FMCB 0001140361-23-023642 10-Q as filed: May 9, 2023

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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

☐ 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
	Unaudited Consolidated Balance Sheets	3
	Unaudited Consolidated Statements of Income	4
	Unaudited Consolidated Statements of Comprehensive Income	5
	Unaudited Consolidated Statements of Changes in Shareholders’ Equity	6
	Unaudited Consolidated Statements of Cash Flows	7
	Notes to Unaudited Consolidated Financial Statements	8

	Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
	Overview	29
	Results of Operations	30
	Results of Financial Condition	35

	Item 3 - Quantitative and Qualitative Disclosures about Market Risk	49

	Item 4 - Controls and Procedures	49

PART II. - OTHER INFORMATION

	Item 1 – Legal Proceedings	49
	Item 1A – Risk Factors	49
	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	49
	Item 3 – Defaults upon Senior Securities	50
	Item 4 – Mine Safety Disclosures	50
	Item 5 – Other Information	50
	Item 6 – Exhibits	50
	Signatures	51

Table of Contents

PART 1. FINANCIAL INFORMATION

Item 1.

Financial Statements

FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share amounts)	March 31, 2023			December 31, 2022
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.

Table of Contents

FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended March 31,
(Dollars in thousands, except share and per share amounts)	2023			2022
Interest income
Interest and fees on loans and leases	$	48,008		$	37,433
Interest and dividends on investment securities		5,663			5,295
Interest on deposits with others		5,961			366
Total interest income		59,632			43,094

Interest expense
Deposits		3,714			803
Subordinated debentures		196			82
Total interest expense		3,910			885
Net interest income		55,722			42,209
Provision for credit losses		1,500			-
Net interest income after provision for credit losses		54,222			42,209
Non-interest income
Card processing		1,591			1,737
Service charges on deposit accounts		634			850
Increase in cash surrender value of BOLI		444			542
Gain on BOLI death benefit		4,346			-
Net loss on sale of securities available-for-sale		(5,686	)		-
Net gain on deferred compensation benefits		896			412
Other		1,235			771
Total non-interest income		3,460			4,312
Non-interest expense
Salaries and employee benefits		19,584			16,784
Net gain on deferred compensation benefits		896			412
Occupancy		1,180			1,154
Data processing		1,260			1,215
FDIC insurance		611			349
Marketing		470			316
Legal		260			279
Other		3,922			3,279
Total non-interest expense		28,183			23,788
INCOME BEFORE INCOME TAXES		29,499			22,733
Income tax expense		5,952			5,675
NET INCOME	$	23,547		$	17,058

Earnings per common share:
Basic	$	30.80		$	21.70
Diluted	$	30.80		$	21.70

Weighted average number of common shares
Basic		764,603			786,096
Diluted		764,603			786,096

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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

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.

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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.

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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

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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.

Table of Contents

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

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 3—Loans and Leases—Continued

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

Table of Contents

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

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 3—Loans and Leases—Continued

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

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

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

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 3—Loans and Leases—Continued

Changes in the allowance for credit losses are as follows:

	For the Three Months Ended 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

Table of Contents

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

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 8—Fair Value—Continued

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

Appraisals are typically obtained at least on an annual basis. The Company also considers other factors and events that may affect the fair value. The appraisals or evaluations are reviewed at least on a quarterly basis to determine if any adjustments are needed. After review and acceptance of the appraisal or evaluation, adjustments to collateral dependent loans or 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

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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.

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Item 2.

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

The following discussion is intended to provide a more comprehensive review of the Company’s operating results and financial condition. 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).

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

Overview

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

The Company’s outstanding common stock as of 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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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	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.

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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 1^st lien position.

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

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

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

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

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

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

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.

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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	%

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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	%

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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.

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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.”

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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.

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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.

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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.

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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	%

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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.

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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.

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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

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.

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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

10.21	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.
10.22	Employment Agreement effective April 1, 2023, between Farmers & Merchants Bank of Central California and John W. Weubbe, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2023.
31(a)	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31(b)	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH	Inline XBRL Taxonomy Extension Schema Document.
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*Filed herewith

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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)

Exhibit 10.21

EXECUTIVE VICE PRESIDENT

EMPLOYMENT, CONFIDENTIALITY

AND NON-DISCLOSURE AGREEMENT

PART I

PARTIES TO AGREEMENT

Section 1.01 - Parties: This Employment Agreement (hereinafter referred to as the “Agreement”) is entered into by and between Farmers & Merchants Bank of Central California, a California banking corporation (the “Bank”), its successors and assigns, and Bart R. Olson (hereinafter referred to as “Employee”). The Bank and Employee are sometimes collectively referred to hereinafter as the “Parties” and individually as a “Party”.

PART II

EMPLOYMENT

Section 2.01 - Employment: The Bank hereby agrees to employ Employee, and Employee hereby accepts such employment with the Bank, in accordance with the terms and conditions set forth herein.

Section 2.02 - Term of Employment: This Agreement shall become effective on March 27, 2023. This Agreement shall terminate on December 31, 2024 unless earlier terminated pursuant to the provisions of Part VII herein. If this Agreement is not terminated pursuant to Part VII, and provided Employee enters into an effective general release of claims at that time in the form attached hereto as Exhibit A, the Agreement shall renew automatically for an additional two year term, and for successive additional two year terms thereafter, unless earlier terminated pursuant to the provisions of Part VII.

PART III

DUTIES OF EMPLOYEE

Section 3.01- General Duties: During the term of this Agreement, Employee shall be employed as Executive Vice President and Chief Financial Officer under the direction of the Chairman, President and Chief Executive Officer and shall perform and discharge well and faithfully the duties that may be assigned to Employee from time to time by the Chairman, President and Chief Executive Officer in connection with the conduct of the Bank’s business. Nothing herein shall preclude the Bank’s Board of Directors or Chief Executive Officer from changing Employee’s title or duties as long as the resulting title and duties are reasonably commensurate with the education, employment background and qualifications of the Employee and involve similar responsibilities and scope of duties.

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Section 3.02 - Outside Activities: Employee agrees that, while employed by the Bank, Employee will refrain from any outside activities which actually or potentially are in direct conflict with the essential enterprise-related or reputational interest of the Bank, that would cause disruption of the Bank’s operations, or that would be in direct competition with the Bank or assist competitors of the Bank. It shall not be a violation of this Agreement for Employee (A) to serve on corporate, civic or charitable boards or committees, or (B) to deliver lectures or fulfill speaking engagements, so long as such activities do not significantly interfere with the performance of Employee’s responsibilities as an employee of the Bank; provided, however, that Employee shall give the Bank’s Chief Executive Officer not less than fourteen (14) days’ notice of any actions contemplated by clauses (A) or (B), and will refrain from any such action to which the Chief Executive Officer in his/her sole discretion, objects. It shall not be a violation of this Agreement for Employee to manage personal investments, so long as such activities do not represent a conflict with the Bank, as described in the Bank’s Employee Code of Conduct, and other pertinent policies and agreements.

PART IV

COMPENSATION

Section 4.01 - Salary: Employee shall be paid an annual base salary of no less than $550,000 per year. This base salary shall be paid to Employee in such intervals and at such times as other salaried executives of the Bank are paid. The Bank’s Board of Directors reserves the right to set the timing and level of salary adjustments for all employees and any particular employee at its sole discretion.

Section 4.02 - Incentive and Retention Programs: Employee shall be eligible for an annual discretionary incentive bonus beginning in 2023. The amount of any incentive bonus shall be determined from time to time by the Bank’s Board of Directors annually by January 31^st of each following year and shall be paid no later than February 28^th of each following year. Any incentive bonus is intended for retention purposes, and as a consequence, it will only be paid provided Employee is still employed by Employer on the payment date. Employee has the bonus potential of $400,000 to $600,000 per year.

Beginning in 2^nd quarter of 2023, Employee shall be entitled to participate in (i) the “Farmers & Merchants Bank of Central California Executive Retirement Plan – Equity Component,” with a quarterly target of $70,000 to $110,000, which is a totally discretionary contribution as determined by the Board of Directors; and (ii) the “Farmers & Merchants Bank of Central California Executive Retirement Plan – Performance Component,” with an initial “Bonus Factor” of .50%; the terms and conditions of which are set forth in separate agreements so titled.

Section 4.03 - Relocation Expenses: The Bank shall reimburse the Employee for all out-of-pocket relocation expenses reasonably incurred by him and his immediate family through December 31, 2023 in connection with his relocation to Northern California, including, packing, moving and out-of-pocket expenses fees up to $50,000.00 (“Moving Expenses”) in the aggregate with no gross-up consideration. The amounts payable to Employee pursuant to this Section 4.03 are taxable to Employee, including appropriate payroll taxes.

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PART V

BENEFITS

Section 5.01 - Benefits: Employee shall be entitled to participate in whatever vacation, medical, dental, pension, sick leave, 401(k), profit sharing, disability insurance or other plans of general application, or other benefits which are in effect as to other officers of equivalent title of the Bank, or as may be in effect from time to time, in accordance with the rules established for individual participation in any such plan.

Section 5.02 - Automobile Allowance: The Bank shall provide Employee with an automobile allowance of $1,000 per month as per Bank policy. However, at the sole discretion of the Board of Directors and/or the Bank’s Chief Executive Officer, the Bank reserves the right to change or eliminate this benefit at any time.

Section 5.03 - Membership Fees: The Bank shall reimburse Employee for all appropriate and reasonable expenses incurred in performing Employee’s duties, including providing and paying for the dues and fees of membership in local service and civic clubs and/or organizations as the Bank deems appropriate and necessary for enhancement of its presence within the local business community. In order to be eligible for reimbursement of these expenses, Employee must obtain pre-approval for such memberships from the Bank’s Chief Executive Officer and must provide the Bank with receipts and documented evidence as is required by federal and state laws and regulations.

Section 5.04 - Directors and Officers Liability Insurance Coverage: To the extent commercially reasonable to do so under prevailing conditions in the insurance market, the Bank shall provide directors and officers liability insurance coverage for the protection of Employee on terms and conditions no less favorable to Employee than are in effect on the date that this Agreement shall become effective. Following any termination of Employee’s employment with the Bank, such coverage shall be continued under substantially the same terms and conditions as are in effect immediately prior to such termination of employment at no cost to Employee until all applicable statutes of limitation expire with respect to claims arising prior to such termination of employment. Employee expressly acknowledges, however, that the Bank cannot and shall not guarantee the performance of the insurance company issuing such directors and officers liability insurance coverage pursuant to this Section. In addition to the foregoing, the Bank shall also continue to make indemnification and advancement of litigation expense payments to Employee to the maximum extent and for the maximum period permitted by law; provided, however, that the obligation of the Bank to advance litigation expense payments shall be subject to Employee having executed and delivered to the Bank, in a form approved by the Bank, an undertaking to return such payments in the event that a court shall have determined that Employee is not entitled to indemnification under the applicable legal standards.

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PART VI

EXPENSES

- Travel and Entertainment Expenses: During the term of this Agreement, the Bank shall reimburse Employee for reasonable out of pocket expenses incurred in connection with the Bank’s business, including travel expenses, food and lodging while away from Employee’s home, subject to such policies as the Bank may from time to time establish for other officers of equivalent title. Employee shall keep records of Employee’s travel and entertainment expenses in a form suitable to the Internal Revenue Service and the Franchise Tax Board to qualify this reimbursement as a federal and state income tax deduction for the Bank. In addition, Employee shall provide the Bank with receipts for all expenses for which Employee seeks reimbursement.

PART VII

TERMINATION OF EMPLOYMENT

Section 7.01 - Termination at Option of the Bank: The Bank may terminate this Agreement at any time and without “Cause” (as defined below) by giving Employee sixty (60) days written notice of the Bank’s intent to terminate this Agreement. The 60th day after Notice of Termination shall be deemed Employee’s Separation Date. In the event Employee’s employment is terminated by the Bank pursuant to this Section, Employee shall be paid all accrued salary, accrued but unused vacation, and reimbursement expenses for which expense reports have been provided to the Bank, or which are provided to the Bank prior to the Separation Date, in accordance with the Bank’s policies and this Agreement. In addition to the foregoing amounts, if Employee is terminated by the Bank pursuant to this Section, and subject to (A) Employee’s continued employment through, and termination of employment on, the Separation Date; (B) Employee’s continued loyalty to the Bank, which includes, but is not limited to, Employee or any outside third party refraining from any announcements to anyone inside or outside the Bank that the Employee is leaving the Bank; and (C) Employee’s execution and non-revocation of a general release of all claims in the form attached hereto as Exhibit B, which release becomes irrevocable within 60 days following the Separation Date or such earlier deadline provided by the Bank, then Employee will be entitled to receipt of the following Severance Package:

A Severance Payment equivalent to twelve (12) times the highest monthly base salary, which Employee has earned during Employee’s employment with the Bank. The Severance Payment shall be paid out in equal increments on regularly scheduled pay days for a period of 12 months following the Separation Date, provided that any payments delayed pending the effectiveness of the release shall be accumulated and paid in a lump sum on the next pay day following the effectiveness of the release, with any remaining payments due paid in accordance with the schedule otherwise provided herein. Such payments will cease, however, if Employee fails to comply with the provisions of Part VIII of this Agreement.

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Payment of all awards of benefit plans and incentive and retention programs in accordance with the terms of those plans and programs, including applicable vesting and forfeiture provisions. Any such payment or distribution from a nonqualified deferred compensation plan shall be governed by the terms of such plan relating to the timing of distributions.

Section 7.02 - Termination for Cause: The Bank may terminate Employee’s employment at any time for “Cause” upon written Notice of Termination to Employee, setting forth in reasonable detail the basis for the determination of “Cause.” Termination for Cause shall be effective immediately upon receipt of the Notice of Termination by Employee, and the date on which the Notice of Termination is received shall be deemed to be the Separation Date. If Employee is terminated pursuant to this Section 7.02, Employee shall be entitled only to accrued salary, vacation and reimbursement of expenses for which expense reports have been provided to the Bank, or which are provided to the Bank prior to the Separation Date, in accordance with the Bank’s policies and this Agreement. Employee shall be entitled to no further compensation or severance payment of any nature; provided however, that Employee will also be entitled to payment of all awards of benefit plans and incentive and retention programs in accordance with the terms of those plans, including any applicable vesting and forfeiture provisions. Any such payment or distribution from a nonqualified deferred compensation plan shall be governed by the terms of such plan relating to the timing of distributions.

“Cause” for purposes of this Agreement shall be defined as follows:

1.	The death of Employee;

2.	Employee’s permanent disability, meaning that Employee is unable to engage in any substantial gainful activity, with or without reasonable accommodation, for an aggregate of 120 working days over a six month period, by reason of any medically determinable physical or mental impairment.

3.	Conviction of a felony resulting in a material economic adverse effect on the Bank or its affiliates;

4.	Committing acts of dishonesty, theft, embezzlement or other acts of moral turpitude against the Bank or its affiliates;

A material breach of, or intentional failure to perform any of Employee’s duties which is not cured by Employee to the reasonable satisfaction of the Bank’s Chief Executive Officer within thirty (30) days, or within a deadline jointly defined by Employee and the Bank’s Chief Executive Officer after written notice is provided by the Bank’s Chief Executive Officer setting forth in reasonable detail the nature of the breach or failure;

6.	An unauthorized, willful, knowing or reckless disclosure of any confidential information concerning the Bank or its affiliates or any of its directors, shareholders, customers or employees; or

Any action that constitutes a material disruption of Bank personnel relationships, that damages the Bank’s reputation or the reputation of any of its directors, shareholders, customers or employees, or that materially adversely affects the professional or business operations or practices of the Bank.

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Section 7.03 - Termination at Option of Employee: This Agreement may be terminated by Employee at Employee’s sole discretion by giving ninety (90) days written Notice of Resignation to the Bank. If Employee terminates his/her employment pursuant to this Section 7.03, and subject to Employee’s continued satisfactory performance of such tasks and duties that may be assigned to Employee through the Separation Date, and Employee’s continued loyalty to the Bank through the Separation Date (which includes, but is not limited to, refraining from any announcements by Employee or any outside third party to anyone inside or outside the Bank that the Employee is leaving the Bank), Employee shall receive accrued salary and payment for accrued but unused vacation through the Separation Date. Employee shall also be entitled to payment of all awards of benefit plans and incentive and retention programs, in accordance with the terms of those plans, including applicable vesting and forfeiture provisions. Any such payment or distribution from a nonqualified deferred compensation plan shall be governed by the terms of such plan relating to the timing of distributions. Alternatively, the Bank may, at its option, at any time after Employee gives written Notice of Resignation as herein provided, pay Employee’s accrued salary up to and including the effective Separation Date set forth in Employee’s Notice of Resignation, and thereupon immediately release and terminate Employee’s employment. Notwithstanding the foregoing, if the Bank determines at any time during the 90-day notice period that Employee materially breaches the obligations imposed by the provisions of this Section 7.03 and Part VIII of this Agreement, the Bank may shorten the notice period and accelerate the Separation Date, thereby reducing the compensation otherwise payable to Employee pursuant to this Section.

The Notice of Termination shall be deemed withdrawn and the Agreement shall remain in effect after a Notice of Termination has been given to Employee under the following circumstances.

A.	Within thirty (30) days of the Notice of Termination being given to Employee, Employee returns to the full performance of Employee’s duties and provides medical certification that Employee can perform the essential functions of Employee’s duties with or without reasonable accommodation.

Within thirty (30) days of the Notice of Termination being given to Employee, Employee requests a reasonable accommodation from the Bank which would permit Employee to perform the essential functions of Employee’s duties and such reasonable accommodation can be provided by the Bank without an undue hardship.

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Section 7.04 - Change of Control: If the Employee is involuntarily terminated without “Cause” within 12 months after a Change of Control of the Bank or Farmers & Merchants Bancorp (the “Bancorp”), and upon the execution by Employee and non-revocation of a general release of all claims provided by the Bank within 60 days following the Separation Date (or such shorter period as the Bank may require), the Bank will provide Employee with a Change of Control Compensation Package equal to (A) two (2) times Employee’s highest Annual Compensation paid before the earlier of the (i) termination of employments or (ii) Change of Control; (B) $125,000; (C) Employee’s monthly premium for continuation coverage under COBRA (as defined in Section 7.07), determined as of the Separation Date, multiplied by twelve (12) months, whether or not such continuation coverage is elected by Employee; and (D) a gross-up payment as defined and set forth herein in Section 7.04.2. In addition, Employee will be entitled to payment of all awards of benefit plans and incentive and retention programs in accordance with the terms of those plans and programs, including applicable vesting and forfeiture provisions. Subject to the provisions of this Section 7.05, Employee shall receive disbursement of payments due Employee under this Section (except for payments or distributions from or pursuant to any nonqualified deferred compensation plan), in one lump sum payment following the Separation Date, subject to Section 10.02 below, less any withholding required by state, federal or local law. Any payment or distribution from or pursuant to any nonqualified deferred compensation plan shall be governed by the terms of such plan. If Employee becomes entitled to payment under this Section 7.05, Employee shall not be entitled to the Severance Package under Sections 7.01 or 7.04, notwithstanding Employee’s subsequent termination of employment pursuant to those Sections.

Change of Control means a change of control of Bancorp. Such a Change of Control will be deemed to have occurred immediately before any of the following occur: (i) individuals, who were members of the Board of Directors of Bancorp immediately prior to a meeting of the shareholders of Bancorp which meeting involved a contest for the election of directors, do not constitute a majority of the Board of Directors of Bancorp following such election or meeting, (ii) an acquisition, directly or indirectly, of more than 30% of the outstanding shares of any class of voting securities of Bancorp by any Person, (iii) a merger, consolidation or sale of all, or substantially all, of the assets of Bancorp, wherein its shareholders immediately before such transaction shall own of record (immediately after such transaction) equity securities, other than any warrant or right to purchase such equity securities, of Bancorp or an acquiring entity or any parent entity thereof, possessing less than 70% of the voting power of Bancorp or such acquiring entity or any parent entity thereof; in making the determination of ownership of such equity securities immediately after such transaction, equity securities owned by shareholders of Bancorp immediately prior to the transaction as shareholders to another party to the transaction shall be disregarded, or (iv) there is a change, during any period of one year, of a majority of the Board of Directors of Bancorp as constituted as of the beginning of such period, unless the election of each director who is not a director at the beginning of such period was approved by a vote of at least a majority of the directors then in office who were directors at the beginning of such period. If the events or circumstances described in (i)-(iv), above, shall occur to or be applicable to the Bank, then such Change of Control shall be deemed for all purposes of this Agreement to also be a “Change of Control” of Bancorp. For purposes of this Agreement, the term “Person” shall mean and include any individual, corporation, partnership, group, association or other “person”, as such term is used in Section 14(d) of the Securities Exchange Act of 1934, other than Bancorp, the Bank, any other wholly owned subsidiary of Bancorp or any employee benefit plan(s) sponsored by Bancorp, Bank or other subsidiary of Bancorp. Notwithstanding the foregoing, a Change of Control shall not be deemed to have occurred unless the change also constitutes the occurrence of a “change in control event,” as defined in Treasury Regulation Section 1.409A-3(i)(5), with respect to the Employee.

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2.	Gross-Up Payment: Employee shall be entitled to a “Gross-Up Payment” under the terms and conditions set forth herein, and such payment shall include the Excise Tax reimbursement due pursuant to Section 7.04.2.a and any federal and state tax reimbursements due pursuant to Section 7.04.2.b.

In the event that any payment or benefit (as those terms are defined within the meaning of Internal Revenue Code Section 280G(b)(2)) paid, payable, distributed or distributable to the Employee (hereinafter referred to as “Payments”) pursuant to the terms of this Agreement or otherwise in connection with or arising out of Employee’s employment with the Bank or a change of control would be subject to the Excise Tax imposed by Section 4999 of the Internal Revenue code or any interest or penalties are incurred by Employee with respect to such Excise Tax, then Employee will be entitled to receive an additional payment (“Gross-Up Payment”) in an amount equal to the total Excise Tax, interest and penalties imposed on Employee as a result of the payment and the Excise Taxes on any federal and state tax reimbursements as set forth in Section 7.05.2.b.

If the Bank is obligated to pay Employee pursuant to Section 7.05.2.a, the Bank shall also pay Employee an amount equal to the “total presumed federal and state taxes” that could be imposed on Employee with respect to the Excise Tax reimbursements due to Employee pursuant to Section 7.05.2.a and the federal and state tax reimbursements due to Employee pursuant to this section. For purposes of the preceding sentence, the “total presumed federal and state taxes” that could be imposed on Employee shall be conclusively calculated using a combined tax rate equal to the sum of the (a) the highest individual income tax rate in effect under Federal tax law applicable to Employee and (ii) the tax laws of the state in which Employee will be subject to tax on the payment and (b) the hospital insurance portion of FICA.

No adjustments will be made in this combined rate for the deduction of state taxes on the federal return, the loss of itemized deductions or exemptions, or for any other purpose for paying the actual taxes.

It is further intended that in the event that any payments would be subject to other “penalty” taxes (in addition to the Excise Tax in section 7.05.2.a) imposed applicable federal tax law, that these taxes would also be included in the calculation of the Gross-Up Payment, including any federal and state tax reimbursements pursuant to section 7.05.2.b.

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Determination of Eligibility for and Amount of Gross-Up Payment: An initial determination as to whether a Gross-Up Payment is required pursuant to this Agreement and the amount of such Gross-Up Payment shall be made at the Bank’s expense by an accounting firm appointed by the Bank prior to any Change of Control. The accounting firm shall provide its determination, together with detailed supporting calculations and documentation to the Bank and Employee prior to submission of the proposed Change of Control to the Bank’s or Bancorp’s shareholders, Board of Directors or appropriate regulators for approval. If the accounting firm determines that no Excise Tax is payable by Employee with respect to a Payment or Payments, it shall furnish Employee with an opinion reasonably acceptable to Employee that no Excise Tax will be imposed with respect to any such Payment or Payments. Within ten (10) days of the delivery of the determination to Employee, Employee shall have the right to dispute the determination. The existence of the dispute shall not in any way affect Employee’s right to receive the Gross-Up Payment in accordance with the determination. Upon the final resolution of a dispute, the Bank or its successor shall promptly pay to Employee any additional amount required by such resolution. If there is no dispute, the determination shall be binding, final and conclusive upon the Bank and Employee, except to the extent that any taxing authority subsequently makes a determination that the Excise Tax or additional Excise Tax is due and owing on the payments made to Employee. If any taxing authority determines that the Excise Tax or additional Excise Tax is due and owing, the Bank or the entity acquiring control of the Bank shall pay the Excise Tax and any penalties assessed by such taxing authority.

Excise Tax Withholding: Notwithstanding anything contained in this Agreement to the contrary, in the event that according to the determination, an Excise Tax will be imposed on any Payment or Payments, the Bank or its successor shall pay to the applicable government taxing authorities as Excise Tax withholding, the amount of the Excise Tax that the Bank has actually withheld from the Payment or Payments.

Section 7.06 – Non-Renewal of Agreement. For the avoidance of doubt, if this Agreement is not renewed automatically by reason of Employee’s failure to execute an effective general release pursuant to Section 2.02, Employee will not be entitled to the Severance Package specified in Section 7.01.

Section 7.07 - Continuation of Medical Benefits: In the event Employee’s employment is terminated Employee shall be afforded the right to continue his/her medical benefits to the extent provided in the Consolidated Omnibus Budget Reconciliation Act (“COBRA”), at his/her expense. The Bank shall provide Employee with the appropriate COBRA notification within the time required by the law from the Separation Date.

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PART VIII

COVENANTS

Section 8.01 - Confidential Nature of Relationship. Employee acknowledges (i) the highly competitive nature of the business and the industry in which the Bank competes; (ii) that as a key executive of the Bank he/she has participated in and will continue to participate in the service of current customers and/or the solicitation of prospective customers, through which, among other things, Employee has obtained and will continue to obtain knowledge of the “know-how” and business practices of the Bank, in which matters the Bank has a substantial proprietary interest; (iii) that his/her employment hereunder renders the performance of services which are special, unique, extraordinary and intellectual in character, and his/her position with the Bank placed and places him/her in a position of confidence and trust with the customers and employees of the Bank; and (iv) that his/her rendering of services to the customers of the Bank necessarily requires the disclosure to Employee of Trade and Business Secrets, Proprietary and Confidential Information, and Bank Materials (as defined in Section 8.03 below) of the Bank. In the course of Employee’s employment with the Bank, Employee has and will continue to develop a personal relationship with the customers and prospective customers (defined for purposes of this Agreement as customers that the Bank is either actively soliciting or in the process of making a proposal for services to as of Employee’s Separation Date) of the Bank and a knowledge of those customers’ and prospective customers’ affairs and requirements, and the relationship of the Bank with its established clientele has been, and will continue to be, placed in Employee’s hands in confidence and trust. Employee consequently agrees that it is a legitimate interest of the Bank, and reasonable and necessary for the protection of the confidential information, goodwill and business of the Bank, which is valuable to the Bank, that Employee make the covenants contained herein.

Employee Initials ____

Section 8.02 - Restrictions: Accordingly, Employee agrees that during the period that he/she is employed by the Bank, unless in the normal course of business, he/she shall not, as an individual, employee, consultant, independent contractor, partner, shareholder, or in association with any other person, business or enterprise, directly or indirectly, and regardless of the reason for him/her ceasing to be employed by the Bank, engage in the following:

Disclosure of Proprietary Information or Materials. Employee agrees that he/she will not directly or indirectly reveal, report, publish or disclose to any person, firm, or corporation not expressly authorized in writing by the Bank’s Board of Directors to receive any Trade and Business Secret, Proprietary and Confidential Information or Bank Materials (as defined in Section 8.03 below). Employee further agrees that he/she will not use any Trade and Business Secret, Proprietary and Confidential Information and/or Bank Materials for any purpose except to perform his/her employment duties for the Bank and such Trade and Business Secret, Proprietary and Confidential Information and/or Bank Materials may not be used or disclosed by Employee for his/her own benefit or purpose or for the benefit or purpose of a subsequent employer. These agreements will continue to apply after Employee is no longer employed by the Bank so long as such Trade and Business Secrets, Proprietary and Confidential Information and Bank Materials are not nor have become, by legitimate means, generally known to the public.

Solicitation of Employees. Employee recognizes that he/she possesses and will possess confidential information about other employees of the Bank and its affiliates relating to their education, experience, skills, abilities, compensation and benefits, and inter-personal relationships with customer(s) of the Bank and its affiliates. Employee recognizes that the information he/she possesses and will possess about these other employees is not generally known, is of substantial value to the Bank and its affiliates in developing their business and in securing and retaining customers, and in managing general daily operations of the Bank, and has been and will be acquired by Employee because of his/her business position with the Bank and its affiliates. Employee agrees that at all times during his/her employment with the Bank and for a period of twelve (12) months thereafter, Employee will not, directly or indirectly, solicit or recruit any employee of the Bank or its affiliates for the purpose of being employed by, or serving as a consultant or information resource to, the Employee, or any competitor of the Bank or its affiliates on whose behalf Employee is acting as an agent, representative or employee, and that Employee will not convey such confidential information or trade secrets about other employees of the Bank and its affiliates to any other Person or legal entity. In view of the nature of Employee’s employment with the Bank, Employee likewise agrees that the Bank and its affiliates would be irreparably harmed by any such solicitation or recruitment in violation of the terms of this paragraph and that the Bank and its affiliates shall therefore be entitled to preliminary and/or permanent injunctive relief prohibiting the Employee from engaging in any activity or threatened activity in violation of the terms of this paragraph and to any other relief, including financial compensation commensurate with damages caused, available to them.

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Solicitation of Customers. During the Employee’s employment by the Bank and its affiliates and for a period of twelve (12) months after such employment ceases, the Employee shall not, directly or indirectly (whether as an officer, director, owner, employee, partner, consultant or other participant), use any Trade and Business Secret, Proprietary and Confidential information, or Bank Materials to identify, solicit or entice any Customer or Prospective Customer of the Bank or its affiliates to make any changes whatsoever in their current or prospective relationships with the Bank or its affiliates, and will not assist any other Person or entity to interfere with or dispute such current or prospective relationships. If Employee leaves the Bank and goes to work for a new employer that is a competitor of the Bank, and if that new employer already has an existing relationship with a Customer or Prospective Customer of the Bank or its affiliates, this paragraph does not preclude Employee from making contact with such Customer or Prospective Customer on the new employer’s behalf, so long as such contact otherwise complies with the provisions of this paragraph. In view of the nature of the Employee’s employment with the Bank, the Employee likewise agrees that the Bank and its affiliates would be irreparably harmed by any such interference or competitive actions in violation of the terms of this paragraph and that the Bank and its affiliates shall therefore be entitled to preliminary and/or permanent injunctive relief prohibiting the Employee from engaging in any activity or threatened activity in violation of the terms of this paragraph, in addition to any other relief, including financial compensation commensurate with damages caused, available to them.

Employee initials _____

Section 8.03 – Definitions:

A. TRADE AND BUSINESS SECRETS means information, including a formula, pattern, compilation, program, device, method, technique or process that derives independent economic value, actual or potential from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use, and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

B. PROPRIETARY AND CONFIDENTIAL INFORMATION means trade secrets, computer programs, designs, technology, ideas, know-how, processes, formulas, compositions, data, techniques, improvements, inventions (whether patentable or not), works of authorship, or other information concerning the Bank’s:

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(i) Business Activities, including but not limited to: actual or anticipated strategic plans and initiatives; marketing plans, advertising and collateral materials; new product development plans; competitor analyses; analyses of internal financial performance; financial forecasts and budgets; customer and prospect strategies and lists; proprietary designs of facilities and other delivery systems and processes; and any similar information to which Employee has access by virtue of performing his/her duties for the Bank.

(ii) Customers, including but not limited to: information about the Bank’s customers or prospective customers, such as the customer’s or prospect’s key decision-makers; customer preferences; customer strategies; terms of any contractual arrangements with the Bank; business considerations; loan, deposit and other product and service pricing, terms and conditions, repayment structures, fee arrangements, structure of guarantees from other entities; and any similar information to which Employee has access by virtue of performing his/her duties for the Bank.

(iii) Employees, including but not limited to: names of and contact information for the Bank’s employees; their compensation, incentive plans, retirement plans, terms of employment, areas of expertise, projects, and experience; and any similar information to which Employee has access by virtue of performing his/her duties for the Bank.

“Proprietary and Confidential Information” includes any information, in whatever form or format, including that which has not been memorialized in writing.

C. BANK MATERIALS means documents or other media or tangible items that contain or embody PROPRIETARY AND CONFIDENTIAL INFORMATION or any other information concerning the business, operations or plans of the Bank and its customers and prospective customers, whether such documents have been prepared by Employee or by others. BANK MATERIALS include, but are not limited to blueprints, drawings, photographs, charts, graphs, notebooks, customer lists, computer disks, photographs of proprietary information or documents on cell phones, iPads or other electronic devices, photocopies of proprietary information or documents, emails, text messages, tapes or printouts, sound recordings and other printed, typewritten, handwritten or computer generated documents, as well as samples, prototypes, product collateral materials, advertising materials, models, products and the like.

Employee Initials ____

Section 8.04 - Return of the Bank’s Property: Upon termination of his/her employment with the Bank for any reason, Employee will promptly deliver to the Bank, without copying or summarizing, all Trade and Business Secrets, Proprietary and Confidential Information, and Bank Materials that are in Employee’s possession or under Employee’s control, including, without limitation, all physical property, keys, documents, lists, electronic storage media, cell phones, iPads, manuals, letters, notes, reports, including all originals, reproductions, recordings, disks, or other media.

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Employee acknowledges that Employee has been apprised of the provisions of Labor Code Section 2860 which provides: “Everything which an Employee acquires by virtue of his employment, except the compensation which is due him from his Employer, belongs to the Employer, whether acquired lawfully or unlawfully, or during or after the expiration of the term of his employment.” Employee understands that any work that Employee created or helped create at the request of the Bank, including user manuals, training materials, sales materials, customer and prospective customer information and business data, process manuals, and other written and visual works, are works made for hire in which the Bank owns the copyright. Employee may not reproduce or publish these copyrighted works, except in the pursuit of his/her employment duties with the Bank.

Employee Initials ____

Section 8.05 - Separate Covenants: The covenants of Part VIII of this Agreement shall be construed as separate covenants covering their particular subject matter. In the event that any covenant shall be found to be judicially unenforceable, said covenant shall not affect the enforceability or validity of any other part of this Agreement.

Employee Initials ____

Section 8.06 - Continuing Obligation: Employee’s obligations set forth in Part VIII of this Agreement shall expressly continue in effect beyond Employee’s employment period in accordance with their terms and such obligations shall be binding on Employee’s assigns, executors, administrators and other legal representatives.

Employee Initials ____

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PART IX

TAXES

Section 9.01 - Withholding: All payments to be made to Employee under this Agreement will be subject to required withholding of federal, state and local income and employment taxes as applicable.

Section 9.02 - Section 409A:

A. Notwithstanding any provision to the contrary in this Agreement, the Bank shall delay the commencement of payments or benefits coverage to which Employee would otherwise become entitled under the Agreement in connection with Employee’s termination of employment until the earlier of (i) the expiration of the six-month period measured from the date of Employee’s “separation from service” with the Bank (as such term is defined in Treasury Regulations issued under Section 409A of the Code (defined below)) or (ii) the date of Employee’s death, if the Bank in good faith determines that Employee is a “specified employee” within the meaning of that term under Code Section 409A at the time of such separation from service and that such delayed commencement is otherwise required in order to avoid a prohibited distribution under Section 409A(a)(2) of the Code. Upon the expiration of the applicable Code Section 409A(a)(2) deferral period, all payments and benefits deferred pursuant to this Section10.02 (whether they would have otherwise been payable in a single sum or in installments in the absence of such deferral) shall be paid or reimbursed to Employee in a lump sum, and any remaining payments and benefits due under the Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.

B. In addition, to the extent the Bank is required pursuant to this Agreement to reimburse expenses incurred by Employee, and such reimbursement obligation is subject to Section 409A of the Code, the Bank shall reimburse any such eligible expenses by the end of the calendar year next following the calendar year in which the expense was incurred, subject to any earlier required deadline for payment otherwise applicable under this Agreement; provided, however, that the following sentence shall apply to any tax gross-up payment and related expense reimbursement obligation, including any payment obligations described in Section 7.05, to the extent subject to Section 409A. Any such tax gross-up payment will be made by the end of the calendar year next following the calendar year in which Employee remits the related taxes.

C. For purposes of the provisions of this Agreement which require commencement of payments or benefits subject to Section 409A upon a termination of employment, the terms “termination of employment” and “Separation Date” shall mean a “separation from service” with the Bank (as such term is defined in Treasury Regulations issued under Code Section 409A), notwithstanding anything in this Agreement to the contrary.

D. In each case where this Agreement provides for the payment to the Employee of an amount that constitutes nonqualified deferred compensation under Section 409A and such payment is subject to the execution and non-revocation of a release of claims, (1) any payments delayed pending the effectiveness of the release shall be accumulated and paid in a lump sum following the effectiveness of the release, with any remaining payments due paid in accordance with the schedule otherwise provided herein, and (2) if the period between the Separation Date and the last day on which the release could become irrevocable assuming the Employee’s latest possible execution and delivery of the release spans two calendar years, then such deferred payments shall not be made before the second calendar year, even if the release becomes irrevocable in the first calendar year, if such payments constitute nonqualified deferred compensation under Section 409A.

E. Any series of payments provided under this Agreement (excluding plans or agreements incorporated by reference) shall for all purposes of Code Section 409A be treated as a series of separate payments and not as single payments.

F. The provisions of this Part X are intended to comply with Code Section 409A and shall be interpreted consistent with such section.

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PART X

GENERAL PROVISIONS

Section 10.01 - Notices: Any notice to be given to the Bank under the terms of this Agreement, and any notice to be given to Employee, shall be addressed to such Party at the mailing address the Party may hereafter designate in writing to the other. Any such notice shall be deemed to have been duly given four days after the same shall be enclosed in a properly sealed and addressed envelope, registered or certified, and deposited (postage or registry or certification fee prepaid) in a post office or branch post office regularly maintained by the United States Government or upon actual delivery to the Party by messenger or delivery service, with receipt acknowledged in writing by the Party to whom such notice is addressed.

Section 10.02 - Entire Agreement: This Agreement and the agreement(s) incorporated by reference herein (“Farmers & Merchants Bank of Central California Executive Retirement Plan”) supersede any and all other agreements or understandings, whether oral, implied, or in writing, between the parties hereto with respect to the subject matter hereof and contain all of the covenants and agreements between the Parties with respect to such matters in their entirety. Each Party to this Agreement acknowledges that no representations, inducements, promises or agreements, orally or otherwise, have been made by any Party, or anyone acting on behalf of any Party, which is not embodied herein, and that no other agreement, statement or promise not contained in this Agreement shall be valid or binding. Any modification(s) to this Agreement will be effective only if in writing and signed by the Parties hereto.

Section 10.03 - Notwithstanding any other provision of this Agreement, this Agreement and all rights and obligations of the Parties hereunder shall be subject to the provisions of the Federal Deposit Insurance Act and the regulations adopted thereunder, including without limitation 12 Code of Federal Regulations, Part 359.

Section 10.04 - Partial Invalidity: If any provisions in this Agreement are held by a court of competent jurisdiction or an arbitrator to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue in full force and effect without being impaired or invalidated in any way.

Section 10.05 - Continuing Obligations: The obligations of the covenants contained in this Agreement shall survive the termination of the Agreement and any employment relationship between the Bank and Employee. Accordingly, neither the Bank nor Employee shall be relieved of the continuing obligations of the covenants contained in this Agreement.

Section 10.06 - Employee’s Representations: Employee represents and warrants that Employee is free to enter into this Agreement and to perform each of the terms and covenants in it. Employee represents and warrants that Employee is not restricted or prohibited, contractually or otherwise, from entering into and performing this Agreement, and that Employee’s execution and performance of this Agreement is not a violation or breach of any other agreement or other legal obligation between Employee and any other person or entity.

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Section 10.07 - Governing Law: This Agreement (not including any plans or agreements incorporated by reference) shall be construed and enforced in accordance with, and the rights of the Parties shall be governed by, the laws of the State of California.

Section 10.08 - Full Settlement: The Bank’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be not be affected by any set off, counterclaim, recoupment, defense or other claim, right or action which the Bank may have against Employee or others. In no event shall Employee be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Employee under any of the provisions of this Agreement and such amount shall not be reduced whether or not Employee obtains other employment.

Section 10.09 - Successors: This Agreement shall be binding upon and enforceable against any successors to the Bank. No duties provided for under this Agreement may be delegated by any of the parties hereto. The Bank will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and assets of the Bank to assume expressly and agree to perform this Agreement in the same matter and to the same extent that the Bank would be required to perform it if no such succession had taken place. As used herein, the term “Bank” shall mean the Bank as hereinbefore defined and any successor to its business and assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. This Agreement shall inure to the benefit of and be enforceable by Employee’s legal representatives.

Section 10.10 - No Waiver: The failure of any of the Parties hereto to insist on strict compliance with any provision of this Agreement, or the failure to assert any right of any Party hereto may have hereunder, shall not be deemed to be a waiver of such provision or right or of any other provision or right contained in this Agreement.

Section 10.11 – Advice of Counsel: Employee warrants that he/she has consulted with legal counsel of his/her choice to advise him/her with respect to the terms and conditions of this Agreement.

FARMERS & MERCHANTS BANK OF CENTRAL CALIFORNIA

By:	/s/ Edward Corum, Jr.	Date: March 14, 2023

	Edward Corum Jr.
	Chairman of the Personnel Committee

EMPLOYEE:	/s/ Bart R. Olson	Date: March 14, 2023

	Bart R. Olson

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Exhibit 10.22

EXECUTIVE VICE PRESIDENT

EMPLOYMENT, CONFIDENTIALITY

AND NON-DISCLOSURE AGREEMENT

PART I

PARTIES TO AGREEMENT

Section 1.01 - Parties: This Employment Agreement (hereinafter referred to as the “Agreement”) is entered into by and between Farmers & Merchants Bank of Central California, a California banking corporation (the “Bank”), its successors and assigns, and John W. Weubbe (hereinafter referred to as “Employee”). The Bank and Employee are sometimes collectively referred to hereinafter as the “Parties” and individually as a “Party”.

PART II

EMPLOYMENT

Section 2.01 - Employment: The Bank hereby agrees to employ Employee, and Employee hereby accepts such employment with the Bank, in accordance with the terms and conditions set forth herein.

Section 2.02 - Term of Employment: This Agreement shall become effective on April 1, 2023. This Agreement shall terminate on December 31, 2024 unless earlier terminated pursuant to the provisions of Part VII herein. If this Agreement is not terminated pursuant to Part VII, and provided Employee enters into an effective general release of claims at that time in the form attached hereto as Exhibit A, the Agreement shall renew automatically for an additional two year term, and for successive additional two year terms thereafter, unless earlier terminated pursuant to the provisions of Part VII.

PART III

DUTIES OF EMPLOYEE

Section 3.01- General Duties: During the term of this Agreement, Employee shall be employed as Executive Vice President and Chief Credit Officer under the direction of the Chairman, President and Chief Executive Officer and shall perform and discharge well and faithfully the duties that may be assigned to Employee from time to time by the Chairman, President and Chief Executive Officer in connection with the conduct of the Bank’s business. Nothing herein shall preclude the Bank’s Board of Directors or Chief Executive Officer from changing Employee’s title or duties as long as the resulting title and duties are reasonably commensurate with the education, employment background and qualifications of the Employee and involve similar responsibilities and scope of duties.

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PART IV

COMPENSATION

Section 4.01 - Salary: Employee shall be paid an annual base salary of no less than $300,000 per year. This base salary shall be paid to Employee in such intervals and at such times as other salaried executives of the Bank are paid. The Bank’s Board of Directors reserves the right to set the timing and level of salary adjustments for all employees and any particular employee at its sole discretion.

Section 4.03 - Relocation Expenses: The Bank shall reimburse the Employee for all out-of-pocket relocation expenses reasonably incurred by him and his immediate family through December 31, 2023 in connection with his relocation to a location near Lodi California, including, packing, moving and out-of-pocket expenses fees up to $50,000.00 (“Moving Expenses”) in the aggregate with no gross-up consideration. The amounts payable to Employee pursuant to this Section 4.03 are taxable to Employee, including appropriate payroll taxes.

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PART V

BENEFITS

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PART VI

EXPENSES

PART VII

TERMINATION OF EMPLOYMENT

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“Cause” for purposes of this Agreement shall be defined as follows:

1.	The death of Employee;

2.	Employee’s permanent disability, meaning that Employee is unable to engage in any substantial gainful activity, with or without reasonable accommodation, for an aggregate of 120 working days over a six month period, by reason of any medically determinable physical or mental impairment.

3.	Conviction of a felony resulting in a material economic adverse effect on the Bank or its affiliates;

4.	Committing acts of dishonesty, theft, embezzlement or other acts of moral turpitude against the Bank or its affiliates;

6.	An unauthorized, willful, knowing or reckless disclosure of any confidential information concerning the Bank or its affiliates or any of its directors, shareholders, customers or employees; or

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The Notice of Termination shall be deemed withdrawn and the Agreement shall remain in effect after a Notice of Termination has been given to Employee under the following circumstances.

A.	Within thirty (30) days of the Notice of Termination being given to Employee, Employee returns to the full performance of Employee’s duties and provides medical certification that Employee can perform the essential functions of Employee’s duties with or without reasonable accommodation.

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Section 7.04 - Change of Control: If the Employee is involuntarily terminated without “Cause” within 12 months after a Change of Control of the Bank or Farmers & Merchants Bancorp (the “Bancorp”), and upon the execution by Employee and non-revocation of a general release of all claims provided by the Bank within 60 days following the Separation Date (or such shorter period as the Bank may require), the Bank will provide Employee with a Change of Control Compensation Package equal to (A) twelve times the highest monthly base salary which Employee has earned during Employee’s employment with the Bank; (B) an amount equal to Employee’s previous year’s (i) annual discretionary incentive bonus, to the extent paid before the termination; (C) Employee’s monthly premium for continuation coverage under COBRA (as defined in Section 7.07), determined as of the Separation Date, multiplied by twelve (12) months, whether or not such continuation coverage is elected by Employee; and (D) a gross-up payment as defined and set forth herein in Section 7.04.2. In addition, Employee will be entitled to payment of all awards of benefit plans and incentive and retention programs in accordance with the terms of those plans and programs, including applicable vesting and forfeiture provisions. Subject to the provisions of this Section 7.05, Employee shall receive disbursement of payments due Employee under this Section (except for payments or distributions from or pursuant to any nonqualified deferred compensation plan), in one lump sum payment following the Separation Date, subject to Section 10.02 below, less any withholding required by state, federal or local law. Any payment or distribution from or pursuant to any nonqualified deferred compensation plan shall be governed by the terms of such plan. If Employee becomes entitled to payment under this Section 7.05, Employee shall not be entitled to the Severance Package under Sections 7.01 or 7.04, notwithstanding Employee’s subsequent termination of employment pursuant to those Sections.

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2.	Gross-Up Payment: Employee shall be entitled to a “Gross-Up Payment” under the terms and conditions set forth herein, and such payment shall include the Excise Tax reimbursement due pursuant to Section 7.04.2.a and any federal and state tax reimbursements due pursuant to Section 7.04.2.b.

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PART VIII

COVENANTS

Employee Initials ____

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Employee initials _____

Section 8.03 – Definitions:

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“Proprietary and Confidential Information” includes any information, in whatever form or format, including that which has not been memorialized in writing.

Employee Initials ____

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Employee Initials ____

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PART IX

TAXES

Section 9.01 - Withholding: All payments to be made to Employee under this Agreement will be subject to required withholding of federal, state and local income and employment taxes as applicable.

Section 9.02 - Section 409A:

F. The provisions of this Part X are intended to comply with Code Section 409A and shall be interpreted consistent with such section.

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PART X

GENERAL PROVISIONS

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Section 10.11 – Advice of Counsel: Employee warrants that he/she has consulted with legal counsel of his/her choice to advise him/her with respect to the terms and conditions of this Agreement.

FARMERS & MERCHANTS BANK OF CENTRAL CALIFORNIA

By:	/s/ Edward Corum, Jr.	Date: May 3, 2023

	Edward Corum Jr.
	Chairman of the Personnel Committee


EMPLOYEE:	/s/ John W. Weubbe	Date: May 3, 2023

	John W. Weubbe

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May 9, 2023

/s/ Kent A. Steinwert

Kent A. Steinwert
Chairman, President
& Chief Executive Officer

/s/ Bart R. Olson

Bart R. Olson
Executive Vice President & Chief Financial Officer