What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-16 compared with 2021-03-15 · 857 added, 957 removed, 104 unchanged (95% of the section changed)

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

Although the Company has initiated efforts to expand its geographic footprint into the East Bay area of San Francisco and Napa, California (see “Item 1.

Business – Service Area”), the Company’s primary service area remains the mid Central Valley of California, a region that can be significantly impacted by the seasonal needs of the agricultural industry.

Accordingly, discussion of the Company’s Financial Condition and Results of Operations is influenced by the seasonal banking needs of its agricultural customers (e.g., during the spring and summer customers draw down their deposit balances and increase loan borrowing to fund the purchase of equipment and planting of crops.

Correspondingly, deposit balances are replenished and loans repaid in late fall and winter as crops are harvested and sold).

The Five-Year Period:

2016 through 2020

By early 2020 the Company’s primary service area had significantly recovered from the recession that began in late 2007.

Then, late in the first quarter of 2020 the COVID-19 pandemic began, an event that would impact economies everywhere.

Importantly, agriculture has been designated as an “essential” industry during the pandemic, helping to mitigate economic stress in the Company’s primary service area.

Despite this challenging economic environment, in management’s opinion, the Company’s operating performance over the past five years has been exceptionally strong.

We used certain non-GAAP financial measures to provide supplemental information regarding our performance in 2017.

Income Tax Expense for the year ended 2017 included a one-time, non-cash $6.3 million charge related to the re-measurement of the Company’s Deferred Tax Asset (“DTA”) as a result of the passage of the Tax Cuts and Jobs Act in 2017.

We believed that presenting Adjusted Net Income, excluding the impact of the DTA re-measurement charge, provides additional clarity to the users of financial statements regarding core financial performance and allows for a better year-over-year comparison of trends in core profitability.

(in thousands, except per share data)

Financial Performance Indicator

Pre Tax Income

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

The information contained in this section should be read in conjunction

with the Audited Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.

Information related to the comparison of the results of operations for the years December 31, 2020 to

2019 is found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2020 Annual Report on Form 10-K filed with the SEC on March 15, 2021.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the 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 Annual Report on Form 10-K that could cause our actual results to differ materially from those anticipated in these forward-looking statements.

The following is a non-exclusive

list of factors, that could cause our actual results to differ materially from our forward-looking statements in this Annual Report on Form 10-K:

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

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

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

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

higher defaults in our loan 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;

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 Annual Report on Form 10-K.

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.

Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in Item 1A.

“Risk Factors” in this Annual Report on Form 10-K.

Please take into

account that forward-looking statements speak only as of the date of this Annual Report on Form 10-K (or documents incorporated by reference, if applicable).

The Company does not undertake any obligation to publicly correct or update any forward-looking statement if it later becomes aware that actual results are likely to differ materially from those expressed in such

forward-looking statement, except as required by law.

Farmers & Merchants Bancorp (the “Company”, “FMCB”, or “we”) is the holding company for Farmers & Merchants Bank of Central California (the “Bank” or “FMB).

The Bank is a full-service community bank providing

loans, deposit and cash management services to individuals and businesses.

Our primary clients are small- to medium-sized businesses that require highly personalized commercial banking products and services.

The Bank has 29 branch locations and 3

ATMs that have been serving communities in the mid Central Valley of California for over 100 years.

The primary source of funding for our asset growth has been the generation of core deposits, which we raise through our existing branch locations, newly opened branch locations, or through acquisitions.

loan growth is primarily the result of organic growth generated by our seasoned relationship managers and supporting associates who provide outstanding service and responsiveness to our clients or through acquisitions.

Our results of operations are largely dependent on net interest income.

Net interest income is the difference between interest income we earn on interest earning assets, which are comprised of loans, investment

securities and short-term investments, and the interest we pay on our 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.

We measure our performance by calculating our 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 our 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.

We also measure our performance by our efficiency ratio, which is calculated by dividing non-interest expense by the sum of net interest income and non-interest

Selected Financial Data

The following condensed consolidated statements of financial condition and operations and selected performance ratios as of December 31, 2021, 2020, and 2019 and for the years then ended have been derived from our

audited consolidated financial statements.

The information below is qualified in its entirety by the detailed information included elsewhere herein and should be read along with this “Item 7.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations” and “Item 8, Financial Statement and Supplementary Data”.

Years Ended December 31

(Dollars in thousands, except per share data)

Selected Income Statement Information:

Interest income

Interest expense

Net interest income

Provision for credit losses

Net interest income after provision for credit losses

Non-interest income

Non-interest expense

Income before income tax expense

Income tax expense

Effect of Income Tax Rate Change

DTA Re-measurement

Adjusted Income Tax Expense

Non-GAAP Adjusted Net Income

Effect of Income Tax Rate Change

DTA Re-measurement

Net Income (See Note 1)

Total Loans & Leases

Total Deposits

Total Shareholders’ Equity

Total Risk-Based Capital Ratio

Non-Performing Loans as a % of Total Loans

Substandard Loans as a % of Total Loans

Net Charge-Offs (Recoveries) to Average Loans

Loan Loss Allowance as a % of Total Loans

Selected financial ratios:

Basic and diluted earnings per share

Cash dividends per common share

Dividend ratio

Net interest margin

Non-interest income to average assets

Non-interest expense to average assets

Efficiency ratio

Return on average assets

Adjusted Return on Average Assets

Return on average equity

Adjusted Return on Average Equity

Earnings Per Share

Adjusted Earnings Per Share

Cash Dividends Per Share

Cash Dividends Declared

Note 1 – On December 22, 2017, the Tax Cuts and Jobs Act was signed into law by the President.

Among other things, this legislation reduced the corporate tax rate from 35% to 21% beginning January 1, 2018.

Although the Company believes that this reduction in the corporate tax rate will continue to have a significant positive impact on future financial performance, U.S.

generally accepted accounting principles require that all companies re-measure their DTA’s using the new lower tax rate as of the date of enactment of the legislation.

As a result the Company’s net income for 2017 included a $6.3 million re-measurement reflected as a one-time, non-cash increase to income tax expense in the 4 th quarter.

Our situation is not unique in that the majority of all financial institutions reported significant DTA re-measurements in the 4 th quarter of 2017.

Excluding the impact of the $6.3 million DTA re-measurement, non-GAAP adjusted net income for the year totaled $34.6 million, an increase of $5.0 million or 16.8% over the prior year, which would have resulted in an adjusted return on average assets of 1.15% and adjusted return on average equity of 11.79%.

Management believes that the Company’s performance compared very favorably to its peer banks during the five-year period ended December 31, 2020:

Net income over the five-year period totaled $218 million.

Return on Average Assets averaged 1.31% over the five-year period.

Total assets increased 74% from $2.6 billion at December 31, 2015 to $4.6 billion at December 31, 2020.

Total loans & leases increased 55.3% from $2.0 billion at December 31, 2015 to $3.1 billion at December 31, 2020.

Total deposits increased 78.3% from $2.3 billion at December 31, 2015 to $4.1 billion at December 31, 2020.

More recently:

In 2020, the Company earned $58.7 million for a return on average assets of 1.43%.

In 2020, the Company increased its cash dividend per share by 3.9% over 2019 levels, and our strong financial performance has allowed us to increase dividends every year during this five-year period.

The Company’s total risk based capital ratio was 12.60% at December 31, 2020, and the Bank achieved the highest regulatory classification of “well capitalized” in each of the previous five years.

See “Financial Condition – Capital.”

The Company’s asset quality remains very strong at the present time, when measured by:

(1) net charge-offs at 0.02% of average loans & leases during 2020;

(2) non-accrual loans of $495,000 at December 31, 2020;

and (3) substandard loans & leases totaling 0.60% of total loans & leases at December 31, 2020.

See “Results of Operations – Provision and Allowance for Credit Losses” and “Financial Condition – Classified Loans & Leases and Non-Performing Assets.”

Because of our strong earnings performance, capital position, and asset quality, stockholders have benefited from the fact that cash dividends per share have increased 14.34% since 2015, and totaled $69.50 per share over the five-year period.

The 2020 dividend of $14.75 per share represents a 1.94% yield based upon the December 31, 2020 closing stock price of $760 per share (See “Part II, Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”).

Looking Forward:

2021 and Beyond

In management’s opinion, the following key issues will continue to influence the financial results of the Company in 2021 and future years:

The continuing impact of COVID-19.

The Company’s earnings are heavily dependent on its net interest margin, which is sensitive to such factors as:

(1) market interest rates;

(2) the mix of our earning assets and interest-bearing liabilities;

and (3) competitor pricing strategies.

Since early 2020 market interest rates have declined and remain at very low levels.

This has adversely impacted the Company’s NIM, and will, in all probability, continue to place pressure on NIM in 2021.

The Company’s results are impacted by changes in the credit quality of its borrowers.

Substandard loans & leases totaled $18.6 million or 0.60% of total loans & leases at December 31, 2020 vs.

$16.2 million or 0.61% of total loans & leases at December 31, 2019.

Management believes, based on information currently available, that these levels are adequately covered by the Company’s $58.9 million allowance for credit losses as of December 31, 2020.

See “Results of Operations - Provision and Allowance for Credit Losses” and “Financial Condition – Classified Loans & Leases and Non-Performing Assets.” The Company’s provision for credit losses was $4.5 million in 2020, compared to $200,000 in 2019 and $5.5 million in 2018.

See “Item 1A.

Risk Factors.”

Since the passage of the Dodd-Frank Act in 2010, Congress has implemented broad changes to the regulation of consumer financial products and the financial services industry as a whole.

These changes have, and will continue to have, a significant effect on the Company’s product offerings, pricing and profitability in areas such as debit and credit cards, home mortgages and deposit service charges.

The Company has:

(i) expanded its geographic footprint through de novo branch expansion in Walnut Creek, Napa, Lockeford and Concord, CA and through acquisition in Manteca, Riverbank, Rio Vista, and Walnut Grove, CA;

and (ii) established equipment leasing as a new line of business.

Although Management believes that these initiatives will result in increased asset growth and earnings, along with reduced concentration risks, the start-up costs related to staff and facilities are significant and will take time to recoup.

The Company benefited significantly in 2018 and 2019, and should continue to benefit in future years, from the reduction of the federal corporate tax rate from 35% to 21% pursuant to the recently enacted Tax Cuts and Jobs Act.

However, if the new Biden administration increases federal corporate tax rates it will negatively impact the Company’s future financial results.

Results of Operations

The following discussion and analysis is intended to provide a better understanding of Farmers & Merchants Bancorp and its subsidiaries’ performance during each of the years in the three-year period ended December 31, 2020 and the material changes in financial condition, operating income, and expense of the Company and its subsidiaries as shown in the accompanying consolidated financial statements.

Impact of Bank of Rio Vista Acquisition on Results of Operations

On October 10, 2018, Farmers & Merchants Bancorp completed the acquisition of Bank of Rio Vista.

Since the acquisition took place late in the year, and Bank of Rio Vista had only $217.5 million in assets (less than 6% of Farmers & Merchants Bancorp’s total assets), the impact on the Company’s 2018 Results of Operations was limited with the exception of legal fees, contract termination costs and systems conversion costs that were booked as non-interest expense by the Company in 2018.

The gross amount of such expenses were $2.93 million.

Net Interest Income/Net Interest Margin

The tables on the following pages reflect the Company's average balance sheets and volume and rate analysis for the years ended 2020, 2019 and 2018.

Average balance amounts for assets and liabilities are the computed average of daily balances.

Net interest income is the amount by which the interest and fees on loans & leases and other interest-earning assets exceed the interest paid on interest-bearing sources of funds.

For the purpose of analysis, the interest earned on tax-exempt investments and municipal loans is adjusted to an amount comparable to interest subject to normal income taxes.

This adjustment is referred to as “tax equivalent” adjustment and is noted wherever applicable.

The presentation of net interest income and net interest margin on a tax equivalent basis is a common practice within the banking industry.

The Volume and Rate Analysis of Net Interest Income summarizes the changes in interest income and interest expense based on changes in average asset and liability balances (volume) and changes in average rates (rate).

For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to:

(1) changes in volume (change in volume multiplied by initial rate);

(2) changes in rate (change in rate multiplied by initial volume);

and (3) changes in rate/volume, also called “changes in mix” (allocated in proportion to the respective volume and rate components).

The Company’s earning assets and interest bearing liabilities are subject to repricing at different times, which exposes the Company to income fluctuations when interest rates change.

In order to minimize income fluctuations, the Company attempts to match asset and liability maturities.

However, some maturity mismatch is inherent in the asset and liability mix.

See “Item 7A.

Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk.”

Farmers & Merchants Bancorp

Year-to-Date Average Balances and Interest Rates

(Interest and Rates on a Taxable Equivalent Basis)

(in thousands)

Year Ended December 31, 2020

Interest Bearing Deposits with Banks

Net charge-offs (recoveries) to average loans

As of December 31,

(Dollars in thousands, except per share data)

Selected Balance Sheet Information:

Cash and cash equivalents

Investment securities

Government Agency & Government-Sponsored Entities

Municipals - Taxable

Obligations of States and Political Subdivisions - Non-Taxable (1)

Mortgage Backed Securities

Total Investment Securities

Loans & Leases:

Home Equity Lines and Loans

Total Loans & Leases

Total Earning Assets

Unrealized Gain on Securities Available-for-Sale

Allowance for Credit Losses

Cash and Due From Banks

All Other Assets

Liabilities & Shareholders' Equity

Interest Bearing Deposits:

Interest Bearing DDA

Savings and Money Market

Time Deposits

Total Interest Bearing Deposits

Federal Home Loan Bank Advances

Subordinated Debt

Total Interest Bearing Liabilities

Interest Rate Spread (4)

Demand Deposits (Non-Interest Bearing)

All Other Liabilities

Total Liabilities

Gross loans held for investment

Total deposits

Shareholders’ equity

Total Liabilities & Shareholders' Equity

Impact of Non-Interest Bearing Deposits and Other Liabilities

Net Interest Income and Margin on Total Earning Assets (5)

Tax Equivalent Adjustment

Net Interest Income

(1) Yields and interest income are calculated on an fully taxable equivalent basis using the current statutory federal tax rate.

(2) Average balances on loans & leases outstanding include non-performing loans, if any.

The amortized portion of net loan origination fees is included in interest income on loans & leases, representing an adjustment to the yield.

(3) Includes CARES Act Small Business Administration Paycheck Protection Program loans.

(4) Interest rate spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.

(5) Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets.

Farmers & Merchants Bancorp

Year-to-Date Average Balances and Interest Rates

(Interest and Rates on a Taxable Equivalent Basis)

(in thousands)

Average Balances:

Average earning assets

Average assets

Average shareholders’ equity

Selected financial ratios:

Book value per share

Tangible book value per share

Allowance for credit losses to total loans

Non-performing assets to total assets

Loans held for investment to deposits

Capital ratios:

Tier 1 leverage capital

Total risk-based capital

Average equity to average assets

Tangible common equity to tangible assets

Summary of Critical Accounting Policies and Estimates

In the opinion of management, the accompanying Consolidated Statements of Financial Condition and related Consolidated Statements of Income, Comprehensive Income, Changes in Shareholders’ Equity and Cash Flows.

preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements.

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments.

In particular, management has identified certain

accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our financial statements.

Management believes the judgments, estimates and assumptions used in the preparation

of the financial statements are appropriate based on the factual circumstances at the time.

However, given the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could

result in material differences in our results of operations or financial condition.

Further, subsequent changes in economic or market conditions could have a material impact on these estimates and our financial condition and operating results in

future periods.

For additional information concerning critical accounting policies, see the Selected Notes to the Consolidated Financial Statements and the following:

Use of Estimates — The preparation of our financial statements requires management to make estimates and judgments that affect the reported amount of assets,

liabilities, revenues and expenses.

On an ongoing basis, management evaluates the estimates used.

Estimates are based upon historical experience, current economic conditions and other factors that management considers reasonable under the

circumstances and the actual results may differ from these estimates under different assumptions.

The allowance for credit losses, deferred income taxes, and fair values of financial instruments are estimates, which are particularly subject to

Allowance for Credit Losses — The Company recognizes there is risk of credit losses with financial instruments, to include loans, and unfunded loan

commitments, where the Company advances funds to a counterparty.

The risk of credit losses varies with, among other things, the type of financial instrument, the creditworthiness and cash flows of the counterparty, any guarantees from government

agencies, and the collateral, if any, used to secure the financial instrument.

The Company maintains an allowance for credit losses on loans and unfunded commitments held in accordance with GAAP.

The allowance for credit losses represents our

estimate of probable losses inherent in our existing loan portfolio.

The allowance for credit losses is increased by charging a provision for credit losses against income and reduced by charge-offs, net of recoveries.

We evaluate our allowance for credit losses quarterly based on a number of quantitative and qualitative factors, including levels and trends of past due and non-accrual loans, asset classifications, loan grades and

internal loan reviews, change in volume and mix of loans, collateral value, historical loss experience, size and complexity of individual credits, loan concentrations and economic conditions.

Allowance for credit losses is provided on both a specific

and general basis.

Specific allowances are provided for impaired credits for which the expected/anticipated loss is measurable.

General valuation allowances are based on a portfolio segmentation based on risk grading, with a further evaluation of

various quantitative and qualitative factors.

The Company begins its determination of credit losses by evaluating historical credit loss experience by loan segment.

Historical loss information may be adjusted based on specific risk characteristics by loan

Such risk characteristics may include, but are not necessarily limited to, changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere

in estimating credit losses;

changes in national and local economic conditions and forecasts;

changes in the nature and volume of the loans and in the terms of such instruments;

changes in the experience, ability, and depth of lending management and

other relevant staff;

changes in the volume and severity of past due status, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans;

changes in the quality of the institution’s loan review system;

in the value of underlying collateral for collateral-dependent loans;

the existence and effect of any concentrations of credit, and changes in the level of such concentrations;

and the effect of other external factors such as competition and legal

and regulatory requirements on the level of estimated credit losses.

While the Company utilizes a systematic methodology in determining its allowance, the allowance is based on estimates, and ultimate losses may vary from current estimates.

The estimates are reviewed periodically and,

as adjustments become necessary, are reported in earnings in the periods in which they become known.

For additional information, see Note 5, located in Item 8.

“Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

The allowance for credit losses on unfunded loan commitments is classified in other liabilities on the Consolidated Balance Sheet.

The allowance for credit losses on unfunded loan commitments is increased by charging

a provision for credit losses on unfunded commitments, which was reported in other non-interest expenses for 2021 and prior.

We believe that our allowance for credit losses was adequate to absorb probable losses inherent in the loan portfolio as of December 31, 2021 and 2020.

Investment Securities — GAAP requires that investment securities available for sale be carried at fair value which is based on quoted market prices or if

quoted market prices are not available, fair values are extrapolated from the quoted prices of similar instruments.

Management utilizes the services of a reputable third-party vendor to assist with the determination of estimated fair values.

Unrealized holding gains and losses on securities classified as available for sale are excluded from earnings and are reported net of tax as accumulated other comprehensive income (“AOCI”), a component of shareholders’ equity, until realized.

Investment securities held to maturity are carried at the amortized costs of such securities.

Investment securities are evaluated for impairment on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value is other

than temporary.

Management utilizes criteria such as the magnitude and duration of the decline and our intent and ability to retain our investment in the securities for a period sufficient to allow for an anticipated recovery in fair value, in

addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary.

The term “other than temporary” is not intended to indicate that the decline is permanent but indicates that the prospect for a near-term

recovery of value is not favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.

Once a decline in value is determined to be other-than-temporary and we do not intend

to sell the security or it is more likely than not that we will not be required to sell the security before recovery, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance

recognized as a charge to other comprehensive income.

If management intends to sell the security or it is more likely than not that, we will be required to sell the security before recovering its forecasted cost;

the entire impairment loss is

recognized as a charge to earnings.

At December 31, 2021, we had no investment securities that were other-than-temporarily impaired.

Goodwill — Goodwill represents the excess of the purchase considerations paid over the fair value of the assets acquired, net of the fair values of

liabilities assumed in a business combination it is not amortized but is reviewed annually, or more frequently as current circumstances and conditions warrant, for impairment.

An assessment of qualitative factors is completed to determine if it is

more likely than not that, the fair value of a reporting unit is less than its carrying amount.

If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed.

The quantitative goodwill

impairment compares the reporting unit’s estimated fair values, including goodwill, to its carrying amount.

If the carrying amount exceeds its reporting unit’s fair value, then an impairment loss would be recognized as a charge to earnings, but is

limited by the amount of goodwill allocated to that reporting unit.

Other Intangible Assets — Other intangible assets consists primarily of core deposit intangibles (“CDI”), which are amounts recorded in business combinations

or deposit purchase transactions related to the value of transaction-related deposits and the value of the client relationships associated with the deposits.

Core deposit intangibles are amortized over the estimated useful lives of such deposits.

These assets are reviewed at least annually for events or circumstances that could affect their recoverability.

These events could include loss of the underlying core deposits, increased competition or adverse changes in the economy.

The amortization

of our CDI is recorded in other non-interest expense.

To the extent other identifiable intangible assets are deemed unrecoverable;

impairment losses are recorded in other non-interest expense to reduce the carrying amount of the assets.

Fair Value Measurements – The Company discloses the fair value of financial instruments and the methods and significant assumptions used to estimate those

The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies.

The use of assumptions and various valuation techniques, as well as the absence of secondary

markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions.

In some cases, book value is a reasonable estimate of fair value due to the relatively short period between

origination of the instrument and its expected realization.

For additional information, see Item 7A.

“Quantitative and Qualitative Disclosures about Market Risk” and Note 13 located in Item 8.

“Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

Income Taxes — Income taxes are filed on a consolidated basis with our subsidiaries and allocate income tax expense (benefit) based on each entity’s

proportionate share of the consolidated provision for income taxes.

Deferred income tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their

respective tax bases.

Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The determination of the amount of deferred income tax assets, that are more likely than not to

be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors.

The realization of deferred income tax assets is assessed and a

valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred income tax asset will not be realized.

“More likely than not” is defined as greater than a 50% probability.

All available evidence, both positive

and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed.

Only tax positions that meet the more-likely-than-not recognition threshold are recognized.

The benefit of a tax position is recognized in the financial statements in the period during which, based on all available

evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.

Tax positions taken are not offset or aggregated with other positions.

Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.

The portion of the

benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and

penalties that would be payable to the taxing authorities upon examination.

Interest expense and penalties associated with unrecognized tax benefits are classified as income tax expense in the consolidated statements of income.

Impact of Recently Issued Accounting Standards

See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements in Item 8.

“Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

Results of Operations

31, 2021 and the material changes in financial condition, operating income, and expense of the Company and its subsidiaries as shown in the accompanying consolidated financial statements.

Information related to the comparison of the results of

operations for the years December 31, 2020 and 2019 can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2020 Annual Report on Form 10-K filed with the SEC on March 15, 2021.

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 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.

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.

Year ended December 31,

Interest Bearing Deposits with Banks

Investment Securities:

Government Agency & Government-Sponsored Entities

Municipals - Taxable

Obligations of States and Political Subdivisions - Non-Taxable

Mortgage Backed Securities

Total Investment Securities

Loans & Leases:

Home Equity Lines and Loans

Total Loans & Leases

Total Earning Assets

Unrealized Gain on Securities Available-for-Sale

(Dollars in thousands)

Income / Expense

Interest earnings deposits in other banks

Taxable securities

Non-taxable securities (2)

Total securities

Residential and home equity

Total real estate

Commercial & industrial

Commercial leases

Consumer and other

Total loans and leases

Non-marketable securities

Total interest earning assets

Allowance for credit losses

Cash and Due From Banks

All Other Assets

Liabilities & Shareholders' Equity

Non-interest earning assets

Total average assets

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest-bearing deposits:

Interest Bearing DDA

Savings and Money Market

Time Deposits

Savings and money market accounts

Certificates of deposit greater than $250,000

Certificates of deposit less than $250,000

Total interest bearing deposits

Federal Home Loan Bank Advances

Subordinated Debt

Short-term borrowings

Subordinated debentures

Total interest bearing liabilities

Interest Rate Spread

Demand Deposits

All Other Liabilities

Total Liabilities

Non-interest bearing deposits

Total funding

Other non-interest bearing liabilities

Shareholders’ equity

Total Liabilities & Shareholders' Equity

Impact of Non-Interest Bearing Deposits and Other Liabilities

Net Interest Income and Margin on Total Earning Assets

Tax Equivalent Adjustment

Total average liabilities and shareholders’ equity

Net interest income

Yields on municipal securities have been calculated on a fully taxable equivalent basis.

Loan interest income includes fee income and unearned discount in the amount of $5.8 million for the year ended December 31, 2019.

Non-accrual loans and lease financing receivables have been included in the average balances.

Yields on securities available-for-sale are based on historical cost.

Farmers & Merchants Bancorp

Year-to-Date Average Balances and Interest Rates

(Interest and Rates on a Taxable Equivalent Basis)

(in thousands)

Year Ended December 31, 2018

Interest Bearing Deposits with Banks

Investment Securities:

Government Agency & Government-Sponsored Entities

Municipals - Taxable

Obligations of States and Political Subdivisions - Non-Taxable

Mortgage Backed Securities

Total Investment Securities

Loans & Leases

Home Equity Lines and Loans

Total Loans & Leases

Total Earning Assets

Unrealized Loss on Securities Available-for-Sale

Allowance for Credit Losses

Cash and Due From Banks

All Other Assets

Liabilities & Shareholders' Equity

Interest Bearing Deposits

Interest Bearing DDA

Savings and Money Market

Time Deposits

Total Interest Bearing Deposits

Federal Home Loan Bank Advances

Subordinated Debt

Total Interest Bearing Liabilities

Interest rate spread

Demand Deposits

All Other Liabilities

Total Liabilities

Shareholders' Equity

Total Liabilities & Shareholders' Equity

Impact of Non-Interest Bearing Deposits and Other Liabilities

Net Interest Income and Margin on Total Earning Assets

Tax Equivalent Adjustment

Net Interest Income

Yields on municipal securities have been calculated on a fully taxable equivalent basis.

Loan interest income includes fee income and unearned discount in the amount of $5.5 million for the year ended December 31, 2018.

Non-accrual loans and lease financing receivables have been included in the average balances.

Yields on securities available-for-sale are based on historical cost.

Farmers & Merchants Bancorp

Volume and Rate Analysis of Net Interest Income

(Rates on a Taxable Equivalent Basis)

(in thousands)

2020 versus 2019

Amount of Increase

(Decrease) Due to Change in:

Interest Earning Assets

Interest Bearing Deposits with Banks

Investment Securities:

Government Agency & Government-Sponsored Entities

Municipals - Taxable

Obligations of States and Political Subdivisions - Non-Taxable

Mortgage Backed Securities

Total Investment Securities

Total Earning Assets

Interest Bearing Liabilities

Interest Bearing Deposits:

Time Deposits

Total Interest Bearing Deposits

Other Borrowed Funds

Subordinated Debt

Total Interest Bearing Liabilities

(1) Includes CARES Act Small Business Administration Paycheck Protection Program loans.

Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total "net change." The above figures have been rounded to the nearest whole number.

Farmers & Merchants Bancorp

Volume and Rate Analysis of Net Interest Income

(Interest and Rates on a Taxable Equivalent Basis)

(in thousands)

2019 versus 2018

Amount of Increase

(Decrease) Due to Change in:

Interest Earning Assets

Interest Bearing Deposits with Banks

Investment Securities:

Government Agency & Government-Sponsored Entities

Municipals - Taxable

Obligations of States and Political Subdivisions - Non-Taxable

Mortgage Backed Securities

Total Investment Securities

Loans & Leases:

Home Equity Lines and Loans

Total Loans & Leases

Total Earning Assets

Interest Bearing Liabilities

Interest Bearing Deposits:

Interest Bearing DDA

Savings and Money Market

Time Deposits

Total Interest Bearing Deposits

Other Borrowed Funds

Subordinated Debt

Total Interest Bearing Liabilities

2020 Compared to 2019

Net interest income increased 6.15% to $149.2 million during 2020.

On a fully tax equivalent (TE) basis, net interest income increased 6.14% and totaled $149.6 million during 2020 compared to $141.0 million for 2019.

As more fully discussed below, the increase in net interest income was due primarily to a $599.1 million increase in average earning assets offset by a 45 basis point decrease in the net interest margin.

Net interest income on a tax equivalent basis, expressed as a percentage of average total earning assets, is referred to as the net interest margin.

For 2020, the Company’s net interest margin was 3.89% compared to 4.34% in 2019.

This decrease in net interest margin was due primarily to a decrease of 0.61% in the yield received on earning assets, offset somewhat by a 0.23% decrease in the cost of interest bearing liabilities.

Average loans & leases totaled $2.9 billion for the year ended December 31, 2020;

an increase of $349.0 million compared to the year ended December 31, 2019.

A significant portion of this increase was due to loans funded under the SBA PPP.

Since April 2020, we have funded $347.4 million of loans for 1,540 of our small business customers.

(See “Introduction - COVID-19 (Coronavirus) Disclosure” for additional information).

Loans & leases decreased from 79.7% of average earning assets during 2019 to 76.4% in 2020.

The year-to-date yield on the loan & lease portfolio decreased to 4.88% for the year ended December 31, 2020, compared to 5.30% for the year ended December 31, 2019.

Some of this decrease was due to $347.4 million of PPP loans funded at a rate of 1.00% (plus accreted loan fees) with the remaining decrease due to an overall drop in market interest rates.

This lower yield was offset by the positive impact of increased average loan & lease balances resulting in interest revenue from loans & leases to increase by 4.48% to $143.4 million.

The Company continues to experience aggressive competitor pricing for loans & leases to which it may need to respond in order to retain key customers.

This could place negative pressure on future loan & lease yields and net interest margin.

The investment portfolio is the other main 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 & leases, the yield earned on investments is generally less than that of loans & leases.

Average investment securities increased $156.6 million in 2020 compared to the average balance during 2019.

The average yield, on a tax equivalent basis, in the investment portfolio was 2.48% in 2020 compared to 2.81% in 2019.

This overall decrease in yield was caused primarily by a decrease in market interest rates.

As a result, of the combined impact of mix, balance and yield changes, tax equivalent interest income on securities increased $2.5 million to $14.5 million for the year ended December 31, 2020, compared to $12.0 million for the year ended December 31, 2019.

See “Financial Condition – Investment Securities” for a discussion of the Company’s investment strategy in 2020.

Net interest income on the Schedule of Year-to-Date Average Balances and Interest Rates, is shown on a tax equivalent basis, which is higher than net interest income as reflected on the Consolidated Statements of Income because of adjustments that relate to income on securities that are exempt from federal income taxes.

Interest-bearing deposits with banks and overnight investments in Federal Funds Sold are additional earning assets available to the Company.

Average interest-bearing deposits with banks consisted primarily of FRB deposits.

Balances with the FRB earn interest at the Fed Funds rate, which decreased to .10% in December 2020 compared to 1.55% in December 2019.

Average interest-bearing deposits with banks for the year ended December 31, 2020, was $326.2 million, an increase of $93.6 million compared to the average balance for the year ended December 31, 2019.

Interest income on interest-bearing deposits with banks for the year ended December 31, 2020, decreased $3.7 million to $1.2 million from the year ended December 31, 2019.

Average interest-bearing liabilities increased $286.1 million or 13.4% during the year ended December 31, 2020 compared to the average balance during 2019.

Of that increase:

(1) interest-bearing transaction deposits increased $118.5 million;

(2) savings and money market deposits increased $198.2 million;

and (3) time deposits decreased $30.6 million (see “Financial Condition – Deposits”);

(4) FHLB advances remained unchanged (see “Financial Condition – Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings”);

and (5) subordinated debt remained unchanged (see “Financial Condition – Subordinated Debentures”).

A significant portion of this deposit growth was a result of funds from the SBA PPP being deposited into borrower accounts until those funds will be used for their operating expenses.

Total interest expense on deposits was $9.1 million for 2020 and $12.6 million for 2019.

As a result of the overall drop in market interest rates during 2020, and the decrease in higher yielding CD’s as a percentage of total deposits, the average rate paid on interest-bearing deposits was 0.38% in 2020 as compared to 0.60% in 2019.

See “Overview – Looking Forward:

2021 and Beyond” for a discussion of factors influencing the Company’s future deposit rates and their impact on net interest margin.

2019 Compared to 2018

Net interest income increased 12.0% to $140.5 million during 2019.

On a fully tax equivalent basis, net interest income increased 12.0% and totaled $141.0 million during 2019 compared to $125.9 million for 2018.

As more fully discussed below, the increase in net interest income was due primarily to a $289.1 million increase in average earning assets, and a 9 basis point increase in the net interest margin.

Net interest income on a tax equivalent basis, expressed as a percentage of average total earning assets, is referred to as the net interest margin.

For 2019, the Company’s net interest margin was 4.34% compared to 4.25% in 2018 This increase in net interest margin was due primarily to an increase of 0.22% in the yield received on earning assets, offset somewhat by a 0.21% increase in the rates paid on interest bearing liabilities.

Average loans & leases totaled $2.6 billion for the year ended December 31, 2019;

an increase of $239.7 million compared to the year ended December 31, 2018.

Loans & leases increased from 79.4% of average earning assets during 2018 to 79.7% in 2019.

The year-to-date yield on the loan & lease portfolio increased to 5.30% for the year ended December 31, 2019, compared to 5.10% for the year ended December 31, 2018.

This higher yield combined with the impact of increased average loan & lease balances resulted in interest revenue from loans & leases increasing 14.5% to $137.2 million for 2019.

The Company continues to experience aggressive competitor pricing for loans & leases to which it may need to respond in order to retain key customers.

This could place negative pressure on future loan & lease yields and net interest margin.

The investment portfolio is the other main component of the Company’s earning assets.

Net interest margin (4)

Excludes average unrealized gains of $3.4 million and $16.3 million for the years ended December 31, 2021, and 2020, respectively, which are included in non-interest earning assets.

The average yield does not include the federal tax benefits at an assumed effective yield of 25% related to income earned on tax-exempt municipal securities totaling $436,000 and $438,000 for the years ended December 31, 2021, and 2020,

respectively.

Loan interest income includes loan fees of $17.0 million and $13.7 million for the years ended December 31, 2021 and 2020, respectively.

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

Interest-bearing deposits with banks and Federal Reserve balances are additional 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 0.14% and 0.37% for the years ended December 31, 2021 and 2020, respectively.

Average interest-bearing deposits was $666 million and

$326 million for the years ended December 31, 2021 and 2020, respectively.

Interest income on interest-bearing deposits with banks was $902,000 and $1.2 million for the years ended December 31, 2021 and 2020, respectively.

The investment portfolio is another main 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.

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 selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 5 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 & leases, the yield earned on investments is generally less than that of loans & leases.

Average investment securities decreased $35.6 million in 2019 compared to the average balance during 2018.

The average yield, on a tax equivalent basis, in the investment portfolio was 2.81% in 2019 compared to 2.44% in 2018.

This overall increase in yield was caused primarily by an increase in the mix of mortgage-backed securities as a percentage of total securities and an increase in market interest rates.

As a result of the combined impact of these mix, balance and yield changes, tax equivalent interest income on securities increased slightly by $710,000 to $12.0 million for the year ended December 31, 2019, compared to $11.3 million for the year ended December 31, 2018.

See “Financial Condition – Investment Securities” for a discussion of the Company’s investment strategy in 2019.

Net interest income on the Schedule of Year-to-Date Average Balances and Interest Rates is shown on a tax equivalent basis, which is higher than net interest income as reflected on the Consolidated Statements of Income because of adjustments that relate to income on securities that are exempt from federal income taxes.

Interest-bearing deposits with banks and overnight investments in Federal Funds Sold are additional earning assets available to the Company.

Average interest-bearing deposits with banks consisted primarily of FRB deposits.

Balances with the FRB earn interest at the Fed Funds rate, which decreased to 1.55% in December 2019.

Average interest-bearing deposits with banks for the year ended December 31, 2019, was $232.6 million, an increase of $84.9 million compared to the average balance for the year ended December 31, 2018.

Interest income on interest-bearing deposits with banks for the year ended December 31, 2019, increased $2.2 million to $4.9 million from the year ended December 31, 2018.

Average interest-bearing liabilities increased $178.9 million or 9.2% during the year ended December 31, 2019 compared to the average balance during 2018.

Of that increase:

(1) interest-bearing transaction deposits increased $50.1 million;

(2) savings and money market deposits increased $85.7 million;

and (3) time deposits increased $43.1 million.

See “Financial Condition – Deposits” for a discussion of trends in the Company’s deposit base.

Total interest expense on deposits was $12.6 million for 2019 and $7.4 million for 2018.

As a result of increasing short-term market interest rates and competition, the average rate paid on interest-bearing deposits was 0.60% in 2019 and 0.38% in 2018.

Provision and Allowance for Credit Losses

As a financial institution that assumes lending and credit risks as a principal element of its business, credit losses will be experienced in the normal course of business.

The Company has established credit management policies and procedures that govern both the approval of new loans & leases and the monitoring of the existing portfolio.

The Company manages and controls credit risk through comprehensive underwriting and approval standards, dollar limits on loans & leases to one borrower (the term “borrower” is used herein to describe a customer who has entered into either a loan or lease transaction), and by restricting loans & leases made primarily to its principal market area where management believes it is best able to assess the applicable risk.

Additionally, management has established guidelines to ensure the diversification of the Company’s credit portfolio such that even within key portfolio sectors such as real estate or agriculture, the portfolio is diversified across factors such as location, building type, crop type, etc.

Management reports regularly to the Board of Directors regarding trends and conditions in the loan & lease portfolio and regularly conducts credit reviews of individual loans & leases.

Loans & leases that are performing but have shown some signs of weakness are subject to more stringent reporting and oversight.

Allowance for Credit Losses

The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company's loan & lease portfolio as of the balance sheet date.

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 & 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 impaired loans & leases;

general reserves for inherent losses related to loans & leases that are not impaired;

and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors.

A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement.

Loans & leases determined to be impaired are individually evaluated for impairment.

When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s or lease's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s or lease's observable market price, or the fair value of the collateral if the loan or lease is collateral dependent.

A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral.

A restructuring of a loan or lease constitutes a troubled debt restructuring (“TDR”) under ASC 310-40, if the Company for economic or legal reasons related to the borrower's financial difficulties grants a more than insignificant concession to the borrower that it would not otherwise consider.

Restructured loans or leases typically present an elevated level of credit risk, as the borrowers are not able to perform according to the original contractual terms.

If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual.

Loans & leases that are on nonaccrual status at the time they become TDR, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent.

A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms.

However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment.

The determination of the general reserve for loans or leases that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors that include economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, the character of the loan & lease portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan & lease type).

These portfolio segments include:

(1) commercial real estate;

(2) agricultural real estate;

(3) real estate construction (including land and development loans);

(4) residential 1 st mortgages;

(5) home equity lines and loans;

(6) agricultural;

(7) commercial;

(8) consumer & other;

and (9) equipment leases.

See “Financial Condition – Loans & Leases” for examples of loans & leases made by the Company.

The allowance for credit losses attributable to each portfolio segment, which includes both impaired loans & leases and loans & leases that are not impaired, is combined to determine the Company's overall allowance, which is included on the consolidated balance sheet.

The Company assigns a risk rating to all loans & leases and periodically performs detailed reviews of all such loans & leases over a certain threshold to identify credit risks and assess overall collectability.

For smaller balance loans & leases, such as consumer and residential real estate, a credit grade is established at inception, and then updated only when the loan or lease becomes contractually delinquent or when the borrower requests a modification.

For larger balance loans or leases, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans & leases.

These credit quality indicators are used to assign a risk rating to each individual loan or lease.

These risk ratings are also subject to examination by independent specialists engaged by the Company.

The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management’s assessment of the following for each portfolio segment:

(1) inherent credit risk;

(2) historical losses;

and (3) other qualitative factors.

These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment.

See “Note 1 Significant Accounting Policies - Allowance for Credit Losses.”

The risk ratings can be grouped into five major categories, defined as follows:

Pass and Watch – A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management's close attention.

This category also includes “Watch” loans, which is a loan with an emerging weakness in either the individual credit or industry that requires additional attention.

A credit may also be classified Watch if cash flows have not yet stabilized, such as in the case of a development project.

Included in this category are all loans in which the Bank entered into a CARES Act modification.

Special Mention – A special mention loan or lease has potential weaknesses that deserve management's close attention.

If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease position at some future date.

Special mention loans & leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard – A substandard loan or lease is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any.

Loans or leases classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.

Well-defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations.

They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans or leases classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable or improbable.

Loss – Loans or leases classified as loss are considered uncollectible.

Once a loan or lease becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral.

If this is not forthcoming and payment in full is unlikely, the Bank will estimate its probable loss and immediately charge-off some or all of the balance.

The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management's assessment of the following for each portfolio segment:

(1) inherent credit risk;

(2) historical losses;

and (3) other qualitative factors.

These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below:

Commercial Real Estate – Commercial real estate mortgage loans are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types.

Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans.

Trends in vacancy rates of commercial properties impact the credit quality of these loans.

High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.

Real Estate Construction – Real estate construction loans, including land loans, are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types.

A major risk arises from the necessity to complete projects within specified cost and time lines.

Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity.

In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.

Commercial – These loans are generally considered to possess a moderate inherent risk of loss because they are shorter-term;

typically made to relationship customers;

generally underwritten to existing cash flows of operating businesses;

and may be collateralized by fixed assets, inventory and/or accounts receivable.

Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

Agricultural Real Estate and Agricultural – These loans are generally considered to possess a moderate inherent risk of loss since they are typically made to relationship customers and are secured by crop production, livestock and related real estate.

These loans are vulnerable to two risk factors that are outside the control of Company and borrowers:

commodity prices and weather conditions.

Leases – Equipment leases are generally considered to possess a moderate inherent risk of loss.

As lessor, the Company is subject to both the credit risk of the borrower and the residual value risk of the equipment.

Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan.

Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

Residential 1st Mortgages and Home Equity Lines and Loans – These loans are generally considered to possess a low inherent risk of loss, although this is not always true as evidenced by the correction in residential real estate values that occurred between 2007 and 2012.

The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion.

Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

Consumer & Other – A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period.

Most installment loans are made for consumer purchases.

Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

In addition, the Company's and Bank's regulators, including the FRB, DFPI and FDIC, as an integral part of their examination process, review the adequacy of the allowance.

These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.

However, at certain times the Company selectively added investment grade corporate securities

(floating rate and fixed rate with maturities less than 5 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 $891 million and $584 million for the years ended December 31, 2021 and 2020, respectively.

The average yield on total investment securities were 1.83% and 2.41% for the years

ended December 31, 2021 and 2020, respectively.

See “Investment Securities and Federal Reserve balances” for a discussion of the Company’s investment strategy in 2021.

Average loans and leases held for investment were $3.1 billion and $2.9 billion for the years ended December 31, 2021 and 2020, respectively.

The yield on the loan & lease portfolio was 4.77% and 4.88% for the

years ended December 31, 2021 and 2020, respectively.

The Company continues to experience aggressive competitor pricing for loans and leases to which it may need to respond in order to retain key customers.

This could continue to place negative

pressure on future loan & lease yields and net interest margin.

Average interest-bearing liabilities was $2.8 billion and $2.4 billion for the years ended December 31, 2021 and 2020, respectively.

Total interest expense on interest-bearing deposits was $4.3 million, $9.5 million

for the years ended December 31, 2021 and 2020, respectively.

The average rate paid on interest-bearing liabilities was 0.16% and 0.39% for the years ended December 31, 2021 and 2020, respectively.

The decline was primarily the result of the FRB

lowering rates to near zero due to the pandemic.

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.

Year Ended December 31, 2021 compared with 2020

Increase (Decrease) Due to:

(Dollars in thousands)

Interest income:

Interest earnings deposits in other banks

Taxable securities

Non-taxable securities

Total securities

Residential and home equity

Total real estate

Commercial & industrial

Commercial leases

Consumer and other

Non-marketable securities

Total interest income

Interest expense:

Interest-bearing deposits:

Savings and money market accounts

Certificates of deposit greater than $250,000

Certificates of deposit less than $250,000

Total interest bearing deposits

Subordinated debentures

Total interest expense

Net interest income

Net interest income was $161 million and $150 million for the two years ended December 31, 2021 and 2020, respectively.

The increase in net interest income was driven by primarily by strong deposit growth, which we

were able to partially deploy into growing our loan portfolio.

The remaining increase in deposits was held in interest earning deposits and investment securities.

Comparison of Results of Operations for the Years Ended December 31, 2021 and 2020

(Dollars in thousands)

$ Better / (Worse)

% Better / (Worse)

Selected Income Statement Information:

Interest income

Interest expense

Net interest income

Provision for credit losses

Changes in the provision for credit losses between years are the result of management’s evaluation, based upon information currently available, of the adequacy of the allowance for credit losses relative to factors such as the credit quality of the loan & lease portfolio, loan & lease growth, current credit losses, and the prevailing economic climate and its effect on borrowers’ ability to repay loans & leases in accordance with the terms of the notes.

The State of California experienced drought conditions from 2013 through most of 2016.

Since 2016, reasonable levels of rain and snow have alleviated drought conditions in California.

As a result, current reservoir levels are adequate and the availability of water in our primary service area should not be an issue.

However, these recent weather patterns further reinforce the fact that the long-term risks associated with the availability of water are significant.

See “Item 1A.

Risk Factors” for additional information.

As discussed above in “COVID-19 (Coronavirus) Disclosure,” COVID-19 has had and continues to have a material impact on the U.S.

and California economies.

We are monitoring the impact on our borrowers, and working closely with them using all of the tools at our disposal, including the SBA PPP program, the FRB Main Street Lending Program and other loan restructuring strategies, to help them move through this period of reduced business activity.

To account for growth in our loan portfolio and the economic uncertainty created by COVID-19, our provision for credit losses increased in 2020.

The provision for credit losses totaled $4.5 million in 2020 compared to $200,000 in 2019.

Net charge offs during 2020 were $650,000 compared to net charge offs of $454,000 during 2019 and net charge offs of $609,000 in 2018.

The allowance for credit losses as a percentage of total loans and leases declined in 2020 from 2.05% to 1.89%.

This decline was due to the increase in government guaranteed SBA loans under the PPP.

Excluding these loans, the allowance for credit losses as a percentage of total loans was 2.04% at December 31, 2020.

See “Critical Accounting Policies and Estimates – Allowance for Credit Losses” and “Item 7A.

Quantitative and Qualitative Disclosures About Market Risk-Credit Risk.”

After reviewing all factors above, management concluded that the allowance for credit losses, as of December 31, 2020, and December 30, 2019 were adequate .

The following table summarizes the activity and the allocation of the allowance for credit losses for the years indicated.

(in thousands)

Allowance for Credit Losses Beginning of Year

Provision Charged to Expense

Commercial Real Estate

Agricultural Real Estate

Real Estate Construction

Residential 1st Mortgages

Home Equity Lines and Loans

Consumer & Other

Total Charge-Offs

Commercial Real Estate

Agricultural Real Estate

Real Estate Construction

Residential 1st Mortgages

Home Equity Lines and Loans

Consumer & Other

Total Recoveries

Net (Charge-Offs) Recoveries

Total Allowance for Credit Losses, End of Year

Allowance for Credit Losses to:

Total Loans & Leases at Year End

Average Loans & Leases

Consolidated Net (Charge-Offs) Recoveries to:

Total Loans & Leases at Year End

Average Loans & Leases

The table below breaks out year-to-date activity by portfolio segment (in thousands):

December 31, 2020

Residential 1st

Year-To-Date Allowance for Credit Losses:

Beginning Balance- January 1, 2020

Ending Balance- December 31, 2019

Overall the Allowance for Credit Losses as of December 31, 2020 increased $3.9 million from December 31, 2019.

Changes to the reserve during 2020 are due to changes in the underlying credit quality of the loan portfolio.

(1) reserves for “Agricultural” and “Agricultural Real Estate” loans (which are currently thought to have more limited COVID-19 loss exposure since agricultural activity has substantially continued without significant issues) have been reduced significantly;

(2) reserves for Commercial Real Estate (where our COVID-19 exposure is thought to be greater since many of these borrowers have been impacted by “non-essential” designations and “shelter-in-place” orders) have been increased significantly;

and (3) the “Unallocated” reserve has been increased.

See “Introduction - COVID-19 (Coronavirus) Disclosure” for additional information of the Company’s COVID-19 exposure.

Allowance Allocation at December 31,

(in thousands)

Percent of Loans in Each Category to Total Loans

Commercial Real Estate

Agricultural Real Estate

Real Estate Construction

Residential 1st Mortgages

Home Equity Lines and Loans

Consumer & Other

As of December 31, 2020, the allowance for credit losses was $58.9 million, which represented 1.89% of the total loan & lease balance (2.04% when government guaranteed SBA loans originated under the PPP beginning in April 2020 are excluded).

At December 31, 2019, the allowance for credit losses was $55.0 million or 2.05% of the total loan & lease balance.

The Company believes that the current allowance provides sufficiently for our exposure at the current time.

Net interest income after provision for credit losses

Non-interest income

Non-interest income includes:

(1) service charges and fees from deposit accounts;

(2) net gains and losses from investment securities;

(3) increases in the cash surrender value of bank owned life insurance;

(4) debit card and ATM fees;

(5) net gains and losses on non-qualified deferred compensation plan;

and (6) fees from other miscellaneous business services.

See “Overview – Looking Forward:

2021 and Beyond.”

2020 Compared to 2019

Non‑interest income totaled $15.7 million for 2020, a decrease of $1.5 million or 8.96% from non-interest income of $17.2 million for 2019.

Debit card and ATM fees totaled $5.5 million in 2020, an increase of 8.13% or $416,000 from $5.1 million in 2019.

This was primarily due to increased numbers of cardholders and increased account activity.

Service charges on deposit accounts totaled $2.6 million in 2020, a decrease of 28.2% or $1.0 million from $3.7 million in 2019.

This decrease was primarily due to the Bank complying with the Governor of California’s request that banks not charge overdraft and other fees during the early stages of the COVID-19 crisis.

Net gains on deferred compensation plan investments were $1.8 million in 2020 compared to net gains of $2.6 million in 2019.

See Note 16, located in “Item 8.

Financial Statements and Supplementary Data” 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 Generally Accepted Accounting Principles require these investment gains/losses be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no effect on the Company’s net income.

Other non-interest income was $3.6 million, a decrease of $173,000 or 4.6% from 2019.

2019 Compared to 2018

Non‑interest income totaled $17.2 million for 2019, an increase of $2.0 million or 13.3% from non-interest income of $15.2 million for 2018.

Net (loss) gain on investment securities was a net gain of $1,000 in 2019 compared to a net loss of $1.3 million for 2018.

See “Financial Condition-Investment Securities” for a discussion of the Company’s investment strategy.

Debit card and ATM fees totaled $5.1 million in 2019, an increase of 17.3% or $755,000 from $4.4 million in 2018.

This was primarily due to increased numbers of cardholders and increased account activity.

Net gains on deferred compensation plan investments were $2.6 million in 2019 compared to net gains of $1.1 million in 2018.

See Note 16, located in “Item 8.

Financial Statements and Supplementary Data” 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.

Other non-interest income was $3.8 million, a decrease of $1.9 million or 33.2% from 2018.

This decrease was primarily due to a $2.0 million decrease related to non-recurring income received in 2018 from:

(1) the purchase of Bank of Rio Vista;

and (2) the gain on sale of fixed assets.

Non-interest expense

Non-interest expense for the Company includes expenses for:

(1) salaries and employee benefits;

(2) net gains and losses on non-qualified deferred compensation plan;

(3) occupancy;

(4) equipment;

(5) supplies;

(6) legal fees;

(7) professional services;

(8) data processing;

(9) marketing;

(10) deposit insurance;

and (11) ORE carrying costs and gains/losses on sale;

and (12) other miscellaneous expenses.

2020 Compared to 2019

Overall, non-interest expense totaled $82.4 million for 2020, an increase of $164,000 or .20% from the year ended December 31, 2019.

Salaries and employee benefits increased $1.7 million or 3.1% in 2020, primarily related to:

(1) general salary increases;

and (2) increased contributions to retirement and profit sharing plans.

Income before income tax expense

Income tax expense

For the years ended December 31, 2021 and 2020, net income was $66.3 million compared with $58.7 million, respectively.

The increase in net income was primarily the

result of higher net interest income of $11.1 million, higher non-interest income of $6.0 million, and lower provision for credit losses of $2.6 million.

These increases were offset by higher non-interest expense of $9.4 million and higher income

tax expense of $2.8 million.

Net Interest Income and Net Interest Margin.

For the year ended December 31, 2021, net interest income increased $11.1 million, or 7.4%, to $161 million compared with $150

million for the same period a year earlier.

The increase is primarily the result of average interest earning assets increasing $795 million, or 20.60%, to $4.7 billion compared with $3.9 billion for the same period a year earlier.

Higher interest

earning assets was driven by strong growth in the Company’s total deposits.

Total deposits grew $755 million, or 20.68%, to $4.4 billion compared with $3.6 billion for the same a year ago.

The strong growth in the Company’s balance sheet was offset

by narrowing net interest margins.

Net interest margins narrowed 42 basis points to 3.46% for all of 2021 compared with 3.88% for the same period a year earlier.

Narrow net interest margins was primarily the result of the FRB lowering interest

rates to near zero over the past two years.

Provision for Credit Losses.

The provision for credit losses in each period is a charge against earnings in that period.

The provision is the amount required to maintain the

allowance for credit losses at a level that, in management’s judgment, is adequate to absorb probable losses inherent in the loan portfolio.

The provision for credit losses for the year ended December 31, 2021, was $1.9 million compared with $4.5 million for the same period a year ago.

For the year ended December 31, 2021, the Company incurred net

recoveries of $0.2 million compared with net charge-offs of $0.7 million for the same period a year earlier.

Non-interest Income.

Non-interest income increased $6.0 million, or 40.0%, to $21.1 million for 2021 compared with $15.1 million for the same period a year earlier.

year-over-year increase in non-interest income was primarily due to a $2.5 million increase in gain on the sale of investment securities, $1.4 million increase in card processing fees, and $0.8 million increase in gains on deferred compensation

Net gains on deferred compensation plan investments were $2.6 million in 2021 compared to net gains of $1.8 million in 2020.

See Note 12, located in “Item 8.

Financial Statements and Supplementary Data” for a description of these plans.

Financial Statements and Supplementary Data” 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.

Occupancy expense in 2020 totaled $4.6 million, an increase of $345,000 or 8.0% from 2019.

This increase was primarily related to operating expenses associated with remodeling existing branch offices.

Marketing expenses decreased $332,000 from 2019 and totaled $922,000.

Legal expenses decreased $2.2 million from 2019 and totaled $128,000.

Other non-interest expense increased $1.5 million or 14.2%, to $12.5 million in 2020 compared to $10.9 million in 2019.

2019 Compared to 2018

Overall, non-interest expense totaled $82.2 million for 2019, an increase of $6.8 million or 9.0% from the year ended December 31, 2018.

Salaries and employee benefits increased $5.2 million or 10.3% in 2019, primarily related to:

(1) new staff from the acquisition of the Bank of Rio Vista;

(2) general salary increases;

and (3) increased contributions to retirement and profit sharing plans.

Net gains on deferred compensation plan investments were $2.6 million in 2019 compared to net gains of $1.1 million in 2018.

Although GAAP require these investment

gains/losses be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no effect on the Company’s net income.

Non-interest expense.

Non-interest expense increased $9.4 million, or 11.35%, to $91.8 million for 2021 compared with $82.4 million for the same period a year ago.

year-over-year increase was primarily due to $6.9 million in higher salaries and employee benefits resulting primarily from higher payroll taxes, the need to hire additional regulatory staff to meet our compliance requirements, the opening of a new

branch in the Oakland area, expansion in the Napa branch, and higher incentives paid for the Company’s strong financial performance in 2021.

The Company experienced higher costs on deferred compensation benefits as the Company’s stock price

increased in 2021, which is an evaluative component of the Company’s non-qualified deferred compensation plans.

The Company also experienced higher FDIC insurance premiums as small bank assessment credits were discontinued by the FDIC in 2020.

the year ended December 31, 2021, the Company’s efficiency ratio was 50.42% compared with 49.99% for the same period a year ago.

Net gains on deferred compensation plan obligations were $2.6 million in 2021 compared to net gains of $1.8 million in 2020.

See Note 12, located in “Item 8.

Financial Statements and Supplementary Data” for a description of these plans.

Financial Statements and Supplementary Data” 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 Generally Accepted Accounting Principles require these investment gains/losses be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no effect on the Company’s net income.

Occupancy expense in 2019 totaled $4.3 million, an increase of $390,000 or 10.0% from 2018 and equipment expense in 2019 totaled $4.9 million, an increase of $618,000 or 14.4% from 2018.

Both of these increases were primarily related to operating expenses associated with remodeling existing branch offices and adding new branches.

Legal expenses increased $1.4 million from 2018 and totaled $2.3 million.

Other non-interest expense increased $862,000, or 8.6%, to $10.9 million in 2019 compared to $10.1 million in 2018.

The preceding increases in non-interest expense were offset somewhat by non-recurring expenses from the acquisition of Bank of Rio Vista that totaled $3.0 million in 2018.

The provision for income taxes decreased $60,000 for the year ended December 31, 2020.

The Company’s effective tax rate for 2020 was 24.65% compared to 25.6% for the year ended December 2019.

The Company’s effective tax rate fluctuates from year to year 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 benefits regarding the cash surrender value of life insurance;

credits associated with low income housing tax credit investments (LIHTC);

and tax-exempt interest income on municipal securities and loans.

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law changing the Company’s Federal corporate tax rate from 35% to 21%.

The Company’s provision for income taxes decreased 45.61% to $14.0 million during 2018 compared to 2017 primarily as a result of:

(1) the Federal corporate tax rate change and (2) the Company having amended and planning to amend tax returns in open tax years resulting in a reduction of $990,000 in the Company’s tax provision for 2018.

Significant Accounting Policies – Out of Period Adjustment.” The effective tax rate for 2018 was 23.8% compared to 47.9% during 2017.

Also due to the signing of the Tax Cuts and Jobs Act, during the 4 th quarter of 2017, all companies were required to re-measure their deferred tax assets (DTA) and deferred tax liabilities (DTL) at the new corporate tax rate of 21%.

This one-time re-measurement resulted in a $6.3 million increase to the Company’s income tax provision in 2017.

This DTA re-measurement accompanied by an 8.7% increase in pre-tax earnings resulted in the tax provision increase in 2017.

With the exception of the one-time DTA re-measurement that took place in 2017, tax law causes the Company’s taxes payable to approximate or exceed the current provision for taxes on the income statement.

Three provisions have had a significant effect on the Company’s current income tax liability:

(1) the restrictions on the deductibility of credit losses;

(2) deductibility of pension and other long-term employee benefits only when paid;

and (3) the statutory deferral of deductibility of California franchise taxes on the Company’s federal return.

Although GAAP require 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 effect on the Company’s net income.

Income Tax Expense.

For the year ended December 31, 2021, income tax expense was $22.0 million, compared with $19.2 million for the same period a year earlier.

ended December 31, 2021, the effective tax rate was 24.89% compared with 24.65% for the same period a year ago.

Financial Condition

Investment Securities and Federal Funds Sold

The investment portfolio provides the Company with an income alternative to loans & leases.

The debt securities in the Company’s investment portfolio have historically been comprised primarily of:

(1) mortgage-backed securities issued by federal government-sponsored entities;

(2) debt securities issued by US 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 without subjecting the Company to the interest rate risk associated with mortgage-backed securities.

The Company’s investment portfolio at December 31, 2020 was $876.7 million compared to $567.6 million at December 31, 2019, an increase of $309.1 million or 54.5%.

The Company uses its investment portfolio to help balance its overall interest rate risk.

Total assets grew $627 million, or 13.78%, to $5.2 billion at December 31, 2021 compared with $4.6 billion at December 31, 2020.

Loans held for investment grew $138 million or 4.44% to $3.2 billion at December 31,

2021, compared with $3.1 billion at December 31, 2020.

Total deposits increased $580 million, or 14.28%, to $4.6 billion at December 31, 2021 compared with $4.1 billion at December 31, 2020.

The increase in total assets and deposits was primarily

the result of strong organic deposit growth.

Investment Securities and Federal Reserve Balances

The Company’s investment portfolio increased $130.8 million, or 14.92%, to $1.0 billion at December 31, 2021 compared to $877 million at December 31, 2020.

The Company uses its investment portfolio to manage interest

rate and liquidity risks.

Accordingly, when market rates are increasing it invests most of its funds in shorter-term Treasury and Agency securities or shorter-term (10, 15 and 20 year) mortgage-backed securities.

Conversely, when rates are falling, 30 year mortgage backed securities or longer term Treasury and Agency securities may be increased.

Conversely, when rates are falling,

30-year mortgage-backed securities or longer term Treasury and Agency securities may be increased.

The Company’s total investment portfolio currently represents 19.45% of the Company’s total assets as compared to 19.26% at December 31, 2020.

As of December 31, 2020, the Company held $68.9 million of municipal investments, all classified as held-to-maturity (“HTM”).

Of this balance $24.4 million were bank-qualified municipal bonds, and $44.5 million were private placement municipal bonds, warrants, and CRA qualified investments in our service area.

In order to comply with Section 939A of the Dodd-Frank Act, the Company performs its own credit analysis on new purchases of municipal bonds.

As of December 31, 2020, all of the Company’s bank-qualified municipal bond portfolio was rated at either the issue or issuer level, and all of these ratings were “investment grade.” The Company monitors the status of all municipal investments, and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security.

Not included in the investment portfolio are interest bearing deposits with banks and overnight investments in Federal Funds Sold.

Not included in the investment portfolio are interest bearing deposits with banks and overnight investments in Federal Reserve balances.

Interest bearing deposits with banks consisted primarily of FRB deposits.

The FRB currently pays interest on the deposits that banks maintain in their FRB accounts, whereas historically banks had to sell these Federal Funds to other banks in order to earn interest.

Since balances at the FRB are effectively risk free, the Company elected to maintain its excess cash at the FRB.

currently pays interest on the deposits that banks maintain in their FRB accounts, whereas historically banks had to sell these Federal Funds to other banks in order to earn interest.

Since balances at the FRB are effectively risk free, the Company

elected to maintain its excess cash at the FRB.

Interest bearing deposits with banks totaled $663 million at December 31, 2021 and $318 million at December 31, 2020.

The Company classifies its investments as held-to-maturity (“HTM”), trading, or available-for-sale (“AFS”).

Securities are classified as held-to-maturity and are carried at amortized cost when the Company has the intent and ability to hold the securities to maturity.

Trading securities are securities acquired for short-term appreciation and are carried at fair value, with unrealized gains and losses recorded in non-interest income.

As of December 31, 2020 and December 31, 2019, there were no securities in the trading portfolio.

The Company classifies its investment securities as either held-to-maturity (“HTM”) or available-for-sale (“AFS”).

Securities are classified as held-to-maturity and are carried at amortized cost when the Company has

the intent and ability to hold the securities to maturity.

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, net of related income taxes.

Investment Portfolio

The following table summarizes the balances and distributions of the investment securities held on the dates indicated.

(in thousands)

securities are reported at fair value with aggregate, unrealized gains or losses excluded from income and included as a separate component of shareholders’ equity, net of related income taxes.

As of December 31, 2021, we held no investment

securities from any issuer that totaled over 10% of our shareholders’ equity.

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

As of December 31,

(Dollars in thousands)

Available-for-Sale Securities

Treasury notes

Government SBA

Government Agency & Government Sponsored Entities

Obligations of States and Political Subdivisions

Government-sponsored securities

Mortgage-backed securities (1)

Collateralized Mortgage Obligations

Corporate securities

Total Book Value

Analysis of Investment Securities Available-for-Sale

The following table is a summary of the relative maturities and yields of the Company's investment securities Available-for-Sale as of December 31, 2020.

December 31, 2020 (in thousands)

One year or less

After one year through five years

Treasury Securities

Government Agency SBA

After one year through five years

After five years through ten years

Total available-for-sale securities

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

As of December 31,

(Dollars in thousands)

Held-to-Maturity Securities

Mortgage-backed securities (1)

Collateralized Mortgage Obligations

Municipal securities

Total held-to-maturity securities

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

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

Investment Securities

As of December 31, 2021

Within One Year

After One but Within Five Years

After Five but Within Ten Years

After Ten Years

Government Agency SBA Securities

Corporate Securities

After one year through five years

After five years through ten years

Total Corporate Securities

One year or less

Total Other Securities

(Dollars in thousands)

Securities available for sale

Treasury notes

Government-sponsored securities

Mortgage-backed securities (1)

Total Investment Securities Available-for-Sale

The average yield for floating rate securities is calculated using the current stated yield.

Analysis of Investment Securities Held-to-Maturity

The following table is a summary of the relative maturities and yields of the Company's investment securities Held-to-Maturity as of December 31, 2020.

Non-taxable Obligations of States and Political Subdivisions have been calculated on a fully taxable equivalent basis.

December 31, 2020 (in thousands)

Obligations of States and Political Subdivisions

One year or less

After one year through five years

After five years through ten years

Collateralized Mortgage Obligations

Total securities available for sale

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

As of December 31, 2021

Within One Year

After One but Within Five Years

After Five but Within Ten Years

After Ten Years

Total Obligations of States and Political Subdivisions

Total Investment Securities Held-to-Maturity

Loans & Leases

Loans & leases can be categorized by borrowing purpose and use of funds.

Common examples of loans & leases made by the Company include:

Commercial and Agricultural Real Estate - These are loans secured by farmland, commercial real estate, multifamily residential properties, and other non-farm, non-residential properties generally within our market area.

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, and the income will be the Bank's primary source of repayment for the loan.

(Dollars in thousands)

Securities held to maturity

Mortgage-backed securities (1)

Collateralized Mortgage Obligations

Municipal securities

Total securities held to maturity

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

Investment Securities

As of December 31, 2020

Within One Year

After One but Within Five Years

After Five but Within Ten Years

After Ten Years

(Dollars in thousands)

Securities available for sale

Treasury notes

Government-sponsored securities

Mortgage-backed securities (1)

Collateralized Mortgage Obligations

Corporate securities

Total securities available for sale

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

As of December 31, 2020

Within One Year

After One but Within Five Years

After Five but Within Ten Years

After Ten Years

(Dollars in thousands)

Securities held to maturity

Municipal securities

Total securities held to maturity

Expected maturities may differ from contractual maturities because issuers may have the right to call obligations with or without penalties.

We evaluate securities for impairment 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 owner-occupied real estate, non-owner-occupied real estate, 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

Loans are made both on owner occupied and investor properties;

2 unchanged sentences

and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.

Real Estate Construction - These are loans for development and construction (the Company generally requires the borrower to fund the land acquisition) and are secured by commercial or residential real estate.

These loans are generally made only to experienced local developers with whom the Bank has a successful track record;

Real Estate Construction – These are loans for acquisition, development and construction and are secured by commercial or residential real estate.

are generally made only to experienced local developers with whom the Bank has a successful track record;

for projects in our service area;

2 unchanged sentences

Commercial construction loans are made only when there is a written 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 or LIBOR with an appropriate spread based on the amount of perceived risk in the loan.

Residential 1 st Mortgages - These are loans primarily made on owner occupied residences;

generally underwritten to income and LTV guidelines similar to those used by FNMA and FHLMC;

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, we will make loans on rural residential properties up to 40 acres.

Most residential loans have terms from ten to twenty years and carry fixed rates priced off of 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.”

Most residential loans have terms from ten to twenty years and carry fixed 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.

3 unchanged sentences

Total Debt Ratios do not exceed 43%;

and in some situations the Company is in a 1 st lien position.

Agricultural - These are 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;

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.

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;

have maturities

from five to seven years;

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.

Commercial - These are 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;

Commercial – These are non-real estate loans and lines of credit to businesses that are sole proprietorships, partnerships, LLC’s and corporations.

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 24 months;

are often secured by general filing liens on accounts receivable, inventory and equipment;

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;

Term loans are primarily made for the financing of equipment, expansion or modernization of a plant or

purchase of a business;

have maturities from five to seven years;

and fixed rates that are most often tied to treasury indices 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 very minimal consumer loan portfolio, and loans are primarily made as an accommodation to deposit customers.

Leases - These are leases to businesses or individuals, for the purpose of 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;

Consumer – These are loans to individuals for personal use, and primarily include loans to purchase automobiles or recreational vehicles, and unsecured lines

The Company has a minimal consumer loan portfolio, and loans are primarily made as an accommodation to deposit customers.

Commercial Leases – These are leases primarily to businesses 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 through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

Credit risks are underwritten using the same credit criteria the

Company would use when making an equipment term loan.

Residual value risk is managed with qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

The Company accounts for leases with Investment Tax Credits (“ITC”) under the deferred method as established in ASC 740-10.

ITC 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.

See “Item 7A.

Quantitative and Qualitative Disclosures About Market Risk-Credit Risk” for a discussion about the credit risks the Company assumes and its overall credit risk management practices.

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:

2 unchanged sentences

and (3) loan & lease structure.

See “Results of Operations - Provision and Allowance for Credit Losses” for a more detailed discussion of risks by loan & lease type.

See “Results of Operations - Provision and Allowance for Credit Losses” for a more detailed

discussion of risks by loan & lease type.

The Company’s current underwriting policies and standards are designed to mitigate the risks involved in each loan & lease type.

The Company’s policies require that loans & leases are 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 & 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 & leases made by the Company are secured, but collateral is the secondary or tertiary source of repayment;

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 & 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 is made.

In order to be responsive to borrower needs, the Company prices loans & leases:

The quality and liquidity of collateral are

important and must be confirmed before the loan 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 7A.

Quantitative and Qualitative Disclosures About Market Risk-Interest Rate Risk” for further details.

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.

“Quantitative and Qualitative Disclosures about Market Risk” in this Annual Report on Form 10-K for further details.

Overall, the Company’s loan & lease portfolio at December 31, 2021 totaled $3.2 billion, an increase of $137.6 million or 4.44% over December 31, 2020.

This increase occurred as a result of:

Exclusive of SBA PPP loans, the loan portfolio grew $290.0

million, or 10.04%, over December 31, 2020.

This increase in the non-PPP loans occurred as a result of:

(1) the Company’s business development efforts directed toward credit-qualified borrowers;

and (2) expansion of our service area into the East Bay of San Francisco and Napa;

and (3) the origination of $347.4 million of PPP loans, of which $224.3 million remain outstanding at December 31, 2020 (See “Introduction - COVID-19 (Coronavirus) Disclosure” for additional information of the Company’s COVID-19 exposure).

No assurances can be made that this growth in the loan & lease portfolio will continue, and it is anticipated that the remainder of the PPP loans will be forgiven by the SBA in early 2021.

However, the Company does anticipate that it will participate in the 2021 PPP which may add some additional loans.

The following table sets forth the distribution of the loan & lease portfolio by type and percent as of December 31 of the years indicated.

(in thousands)

and (2) expansion of our service area into the East Bay

of San Francisco and Napa.

This data constitutes non-GAAP financial data.

The Company believes that excluding the temporary effect of the PPP loans furnishes useful information regarding the Company’s growth.

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

(Dollars in thousands)

Percent of Total

Gross Loans and Leases

Commercial real estate

Agricultural Real Estate

Real Estate Construction

Residential 1st Mortgages

Home Equity Lines and Loans

Consumer & Other (1)

Total Gross Loans & Leases

Unearned Income

Allowance for Credit Losses

Net Loans & Leases

Includes PPP loans.

There were no concentrations of loans exceeding 10% of total loans which were not otherwise disclosed as a category of loans in the above table.

The following table shows the maturity distribution and interest rate sensitivity of the loan portfolio of the Company on December 31, 2020.

(in thousands)

Residential and home equity

Total real estate

Commercial & Industrial

Commercial leases

Consumer and other (1)

Total gross loans and leases

(1) Includes SBA PPP loans.

The following table shows the maturity distribution and interest rate sensitivity of the loan portfolio of the Company as of December 31, 2021.

Loan Contractual Maturity

(Dollars in thousands)

Fifteen Years

After Fifteen Years

Gross loan and leases:

Commercial real estate

Agricultural Real Estate

Real Estate Construction

Residential 1st Mortgages

Home Equity Lines and Loans

Consumer & Other

Rate Sensitivity:

Variable Rate

Classified Loans & Leases and Non-Performing Assets

All loans & leases are assigned a credit risk grade using grading standards developed by bank regulatory agencies.

See “Results of Operations - Provision and Allowance for Credit Losses” for more detail on risk grades.

The Company utilizes the services of a third-party independent loan & lease review firm to perform evaluations of individual loans & leases and review the credit risk grades the Company places on loans & leases.

Loans & leases that are judged to exhibit a higher risk profile are referred to as “classified” and these loans & leases receive increased management attention.

As of December 31, 2020, classified loans & leases totaled $18.6 million compared to $16.2 million at December 31, 2019.

Classified loans & leases with higher levels of credit risk can be further designated as “impaired” loans & leases.

See “Results of Operations - Provision and Allowance for Credit Losses” for further details.

Impaired loans & leases consist of:

(1) non-accrual loans & leases;

and/or (2) restructured loans & leases that are still performing (i.e., accruing interest).

Non-Accrual Loans & Leases - Accrual of interest on loans & 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 & 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 & leases is then recognized only to the extent that cash is received and where the future collection of principal is probable.

At December 31, 2020, non-accrual loans & leases totaled $495,000.

There were no non-accrual loans & leases at December 2019.

Restructured Loans & Leases - A restructuring of a loan or lease constitutes a TDR under ASC 310-40, if the Company for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider, except when subject to the CARES Act and H.R.

Restructured loans or leases typically present an elevated level of credit risk, as the borrowers are not able to perform according to the original contractual terms.

Loans & leases that are on nonaccrual status at the time they become TDR loans or leases, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent.

A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms.

Residential and home equity

Total real estate

Commercial & Industrial

Commercial leases

Consumer and other (1)

Total gross loans and leases

Rate Structure for Loans

Adjustable Rate

Total gross loans and leases

(1) Includes SBA PPP loans.

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 $516,000 and $495,000 for the two years ended December 31, 2021 and 2020, respectively.

The one non-accrual loan outstanding as of December 31, 2021 of $516,000 paid-off in January 2022.

Restructured Loans and leases - A restructuring of a loan or lease constitutes a TDR under ASC 310-40, if the Company for economic or legal reasons related to the debtor’s

financial difficulties grants a concession to the borrower that it would not otherwise consider, except when subject to the CARES Act and H.R.

Restructured loans or leases typically present an elevated level of credit risk, as the borrowers are

not able to perform according to the original contractual terms.

If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure,

management may keep the loan or lease on accrual.

Loans and leases that are on nonaccrual status at the time they become TDR loans or leases, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the

Company generally believes to be six consecutive months of payments, or equivalent.

A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified

However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment.

At December 31, 2020, restructured loans totaled $7.9 million all of which were performing and at December 31, 2019, restructured loans totaled $12.1 million all of which were performing.

Other Real Estate - Loans where the collateral has been repossessed are classified as other real estate ("ORE") or, if the collateral is personal property, the loan is classified as other assets on the Company's financial statements.

Not included in the table below, but relevant to a discussion of asset quality are loans that were granted some form of relief because of COVID-19 and are not considered TDRs because of the CARES Act and H.R.

At December 31, 2021, restructured loans totaled $8.3 million compared with $7.9 million at December 31, 2020, all of which were performing.

See Note 5 “Loans and Leases” to the Consolidated Financial Statements in

“Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

Other Real Estate – Other real estate (“ORE”) represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower.

We record all “ORE” 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 assets at December 31, 2021, and at December

Not included in the table below, but relevant to a discussion of asset quality are loans that were granted some form of relief because of COVID-19 and are not considered TDRs because

of the CARES Act and H.R.

Since April 2020, we have restructured $278.1 million of loans under the CARES Act and H.R.

133 guidelines (see “Part I, Introduction - COVID-19 (Coronavirus) Disclosure”).

The following table sets forth the amount of the Company's non-performing loans & leases (defined as non-accrual loans & leases plus accruing loans & leases past due 90 days or more) and ORE as of December 31 of the years indicated.

(in thousands)

Non-Accrual Loans & Leases

At December 31, 2021, all loans

that were restructured as part of the CARES Act, have returned to the contractual terms and conditions of the loans, without exception.

The following table summarizes the loans for which the accrual of interest has been discontinued and loans more than 90 days past due and still accruing interest, including those non-accrual loans

that are troubled debt restructured loans, and OREO (as hereinafter defined):

(Dollars in thousands)

Non-performing assets:

Non-accrual loans and leases, not TDRs

Commercial real estate

Agricultural Real Estate

Real Estate Construction

Residential 1st Mortgages

Home Equity Lines and Loans

Consumer & Other

Total Non-Accrual Loans & Leases

Accruing Loans & Leases Past Due 90 Days or More

Residential and home equity

Total real estate

Commercial & Industrial

Commercial leases

Consumer and other

Non-accrual loans and leases, are TDRs

Commercial real estate

Agricultural Real Estate

Real Estate Construction

Residential 1st Mortgages

Home Equity Lines and Loans

Consumer & Other

Total Accruing Loans & Leases Past Due 90 Days or More

Total Non-Performing Loans & Leases

Other Real Estate Owned

Residential and home equity

Total real estate

Commercial & Industrial

Commercial leases

Consumer and other

Total non-performing loans and leases

Other real estate owned (“OREO”)

Total non-performing assets

Restructured Loans & Leases (Performing)

Non-Performing Loans & Leases as a Percent of Total Loans & Leases

Although management believes that non-performing loans & 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 6, located in “Item 8.

Financial Statements and Supplementary Data” for an allocation of the allowance classified to impaired loans & leases.

The Company reported $873,000 of ORE at December 31, 2020, and at December 31, 2019.

ORE at December 31, 2020 consisted of commercial land.

(i) those classified and non-performing loans & leases discussed above;

Performing TDRs

Selected ratios:

Non-performing loans to total loans and leases

Non-performing assets to total assets

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.

“Loans and Leases”, located in Item 8.

“Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for an

allocation of the allowance classified to impaired loans and leases.

Except for non-performing loans and leases discussed above;

and (ii) those loans modified under the COVID-19 guidelines of the CARES Act and H.R.

133, the Company’s management is not aware of any loans & leases as of December 31, 2020, for which known financial problems of the borrower would cause serious doubts as to the ability of these borrowers to materially comply with their present loan or lease repayment terms, or any known events that would result in the loan or lease being designated as non-performing at some future date.

133, the Company’s management is not aware of any loans and leases as of December 31, 2021, for which

known financial problems of the borrower would cause serious doubts as to the ability of these borrowers to materially comply with their present loan or lease repayment terms, or any known events that would result in the loan or lease being designated

as non-performing at some future date.

The State of California experienced drought conditions from 2013 through most of 2016.

Since 2016, reasonable levels of rain and snow have alleviated drought conditions in California.

As a result, current reservoir levels are adequate and the availability of water in our primary service area should not be an issue.

However, the weather patterns over the past 5 years further reinforce the fact that the long-term risks associated with the availability of water are significant.

The agricultural industry is facing challenges associated with:

(1) downward pressures on commodity prices (somewhat offset by higher yields);

and (2) tight labor markets and higher wages due to legislative changes at the state and federal levels.

In an attempt to slow the accelerating spread of COVID-19, on March 16, 2020 the first cities and counties in Northern California were placed under “shelter-in-place” orders.

By March 19th, the Governor had placed the entire state under these orders.

Since that time most California counties have been in various levels of lockdown, including those in which the Company operates.

The Governor has developed guidance as to when a given county can re-open certain business and other activities, but all counties in which the Company operates remain under some level of restriction.

Businesses have been designated as “essential” or “non-essential.” Non-essential businesses have either been closed or had the scope of their activities significantly reduced.

Unemployment has increased.

The economic impact of this situation has already been severe, and continuing restrictions will only exacerbate the situation.

The duration of these restrictions is not known at this time nor is the pace of recovery once they are lifted, therefore, the Company cannot determine the ultimate impact on classified and non-performing loans and leases (see “Part I, Introduction - COVID-19 (Coronavirus) Disclosure”).

One of the key sources of funds to support earning assets is the generation of deposits from the Company’s customer base.

The ability to grow the customer base and subsequently deposits is a significant element in the performance of the Company.

The following table sets forth, by time remaining to maturity, the Company’s time deposits in amounts of $250,000 or more at December 31, 2020.

(in thousands)

Time Deposits of $250,000 or More

Three Months or Less

Over Three Months Through Six Months

Over Six Months Through Twelve Months

Over Twelve Months

Total Time Deposits of $250,000 or More

Refer to the Year-To-Date Average Balances and Rate Schedules located in this "Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations" for information on separate deposit categories.

At December 31, 2020, deposits totaled $4.06 billion.

This represents an increase of 23.9% or $782.2 million from December 31, 2019.

In addition to the Company’s ongoing business development activities for deposits, the following factors positively impacted year-over-year deposit growth:

After 2016, reasonable levels of rain and snow alleviated drought conditions in our primary service area, but the winter of 2020-2021 was once again

Despite this, the availability of water in our primary service area was not an issue for the 2021 growing season.

However, the weather patterns over the past eight years further reinforce the fact that the long-term risks associated with

the availability of water are significant.

While tremendous strides have been made in fighting the COVID-19 virus, particularly with the development of a vaccine, the lingering effects of COVID-19 are still with us, and it is impossible to predict the ultimate impact on classified

and non-performing loans and leases (see Part I.

“Introduction - COVID-19 (Coronavirus) Disclosure”).

Allowance for Credit Losses—Loans and Leases

The Company maintains an allowance for credit losses (“ACL”) on loans based on probable credit losses inherent in the Company’s loan & lease portfolio as of the balance sheet date.

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 & 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 impaired loans and

general reserves for inherent losses related to loans and leases that are not impaired;

and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors.

Note 5, located in “Item 8.

Financial Statements and Supplementary Data” for a detailed discussion on the Company’s allowance for credit losses.

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

Year Ended December 31, 2021

(Dollars in thousands)

Allowance for credit losses:

Balance at beginning of year

Provision for credit losses

Commercial real estate

Residential and home equity

Total real estate

Commercial & Industrial

Commercial leases

Consumer and other

Total charge-offs

Commercial real estate

Residential and home equity

Total real estate

Commercial & Industrial

Commercial leases

Consumer and other

Total recoveries

Net recoveries / (charge-offs)

Balance at end of year

Selected financial information:

Gross loans and leases held for investment

Average loans and leases

Non-performing loans and leases

Allowance for credit losses to non-performing loans and leases

Net recoveries/(charge-offs) to average loans and leases

Provision for credit losses to average loans and leases

Allowance for credit losses to loans and leases held for investment

Non-performing loans and leases to loans and leases held for investment

The increase in ACL in both 2020 and 2021 is primarily related to higher expected probable losses inherent in the loan portfolio that is directly related to management’s judgement of impacts associated with negative

economic effects of the COVID-19 pandemic and overall growth in the loan portfolio.

The decrease in ACL to total loans in both 2020 and 2021 is primarily related to the funding of SBA PPP loans, which management does not believe the Company will

experience credit losses.

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

(Dollars in thousands)

Percent of Total

Allowance for credit losses:

Commercial real estate

Residential and home equity

Total real estate

Commercial & Industrial

Commercial leases

Consumer and other

Total allowance for credit losses

Total deposits were $4.64 billion and $4.06 billion as of December 31, 2021 and 2020, respectively.

In addition to the Company’s ongoing business development activities for deposits, in management’s opinion the

following factors positively impacted year-over-year deposit growth:

(1) the Company’s strong financial results and position and F&M Bank’s reputation as one of the most safe and sound banks in its market area;

and (2) the Company’s expansion of its service area into Walnut Creek, Concord and Napa;

and (3) borrowers under the PPP depositing loan proceeds into their deposit accounts until those funds are used for operating expenses.

Although total deposits have increased 23.9% since December 31, 2019, importantly, low cost transaction accounts have grown at a strong pace as well as:

Demand and interest-bearing transaction accounts increased $612.8 million or 34.7% since December 31, 2019.

Savings and money market accounts have increased $265.5 million or 26.7% since December 31, 2019.

Time deposit accounts have decreased $96.1 million or 18.6% since December 31, 2019.

(2) the Company’s expansion of its

service area into Walnut Creek, Concord and Napa;

and (3) borrowers under the SBA PPP depositing loan proceeds into their deposit accounts with the Bank until those funds are used for operating expenses.

Non-interest bearing demand deposits increased to $1.75 billion, or 37.72% of total deposits, as of December 31, 2021 from $1.48 billion, or 36.34% of total deposits, as of December 31, 2020.

Interest bearing deposits

are comprised of interest-bearing transaction accounts, money market accounts, regular savings accounts, and certificates of deposit.

Although total deposits have increased 14.28% since December 31, 2020, more importantly, low cost transaction accounts have grown at a strong pace as well as:

Demand and interest-bearing transaction accounts totaled $2.85 billion at December 31, 2021, an increase of $470 million, or 19.75% from $2.38 billion held at December 31, 2020.

Savings and money market accounts increased $140 million, or 11.07%, to $1.40 billion at December 31, 2021 compared with $1.26 billion at December 31, 2020.

Time deposit accounts decreased $29.4 million, or 6.96%, to $392 million at December 31, 2021 compared with $422 million at December 31, 2020.

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

As of December 31,

(Dollars in thousands)

Average Balance

Interest Expense

Average Balance

Interest Expense

Average Balance

Interest Expense

Total deposits:

Interest-bearing deposits:

Savings and Money Market

Certificates of deposit greater than $250,000

Certificates of deposit less than $250,000

Total interest bearing deposits

Non-interest bearing deposits

Total deposits

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.

continue to manage interest expense through deposit pricing.

The average cost of deposits, including non-interest bearing deposits, declined to 0.09% for all of 2021 compared with 0.25% for all of 2020, as overall interest rates were lowered to near

zero by the Federal Reserve.

The following table shows deposit with a balance greater than $250,000 at December 31, 2021 and 2020:

(Dollars in thousands)

Deposits greater than $250,000

Certificates of deposit greater $250,000, by maturity:

Less than 3 months

3 months to 6 months

6 months to 12 months

More than 12 months

Total Time Deposits greater than $250,000

Total deposits greater than $250,000

Refer to the Year-To-Date Average Balances and Rate Schedules located in this “Item 7.

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

The Bank participates in a program wherein the State of California places time deposits with the Bank at the Bank’s option.

At December 31, 2021 and 2020, 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.

These sources of funds are also used to manage the Company’s interest rate risk exposure;

These sources of funds are also used to manage the Company’s interest rate risk

and, as opportunities arise, to borrow and invest the proceeds at a positive spread through the investment portfolio.

There were no FHLB advances at December 31, 2021 or 2020.

There were no Federal Funds purchased or advances from the FRB at December 31, 2020 or 2019.

There were no Federal Funds purchased or advances from the FRB

at December 31, 2021 or 2020.

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 13, located in “Item 8.

Financial Statements and Supplementary Data.” Although this amount is reflected as subordinated debt on the Company’s balance sheet, under current regulatory guidelines, our TPS will continue to qualify as regulatory capital.

These securities accrue interest at a variable rate based upon 3-month London InterBank Offered Rate (“LIBOR”) plus 2.85%.

Interest rates reset quarterly (the next reset is March 17, 2021) and the rate was 3.08% as of December 31, 2020.

“Long-Term Subordinated

Debentures” located in Item 8.

“Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

Although this amount is reflected as subordinated debt on the Company’s balance sheet, under current regulatory guidelines, our Trust

Preferred Securities will continue to qualify as regulatory capital.

These securities accrue interest at a variable rate based upon 3-month LIBOR plus 2.85%.

Interest rates reset quarterly (the next reset is March 17, 2022) and the rate was 3.07% as

of December 31, 2021.

The average rate paid for these securities was 3.06% in 2021 and 3.67% in 2020.

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.

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.

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 $463 million at December 31, 2021, and $424 million at the end of 2020.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.

Failure to meet minimum capital requirements can initiate certain actions by regulators that, if undertaken, could have a material effect on the Company and the Bank's financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.

The Company’s 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 minimum capital level requirements applicable to the Company and the Bank are:

(i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets (“RWA”);

(ii) a Tier 1 capital ratio of 6% of RWA;

(iii) a total capital ratio of 8% of RWA;

and (iv) a Tier 1 leverage ratio of 4% of total assets.

A "capital conservation buffer" of 2.5% above each of the regulatory minimum capital ratios, which would result in the following minimum ratios:

(i) a common equity Tier 1 capital ratio of 7.0% of RWA;

(ii) a Tier 1 capital ratio of 8.5% of RWA;

and (iii) a total capital ratio of 10.5% of RWA.

An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount.

The Company’s subordinated debentures issued in 2003 continue to be counted as Tier 1 capital.

As previously discussed, in order to supplement its regulatory capital base, during December 2003, the Company issued $10.0 million of trust preferred securities.

In accordance with the provisions of the “Consolidation” topic of the FASB Accounting Standards Codification (“ASC”), the Company does not consolidate the subsidiary trust, which has issued the trust-preferred securities.

In 1998, the Board approved the Company’s first common stock repurchase program.

This program has been extended and expanded several times since then, and most recently, on November 6, 2018, the Board of Directors approved an extension of the $20 million stock repurchase program over the three-year period ending December 31, 2021.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

There were no stock repurchases in 2020 or 2019 under the Common Stock Repurchase Plan.

The remaining dollar value of shares that may yet be purchased under the Company’s Common Stock Repurchase Plan is approximately $20 million.

On August 5, 2008, the Board of Directors approved a Share Purchase Rights Plan (the “Rights Plan”), pursuant to which the Company entered into a Rights Agreement dated August 5, 2008, with Computershare as Rights Agent.

The Rights Plan was set to expire on August 5, 2018.

On November 19, 2015, the Board of Directors approved a seven-year extension of the term of the Rights Plan.

Pursuant to an Amendment to the Rights Agreement dated February 18, 2016, the term of the Rights Plan was extended from August 5, 2018 to August 5, 2025.

The extension of the term of the Rights Plan was intended as a means to continue to guard against abusive takeover tactics and was not in response to any particular proposal.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for further explanation.

On November 23, 2020, the Board of Directors of Farmers & Merchants Bancorp approved, and all applicable regulators provided statements of non-objection regarding, the Company’s repurchase and retirement of up to $8.5 million of its outstanding common stock during the fourth quarter of 2020 and the first half of 2021.

These repurchases will be done outside of the Company’s current repurchase plan.

All repurchases have been and will continue to be made at the then prevailing market prices.

In the fourth quarter of 2020 the Company repurchased $2.8 million of shares from shareholders.

During the first quarter of 2020, the Company issued a combined total 523 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans.

All of the shares were issued at a price of $770.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder.

The proceeds were contributed to the Bank as equity capital.

See Note 14, located in “Item 8.

Financial Statements and Supplementary Data.”

During 2019, the Company issued a combined total 9,312 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans.

All of the shares were issued at prices ranging from $715.00 to $770.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder.

The proceeds were contributed to the Bank as equity capital.

See Note 14, located in “Item 8.

Financial Statements and Supplementary Data.”

During 2018, the Company issued a combined total 13,520 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans.

There were also 2,400 shares issued to individuals during 2018.

All of the shares were issued at prices ranging from $635.00 to $690.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder.

The proceeds were contributed to the Bank as equity capital.

Critical Accounting Policies and Estimates

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

In preparing the Company’s financial statements management makes estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses.

Management believes that the most significant subjective judgments that it makes include the following:

Allowance for Credit Losses - As a financial institution, which assumes lending and credit risks as a principal element in its business, the Company anticipates that credit losses will be experienced in the normal course of business.

Accordingly, the allowance for credit losses is maintained at a level considered adequate by management to provide for losses that are inherent in the portfolio.

The allowance is increased by provisions charged to operating expense and reduced by net charge-offs.

Management employs a systematic methodology for determining the allowance for credit losses.

On a quarterly basis, management reviews the credit quality of the loan & lease portfolio and considers problem loans & leases, delinquencies, internal credit reviews, current economic conditions, loan & lease loss experience, and other factors in determining the adequacy of the allowance balance.

While the Company utilizes a systematic methodology in determining its allowance, the allowance is based on estimates, and ultimate losses may vary from current estimates.

The estimates are reviewed periodically and, as adjustments become necessary, are reported in earnings in the periods in which they become known.

For additional information, see Note 6, located in “Item 8.

Financial Statements and Supplementary Data.”

Fair Value Measurements - The Company discloses the fair value of financial instruments and the methods and significant assumptions used to estimate those fair values.

The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies.

The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions.

In some cases, book value is a reasonable estimate of fair value due to the relatively short period of time between origination of the instrument and its expected realization.

For additional information, see “Item 7A.

Quantitative and Qualitative Disclosures About Market Risk – Credit Risk” and Notes 17 and 18 located in “Item 8.

Financial Statements and Supplementary Data.”

Income Taxes - The Company uses the liability method of accounting for income taxes.

This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled.

As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year.

This amount combined with the current taxes payable or refundable results in the income tax expense for the current year.

For additional information, see Note 1, located in “Item 8.

Financial Statements and Supplementary Data.”

We are subject to risk-based capital adequacy guidelines related to the adoption of U.S.

Basel III Capital Rules, which impose higher risk-based capital and leverage requirements than those previously in place.

Specifically, the rules impose, among other requirements, minimum capital requirements including a Tier 1 leverage capital ratio of 4.0%, common equity Tier 1 risk-based capital ratio of 4.5%, a Tier 1 risk-based capital ratio of 6.0% and a total

risk-based capital ratio of 8.0%.

The following table sets forth our capital ratios:

(Dollars in thousands)

Basel III Regulatory Well Capitalized Requirement

As of December

Farmers & Merchants Bancorp

CET1 capital to risk-weighted assets

Tier 1 capital to risk-weighted assets

Risk-based capital to risk-weighted assets

Tier 1 leverage capital ratio

Farmers & Merchants Bank

CET1 capital to risk-weighted assets

Tier 1 capital to risk-weighted assets

Risk-based capital to risk-weighted assets

Tier 1 leverage capital ratio

FMCB and FMB met the definition of a “well-capitalized” institution as of December 31, 2021 and 2020 for federal regulatory purposes.

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;

(1) any obligation under a guarantee

(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.

(3) any obligation under certain

derivative instruments;

research and development services with the Company.

The Company had the following off balance sheet commitments as of the dates indicated.

(in thousands)

The following table sets forth our off-balance sheet lending commitments as of December 31, 2021:

Amount of Commitment Expiration per Period

(Dollars in thousands)

Committed Amount

Off-balance sheet commitments

Commitments to extend credit

Letters of Credit

Performance Guarantees Under Interest Rate Swap Contracts Entered Into Between Our Borrowing Customers and Third Parties

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.

Standby letters of credit

Performance guarantees

Total off-balance sheet commitments

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 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.

Evaluations of each customer’s creditworthiness are performed on a

case-by-case basis.

Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third-party.

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Additionally, the Company maintains a reserve for off balance sheet commitments, which totaled $315,000 at December 31, 2021 and 2020.

We do not anticipate any material losses as a result of these transactions.

Aggregate Contractual Obligations and Commitments

The following table presents, as of December 31, 2020, our significant and determinable contractual obligations by payment date.

The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts, or other similar carrying value adjustments.

For further information on the nature of each obligation type, see applicable note disclosures located in “Item 8.

Financial Statements and Supplementary Data.”

(in thousands)

1 Year or Less

More Than 5 Years

Long-Term Subordinated Debentures

Deferred Compensation (1)

(1) These amounts represent obligations to participants under the Company's various non-qualified deferred compensation plans.

All amounts have been fully funded in to a Rabbi Trust as of December 31, 2020.

See Note 16 located in “Item 8.

Financial Statements and Supplementary Data.”

do not anticipate any material losses because of these transactions.

The ability to have readily available funds sufficient to repay fully maturing liabilities is of primary importance to depositors, creditors and regulators.

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 on a monthly basis the amount of

funds that will be required and we maintain relationships with a diversified client base so funds are accessible.

Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets.

We had the following

borrowing lines available at December 31, 2021:

As of December 31, 2021

(Dollars in thousands)

Credit Line Available

Outstanding Amount

Remaining Credit Line Available

Value of Collateral Pledged

Additional liquidity sources:

Federal Home Loan Bank

Federal Reserve BIC

FHLB Fed Funds

US Bank Fed Funds

MUFG Union Bank Fed Funds

PCBB Fed Funds

Total additional liquidity sources

We believe our liquid assets and short-term borrowing credit lines are adequate to meet our cash flow needs for loan funding and deposit cash withdrawal for the next 60 to 90 days.

As of December 31, 2021, we had $1.3

billion in cash and unencumbered investment securities;

$3.1 million in investment securities and $1.9 billion in loans pledged as collateral on short-term borrowing credit lines.

We have the option of either borrowing on our credit lines or selling

these investment securities for cash flow needs.

On a long-term basis, our liquidity will be met by changing the relative distribution of our asset portfolios by reducing our investment or loan 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 originations and commitments and deposit withdrawals.

We believe we can meet all of these needs by cash flows from investment payments and maturities, and investment sales, if the need arises.

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.

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 real estate, commercial & industrial, consumer loans, and purchases and sales of investment securities.

As of December 31, 2021, we had outstanding loan

commitments of $937 million and outstanding letters of credit of $17.9 million.

We anticipate that we will have sufficient funds available to meet current loan commitments.

Net cash provided by financing activities has been impacted significantly by higher deposit levels.

During the years ended December 31, 2021 and 2020, deposits increased $580 million and $782 million, respectively.

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What changed 10-K

Item 7. Management’s Discussion and Analysis