FARMERS & MERCHANTS BANCORP - Quarter Report: 2023 September (Form 10-Q)

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 September 30, 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 October 31, 2023, the registrant had 751,095 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

	Item 3 - Quantitative and Qualitative Disclosures about Market Risk		50

	Item 4 - Controls and Procedures		52

PART II. - OTHER INFORMATION

	Item 1 – Legal Proceedings		53
	Item 1A – Risk Factors		53
	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		53
	Item 3 – Defaults upon Senior Securities		54
	Item 4 – Mine Safety Disclosures		54
	Item 5 – Other Information		54
	Item 6 – Exhibits		54
	Signatures		55

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)	September 30, 2023			December 31, 2022
ASSETS
Cash and due from banks	$	70,622		$	73,358
Interest bearing deposits with banks		597,739			514,899
Total cash and cash equivalents		668,361			588,257
Securities available-for-sale, amortized cost $135,125 and $183,171 respectively		106,493			152,864
Securities held-to-maturity, fair value $636,623 and $688,393 respectively		826,015			845,346
Allowance for credit losses - securities held-to-maturity		(450	)		(393	)
Total investment securities		932,058			997,817
Non-marketable securities		15,549			15,549
Loans and leases held-for-investment, net of unearned income		3,557,203			3,512,361
Allowance for credit losses - loans and leases		(74,159	)		(66,885	)
Loans held-for-investment, net		3,483,044			3,445,476
Bank-owned life insurance		67,094			73,038
Premises and equipment, net		52,091			49,476
Deferred income tax assets		32,306			31,507
Accrued interest receivable		25,804			21,602
Goodwill		11,183			11,183
Other intangibles		2,380			2,809
Other real estate owned		873			873
Other assets		84,632			89,812
TOTAL ASSETS	$	5,375,375		$	5,327,399

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	1,470,590		$	1,758,793
Interest bearing:
Demand		985,408			1,125,014
Savings and money market		1,670,688			1,544,062
Certificates of deposit		622,081			331,400
Total interest bearing		3,278,177			3,000,476
Total deposits		4,748,767			4,759,269
Subordinated debentures		10,310			10,310
Interest payable and other liabilities		85,675			72,512
TOTAL LIABILITIES		4,844,752			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 752,013 and 768,337 outstanding at September 30, 2023 and December 31, 2022, respectively		7			8
Additional paid-in capital		40,813			57,206
Retained earnings		510,535			449,932
Accumulated other comprehensive (loss), net of taxes		(20,732	)		(21,838	)
TOTAL SHAREHOLDERS’ EQUITY		530,623			485,308
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	5,375,375		$	5,327,399

See accompanying notes to the unaudited consolidated financial statements.

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FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands, except share and per share amounts)	2023			2022			2023			2022
Interest income
Interest and fees on loans and leases	$	52,153		$	41,868		$	149,851		$	117,871
Interest and dividends on investment securities		5,485			5,686			16,593			16,697
Interest on deposits with others		8,075			4,159			19,918			5,934
Total interest income		65,713			51,713			186,362			140,502
Interest expense
Deposits		12,051			1,122			24,156			2,798
Subordinated debentures		221			134			621			319
Total interest expense		12,272			1,256			24,777			3,117
Net interest income		53,441			50,457			161,585			137,385
Provision for credit losses		3,000			1,500			7,057			3,000
Net interest income after provision for credit losses		50,441			48,957			154,528			134,385
Non-interest income
Card processing		1,693			1,791			4,996			5,375
Service charges on deposit accounts		722			638			2,046			2,318
Increase in cash surrender value of BOLI		512			566			1,462			1,668
Gain on BOLI death benefit		-			-			4,346			-
Net loss on sale of securities available-for-sale		-			(2,987	)		(5,686	)		(2,985	)
Net (loss)/gain on deferred compensation benefits		(304	)		352			1,894			(227	)
Other		983			1,199			3,455			3,234
Total non-interest income		3,606			1,559			12,513			9,383
Non-interest expense
Salaries and employee benefits		17,172			15,994			54,693			49,181
Net (loss)/gain on deferred compensation benefits		(304	)		352			1,894			(227	)
Data processing		1,254			1,250			3,821			3,698
Occupancy		1,191			1,196			3,599			3,500
FDIC insurance		582			366			1,785			1,076
Marketing		440			303			1,335			959
Legal		256			49			780			733
Other		3,877			4,865			11,566			12,274
Total non-interest expense		24,468			24,375			79,473			71,194
INCOME BEFORE INCOME TAXES		29,579			26,141			87,568			72,574
Income tax expense		7,545			6,605			20,679			17,537
NET INCOME	$	22,034		$	19,536		$	66,889		$	55,037

Earnings per common share:
Basic	$	29.23		$	25.20		$	88.06		$	70.47
Diluted	$	29.23		$	25.20		$	88.06		$	70.47

Weighted average number of common shares
Basic		753,780			775,109			759,600			780,988
Diluted		753,780			775,109			759,600			780,988

See accompanying notes to the unaudited consolidated financial statements.

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FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2023			2022			2023			2022
Net income	$	22,034		$	19,536		$	66,889		$	55,037
Other comprehensive income
Unrealized (losses) on available-for-sale securities		(5,181	)		(12,378	)		(4,010	)		(39,677	)
Reclassification adjustment for losses on available-for-sale securities		-			2,987			5,685			2,985
Amortization of unrealized loss on securities transferred to held-to-maturity		(28	)		(52	)		(105	)		(193	)
Net unrealized (losses)/gains on available-for-sale securities		(5,209	)		(9,443	)		1,570			(36,885	)
Income tax benefit/(expense)		1,540			2,792			(464	)		10,905
Other comprehensive (loss)/income, net of tax		(3,669	)		(6,651	)		1,106			(25,980	)
Total comprehensive income	$	18,365		$	12,885		$	67,995		$	29,057

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 and nine months ended September 30, 2023 and 2022
(Dollars in thousands, except share amounts)	Common Shares			Amount			Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive (Loss)/Income			Total
Balance as of June 30, 2023		754,523		$	8		$	43,263		$	488,501	$	(17,063	)	$	514,709
Net income		-			-			-			22,034		-			22,034
Other comprehensive loss, net of tax		-			-			-			-		(3,669	)		(3,669	)
Repurchase of common stock		(2,510	)		(1	)		(2,450	)		-		-			(2,451	)
Balance as of September 30, 2023		752,013		$	7		$	40,813		$	510,535	$	(20,732	)	$	530,623

Balance as of June 30, 2022		777,190		$	8		$	65,671		$	416,722	$	(21,048	)	$	461,353
Net income		-			-			-			19,536		-			19,536
Other comprehensive loss, net of tax		-			-			-			-		(6,651	)		(6,651	)
Repurchase of common stock		(6,368	)		-			(6,060	)		-		-			(6,060	)
Balance as of September 30, 2022		770,822		$	8		$	59,611		$	436,258	$	(27,699	)	$	468,178

(Dollars in thousands, except share amounts)	Common Shares			Amount			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive (Loss)/Income			Total
Balance as of December 31, 2022		768,337		$	8		$	57,206		$	449,932		$	(21,838	)	$	485,308
Net income		-			-			-			66,889			-			66,889
Other comprehensive gain, net of tax		-			-			-			-			1,106			1,106
Cash dividends declared ($8.30 per share)		-			-			-			(6,286	)		-			(6,286	)
Repurchase of common stock		(16,324	)		(1	)		(16,393	)		-			-			(16,394	)
Balance as of September 30, 2023		752,013		$	7		$	40,813		$	510,535		$	(20,732	)	$	530,623

Balance as of December 31, 2021		789,646		$	8		$	77,516		$	387,331		$	(1,719	)	$	463,136
Net income		-			-			-			55,037			-			55,037
Other comprehensive loss, net of tax		-			-			-			-			(25,980	)		(25,980	)
Cash dividends declared ($7.85 per share)		-			-			-			(6,110	)		-			(6,110	)
Repurchase of common stock		(18,824	)		-			(17,905	)		-			-			(17,905	)
Balance as of September 30, 2022		770,822		$	8		$	59,611		$	436,258		$	(27,699	)	$	468,178

See accompanying notes to the unaudited consolidated financial statements.

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FARMERS & MERCHANTS BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended September 30,
(Dollars in thousands)	2023			2022
Cash flows from operating activities:
Net income	$	66,889		$	55,037
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		7,057			3,000
Depreciation and amortization		1,833			1,849
Net amortization of securities premiums and discounts		11			341
Increase in cash surrender value of BOLI		(1,462	)		(1,668	)
Gain on BOLI death benefit		(4,346	)		-
(Increase)/decrease in deferred income taxes, net		(1,994	)		2,356
Loss on sale of securities available-for-sale		5,686			2,985
Net changes in:
Other assets		2,368			(2,362	)
Other liabilities		18,297			18,134
Net cash provided by operating activities		94,339			79,672
Cash flows from investing activities:
Net change in loans and leases held-for-investment		(59,022	)		(86,401	)
Purchase of available-for-sale securities		(4,515	)		(10,135	)
Purchase of held-to-maturity securities		(3,814	)		(168,634	)
Proceeds from sales, maturities, calls and pay downs of available-for-sale securities		46,751			62,979
Proceeds from maturities, calls and pay downs of held-to-maturity securities		37,524			52,884
Purchase of premises and equipment		(4,493	)		(3,318	)
Purchase of other investments		(5,263	)		(5,300	)
Proceeds from bank-owned life insurance		11,752			513
Proceeds from sale of assets		27			73
Net cash provided by (used in) investing activities		18,947			(157,339	)
Cash flows from financing activities:
Net (decrease) increase in deposits		(10,502	)		269,105
Cash dividends paid		(6,286	)		(6,110	)
Net cash used in share repurchase of common stock		(16,394	)		(17,905	)
Net cash (used in) provided by financing activities		(33,182	)		245,090
Net change in cash and cash equivalents		80,104			167,423
Cash and cash equivalents, beginning of period		588,257			715,460
Cash and cash equivalents, end of period	$	668,361		$	882,883

Supplemental disclosures of cash flow information:
Cash paid for interest	$	18,664		$	3,832
Income taxes paid	$	16		$	11,451

Supplemental disclosures of non-cash transactions:
Net change in unrealized gain/(losses) on securities available-for-sale	$	1,676		$	(36,692	)

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

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

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

Accounting Standards Adopted in 2023

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

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

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

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

Accounting Standards Pending Adoption

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

In June 2022, the Financial Accounting Standards Board (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 adoption of this ASU is not expected to have material impact on the Company’s Consolidated Financial Statements.

In July 2023, the FASB issued ASU 2023-03, Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718). This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.

In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Updated and Simplification Initiative. ASU 2023-06 amends the disclosure or presentation requirements related to various subtopics in the FASB Accounting Standards Codification (the “Codification”). The ASU was issued in response to the SEC’s August 2018 final rule that updated and simplified disclosure requirements that the SEC believed were “redundant, duplicative, overlapping, outdated, or superseded.” The new guidance is intended to align U.S. GAAP requirements with those of the SEC and to facilitate the application of U.S. GAAP for all entities. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company is evaluating the impacts of this ASU and has not yet determined whether this ASU will have a material impact on its consolidated financial statements.

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

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 September 30, 2023
U.S. Government-sponsored securities	$	3,614	$	15	$	20	$	3,609
Mortgage-backed securities⁽¹⁾		120,588		7		28,477		92,118
Collateralized mortgage obligations⁽¹⁾		579		-		16		563
Corporate securities		10,034		-		141		9,893
Other		310		-		-		310
Total available-for-sale securities	$	135,125	$	22	$	28,654	$	106,493

⁽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.

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

Held-to-Maturity Securities			Gross Unrealized
(Dollars in thousands)	Amortized Cost		Gains		Losses		Fair Value		Allowance for Credit Losses
As of September 30, 2023
Mortgage-backed securities⁽¹⁾	$	673,924	$	-	$	170,743	$	503,181	$	-
Collateralized mortgage obligations⁽¹⁾		75,507		-		17,676		57,831		-
Municipal securities		76,584		1		974		75,611		450
Total held-to-maturity securities	$	826,015	$	1	$	189,393	$	636,623	$	450

⁽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

Held-to-Maturity Securities			Gross Unrealized
(Dollars in thousands)	Amortized Cost		Gains		Losses		Fair Value		Allowance for Credit Losses
As of December 31, 2022
Mortgage-backed securities⁽¹⁾	$	702,858	$	29	$	141,121	$	561,766	$	-
Collateralized mortgage obligations⁽¹⁾		80,186		-		15,701		64,485		-
Municipal securities		62,302		49		209		62,142		393
Total held-to-maturity securities	$	845,346	$	78	$	157,031	$	688,393	$	393

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

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

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

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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:

	September 30, 2023
	Less Than 12 Months				12 Months or More				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available-for-Sale Securities
U.S. Government-sponsored securities	$	223	$	1	$	1,121	$	19	$	1,344	$	20
Mortgage-backed securities⁽¹⁾		4,930		231		86,461		28,246		91,391		28,477
Collateralized mortgage obligations⁽¹⁾		-		-		563		16		563		16
Corporate securities		-		-		9,893		141		9,893		141
Total available-for-sale securities	$	5,153	$	232	$	98,038	$	28,422	$	103,191	$	28,654

⁽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

					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
Available-for-Sale Securities
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 September 30, 2023, the Company held 179 available-for-sale securities of which 13 were in an unrealized loss position for less than twelve months and 143 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 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:

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

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

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 2—Investment Securities—Continued

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

	Available-for-Sale				Held-to-Maturity
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities maturing in:
One year or less	$	387	$	386	$	450	$	450
After one year through five years		17,771		17,321		16,910		16,335
After five years through ten years		6,561		6,121		24,031		21,844
After ten years		110,406		82,665		784,624		597,994
Total	$	135,125	$	106,493	$	826,015	$	636,623

The Company monitors the credit quality of those held-to-maturity 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 securities by credit rating at September 30, 2023:

	Held-to-Maturity
	Amortized Cost
(Dollars in thousands)	AAA/AA/A		BBB/BB/B		Not Rated		Total
September 30, 2023
Municipal securities	$	19,381	$	393	$	56,810	$	76,584
Total	$	19,381	$	393	$	56,810	$	76,584

As of September 30, 2023, there were no past due principal or interest payments associated with held-to-maturity municipal securities.

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

(Dollars in thousands)	Gross Proceeds		Gross Gains		Gross Losses
Nine months ended September 30, 2023	$	30,482	$	-	$	5,686
Nine months ended September 30, 2022	$	31,394	$	2	$	2,987

Pledged Securities

As of September 30, 2023, investment securities carried at $757.2 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) borrowings, and other government agency deposits as required by law. This amount was $478.7 million at December 31, 2022.

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 3—Loans and Leases

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

(Dollars in thousands)	September 30, 2023			December 31, 2022
Loans and leases held-for-investment, net
Real estate:
Commercial	$	1,297,380		$	1,328,691
Agricultural		753,353			726,938
Residential and home equity		398,990			387,753
Construction		192,745			166,538
Total real estate		2,642,468			2,609,920
Commercial & industrial		489,772			478,758
Agricultural		301,951			314,525
Commercial leases		128,063			112,629
Consumer and other		5,553			5,886
Total gross loans and leases		3,567,807			3,521,718
Unearned income		(10,604	)		(9,357	)
Total net loans and leases		3,557,203			3,512,361
Allowance for credit losses		(74,159	)		(66,885	)
Total loans and leases held-for-investment, net	$	3,483,044		$	3,445,476

At September 30, 2023, the portion of loans that were approved for pledging as collateral on borrowing lines with the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“FRB”) were $1.3 billion and $1.5 billion, respectively. The borrowing capacity on these loans was $794.9 million from FHLB and $1.2 billion 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, net of unearned income, by the time past due for the periods indicated:

	September 30, 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	$	1,287,872	$	954	$	-	$	363	$	1,317	$	1,289,189
Agricultural		749,259		-		-		4,094		4,094		753,353
Residential and home equity		398,769		221		-		-		221		398,990
Construction		192,745		-		-		-		-		192,745
Total real estate		2,628,645		1,175		-		4,457		5,632		2,634,277
Commercial & industrial		489,653		80		-		39		119		489,772
Agricultural		301,951		-		-		-		-		301,951
Commercial leases		124,508		1,142		-		-		1,142		125,650
Consumer and other		5,541		12		-		-		12		5,553
Total loans and leases, net	$	3,550,298	$	2,409	$	-	$	4,496	$	6,905	$	3,557,203

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

Non-accrual loans are summarized as follows:

(Dollars in thousands)	September 30, 2023		December 31, 2022
Non-accrual loans and leases:
Real estate:
Commercial	$	363	$	403
Agricultural		4,094		-
Residential and home equity		-		-
Construction		-		168
Total real estate		4,457		571
Commercial & industrial		39		-
Agricultural		-		-
Commercial leases		-		-
Consumer and other		-		-
Total non-accrual loans and leases	$	4,496	$	571

Table of contents

FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 3—Loans and Leases—Continued

During the nine months ended September 30, 2023, we had one residential real estate loan modified in the amount of $127,000. The contractual interest rate of the modified loan decreased from 3.18% to 2.18% and the contractual term was extended from 15 years to 25 years. There were no loans modified on or after January 1, 2023, when the Company adopted ASU 2022-02, through September 30, 2023 that subsequently defaulted during the period presented.

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

	September 30, 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	$	1,271,547	$	17,279	$	363	$	-	$	1,289,189	$	26,724
Agricultural		736,338		6,793		10,222		-		753,353		7,241
Residential and home equity		398,216		-		774		-		398,990		7,458
Construction		192,745		-		-		-		192,745		3,612
Total real estate		2,598,846		24,072		11,359		-		2,634,277		45,035
Commercial & industrial		477,474		11,710		588		-		489,772		17,903
Agricultural		297,946		3,998		7		-		301,951		9,082
Commercial leases		125,625		25		-		-		125,650		1,967
Consumer and other		5,337		-		216		-		5,553		172
Total loans and leases, net	$	3,505,228	$	39,805	$	12,170	$	-	$	3,557,203	$	74,159

	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

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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 September 30, 2023:

	September 30, 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	$	94,553	$	171,741	$	209,733	$	144,704	$	68,258	$	270,620	$	311,938	$	1,271,547
Special mention		-		-		14,527		-		-		1,797		955		17,279
Substandard		-		-		-		-		-		363		-		363
Doubtful		-		-		-		-		-		-		-		-
Total Commercial	$	94,553	$	171,741	$	224,260	$	144,704	$	68,258	$	272,780	$	312,893	$	1,289,189
Commercial
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Agricultural
Pass	$	40,919	$	74,346	$	41,434	$	50,996	$	12,164	$	168,019	$	348,460	$	736,338
Special mention		-		-		-		594		2,020		4,179		-		6,793
Substandard		-		-		-		-		-		6,128		4,094		10,222
Doubtful		-		-		-		-		-		-		-		-
Total Agricultural	$	40,919	$	74,346	$	41,434	$	51,590	$	14,184	$	178,326	$	352,554	$	753,353
Agricultural
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Residential and home equity
Pass	$	33,656	$	63,154	$	90,089	$	80,757	$	13,514	$	72,734	$	44,312	$	398,216
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		774		-		774
Doubtful		-		-		-		-		-		-		-		-
Total Residential and home equity	$	33,656	$	63,154	$	90,089	$	80,757	$	13,514	$	73,508	$	44,312	$	398,990
Residential and home equity
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	14	$	-	$	14

Construction
Pass	$	-	$	3,000	$	-	$	-	$	1,575	$	-	$	188,170	$	192,745
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Total construction	$	-	$	3,000	$	-	$	-	$	1,575	$	-	$	188,170	$	192,745
Construction
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Total Real estate	$	169,128	$	312,241	$	355,783	$	277,051	$	97,531	$	524,614	$	897,929	$	2,634,277

Commercial & industrial
Pass	$	47,471	$	27,835	$	23,821	$	8,612	$	5,357	$	7,741	$	356,637	$	477,474
Special mention		-		-		4,878		-		-		-		6,832		11,710
Substandard		-		-		-		-		-		499		89		588
Doubtful		-		-		-		-		-		-		-		-
Total Commercial & industrial	$	47,471	$	27,835	$	28,699	$	8,612	$	5,357	$	8,240	$	363,558	$	489,772
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

	September 30, 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	$	3,311	$	4,770	$	2,279	$	709	$	1,100	$	2,158	$	283,619	$	297,946
Special mention		-		-		75		-		-		-		3,923		3,998
Substandard		-		-		-		-		7		-		-		7
Doubtful		-		-		-		-		-		-		-		-
Total Agricultural	$	3,311	$	4,770	$	2,354	$	709	$	1,107	$	2,158	$	287,542	$	301,951
Agricultural
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Commercial leases
Pass	$	35,681	$	33,040	$	11,381	$	9,943	$	4,994	$	30,586	$	-	$	125,625
Special mention		-		-		-		-		25		-		-		25
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Total Commercial leases	$	35,681	$	33,040	$	11,381	$	9,943	$	5,019	$	30,586	$	-	$	125,650
Commercial leases
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Consumer and other
Pass	$	1,470	$	1,078	$	466	$	105	$	67	$	1,552	$	599	$	5,337
Special mention		-		-		-		-		-		-		-		-
Substandard		191		-		-		-		-		25		-		216
Doubtful		-		-		-		-		-		-		-		-
Total Consumer and other	$	1,661	$	1,078	$	466	$	105	$	67	$	1,577	$	599	$	5,553
Consumer and other
Current-period gross charge-offs	$	30	$	3	$	-	$	-	$	-	$	-	$	-	$	33
Total net loans and leases
Pass	$	257,061	$	378,964	$	379,203	$	295,826	$	107,029	$	553,410	$	1,533,735	$	3,505,228
Special mention		-		-		19,480		594		2,045		5,976		11,710		39,805
Substandard		191		-		-		-		7		7,789		4,183		12,170
Doubtful		-		-		-		-		-		-		-		-
Total net loans and leases	$	257,252	$	378,964	$	398,683	$	296,420	$	109,081	$	567,175	$	1,549,628	$	3,557,203
Total current-period gross charge-offs	$	30	$	3	$	-	$	-	$	-	$	14	$	-	$	47

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 nine months ended September 30, 2023 and year ended December 31, 2022. Such loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with borrowers not related to the Company. These loans did not involve more than the normal risk of collection or have other unfavorable features. A summary of the changes in those loans is as follows:

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

Balance at beginning of the period	$	17,521		$	18,128
New loans or advances during year		1,706			523
Repayments		(1,655	)		(1,130	)
Balance at end of period	$	17,572		$	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 nine months ended September 30, 2023, there were no significant changes to the collateral that secures the collateral dependent loans, whether due to general deterioration or with credit quality indicators like appraisal value. The following tables present the amortized cost basis for collateral dependent loans and leases by type as of September 30, 2023 and December 31, 2022, respectively:

	September 30, 2023
(Dollars in thousands)	Real Estate		Vehicles and Equipment		Total
Collateral dependent loans and leases
Real estate:
Commercial	$	1,450	$	-	$	1,450
Agricultural		10,222		-		10,222
Residential and home equity		1,630		-		1,630
Construction		-		-		-
Total real estate		13,302		-		13,302
Commercial & industrial		89		495		584
Agricultural		-		7		7
Commercial leases		-		-		-
Consumer and other		-		171		171
Total collateral dependent, gross loans and leases	$	13,391	$	673	$	14,064

	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 collateral dependent, gross loans and leases	$	14,302	$	171	$	14,473

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 3—Loans and Leases—Continued

Changes in the allowance for credit losses are as follows:

	For the Three Months Ended September 30, 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	$	34,695		$	3,195	$	7,179	$	24,194	$	1,657	$	192		$	71,112
Provision / (recapture) for credit losses		(730	)		417		268		2,748		310		(13	)		3,000
Charge-offs		-			-		-		-		-		(15	)		(15	)
Recoveries		-			-		11		43		-		8			62
Net (charge-offs) / recoveries		-			-		11		43		-		(7	)		47
Balance at end of period	$	33,965		$	3,612	$	7,458	$	26,985	$	1,967	$	172		$	74,159

	For the Three Months Ended September 30, 2022
(Dollars in thousands)	Commercial & Agricultural R/E			Construction		Residential & Home Equity			Commercial & Agricultural			Commercial Leases			Consumer & Other			Total
Allowance for credit losses:
Balance at beginning	$	34,716		$	2,876	$	6,874		$	15,808		$	1,645		$	161		$	62,080
Provision / (recapture) for credit losses		(1,616	)		119		(15	)		3,063			(57	)		5			1,499
Charge-offs		-			-		-			(48	)		-			(20	)		(68	)
Recoveries		-			-		6			92			-			8			106
Net (charge-offs) / recoveries		-			-		6			44			-			(12	)		38
Balance at end of period	$	33,100		$	2,995	$	6,865		$	18,915		$	1,588		$	154		$	63,617

	For the Nine Months Ended September 30, 2023
(Dollars in thousands)	Commercial & Agricultural R/E		Construction		Residential & Home Equity			Commercial & Agricultural		Commercial Leases		Consumer & Other			Total
Allowance for credit losses:
Balance at beginning of period	$	32,551	$	3,026	$	7,508		$	21,705	$	1,924	$	171		$	66,885
Provision / (recapture) for credit losses		1,244		586		(78	)		5,196		43		9			7,000
Charge-offs		-		-		(14	)		-		-		(33	)		(47	)
Recoveries		170		-		42			84		-		25			321
Net (charge-offs) / recoveries		170		-		28			84		-		(8	)		274
Balance at end of period	$	33,965	$	3,612	$	7,458		$	26,985	$	1,967	$	172		$	74,159

	For the Nine Months Ended September 30, 2022
(Dollars in thousands)	Commercial & Agricultural R/E			Construction		Residential & Home Equity		Commercial & Agricultural			Commercial Leases		Consumer & Other			Total
Allowance for credit losses:
Balance at beginning of period	$	38,149		$	1,456	$	2,847	$	16,954		$	938	$	663		$	61,007
Impact of Adopting ASC 326		-			-		-		-			-		-			-
Provision / (recapture) for credit losses		(5,049	)		1,539		3,893		2,058			650		(485	)		2,606
Charge-offs		-			-		-		(324	)		-		(38	)		(362	)
Recoveries		-			-		125		227			-		14			366
Net (charge-offs) / recoveries		-			-		125		(97	)		-		(24	)		4
Balance at end of period	$	33,100		$	2,995	$	6,865	$	18,915		$	1,588	$	154		$	63,617

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 4—Deposits

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

(Dollars in thousands)	September 30, 2023		December 31, 2022
Certificates of deposit:
Certificates of deposit less than or equal to $250,000	$	308,171	$	202,554
Certificates of deposit greater than $250,000		313,910		128,846
Total certificates of deposit	$	622,081	$	331,400

Scheduled maturities for certificates of deposit are as follows:

(Dollars in thousands)	Amount
2023	$	131,282
2024		461,680
2025		23,267
2026		4,494
2027 and beyond		1,358
Total certificates of deposit	$	622,081

Note 5—Short-term borrowings

As of September 30, 2023 and December 31, 2022, committed lines of credit arrangements totaling $2.2 billion and $1.5 billion were available to the Company from unaffiliated banks, respectively. The average Federal Funds interest rate as of September 30, 2023 was 5.25%.

The Company is a member of the FHLB of San Francisco and has a committed credit line of $796.7 million, which is secured by $1.3 billion in various real estate loans and investment securities pledged as collateral. Borrowings generally provide for interest at the then current published rate, which was 5.70% as of September 30, 2023.

The Company has $1.5 billion in pledged loans and $147.7 million in pledged securities at par value with the Federal Reserve Bank (the “Fed”). As of September 30, 2023, the Company’s overnight borrowing capacity using the primary credit facilities from the Fed account was $1.3 billion. The borrowing rate was 5.50% as of September 30, 2023.

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

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 6—Employee Benefit Plans

Executive Retirement Plan

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

The Company expensed $6.8 million to the ERP during the nine months ended September 30, 2023 and $5.2 million during the nine months ended September 30, 2022. The Company’s carrying value of the liability under the ERP was $57.0 million as of September 30, 2023 and $57.0 million as of December 31, 2022. The Company’s shares of common stock held as investments in the Rabbi Trust of the ERP as of September 30, 2023 and December 31, 2022 totaled 49,121 and 50,196 with an historical cost basis of $31.6 million and $31.4 million, respectively. All amounts have been fully funded into the Rabbi Trust as of September 30, 2023 and December 31, 2022. The consolidated investments held in the Rabbi Trust are recorded at fair value with changes in unrealized gains or losses recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income.

Net gains on ERP plan investments were $1.6 million compared to net loss of $0.5 million at September 30, 2023 and 2022, respectively. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices.

Senior Management Retention Plan

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

The Company expensed $3.1 million to the SMRP during the nine months ended September 30, 2023 and $2.2 million for nine months ended September 30, 2022. The Company’s carrying value of the liability under the SMRP was $17.1 million as of September 30, 2023 and $13.6 million as of December 31, 2022. The Company’s shares of stock held as investments in the Rabbi Trust of the SMRP as of September 30, 2023 and December 31, 2022 totaled 18,161 and 15,998 shares with an historical cost basis of $13.0 million and $10.8 million, respectively. All amounts have been fully funded into the Rabbi Trust as of September 30, 2023 and December 31, 2022. The consolidated investments held in the Rabbi Trust are recorded at fair value with changes in unrealized gains or losses recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income.

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

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 7—Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain financial and non-financial assets and liabilities and to determine fair value disclosures. Various financial instruments such as available-for-sale securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets and liabilities on a non-recurring basis, such as collateral dependent loans and other real estate owned. These non-recurring fair value adjustments typically involve lower of cost or fair value accounting or write-down of individual assets.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. For accounting disclosure purposes, a three-level valuation hierarchy of fair value measurements has been established. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

•

Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

•

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs that are observable for the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds).

•

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

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

The valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis are described in the Fair Value note in the Company’s 2022 Annual Report on Form 10-K. There have been no significant changes in these methodologies since then.

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 7—Fair Value Measurements—Continued

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.

September 30, 2023			Fair Value Measurements
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Financial Assets:
Cash and cash equivalents	$	668,361	$	668,361	$	-	$	-	$	668,361
Held-to-maturity securities		825,565		-		579,814		56,809		636,623
Non-marketable securities		15,549		-		-		15,549		15,549
Loans and leases, net		3,483,044		-		-		3,263,858		3,263,858
Bank-owned life insurance		67,094		67,094		-		-		67,094

Financial Liabilities:
Total deposits	$	4,748,767	$	-	$	4,126,686	$	614,257	$	4,740,943
Subordinated debentures		10,310		-		12,206		-		12,206

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

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FARMERS & MERCHANTS BANCORP

NOTES TO UNAUDITED CONSOLIDATED STATEMENTS (Continued)

Note 7—Fair Value Measurements—Continued

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

September 30, 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	$	3,609	$	-	$	3,609	$	-	$	3,609
Mortgage-backed securities		92,118		-		92,118		-		92,118
Collateralized mortgage obligations		563		-		563		-		563
Corporate securities		9,893		-		9,893		-		9,893
Other		310		-		310		-		310

Fair valued on a non-recurring basis:
Collateral Dependent loans	$	13,480	$	-	$	-	$	13,480	$	13,480
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 8—Commitments and Contingencies

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

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

Commitments to extend credit, including unsecured commitments of $19,816 and $20,401 as of September 30, 2023 and December 31, 2022, respectively	$	1,156,479	$	1,141,036
Stand-by letters of credit, including unsecured commitments of $7,970 and $7,954 as of September 30, 2023 and December 31, 2022, respectively		16,802		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 September 30, 2023 and December 31, 2022.

Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third-party. Outstanding standby letters of credit have maturity dates ranging from 1 to 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 September 30, 2023, the remaining commitments to the LIHTC partnerships and limited liability companies were approximately $17.5 million. At December 31, 2022, the remaining commitments to the LIHTC partnerships and the limited liability companies were $19.7 million.

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

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

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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;

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

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

The Company’s outstanding common stock as of September 30, 2023, consisted of 752,013 shares of common stock, $0.01 par value and no shares of preferred stock were issued or outstanding. The common stock of the Company is not widely held or listed on any exchange. However, trades are reported on the OTCQX under the symbol “FMCB.”

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

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

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

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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.

Non-GAAP Measurements

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

•

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

Tangible Common Equity Ratio and Tangible Book Value Per Common Share	September 30, 2023			September 30, 2022
(Dollars in thousands, except per share data)
Shareholders’ equity	$	530,623		$	468,178
Less: Intangible assets		13,563			14,140
Tangible common equity	$	517,060		$	454,038

Total Assets	$	5,375,375		$	5,466,781
Less: Intangible assets		13,563			14,140
Tangible assets	$	5,361,812		$	5,452,641

Tangible common equity ratio⁽¹⁾		9.64	%		8.33	%
Book value per common share⁽²⁾	$	705.60		$	607.37
Tangible book value per common share⁽³⁾	$	687.57		$	589.03
Common shares outstanding		752,013			770,822

(1)	Tangible common equity divided by tangible assets

(2)	Total common equity divided by common shares outstanding.

(3)	Tangible common equity divided by common shares outstanding.

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Results of Operations

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

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

Earnings Performance

The following table presents performance metrics for the periods indicated:

	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands, except per share amounts)	2023			2022			2023			2022
Earnings Summary:
Interest income	$	65,713		$	51,713		$	186,362		$	140,502
Interest expense		12,272			1,256			24,777			3,117
Net interest income		53,441			50,457			161,585			137,385
Provision for credit losses		3,000			1,500			7,057			3,000
Non-interest income		3,606			1,559			12,513			9,383
Non-interest expense		24,468			24,375			79,473			71,194
Income before taxes		29,579			26,141			87,568			72,574
Income tax expense		7,545			6,605			20,679			17,537
Net Income	$	22,034		$	19,536		$	66,889		$	55,037

Per Common Share Data:
Diluted earnings per common share	$	29.23		$	25.20		$	88.06		$	70.47
Book value per common share	$	705.60		$	607.37		$	705.60		$	607.37
Tangible book value per common share⁽¹⁾	$	687.57		$	589.03		$	687.57		$	589.03

Performance Ratios:
Return on average assets		1.65	%		1.45	%		1.70	%		1.37	%
Return on average equity		16.80	%		16.64	%		17.43	%		15.75	%
Net interest margin (tax equivalent)		4.17	%		3.91	%		4.33	%		3.62	%
Yield on average loans and leases (tax equivalent)		5.87	%		5.06	%		5.77	%		4.86	%
Cost of average total deposits		1.01	%		0.09	%		0.70	%		0.08	%
Efficiency ratio		42.89	%		46.86	%		45.65	%		48.51	%
Loan-to-deposit ratio		75.13	%		67.71	%		75.13	%		67.71	%
Percentage of checking deposits to total deposits		51.72	%		60.32	%		51.72	%		60.32	%

Capital Ratios Bancorp:
Common equity tier 1 capital to risk-weighted assets		12.48	%		11.82	%		12.48	%		11.82	%
Tier 1 capital to risk-weighted assets		12.72	%		12.06	%		12.72	%		12.06	%
Risk-based capital to risk-weighted assets		13.97	%		13.32	%		13.97	%		13.32	%
Tier 1 leverage capital ratio		10.22	%		9.12	%		10.22	%		9.12	%
Tangible common equity ratio⁽¹⁾		9.64	%		8.33	%		9.64	%		8.33	%

(1)

See “Non-GAAP Measurements”

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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 September 30,
	2023								2022
(Dollars in thousands)	Average Balance			Interest Income / Expense		Average Yield / Rate			Average Balance			Interest Income / Expense		Average Yield / Rate
ASSETS
Interest earnings deposits in other banks and federal funds sold	$	592,012		$	8,075		5.41	%	$	718,794		$	4,159		2.30	%
Investment securities:⁽¹⁾
Taxable securities		908,591			4,588		2.02	%		1,063,166			5,091		1.92	%
Non-taxable securities⁽²⁾		61,580			575		3.73	%		47,005			386		3.28	%
Total investment securities		970,171			5,163		2.13	%		1,110,171			5,477		2.00	%
Loans:⁽³⁾
Real estate:
Commercial		1,290,892			16,990		5.22	%		1,224,689			15,179		4.92	%
Agricultural		749,899			10,497		5.55	%		715,286			9,243		5.13	%
Residential and home equity		394,500			4,527		4.55	%		375,699			3,836		4.05	%
Construction		180,658			3,168		6.96	%		164,664			2,468		5.95	%
Total real estate		2,615,949			35,182		5.34	%		2,480,338			30,726		4.91	%
Commercial & industrial		479,113			8,729		7.23	%		438,761			5,770		5.22	%
Agricultural		296,973			6,138		8.20	%		259,345			3,607		5.52	%
Commercial leases		127,383			2,018		6.29	%		93,051			1,365		5.82	%
Consumer and other		5,432			86		6.28	%		8,929			400		17.77	%
Total loans and leases		3,524,850			52,153		5.87	%		3,280,424			41,868		5.06	%
Non-marketable securities		15,549			322		8.22	%		15,549			209		5.33	%
Total interest earning assets		5,102,582			65,713		5.11	%		5,124,938			51,713		4.00	%
Allowance for credit losses		(72,639	)							(63,107	)
Non-interest earning assets		324,105								318,078
Total average assets	$	5,354,048							$	5,379,909

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing deposits:
Demand	$	973,380			741		0.30	%	$	1,101,830			445		0.16	%
Savings and money market accounts		1,691,933			6,919		1.62	%		1,588,234			476		0.12	%
Certificates of deposit greater than $250,000		285,741			2,495		3.46	%		156,110			96		0.24	%
Certificates of deposit less than $250,000		302,826			1,896		2.48	%		212,036			105		0.20	%
Total interest bearing deposits		3,253,880			12,051		1.47	%		3,058,210			1,122		0.15	%
Short-term borrowings		-			-		0.00	%		-			-		0.00	%
Subordinated debentures		10,310			221		8.50	%		10,310			134		5.16	%
Total interest bearing liabilities		3,264,190			12,272		1.49	%		3,068,520			1,256		0.16	%
Non-interest bearing deposits		1,474,752								1,764,266
Total funding		4,738,942			12,272		1.03	%		4,832,786			1,256		0.10	%
Other non-interest bearing liabilities		90,510								77,389
Shareholders’ equity		524,596								469,734
Total average liabilities and shareholders’ equity	$	5,354,048							$	5,379,909

Net interest income				$	53,441							$	50,457
Interest rate spread							3.62	%							3.84	%
Net interest margin⁽⁴⁾							4.16	%							3.91	%

⁽¹⁾Excludes average unrealized losses of ($24.4) million and ($28.5) million for the three months ended September 30, 2023, and 2022, respectively, which are included in non-interest earning assets.

⁽²⁾The average yield does not include the federal tax benefits at an assumed effective yield of 26% related to income earned on tax-exempt municipal securities totaling $152,000 and $102,000 for the three months ended September 30, 2023, and 2022, respectively.

⁽³⁾Loan interest income includes loan fees of $1.3 million and $2.6 million for the three months ended September 30, 2023 and 2022, respectively.

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

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	For the Nine Months Ended September 30,
	2023								2022
(Dollars in thousands)	Average Balance			Interest Income / Expense		Average Yield / Rate			Average Balance			Interest Income / Expense		Average Yield / Rate
ASSETS
Interest earnings deposits in other banks and federal funds sold	$	524,288		$	19,918		5.08	%	$	720,692		$	5,934		1.10	%
Investment securities:⁽¹⁾
Taxable securities		932,901			14,019		2.00	%		1,058,859			14,786		1.86	%
Non-taxable securities⁽²⁾		60,238			1,696		3.75	%		48,436			1,179		3.25	%
Total investment securities		993,139			15,715		2.11	%		1,107,295			15,965		1.92	%
Loans:⁽³⁾
Real estate:
Commercial		1,292,817			50,383		5.21	%		1,178,731			41,986		4.76	%
Agricultural		728,035			29,873		5.49	%		699,205			25,545		4.88	%
Residential and home equity		390,788			12,889		4.41	%		365,062			10,728		3.93	%
Construction		171,223			9,033		7.05	%		187,181			7,075		5.05	%
Total real estate		2,582,863			102,178		5.29	%		2,430,179			85,334		4.69	%
Commercial & industrial		473,346			24,699		6.98	%		434,217			15,460		4.76	%
Agricultural		286,314			16,955		7.92	%		257,555			9,350		4.85	%
Commercial leases		123,534			5,770		6.24	%		92,914			4,158		5.98	%
Consumer and other		5,514			249		6.04	%		27,330			3,569		17.46	%
Total loans and leases		3,471,571			149,851		5.77	%		3,242,195			117,871		4.86	%
Non-marketable securities		15,549			878		7.55	%		15,549			732		6.29	%
Total interest earning assets		5,004,547			186,362		4.98	%		5,085,731			140,502		3.69	%
Allowance for credit losses		(70,062	)							(61,864	)
Non-interest earning assets		314,924								314,520
Total average assets	$	5,249,409							$	5,338,387

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing deposits:
Demand	$	994,113			1,629		0.22	%	$	1,111,513			1,023		0.12	%
Savings and money market accounts		1,626,444			14,575		1.20	%		1,550,334			1,179		0.10	%
Certificates of deposit greater than $250,000		220,973			4,637		2.81	%		163,148			299		0.25	%
Certificates of deposit less than $250,000		257,158			3,315		1.72	%		218,302			297		0.18	%
Total interest bearing deposits		3,098,688			24,156		1.04	%		3,043,297			2,798		0.12	%
Short-term borrowings		1			-		0.00	%		1			-		0.00	%
Subordinated debentures		10,310			621		8.05	%		10,310			319		4.14	%
Total interest bearing liabilities		3,108,999			24,777		1.07	%		3,053,608			3,117		0.14	%
Non-interest bearing deposits		1,547,327								1,740,859
Total funding		4,656,326			24,777		0.71	%		4,794,467			3,117		0.09	%
Other non-interest bearing liabilities		81,348								77,953
Shareholders’ equity		511,735								465,967
Total average liabilities and shareholders’ equity	$	5,249,409							$	5,338,387

Net interest income				$	161,585							$	137,385
Interest rate spread							3.91	%							3.56	%
Net interest margin⁽⁴⁾							4.32	%							3.61	%

⁽¹⁾Excludes average unrealized losses of ($25.0) million and ($20.1) million for the nine months ended September 30, 2023, and 2022, respectively, which are included in non-interest earning assets.

⁽²⁾The average yield does not include the federal tax benefits at an assumed effective yield of 26% related to income earned on tax-exempt municipal securities totaling $448,000 and $312,000 for the nine months ended September 30, 2023, and 2022, respectively.

⁽³⁾Loan interest income includes loan fees of $4.6 million and $9.8 million for the nine months ended September 30, 2023 and 2022, respectively.

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

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Third Quarter 2023 vs. Third Quarter 2022

Interest-bearing deposits with banks and Federal Reserve balances are earning assets available to the Company. Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 5.41% and 2.30% for the third quarter of 2023 and 2022, respectively. The increase was primarily the result of the FRB increasing rates by 225 basis points from the third quarter of 2022 and the first nine months of 2023. Average interest-bearing deposits were $592.0 million and $718.8 million for the quarter ended September 30, 2023 and 2022, respectively. Interest income on interest-bearing deposits with banks was $8.1 million and $4.2 million for the quarter ended September 30, 2023 and 2022, respectively.

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

Average total investment securities were $970.2 million and $1.1 billion for the quarter ended September 30, 2023 and 2022, respectively. The average yield on total investment securities was 2.13% and 2.00% for the quarter ended September 30, 2023 and 2022, respectively.

Average loans and leases held-for-investment were $3.5 billion and $3.3 billion for the quarter ended September 30, 2023 and 2022, respectively. The average yield on the loan and lease portfolio was 5.87% and 5.06% for the quarter ended September 30, 2023 and 2022, respectively. The increase in the loan yield reflects the increase in market interest rates over the last year.

Average interest-bearing deposits were $3.3 billion and $3.1 billion for the quarter ended September 30, 2023 and 2022, respectively. The average rate paid on interest-bearing deposits was 1.47% and 0.15% for the quarter ended September 30, 2023 and 2022, respectively. Total interest expense on interest-bearing deposits was $12.1 million and $1.1 million for the quarter ended September 30, 2023 and 2022, respectively, as a result of increases in short-term market interest rates during 2022 and the first nine months of 2023. The average rate paid on total funding costs was 1.03% and 0.10% for the quarter ended September 30, 2023 and 2022, respectively. Industry competition for deposits continues, which has the potential to increase future deposit costs in order to retain key customers, which could place negative pressure on the net interest margin looking forward.

Nine Months Ended September 30, 2023 vs. Nine Months Ended September 30, 2022

Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 5.08% and 1.10% for the first nine months ended of 2023 and 2022, respectively. The increase was primarily the result of the FRB increasing rates by 525 basis points during 2022 and the first nine months of 2023. Average interest-bearing deposits were $524.3 million and $720.7 million for the nine months ended September 30, 2023 and 2022, respectively. Interest income on interest-bearing deposits with banks was $19.9 million and $5.9 million for the nine months ended September 30, 2023 and 2022, respectively.

Average total investment securities were $1.0 billion and $1.1 billion for the nine months ended September 30, 2023 and 2022, respectively. The average yield on total investment securities was 2.11% and 1.92% for the nine months ended September 30, 2023 and 2022, respectively.

Average loans and leases held-for-investment were $3.5 billion and $3.2 billion for the nine months ended September 30, 2023 and 2022, respectively. The average yield on the loan and lease portfolio was 5.77% and 4.86% for the nine months ended September 30, 2023 and 2022, respectively. The increase in the loan yield reflects the increase in market interest rates over the last year.

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Average interest-bearing deposits were $3.1 billion and $3.0 billion for the nine months ended September 30, 2023 and 2022, respectively. The average rate paid on interest-bearing deposits was 1.04% and 0.12% for the nine months ended September 30, 2023 and 2022, respectively. Total interest expense on interest-bearing deposits was $24.2 million and $2.8 million for the nine months ended September 30, 2023 and 2022, respectively, as a result of increases in short-term market interest rates during 2022 and the first nine months of 2023. The average rate paid on total funding costs was 0.71% and 0.09% for the nine months ended September 30, 2023 and 2022, respectively.

Rate/Volume Analysis

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

	Three Months Ended September 30, 2023 compared with 2022									Nine Months Ended September 30, 2023 compared with 2022
	Increase (Decrease) Due to:									Increase (Decrease) Due to:
(Dollars in thousands)	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Interest earnings deposits in other banks and federal funds sold		(837	)		4,753		$	3,916			(2,035	)		16,019		$	13,984
Investment securities:
Taxable securities		(770	)		267			(503	)		(1,841	)		1,074			(767	)
Non-taxable securities		131			58			189			315			202			517
Total investment securities		(638	)		324			(314	)		(1,526	)		1,276			(250	)
Loans:
Real estate:
Commercial		844			967			1,811			4,258			4,139			8,397
Agricultural		461			793			1,254			1,086			3,242			4,328
Residential and home equity		199			492			691			790			1,371			2,161
Construction		255			445			700			(648	)		2,606			1,958
Total real estate		1,759			2,697			4,456			5,485			11,359			16,844
Commercial & industrial		570			2,389			2,959			1,498			7,741			9,239
Agricultural		582			1,949			2,531			1,143			6,462			7,605
Commercial leases		537			116			653			1,423			189			1,612
Consumer and other⁽¹⁾		(118	)		(196	)		(314	)		(1,825	)		(1,495	)		(3,320	)
Total loans and leases		3,329			6,956			10,285			7,725			24,255			31,980
Non-marketable securities		-			113			113			-			146			146
Total interest income		1,853			12,147			14,000			4,164			41,696			45,860

Interest expense:
Interest bearing deposits:
Demand		(56	)		352			296			(119	)		725			606
Savings and money market accounts		33			6,410			6,443			61			13,335			13,396
Certificates of deposit greater than $250,000		142			2,257			2,399			142			4,196			4,338
Certificates of deposit less than $250,000		64			1,727			1,791			62			2,956			3,018
Total interest bearing deposits		182			10,747			10,929			146			21,212			21,358
Short-term borrowings		-			-			-			-			-			-
Subordinated debentures		-			87			87			-			302			302
Total interest expense		182			10,834			11,016			146			21,514			21,660
Net interest income	$	1,671		$	1,313		$	2,984		$	4,017		$	20,183		$	24,200

⁽¹⁾ Consumer and other - These decreases represent the end of the PPP loans which were $0 and $1.8 million as of September 30, 2023 and 2022 respectively.

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

	Three Months Ended September 30,										Nine Months Ended September 30,
(Dollars in thousands)	2023		2022		$ Better / (Worse)			% Better / (Worse)			2023		2022		$ Better / (Worse)			% Better / (Worse)
Selected Income Statement Information:
Interest income	$	65,713	$	51,713	$	14,000			27.07	%	$	186,362	$	140,502	$	45,860			32.64	%
Interest expense		12,272		1,256		(11,016	)		(877.07	%)		24,777		3,117		(21,660	)		(694.90	%)
Net interest income		53,441		50,457		2,984			5.91	%		161,585		137,385		24,200			17.61	%
Provision for credit losses		3,000		1,500		(1,500	)		(100.00	%)		7,057		3,000		(4,057	)		(135.23	%)
Net interest income after provision for credit losses		50,441		48,957		1,484			3.03	%		154,528		134,385		20,143			14.99	%
Non-interest income		3,606		1,559		2,047			131.30	%		12,513		9,383		3,130			33.36	%
Non-interest expense		24,468		24,375		(93	)		(0.38	%)		79,473		71,194		(8,279	)		(11.63	%)
Income before income tax expense		29,579		26,141		3,438			13.15	%		87,568		72,574		14,994			20.66	%
Income tax expense		7,545		6,605		(940	)		(14.23	%)		20,679		17,537		(3,142	)		(17.92	%)
Net income	$	22,034	$	19,536	$	2,498			12.79	%	$	66,889	$	55,037	$	11,852			21.53	%

For the three and nine months ended September 30, 2023, net income was $22.0 million and $66.9 million, respectively compared to $19.5 million and $55.0 million for the same periods a year ago. For the three months ended September 30, 2023 the increase in net income was primarily the result of higher net interest income of $3.0 million and an increase in non-interest income of $2.0 million. These increases were offset by a higher provision for credit losses of $1.5 million and higher income tax expense of $0.9 million.

For the nine months ended September 30, 2023, the increase in net income was primarily the result of higher net interest income of $24.2 million. The Company also recognized in non-interest income, a $4.3 million death benefit on bank-owned life insurance (“BOLI”) during the nine months ended September 30, 2023 that was not present during the nine months ended September 30, 2022. This increase was offset by an increase in non-interest expense of $8.3 million, higher provision for credit losses of $4.1 million and higher income tax expense of $3.1 million.

Net Interest Income and Net Interest Margin.

For the quarter ended September 30, 2023, net interest income increased $3.0 million, or 5.91%, to $53.4 million compared with $50.5 million for the same period a year earlier. The increase is primarily the result of the net interest margin increasing 25 basis points to 4.16% compared with 3.91% 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 225 basis points from the third quarter of 2022 and the first nine months of 2023. The yield on interest earning assets increased 111 basis points to 5.11% compared to 4.00% for the third quarter of 2022 while the yield on interest bearing liabilities increased 133 basis points to 1.49% compared to 0.16% for the third quarter of 2022.

For the nine months ended September 30, 2023, net interest income increased $24.2 million, or 17.61%, to $161.6 million compared with $137.4 million for the same period a year earlier. The increase is primarily the result of the net interest margin increasing 71 basis points to 4.32% compared with 3.61% 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 225 basis points from the third quarter of 2022 and the first nine months of 2023. The loan yield increased 91 basis points compared to the first nine months of 2022 and the deposit yield increased 93 basis points compared to the same period a year earlier.

Provision for Credit Losses

The Company made a $3.0 million provision for credit losses during the three months ended September 30, 2023 compared to $1.5 million for the same period a year ago. Net recoveries during the three months ended September 30, 2023 were $47,000 compared to net recoveries of $38,000 for the same period a year ago.

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The Company made a $7.1 million provision for credit losses during the first nine months of 2023 compared to $3.0 million during the first nine months of 2022. Net recoveries during the first nine months of 2023 were $274,000 compared to net recoveries of $4,000 in the first nine months of 2022. The increase in ACL during the first nine months of 2023 was primarily related to higher expected probable losses inherent in the loan and lease portfolio that was directly related to quantitative and qualitative factors associated with the current economic environment.

Non-interest Income

Non-interest income increased $2.0 million, or 131.30%, to $3.6 million for the quarter ended September 30, 2023 compared with $1.6 million for the same period a year earlier. The increase in non-interest income was primarily due to a $3.0 million net loss on sales of securities during 2022 and a $0.7 million increase in net losses on deferred compensation plan investments compared to a net gain during the same period in 2022.

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

Non-interest income increased $3.1 million, or 33.36%, to $12.5 million for the nine months ended September 30, 2023 compared with $9.4 million for the same period of 2022. The year-over-year increase in non-interest income was primarily due to a $4.3 million BOLI death benefit gain and a $2.1 million increase in net gains on deferred compensation plan investments. These increases were partially off-set by a $2.7 million increase in net losses on the sale of investment securities in the first quarter of 2023 to reposition the investment portfolio.

The Company recorded net gains on deferred compensation plan investments of $1.9 million for the nine months ended September 30, 2023 compared with net losses of $0.2 million for the same respective period. See Note 11, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2022 Form 10-K filed on March 15, 2023 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these investment gains/losses to be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no net-effect on the Company’s net income.

Non-interest Expense

Non-interest expense increased $0.1 million, or 0.38%, to $24.5 million for the quarter ended September 30, 2023 compared with $24.4 million for the same period a year ago. This increase was primarily comprised of a $1.2 million increase in salaries and employee benefits partially off-set by a $1.0 million decrease in other expenses.

Net losses on deferred compensation plan obligations were $0.3 million for the quarter ended September 30, 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.

Non-interest expense increased $8.3 million, or 11.63%, to $79.5 million for the nine months ended September 30, 2023 compared with $71.2 million for the same period a year ago. This increase was primarily comprised of a $5.5 million increase in salaries and employee benefits, a $2.1 million increase in net gains on deferred compensation plan investments, a $0.7 million increase in FDIC insurance.

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The Company recorded net gains on deferred compensation plan investments of $1.9 million for the nine months ended September 30, 2023 compared with net losses of $0.2 million for the same respective period. See Note 11, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2022 Form 10-K filed on March 15, 2023 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these gains on obligations to be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no net-effect on the Company’s net income.

Income Tax Expense

For the three and nine months ended September 30, 2023, income tax expense was $7.5 million and $20.7 million, respectively compared to $6.6 million and $17.5 million for the same periods a year ago. The Company’s effective tax rate for the three and nine months ended September 30, 2023 was 25.51% and 23.61%, respectively compared to 25.27% and 24.16% for the same period in 2022. The Company’s effective tax rate for the nine months ended September 30, 2023 was lower than its historical effective tax rate primarily due to a non-taxable BOLI death benefit gain of $4.3 million recognized during the nine months ended September 30, 2023. The Company’s effective tax rate can fluctuate from quarter to quarter due primarily to changes in the mix of taxable and tax-exempt earning sources. The effective rates were lower than the combined Federal and State statutory rate of 30% due primarily to BOLI death benefits, the cash surrender value of life insurance, credits associated with low income housing tax credit investments (LIHTC), and tax-exempt interest income on municipal securities and loans.

Balance Sheet Analysis

Total assets grew by $48.0 million, or 0.90%, to $5.4 billion at September 30, 2023 compared with $5.3 billion at December 31, 2022. Loans held-for-investment were $3.6 billion at September 30, 2023, an increase of $44.8 million, or 1.28% compared to December 31, 2022. Total deposits were $4.75 billion at September 30, 2023 compared with $4.76 billion at December 31, 2022, a decrease of $10.5 million or 0.22%.

Cash and Cash Equivalents

The Company’s cash and cash equivalents consists of 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 $597.7 million at September 30, 2023 and $514.9 million at December 31, 2022. The Company’s total cash and cash equivalents as of September 30, 2023 represents 12.4% of the Company’s total assets as compared to 11.0% as of December 31, 2022.

Investment Securities

The Company’s net investment portfolio decreased by $65.8 million or 6.59% to $932.1 million at September 30, 2023 compared to December 31, 2022. During the first quarter of 2023, $36.2 million in available for sale securities were 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 September 30, 2023 represents 17.35% of the Company’s total assets as compared to 18.74% at December 31, 2022.

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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 September 30, 2023, the Company held no investment securities from any issuer (other than the U.S. Treasury or an agency of the U.S. government or a government sponsored entity) that totaled over 10% of our shareholders’ equity.

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

(Dollars in thousands)	September 30, 2023		December 31, 2022
Available-for-Sale Securities
U.S. Treasury notes	$	-	$	4,964
U.S. Government-sponsored securities		3,609		4,427
Mortgage-backed securities⁽¹⁾		92,118		132,528
Collateralized mortgage obligations⁽¹⁾		563		1,054
Corporate securities		9,893		9,581
Other		310		310
Total available-for-sale securities	$	106,493	$	152,864

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

(Dollars in thousands)	September 30, 2023		December 31, 2022
Held-to-Maturity Securities
Mortgage-backed securities⁽¹⁾	$	673,924	$	702,858
Collateralized mortgage obligations⁽¹⁾		75,507		80,186
Municipal securities⁽²⁾		76,134		61,909
Total held-to-maturity securities	$	825,565	$	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 $450 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 September 30, 2023
	Within One Year					After One but Within Five Years					After Five but Within Ten Years					After Ten Years					Total
(Dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities available-for-sale
U.S. Government-sponsored securities	$	-		0.00	%	$	107		6.28	%	$	228		6.55	%	$	3,274		6.17	%	$	3,609		6.19	%
Mortgage-backed securities⁽¹⁾		76		1.85	%		7,321		2.54	%		5,893		3.59	%		78,828		1.98	%		92,118		2.12	%
Collateralized mortgage obligations⁽¹⁾		-		0.00	%		-		0.00	%		-		0.00	%		563		2.28	%		563		2.28	%
Corporate securities		-		0.00	%		9,893		5.74	%		-		0.00	%		-		0.00	%		9,893		5.74	%
Other		310		5.99	%		-		0.00	%		-		0.00	%		-		0.00	%		310		5.99	%
Total securities available-for-sale	$	386		5.18	%	$	17,321		4.39	%	$	6,121		3.70	%	$	82,665		2.14	%	$	106,493		2.61	%

⁽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 September 30, 2023
	Within One Year					After One but Within Five Years					After Five but Within Ten Years					After Ten Years					Total
(Dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities held-to-maturity
Mortgage-backed securities⁽¹⁾	$	-		0.00	%	$	2,260		0.74	%	$	13,107		1.38	%	$	658,557		1.91	%	$	673,924		1.89	%
Collateralized mortgage obligations⁽¹⁾		-		0.00	%		-		0.00	%		-		0.00	%		75,507		1.78	%		75,507		1.78	%
Municipal securities		450		4.01	%		14,650		4.14	%		10,924		3.68	%		50,560		3.86	%		76,584		3.89	%
Total securities held-to-maturity	$	450		4.01	%	$	16,910		3.69	%	$	24,031		2.43	%	$	784,624		2.02	%	$	826,015		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.

	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.

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

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

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 three 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.

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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.

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 September 30, 2023 totaled $3.6 billion, an increase of $44.8 million or 1.28% compared to December 31, 2022.

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

	September 30, 2023					December 31, 2022
(Dollars in thousands)	Dollars		Percent of Total			Dollars		Percent of Total
Gross loans and leases
Real estate:
Commercial	$	1,297,380		36.36	%	$	1,328,691		37.73	%
Agricultural		753,353		21.12	%		726,938		20.64	%
Residential and home equity		398,990		11.18	%		387,753		11.01	%
Construction		192,745		5.40	%		166,538		4.73	%
Total real estate		2,642,468		74.06	%		2,609,920		74.11	%
Commercial & industrial		489,772		13.73	%		478,758		13.59	%
Agricultural		301,951		8.46	%		314,525		8.93	%
Commercial leases		128,063		3.59	%		112,629		3.20	%
Consumer and other		5,553		0.16	%		5,886		0.17	%
Total gross loans and leases	$	3,567,807		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 September 30, 2023.

	Loan Contractual Maturity
(Dollars in thousands)	One Year or Less		After One But Within Five Years		After Five Years But Within Fifteen Years		After Fifteen Years		Total
Gross loan and leases:
Real estate:
Commercial	$	25,332	$	400,168	$	837,301	$	34,579	$	1,297,380
Agricultural		19,394		193,583		465,169		75,207		753,353
Residential and home equity		124		4,316		114,246		280,304		398,990
Construction		114,543		78,202		-		-		192,745
Total real estate		159,393		676,269		1,416,716		390,090		2,642,468
Commercial & industrial		177,231		215,299		91,261		5,981		489,772
Agricultural		154,486		126,216		19,561		1,688		301,951
Commercial leases		2,574		48,447		77,042		-		128,063
Consumer and other		730		3,573		1,250		-		5,553
Total gross loans and leases	$	494,414	$	1,069,804	$	1,605,830	$	397,759	$	3,567,807
Rate structure for loans and leases
Fixed Rate	$	85,475	$	617,148	$	1,152,734	$	228,707	$	2,084,064
Adjustable Rate		408,939		452,656		453,096		169,052		1,483,743
Total gross loans and leases	$	494,414	$	1,069,804	$	1,605,830	$	397,759	$	3,567,807

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)	September 30, 2023			December 31, 2022
Non-performing assets:
Non-accrual loans and leases
Real estate:
Commercial	$	363		$	403
Agricultural		4,094			-
Residential and home equity		-			-
Construction		-			168
Total real estate		4,457			571
Commercial & industrial		39			-
Agricultural		-			-
Commercial leases		-			-
Consumer and other		-			-
Total non-performing loans and leases	$	4,496		$	571
Other real estate owned (“OREO”)	$	873		$	873
Total non-performing assets	$	5,369		$	1,444

Selected ratios:
Non-performing loans to total loans and leases		0.13	%		0.02	%
Non-performing assets to total assets		0.10	%		0.03	%

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 $4.5 million and $571,000 at September 30, 2023 and December 31, 2022, respectively. The increase was primarily due to one borrower.

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

Loan Modifications to Borrowers Experiencing Financial Difficulties – In the normal course of business, the Company may execute loan modifications to borrowers experiencing financial difficulties. Some of these modifications include: term extension, principle forgiveness, rate reduction, other-than-insignificant payment delay, or any combination of those. ASU 2022-02 requires certain disclosure of loans and leases that have been modified within the past 12 months and the effects that those modifications had on the modified loans and leases. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses and because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness that is deemed to be uncollectable; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

The Company modified one residential real estate loan in the amount of $127,000, during the nine months ended September 30, 2023.

Allowance for Credit Losses—Loans and Leases

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

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

	Nine Months Ended September 30,
(Dollars in thousands)	2023			2022
Allowance for credit losses:
Balance at beginning of year	$	66,885		$	61,007
Provision for credit losses		7,000			2,606
Charge-offs:
Real estate:
Commercial		-			-
Agricultural		-			-
Residential and home equity		(14	)		-
Construction		-			-
Total real estate		(14	)		-
Commercial & industrial		-			(324	)
Agricultural		-			-
Commercial leases		-			-
Consumer and other		(33	)		(38	)
Total charge-offs		(47	)		(362	)
Recoveries:
Real estate:
Commercial		170			-
Agricultural		-			-
Residential and home equity		42			125
Construction		-			-
Total real estate		212			125
Commercial & industrial		57			176
Agricultural		27			51
Commercial leases		-			-
Consumer and other		25			14
Total recoveries		321			366
Net recoveries / (charge-offs)		274			4
Balance at end of year	$	74,159		$	63,617

Selected financial information:
Net loans and leases held-for-investment	$	3,557,203		$	3,323,862
Average loans and leases		3,471,571			3,242,195
Non-performing loans and leases		4,496			411
Allowance for credit losses to non-performing loans and leases		1649.44	%		15478.59	%
Net (recoveries)/charge-offs to average loans and leases		(0.01	%)		0.00	%
Provision for credit losses to average loans and leases		0.20	%		0.08	%
Allowance for credit losses to gross loans and leases held-for-investment		2.08	%		1.91	%

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

The allowance for credit losses in total is $76.2 million which includes the allowance for loan and lease losses of $74.1 million and the reserve for unfunded loan commitments of $2.1 million.

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

	September 30, 2023					December 31, 2022
(Dollars in thousands)	Dollars		Percent of Each Loan Type to Total Loans			Dollars		Percent of Each Loan Type to Total Loans
Allowance for credit losses:
Real estate:
Commercial	$	26,724		36.36	%	$	18,055		37.73	%
Agricultural		7,241		21.12	%		14,496		20.64	%
Residential and home equity		7,458		11.18	%		7,508		11.01	%
Construction		3,612		5.40	%		3,026		4.73	%
Total real estate		45,035		74.06	%		43,085		74.11	%
Commercial & industrial		17,903		13.73	%		11,503		13.59	%
Agricultural		9,082		8.46	%		10,202		8.93	%
Commercial leases		1,967		3.59	%		1,924		3.20	%
Consumer and other		172		0.16	%		171		0.17	%
Total allowance for credit losses	$	74,159		100.00	%	$	66,885		100.00	%

Deposits

Total deposits were $4.75 billion and $4.76 billion as of September 30, 2023 and December 31, 2022, respectively a decrease of $10.5 million or 0.22%. The Company experienced a decrease in deposits in the first quarter of 2023 of $220.1 million followed by an increase of $99.1 million and an increase of $110.5 million in the second and third quarters, respectively. The fluctuations during the year were due in part to seasonality within our agriculture client base and customer behavior in a changing interest rate environment. The Company’s continuous focus on business development activities for deposits, contributed to the increases in the second and third quarters of 2023.

Non-interest bearing demand deposits were $1.47 billion as of September 30, 2023 and $1.76 billion at December 31, 2022. Non-interest bearing deposits were 30.97% of total deposits, as of September 30, 2023 and 36.96% as of December 31, 2022. Interest bearing deposits were $3.28 billion as of September 30, 2023 and $3.00 billion as of December 31, 2022. Interest bearing deposits are comprised of interest-bearing transaction accounts, money market accounts, regular savings accounts, and certificates of deposit. The decrease in non-interest bearing deposits and the increase in interest-bearing deposits reflects customer behavior in shifting from non-interest bearing accounts to higher interest earning accounts given the current interest rate environment.

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

	Nine Months Ended September 30,
	2023							2022
(Dollars in thousands)	Average Balance		Interest Expense		Average Rate			Average Balance		Interest Expense		Average Rate
Total deposits:
Interest bearing deposits:
Demand	$	994,113	$	1,629		0.22	%	$	1,111,513	$	1,023		0.12	%
Savings and money market		1,626,444		14,575		1.20	%		1,550,334		1,179		0.10	%
Certificates of deposit greater than $250,000		220,973		4,637		2.81	%		163,148		299		0.25	%
Certificates of deposit less than $250,000		257,158		3,315		1.72	%		218,302		297		0.18	%
Total interest bearing deposits		3,098,688		24,156		1.04	%		3,043,297		2,798		0.12	%
Non-interest bearing deposits		1,547,327							1,740,859
Total deposits	$	4,646,015	$	24,156		0.70	%	$	4,784,156	$	2,798		0.08	%

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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 1.01% for the three months ended September 30, 2023, compared to 0.74% for the three months ended June 30, 2023 and 0.70% for the nine months ended September 30, 2023 compared with 0.08% for the same period a year ago.

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

Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings

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

Long-Term Subordinated Debentures

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

These securities accrue interest at a variable rate based upon 3-month SOFR plus 2.85%. Interest rates reset quarterly (the next reset is December 18, 2023) and the rate was 8.52% as of September 30, 2023 and 7.59% at December 31, 2022. The average rate paid for these securities was 8.05% for the first nine months of 2023 and 4.14% for the first nine 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 $530.6 million at September 30, 2023, and $485.3 million at December 31, 2022.

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.

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

	September 30, 2023
	Actual					Required for Capital Adequacy Purposes					Minimum to be Categorized as “Well Capitalized” Under Prompt Corrective Action Regulation
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Farmers & Merchants Bancorp
CET1 capital to risk-weighted assets	$	537,981		12.48	%	$	193,910		4.50	%		N/A		N/A
Tier 1 capital to risk-weighted assets		547,981		12.72	%		258,546		6.00	%		N/A		N/A
Risk-based capital to risk-weighted assets		602,126		13.97	%		344,728		8.00	%		N/A		N/A
Tier 1 leverage capital ratio		547,981		10.22	%		214,463		4.00	%		N/A		N/A

Farmers & Merchants Bank
CET1 capital to risk-weighted assets	$	548,020		12.72	%	$	193,906		4.50	%	$	280,087		6.50	%
Tier 1 capital to risk-weighted assets		548,020		12.72	%		258,542		6.00	%		344,723		8.00	%
Risk-based capital to risk-weighted assets		602,165		13.97	%		344,723		8.00	%		430,903		10.00	%
Tier 1 leverage capital ratio		548,020		10.22	%		214,390		4.00	%		267,987		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	%

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 represented approximately 4% of outstanding shareholders’ equity at the time of approval. Repurchases by the Company under the Repurchase Plan may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means. The Inflation Reduction Act of 2022 signed into law in August 2022 includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions. The excise tax became effective on January 1, 2023.

During the nine months of 2023 the Company repurchased 16,324 shares under the Repurchase Plan, for a total of $16.4 million. The Company has repurchased a total of 17,126 shares or $17.0 million under the current Repurchase Plan.

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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 September 30, 2023:

			Amount of Commitment Expiration per Period
(Dollars in thousands)	Total Committed Amount		Less than One Year		One to Three Years		Three to Five Years		After Five Years
Off-balance sheet commitments
Commitments to extend credit	$	1,156,479	$	541,321	$	376,208	$	45,504	$	193,446
Standby letters of credit		16,802		13,782		1,950		1,070		-
Total off-balance sheet commitments	$	1,173,281	$	555,103	$	378,158	$	46,574	$	193,446

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 September 30, 2023 and December 31, 2022.

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

Liquidity

The ability to have readily available funds sufficient to repay 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 totaled $668.4 million or 12.4% of total assets as of September 30, 2023. The majority of cash is on deposit with the FRB and amounted to $597.7 million. 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 secured 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.

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We had the following borrowing lines available at September 30, 2023:

	September 30, 2023
(Dollars in thousands)	Total Credit Line Limit		Current Credit Line Available		Outstanding Amount		Remaining Credit Line Available		Value of Collateral Pledged
Additional liquidity sources:
Federal Reserve BIC	$	1,165,853	$	1,165,853	$	-	$	1,165,853	$	1,526,304
Federal Home Loan Bank		796,666		796,666		-		796,666		1,272,566
FRB Bank Term Funding Program		147,655		147,655		-		147,655		147,655
US Bank Fed Funds		50,000		50,000		-		50,000		-
PCBB Fed Funds		50,000		50,000		-		50,000		-
FHLB Fed Funds		18,000		18,000		-		18,000		-
Total additional liquidity sources	$	2,228,174	$	2,228,174	$	-	$	2,228,174	$	2,946,525

We continued our focus on maintaining a strong liquidity position throughout the first nine months of 2023 and we believe our liquid assets and short-term borrowing credit lines are adequate to meet our cash flow needs for loan and lease funding and deposit cash withdrawal for the foreseeable future. As of September 30, 2023, we had internal sources of liquidity comprised of $668.4 million in cash and $256.7 million unencumbered investment securities, which is 17.21% of total assets. We also had $2.23 billion in external sources of liquidity as outlined in the table above bringing our total available liquidity to $3.15 billion. Our pledged collateral on short-term borrowing lines is comprised of $2.8 billion in loans, $148 million in investment securities pledged at par value and $2.0 million in investment securities held at market value. 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 September 30, 2023, we had unfunded loan commitments of $1.2 billion and unfunded letters of credit of $16.8 million. We anticipate that we will have sufficient funds available to meet current loan commitments.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

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

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

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Since our earnings are primarily dependent on our ability to generate net interest income, we focus on actively monitoring and managing the effects of adverse changes in interest rates on our net interest income. Our Asset Liability Management Committee (“ALCO”), which is comprised of members of the Board of Directors and executive officers, manages market risk. ALCO monitors interest rate risk by analyzing the potential impact on net interest income from potential changes in interest rates, and considers the impact of alternative strategies or changes in balance sheet structure. ALCO manages our balance sheet in part to maintain the potential impact of changes in interest rates on net interest income within acceptable ranges despite changes in interest rates.

Our exposure to interest rate risk is reviewed on at least a quarterly basis by ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in net interest income in the event of hypothetical changes in interest rates. If potential changes to net interest income resulting from hypothetical interest rate changes are not within risk tolerances determined by ALCO, and approved by the full Board of Directors, Management may make adjustments to the Company’s asset and liability mix to bring interest rate risk levels within the Board approved limits.

Net Interest Income Simulation. In order to measure interest rate risk, we use a simulation model to project changes in net interest income that result from forecasted changes in interest rates. This analysis calculates the difference between net interest income forecasted using a rising and a falling interest rate scenario and a net interest income forecast using a base market interest rate derived from the current treasury yield curve. The income simulation model includes various assumptions regarding the re-pricing relationships for each of our products. Many of our assets are floating rate loans, which are assumed to re-price immediately, and to the same extent as the change in market rates according to their contracted index.

Some loans and investment vehicles include the opportunity of prepayment (embedded options), and accordingly the simulation model uses national indexes to estimate these prepayments and assumes the reinvestment of the proceeds at current yields. Our non-term deposit products re-price more slowly, usually changing less than the change in market rates and at our discretion.

This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions. It assumes the balance sheet size remains static throughout the simulation horizon by replacing existing cashflows/amortization into similar products at current rates to try and capture the ongoing activity of the balance sheet without forecasting any level of growth. It does not account for all factors that affect this analysis, including changes by management to mitigate the effect of interest rate changes or secondary impacts such as changes to our credit risk profile as interest rates change.

Furthermore, loan prepayment-rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in this analysis. Changes that vary significantly from the assumptions may have significant effects on our net interest income.

For the rising and falling interest rate scenarios, the base market interest rate forecast was increased or decreased, on an instantaneous and sustained basis, by 100, 200 and 300 basis points. We then evaluate the simulation results using two approaches: Net Interest Income at Risk (“NII at Risk”) and Economic Value of Equity (“EVE”). Under NII at Risk, the impact on net interest income from the changes in interest rates on interest-earning assets and interest-bearing liabilities is modeled using various assumptions of assets and liabilities. EVE measures the period end present value of assets minus the present value of liabilities. Management uses this value to measure the changes in the economic value of the Company under various interest rate scenarios. In some ways, the economic value approach provides a broader scope than net income volatility approach since it captures all anticipated cash flows.

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Based on our quarterly simulations, our net interest margin exposure related to these hypothetical changes in market interest rates was within the current guidelines established by us. Our simulation model highlights the fact that our balance sheet is asset sensitive, which means that our net interest income rises in a rising interest rate environment as rates earned on our interest-bearing assets reprice higher at a faster pace than rates paid on our interest-bearing liabilities.

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

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

	Estimated Change in Net Interest Income (NII) (as a % of NII)			Estimated Change in Economic Value of Equity (EVE) (as a % of EVE)
September 30, 2023
+300 bps		3.6	%		(10.7	%)
+200 bps		2.1	%		(7.5	%)
+100 bps		1.2	%		(3.0	%)
0 bps		-			-
-100 bps		(3.1	%)		0.5	%
-200 bps		(6.5	%)		(1.5	%)
-300 bps		(10.1	%)		(5.8	%)

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 nine months ended September 30, 2023, to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

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

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

Item 1A.

Risk Factors

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

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

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

Period	Total number of shares purchased		Average price paid per share⁽²⁾		Total number of shares purchased as part of publicly announced plans or programs		Maximum number (or approximate dollar value) of shares that may yet purchased under the plans or programs (In thousands) ⁽¹⁾
Total 1st Quarter 2023		5,406	$	1,024.02		5,406	$	13,682
Total 2nd Quarter 2023		8,408		983.49		8,408		5,413

July 1, 2023 to July 31, 2023		87	$	975.86		87	$	5,328
August 1, 2023 to August 31, 2023		903		963.94		903		4,457
September 1, 2023 to September 30, 2023		1,520		967.60		1,520		2,987
Total 3rd Quarter 2023		2,510	$	966.57		2,510	$	2,987

Total 2023		16,324	$	994.31		16,324	$	2,987

⁽¹⁾As of November 8, 2022 the Board approved an extension to the repurchase program through December 31, 2024 and for an additional $20 million of the Company’s common stock.

⁽²⁾The aggregate purchase price and weighted average price per share does not include the effect of excise tax expense incurred on net stock repurchases. For the nine months ended September 30, 2023, the excise tax expense accrual totaled $162,000.

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

During the first nine months of 2023 the Company repurchased 16,324 shares under the Repurchase Plan, for a total of $16.4 million. All of these shares were purchased at prices ranging from $949.00 to $1,082.00 per share, based upon the then current price on the OTCQX. The Company has repurchased a total of 17,126 shares or $17.0 million under the current Repurchase Plan.

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Item 3.

Defaults upon Senior Securities

Not Applicable

Item 4.

Mine Safety Disclosures

Not Applicable

Item 5

Other Information

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

Item 6.

Exhibits

List of Financial Statements and Financial Statement Schedules

(a)

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

(1)

Financial Statements and

(2)

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

(3)

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

Exhibit Number	Description

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

*Filed herewith

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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: November 3, 2023	/s/ Kent A. Steinwert
	Kent A. Steinwert
	Director, Chairman, President and Chief Executive Officer
	(Principal Executive Officer)

Date: November 3, 2023	/s/ Bart R. Olson
	Bart R. Olson
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)