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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

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

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

As of April 30, 2023, the registrant had 762,393 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
 
 
3
 
4
 
5
 
6
 
7
 
8
     
 
 
28
 
29
 
30
 
35
     
 
 
49
   
 
 
49
     
 
PART II. - OTHER INFORMATION
 
   
 
 
49
 
49
 
49
 
50
 
50
 
50
 
50
 
51

2
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
  
ASSETS
            
Cash and due from banks
  
$
68,278
    
$
73,358
  
Interest bearing deposits with banks
    
461,315
      
514,899
  
Total cash and cash equivalents
    
529,593
      
588,257
  
Securities available-for-sale, at fair value
    
118,437
      
152,864
  
Securities held-to-maturity, fair value $705,909 and $688,393 respectively
    
850,387
      
845,346
  
Allowance for credit losses - securities held-to-maturity
     (393 )     (393 )
Total investment securities
    
968,431
      
997,817
  
Non-marketable securities
    
15,549
      
15,549
  
Loans and leases held-for-investment
    
3,427,133
      
3,512,361
  
Allowance for credit losses - loans and leases
    
(68,573
)
    
(66,885
)
Loans held-for-investment, net
    
3,358,560
      
3,445,476
  
Bank-owned life insurance
    
66,076
      
73,038
  
Premises and equipment, net
    
50,423
      
49,476
  
Deferred income tax assets
    
29,427
      
31,507
  
Accrued interest receivable
    
16,818
      
21,602
  
Goodwill
    
11,183
      
11,183
  
Other intangibles
    
2,666
      
2,809
  
Other real estate owned
    
873
      
873
  
Other assets
    
84,172
      
89,812
  
TOTAL ASSETS
  
$
5,133,771
    
$
5,327,399
  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
Deposits:
                
Non-interest bearing
  
$
1,551,906
    
$
1,758,793
  
Interest bearing:
                
Demand
    
985,088
      
1,125,014
  
Savings and money market
    
1,616,038
      
1,544,062
  
Certificates of deposit
    
386,130
      
331,400
  
Total interest bearing
    
2,987,256
      
3,000,476
  
Total deposits
    
4,539,162
      
4,759,269
  
Subordinated debentures
    
10,310
      
10,310
  
Interest payable and other liabilities
    
75,397
      
72,512
  
TOTAL LIABILITIES
    
4,624,869
      
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
  
Additional paid in capital
    
51,615
      
57,206
  
Retained earnings
    
473,479
      
449,932
  
Accumulated other comprehensive (loss), net of taxes
    
(16,200
)
    
(21,838
)
TOTAL SHAREHOLDERS’ EQUITY
    
508,902
      
485,308
  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  
$
5,133,771
    
$
5,327,399
  

See accompanying notes to the unaudited consolidated financial statements.
3
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
FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATED STATEMENTS 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
  

See accompanying notes to the unaudited consolidated financial statements.
5
FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
                                                                                                                                                                                                                                                                      
                    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
  

See accompanying notes to the unaudited consolidated financial statements.
6
FARMERS & MERCHANTS BANCORP
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
   
Three Months Ended
March 31,
  
(Dollars in thousands)
  
2023
    
2022
  
Cash flows from operating activities:
            
Net income
  
$
23,547
    
$
17,058
  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Provision for credit losses
    
1,500
      
-
  
Depreciation and amortization
    
596
      
656
  
Net amortization of securities premiums and discounts
    
33
      
176
  
Increase in cash surrender value of BOLI
    
(444
)
    
(542
)
Gain on BOLI death benefit
    (4,346 )     -  
Decrease /(increase) in deferred income taxes, net
    
3,933
      
(113
)
Loss on sale of securities available-for-sale
    
5,686
      
-
  
Net changes in:
                
Other assets
    
6,307
      
4,709
  
Other liabilities
    
4,864
      
6,966
  
Net cash provided by operating activities
    
41,676
      
28,910
  
Cash flows from investing activities:
                
Net change in loans held-for-investment
    
70,927
      
(374
)
Purchase of available-for-sale securities
    
(3,585
)
    
(10,067
)
Purchase of held-to-maturity securities
    
(1,350
)
    
(118,162
)
Proceeds from sales, maturities, calls and pay downs of available-for-sale securities
    
40,348
      
13,097
  
Proceeds from maturities, calls and pay downs of held-to-maturity securities
    
10,817
      
19,516
  
Purchase of premises and equipment
    
(1,543
)
    
(363
)
Purchase of other investments
    
(2,008
)
    
-
  
Proceeds from bank-owned life insurance     11,752       -  
Proceeds from sale of assets
    
-
      
34
  
Net cash provided (used in) by investing activities
    
125,358
      
(96,319
)
Cash flows from financing activities:
                
Net (decrease) increase in deposits
    
(220,107
)
    
197,287
  
Net cash used in share repurchase of common stock
    
(5,591
)
    
(4,252
)
Net cash (used in) provided by financing activities
    
(225,698
)
    
193,035
  
Net change in cash and cash equivalents
    
(58,664
)
    
125,626
  
Cash and cash equivalents, beginning of period
    
588,257
      
715,460
  
Cash and cash equivalents, end of period
  
$
529,593
    
$
841,086
  
                 
Supplemental disclosures of cash flow information:
                
Cash paid for interest
  
$
3,389
    
$
951
  
Income Taxes Paid
   $ 1     $ -  
                 
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 )

See accompanying notes to the unaudited consolidated financial statements.

7
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, 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 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 provisions of this ASU to determine the potential impact the new standard will have on the Company’s consolidated financial statements.
9
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.
  


Note 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
  

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

Available-for-Sale Securities  

   
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 March 31, 2023                    
Municipal securities
  
$
76,260
    
$
98
    
$
96
    
$
76,262
     $ 393  
Mortgage-backed securities (1)
    
695,083
      
59
      
130,405
      
564,737
       -  
Collateralized mortgage obligations (1)
     79,044       -       14,134       64,910       -  
Total held-to-maturity securities
  
$
850,387
    
$
157
    
$
144,635
    
$
705,909
     $ 393  

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

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  

(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
  



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



(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.
As of March 31, 2023, the Company held 183 available-for-sale securities of which 61 were in an unrealized loss position for less than twelve months and 97 securities were in an unrealized loss position for twelve months or more without an allowance for credit losses. Because the decline in fair value is attributable to changes in interest rates and not credit quality and because the Company does not have the intent to sell these securities and it is more likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be impaired. Management evaluates the available-for-sale debt securities in an unrealized loss position, relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations.

The following table presents the activity in the allowance for credit losses for held-to-maturity 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
  

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 debt securities at March 31, 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
  

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, 2023:

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

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

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
  
Loans and leases held-for-investment, net
            
Real estate:
            
Commercial
  
$
1,312,745
    
$
1,328,691
  
Agricultural
    
707,412
      
726,938
  
Residential and home equity
    
387,370
      
387,753
  
Construction
    
153,394
      
166,538
  
Total real estate
    
2,560,921
      
2,609,920
  
Commercial & industrial
    
472,189
      
478,758
  
Agricultural
    
275,785
      
314,525
  
Commercial leases
    
123,314
      
112,629
  
Consumer and other
    
5,382
      
5,886
  
Total gross loans and leases
    
3,437,591
      
3,521,718
  
Unearned income
    
(10,458
)
    
(9,357
)
Total net loans and leases
    
3,427,133
      
3,512,361
  
Allowance for credit losses
    
(68,573
)
    
(66,885
)
Total loans and leases held-for-investment, net
  
$
3,358,560
    
$
3,445,476
  

At March 31, 2023, the portion of loans that were approved for pledging as collateral on borrowing lines with the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“FRB”) were $1.2 billion and $881.5 million, respectively. The borrowing capacity on these loans was $770.7 million from FHLB and $656.5 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
  
(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
  
$
1,304,052
    
$
-
    
$
-
    
$
387
    
$
387
    
$
1,304,439
  
Agricultural
    
707,412
      
-
      
-
      
-
      
-
      
707,412
  
Residential and home equity
    
387,370
      
-
      
-
      
-
      
-
      
387,370
  
Construction
    
153,394
      
-
      
-
      
-
      
-
      
153,394
  
Total real estate
    
2,552,228
      
-
      
-
      
387
      
387
      
2,552,615
  
Commercial & industrial
    
472,189
      
-
      
-
      
-
      
-
      
472,189
  
Agricultural
    
275,785
      
-
      
-
      
-
      
-
      
275,785
  
Commercial leases
    
121,162
      
-
      
-
      
-
      
-
      
121,162
  
Consumer and other
    
5,357
      
25
      
-
      
-
      
25
      
5,382
  
Total loans and leases, net
  
$
3,426,721
    
$
25
    
$
-
    
$
387
    
$
412
    
$
3,427,133
  


   
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
  

15
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 3—Loans and Leases—Continued

 

Non-accrual loans are summarized as follows:
(Dollars in thousands)
  
March 31,
2023
    
December 31,
2022
 
Non-accrual loans and leases:
            
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-accrual loans and leases
  
$
387
    
$
571
  

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


16
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
  
(Dollars in thousands)
  
Pass
    
Special
Mention
    
Sub-
standard
    
Doubtful
    
Total Loans
& Leases
    
Total
Allowance
for Credit
Losses
  
Loans and leases held-for-investment, net
                                    
Real estate:
                                    
Commercial
  
$
1,301,094
    
$
2,958
    
$
387
    
$
-
    
$
1,304,439
    
$
24,253
  
Agricultural
    
688,406
      
12,875
      
6,131
      
-
      
707,412
      
8,441
  
Residential and home equity
    
387,006
      
-
      
364
      
-
      
387,370
      
7,334
  
Construction
    
153,394
      
-
      
-
      
-
      
153,394
      
2,785
  
Total real estate
    
2,529,900
      
15,833
      
6,882
      
-
      
2,552,615
      
42,813
  
Commercial & industrial
    
471,348
      
594
      
247
      
-
      
472,189
      
11,346
  
Agricultural
    
271,307
      
4,467
      
11
      
-
      
275,785
      
12,542
  
Commercial leases
    
121,099
      
63
      
-
      
-
      
121,162
      
1,720
  
Consumer and other
    
5,251
      
-
      
131
      
-
      
5,382
      
152
  
Total loans and leases, net
  
$
3,398,905
    
$
20,957
    
$
7,271
    
$
-
    
$
3,427,133
    
$
68,573
  


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

17
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, 2023:


   
March 31, 2023
  
   
Term Loans Amortized Cost Basis by Origination Year
              
(Dollars in thousands)
  
2023
    
2022
    
2021
    
2020
    
2019
    
Prior
    
Revolving
Loans
Amortized
Cost
    
Total
  
Net loans and leases held-for-investment
                                                
Real estate:
                                                
Commercial
                                                
Pass
  
$
51,123
    
$
176,639
    
$
227,251
    
$
149,007
    
$
69,798
    
$
301,459
    
$
325,817
    
$
1,301,094
  
Special mention
    
-
      
-
      
-
      
-
      
-
      
2,358
      
600
      
2,958
  
Substandard
    
-
      
-
      
-
      
-
      
-
      
387
      
-
      
387
  
Doubtful
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Total Commercial
  
$
51,123
    
$
176,639
    
$
227,251
    
$
149,007
    
$
69,798
    
$
304,204
    
$
326,417
    
$
1,304,439
  
Commercial
                                                               
Current-period gross charge-offs
  $
 		-     $
-     $
 		-     $
 		-     $
 		-     $
 		-     $
 		-     $
 		-  
                                                                 
Agricultural
                                                               
Pass
  
$
14,274
    
$
75,313
    
$
41,782
    
$
53,027
    
$
14,264
    
$
176,639
    
$
313,107
    
$
688,406
  
Special mention
    
-
      
-
      
-
      
-
      
-
      
-
      
12,875
      
12,875
  
Substandard
    
-
      
-
      
-
      
-
      
-
      
6,131
      
-
      
6,131
  
Doubtful
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Total Agricultural
 
$
14,274
    
$
75,313
    
$
41,782
    
$
53,027
    
$
14,264
    
$
182,770
    
$
325,982
    
$
707,412
  
Agricultural
                                                                
Current-period gross charge-offs
   $
 		-     $
 		-     $
 		-     $
 		-     $
 		-     $
 		-     $
 		-     $
 		-  
                                                                 
Residential and home equity
                                                                
Pass
  
$
7,062
    
$
65,050
    
$
94,458
    
$
85,239
    
$
14,222
    
$
79,905
    
$
41,070
    
$
387,006
  
Special mention
     -       -       -       -       -       -       -       -  
Substandard
    
-
      
-
      
-
      
-
      
-
      
284
      
80
      
364
  
Doubtful
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Total Residential and home equity
  
$
7,062
    
$
65,050
    
$
94,458
    
$
85,239
    
$
14,222
    
$
80,189
    
$
41,150
    
$
387,370
  
Residential and home equity
                                                                
Current-period gross charge-offs
   $
-     $
 		-     $
 		-     $
-     $
-     $
 		14     $
 		-     $
 		14  
                                                                 
Construction
                                                                
Pass
  
$
-
    
$
2,003
    
$
-
    
$
-
    
$
1,575
    
$
-
    
$
149,816
    
$
153,394
  
Special mention
     -       -       -       -       -       -       -       -  
Substandard
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Doubtful
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Total construction
  
$
-
    
$
2,003
    
$
-
    
$
-
    
$
1,575
    
$
-
    
$
149,816
    
$
153,394
  
Construction
    




























 
Current-period gross charge-offs
   $
 		-     $
 		-     $
 		-     $
-     $
 		-     $
 		-     $
 		-     $
 		-  
                                                                 
Total Real estate
  
$
72,459
    
$
319,005
    
$
363,491
    
$
287,273
    
$
99,859
    
$
567,163
    
$
843,365
    
$
2,552,615
  
                                                                 
Commercial & industrial
                                                                
Pass
  
$
11,960
    
$
30,234
    
$
35,318
    
$
11,131
    
$
7,195
    
$
10,318
    
$
365,192
    
$
471,348
  
Special mention
    
-
      
-
      
55
      
-
      
-
      
539
      
-
      
594
  
Substandard
    
-
      
-
      
-
      
-
      
-
      
6
      
241
      
247
  
Doubtful
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Total Commercial & industrial
  
$
11,960
    
$
30,234
    
$
35,373
    
$
11,131
    
$
7,195
    
$
10,863
    
$
365,433
    
$
472,189
  
Commercial & industrial
                                                                
Current-period gross charge-offs
   $
 		-     $ -     $
 		-     $
 		-     $
 		-     $
 		-     $
-     $
 		-  

18
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 3—Loans and Leases—Continued
 
    March 31, 2023  
    Term Loans Amortized Cost Basis by Origination Year                
(Dollars in thousands)   2023     2022     2021     2020     2019     Prior    
Revolving
Loans
Amortized
Cost
     Total  
Agricultural
                                                        
Pass
  
$
170
    
$
5,179
    
$
2,755
    
$
918
    
$
1,135
    
$
2,448
    
$
258,702
    
$
271,307
  
Special mention
    
-
      
-
      
-
      
-
      
-
      
-
      
4,467
      
4,467
  
Substandard
    
-
      
-
      
-
      
-
      
10
      
1
      
-
      
11
  
Doubtful
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Total Agricultural
 
$
170
    
$
5,179
    
$
2,755
    
$
918
    
$
1,145
    
$
2,449
    
$
263,169
    
$
275,785
  
Agricultural
                                                                
Current-period gross charge-offs
   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                                 
Commercial leases
                                                                
Pass
  
$
33,959
    
$
15,132
    
$
12,359
    
$
5,537
    
$
33,433
    
$
20,679
    
$
-
    
$
121,099
  
Special mention
    
-
      
-
      
-
      
-
      
63
      
-
      
-
      
63
  
Substandard
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Doubtful
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Total Commercial leases
  
$
33,959
    
$
15,132
    
$
12,359
    
$
5,537
    
$
33,496
    
$
20,679
    
$
-
    
$
121,162
  
Commercial leases
                                                                
Current-period gross charge-offs
   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                                 
Consumer and other
                                                                
Pass
  
$
318
    
$
1,476
    
$
575
    
$
213
    
$
121
    
$
1,922
    
$
626
    
$
5,251
  
Special mention
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Substandard
    
131
      
-
      
-
      
-
      
-
      
-
      
-
      
131
  
Doubtful
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Total Consumer and other
  
$
449
    
$
1,476
    
$
575
    
$
213
    
$
121
    
$
1,922
    
$
626
    
$
5,382
  
Consumer and other
                                                                
Current-period gross charge-offs
   $ 8     $ 1     $ -     $ -     $ -     $ 1     $ -     $ 10  
                                                                 
Total net loans and leases
  
$
118,997
    
$
371,026
    
$
414,553
    
$
305,072
    
$
141,816
    
$
603,076
    
$
1,472,593
    
$
3,427,133
  

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

   
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
  
 

19
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 three months ended March 31, 2023, there were no significant changes to the collateral that secures the collateral dependent loans, whether due to general deterioration or with credit quality indicators like appraisal value. The following tables present the amortized cost basis for collateral dependent loans and leases by type as of March 31, 2023 and December 31, 2022, respectively:
   
March 31, 2023
  
(Dollars in thousands)
  
Real Estate
    
Vehicles and
Equipment
    
Total
  
Collateral dependent loans and leases
                  
Real estate:
                  
Commercial
  
$
1,492
    
$
-
    
$
1,492
  
Agricultural
    
10,751
      
-
      
10,751
  
Residential and home equity
    
1,658
      
-
      
1,658
  
Construction
    
-
      
-
      
-
  
Total real estate
    
13,901
      
-
      
13,901
  
Commercial & industrial
    
-
      
-
      
-
  
Agricultural
    
-
      
11
      
11
  
Commercial leases
    
-
      
-
      
-
  
Consumer and other
    
-
      
153
      
153
  
Total gross loans and leases
  
$
13,901
    
$
164
    
$
14,065
  


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

20
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 March 31, 2023
  
(Dollars in thousands)
  
Commercial &
Agricultural
R/E
    
Construction
    
Residential &
Home Equity
    
Commercial
&
Agricultural
    
Commercial
Leases
    
Consumer
& Other
    
Total
  
Allowance for credit losses:
                                          
Balance at beginning of period
   $ 32,551     $ 3,026     $ 7,508     $ 21,705     $ 1,924     $ 171     $ 66,885  
Provision / (recapture) for credit losses
     (27 )     (241 )     (170 )     2,163       (204 )     (21 )     1,500  
Charge-offs
     -       -       (14 )     -       -       (10 )     (24 )
Recoveries
     170       -       10       20       -       12       212  
Net (charge-offs) / recoveries
     170       -       (4 )     20       -       2       188  
Balance at end of period
   $ 32,694     $ 2,785     $ 7,334     $ 23,888     $ 1,720     $ 152     $ 68,573  

   
For the Three Months Ended March 31, 2022
  
(Dollars in thousands)
  
Commercial &
Agricultural
R/E
    
Construction
    
Residential &
Home Equity
    
Commercial
&
Agricultural
    
Commercial
Leases
    
Consumer
& Other
    
Total
  
Allowance for credit losses:
                                          
Balance at beginning of period, prior to adoption of ASC 326
   $ 38,149     $ 1,456     $ 2,847     $ 16,954     $ 938     $ 663     $ 61,007  
Impact of adopting ASC 326
    (6,190 )     1,855       3,032       826       629       (152 )     -  
Provision / (recapture) for credit losses
     552       466       866       (1,700 )     (101 )     (83 )     -  
Charge-offs
     -       -       -       -       -       (9 )     (9 )
Recoveries
     -       -       14       18       -       2       34  
Net (charge-offs) / recoveries
     -       -       14       18       -       (7 )     25  
Balance at end of period
   $ 32,511     $ 3,777     $ 6,759     $ 16,098     $ 1,466     $ 421     $ 61,032  


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
  
Certificates of deposit:
            
Certificates of deposit less than or equal to $250,000
  
$
218,375
    
$
202,554
  
Certificates of deposit greater than $250,000
    
167,755
      
128,846
  
Total certificates of  deposit
  
$
386,130
    
$
331,400
  



Scheduled maturities for certificates of deposit are as follows:
(Dollars in thousands)
  
Amount
  
2023
  
$
237,695
  
2024
    
131,935
  
2025
    
12,059
  
2026
    
3,029
  
2027 and beyond
    
1,412
  
Total certificates of  deposit
  
$
386,130
  

21
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 5—Short-term borrowings
As of March 31, 2023 and December 31, 2022, committed lines of credit arrangements totaling $1.55 billion and $1.51 billion were available to the Company from unaffiliated banks, respectively. The average Federal Funds interest rate as of March 31, 2023 was 5.00%.
The Company is a member of the FHLB of San Francisco and has a committed credit line of $772.7 million, which is secured by $1.2 billion in various real estate loans and investment securities pledged as collateral. Borrowings generally provide for interest at the then current published rate, which was 5.08% as of March 31, 2023.
The Company has $881.5 million in pledged loans with the Federal Reserve Bank (the “Fed”). As of March 31, 2023, the Company’s overnight borrowing capacity using the primary credit facilities from the Fed account was $656.5 million. The borrowing rate was 5.00% as of March 31, 2023.
There were no outstanding advances on the above borrowing facilities as of March 31, 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
  

22
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 7—Employee Benefit Plans
Executive Retirement Plan
The Company, through the Bank, sponsors an Executive Retirement Plan (“ERP”) for certain executive level employees. The ERP is a non-qualified deferred compensation plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by Internal Revenue Service regulations. The ERP is comprised of: (1) a Performance Component which makes contributions based upon long-term cumulative profitability and increase in market value of the Company; (2) a Salary Component which makes contributions based upon participant salary levels; and (3) an Equity Component for which contributions are discretionary and subject to Board of Directors approval.
The Company expensed $2.3 million to the ERP during the three months ended March 31, 2023 and $1.8 million during the three months ended March 31, 2022. The Company’s carrying value of the liability under the ERP was $55.1 million as of March 31, 2023 and $57.0 million as of December 31, 2022. The Company’s shares of common stock held as investments in the Rabbi Trust of the ERP as of March 31, 2023 and December 31, 2022 totaled 48,055 and 50,196 with an historical cost basis of $30.0 million and $31.4 million, respectively. All amounts have been fully funded into the Rabbi Trust as of March 31, 2023 and December 31, 2022. The consolidated investments held in the Rabbi Trust are recorded at fair value with changes in unrealized gains or losses recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income.
Net gains on ERP plan investments were $0.7 million compared to net gains of $0.3 million at March 31, 2023 and 2022, respectively. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices.
Senior Management Retention Plan
The Company, through the Bank, sponsors a Senior Management Retention Plan (“SMRP”) for certain senior level employees. The SMRP is a non-qualified deferred compensation plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by Internal Revenue Service regulations. All contributions are discretionary and subject to the Board of Directors approval.
The Company expensed $1.2 million to the SMRP during the three months ended March 31, 2023 and $0.7 million for three months ended March 31, 2022. The Company’s carrying value of the liability under the SMRP was $15.4 million as of March 31, 2023 and $13.6 million as of December 31, 2022. The Company’s shares of stock held as investments in the Rabbi Trust of the SMRP as of March 31, 2023 and December 31, 2022 totaled 16,629 and 15,998 shares with an historical cost basis of $11.5 million and $10.8 million, respectively. All amounts have been fully funded into the Rabbi Trust as of March 31, 2023 and December 31, 2022. The consolidated investments held in the Rabbi Trust are recorded at fair value with changes in unrealized gains or losses recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income.
Net gains on SMRP plan investments were $0.2 million compared to net gains of $0.1 million at March 31, 2023 and 2022, respectively. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices.

23
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 8—Fair Value

The Company follows the “Fair Value Measurement and Disclosures” topic of the FASB ASC Topic 820, which establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. This standard applies whenever other standards require, or permit assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, this standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
Level 2 inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.
Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.
Securities classified as available-for-sale are reported at fair value on a recurring basis utilizing Level 1, 2 and 3 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.
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 leases is primarily the sales comparison approach less estimated selling costs.

24
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 8—Fair Value—Continued
Other Real Estate Owned (“OREO”) is reported at fair value on a non-recurring basis. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take in to account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 non-recurring OREO is primarily the sales comparison approach less estimated 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
 
(Dollars in thousands)
  
Carrying
Amount
    
Level 1
    
Level 2
    
Level 3
    
Total Fair
Value
  
Financial Assets:
                              
Cash and cash equivalents
  
$
529,593
    
$
529,593
    
$
-
    
$
-
    
$
529,593
  
Held-to-maturity securities
    
849,994
      
-
      
649,419
      
56,490
      
705,909
  
Non-marketable securities
    
15,549
      
-
      
-
      
15,549
      
15,549
  
Loans and leases, net
    
3,358,560
      
-
      
-
      
3,207,754
      
3,207,754
  
Bank-owned life insurance
    
66,076
      
66,076
      
-
      
-
      
66,076
  
                                         
Financial Liabilities:
                                        
Total deposits
   $
4,539,162
    
$
-
    
$
4,153,033
    
$
377,969
    
$
4,531,002
  
Subordinated debentures
    
10,310
      
-
      
12,830
      
-
      
12,830
  

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.
25
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)
Note 8—Fair Value—Continued

Valuations and significant inputs obtained by independent sources are reviewed by the Company for accuracy and reasonableness.

Appraisals are typically obtained at least on an annual basis. The Company also considers other factors and events that may affect the fair value. The appraisals or evaluations are reviewed at least on a quarterly basis to determine if any adjustments are needed. After review and acceptance of the appraisal or evaluation, adjustments to collateral dependent loans or leases may occur.
The following tables presents information about the Bank’s assets and liabilities measured at fair value on a recurring and non-recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Bank to determine such fair value for the periods indicated.
March 31, 2023
        
Fair Value Measurements
 
(Dollars in thousands)
  
Carrying
Amount
    
Level 1
    
Level 2
    
Level 3
    
Total Fair
Value
  
Fair valued on a recurring basis:
                              
Available-for-sale securities
                             
U.S. Government-sponsored securities
   $
4,112
     $
-
     $
4,112
     $
-
     $
4,112
  
Mortgage-backed securities
    
103,697
      
-
      
103,697
      
-
      
103,697
  
Collateralized mortgage obligations
    
607
      
-
      
607
      
-
      
607
  
Corporate securities
    
9,711
      
-
      
9,711
      
-
      
9,711
  
Other
    
310
      
-
      
310
      
-
      
310
  
                                         
Fair valued on a non-recurring basis:
                                        
    Collateral Dependent loans
   $
14,065     $
-     $
-     $
14,065     $
14,065  
Other real estate owned
    
873
      
-
      
-
      
873
      
873
  

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

26
FARMERS & MERCHANTS BANCORP
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 9—Commitments and Contingencies

In the normal course of business, the Company enters into financial instruments with off balance sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These instruments include commitments to extend credit, letters of credit, and other types of financial guarantees. The Company had the following off balance sheet commitments as of the dates indicated.
(Dollars in thousands)
  
March 31,
2023
   
December 31,
2022
 
                 
Commitments to extend credit, including unsecured commitments of $20,114 and $20,401 as of March 31, 2023 and  December 31, 2022, respectively
  
$
1,174,664
    
$
1,141,036
  
Stand-by letters of credit, including unsecured commitments of $8,059 and $7,954 as of March 31, 2023 and December 31, 2022, respectively
    
16,821
      
17,138
  



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

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


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

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

The Company may be required to maintain average reserves on deposit with the Federal Reserve Bank primarily based on deposits outstanding. Reserve requirements are offset by the Company’s vault cash and deposit balances maintained with the Federal Reserve Bank.
27
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).
28
The Company does not undertake any obligation to publicly correct or update any forward-looking statements if it later becomes aware that actual results are likely to differ materially from those expressed in such forward-looking statements, except as required by law.

Overview

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

The Company’s outstanding common stock as of 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 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.
29
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.

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, 2023 and December 31, 2022 and results of operations during the three months ended March 31, 2023 and 2022. Information related to the comparison of the results of operations for the three years ended December 31, 2022, 2021, and 2020 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.
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 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
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% and 0.20% for the three months ended March 31, 2023 and 2022, respectively. The increase was primarily the result of the FRB increasing rates by 475 basis points during 2022 and the first quarter of 2023. Average interest-bearing deposits were $521 million and $760 million for the three months ended March 31, 2023 and 2022, respectively. Interest income on interest-bearing deposits with banks was $6.0 million and $0.4 million for the three months ended March 31, 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 and $1.1 billion for the three months ended March 31, 2023 and 2022, respectively. The average yield on total investment securities was 2.12% and 1.89% for the three months ended March 31, 2023 and 2022, respectively.

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

Average interest-bearing liabilities were $3.0 billion for the three months ended March 31, 2023 and 2022. The average rate paid on interest-bearing liabilities was 0.53% and 0.12% for the three months ended March 31, 2023 and 2022, respectively. Total interest expense on interest-bearing deposits was $3.7 million and $0.8 million for the three months ended March 31, 2023 and 2022, respectively, as a result of increases in short-term market interest rates during 2022 and the first quarter of 2023. The Company is experiencing deposit pricing pressures as competition for deposits increases which may increase future deposit costs in order to retain key customers, which could place negative pressure on the net interest margin looking forward.
32
Rate/Volume Analysis. The following table shows the change in interest income and interest expense and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates. For purposes of this table, the change in interest due to both volume and rate has been allocated to change due to volume and rate in proportion to the relationship of absolute dollar amounts of change in each.
   
Three Months Ended March 31,
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.
33
Comparison of Results of Operations for the Three Months Ended March 31, 2023 and 2022
 

 		 
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 months ended March 31, 2023 and 2022, net income was $23.5 million compared with $17.1 million, respectively. The increase in net income was primarily the result of higher net interest income of $13.5 million. The Company also recognized in non-interest income, a $4.3 million death benefit on bank-owned life insurance (“BOLI”) during the three months ended March 31, 2023 that was not present during the three months ended March 31, 2022. This increase was offset by an increase in non-interest expense of $4.4 million, higher provision for credit losses of $1.5 million, a decrease in non-interest income of $0.8 million and higher income tax expense of $.3 million.
 
Net Interest Income and Net Interest Margin. For the three months ended March 31, 2023, net interest income increased $13.5 million, or 32.01%, to $55.7 million compared with $42.2 million for the same period a year earlier. The increase is primarily the result of the net interest margin increasing 114 basis points to 4.53% compared with 3.39% 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 475 basis points during 2022 and the first quarter of 2023. The loan yield increased 94 basis points compared to the first quarter of 2022 and outpaced the increase in deposit yield of 41 basis points compared to the same period a year earlier.

Provision for Credit Losses. The Company made a $1.5 million provision for credit losses during the first three months of 2023 compared to no provision for credit losses the same period a year earlier. For the three month ended March 31, 2023 net recoveries were $188,000 compared to net recoveries of $25,000 for the same period a year earlier.

Non-interest Income. Non-interest income decreased $0.9 million, or 19.76%, to $3.5 million for the three months ended March 31, 2023 compared with $4.3 million for the same period a year earlier. The year-over-year decrease 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 million increase in net gains on deferred compensation plan investments.

The Company recorded net gains on deferred compensation plan investments of $0.9 million for the three months ended March 31, 2023 compared with net gains of $0.4 million for the same period a year earlier. 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.
34
Non-interest Expense. Non-interest expense increased $4.4 million, or 18.48%, to $28.2 million for the three months ended March 31, 2023 compared with $23.8 million for the same period a year ago. This year-over-year increase was primarily comprised of: (1) 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 million increase in net gains on deferred compensation plan investments; (5) a $0.3 million increase in FDIC insurance; and (6) a $0.2 million increase in marketing expenses.

Net gains on deferred compensation plan obligations were $0.9 million for the three months ended March 31, 2023 compared with net gains of $0.4 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 months ended March 31, 2023, income tax expense was $6.0 million compared to $5.7 million for the same period a year earlier. For the three months ended March 31, 2023, the effective tax rate was 20.18% compared to 24.96% for the same period a year earlier. The Company’s effective tax rate for the three months ended March 31, 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 three months ended March 31, 2023. The Company’s effective tax rate can fluctuate from quarter to quarter due primarily to changes in the mix of taxable and tax-exempt earning sources. The effective rates were lower than the combined Federal and State statutory rate of 30% due primarily to BOLI death benefits, the cash surrender value of life insurance; credits associated with low income housing tax credit investments (LIHTC); and tax-exempt interest income on municipal securities and loans.

Financial Condition

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

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 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 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 million at March 31, 2023 and $514.9 million 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, 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.
35
The carrying value of our portfolio of investment securities was as follows:
(Dollars in thousands)
  
March 31,
2023
    
December 31, 2022
  
Available-for-Sale Securities
            
U.S. Treasury notes
  
$
-
    
$
4,964
  
U.S. Government-sponsored securities
    
4,112
      
4,427
  
Mortgage-backed securities(1)
    
103,697
      
132,528
  
Collateralized mortgage obligations(1)
    
607
      
1,054
  
Corporate securities
    
9,711
      
9,581
  
Other
    
310
      
310
  
Total available-for-sale securities
  
$
118,437
    
$
152,864
  

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

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

 
As of March 31, 2023
  

 
Within One Year
    
After One but Within
Five Years
    
After Five but Within Ten Years
    
After Ten Years
    
Total
  
(Dollars in thousands)
  
Amount
    
Yield
    
Amount
    
Yield
    
Amount
    
Yield
    
Amount
    
Yield
    
Amount
    
Yield
  
Securities held-to-maturity
                                                            
Mortgage-backed securities(1)
  
$
-
      
0.00
%
  
$
-
      
0.00
%
  
$
17,265
      
1.28
%
  
$
677,818
      
1.90
%
  
$
695,083
      
1.88
%
Collateralized mortgage obligations(1)
    
-
      
0.00
%
    
-
      
0.00
%
    
-
      
0.00
%
    
79,044
      
1.73
%
    
79,044
      
1.73
%
Municipal securities
    
283
      
0.69
%
    
11,174
      
2.77
%
    
13,083
      
3.56
%
    
51,720
      
1.28
%
    
76,260
      
1.89
%
Total securities held-to-maturity
  
$
283
      
0.69
%
  
$
11,174
      
2.77
%
  
$
30,348
      
2.06
%
  
$
808,582
      
1.84
%
  
$
850,387
      
1.87
%

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

 		 
As of December 31, 2022
  

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

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

 
As of December 31, 2022
  

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


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

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

Loans and Leases

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

Commercial and Agricultural Real Estate – These are loans secured by owner-occupied real estate, non-owner-occupied real estate, owner-occupied farmland, and multifamily residential properties. Commercial mortgage term loans can be made if the property is either income producing or scheduled to become income producing based upon acceptable pre-leasing, or the income will be the Bank’s 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 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.
 
37
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 five to seven years; and fixed rates that are most often tied to treasury indices or variable rates tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan.

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

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

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

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

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’s loan and lease portfolio at March 31, 2023 totaled $3.4 billion, a decrease of $85.2 million or 2.43% over 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
The following table shows the maturity distribution and interest rate sensitivity of the loan and lease portfolio of the Company as of March 31, 2023.

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

The following table summarizes the loans for which the accrual of interest has been discontinued and loans more than 90 days past due and still accruing interest, and OREO (as hereinafter defined):
(Dollars in thousands)
  
March 31,
2023
    
December 31, 2022
  
Non-performing assets:
            
Non-accrual loans and leases
            
Real estate:
            
Commercial
  
$
387
    
$
403
  
Agricultural
    
-
      
-
  
Residential and home equity
    
-
      
-
  
Construction
    
-
      
168
  
Total real estate
    
387
      
571
  
Commercial & industrial
    
-
      
-
  
Agricultural
    
-
      
-
  
Commercial leases
    
-
      
-
  
Consumer and other
    
-
      
-
  
Total non-performing loans and leases
  
$
387
    
$
571
  
Other real estate owned (“OREO”)
  
$
873
    
$
873
  
Total non-performing assets
  
$
1,260
    
$
1,444
  
                 
Selected ratios:
                
Non-performing loans to total loans and leases
    
0.01
%
    
0.02
%
Non-performing assets to total assets
    
0.02
%
    
0.03
%

40
Non-Accrual Loans and Leases - Accrual of interest on loans and leases is generally discontinued when a loan or lease becomes contractually past due by 90 days or more with respect to interest or principal. When loans and leases are 90 days past due, but in management’s judgment are well secured and in the process of collection, they may not be classified as non-accrual. When a loan or lease is placed on non-accrual status, all interest previously accrued but not collected is reversed. Income on such loans and leases is then recognized only to the extent that cash is received and where the future collection of principal is probable. Non-accrual loans and leases totaled $387,000 and $571,000 at March 31, 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, 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, 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.

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 had on the loans or leases modified.  Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

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

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, 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. See “Summary of Critical Accounting Policies and Estimates - Allowance for Credit Losses – Loans and Leases.”

42
The following table sets forth the activity in our ACL for the periods indicated:

 
Three Months Ended
March 31,
  
(Dollars in thousands)
  
2023
    
2022
  
Allowance for credit losses:
            
Balance at beginning of year
  
$
66,885
    
$
61,007
  
Provision for credit losses
    
1,500
      
-
  
Charge-offs:
                
Real estate:
                
Commercial
    
-
      
-
  
Agricultural
    
-
      
-
  
Residential and home equity
    
(14
)
    
-
  
Construction
    
-
      
-
  
Total real estate
    
(14
)
    
-
  
Commercial & industrial
    
-
      
-
  
Agricultural
    
-
      
-
  
Commercial leases
    
-
      
-
  
Consumer and other
    
(10
)
    
(9
)
Total charge-offs
    
(24
)
    
(9
)
Recoveries:
                
Real estate:
                
Commercial
    
170
      
-
  
Agricultural
    
-
      
-
  
Residential and home equity
    
10
      
14
  
Construction
    
-
      
-
  
Total real estate
    
180
      
14
  
Commercial & industrial
    
19
      
16
  
Agricultural
    
1
      
2
  
Commercial leases
    
-
      
-
  
Consumer and other
    
12
      
2
  
Total recoveries
    
212
      
34
  
Net recoveries / (charge-offs)
    
188
      
25
  
                 
Balance at end of year
  
$
68,573
    
$
61,032
  
                 
Selected financial information:
                
Net loans and leases held for investment
  
$
3,427,133
    
$
3,237,619
  
Average loans and leases
    
3,422,375
      
3,196,841
  
Non-performing loans and leases
    
387
      
437
  
Allowance for credit losses to non-performing loans and leases
    
17719.12
%
    
13966.13
%
Net (recoveries)/charge-offs to average loans and leases
    
(0.01
%)
    
0.00
%
Provision for credit losses to average loans and leases
    
0.04
%
    
0.00
%
Allowance for credit losses to gross loans and leases held-for-investment
    
1.99
%
    
1.88
%

The increase in ACL during the first quarter of 2023 was primarily related to higher expected probable losses inherent in the loan and lease portfolio that was directly related to quantitative and qualitative factors associated with the current economic environment.
43
The following table indicates management’s allocation of the ACL by loan type as of each of the following dates:

 
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 billion and $4.8 billion as of March 31, 2023 and December 31, 2022, respectively a decrease of 4.62% due in part to traditional seasonality related to the cyclical nature of our agricultural customers. Despite the slight decrease in deposits during the first quarter, the Company is highly focused on business development activities for deposits, 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.

Non-interest bearing demand deposits were $1.55 billion as of March 31, 2023 and $1.76 billion at December 31, 2022. Non-interest bearing deposits were 34.19% of total deposits, as of March 31, 2023 and 36.96% 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 following table shows the average amount and average rate paid on the categories of deposits for each of the periods presented:

 
Three Months Ended March 31,
  

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

Deposits are gathered from individuals and businesses in our market areas. The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements. 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 0.32% for the three months ended March 31, 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, 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, 2023 or December 31, 2022. There were no Federal Funds purchased or advances from the FRB at March 31, 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 June 18, 2023) and the rate was 7.76% as of March 31, 2023 and 7.59% at December 31, 2022. The average rate paid for these securities was 7.71% for the first three months of 2023 and 3.23% for the first three months 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 million at March 31, 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’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

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

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

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

 
March 31, 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.

During the first three months of 2023 the Company repurchased 5,406 shares under the Repurchase Plan, for a total of $5.6 million.

Off-Balance-Sheet Arrangements

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

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


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

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

Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third-party. Most standby letters of credit have maturity dates ranging from 1 to 60 months with final expiration in January 2027. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
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 million as of March 31, 2023. Potential sources of liquidity also include investment securities in our available-for-sale securities portfolio, our ability to sell loans in the secondary market, and to secure borrowings from the FRB and FHLB. Our diversified deposit portfolio has historically provided us with a long-term source of stable low cost funding. Maturities and payments on outstanding loans and investment securities also provide a steady flow of funds. Our liquidity, represented by cash borrowing lines, federal funds and available for sale securities, is a result of our operating, investing and financing activities and related cash flows. In order to ensure funds are available at all times, we devote resources to projecting the amount of funds that will be required and we maintain relationships with a diversified client base so funds are accessible. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets. We had the following borrowing lines available at March 31, 2023:

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

We continued our focus on maintaining a strong liquidity position throughout the first three months of 2023 and we believe our liquid assets and short-term borrowing credit lines are adequate to meet our cash flow needs for loan and lease funding and deposit cash withdrawal for the foreseeable future. As of March 31, 2023, we had $898.1 million in cash and unencumbered investment securities, which is 17.49% of total assets. We also had $2.1 million in investment securities and $2.1 billion in loans pledged as collateral on short-term borrowing credit lines. We have the option of either borrowing on our credit lines or selling these investment securities for cash flow needs.

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

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, 2023, we had unfunded loan commitments of $1.1 billion and unfunded letters of credit of $16.8 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, 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.

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 three months ended March 31, 2023, to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.
Legal Proceedings

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

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.

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

49
Item 3.
Defaults upon Senior Securities

Not Applicable

Item 4.
Mine Safety Disclosures

Not Applicable

Item 5.
Other Information

Not Applicable

Item 6.
Exhibits
 
List of Financial Statements and Financial Statement Schedules
 
(a) The following documents are filed as a part of this Quarterly Report on Form 10-Q:
 
(1) Financial Statements and
 
(2) Financial Statement schedules required to be filed by Item 1 of this Quarterly Report on Form 10-Q.
 
(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.
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*Filed herewith

50
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, 2023
/s/ Kent A. Steinwert
 
Kent A. Steinwert
 
Director, Chairman, President and Chief Executive Officer
(Principal Executive Officer)

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


51
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