260  $19,380  $391  $56,357  $76,128 
Total $19,380  $390  $56,490  $76,260  $19,380  $391  $56,357  $76,128 

As of March 31,June 30, 2023, there were no past due principal or interest payments associated with these securities.

13
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 
Three months ended March 31, 2023 $30,482  $-  $5,686 
Three months ended March 31, 2022 $2,190  $-  $- 
(Dollars in thousands) Gross Proceeds  Gross Gains  Gross Losses 
Six months ended June 30, 2023 $30,482  $-  $5,686 
Six months ended June 30, 2022 $2,610  $2  $- 

Pledged Securities

As of March 31,June 30, 2023, securities carried at $498$582.2 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) borrowings, and other government agency deposits as required by law. This amount was $479$478.7 million at December 31, 2022.

13
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 3—Loans and Leases

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

(Dollars in thousands) 
March 31,
2023
  
December 31,
2022
  
June 30,
2023
  
December 31,
2022
 
Loans and leases held-for-investment, net
            
Real estate:            
Commercial $1,312,745  $1,328,691  $1,302,460  $1,328,691 
Agricultural  707,412   726,938   739,207   726,938 
Residential and home equity  387,370   387,753   392,754   387,753 
Construction  153,394   166,538   172,903   166,538 
Total real estate  2,560,921   2,609,920   2,607,324   2,609,920 
Commercial & industrial  472,189   478,758   479,908   478,758 
Agricultural
  275,785   314,525   282,725   314,525 
Commercial leases  123,314   112,629   126,554   112,629 
Consumer and other  5,382   5,886   5,553   5,886 
Total gross loans and leases  3,437,591   3,521,718   3,502,064   3,521,718 
Unearned income  (10,458)  (9,357)  (10,341)  (9,357)
Total net loans and leases  3,427,133   3,512,361   3,491,723   3,512,361 
Allowance for credit losses  (68,573)  (66,885)  (71,112)  (66,885)
Total loans and leases held-for-investment, net $3,358,560  $3,445,476  $3,420,611  $3,445,476 

At March 31,June 30, 2023, the portion of loans that were approved for pledging as collateral on borrowing lines with the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“FRB”) were $1.2$1.3 billion and $881.5$894.4 million, respectively. The borrowing capacity on these loans was $770.7$784.1 million from FHLB and $656.5$655.0 million from the FRB.

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

 

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


 March 31, 2023  June 30, 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
                                    
Real estate:                                    
Commercial $1,304,052  $-  $-  $387  $387  $1,304,439  $1,293,842  $-  $-  $375  $375  $1,294,217 
Agricultural  707,412   -   -   -   -   707,412   739,207   -   -   -   -   739,207 
Residential and home equity  387,370   -   -   -   -   387,370   392,754   -   -   -   -   392,754 
Construction  153,394   -   -   -   -   153,394   172,903   -   -   -   -   172,903 
Total real estate  2,552,228   -   -   387   387   2,552,615   2,598,706   -   -   375   375   2,599,081 
Commercial & industrial  472,189   -   -   -   -   472,189   479,729   179   -   -   179   479,908 
Agricultural  275,785   -   -   -   -   275,785   282,725   -   -   -   -   282,725 
Commercial leases  121,162   -   -   -   -   121,162   124,456   -   -   -   -   124,456 
Consumer and other  5,357   25   -   -   25   5,382   5,549   4   -   -   4   5,553 
Total loans and leases, net $3,426,721  $25  $-  $387  $412  $3,427,133  $3,491,165  $183  $-  $375  $558  $3,491,723 


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

1514
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 3—Loans and Leases—Continued

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



Non-accrual loans are summarized as follows:


(Dollars in thousands) 
March 31,
2023
  
December 31,
2022
  
June 30,
2023
  
December 31,
2022
 
Non-accrual loans and leases:            
Non-accrual loans and leases      
Real estate:            
Commercial $387  $403  $375  $403 
Agricultural  -   -   -   - 
Residential and home equity  -   -   -   - 
Construction  -   168   -   168 
Total real estate  387   571   375   571 
Commercial & Industrial  -   - 
Commercial & industrial  -   - 
Agricultural  -   -   -   - 
Commercial leases  -   -   -   - 
Consumer and other  -   -   -   - 
Total non-accrual loans and leases $387  $571  $375  $571 

During the six months ended June 30, 2023, we had one residential real estate loan modified in the amount of $127,000.  The Company did not enter into anycontractual interest rate of the modified loan modifications with borrowers experiencing financial difficultydecreased from 3.18% to 2.18% and the contractual term was extended from 15 years to 25 years.  There were no loans modified on or after January 1, 2023, when the company adopted ASU 2022-02, through June 30, 2023 that subsequently defaulted during the three months ended March 31, 2023.
period presented.


1615
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 3—Loans and Leases—Continued

 

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


 March 31, 2023  June 30, 2023 
(Dollars in thousands) Pass  
Special
Mention
  
Sub-
standard
  Doubtful  
Total Loans
& Leases
  
Total
Allowance
for Credit
Losses
  Pass  
Special
Mention
  
Sub-
standard
  Doubtful  
Total Loans
& Leases
  
Total
Allowance
for Credit
Losses
 
Loans and leases held-for-investment, net                                    
Real estate:                                    
Commercial $1,301,094  $2,958  $387  $-  $1,304,439  $24,253  $1,290,902  $2,940  $375  $-  $1,294,217  $24,787 
Agricultural  688,406   12,875   6,131   -   707,412   8,441   728,490   -   10,717   -   739,207   9,908 
Residential and home equity  387,006   -   364   -   387,370   7,334   392,462   -   292   -   392,754   7,179 
Construction  153,394   -   -   -   153,394   2,785   172,903   -   -   -   172,903   3,195 
Total real estate  2,529,900   15,833   6,882   -   2,552,615   42,813   2,584,757   2,940   11,384   -   2,599,081   45,069 
Commercial & industrial  471,348   594   247   -   472,189   11,346   471,586   8,083   239   -   479,908   11,291 
Agricultural  271,307   4,467   11   -   275,785   12,542   282,699   17   9   -   282,725   12,903 
Commercial leases  121,099   63   -   -   121,162   1,720   124,412   44   -   -   124,456   1,657 
Consumer and other  5,251   -   131   -   5,382   152   5,391   -   162   -   5,553   192 
Total loans and leases, net $3,398,905  $20,957  $7,271  $-  $3,427,133  $68,573  $3,468,845  $11,084  $11,794  $-  $3,491,723  $71,112 


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

1716
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 3—Loans and Leases—Continued

 
The following table presents outstanding loan and lease balances held-for-investment by segment and class, credit quality indicators, vintage year by class of financing receivable, and current period gross charge-offs by year of origination as of March 31,June 30, 2023:


 March 31, 2023  June 30, 2023 
 Term Loans Amortized Cost Basis by Origination Year        Term Loans Amortized Cost Basis by Origination Year       
(Dollars in thousands) 2023  2022  2021  2020  2019  Prior  
Revolving
Loans
Amortized
Cost
  Total  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  $72,459  $172,866  $226,209  $146,307  $69,072  $285,957  $318,032  $1,290,902 
Special mention  -   -   -   -   -   2,358   600   2,958   -   -   -   -   -   2,340   600   2,940 
Substandard  -   -   -   -   -   387   -   387   -   -   -   -   -   375   -   375 
Doubtful  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Total Commercial $51,123  $176,639  $227,251  $149,007  $69,798  $304,204  $326,417  $1,304,439  $72,459  $172,866  $226,209  $146,307  $69,072  $288,672  $318,632  $1,294,217 
Commercial
                                                                
Current-period gross charge-offs
 $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
- 
                                                                
Agricultural
                                                                
Pass $14,274  $75,313  $41,782  $53,027  $14,264  $176,639  $313,107  $688,406  $35,673  $74,658  $41,588  $51,985  $14,224  $174,620  $335,742  $728,490 
Special mention  -   -   -   -   -   -   12,875   12,875   -   -   -   -   -   -   -   - 
Substandard  -   -   -   -   -   6,131   -   6,131   -   -   -   -   -   6,128   4,589   10,717 
Doubtful  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Total Agricultural
 $14,274  $75,313  $41,782  $53,027  $14,264  $182,770  $325,982  $707,412  $35,673  $74,658  $41,588  $51,985  $14,224  $180,748  $340,331  $739,207 
Agricultural                                                                
Current-period gross charge-offs $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
-  $
- 
                                                                
Residential and home equity                                                                
Pass $7,062  $65,050  $94,458  $85,239  $14,222  $79,905  $41,070  $387,006  $19,331  $63,975  $92,602  $82,832  $13,730  $76,970  $43,022  $392,462 
Special mention
  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Substandard  -   -   -   -   -   284   80   364   -   -   -   -   -   292   -   292 
Doubtful  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Total Residential and home equity $7,062  $65,050  $94,458  $85,239  $14,222  $80,189  $41,150  $387,370  $19,331  $63,975  $92,602  $82,832  $13,730  $77,262  $43,022  $392,754 
Residential and home equity                                                                
Current-period gross charge-offs $
-  $
-  $
-  $
-  $
-  $
14  $
-  $
14  $
14  $
-  $
-  $
-  $
-  $
-  $
-  $
14 
                                                                
Construction                                                                
Pass $-  $2,003  $-  $-  $1,575  $-  $149,816  $153,394  $-  $3,000  $-  $-  $1,575  $-  $168,328  $172,903 
Special mention
  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Substandard  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Doubtful  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Total construction $-  $2,003  $-  $-  $1,575  $-  $149,816  $153,394  $-  $3,000  $-  $-  $1,575  $-  $168,328  $172,903 
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  $127,463  $314,499  $360,399  $281,124  $98,601  $546,682  $870,313  $2,599,081 
                                                                
Commercial & industrial                                                                
Pass $11,960  $30,234  $35,318  $11,131  $7,195  $10,318  $365,192  $471,348  $33,979  $29,326  $33,982  $10,053  $6,174  $8,715  $349,357  $471,586 
Special mention  -   -   55   -   -   539   -   594   -   -   48   -   -   517   7,518   8,083 
Substandard  -   -   -   -   -   6   241   247   -   -   -   -   -   5   234   239 
Doubtful  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Total Commercial & industrial $11,960  $30,234  $35,373  $11,131  $7,195  $10,863  $365,433  $472,189  $33,979  $29,326  $34,030  $10,053  $6,174  $9,237  $357,109  $479,908 
Commercial & industrial                                                                
Current-period gross charge-offs $
-  $-  $
-  $
-  $
-  $
-  $
-  $
-  $
-  $-  $
-  $
-  $
-  $
-  $
-  $
- 

1817
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 3—Loans and Leases—Continued

 March 31, 2023  June 30, 2023 
 Term Loans Amortized Cost Basis by Origination Year          Term Loans Amortized Cost Basis by Origination Year         
(Dollars in thousands) 2023  2022  2021  2020  2019  Prior  
Revolving
Loans
Amortized
Cost
  Total  2023  2022  2021  2020  2019  Prior  
Revolving
Loans
Amortized
Cost
  Total 
Net loans and leases held-for-investment                        
Agricultural                                                                
Pass $170  $5,179  $2,755  $918  $1,135  $2,448  $258,702  $271,307  $395  $4,976  $2,491  $794  $1,109  $2,368  $270,566  $282,699 
Special mention  -   -   -   -   -   -   4,467   4,467   -   -   -   -   -   -   17   17 
Substandard  -   -   -   -   10   1   -   11   -   -   -   -   9   -   -   9 
Doubtful  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Total Agricultural $170  $5,179  $2,755  $918  $1,145  $2,449  $263,169  $275,785  $395  $4,976  $2,491  $794  $1,118  $2,368  $270,583  $282,725 
Agricultural                                                                
Current-period gross charge-offs $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $- 
                                                                
Commercial leases                                                                
Pass $33,959  $15,132  $12,359  $5,537  $33,433  $20,679  $-  $121,099  $28,715  $34,385  $12,082  $10,626  $5,315  $33,289  $-  $124,412 
Special mention  -   -   -   -   63   -   -   63   -   -   -   -   44   -   -   44 
Substandard  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Doubtful  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Total Commercial leases $33,959  $15,132  $12,359  $5,537  $33,496  $20,679  $-  $121,162  $28,715  $34,385  $12,082  $10,626  $5,359  $33,289  $-  $124,456 
Commercial leases                                                                
Current-period gross charge-offs $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $-  $- 
                                                                
Consumer and other                                                                
Pass $318  $1,476  $575  $213  $121  $1,922  $626  $5,251  $793  $1,361  $516  $155  $93  $1,694  $779  $5,391 
Special mention  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Substandard  131   -   -   -   -   -   -   131   127   -   -   -   -   35   -   162 
Doubtful  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Total Consumer and other $449  $1,476  $575  $213  $121  $1,922  $626  $5,382  $920  $1,361  $516  $155  $93  $1,729  $779  $5,553 
Consumer and other                                                                
Current-period gross charge-offs $8  $1  $-  $-  $-  $1  $-  $10  $18  $-  $-  $-  $-  $-  $-  $18 
                                
Total net loans and leases $118,997  $371,026  $414,553  $305,072  $141,816  $603,076  $1,472,593  $3,427,133                                 
Pass
 $
191,345  $
384,547  $
409,470  $
302,752  $
111,292  $
583,613  $
1,485,826  $
3,468,845 
Special mention
  -   -   48   -   44   2,857   8,135   11,084 
Substandard
  127   -   -   -   9   6,835   4,823   11,794 
Doubtful
  -   -   -   -   -   -   -   - 
Total net loans and leases $191,472  $384,547  $409,518  $302,752  $111,345  $593,305  $1,498,784  $3,491,723 
Total current-period gross charge-offs
 $32  $-  $-  $-  $-  $-  $-  $32 

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

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

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

1918
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 3—Loans and Leases—Continued



A loan or lease is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. When management determines that foreclosure is probable, expected credit losses for collateral dependent loans or leases are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. The collateral on the loans and leases is a significant portion of what secures the collateral dependent loans or leases and significant changes to the fair value of the collateral can impact the ACL. During the threesix months ended March 31,June 30, 2023, there were no significant changes to the collateral that secures the collateral dependent loans, whether due to general deterioration or with credit quality indicators like appraisal value. The following tables present the amortized cost basis for collateral dependent loans and leases by type as of March 31,June 30, 2023 and December 31, 2022, respectively:


 March 31, 2023  June 30, 2023 
(Dollars in thousands) Real Estate  
Vehicles and
Equipment
  Total  Real Estate  
Vehicles and
Equipment
  Total 
Collateral dependent loans and leases                  
Real estate:                  
Commercial $1,492  $-  $1,492  $1,471  $-  $1,471 
Agricultural  10,751   -   10,751   10,717   -   10,717 
Residential and home equity  1,658   -   1,658   1,649   -   1,649 
Construction  -   -   -   -   -   - 
Total real estate  13,901   -   13,901   13,837   -   13,837 
Commercial & industrial  -   -   -   -   -   - 
Agricultural  -   11   11   -   9   9 
Commercial leases  -   -   -   -   -   - 
Consumer and other  -   153   153   -   184   184 
Total gross loans and leases $13,901  $164  $14,065  $13,837  $193  $14,030 


  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 

2019
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 June 30, 2023 
(Dollars in thousands) 
Commercial &
Agricultural
R/E
  Construction  
Residential &
Home Equity
  
Commercial
&
Agricultural
  
Commercial
Leases
  Consumer
& Other		  Total 
Allowance for credit losses:                     
Balance at beginning of period
 $32,694  $2,785  $7,334  $23,888  $1,720  $152  $68,573 
Provision / (recapture) for credit losses  2,001   410   (176)  285   (63)
  43   2,500 
Charge-offs  -   -   -   -   -   (9)  (9)
Recoveries  -   -   21   21   -   6   48 
Net (charge-offs) / recoveries  -   -   21   21   -   (3)  39 
Balance at end of period
 $34,695  $3,195  $7,179  $24,194  $1,657  $192  $71,112 

 For the Three Months Ended March 31, 2023  For the Three Months Ended June 30, 2022 
(Dollars in thousands) 
Commercial &
Agricultural
R/E
  Construction  
Residential &
Home Equity
  
Commercial
&
Agricultural
  
Commercial
Leases
  Consumer
& Other		  Total  
Commercial &
Agricultural
R/E
  Construction  
Residential &
Home Equity
  
Commercial
&
Agricultural
  
Commercial
Leases
  Consumer
& Other		  Total 
Allowance for credit losses:                                          
Balance at beginning of period
 $32,551  $3,026  $7,508  $21,705  $1,924  $171  $66,885 
Balance at beginning
 $32,511  $3,777  $6,759  $16,098  $1,466  $421  $61,032 
Provision / (recapture) for credit losses  (27)  (241)  (170)  2,163   (204)  (21)  1,500   2,205   (901)  10   (131)  179   (255)  1,107 
Charge-offs  -   -   (14)  -   -   (10)  (24)  -   -   -   (276)  -   (9)  (285)
Recoveries  170   -   10   20   -   12   212   -   -   105   117   -   4   226 
Net (charge-offs) / recoveries  170   -   (4)  20   -   2   188   -   -   105   (159)  -   (5)  (59)
Balance at end of period
 $32,694  $2,785  $7,334  $23,888  $1,720  $152  $68,573  $34,716  $2,876  $6,874  $15,808  $1,645  $161  $62,080 

 For the Three Months Ended March 31, 2022  For the Six Months Ended June 30, 2023 
(Dollars in thousands) 
Commercial &
Agricultural
R/E
  Construction  
Residential &
Home Equity
  
Commercial
&
Agricultural
  
Commercial
Leases
  Consumer
& Other		  Total  
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)  - 
Balance at beginning of period
 $32,551  $3,026  $7,508  $21,705  $1,924  $171  $66,885 
Provision / (recapture) for credit losses  552   466   866   (1,700)  (101)  (83)  -   1,974   169   (346)  2,448   (267)  22   4,000 
Charge-offs  -   -   -   -   -   (9)  (9)  -   -   (14)  -   -   (18)  (32)
Recoveries  -   -   14   18   -   2   34   170   -   31   41   -   17   259 
Net (charge-offs) / recoveries  -   -   14   18   -   (7)  25   170   -   17   41   -   (1)  227 
Balance at end of period
 $32,511  $3,777  $6,759  $16,098  $1,466  $421  $61,032  $34,695  $3,195  $7,179  $24,194  $1,657  $192  $71,112 

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

20
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 4—Deposits



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


(Dollars in thousands) 
March 31,
2023
  
December 31,
2022
  
June 30,
2023
  
December 31,
2022
 
Certificates of deposit:
            
Certificates of deposit less than or equal to $250,000 $218,375  $202,554  $286,881  $202,554 
Certificates of deposit greater than $250,000  167,755   128,846   265,899   128,846 
Total certificates of deposit
 $386,130  $331,400  $552,780  $331,400 



Scheduled maturities for certificates of deposit are as follows:


(Dollars in thousands) Amount  Amount 
2023
 $237,695  $205,571 
2024
  131,935   327,243 
2025
  12,059   15,007 
2026
  3,029   3,894 
2027 and beyond
  1,412   1,065 
Total certificates of deposit
 $386,130  $552,780 

21
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 5—Short-term borrowings

As of March 31,June 30, 2023 and December 31, 2022, committed lines of credit arrangements totaling $1.55$1.6 billion and $1.51$1.5 billion were available to the Company from unaffiliated banks, respectively. The average Federal Funds interest rate as of March 31,June 30, 2023 was 5.00%5.25%.

The Company is a member of the FHLB of San Francisco and has a committed credit line of $772.7$784.1 million, which is secured by $1.2$1.3 billion in various real estate loans and investment securities pledged as collateral. Borrowings generally provide for interest at the then current published rate, which was 5.08%5.35% as of March 31,June 30, 2023.

The Company has $881.5$894.4 million in pledged loans with the Federal Reserve Bank (the “Fed”). As of March 31,June 30, 2023, the Company’s overnight borrowing capacity using the primary credit facilities from the Fed account was $656.5$655.0 million. The borrowing rate was 5.00%5.25% as of March 31,June 30, 2023.

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


Note 6—Earnings Per Share


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 March 31, 
(Dollars in thousands, except share and per share amounts) 2023
  2022
 
Numerator      
Net income $23,547  $17,058 

        
Denominator        
Weighted average number of common shares outstanding  764,603   786,096 
Weighted average number of dilutive shares outstanding  764,603   786,096 
         
Basic earnings per common share $30.80  $21.70 
Diluted earning per common share $30.80  $21.70 

2221
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 7—6—Employee Benefit Plans

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

The Company expensed $2.3$4.5 million to the ERP during the threesix months ended March 31,June 30, 2023 and $1.8$3.3 million during the threesix months ended March 31,June 30, 2022. The Company’s carrying value of the liability under the ERP was $55.1$58.3 million as of March 31,June 30, 2023 and $57.0 million as of December 31, 2022. The Company’s shares of common stock held as investments in the Rabbi Trust of the ERP as of March 31,June 30, 2023 and December 31, 2022 totaled 48,05549,156 and 50,196 with an historical cost basis of $30.0$31.6 million and $31.4 million, respectively. All amounts have been fully funded into the Rabbi Trust as of March 31,June 30, 2023 and December 31, 2022. The consolidated investments held in the Rabbi Trust are recorded at fair value with changes in unrealized gains or losses recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income.

Net gains on ERP plan investments were $0.7$1.8 million compared to net gainsloss of $0.3$0.7 million at March 31,June 30, 2023 and 2022, respectively. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices.

Senior Management Retention Plan
The Company, 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$2.1 million to the SMRP during the threesix months ended March 31,June 30, 2023 and $0.7$1.4 million for threesix months ended March 31,June 30, 2022. The Company’s carrying value of the liability under the SMRP was $15.4$16.9 million as of March 31,June 30, 2023 and $13.6 million as of December 31, 2022. The Company’s shares of stock held as investments in the Rabbi Trust of the SMRP as of March 31,June 30, 2023 and December 31, 2022 totaled 16,62917,941 and 15,998 shares with an historical cost basis of $11.5$12.7 million and $10.8 million, respectively. All amounts have been fully funded into the Rabbi Trust as of March 31,June 30, 2023 and December 31, 2022. The consolidated investments held in the Rabbi Trust are recorded at fair value with changes in unrealized gains or losses recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income.

Net gains on SMRP plan investments were $0.2$0.4 million compared to net gains of $0.1 million at March 31,June 30, 2023 and 2022, respectively. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices.

2322
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 8—7—Fair Value Measurements


The Company follows the “Fair Value Measurement and Disclosures” topic of the FASB ASC Topic 820, which establishes a framework for measuringuses fair value in U.S. GAAP and expands disclosures aboutmeasurements to record fair value measurements. This standard applies whenever other standards require, or permitadjustments to certain financial and non-financial assets orand liabilities and to be measureddetermine fair value disclosures. Various financial instruments such as available-for-sale securities are recorded at fair value but does not expandon a recurring basis. Additionally, from time to time, the useCompany may be required to record at fair value other assets and liabilities on a non-recurring basis, such as collateral dependent loans and other real estate owned. These non-recurring fair value adjustments typically involve lower of cost or fair value accounting or write-down of individual assets.



Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. For accounting disclosure purposes, a three-level valuation hierarchy of fair value in any new circumstances. In this standard,measurements has been established. The valuation hierarchy is based upon the FASB clarifiestransparency of inputs to the principle that fair value should be based on the assumptions market participants would use when pricing thevaluation of an asset or liability. In supportliability as of this principle, this standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.measurement date. The fair value hierarchy isthree levels are defined as follows:follows:


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


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


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



The carrying amounts and estimated fair values of assetsfinancial instruments held by the Company are set forth below. Fair value estimates are made at a specific point in time based on relevant market information. They do not reflect any premium or liabilitiesdiscount that reflect an entity’s owncould result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.  Because no market exists for many of the Company’s financial instruments, fair value estimates are based on judgements regarding future expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties, and cannot be determined with precision. Changes in assumptions aboutcould significantly affect the assumptions that market participants would use in pricing the assets or liabilities.
estimates.

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 instrumentThe valuation methodologies for assets and size of the transfer relative to total assets, total liabilities or total earnings.

Securities classified as available-for-sale are reportedmeasured at fair value on a recurring and non-recurring basis utilizing Level 1, 2 and 3 inputs. Forare described in the Fair Value note in the Company’s 2022 Annual Report on Form 10-K. There have been no significant changes in these 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.methodologies since then.

Collateral dependent loans represent certain loans held for investment that are subject to a fair value measurement under U.S. GAAP because they are individually evaluated using a fair value measurement, such as the fair value of the underlying collateral. Credit loss is measured using a market approach based on the fair value of 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.

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

2423
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 8—7—Fair Value—Value Measurements—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 non-recurring OREO is primarily the sales comparison approach lessestimated selling costs.

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

March 31, 2023
   
Fair Value Measurements
 
June 30, 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 $529,593 $529,593 $- $- $529,593  $586,972 $586,972 $- $- $586,972 
Held-to-maturity securities 849,994 - 649,419 56,490 705,909  837,996 - 628,149 56,356 684,505 
Non-marketable securities 15,549 - - 15,549 15,549  15,549 - - 15,549 15,549 
Loans and leases, net 3,358,560 - - 3,207,754 3,207,754  3,420,611 - - 3,224,473 3,224,473 
Bank-owned life insurance 66,076 66,076 - - 66,076  66,582 66,582 - - 66,582 
                      
Financial Liabilities:                      
Total deposits $
4,539,162 $- $4,153,033 $377,969 $4,531,002  $
4,638,313 $- $4,085,533 $543,784 $4,629,317 
Subordinated debentures 10,310 - 12,830 - 12,830  10,310 - 12,717 - 12,717 

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

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 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.
2524
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 8—7—Fair Value—Value Measurements—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 presentspresent information about the Bank’s assets and liabilities measured at fair value on a recurring and non-recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Bank to determine such fair value for the periods indicated.

March 31, 2023
   
Fair Value Measurements
 
June 30, 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:                      
Available-for-sale securities                      
U.S. Government-sponsored securities $
4,112 $
- $
4,112 $
- $
4,112  $
3,841 $
- $
3,841 $
- $
3,841 
Mortgage-backed securities 103,697 - 103,697 - 103,697  100,068 - 100,068 - 100,068 
Collateralized mortgage obligations 607 - 607 - 607  586 - 586 - 586 
Corporate securities 9,711 - 9,711 - 9,711  9,838 - 9,838 - 9,838 
Other 310 - 310 - 310  310 - 310 - 310 
                      
Fair valued on a non-recurring basis:                      
Collateral Dependent loans
 $
14,065 $
- $
- $
14,065 $
14,065  $
14,030 $
- $
- $
14,030 $
14,030 
Other real estate owned
  
873  
-  
-  
873  
873   
873  
-  
-  
873  
873 

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

2625
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 9—8—Commitments and Contingencies



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


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



The Company’s exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or 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,June 30, 2023 and December 31, 2022.



Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third-party. Outstanding standby letters of credit have maturity dates ranging from 1 to 6078 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,June 30, 2023, the remaining commitments to the LIHTC partnerships and limited liability companies were approximately $18.8$20.5 million. At December 31, 2022, the remaining commitments to the LIHTC partnerships and the limited liability companies were $19.7 million.



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

2726
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

FORWARD-LOOKING INFORMATION

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

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

■
changes in general economic conditions, either nationally, in California, or in our local markets;
■inflation, changes in interest rates, securities market volatility and monetary fluctuations;
■increases in competitive pressures among financial institutions and businesses offering similar products and services;
■risks associated with recent negative events in the banking industry, and any legislative and/or bank regulatory actions, that could potentially impact earnings, liquidity and/or the availability of capital;
■higher defaults in our loan and lease portfolio than we expect;
■changes in management’s estimate of the adequacy of the allowance for credit losses;
■risks associated with our growth and expansion strategy and related costs;
■increased lending risks associated with our high concentration of real estate loans;
■legislative or regulatory changes or changes in accounting principles, policies or guidelines;
■technological changes;
■failure to raise the debt limit on U.S. debt;
■regulatory or judicial 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 (or documents incorporated by reference, if applicable).

2827
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

Overview

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

The Company’s outstanding common stock as of March 31, 2023, consisted of 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 Company’s outstanding common stock as of June 30, 2023, consisted of 754,523 shares of common stock, $0.01 par value and no shares of preferred stock were issued or outstanding. The common stock of the Company is not widely held or listed on any exchange. However, trades are reported on the OTCQX under the symbol “FMCB.”

The primary source of funding for the Company’s growth has been the generation of core deposits, which the Company raises through its existing branch locations, newly opened branch locations, or through acquisitions. Loan growth over the years is the result of organic growth generated by the Company’s seasoned relationship managers and supporting associates who provide outstanding service and responsiveness to the Company’s clients.

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

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

2928
Critical Accounting Policies and Estimates

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

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

Impact of Recently Issued Accounting Standards

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

Non-GAAP Measurements

We use certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance.  The methodology for determining these non-GAAP measures may differ among companies. We used the following non-GAAP measures in this Form 10-Q:


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

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

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

29
Results of Operations

The following discussion and analysis is intended to provide a better understanding of Farmers & Merchants Bancorp and its subsidiaries’ financial condition at March 31,June 30, 2023 and December 31, 2022 and results of operations during the three and six months ended March 31,June 30, 2023 and 2022.2022, respectively. Information related to the comparison of the results of operations for the three years ended December 31, 2022, 2021, and 20202021 can be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2022 Annual Report on Form 10-K filed with the SEC on March 15, 2023.

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

Earnings Performance

The following table presents performance metrics for the periods indicated:

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

(1)
See "Non-GAAP Measurements"

30
Average Balance and Yields.
The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield, cost and net interest margin information for the periods presented. Average balances are derived from daily balances.

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

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


 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) of ($28.2) million and ($7.0) million for the three months ended March 31, 2023, and 2022, respectively, which are included in non-interest earning assets.
(2)The average yield does not include the federal tax benefits at an assumed effective yield of 26% related to income earned on tax-exempt municipal securities totaling $147,000 and $106,000 for the three months ended March 31, 2023, and 2022, respectively.
(3)Loan interest income includes loan fees of $2.0 million and $3.9 million for the three months ended March 31, 2023 and 2022, respectively.
(4)Net interest margin is computed by dividing net interest income by average interest earning assets.

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

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

32
Second Quarter 2023 vs. Second Quarter 2022
Interest-bearing deposits with banks and Federal Reserve balances are earning assets available to the Company.  Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 4.64%5.14% and 0.20%0.83% for the three months ended March 31,second quarter of 2023 and 2022, respectively. The increase was primarily the result of the FRB increasing rates by 475350 basis points duringfrom the second quarter of 2022 and the first quartersix months of 2023. Average interest-bearing deposits were $521$458.9 million and $760$683.7 million for the three monthsquarter ended March 31,June 30, 2023 and 2022, respectively. Interest income on interest-bearing deposits with banks was $6.0$5.9 million and $0.4$1.4 million for the three monthsquarter ended March 31,June 30, 2023 and 2022, respectively.

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

Average total investment securities were $1.0 billion$984.6 million and $1.1 billion for the three monthsquarter ended March 31,June 30, 2023 and 2022, respectively. The average yield on total investment securities was 2.12%2.11% and 1.89%1.94% for the three monthsquarter ended March 31,June 30, 2023 and 2022, respectively.

Average loans and leases held for investment were $3.4$3.5 billion and $3.2 billion for the three monthsquarter ended March 31,June 30, 2023 and 2022, respectively. The average yield on the loan and lease portfolio was 5.69%5.75% and 4.75%4.76% for the three monthsquarter ended March 31,June 30, 2023 and 2022, respectively. The increase in the loan yield reflects the increase in market interest rates over the last year.

Average interest-bearing liabilitiesdeposits were $3.0$3.1 billion and $3.1 billion for the three monthsquarter ended March 31,June 30, 2023 and 2022.2022, respectively. The average rate paid on interest-bearing liabilitiesdeposits was 0.53%1.10% and 0.12%0.11% for the three monthsquarter ended March 31,June 30, 2023 and 2022, respectively. Total interest expense on interest-bearing deposits was $3.7$8.4 million and $0.8$0.9 million for the three monthsquarter ended March 31,June 30, 2023 and 2022, respectively, as a result of increases in short-term market interest rates during 2022 and the first quarterhalf of 2023. The Company is experiencing deposit pricing pressures asaverage rate paid on total funding costs was 0.75% and 0.08% for the quarter ended June 30, 2023 and 2022, respectively. Industry competition for deposits increasesremains challenging which mayhas the potential to increase future deposit costs in order to retain key customers, which could place negative pressure on the net interest margin looking forward.

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

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

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

3233
Average interest-bearing deposits were $3.0 billion and $3.0 billion for the six months ended June 30, 2023 and 2022, respectively. The average rate paid on interest-bearing deposits was 0.81% and 0.11% for the six months ended June 30, 2023 and 2022, respectively. Total interest expense on interest-bearing deposits was $12.1 million and $1.7 million for the six months ended June 30, 2023 and 2022, respectively, as a result of increases in short-term market interest rates during 2022 and the first six months of 2023. The average rate paid on total funding costs was 0.55% and 0.08% for the six months ended June 30, 2023 and 2022, respectively.

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

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

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

  
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 was $55.7 million and $42.2 million for the three months ended March 31, 2023 and 2022, respectively. The increase in net interest income was driven primarily by increased interest rates as the increase in the loan yield outpaced the increase in deposit costs.

3334
Comparison of Results of Operations for the Three and Six Months Ended March 31,June 30, 2023 and 2022
  
Three Months Ended
June 30,
        
Six Months Ended
June 30,
       
(Dollars in thousands) 2023  2022  
$ Better /
(Worse)
  % Better /
(Worse)		  2023  2022  
$ Better /
(Worse)
  
% Better /
(Worse)
 
Selected Income Statement Information:                        
Interest income 
$
61,017
  
$
45,695
  
$
15,322
   
33.53
%
 
$
120,649
  
$
88,789
  
$
31,860
   
35.88
%
Interest expense  
8,595
   
976
   
(7,619
)
  
(780.64
%)
  
12,505
   
1,861
   
(10,644
)
  
(571.95
%)
Net interest income  
52,422
   
44,719
   
7,703
   
17.23
%
  
108,144
   
86,928
   
21,216
   
24.41
%
Provision for credit losses  
2,557
   
1,500
   
(1,057
)
  
(70.47
%)
  
4,057
   
1,500
   
(2,557
)
  
(170.47
%)
Net interest income after provision for credit losses  
49,865
   
43,219
   
6,646
   
15.38
%
  
104,087
   
85,428
   
18,659
   
21.84
%
Non-interest income  
5,447
   
3,512
   
1,935
   
55.10
%
  
8,907
   
7,824
   
1,083
   
13.84
%
Non-interest expense  
26,822
   
23,031
   
(3,791
)
  
(16.46
%)
  
55,005
   
46,819
   
(8,186
)
  
(17.48
%)
Income before income tax expense  
28,490
   
23,700
   
4,790
   
20.21
%
  
57,989
   
46,433
   
11,556
   
24.89
%
Income tax expense  
7,182
   
5,257
   
(1,925
)
  
(36.62
%)
  
13,134
   
10,932
   
(2,202
)
  
(20.14
%)
Net income 
$
21,308
  
$
18,443
  
$
2,865
   
15.53
%
 
$
44,855
  
$
35,501
  
$
9,354
   
26.35
%


 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 six months ended June 30, 2023, net income was $21.3 million and $44.9 million, respectively compared to $18.4 million and $35.5 million for the same periods a year ago. For the three months ended March 31,June 30, 2023 and 2022, net income was $23.5 million compared with $17.1 million, respectively. Thethe increase in net income was primarily the result of higher net interest income of $13.5$7.7 million and an increase in non-interest income of $1.9 million. These increases were offset by an increase in non-interest expense of $3.8 million, higher provision for credit losses of $1.1 million and higher income tax expense of $1.9 million.

For the six months ended June 30, 2023, the increase in net income was primarily the result of higher net interest income of $21.2 million. The Company also recognized in non-interest income, a $4.3 million death benefit on bank-owned life insurance (“BOLI”) during the threesix months ended March 31,June 30, 2023 that was not present during the threesix months ended March 31,June 30, 2022. This increase was offset by an increase in non-interest expense of $4.4$8.2 million, higher provision for credit losses of $1.5 million, a decrease in non-interest income of $0.8$2.5 million and higher income tax expense of $.3$2.2 million.
 
Net Interest Income and Net Interest Margin.
For the three monthsquarter ended March 31,June 30, 2023, net interest income increased $13.5$7.7 million, or 32.01%17.23%, to $55.7$52.4 million compared with $42.2$44.7 million for the same period a year earlier. The increase is primarily the result of the net interest margin increasing 11474 basis points to 4.53%4.27% compared with 3.39%3.53% for the same period a year earlier. The increase in the net interest margin was primarily the result of the FRB increasing the federal funds rate by 475350 basis points duringfrom the second quarter of 2022 and the first half of 2023. The yield on interest earning assets increased 137 basis points to 4.97% compared to 3.60% for the second quarter of 2022 as the yield on interest bearing liabilities increased 99 basis points to 1.12% compared to .13% for the second quarter of 2022.

For the six months ended June 30, 2023, net interest income increased $21.2 million, or 24.41%, to $108.1 million compared with $86.9 million for the same period a year earlier. The increase is primarily the result of the net interest margin increasing 94 basis points to 4.40% compared with 3.46% for the same period a year earlier. The increase in the net interest margin was primarily the result of the FRB increasing the federal funds rate by 350 basis points from the second quarter of 2022 and the first six months of 2023. The loan yield increased 9496 basis points compared to the first quartersix months of 2022 and outpaced the increase in deposit yield of 4171 basis points compared to the same period a year earlier.

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

The Company made a $4.1 million provision for credit losses during the first three monthshalf of 2023 compared to no provision for credit losses$1.5 million during the same period a year earlier. Forfirst half of 2022. Net recoveries during the three month ended March 31,first half of 2023 net recoveries were $188,000$227,000 compared to net recoveriescharge-offs of $25,000 for$34,000 in the same period a year earlier.
first half of 2022. The increase in ACL during the first six months of 2023 was primarily related to higher expected probable losses inherent in the loan and lease portfolio that was directly related to quantitative and qualitative factors associated with the current economic environment.

35
Non-interest Income.Income
Non-interest income decreased $0.9increased $1.9 million, or 19.76%55.1%, to $3.5$5.4 million for the three monthsquarter ended March 31,June 30, 2023 compared with $4.3$3.5 million for the same period a year earlier. The year-over-year decreaseincrease in non-interest income was primarily due to a $5.7 million loss on sale of investment securities.  This decrease was off-set by a $4.3 million BOLI death benefit and a $0.5$2.3 million increase in net gains on deferred compensation plan investments.

The Company recorded net gains on deferred compensation plan investments of $0.9$1.3 million for the three monthsquarter ended March 31,June 30, 2023 compared with net gainslosses of $0.4$1.0 million for the same respective period a year earlier.ago. See Note 11, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2022 Form 10-K filed on March 15, 2023 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these investment gains/losses to be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no net-effect on the Company’s net income.

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

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

34Non-interest Expense
Non-interest Expense.Non-interest expense increased $4.4$3.8 million, or 18.48%16.46%, to $28.2$26.8 million for the three monthsquarter ended March 31,June 30, 2023 compared with $23.8$23.0 million for the same period a year ago. This year-over-year increase was primarily comprised of: (1)of a $1.6 million increase in employee benefits; (2) a $1.2 million increase in salaries; (3) a $0.6 million increase in other miscellaneous expenses; (4) a $0.5$2.3 million increase in net gains on deferred compensation plan investments; (5)investments, a $0.3$1.1 million increase in FDIC insurance;salaries and (6) a $0.2$0.4 million increase in marketing expenses.
employee benefits.

Net gains on deferred compensation plan obligations were $0.9$1.3 million for the three monthsquarter ended March 31,June 30, 2023 compared with net gainslosses of $0.4$1.0 million for the same respective period. See Note 11, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2022 Form 10-K filed on March 15, 2023 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these gains on obligations to be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no net-effect on the Company’s net income.

Income Tax Expense. ForNon-interest expense increased $8.2 million, or 17.48%, to $55.0 million for the threesix months ended March 31,June 30, 2023 income tax expense was $6.0 million compared to $5.7with $46.8 million for the same period a year earlier. ago. This increase was primarily comprised of a $2.8 million increase in net gains on deferred compensation plan investments, a $2.2 million increase in salaries, a $2.1 million increase in employee benefits, a $0.6 million increase in other expenses and a $0.5 million increase in FDIC insurance.

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

Income Tax Expense
For the three and six months ended March 31,June 30, 2023, the effectiveincome tax rateexpense was 20.18%$7.2 million and $13.1 million, respectively compared to 24.96%$5.3 million and $10.9 million for the same periodperiods a year earlier.ago. The Company’s effective tax rate for the three and six months ended March 31,June 30, 2023 was 25.21% and 22.65%, respectively compared to 22.18% and 23.54% for the same period in 2022. The Company’s effective tax rate for the six months ended June 30, 2023 was lower than its historical effective tax rate primarily due to a non-taxable BOLI death benefit of $4.3 million recognized during the threesix months ended March 31,June 30, 2023. The Company’s effective tax rate can fluctuate from quarter to quarter due primarily to changes in the mix of taxable and tax-exempt earning sources. The effective rates were lower than the combined Federal and State statutory rate of 30% due primarily to BOLI death benefits, the cash surrender value of life insurance; credits associated with low income housing tax credit investments (LIHTC); and tax-exempt interest income on municipal securities and loans.

Financial Condition
Balance Sheet Analysis

Total assets were $5.1 billion at March 31, 2023 compared with $5.3 billion at December 31, 2022,June 30, 2023, a decrease of $193.6$77.0 million or 3.63%.1.45% compared to December 31, 2022. Loans held for investment were $3.4$3.5 billion at March 31,June 30, 2023, a decrease of $85.2$20.6 million, or 2.43%0.59% compared with $3.5 billion atto December 31, 2022. Total deposits were $4.5$4.6 billion at March 31,June 30, 2023 compared with $4.8 billion at December 31, 2022, a decrease of $220.1$121.0 million or 4.62%2.54%.
Investment Securities and Federal Reserve Balances

Cash and Cash Equivalents

The Company’s net investment portfolio decreased by $29.4 million or 2.95% to $968.4 million at March 31, 2023 compared to December 31, 2022. This decrease is netcash and cash equivalents consists of the impact of $36.2 million in available for sale securities sold for interest rate risk management purposes. The Company uses its investment portfolio to manage interest rate and liquidity risks. The Company’s total investment portfolio as of March 31, 2023 represents 18.86% of the Company’s total assets as compared to 18.72% at December 31, 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. 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 $461.3$506.7 million at March 31,June 30, 2023 and $514.9 million at December 31, 2022.
The Company’s total cash and cash equivalents as of June 30, 2023 represents 11.2% of the Company’s total assets as compared to 11.0% as of December 31, 2022.

Investment Securities

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

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

3537
The carrying value of our portfolio of investment securities was as follows:

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

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

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

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

(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 $393, respectively.

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


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

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

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

36
(1)
All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.

38

 As of December 31, 2022  As of December 31, 2022 

 Within One Year  
After One but Within
Five Years
  After Five but Within Ten Years  After Ten Years  Total  Within One Year  
After One but Within
Five Years
  
After Five but
Within Ten Years
  After Ten Years  Total 
(Dollars in thousands) Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield 
Securities available-for-sale                                                            
U.S. Treasury notes $4,964 2.37% $- 0.00% $- 0.00% $- 0.00% $4,964 2.37% 
$
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%  
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%  
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%  
-
   
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%  
-
   
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%  
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% 
$
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.

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


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

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

Loans and Leases

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

Commercial and Agricultural Real Estate – These are loans secured by owner-occupied real estate, non-owner-occupied real estate, owner-occupied farmland, and multifamily residential properties. Commercial mortgage term loans can be made if the property is either income producing or scheduled to become income producing based upon acceptable pre-leasing, or the income will be the Bank’sBank's primary source of repayment for the loan. Loans are made both on owner occupied and investor properties; maturities generally do not exceed 15 years (and may have pricing adjustments on a shorter timeframe) amortizations of up to 25 years (30 years for multifamily residential properties); have debt service coverage ratios of 1.00 or better with a target of 1.25 or greater; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.
 
Real Estate Construction – These are loans for acquisition, development and construction and are secured by commercial or residential real estate. These loans are generally made only to experienced local developers with a successful track record; for projects in our service area; with Loan to Value (LTV) below 75%; and where the property can be developed and sold within 2 years. Commercial construction loans are generally made only when there is an approved take-out commitment from the Bank or an acceptable financial institution or government agency. Most acquisition, development and construction loans are tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan.
 
Single Family Residential Real Estate – These are loans primarily made on owner occupied residences; generally underwritten to income and LTV guidelines similar to those used by FNMA and FHLMC. However, the Company will make loans on rural residential properties up to 41 acres. Most residential loans have terms from ten to thirty years and carry fixed or variable rates priced to treasury rates. The Company has always underwritten mortgage loans based upon traditional underwriting criteria and does not make loans that are known in the industry as “subprime,” “no or low doc,” or “stated income” loans.
 
3739
Home Equity Lines and Loans – These are loans made to individuals for home improvements and other personal needs. Generally, amounts do not exceed $500,000; but can be made for up to $1,000,000 in high cost counties. Combined Loan to Value (CLTV) does not exceed 75%; FICO scores are at or above 670; Total Debt Ratios do not exceed 43%; and in some situations the Company is in a 1st lien position.

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

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

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

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

38
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’sCompany's loan and lease portfolio at March 31,June 30, 2023 totaled $3.4$3.5 billion, a decrease of $85.2$20.6 million or 2.43% over0.59% compared to December 31, 2022.

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


 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%

39
  
June 30,
2023
  
December 31,
2022
 
(Dollars in thousands) Dollars  
Percent of
Total
  Dollars  
Percent of
Total
 
Gross Loans and Leases            
Real estate:            
Commercial 
$
1,302,460
   
37.19
%
 
$
1,328,691
   
37.73
%
Agricultural  
739,207
   
21.11
%
  
726,938
   
20.64
%
Residential and home equity  
392,754
   
11.21
%
  
387,753
   
11.01
%
Construction  
172,903
   
4.94
%
  
166,538
   
4.73
%
Total real estate  
2,607,324
   
74.45
%
  
2,609,920
   
74.11
%
Commercial & industrial  
479,908
   
13.71
%
  
478,758
   
13.59
%
Agricultural  
282,725
   
8.07
%
  
314,525
   
8.93
%
Commercial leases  
126,554
   
3.61
%
  
112,629
   
3.20
%
Consumer and other  
5,553
   
0.16
%
  
5,886
   
0.17
%
Total gross loans and leases 
$
3,502,064
   
100.00
%
 
$
3,521,718
   
100.00
%
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 March 31,June 30, 2023.

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


 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 
41

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%

40
(Dollars in thousands) 
June 30,
2023
  
December 31,
2022
 
Non-performing assets:      
Non-accrual loans and leases      
Real estate:      
Commercial 
$
375
  
$
403
 
Agricultural  
-
   
-
 
Residential and home equity  
-
   
-
 
Construction  
-
   
168
 
Total real estate  
375
   
571
 
Commercial & industrial  
-
   
-
 
Agricultural  
-
   
-
 
Commercial leases  
-
   
-
 
Consumer and other  
-
   
-
 
Total non-performing loans and leases 
$
375
  
$
571
 
Other real estate owned ("OREO") 
$
873
  
$
873
 
Total non-performing assets 
$
1,248
  
$
1,444
 
         
Selected ratios:        
Non-performing loans to total loans and leases  
0.01
%
  
0.02
%
Non-performing assets to total assets  
0.02
%
  
0.03
%
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’smanagement'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 $387,000$375,000 and $571,000 at March 31,June 30, 2023 and December 31, 2022, respectively.

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

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

Except for non-performing loans and leases discussed above, the Company’s management is not aware of any loans and leases as of March 31,June 30, 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, the State of California has routinely experienced drought conditions such as from 2013 through 2016 and 2020-2022. Although the availability of water in our primary service area was not an issue for the 2022 growing season, the weather patterns over the past nine years further reinforce the fact that the long-term risks associated with the availability of water are significant.

42
Loan Modifications/Restructurings – A modification/restructuring of a loan or lease happens when the Company makes certain concessions to a borrower experiencing financial difficulty.  These concessions either stem from an agreement between the Company and the borrower or is imposed by law or a court; some of these concessions include: term extension, principle forgiveness, rate reduction, or a combination of any of those.  The Company has granted a concession when, as a result of the modification/restructuring, it does not expect to collect all amounts due, including interest accrued at the original contract rate.  ASU 2022-02 requires certain disclosure of loans and leases that have been modified or restructured within the past 12 months and the effects that said modifications had on the loans or leases modified.leases.  Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses and because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness 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 forgivenessthat is deemed to be uncollectible;uncollectable; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

The Company did not enter into anymodified one residential real estate loan modifications with borrowers experiencing financial difficultyin the amount of $127,000, during the three months ended March 31,June 30, 2023.

41
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, ASC Topic 326, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“CECL”). The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan and lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of three primary components: specific reserves related to collateral dependent loans and leases; general reserves for current expected credit losses related to loans and leases that are not collateral dependent; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors. The Company uses the Weighted Average Remaining Maturity (“WARM”) method to calculate the ACL as this method is the most appropriate given the Company’s current size and complexity. See “Summary of Critical Accounting Policies and Estimates - Allowance for Credit Losses – Loans and Leases.”

4243
The following table sets forth the activity in our ACL for loans and leases for the periods indicated:

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

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

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

4344
The following table indicates management’s allocation of the ACL for loans and leases by loan type as of each of the following dates:

  
June 30,
2023
  
December 31,
2022
 
(Dollars in thousands) Dollars  
Percent of
Each Loan
Type to Total
Loans
  Dollars  
Percent of
Each Loan
Type to Total
Loans
 
Allowance for credit losses:            
Real estate:            
Commercial 
$
24,787
   
37.19
%
 
$
18,055
   
37.73
%
Agricultural  
9,908
   
21.11
%
  
14,496
   
20.64
%
Residential and home equity  
7,179
   
11.21
%
  
7,508
   
11.01
%
Construction  
3,195
   
4.94
%
  
3,026
   
4.73
%
Total real estate  
45,069
   
74.45
%
  
43,085
   
74.11
%
Commercial & industrial  
11,291
   
13.71
%
  
11,503
   
13.59
%
Agricultural  
12,903
   
8.07
%
  
10,202
   
8.93
%
Commercial leases  
1,657
   
3.61
%
  
1,924
   
3.20
%
Consumer and other  
192
   
0.16
%
  
171
   
0.17
%
Total allowance for credit losses 
$
71,112
   
100.00
%
 
$
66,885
   
100.00
%

 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 $4.5$4.6 billion and $4.8 billion as of March 31,June 30, 2023 and December 31, 2022, respectively a decrease of 4.62%$121.0 million or 2.5% due in part to traditional seasonality related towithin our agriculture client base. The Company experienced a decrease in deposits in the cyclical naturefirst quarter of our agricultural customers. Despite2023 of $220.1 million or 4.6% while during the slight decreasesecond quarter of 2023, deposits increased $99.1 million or 2.2%. The increase in deposits during the first quarter,second of 2023 reflects seasonality within our agricultural client base and the Company is highly focusedfocus on business development activities for deposits, and the following factors contributed positively to our deposit 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.
deposits.

Non-interest bearing demand deposits were $1.55$1.50 billion as of March 31,June 30, 2023 and $1.76 billion at December 31, 2022. Non-interest bearing deposits were 34.19%32.24% of total deposits, as of March 31,June 30, 2023 and 36.96% as of December 31, 2022. Interest bearing deposits were $3.1 billion as of June 30, 2023 and $3.0 billion as of December 31, 2022. Interest bearing deposits are comprised of interest-bearing transaction accounts, money market accounts, regular savings accounts, and certificates of deposit.
The decrease in non-interest bearing deposits and the increase in interest-bearing deposits reflects customer behavior in shifting from non-interest bearing accounts to higher interest earning accounts given the current interest rate environment.

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

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


 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%
45

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

The significant increase in short-term interest rates during 2022 and into 2023 has placed pressure on deposit pricing, and we will continue to manage this ongoing impact through careful deposit pricing.  The average cost of deposits, including non-interest bearing deposits, increased to 0.74% for the three months ended June 30, 2023, compared to 0.32% for the three months ended March 31, 2023 and 0.53% for the six months ended June 30, 2023 compared with 0.07% for the same period a year ago.

44
The following table shows deposits with a balance greater than $250,000 at March 31, 2023 and December 31, 2022:


 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 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information on separate deposit categories.

The Bank participates in a program wherein the State of California places time deposits with the Bank at the Bank’s option.  At March 31,June 30, 2023 and December 31, 2022, the Bank had $3.0 million, of these deposits.

Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings

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

Long-Term Subordinated Debentures

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

These securities accrue interest at a variable rate based upon 3-month LIBOR plus 2.85%. Interest rates reset quarterly (the next reset is JuneSeptember 18, 2023) and the rate was 7.76%8.36% as of March 31,June 30, 2023 and 7.59% at December 31, 2022. The average rate paid for these securities was 7.71%7.82% for the first three monthshalf of 2023 and 3.23%3.62% for the first three monthshalf of 2022. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on the Company’s common stock.

Capital Resources

The Company relies primarily on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to insure depositor protection. Shareholders’ Equity totaled $508.9$514.7 million at March 31,June 30, 2023, and $485.3 million at December 31, 2022.

45
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’sBank'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’sBank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank’sBank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

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

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

46
The Company’s and Bank’s actual and required capital amounts and ratios are as follows:

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

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


 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%

46
On November 8, 2022, the Board of Directors authorized an extension to its share repurchase program through December 31, 2024 for an additional $20.0 million of the Company’s common stock (“Repurchase Plan”), which represents approximately 4% of outstanding shareholders’ equity. Repurchases by the Company under the Repurchase Plan may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means.
The Inflation Reduction Act of 2022 signed into law in August 2022 includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions. The excise tax became effective on January 1, 2023.

During the first threesix months of 2023 the Company repurchased 5,40613,814 shares under the Repurchase Plan, for a total of $5.6$13.9 million.
The Company has repurchased a total of 14,616 shares or $14.6 million under the current Repurchase Plan.

47
Off-Balance-Sheet Arrangements

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

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

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


    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’sCompany'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’scustomer'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,June 30, 2023 and December 31, 2022.

Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third-party. Most standby letters of credit have maturity dates ranging from 1 to 6078 months with final expiration in January 2027. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

47
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$506.7 million as of March 31,June 30, 2023. Potential sources of liquidity also include investment securities in our available-for-sale securities portfolio, our ability to sell loans in the secondary market, and to secure borrowings from the FRB and FHLB. Our diversified deposit portfolio has historically provided us with a 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.

48
We had the following borrowing lines available at March 31,June 30, 2023:

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


 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 threesix 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 March 31,June 30, 2023, we had $898.1$835.6 million in cash and unencumbered investment securities, which is 17.49%15.91% of total assets. We also had $2.1$2.0 million in investment securities and $2.1$2.2 billion in loans pledged as collateral on short-term borrowing credit lines. We have the option of either borrowing on our credit lines or selling these investment securities for cash flow needs.
We also have additional loans which are available to pledge which would further increase our borrowing capacity.

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

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

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

Our primary investing activities are the origination of loans and lease and purchases and sales of investment securities. As of March 31,June 30, 2023, we had unfunded loan commitments of $1.1 billion and unfunded letters of credit of $16.8$16.9 million. We anticipate that we will have sufficient funds available to meet current loan commitments.

48
Item 3.Quantitative and Qualitative Disclosures about Market Risk

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

Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Our market risk arises primarily from interest rate risk inherent in our lending and deposit taking activities. Management actively monitors and manages our interest rate risk exposure. In monitoring interest rate risk we continually analyze and manage our earning assets and funding liabilities based on their payment streams and interest rates, the timing of their maturities and/or prepayments, and their sensitivity to actual or potential changes in market interest rates.

49
Since our earnings are primarily dependent on our ability to generate net interest income, we focus on actively monitoring and managing the effects of adverse changes in interest rates on our net interest income. Our Asset Liability Management Committee (“ALCO”), which is comprised of members of the Board of Directors and executive officers, manages market risk. ALCO monitors interest rate risk by analyzing the potential impact on net interest income from potential changes in interest rates, and considers the impact of alternative strategies or changes in balance sheet structure. ALCO manages our balance sheet in part to maintain the potential impact of changes in interest rates on net interest income within acceptable ranges despite changes in interest rates.
Our exposure to interest rate risk is reviewed on at least a quarterly basis by ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in net interest income in the event of hypothetical changes in interest rates. If potential changes to net interest income resulting from hypothetical interest rate changes are not within risk tolerances determined by ALCO, and approved by the full Board of Directors, Management may make adjustments to the Company’s asset and liability mix to bring interest rate risk levels within the Board approved limits.
Net Interest Income Simulation. In order to measure interest rate risk, we use a simulation model to project changes in net interest income that result from forecasted changes in interest rates. This analysis calculates the difference between net interest income forecasted using a rising and a falling interest rate scenario and a net interest income forecast using a base market interest rate derived from the current treasury yield curve. The income simulation model includes various assumptions regarding the re-pricing relationships for each of our products. Many of our assets are floating rate loans, which are assumed to re-price immediately, and to the same extent as the change in market rates according to their contracted index.
Some loans and investment vehicles include the opportunity of prepayment (embedded options), and accordingly the simulation model uses national indexes to estimate these prepayments and assumes the reinvestment of the proceeds at current yields. Our non-term deposit products re-price more slowly, usually changing less than the change in market rates and at our discretion.
This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions. It assumes the balance sheet size remains static throughout the simulation horizon by replacing existing cashflows/amortization into similar products at current rates to try and capture the ongoing activity of the balance sheet without forecasting any level of growth. It does not account for all factors that affect this analysis, including changes by management to mitigate the effect of interest rate changes or secondary impacts such as changes to our credit risk profile as interest rates change.

Furthermore, loan prepayment-rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in this analysis. Changes that vary significantly from the assumptions may have significant effects on our net interest income.
For the rising and falling interest rate scenarios, the base market interest rate forecast was increased or decreased, on an instantaneous and sustained basis, by 100, 200 and 300 basis points. We then evaluate the simulation results using two approaches: Net Interest Income at Risk (“NII at Risk”) and Economic Value of Equity (“EVE”). Under NII at Risk, the impact on net interest income from the changes in interest rates on interest-earning assets and interest-bearing liabilities is modeled using various assumptions of assets and liabilities. EVE measures the period end present value of assets minus the present value of liabilities. Management uses this value to measure the changes in the economic value of the Company under various interest rate scenarios. In some ways, the economic value approach provides a broader scope than net income volatility approach since it captures all anticipated cash flows.
Based on our quarterly simulations, our net interest margin exposure related to these hypothetical changes in market interest rates was within the current guidelines established by us.  Our simulation model highlights the fact that our balance sheet is asset sensitive, which means that our net interest income rises in a rising interest rate environment as rates earned on our interest-bearing assets reprice higher at a faster pace than rates paid on our interest-bearing liabilities.

50
The ratio of variable to fixed-rate loans in our loan portfolio, the ratio of short-term (maturing at a given time within 12 months) to long-term loans, and the ratio of our demand, money market and savings deposits to CDs (and their time periods), are the primary factors affecting the sensitivity of our net interest income to changes in market interest rates. Our short-term loans are typically priced at prime plus a margin, and our long-term loans are typically priced based on a specific term of the Treasury Curve for comparable maturities, plus a margin. The composition of our rate-sensitive assets or liabilities is subject to change and could result in a more unbalanced position that would cause market rate changes to have a greater impact on our net interest margin.

The following table present the projected change in the Company’s net interest income over the next twelve months and the economic value of equity at June 30, 2023, that would occur upon an immediate change in interest rates, but without giving effect to any steps that management might take to counteract that change:

  
Estimated Change in
Net Interest Income (NII)
(as a % of NII)
 
Estimated Change in
Market Value of Equity
(MVE) (as a % of MVE)
June 30, 2023    
+300 bps 3.44% (10.50%)
+200 bps 2.09% (7.31%)
+100 bps 1.19% (2.99%)
0 bps  -  -
-100 bps (3.43%) (0.65%)
-200 bps (7.18%) (3.90%)
-300 bps (11.21%) (9.50%)

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls

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

51
PART II – OTHER INFORMATION

Item 1.Legal Proceedings

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

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

Item 1A.Risk Factors

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

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

The following table reports information regarding repurchases of our common stock during the six months ended June 30, 2023:

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

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

On November 8, 2022, the Board of Directors authorized an extension to its share repurchase program through December 31, 2024 for an additional $20.0 million of the Company’s common stock (“Repurchase Plan”), which represents approximately 4% of outstanding shareholders’ equity. Repurchases by the Company under the Repurchase Plan may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means.
The Inflation Reduction Act of 2022 signed into law in August 2022 includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions. The excise tax became effective on January 1, 2023.

During the first three monthshalf of 2023 the Company repurchased 5,40613,814 shares under the Repurchase Plan, for a total of $5.6$13.9 million.  All of these shares were purchased at prices ranging from $1,000.00$967.00 to $1,082.00 per share, based upon the then current price on the OTCQX.
The Company has repurchased a total of 14,616 shares or $14.6 million under the current Repurchase Plan.

4952
Item 3.Defaults upon Senior Securities

Not Applicable

Item 4.Mine Safety Disclosures

Not Applicable

Item 5.Other Information

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

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.
(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

 
Employment Agreement effective March 27, 2023, between Farmers & Merchants Bank of Central California and Bart R. Olson, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2023.
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.INSInline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCHInline XBRL Taxonomy Extension Schema Document.
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.
101.LABInline XBRL Taxonomy Extension Label Linkbase Document.
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document.
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*Filed herewith

5053
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:  May 9,August 8, 2023
/s/ Kent A. Steinwert
 
Kent A. Steinwert
 
Director, Chairman, President and Chief Executive Officer
(Principal Executive Officer)

Date:  May 9,August 8, 2023
/s/ Bart R. Olson
 
Bart R. Olson
 
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)


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