FARMERS & MERCHANTS BANCORP 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2022 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number: 000-26099 FARMERS & MERCHANTS BANCORP (Exact name of registrant as specified in its charter) Delaware 94-3327828 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 111 W. Pine Street , Lodi , California 95240 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code ( 209 ) 367-2300 Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered None Not Applicable Not Applicable Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 Par Value Per Share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ As of July 31, 2022, the registrant had 775,246 shares of common stock $0.01 par value per share, outstanding. FARMERS & MERCHANTS BANCORP FORM 10-Q TABLE OF CONTENTS Table Of Contents PART I. - FINANCIAL INFORMATION Page Item 1 - Financial Statements Unaudited Consolidated Statements of Financial Condition 4 Unaudited Consolidated Statements of Income 5 Unaudited Consolidated Statements of Comprehensive Income 6 Unaudited Consolidated Statements of Changes in Shareholders’ Equity 7 Unaudited Consolidated Statements of Cash Flows 8 Notes to Unaudited Consolidated Financial Statements 9 Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations 32 Overview 33 Results of Operations 38 Results of Financial Condition 45 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 59 Item 4 - Controls and Procedures 59 PART II. - OTHER INFORMATION Item 1 – Legal Proceedings 59 Item 1A – Risk Factors 59 Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds 59 Item 3 – Defaults upon Senior Securities 59 Item 4 – Mine Safety Disclosures 60 Item 5 – Other Information 60 Item 6 – Exhibits 60 Signatures 61 2 Table Of Contents Special Note Regarding Forward-Looking Statements Certain matters in this Quarterly Report on Form 10-Q contains various forward-looking statements, usually containing the words “estimate,” “project,” “expect,” “objective,” “goal,” or similar expressions and includes assumptions concerning Farmers & Merchants Bancorp’s (together with its subsidiaries, the “Company”, “FMCB”, or “we”) operations, future results, and prospects. These forward-looking statements are based upon current expectations and are subject to risks and uncertainties. In connection with the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important factors which could cause the actual results of events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Such factors include, but are not limited to, the following: (1) economic conditions in the mid Central Valley or the East Bay region of San Francisco in California; (2) significant changes in interest rates and loan prepayment speeds; (3) credit risks of lending and investment activities; (4) changes in federal and state banking laws or regulations; (5) competitive pressure in the banking industry; (6) changes in governmental fiscal or monetary policies; (7) the possible adverse impacts on the banking industry and our business from a period of significant, prolonged inflation; (8) uncertainty regarding the economic outlook resulting from the continuing war on terrorism, as well as actions taken or to be taken by the U.S. or other governments as a result of further acts or threats of terrorism; (9) water availability and management issues in California and the resulting impact on the Company’s agricultural and industrial customers; (10) expansion into new geographic markets and new lines of business; (11) the impact of COVID-19 (Coronavirus) on the Company and its customers (see “Note 2 – Risks and Uncertainties”); (12) the impact of changes in Federal and State taxation policies and rates; and (13) other factors discussed in “Item 1A. Risk Factors” on our Annual Report on Form 10-K filed with the SEC on March 15, 2022. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made. 3 Table Of Contents PART 1. FINANCIAL INFORMATION Item 1. Financial Statements FARMERS & MERCHANTS BANCORP UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands, except share and per share amounts) June 30, 2022 December 31, 2021 ASSETS Cash and due from banks $ 67,136 $ 52,499 Interest bearing deposits with banks 680,652 662,961 Total cash and cash equivalents 747,788 715,460 Securities available-for-sale, at fair value 225,338 270,454 Securities held-to-maturity, net of allowance for credit losses of $ 393 and $ 0 , respectively, fair value $ 754,834 and $ 725,841 , respectively 867,990 737,052 Total investment securities 1,093,328 1,007,506 Non-marketable securities 15,549 15,549 Loans and leases held for investment 3,249,886 3,237,177 Allowance for credit losses ( 62,080 ) ( 61,007 ) Loans held for investment, net 3,187,806 3,176,170 Bank-owned life insurance 72,513 71,411 Premises and equipment, net 46,970 47,730 Deferred income tax assets 34,839 25,542 Accrued interest receivable 18,231 18,098 Goodwill 11,183 11,183 Other intangibles 3,106 3,402 Other real estate owned 873 873 Other assets 94,495 84,796 TOTAL ASSETS $ 5,326,681 $ 5,177,720 LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits: Non-interest bearing $ 1,753,633 $ 1,750,330 Interest bearing: Demand 1,059,651 1,097,337 Savings and money market 1,577,599 1,400,000 Certificate of deposits 378,630 392,485 Total interest bearing 3,015,880 2,889,822 Total deposits 4,769,513 4,640,152 Subordinated debentures 10,310 10,310 Interest payable and other liabilities 85,505 64,122 TOTAL LIABILITIES 4,865,328 4,714,584 SHAREHOLDERS’ EQUITY Preferred shares, no par value, 1,000,000 shares authorized and, none issued or outstanding - - Common shares, $ 0.01 par value, 7,500,000 authorized 777,190 and 789,646 outstanding at June 30, 2022 and December 31, 2021 , respectively 8 8 Additional paid-in capital 65,671 77,516 Retained earnings 416,722 387,331 Accumulated other comprehensive (loss) / income, net of taxes ( 21,048 ) ( 1,719 ) TOTAL SHAREHOLDERS’ EQUITY 461,353 463,136 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 5,326,681 $ 5,177,720 4 Table Of Contents FARMERS & MERCHANTS BANCORP UNAUDITED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended June 30, Six Months Ended June 30, (Dollars in thousands, except share and per share amounts) 2022 2021 2022 2021 Interest income Interest and fees on loans and leases $ 38,570 $ 36,664 $ 76,003 $ 73,751 Interest and dividends on investments 5,716 4,322 11,011 8,739 Interest on deposits with others 1,409 164 1,775 267 Total interest income 45,695 41,150 88,789 82,757 Interest expense Deposits 873 1,034 1,676 2,271 Subordinated debentures 103 79 185 158 Total interest expense 976 1,113 1,861 2,429 Net interest income 44,719 40,037 86,928 80,328 Provision for credit losses 1,500 - 1,500 1,250 Net interest income after provision for credit losses 43,219 40,037 85,428 79,078 Non-interest income Card processing 1,847 1,806 3,584 3,385 Service charges on deposit accounts 830 679 1,680 1,317 Increase in cash surrender value of BOLI 560 541 1,102 1,067 Gain on sale of investment securities 2 714 2 2,554 Net (loss)/gain on deferred compensation benefits ( 991 ) 492 ( 579 ) 1,213 Other 1,264 727 2,035 2,139 Total non-interest income 3,512 4,959 7,824 11,675 Non-interest expense Salaries and employee benefits 16,403 16,182 33,187 32,922 Net (loss)/gain on deferred compensation benefits ( 991 ) 492 ( 579 ) 1,213 Occupancy 1,150 1,178 2,304 2,409 Data Processing 1,233 1,213 2,448 2,437 FDIC insurance 361 298 710 585 Marketing 340 418 656 606 Legal 405 289 684 400 Other 4,130 3,533 7,409 6,575 Total non-interest expense 23,031 23,603 46,819 47,147 INCOME BEFORE INCOME TAXES 23,700 21,393 46,433 43,606 Income tax expense 5,257 5,240 10,932 10,740 NET INCOME $ 18,443 $ 16,153 $ 35,501 $ 32,866 Earnings per common share: Basic $ 23.58 $ 20.45 $ 45.28 $ 41.62 Diluted $ 23.58 $ 20.45 $ 45.28 $ 41.62 Weighted average number of common shares Basic 781,880 789,646 783,976 789,646 Diluted 781,880 789,646 783,976 789,646 5 Table Of Contents FARMERS & MERCHANTS BANCORP UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended June 30, Six Months Ended June 30, (Dollars in thousands) 2022 2021 2022 2021 Net income $ 18,443 $ 16,153 $ 35,501 $ 32,866 Other comprehensive income Unrealized holding (losses)/gains on securities available-for-sale ( 11,434 ) 3,957 ( 27,299 ) ( 14,609 ) Reclassification adjustment for (gains)/losses on available-for-sale securities ( 2 ) ( 714 ) ( 2 ) ( 2,554 ) Amortization of unrealized loss on securities transferred to held-to-maturity ( 64 ) ( 180 ) ( 141 ) ( 238 ) Net unrealized holding (losses)/gains on securities available-for-sale ( 11,500 ) 3,063 ( 27,442 ) ( 17,401 ) Income tax benefit/(expense) 3,400 ( 905 ) 8,113 5,144 Other comprehensive (loss)/income, net of tax ( 8,100 ) 2,158 ( 19,329 ) ( 12,257 ) Total comprehensive income $ 10,343 $ 18,311 $ 16,172 $ 20,609 6 Table Of Contents FARMERS & MERCHANTS BANCORP UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY For the three and six months ended June 30, 2022 and 2021 (Dollars in thousands, except share amounts) Common Shares Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss)/Income Total Balance as of April 1, 2022 785,146 $ 8 $ 73,264 $ 404,389 $ ( 12,948 ) $ 464,713 Net income - - - 18,443 - 18,443 Other comprehensive loss, net of tax - - - - ( 8,100 ) ( 8,100 ) Cash dividends declared ($ 7.85 per share) - - - ( 6,110 ) - ( 6,110 ) Repurchase of common stock ( 7,956 ) - ( 7,593 ) - - ( 7,593 ) Balance as of June 30 , 2022 777,190 $ 8 $ 65,671 $ 416,722 $ ( 21,048 ) $ 461,353 Balance as of April 1, 2021 789,646 $ 8 $ 77,516 $ 349,790 $ ( 1,344 ) $ 425,970 Net income - - - 16,153 - 16,153 Other comprehensive loss, net of tax - - - - 2,158 2,158 Cash dividends declared ($ 7.50 per share) - - - ( 5,922 ) - ( 5,922 ) Balance as of June 30 , 2021 789,646 $ 8 $ 77,516 $ 360,021 $ 814 $ 438,359 (Dollars in thousands, except share amounts) Common Shares Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss)/Income Total Balance as of January 1, 2022 789,646 $ 8 $ 77,516 $ 387,331 $ ( 1,719 ) $ 463,136 Net income - - - 35,501 - 35,501 Other comprehensive loss, net of tax - - - - ( 19,329 ) ( 19,329 ) Cash dividends declared ($ 7.85 per share) - - - ( 6,110 ) - ( 6,110 ) Repurchase of common stock ( 12,456 ) - ( 11,845 ) - - ( 11,845 ) Balance as of June 30 , 2022 777,190 $ 8 $ 65,671 $ 416,722 $ ( 21,048 ) $ 461,353 Balance as of January 1, 2021 789,646 $ 8 $ 77,516 $ 333,070 $ 13,071 $ 423,665 Net income - - - 32,866 - 32,866 Other comprehensive loss, net of tax - - - - ( 12,257 ) ( 12,257 ) Cash dividends declared ($ 7.50 per share) - - - ( 5,922 ) - ( 5,922 ) Cash dividends returned - - - 7 - 7 Balance as of June 30 , 2021 789,646 $ 8 $ 77,516 $ 360,021 $ 814 $ 438,359 7 Table Of Contents FARMERS & MERCHANTS BANCORP UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, (Dollars in thousands) 2022 2021 Cash flows from operating activities: Net income $ 35,501 $ 32,866 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 1,500 1,250 Depreciation and amortization 1,270 1,318 Net amortization of securities premiums and discounts 275 797 Increase in cash surrender value of BOLI ( 1,102 ) ( 1,067 ) Increase in deferred income taxes, net ( 1,127 ) ( 1,178 ) Gains on sale of securities available-for-sale ( 2 ) ( 2,554 ) Net changes in: Other assets ( 7,797 ) ( 18,274 ) Other liabilities 22,823 14,280 Net cash provided by operating activities 51,341 27,438 Cash flows from investing activities: Net change in loans held for investment ( 12,568 ) 66,550 Purchase of available-for-sale securities ( 10,090 ) ( 257,225 ) Purchase of held-to-maturity securities ( 168,149 ) ( 124,070 ) Maturities/sales of available-for-sale securities 27,679 381,117 Maturities of held-to-maturity securities 36,641 13,140 Purchase of premises and equipment ( 526 ) ( 377 ) Purchase of other investments ( 3,440 ) ( 1,656 ) Proceeds from sale of assets 34 74 Net cash provided by investing activities ( 130,419 ) 77,553 Cash flows from financing activities: Net increase in deposits 129,361 351,797 Cash dividends paid ( 6,110 ) ( 5,915 ) Net cash used in share repurchase of common stock ( 11,845 ) - Net provided by financing activities 111,406 345,882 Net change in cash and cash equivalents 32,328 450,873 Cash and cash equivalents, beginning of period 715,460 383,837 Cash and cash equivalents, end of period $ 747,788 $ 834,710 Supplemental disclosures of cash flow information: Cash paid for interest $ 2,580 $ 3,220 Income taxes paid $ 9,343 $ 19,181 Supplemental disclosures of non-cash transactions: Investment securities available-for-sale transferred to held-to-maturity $ - $ 316,925 8 Table Of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED STATEMENTS Note 1—Basis of Presentation and Significant Accounting Policies The accompanying unaudited consolidated financial statements include the accounts of Farmers & Merchants Bancorp (“FMCB” or “Bancorp”), a bank holding company incorporated in the State of Delaware and its wholly owned subsidiary, Farmers & Merchants Bank of Central California (“FMB” or “Bank”) collectively (the “Company”). These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In preparing these financial statements, the Company has evaluated events and transactions subsequent to June 30, 2022 for potential recognition or disclosure. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and note disclosures have been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements. Certain reclassifications have been made to the 2021 Consolidated Financial Statements and/or schedules to conform to the 2022 presentation. All significant intercompany transactions and balances have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are significant to an understanding of Bank’s financial statements. These policies relate to: (i) the methodology for the recognition of interest income; (ii) the determination of the provision and allowance for credit losses; (iii) the valuation of financial assets and liabilities recorded at fair value; (iv) the valuation of intangibles, such as goodwill and core deposit intangibles (“CDI”); (v) the valuation of other real estate owned (“OREO”); and (vi) the valuation or recognition of deferred tax assets and liabilities. These policies and judgments, estimates and assumptions are described in greater detail in subsequent notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, Summary of Critical Accounting Policies and Estimates, in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 15, 2022 and Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations Summary of Critical Accounting Policies and Estimates included in this Quarterly Report on Form 10-Q. The information included in this Form 10-Q should be read in conjunction with our 2021 Form 10-K. Interim results are not necessarily indicative of results for a full year or any other interim period. Accounting Standards Pending Adoption — The following paragraphs provide descriptions of newly issued but not yet effective accounting standards that could have a material effect on the Company’s financial position or results of operations. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The amendments in this ASU are elective and provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Since the issuance of this guidance, the publication cessation of the U.S. dollar LIBOR has been extended to June 30, 2023. We have not elected to apply these amendments. However, we will assess the applicability of the ASU to us and continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations. 9 Table Of Contents Note 1—Basis of Presentation and Significant Accounting Policies—Continued In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). The main amendments in this ASU are intended to clarify certain optional expedients and scope of derivative instruments. The amendments are elective and effective immediately upon issuance of this ASU. Amendments may be elected through December 31, 2022. We have not elected to apply amendments at this time, however, will assess the applicability of this ASU to us as we continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations. In March 2022, the FASB issued guidance within ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures . The amendments in this ASU eliminate the current troubled debt restructuring (TDR) recognition and measurement guidance and, instead, require that a creditor evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. These amendments require vintage disclosures including current-period gross write-offs by year of origination for financing receivables. Gross write-off information must be included in the vintage disclosures in accordance with ASC 326-20-50-6, which requires disclosure of the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years since the Company previously adopted the amendments in ASU 2016-13, which is commonly referred to as the current expected credit loss methodology, on January 1, 2020. These amendments should be applied prospectively, though for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. Early adoption is permitted, including adoption in an interim period. If an entity elects to early adopt in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to the vintage disclosures. The adoption of this ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements. Impact of recent authoritative accounting guidance — The Accounting Standards Codification™ (“ASC”) is the FASB officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities. Periodically, the FASB will issue Accounting Standard updates (“ASU”) to its ASC. Rules and interpretive releases of the SEC under the authority of the federal securities laws are also sources of authoritative GAAP for the Company as an SEC registrant. All other accounting literature is non-authoritative. 10 Table Of Contents Note 1—Basis of Presentation and Significant Accounting Policies—Continued On January 1, 2022, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology that delays recognition until it is probable a loss has been incurred with an expected loss methodology that is referred to as CECL. In adopting ASU 2016-13 (Topic 326) Management determined that the Weighted Average Remaining Maturity (“WARM”) method was most appropriate given the Company’s current size and complexity. The implementation of the WARM method did not result in any material change in the calculation of the Company’s December 31, 2021 Allowance for Credit Losses, therefore, no adjustment to Shareholders’ Equity was made as of January 1, 2022. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The ASU affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial asset not excluded from the scope that have the contractual right to receive cash. The ASU replaces the incurred loss impairment methodology in previous GAAP with CECL, a methodology that reflects current expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This ASU broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. The following table illustrates the pre-tax impact of the adoption of this ASU: January - 2022 (Dollars in thousands) Reported under ASC 326 Reported Pre- Adoption Impact of ASC 326 Adoption Allowance for credit losses: Real estate: Commercial $ ( 17,379 ) $ ( 28,536 ) $ 11,157 Agricultural ( 14,580 ) ( 9,613 ) ( 4,967 ) Residential and home equity ( 5,879 ) ( 2,847 ) ( 3,032 ) Construction ( 3,311 ) ( 1,456 ) ( 1,855 ) Total real estate ( 41,149 ) ( 42,452 ) 1,303 Commercial & industrial ( 11,417 ) ( 11,489 ) 72 Agricultural ( 6,363 ) ( 5,465 ) ( 898 ) Commercial leases ( 1,567 ) ( 938 ) ( 629 ) Consumer and other ( 511 ) ( 663 ) 152 Total allowance for credit losses $ ( 61,007 ) $ ( 61,007 ) $ - 11 Table Of Contents Note 1—Basis of Presentation and Significant Accounting Policies—Continued Subsequent events — The Company has evaluated events occurring subsequent to June 30, 2022 for disclosure in the consolidated financial statements. Note 2 — Risks and Uncertainties The COVID-19 pandemic has affected the economy and businesses throughout the U.S., in California and in the markets served by the Company. Designated as an “essential business”, the Company’s subsidiary, Farmers & Merchants Bank of Central California, has kept all branches open and maintained regular business hours during the COVID-19 pandemic. Our staffing levels have remained stable during the COVID-19 pandemic. Through the CARES Act and H.R. 133, as well as related federal and state regulatory actions, the federal government has taken extraordinary efforts to provide financial assistance to individuals and companies to help them move through these difficult times. However, there are no guarantees how long the COVID-19 virus may continue to impact our economy, and therefore, the Company. While we expect the effects of COVID-19 could have an adverse future impact on our business, financial condition and results of operations, we are unable to predict the full extent or nature of these impacts at the current time. 12 Table Of Contents N ote 3— Investment Securities The amortized cost, fair values, and unrealized gains and losses of the securities available-for-sale are as follows: Available-for-Sale Securities Gross Unrealized (Dollars in thousands) Amortized Cost Gains Losses Fair Value As of June 30, 2022 U.S. Treasury notes $ 4,968 $ - $ 16 $ 4,952 U.S. Government-sponsored securities 5,402 65 26 5,441 Mortgage-backed securities (1) 232,368 116 28,877 203,607 Collateralized mortgage obligations (1) 1,525 - 23 1,502 Corporate securities 10,049 - 523 9,526 Other 310 - - 310 Total available-for-sale securities $ 254,622 $ 181 $ 29,465 $ 225,338 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. Gross Unrealized (Dollars in thousands) Amortized Cost Gains Losses Fair Value As of December 31, 2021 U.S. Treasury notes $ 9,938 $ 151 $ - $ 10,089 U.S. Government-sponsored securities 6,351 62 39 6,374 Mortgage-backed securities (1) 253,300 3,200 5,380 251,120 Collateralized mortgage obligations (1) 2,412 24 - 2,436 Other 435 - - 435 Total available-for-sale securities $ 272,436 $ 3,437 $ 5,419 $ 270,454 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. 13 Table Of Contents Note 3—Investment Securities—Continued The book values, estimated fair values and unrealized gains and losses of investments classified as held-to-maturity are as follows: Held-to-Maturity Securities Gross Unrealized (Dollars in thousands) Amortized Cost Gains Losses Fair Value Allowance for Credit Losses As of June 30, 2022 Municipal securities $ 62,459 $ 33 $ 151 $ 62,341 $ 393 Mortgage-backed securities (1) 721,510 - 104,726 616,784 - Collateralized mortgage obligations (1) 84,414 - 8,705 75,709 - Total held-to-maturity securities $ 868,383 $ 33 $ 113,582 $ 754,834 $ 393 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. Gross Unrealized (Dollars in thousands) Amortized Cost Gains Losses Fair Value As of December 31, 2021 Municipal securities $ 66,496 $ 701 $ - $ 67,197 Mortgage-backed securities (1) 596,775 45 11,764 585,056 Collateralized mortgage obligations (1) 73,781 36 229 73,588 Total held-to-maturity securities $ 737,052 $ 782 $ 11,993 $ 725,841 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government . Fair values are based on quoted market prices or dealer quotes. If a quoted market price or dealer quote is not available, fair value is estimated using quoted market prices for similar securities. As of June 30, 2022, the Company held 556 investment securities of which 148 were in an unrealized loss position for less than twelve months and 101 securities were in an unrealized loss position for twelve months or more. Management periodically evaluates each investment security for other-than-temporary impairment relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities. 14 Table Of Contents Note 3—Investment Securities—Continued The follo wing tables show the gross unrealized losses for available-for-sale securities that are less than 12 months and 12 months or more: Available-for-Sale Securities As of June 30, 2022 Less Than 12 Months 12 Months or More Total (Dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses As of June 30 , 2022 U.S. Treasury notes $ 4,952 $ 16 $ - $ - $ 4,952 $ 16 U.S. Government-sponsored securities 46 - 1,623 26 1,669 26 Mortgage-backed securities (1) 90,670 6,663 103,737 22,214 194,407 28,877 Collateralized mortgage obligations (1) 1,501 23 - - 1,501 23 Corporate securities 9,526 523 - - 9,526 523 Total available-for-sale securities $ 106,695 $ 7,225 $ 105,360 $ 22,240 $ 212,055 $ 29,465 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government . As of December 31, 2021 Less Than 12 Months 12 Months or More Total (Dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses As of December 31 , 2021 U.S. Government-sponsored securities $ 183 $ - $ 2,007 $ 39 $ 2,190 $ 39 Mortgage-backed securities (1) 61,469 1,192 104,489 4,188 165,958 5,380 Total available-for-sale securities $ 61,652 $ 1,192 $ 106,496 $ 4,227 $ 168,148 $ 5,419 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government . The following tables show the gross unrealized losses for held-to-maturity securities that are less than 12 months and 12 months or more: Held-to-Maturity Securities As of June 30, 2022 Less Than 12 Months 12 Months or More Total (Dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses As of June 30 , 2022 Municipal securities $ 6,862 $ 151 $ - $ - $ 6,862 $ 151 Mortgage-backed securities (1) 404,026 57,850 212,758 46,876 616,784 104,726 Collateralized mortgage obligations (1) 73,221 8,705 - - 73,221 8,705 Total held-to-maturity securities $ 484,109 $ 66,706 $ 212,758 $ 46,876 $ 696,867 $ 113,582 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government . As of December 31, 2021 Less Than 12 Months 12 Months or More Total (Dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses As of December 31, 2021 Mortgage-backed securities (1) $ 570,119 $ 11,764 $ - $ - $ 570,119 $ 11,764 Collateralized mortgage obligations (1) 58,977 229 - - 58,977 229 Total held-to-maturity securities $ 629,096 $ 11,993 $ - $ - $ 629,096 $ 11,993 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government . 15 Table Of Contents Note 3—Investment Securities—Continued U.S. Government-sponsored securities. The unrealized losses were caused by interest rate fluctuations. The decline in market value is attributable to changes in interest rates and not credit quality. The Company does not intend to sell the investments and it is more likely than not that the Company will not be requied to sell the investments before recovery of their amortized cost basis. Mortgage-backed securities and collateralized mortgage obligations. The unrealized losses were caused by interest rate fluctuations. The contractual cash flows of these investments are guaranteed by an agency or government-sponsored entity of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. The decline in market value is attributable to changes in interest rates and not credit quality. The Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their amortized cost basis. Corporate securities. Changes in the prices of corporate securities are primarily influenced by: (1) changes in market interest rates; (2) changes in perceived credit risk in the general economy or in particular industries; (3) changes in the perceived credit risk of a particular company; and (4) day to day trading supply, demand and liquidity. The Company monitors the status of each of our corporate securities 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. The Company does not intend to sell the securities and it is more likely than not that the Company would not have to sell the securities before recovery of their amortized cost basis. Obligations of states and political subdivisions. The Company’s bank-qualified municipal bond portfolio is comprised of two different segments: (1) publicly issued debt of $ 19.4 million purchased on the open market, all rated at either the issue or issuer level and all of these ratings are “investment grade”; and (2) municipal debt of $ 43 million purchased directly from the Bank’s customers, all of which is monitored through quarterly or annual financial reviews of the issuer. The Company monitors the status of all municipal investments in the portfolio 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. The amortized cost and estimated fair values of investment securities at June 30, 2022 by contractual maturity are shown in the following tables: Available-for-Sale Held-to-Maturity ( Doll ars in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Securities maturing in: One year or less $ 5,290 $ 5,274 $ 700 $ 700 After one year through five years 5,120 4,842 7,089 7,074 After five years through ten years 5,411 5,168 15,948 15,926 After ten years 4,908 4,945 38,722 38,641 $ 20,729 $ 20,229 $ 62,459 $ 62,341 Securities not due at a single maturity date: Mortgage-backed securities 232,368 203,607 721,510 616,784 Collateralized mortgage obligations 1,525 1,502 84,414 75,709 Total $ 254,622 $ 225,338 $ 868,383 $ 754,834 Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. 16 Table Of Contents Note 3—Investment Securities—Continued The Company monitors the credit quality of those available-for-sale and held-to-maturity debt securities not issued by the U.S. government or one of its agencies or government sponsored entities, through the use of credit ratings. Credit ratings are reviewed and updated quarterly. The following table summarizes the fair value of available-for-sale and amortized cost of held-to-maturity debt securities by credit rating at June 30, 2022: Available-for-Sale Held-to-Maturity Fair Value Amortized Cost (Dollars in thousands) AAA/AA/A BBB/BB/B Not Rated AAA/AA/A BBB/BB/B Not Rated June 30, 2022 Breakdown by Category: U.S. Treasury notes $ - $ - $ 4,952 $ - $ - $ - U.S. Government-sponsored securities - - 5,441 - - - Mortgage-backed securities (1) - - 203,607 - - 721,510 Collateralized mortgage obligations (1) - - 1,502 - - 84,414 Municipal securities - - - 19,271 149 43,039 Corporate securities 4,738 4,788 - - - - Other - - 310 - - - Total Investment Grade $ 4,738 $ 4,788 $ 215,812 $ 19,271 $ 149 $ 848,963 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. government. The following table presents the activity in the allowance for credit losses for held-to-maturity debt securities by major type for the six months ended June 30, 2022. For the Six Months Ended June 30, 2022 (Dollars in thousands) Municipal securities Mortgage- backed securites Collateralized Mortgage obligation Total Allowance for credit losses - securities Beginning Balance $ - $ - $ - $ - Provision for credit losses 393 - - 393 Ending Balance $ 393 $ - $ - $ 393 Proceeds from sales and calls of these securities were as follows: (Dollars in thousands) Gross Proceeds Gross Gains Gross Losses Six months ended June 30, 2022 $ 2,610 $ 2 $ - Six months ended June 30, 2021 $ 299,870 $ 5,570 $ 3,016 Pledged Securities As of June 30, 2022, securities carried at $ 512 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) borrowings, and other government agency deposits as required by law. This amount was $ 426 million at December 31, 2021. 17 Table Of Contents Note 4— Loans and Leases Loans and leases as of the dates indicated consisted of the following: (Dollars in thousands) June 30, 2022 December 31, 2021 Loans and leases held for investment, net Real estate: Commercial $ 1,210,195 $ 1,167,516 Agricultural 709,624 672,830 Residential and home equity 371,874 350,581 Construction 162,713 177,163 Total real estate 2,454,406 2,368,090 Commercial & industrial 439,455 427,799 Agricultural 261,856 276,684 Commercial leases 89,095 96,971 Consumer and other (1) 13,588 78,367 Total gross loans and leases 3,258,400 3,247,911 Unearned income ( 8,514 ) ( 10,734 ) Total net loans and leases 3,249,886 3,237,177 Allowance for credit losses ( 62,080 ) ( 61,007 ) Total loans and leases held for investment, net $ 3,187,806 $ 3,176,170 (1) Includes SBA PPP loans. Paycheck Protection Program (“PPP”) — Under the CARES Act and H.R. 133 (see “Note 2 – Risks and Uncertainties”) the Small Business Administration (“SBA”) was directed by Congress to provide loans to small businesses with less than 500 employees to assist these businesses in meeting their payroll and other financial obligations during the COVID-19 pandemic. These government guaranteed loans are made with an interest rate of 1%, a risk weight of 0% under risk-based capital rules, have a term of 2 to 5 years, and under certain conditions the SBA will forgive them. The Bank actively participated in the PPP, and since April 2020, the Bank has funded $ 494.39 million of loans for 2,680 small business customers. PPP loans outstanding were $ 6.8 million and $ 70.8 million at June 30 , 2022 and December 31, 2021, respectively. At June 30, 2022, the portion of loans that were approved for pledging as collateral on borrowing lines with the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“FRB”) were $ 1.2 billion and $ 870 million, respectively. The borrowing capacity on these loans was $ 794 million from FHLB and $ 657 million from the FRB. 18 Table Of Contents Note 4—Loans and Leases—Continued The following tables show an aging analysi s of the loan & lease portfolio, including unearned income, by the time past due for the periods indicated: June 30, 2022 (Dollars in thousands) Current 30-89 Days Past Due 90+ Days Past Due Non- accrual Total Past Due Total Loans and leases held for investment, net Real estate: Commercial $ 1,200,516 $ - $ - $ 1,674 $ 1,674 $ 1,202,190 Agricultural 709,149 - - 475 475 709,624 Residential and home equity 371,847 27 - - 27 371,874 Construction 162,713 - - - - 162,713 Total real estate 2,444,225 27 - 2,149 2,176 2,446,401 Commercial & industrial 439,258 197 - - 197 439,455 Agricultural 260,977 - - 879 879 261,856 Commercial leases 88,586 - - - - 88,586 Consumer and other 13,578 10 - - 10 13,588 Total loans and leases, net $ 3,246,624 $ 234 $ - $ 3,028 $ 3,262 $ 3,249,886 December 31, 2021 (Dollars in thousands) Current 30-89 Days Past Due 90+ Days Past Due Non- accrual Total Past Due Total Loans and leases held for investment, net Real estate: Commercial $ 1,156,879 $ 459 $ - $ - $ 459 $ 1,157,338 Agricultural 672,812 - - 18 18 672,830 Residential and home equity 350,492 89 - - 89 350,581 Construction 177,163 - - - - 177,163 Total real estate 2,357,346 548 - 18 566 2,357,912 Commercial & industrial 427,799 - - - - 427,799 Agricultural 276,186 - - 498 498 276,684 Commercial leases 96,415 - - - - 96,415 Consumer and other 78,363 4 - - 4 78,367 Total loans and leases, net $ 3,236,109 $ 552 $ - $ 516 $ 1,068 $ 3,237,177 19 Table Of Contents Note 4—Loans and Leases—Continued Non-accrual loans are summarized as follows: (Dollars in thousands) June 30, 2022 December 31, 2021 Non-accrual loans and leases: Non-accrual loans and leases, not TDRs Real estate: Commercial $ 1,674 $ - Agricultural 475 18 Residential and home equity - - Construction - - Total real estate 2,149 18 Commercial & industrial - - Agricultural 879 - Commercial leases - - Consumer and other - - Subtotal 3,028 18 Non-accrual loans and leases, are TDRs Real estate: Commercial $ - $ - Agricultural - - Residential and home equity - - Construction - - Total real estate - - Commercial & industrial - - Agricultural - 498 Commercial leases - - Consumer and other - - Subtotal - 498 Total non-accrual loans and leases $ 3,028 $ 516 20 Table Of Contents Note 4—Loans and Leases—Continued The following table lists total troubled debt restructured loans that the Company is either accruing or not accruing interest by loan category: (Dollars in thousands) June 30, 2022 December 31, 2021 Troubled debt restructured loans and leases: Accruing TDR loans and leases Real estate: Commercial $ - $ 41 Agricultural - - Residential and home equity 1,334 1,522 Construction - - Total real estate 1,334 1,563 Commercial & industrial 55 260 Agricultural - - Commercial leases - - Consumer and other - 1 Subtotal 1,389 1,824 Non-accruing TDR loans and leases Real estate: Commercial $ - $ - Agricultural - - Residential and home equity - - Construction - - Total real estate - - Commercial & industrial - - Agricultural - 498 Commercial leases - - Consumer and other - - Subtotal - 498 Total TDR loans and leases $ 1,389 $ 2,322 The below table summarize TDRs outstanding as of June 30, 2022, by year of occurrence: June 30, 2022 (Dollars in thousands) # of Accruing TDR $ of Accruing TDR # of Non- Accruing TDR $ of Non- Accruing TDR # of Total TDR $ of Total TDR Loan and lease TDRs 2022 - $ - - $ - - $ - 2021 1 48 - - 1 48 2020 4 266 - - 4 266 2019 - - - - - - Thereafter 8 1,075 - - 8 1,075 Total 13 $ 1,389 - $ - 13 $ 1,389 The Company did no t enter into any troubled debt restructuring with borrowers during the six months ended June 30, 2022 and 2021, respectively. 21 Table Of Contents Note 4—Loans and Leases—Continued Outstanding loan balances (accruing and non-accruing) categorized by these credit quality indicators are summarized as follows: June 30, 2022 (Dollars in thousands) Pass Special Mention Sub- standard Doubtful Total Loans & Leases Total Allowance for Credit Losses Loans and leases held for investment, net Real estate: Commercial $ 1,187,461 $ 8,629 $ 6,100 $ - $ 1,202,190 $ 17,879 Agricultural 697,994 5,003 6,627 - 709,624 16,837 Residential and home equity 371,494 - 380 - 371,874 6,874 Construction 160,787 1,926 - - 162,713 2,876 Total real estate 2,417,736 15,558 13,107 - 2,446,401 44,466 Commercial & industrial 431,441 7,459 555 - 439,455 10,139 Agricultural 260,079 880 897 - 261,856 5,669 Commercial leases 88,468 118 - - 88,586 1,645 Consumer and other 13,391 - 197 - 13,588 161 Total loans and leases, net $ 3,211,115 $ 24,015 $ 14,756 $ - $ 3,249,886 $ 62,080 December 31, 2021 (Dollars in thousands) Pass Special Mention Sub- standard Doubtful Total Loans & Leases Total Allowance for Credit Losses Loans and leases held for investment, net Real estate: Commercial $ 1,142,175 $ 6,903 $ 8,260 $ - $ 1,157,338 $ 28,536 Agricultural 663,157 3,292 6,381 - 672,830 9,613 Residential and home equity 350,148 - 433 - 350,581 2,847 Construction 177,163 - - - 177,163 1,456 Total real estate 2,332,643 10,195 15,074 - 2,357,912 42,452 Commercial & industrial 417,806 9,321 672 - 427,799 11,489 Agricultural 275,206 958 520 - 276,684 5,465 Commercial leases 96,415 - - - 96,415 938 Consumer and other 78,181 - 186 - 78,367 663 Total loans and leases, net $ 3,200,251 $ 20,474 $ 16,452 $ - $ 3,237,177 $ 61,007 22 Table Of Contents Note 4—Loans and Leases—Continued The following table represents outstanding loan balances by credit quality indicators and vintage year by class of financing receivable as of June 30, 2022: June 30, 2022 Term Loans Amortized Cost Basis by Origination Year (Dollars in thousands) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Total Net loans and leases held for investment Real estate: Commercial Pass $ 64,720 $ 239,840 $ 161,165 $ 73,041 $ 87,035 $ 237,333 $ 324,326 $ 1,187,461 Special mention - - - - 3,866 834 3,929 8,629 Substandard - - - - - 4,203 1,897 6,100 Doubtful - - - - - - - - Total Commercial $ 64,720 $ 239,840 $ 161,165 $ 73,041 $ 90,901 $ 242,370 $ 330,152 $ 1,202,190 Agricultural Pass $ 34,325 $ 43,251 $ 58,263 $ 15,341 $ 53,916 $ 157,648 $ 335,250 $ 697,994 Special mention - - 2,367 2,636 - - - 5,003 Substandard - - - - 118 6,034 475 6,627 Doubtful - - - - - - - - Total Agricultural $ 34,325 $ 43,251 $ 60,630 $ 17,977 $ 54,034 $ 163,682 $ 335,725 $ 709,624 Residential and home equity Pass $ 40,868 $ 100,298 $ 90,939 $ 15,957 $ 7,140 $ 82,590 $ 33,702 $ 371,494 Special mention - - - - - - - - Substandard - - - - - 235 145 380 Doubtful - - - - - - - - Total Residential and home equity $ 40,868 $ 100,298 $ 90,939 $ 15,957 $ 7,140 $ 82,825 $ 33,847 $ 371,874 Construction Pass $ - $ - $ - $ 2,272 $ - $ 92 $ 158,423 $ 160,787 Special mention - - - - - - 1,926 1,926 Substandard - - - - - - - - Doubtful - - - - - - - - Total construction $ - $ - $ - $ 2,272 $ - $ 92 $ 160,349 $ 162,713 Total Real estate $ 139,913 $ 383,389 $ 312,734 $ 109,247 $ 152,075 $ 488,969 $ 860,073 $ 2,446,401 Commercial & industrial Pass $ 8,395 $ 44,225 $ 15,482 $ 12,734 $ 10,126 $ 9,183 $ 331,296 $ 431,441 Special mention - 76 - - - 3 7,380 7,459 Substandard - - - - - 30 525 555 Doubtful - - - - - - - - Total Commercial & industrial $ 8,395 $ 44,301 $ 15,482 $ 12,734 $ 10,126 $ 9,216 $ 339,201 $ 439,455 Agricultural Pass $ 3,547 $ 4,532 $ 1,194 $ 1,626 $ 776 $ 2,273 $ 246,131 $ 260,079 Special mention - - - - - 12 868 880 Substandard - - - 14 4 79 800 897 Doubtful - - - - - - - - Total Agricultural $ 3,547 $ 4,532 $ 1,194 $ 1,640 $ 780 $ 2,364 $ 247,799 $ 261,856 Commercial leases Pass $ 1,566 $ 17,129 $ 14,293 $ 8,473 $ 21,686 $ 25,320 $ - $ 88,468 Special mention - - - 118 - - - 118 Substandard - - - - - - - - Doubtful - - - - - - - - Total Commercial leases $ 1,566 $ 17,129 $ 14,293 $ 8,591 $ 21,686 $ 25,320 $ - $ 88,586 Consumer and other Pass $ 901 $ 7,589 $ 475 $ 350 $ 531 $ 2,713 $ 832 $ 13,391 Special mention - - - - - - - - Substandard 197 - - - - - - 197 Doubtful - - - - - - - - Total Consumer and other $ 1,098 $ 7,589 $ 475 $ 350 $ 531 $ 2,713 $ 832 $ 13,588 Total net loans and leases $ 154,519 $ 456,941 $ 344,178 $ 132,563 $ 185,198 $ 528,583 $ 1,447,905 $ 3,249,886 23 Table Of Contents Note 4—Loans and Leases—Continued The following tables provide amortized cost basis for collateral dependent loans as of June 30, 2022 and December 31, 2021, respectively: June 30, 2022 (Dollars in thousands) Real Estate Vehicles Total Collateral dependent loans and leases Real estate: Commercial $ - $ - $ - Agricultural 5,533 - 5,533 Residential and home equity 216 - 216 Construction - - - Total Real estate 5,749 - 5,749 Commercial & industrial - - - Agricultural - - - Commercial leases - - - Consumer and other - 165 165 Total gross loans and leases $ 5,749 $ 165 $ 5,914 December 31, 2021 (Dollars in thousands) Real Estate Vehicles Total Collateral dependent loans and leases Real estate: Commercial $ 5 $ - $ 5 Agricultural 5,587 - 5,587 Residential and home equity 330 - 330 Construction - - - Total Real estate 5,922 - 5,922 Commercial & industrial - - - Agricultural - - - Commercial leases - - - Consumer and other - 173 173 Total gross loans and leases $ 5,922 $ 173 $ 6,095 24 Table Of Contents Note 4—Loans and Leases—Continued Changes in the allowance for credit losses are as follows: For the Three Months Ended June 30, 2022 (Dollars in thousands) Commercial & Agricultural R/E Construction Residential & Home Equity Commercial & Agricultural Commercial Leases Consumer & Other Total Allowance for credit losses: Beginning balance $ 32,511 $ 3,777 $ 6,759 $ 16,098 $ 1,466 $ 421 $ 61,032 Provision / (recapture) for credit losses 2,205 ( 901 ) 10 ( 131 ) 179 ( 255 ) 1,107 Charge-offs - - - ( 276 ) - ( 9 ) ( 285 ) Recoveries - - 105 117 - 4 226 Net (charge-offs) / recoveries - - 105 ( 159 ) - ( 5 ) ( 59 ) Ending balance $ 34,716 $ 2,876 $ 6,874 $ 15,808 $ 1,645 $ 161 $ 62,080 For the Six Months Ended June 30, 2022 (Dollars in thousands) Commercial & Agricultural R/E Construction Residential & Home Equity Commercial & Agricultural Commercial Leases Consumer & Other Total Allowance for credit losses: Beginning balance $ 38,149 $ 1,456 $ 2,847 $ 16,954 $ 938 $ 663 $ 61,007 Impact of Adopting ASC 326 ( 6,190 ) 1,855 3,032 826 629 ( 152 ) - Provision / (recapture) for credit losses 2,757 ( 435 ) 876 ( 1,831 ) 78 ( 338 ) 1,107 Charge-offs - - - ( 276 ) - ( 18 ) ( 294 ) Recoveries - - 119 135 - 6 260 Net (charge-offs) / recoveries - - 119 ( 141 ) - ( 12 ) ( 34 ) Ending balance $ 34,716 $ 2,876 $ 6,874 $ 15,808 $ 1,645 $ 161 $ 62,080 Note 5—Deposits Certificate of deposits greater than and less than or equal to the FDIC insurance limit are summarized as follows: (Dollars in thousands) June 30, 2022 December 31, 2021 Certificate of deposits: Certificates of deposits less than or equal to $250,000 $ 216,390 $ 223,620 Certificates of deposits greater than $250,000 162,240 168,865 Total certificates of deposits $ 378,630 $ 392,485 Scheduled maturities for certificates of deposit are as follows: (Dollars in thousands) Amount 2022 $ 217,575 2023 147,620 2024 8,788 2025 2,270 2026 and beyond 2,377 Total time deposits $ 378,630 25 Table Of Contents Note 6—Shareholders’ Equity The Company and the Bank are subject to various regulatory capital adequacy guidelines as outlined under Part 324 of the FDIC Rules and Regulations. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Company believes that it is currently in compliance with all of these capital requirements and that they will not result in any restrictions on the Company’s business activity. Management believes that the Bank meets the requirements to be categorized as “well capitalized” under the FDIC regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. The Company’s and Bank’s actual and required capital amounts and ratios are as follows: June 30, 2022 Actual Minimum to be Categorized as “Adequately Capitalized” Minimum to be Categorized as “Well Capitalized” (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Farmers & Merchants Bancorp CET1 capital to risk-weighted assets $ 468,463 11.55 % $ 182,499 4.50 % N/A N/A Tier 1 capital to risk-weighted assets 478,463 11.80 % 243,332 6.00 % N/A N/A Risk-based capital to risk-weighted assets 529,311 13.05 % 324,442 8.00 % N/A N/A Tier 1 leverage capital ratio 478,463 8.94 % 214,167 4.00 % N/A N/A Farmers & Merchants Bank CET1 capital to risk-weighted assets $ 475,077 11.72 % $ 182,470 4.50 % $ 263,567 6.50 % Tier 1 capital to risk-weighted assets 475,077 11.72 % 243,293 6.00 % 324,391 8.00 % Risk-based capital to risk-weighted assets 525,918 12.97 % 324,391 8.00 % 405,488 10.00 % Tier 1 leverage capital ratio 475,077 8.89 % 213,871 4.00 % 267,339 5.00 % 26 Table Of Contents Note 6—Shareholders’ Equity—Continued December 31, 2021 Actual Minimum to be Categorized as “Adequately Capitalized” Minimum to be Categorized as “Well Capitalized” (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Farmers & Merchants Bancorp CET1 capital to risk-weighted assets $ 450,687 11.68 % $ 173,674 4.50 % N/A N/A Tier 1 capital to risk-weighted assets 460,687 11.94 % 231,566 6.00 % N/A N/A Risk-based capital to risk-weighted assets 509,091 13.19 % 308,755 8.00 % N/A N/A Tier 1 leverage capital ratio 460,687 8.92 % 206,606 4.00 % N/A N/A Farmers & Merchants Bank CET1 capital to risk-weighted assets $ 459,813 11.91 % $ 173,664 4.50 % $ 250,847 6.50 % Tier 1 capital to risk-weighted assets 459,813 11.91 % 231,551 6.00 % 308,735 8.00 % Risk-based capital to risk-weighted assets 508,215 13.17 % 308,735 8.00 % 385,919 10.00 % Tier 1 leverage capital ratio 459,813 8.91 % 206,426 4.00 % 258,033 5.00 % Basic and diluted earnings per common share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Earnings per common share have been computed based on the following: Three Months Ended June 30, (Dollars in thousands, except share and per share amounts) 2022 2021 Numerator Net income $ 18,443 $ 16,153 Denominator Weighted average number of common shares outstanding 781,880 789,646 Weighted average number of dilutive shares outstanding 781,880 789,646 Basic earnings per common share $ 23.58 $ 20.45 Diluted earning per common share $ 23.58 $ 20.45 Six Months Ended June 30, (Dollars in thousands, except share and per share amounts) 2022 2021 Numerator Net income $ 35,501 $ 32,866 Denominator Weighted average number of common shares outstanding 783,976 789,646 Weighted average number of dilutive shares outstanding 783,976 789,646 Basic earnings per common share $ 45.28 $ 41.62 Diluted earning per common share $ 45.28 $ 41.62 27 Table Of Contents Note 7—Fair Value Measurements The Company follows the “Fair Value Measurement and Disclosures” topic of the FASB ASC, which establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. U.S. GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. This standard applies whenever other standards require, or permit assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, this standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows: Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date. Level 2 inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. Securities classified as available-for-sale are reported at fair value on a recurring basis utilizing Level 1, 2 and 3 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The Company does not record all loans and leases at fair value on a recurring basis. However, from time to time, a loan or lease is considered collateral dependent and an allowance for credit losses is established. Once a loan or lease is identified as collaterally dependent, management measures impairment in accordance with the “Receivable” topic of the FASB ASC. The fair value of collateral dependent loans or leases is estimated using one of several methods, including collateral value when the loan is collateral dependent, market value of similar debt, enterprise value, and discounted cash flows. Collateral dependent loans and leases not requiring an allowance represent loans and leases for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans and leases. Collateral dependent loans and leases where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The fair value of collateral dependent loans is generally based on recent real estate appraisals. 28 Table Of Contents Note 7—Fair Value Measurements—Continued These appraisals may utilize a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take into account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring collateral dependent loans is primarily the sales comparison approach less selling costs of 10 %. OREO is reported at fair value on a non-recurring basis. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take in to account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring OREO is primarily the sales comparison approach less selling costs of 10 %. The following tables summarize the carrying value and estimated fair values of the Company’s financial assets and liabilities on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated. June 30 , 2022 Fair Value (Dollars in thousands) Carrying Amount Level 1 Level 2 Level 3 Total Fair Value Financial Assets: Cash and cash equivalents $ 747,788 $ 747,788 $ - $ - $ 747,788 Investment securities available-for-sale 225,338 4,952 220,386 - 225,338 Investment securities held-to-maturity 867,990 - 720,108 43,039 763,147 Non-marketable securities 15,549 - - 15,549 15,549 Loans and leases, net 3,187,806 - - 3,180,540 3,180,540 Bank-owned life insurance 72,513 72,513 - - 72,513 Financial Liabilities: Total deposits $ 4,769,513 $ - $ 4,390,883 $ 373,285 $ 4,764,168 Subordinated debentures 10,310 - 9,181 - 9,181 December 31, 2021 Fair Value (Dollars in thousands) Carrying Amount Level 1 Level 2 Level 3 Total Fair Value Financial Assets: Cash and cash equivalents $ 715,460 $ 715,460 $ - $ - $ 715,460 Investment securities available-for-sale 270,454 10,214 260,240 - 270,454 Investment securities held-to-maturity 737,052 - 681,588 44,446 726,034 Non-marketable securities 15,549 - - 15,549 15,549 Loans and leases, net 3,176,170 - - 3,179,857 3,179,857 Bank-owned life insurance 71,411 71,411 - - 71,411 Financial Liabilities: Total deposits $ 4,640,152 $ - $ 4,247,666 $ 391,732 $ 4,639,398 Subordinated debentures 10,310 - 6,890 - 6,890 29 Table Of Contents Note 7—Fair Value Measurements—Continued Non-recurring Measurements: collateral dependent loans and OREO are classified with Level 3 of the fair value hierarchy. The estimated fair value of collateral dependent loans is based on the fair value of the collateral, less estimated costs to sell. The Company receives an appraisal or performs an evaluation for each collateral dependent loan. The key inputs used to determine the fair value of collateral dependent loans include selling costs, and adjustment to comparable collateral. Valuations and significant inputs obtained by independent sources are reviewed by the Company for accuracy and reasonableness. Appraisals are typically obtained at least on an annual basis. The Company also considers other factors and events that may affect the fair value. The appraisals or evaluations are reviewed at least on a quarterly basis to determine if any adjustments are needed. After review and acceptance of the appraisal or evaluation, adjustments to collateral dependent loans may occur. The following tables present information about the Bank’s assets and liabilities measured at fair value on a recurring and non-recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Bank to determine such fair value for the periods indicated. June 30 , 2022 Fair Value (Dollars in thousands) Carrying Amount Level 1 Level 2 Level 3 Total Fair Value Fair valued on a recurring basis: Investment securities available-for-sale U.S. Treasury notes $ 4,952 $ 4,952 $ - $ - $ 4,952 U.S. Government-sponsored securities 5,441 - 5,441 - 5,441 Mortgage-backed securities 203,607 - 203,607 - 203,607 Collateralized mortgage obligations 1,502 - 1,502 - 1,502 Corporate securities 9,526 - 9,526 - 9,526 Other 310 - 310 - 310 Fair valued on a non-recurring basis: Other real estate $ 873 $ - $ - $ 873 $ 873 December 31, 2021 Fair Value (Dollars in thousands) Carrying Amount Level 1 Level 2 Level 3 Total Fair Value Fair valued on a recurring basis: Investment securities available-for-sale U.S. Treasury notes $ 10,089 $ 10,089 $ - $ - $ 10,089 U.S. Government-sponsored securities 6,374 - 6,374 - 6,374 Mortgage-backed securities 251,120 - 251,120 - 251,120 Collateralized mortgage obligations 2,436 - 2,436 - 2,436 Other 435 125 310 - 435 Fair valued on a non-recurring basis: Individually evaluated loans $ 2,562 $ - $ - $ 2,562 $ 2,562 Other real estate 873 - - 873 873 30 Table Of Contents Note 8—Commitments and Contingencies In the normal course of business, the Company enters into financial instruments with off balance sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These instruments include commitments to extend credit, letters of credit, and other types of financial guarantees. The Company had the following off balance sheet commitments as of the dates indicated. (Dollars in thousands) June 30, 2022 December 31, 2021 Commitments to extend credit, including unsecured commitments of $ 20,787 and $ 21,036 as of June 30, 2022 and December 31, 2021, respectively $ 995,795 $ 937,009 Stand-by letters of credit, including unsecured commitments of $ 7,409 and $ 9,091 as of June 30, 2022 and December 31, 2021, respectively 16,484 17,880 Performance guarantees under interest rate swap contracts entered into with our clients and third-parties - 1,433 The Company’s exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer’s creditworthiness are performed on a case-by-case basis. Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third-party. Outstanding standby letters of credit have maturity dates ranging from 1 to 60 months with final expiration in January 2027. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. In the ordinary course of business, the Company becomes involved in litigation arising out of its normal business activities. Management, after consultation with legal counsel, believes that the ultimate liability, if any, resulting from the disposition of such claims would not be material in relation to the financial position of the Company. The Company may be required to maintain average reserves on deposit with the Federal Reserve Bank primarily based on deposits outstanding. Reserve requirements are offset by the Company’s vault cash and deposit balances maintained with the Federal Reserve Bank. 31 Table Of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion is intended to provide a more comprehensive review of the Company’s operating results and financial condition than can be obtained from reading the Unaudited Consolidated Financial Statements alone. The discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto included in “Part I. Item 1. Financial Statements.” FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10–Q may contain certain forward-looking statements within the meaning of Section 27A the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect the Company’s current views and are not historical facts. 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 the Company’s 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 the Company’s ability to control or predict. For those statements, the Company claims 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 in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (“Form 10-K”), and other parts of this report that could cause actual results to differ materially from those anticipated in these forward-looking statements. The following is a non-exclusive list of factors which could cause actual results to differ materially from forward-looking statements in this Quarterly Report on Form 10-Q: ◾ 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; and ◾ regulatory or judicial proceedings. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed. Please take into account that forward-looking statements speak only as of the date of this Form 10-Q. The Company does not undertake any obligation to release publicly revisions to such forward-looking statements to reflect events or circumstances after the date of this Form 10-Q, except as required by law. 32 Table Of Contents Overview Farmers & Merchants Bancorp is a Delaware registered bank holding company organized in 1999. As a registered bank holding company, FMCB is subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System (“FRB”) and by the California Department of Financial Protection and Innovation (“DFPI”). The Company’s principal business is to serve as a holding company for the Bank and for other banking or banking related subsidiaries, which the Company may establish or acquire. As a legal entity separate and distinct from its subsidiary, the Company’s principal source of funds is, and will continue to be, dividends paid by and other funds received from the Bank. Legal limitations are imposed on the amount of dividends that may be paid and loans that may be made by the Bank to the Company. The Company’s outstanding common stock as of June 30, 2022, consisted of 777,190 shares of common stock, $0.01 par value and no shares of preferred stock were issued or outstanding. The common stock of Farmers & Merchants Bancorp is not widely held or listed on any exchange. However, trades are reported on the OTCQX under the symbol “FMCB.” F & M Bancorp, Inc. was created in March 2002 to protect the name “F & M Bank.” During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name, “F & M Bank,” as part of a larger effort to enhance the Company’s image and build brand name recognition. Since 2002, the Company has converted all of its daily operating and image advertising to the “F & M Bank” name and the Company’s logo, slogan and signage were redesigned to incorporate the trade name, “F & M Bank”. The primary source of funding for 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. Our recent 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 income. 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 reflect all adjustments (which include reclassification and normal recurring adjustments) that are necessary for a fair presentation in conformity with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. 33 Table Of Contents 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 change. Allowance for Credit Losses — Loans — The methodology for determining the allowance for credit losses (“ACL”) on loans is considered a critical accounting policy by Management because of the high degree of judgment involved. The subjectivity of the assumptions used and the potential for changes in the economic environment could result in changes to the amount of the recorded ACL. Among the material estimates required to establish the ACL are: (i) a reasonable and supportable forecast; (ii) a reasonable and supportable forecast period and the reversion period; (iii) value of collateral; strength of guarantors; (iv) the amount and timing of future cash flows for loans individually evaluated; and (v) the determination of the qualitative loss factors. All of these estimates are susceptible to significant change. The Company has established systematic methodologies for the determination of the adequacy of the ACL. The methodologies are set forth in a formal policy and take into consideration the need for a valuation allowance for loans evaluated on a collective (pool) basis, which have similar risk characteristics as well as allowances to individual loans that do not share risk characteristics. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The provision for credit losses reflects the amount required to maintain the ACL at an appropriate level based upon management’s evaluation of the adequacy of loss reserves. The Company increases its ACL by charging provisions for credit losses on its consolidated statement of income. Losses related to specific assets are applied as a reduction of the carrying value of the assets and charged against the ACL when management believes a loan balance is uncollectable. Recoveries on previously charged off loans are credited to the ACL. Management estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience, either internal or peer information, provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made, using qualitative factors, when management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The ACL is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. These factors include, among others, changes in the size and composition of the loan portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions. 34 Table Of Contents On January 1, 2022, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology that delays recognition until it is probable a loss has been incurred with an expected loss methodology that is referred to as CECL. Both the Financial Accounting Standards Board (“FASB Staff Q&A Topic 326, No. 1”) and the federal financial institution regulatory agencies (“Financial Institution Letter FIL-17-2019”), along with the Securities and Exchange Commission, have confirmed that smaller, less complex organizations are not required to implement complex models, developed by outside vendors to calculate current expected credit losses. Accordingly, in adopting ASU 2016-13 (Topic 326) Management determined that the Weighted Average Remaining Maturity (“WARM”) method was most appropriate given the Company’s current size and complexity. Management will incorporate reasonable and supportable information in order to calculate CECL reserves.This includes the ability to reliably forecast and document exogenous events that may affect the credit performance of the Company’s loan portfolio. Management is confident with its ability to effectively identify historical loss information by the appropriate portfolio segmentation. In addition, Management believes that it can reasonably obtain historical loss information by its respective peers to further improve historical loss information. Additionally, the Company believes that it can effectively evaluate the potential impact that both macro and micro-economic conditions can have on its loan portfolio. Management is also comfortable that it can rely on weighted average maturity calculations, including estimated prepayments with its existing third party Asset/Liability Management (“ALM”) applications. Management determined that the most effective approach to segment its portfolio and to extract the relevant information it needed to calculate its CECL reserves was to utilize the seventeen loan segments used in preparing regulatory Call Reports. This allows Management the ability to obtain historical loss information for itself as well as its peer group. Additionally, Management’s ALM application also utilizes a similar loan segmentation in calculating weighted average remaining terms. The foundation of CECL modeling is the ability to estimate expected credit losses over the lifetime of a loan. Management must use relevant available information about past events (e.g. historical losses) current conditions, and reasonable and supportable forecasts about future conditions. Historical losses serve as the starting point to estimate expected credit losses. When available, historical losses should include cumulative actual losses incurred over the lifetime of the various loan segments of the loans being evaluated. In cases where such information is not available, companies may need to rely on external data, such as peer data of historical losses for similar loan segments. Management has determined to use a “through-the-cycle” historical credit loss experience as its baseline for historical credit losses. Management has determined a representative period for a full credit cycle would be from 2008 to 2022 (fifteen-year credit cycle). Management has collected historical loss information on its own loan portfolio as well as peer group information by the seventeen loan segments over this time horizon using information available from Federal Regulators on the Uniform Bank Performance Report (“UBPR”). Federal Regulators have placed the Company into a peer group of banks with assets between $3 billion to $10 billion. This peer group segmentation includes 181 banks across the nation. The model calculates the mean historical loss rate over the fifteen year economic cycle for both the Bank and its peer group. The model calculates the stressed historical loss rate over the fifteen year economic cycle for both the Bank and its peer group. 35 Table Of Contents Management evaluates macro and micro economic information as well as internal trends in credit performance on our loan portfolio to determine where we believe we are in an economic credit cycle. Depending upon our estimation of what point in the credit cycle the current economy may exist, we adjust, on a quantitative basis, historical loss rates either upwards or downwards from the mean. If Management believes we are nearing the end on a credit cycle, we may adjust historical losses in increments higher from the mean (e.g. one standard deviation from the mean). If the Company believes that we are in the recovery stage of a credit cycle, we may adjust historical losses downwards from the mean. Management understands that historical credit losses may not exactly follow a normal bell-shaped curve, but that the approach provides consistency across all loan segments as well as a measured probability of credit loss coverage. Management evaluated current economic metrics as its basis to determine that we believe that we are at the beginning of an economic recession. Based on this determination, management has used a one-standard deviation from the mean to capture 68.2% of all credit losses over the 15-year economic cycle. Management used the duration of each loan segment to estimate the remaining life of loans to ensure that the model covers credit losses over the expect life of such loans. Management will continue to employ the use of qualitative factors as defined by the Interagency Policy Statement on the Allowance for Loan and Lease Losses (“SR 2006-17”). Management will consider qualitative or environmental factors that are likely to cause estimated credit losses associated with our existing portfolio to differ from historical loss experience, as defined in the Interagency Guidance, including but not 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 international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments. ■ Changes in the nature and volume of the portfolio and in the terms of loans. ■ Changes in the experience, ability, and depth of lending management and other relevant staff. ■ Changes in the volume and severity of past due loans, 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. ■ Changes 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. ■ The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio. These qualitative factors are applied primarily to our agriculture and agricultural real estate loan exposure. Investment Securities — Investment securities are classified as held-to-maturity (“HTM”) when the Company has the positive intent and ability to hold the securities to maturity. Investment securities are classified as available-for-sale (“AFS”) when the Company has the intent of holding the security for an indefinite period of time, but not necessarily to maturity. The Company determines the appropriate classification at the time of purchase, and periodically thereafter. Investment securities classified at HTM are carried at amortized cost. Investment securities classified at AFS are reported at fair value. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Debt securities classified as held-to-maturity are carried at cost, net of the allowance for credit losses - securities, adjusted for amortization of premiums and discounts to the earliest callable date. Debt securities classified as available-for-sale are measured at fair value. Unrealized holding gains and losses on debt 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. When AFS securities, specifically identified, are sold, the unrealized gain or loss is reclassified from AOCI to non-interest income. 36 Table Of Contents Allowance for Credit Losses – Securities — Management measures expected credit losses on held-to- maturity debt securities on a collective basis by major security type. The Company’s HTM portfolio contains securities issued by U.S. government entities and agencies and municipalities. The Company uses industry historical credit loss information adjusted for current conditions to establish the allowance for credit losses on its HTM municipal bond portfolio. For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If the Company intends to sell the security or it is more likely than not that, the Company will be required to sell the security before recovering its cost basis; the entire impairment loss would be recognized in earnings. If the Company does not intend to sell the security and it is not more likely than not that, the Company will be required to sell the security the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized costs, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. Projected cash flows are discounted by the current effective interest rate. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to AOCI. Changes in the allowance for credit losses-securities are recorded as provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the non-collectability of an available-for-sale security is confirmed or when either criteria regarding intent of requirement to sell is met. 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. 37 Table Of Contents 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 Company, using available market information and appropriate valuation methodologies has determined the estimated fair value amounts. 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. 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. “Basis of Presentation and Significant Accounting Policies” to the Consolidated Financial Statements in “Item 1. Financial Information” in this Quarterly Report on Form 10-Q. Results of Operations The following discussion and analysis is intended to provide a better understanding of Farmers & Merchants Bancorp and its subsidiaries’ financial condition at June 30, 2022 and December 31, 2021 and results of operations during the three and six months ended June 30, 2022 and 2021, respectively. Information related to the comparison of the results of operations for the three years ended December 31, 2021, 2020, and 2019 can be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2021 Annual Report on Form 10-K filed with the SEC on March 15, 2022. 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. 38 Table Of Contents 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. For the Three Months Ended June 30, 2022 2021 (Dollars in thousands) Average Balance Interest Income / Expense Average Yield / Rate Average Balance Interest Income / Expense Average Yield / Rate ASSETS Interest earnings deposits in other banks and federal funds sold $ 683,655 $ 1,409 0.83 % $ 590,936 $ 164 0.11 % Securities: (1) Taxable securities 1,090,507 5,107 1.87 % 839,121 3,694 1.76 % Non-taxable securities (2) 48,339 391 3.24 % 53,813 416 3.09 % Total investment securities 1,138,846 5,498 1.94 % 892,934 4,110 1.84 % Loans: (3) Real estate: Commercial 1,158,892 13,373 4.63 % 1,005,143 12,370 4.94 % Agricultural 701,905 8,415 4.81 % 622,977 7,447 4.79 % Residential and home equity 365,872 3,539 3.88 % 337,796 3,662 4.35 % Construction 205,491 2,508 4.90 % 189,930 2,150 4.54 % Total real estate 2,432,160 27,835 4.59 % 2,155,846 25,629 4.77 % Commercial & industrial 439,137 4,546 4.15 % 357,098 4,345 4.88 % Agricultural 264,791 2,988 4.53 % 227,206 2,557 4.51 % Commercial leases 90,855 1,377 6.08 % 101,848 1,428 5.62 % Consumer and other 21,457 1,824 34.10 % 223,877 2,705 4.85 % Total loans and leases 3,248,400 38,570 4.76 % 3,065,875 36,664 4.80 % Non-marketable securities 15,549 218 5.62 % 15,078 212 5.64 % Total interest earning assets 5,086,450 45,695 3.60 % 4,564,823 41,150 3.62 % Allowance for credit losses (61,439 ) (60,204 ) Non-interest earning assets 317,066 315,846 Total average assets $ 5,342,077 $ 4,820,465 LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing deposits: Demand $ 1,117,283 319 0.11 % $ 993,084 282 0.11 % Savings and money market accounts 1,544,753 361 0.09 % 1,332,799 372 0.11 % Certificates of deposit greater than $250,000 165,944 106 0.26 % 168,450 188 0.45 % Certificates of deposit less than $250,000 219,157 87 0.16 % 239,792 192 0.32 % Total interest bearing deposits 3,047,137 873 0.11 % 2,734,125 1,034 0.15 % Short-term borrowings - - 0.00 % - - 0.00 % Subordinated debentures 10,310 103 4.01 % 10,310 79 3.07 % Total interest bearing liabilities 3,057,447 976 0.13 % 2,744,435 1,113 0.16 % Non-interest bearing deposits 1,735,258 1,573,743 Total funding 4,792,705 976 0.08 % 4,318,178 1,113 0.10 % Other non-interest bearing liabilities 86,550 69,049 Shareholders' equity 462,822 433,238 Total average liabilities and shareholders' equity $ 5,342,077 $ 4,820,465 Net interest income $ 44,719 $ 40,037 Interest rate spread 3.48 % 3.45 % Net interest margin (4) 3.53 % 3.52 % (1) Excludes average unrealized (losses) gains of ($24.7) million and $.3 million for the three months ended June 30, 2022, and 2021, respectively, which are included in non-interest earning assets. (2) The average yield does not include the federal tax benefits at an assumed effective yield of 26% related to income earned on tax-exempt municipal securities totaling $103,000 and $109,000 for the three months ended June 30, 2022, and 2021, respectively. (3) Loan interest income includes loan fees of $3.3 million and $4.4 million for the three months ended June 30, 2022 and 2021, respectively. (4) Net interest margin is computed by dividing net interest income by average interest earning assets. 39 Table Of Contents For the Six Months Ended June 30, 2022 2021 (Dollars in thousands) Average Balance Interest Income / Expense Average Yield / Rate Average Balance Interest Income / Expense Average Yield / Rate ASSETS Interest earnings deposits in other banks and federal funds sold $ 721,656 $ 1,775 0.50 % $ 501,105 $ 267 0.11 % Securities: (1) Taxable securities 1,056,670 9,695 1.84 % 836,501 7,498 1.79 % Non-taxable securities (2) 49,164 793 3.23 % 54,442 839 3.08 % Total investment securities 1,105,834 10,488 1.90 % 890,943 8,337 1.87 % Loans: (3) Real estate: Commercial 1,155,271 26,649 4.65 % 985,307 25,347 5.19 % Agricultural 691,128 16,208 4.73 % 630,592 14,583 4.66 % Residential and home equity 359,656 6,840 3.84 % 336,691 6,333 3.79 % Construction 198,626 4,580 4.65 % 191,638 4,147 4.36 % Total real estate 2,404,681 54,277 4.55 % 2,144,228 50,410 4.74 % Commercial & industrial 431,907 9,345 4.36 % 361,465 8,456 4.72 % Agricultural 256,648 5,743 4.51 % 226,706 5,121 4.56 % Commercial leases 92,844 2,793 6.07 % 102,205 2,772 5.47 % Consumer and other 36,683 3,845 21.14 % 228,336 6,992 6.18 % Total loans and leases 3,222,763 76,003 4.76 % 3,062,940 73,751 4.86 % Non-marketable securities 15,549 523 6.78 % 13,892 402 5.84 % Total interest earning assets 5,065,802 88,789 3.53 % 4,468,880 82,757 3.73 % Allowance for credit losses (61,232 ) (59,820 ) Non-interest earning assets 315,037 310,629 Total average assets $ 5,319,607 $ 4,719,689 LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing deposits: Demand $ 1,116,436 578 0.10 % $ 968,496 576 0.12 % Savings and money market accounts 1,531,069 703 0.09 % 1,312,122 790 0.12 % Certificates of deposit greater than $250,000 166,725 203 0.25 % 169,967 444 0.53 % Certificates of deposit less than $250,000 221,487 192 0.17 % 243,583 461 0.38 % Total interest bearing deposits 3,035,717 1,676 0.11 % 2,694,168 2,271 0.17 % Short-term borrowings 1 - 0.00 % 2 - 0.00 % Subordinated debentures 10,310 185 3.62 % 10,310 158 3.09 % Total interest bearing liabilities 3,046,028 1,861 0.12 % 2,704,480 2,429 0.18 % Non-interest bearing deposits 1,728,962 1,522,029 Total funding 4,774,990 1,861 0.08 % 4,226,509 2,429 0.12 % Other non-interest bearing liabilities 80,413 61,662 Shareholders' equity 464,204 431,518 Total average liabilities and shareholders' equity $ 5,319,607 $ 4,719,689 Net interest income $ 86,928 $ 80,328 Interest rate spread 3.41 % 3.55 % Net interest margin (4) 3.46 % 3.62 % (1) Excludes average unrealized (losses) gains of ($15.9) million and $7.1 million for the six months ended June 30, 2022, and 2021, respectively, which are included in non-interest earning assets. (2) The average yield does not include the federal tax benefits at an assumed effective yield of 26% related to income earned on tax-exempt municipal securities totaling $210,000 and $220,000 for the six months ended June 30, 2022, and 2021, respectively. (3) Loan interest income includes loan fees of $7.2 million and $9.6 million for the six months ended June 30, 2022 and 2021, respectively. (4) Net interest margin is computed by dividing net interest income by average interest earning assets. 40 Table Of Contents Second Quarter 2022 vs. Second Quarter 2021 Interest-bearing deposits with banks and Federal Reserve balances consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 0.83% and 0.11% during the second quarter of 2022 and 2021, respectively. Average interest-bearing deposits with banks were $684 million and $591 million for the quarter June 30, 2022 and 2021, respectively. Interest income on interest-bearing deposits with banks was $1.4 million and $0.2 million for the quarter ended June 30, 2022 and 2021, respectively. The investment securities portfolio consists primarily of: (1) mortgage-backed securities issued by government-sponsored entities; (2) debt securities issued by the U.S. Treasury, government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, at certain times the Company has selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 7 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity. Since the risk factor for these types of investments is generally lower than that of loans and leases, the yield earned on investments is generally less than that of loans and leases. Total investment securities averaged $1.1 billion and $893 million for the quarter ended June 30, 2022 and 2021, respectively. The average yield on total investment securities was 1.94% and 1.84% for the quarter ended June 30, 2022 and 2021, respectively. See “Investment Securities and Federal Reserve balances” for a discussion of the Company’s investment strategy in 2022. Loans and leases held for investment averaged $3.2 billion and $3.1 billion for the quarter ended June 30, 2022 and 2021, respectively. The yield on the loan & lease portfolio was 4.76% and 4.80% for the quarter ended June 30, 2022 and 2021, 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. Interest-bearing liabilities averaged $3.1 billion and $2.7 billion for the quarter ended June 30, 2022 and 2021, respectively. Total interest expense on interest-bearing deposits was $0.9 million, $1.0 million for the quarter ended June 30, 2022 and 2021, respectively. The average rate paid on interest-bearing liabilities was 0.13% and 0.16% for the quarter ended June 30, 2022 and 2021, respectively. As a result of recent increases in short-term market interest rates, the Company is experiencing more aggressive competitor rates on interest bearing deposits, which it may need to meet in order to retain key customers. This could place negative pressure on future deposit rates and net interest margin. Six Months Ended June 30, 2022 vs. Six Months Ended June 30, 2021 Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 0.50% and 0.11% for the first six months ended June 30, 2022 and 2021, respectively. Average interest-bearing deposits were $722 million and $501 million for the six months ended June 30, 2022 and 2021, respectively. Interest income on interest-bearing deposits with banks was $1.8 million and $0.3 million for the six months ended June 30, 2022 and 2021, respectively. Average total investment securities were $1.1 billion and $891 million for the six months ended June 30, 2022 and 2021, respectively. The average yield on total investment securities were 1.90% and 1.87% for the six months ended June 30, 2022 and 2021, respectively. See “Investment Securities and Federal Reserve balances” for a discussion of the Company’s investment strategy in 2022. Average loans and leases held for investment were $3.2 billion and $3.1 billion for the six months ended June 30, 2022 and 2021, respectively. The yield on the loan & lease portfolio was 4.76% and 4.86% for the six months ended June 30, 2022 and 2021, respectively. 41 Table Of Contents Average interest-bearing liabilities were $3.0 billion and $2.7 billion for the six months ended June 30, 2022 and 2021, respectively. Total interest expense on interest-bearing deposits was $1.7 million, $2.3 million for the six months ended June 30, 2022 and 2021, respectively. The average rate paid on interest-bearing liabilities was 0.12% and 0.18% for the six months ended June 30, 2022 and 2021, respectively. Rate/Volume Analysis . The following table shows the change in interest income and interest expense and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates. For purposes of this table, the change in interest due to both volume and rate has been allocated to change due to volume and rate in proportion to the relationship of absolute dollar amounts of change in each. Three Months Ended June 30, 2022 compared with 2021 Six Months Ended June 30, 2022 compared with 2021 Increase (Decrease) Due to: Increase (Decrease) Due to: (Dollars in thousands) Volume Rate Net Volume Rate Net Interest income: Interest earnings deposits in other banks and federal funds sold $ 30 $ 1,215 $ 1,245 $ 164 $ 1,344 $ 1,508 Securities: Taxable securities 1,165 248 1,413 2,016 181 2,197 Non-taxable securities (123 ) 98 (25 ) (137 ) 91 (46 ) Total securities 1,042 346 1,388 1,879 272 2,151 Loans: Real estate: Commercial 5,108 (4,105 ) 1,003 7,420 (6,118 ) 1,302 Agricultural 946 22 968 1,417 208 1,625 Residential and home equity 1,325 (1,448 ) (123 ) 436 71 507 Construction 183 175 358 155 278 433 Total real estate 7,562 (5,356 ) 2,206 9,428 (5,561 ) 3,867 Commercial & industrial 3,275 (3,074 ) 201 2,491 (1,602 ) 889 Agricultural 424 7 431 762 (140 ) 622 Commercial leases (559 ) 508 (51 ) (547 ) 568 21 Consumer and other (17,178 ) 16,297 (881 ) (18,389 ) 15,242 (3,147 ) Total loans (6,477 ) 8,383 1,906 (6,257 ) 8,509 2,252 Non-marketable securities 10 (4 ) 6 51 70 121 Total interest income (5,395 ) 9,940 4,545 (4,162 ) 10,194 6,032 Interest expense: Interest bearing deposits: Demand 35 2 37 164 (162 ) 2 Savings and money market accounts 235 (246 ) (11 ) 276 (363 ) (87 ) Certificates of deposit greater than $250,000 (3 ) (79 ) (82 ) (8 ) (233 ) (241 ) Certificates of deposit less than $250,000 (15 ) (90 ) (105 ) (39 ) (230 ) (269 ) Total interest bearing deposits 252 (413 ) (161 ) 393 (988 ) (595 ) Short-term borrowings - - - - - - Subordinated debentures - 24 24 - 27 27 Total interest expense 252 (389 ) (137 ) 393 (961 ) (568 ) Net interest income $ (5,647 ) $ 10,329 $ 4,682 $ (4,556 ) $ 11,156 $ 6,600 Net interest income increased by $6.6 million, or 8.22% to $86.9 million for the six months ended June 30, 2022 compared to $40.0 million for the same quarter one year earlier. The increase in net interest income was driven 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 Fed Funds sold and investment securities. 42 Table Of Contents Comparison of Results of Operations for the Three and Six Months Ended June 30, 2022 and 2021 Three Months Ended June 30, Six Months Ended June 30, (Dollars in thousands) 2022 2021 $ Better / (Worse) % Better / (Worse) 2022 2021 $ Better / (Worse) % Better / (Worse) Selected Income Statement Information: Interest income $ 45,695 $ 41,150 $ 4,545 11.04 % $ 88,789 $ 82,757 $ 6,032 7.29 % Interest expense 976 1,113 137 12.31 % 1,861 2,429 568 23.38 % Net interest income 44,719 40,037 4,682 11.69 % 86,928 80,328 6,600 8.22 % Provision for credit losses 1,500 - (1,500 ) 0.00 % 1,500 1,250 (250 ) (20.00 %) Net interest income after provision for credit losses 43,219 40,037 3,182 7.95 % 85,428 79,078 6,350 8.03 % Non-interest income 3,512 4,959 (1,447 ) (29.18 %) 7,824 11,675 (3,851 ) (32.99 %) Non-interest expense 23,031 23,603 572 2.42 % 46,819 47,147 328 0.70 % Income before income tax expense 23,700 21,393 2,307 10.78 % 46,433 43,606 2,827 6.48 % Income tax expense 5,257 5,240 (17 ) (0.32 %) 10,932 10,740 (192 ) (1.79 %) Net income $ 18,443 $ 16,153 $ 2,290 14.18 % $ 35,501 $ 32,866 $ 2,635 8.02 % Net Income. For the three and six months ended June 30, 2022, Farmers & Merchants Bancorp reported net income of $18.4 million and $35.5 million, earnings per share of $23.58 and $45.28 and return on average assets of 1.38% and 1.33%, respectively. Return on average shareholders’ equity was 15.94% and 15.30% for the three and six months ended June 30, 2022. For the three and six months ended June 30, 2021, Farmers & Merchants Bancorp reported net income of $16.2 million and $32.9 million, earnings per share of $20.45 and $41.62 and return on average assets of 1.34% and 1.39%, respectively. Return on average shareholders’ equity was 14.91% and 15.23% for the three and six months ended June 30, 2021. Net Interest Income and Net Interest Margin. For the quarter ended June 30, 2022, net interest income increased $4.7 million, or 11.7%, to $44.7 million compared with $40.0 million for the same quarter a year earlier. The increase is primarily the result of average interest earning assets increasing $522 million, or 11.4% to $5.1 billion compared with $4.6 billion for the same period a year earlier. Total deposits grew $475 million, or 12.31%, to $4.8 billion compared with $4.3 billion for the same a year ago. Net interest margins increased slightly by 1 basis point to 3.53% for the quarter ended June 30, 2022, compared with 3.52% for the same period a year earlier. Net interest income for the six months ended June 30, 2022 increased by $6.6 million, or 8.22%, to $86.9 million, compared to $80.3 million at June 30, 2001. The increase in net interest income was primarily due to a $597 million increase in average earning assets offset by a 16 basis point decrease in the net interest margin. For the six months ended June 30, 2022, the Company’s net interest margin was 3.46% compared to 3.62% for the same period in 2021. This decrease in net interest margin was due primarily to a decrease of 20 basis points in the yield received on earning assets offset somewhat by a 6 basis point decrease in the cost of interest-bearing liabilities. 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 expected losses over the life of the loan and HTM securities portfolios. The Company made a $1.5 million provision for credit losses during the first half of 2022 compared to $1.3 million during the first half of 2021. Net charge-offs during the first half of 2022 were $34,000 compared to net recoveries of $117,000 in the first half of 2021. 43 Table Of Contents Non-interest Income. Non-interest income decreased $1.4 million, or 29.2%, to $3.5 million for the quarter ended June 30, 2022 compared with $5.0 million for the same period a year earlier. This decrease in non-interest income was primarily due to a $1.5 million decline in gains/(losses) loss on deferred compensation investments and a $0.7 million reduction in gain on sale of investment securities recorded in the first quarter of 2021. This decrease in non-interest income was partially off-set by an increase of $.4 million in other investment income. The Company recorded net losses on deferred compensation plan investments of $1 million for the quarter ended June 30, 2022 compared with net gains of $0.5 million for the same respective period. See Note 12, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2021 Form 10-K filed on March 15, 2022 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these investment gains/losses to be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no net-effect on the Company’s net income. Non-interest income decreased $3.9 million, or 33%, to $7.8 million for the six months ended June 30, 2022 compared with $11.7 million for the same period of 2021. The year-over-year decrease in non-interest income was primarily due to a $1.8 million reduction in gain on sale of investment securities recorded in the first quarter of 2021and a $2.5 million decline in gains/(losses) on deferred compensation plan investments. These reductions were primarily off-set by a $0.4 million increase in services charges received on deposit accounts. The Company recorded net losses on deferred compensation plan investments of $0.6 million for the six months ended June 30, 2022 compared with net gains of $1.2 million for the same respective period. See Note 12, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2021 Form 10-K filed on March 15, 2022 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these investment gains/losses to be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no net-effect on the Company’s net income. Non-interest Expense. Non-interest expense decreased $0.6 million, or 2.4%, to $23 million for the quarter ended June 30, 2022 compared with $23.6 million for the same period a year ago. This decrease was primarily due to the $1.5 million decline in gains/(losses) on deferred compensation plan investments. This decrease was partially off-set by a $0.5 million increase in outside professional fees, a $0.2 million increase in salaries and employee benefits and a $0.1 million increase in legal expenses. The Company recorded net losses on deferred compensation plan investments of $1.0 million for the quarter ended June 30, 2022 compared with net gains of $0.5 million for the same respective period. See Note 12, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2021 Form 10-K filed on March 15, 2022 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires gains/(losses) on deferred compensation plan investments to be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no net-effect on the Company’s net income. Non-interest expense decreased $.3 million, or 0.7%, to $46.8 million for the six months ended June 30, 2022 compared with $47.1 million for the same period a year ago. This decrease was primarily due to the $1.8 million decline in gains/(losses) on deferred compensation plan investments. This decrease was off-set by a $0.4 million increase in accounting expenses, a $0.3 million increase in legal expenses and a $0.3 million increase in employee salaries and benefits. The Company recorded net losses on deferred compensation plan investments of $0.6 million for the six months ended June 30, 2022 compared with net gains of $1.2 million for the same period of 2021. See Note 12, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2021 Form 10-K filed on March 15, 2022 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. 44 Table Of Contents Although GAAP requires gains/(losses) on deferred compensation plan investments to be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no net-effect on the Company’s net income. Income Tax Expense. The Bank’s provision for income taxes increased 1.79% to $10.9 million for the first six months of 2022 compared to the first six months of 2021. The Company’s effective tax rate for the first six months of 2022 was 23.54% compared to 24.63% for the same period in 2021. The Company’s effective tax rate can fluctuate from quarter to quarter due primarily to changes in the mix of taxable and tax-exempt earning sources. The effective rates were lower than the combined Federal and State statutory rate of 30% due primarily to 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. Financial Condition Total assets grew $149 million, or 2.88%, to $5.3 billion at June 30, 2022 compared with $5.2 billion at December 31, 2021. Loans held for investment were $3.2 billion at June 30, 2022, an increase of $12.7 million, or .39% compared to December 31, 2021. Total deposits grew $129 million, or 2.8%, to $4.8 billion at June 30, 2022 compared with $4.6 billion at December 31, 2021. The increase in total assets and deposits was primarily the result of continued strong organic deposit growth. Investment Securities and Federal Reserve Balances The Company’s investment portfolio increased $86 million, or 8.56%, to $1.1 billion at June 30, 2022 compared to $1.0 billion at December 31, 2021. 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. The Company's total investment portfolio currently represents 20.53% of the Company’s total assets at June 30, 2022 as compared with 19.46% at December 31, 2021. 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. Interest bearing deposits with banks totaled $681 million at June 30, 2022 and $663 million at December 31, 2021. 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. As of June 30, 2022, we held no investment securities from any issuer that totaled over 10% of our shareholders’ equity. 45 Table Of Contents The carrying value of our portfolio of investment securities was as follows: (Dollars in thousands) June 30, 2022 December 31, 2021 Available-for-Sale Securities U.S. Treasury notes $ 4,952 $ 10,089 U.S. Government-sponsored securities 5,441 6,374 Mortgage-backed securities (1) 203,607 251,120 Collateralized mortgage obligations (1) 1,502 2,436 Corporate securities 9,526 - Other 310 435 Total available-for-sale securities $ 225,338 $ 270,454 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. (Dollars in thousands) June 30, 2022 December 31, 2021 Held-to-Maturity Securities Mortgage-backed securities (1) $ 721,510 $ 596,775 Collateralized mortgage obligations (1) 84,414 73,781 Municipal securities 62,459 66,496 Total held-to-maturity securities $ 868,383 $ 737,052 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. 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: As of June 30, 2022 Within One Year After One but Within Five Years After Five but Within Ten Years After Ten Years Total (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Securities available-for-sale U.S. Treasury notes $ 4,952 2.39 % $ - 0.00 % $ - 0.00 % $ - 0.00 % $ 4,952 2.39 % U.S. Government-sponsored securities 12 1.09 % 104 2.90 % 380 1.70 % 4,945 1.52 % 5,441 1.56 % Mortgage-backed securities (1) - 0.00 % 24,553 2.36 % 34,650 2.40 % 144,403 1.72 % 203,607 1.91 % Collateralized mortgage obligations (1) - 0.00 % - 0.00 % - 0.00 % 1,502 2.30 % 1,502 2.30 % Corporate securities - 0.00 % 4,738 0.78 % 4,788 0.90 % - 0.00 % 9,526 0.84 % Other 310 1.72 % - 0.00 % - 0.00 % - 0.00 % 310 1.72 % Total securities available-for-sale $ 5,273 2.35 % $ 29,395 2.10 % $ 39,818 2.21 % $ 150,851 1.72 % $ 225,338 1.87 % (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. 46 Table Of Contents As of June 30, 2022 Within One Year After One but Within Five Years After Five but Within Ten Years After Ten Years Total (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Securities held-to-maturity Mortgage-backed securities (1) $ - 0.00 % $ - 0.00 % $ 14,693 7.90 % $ 706,817 1.87 % $ 721,510 1.85 % Collateralized Mortgage Obligations (1) - 0.00 % - 0.00 % - 0.00 % 84,414 1.88 % 84,414 1.88 % Municipal securities 700 1.51 % 7,089 2.81 % 15,948 3.40 % 38,723 2.38 % 62,460 2.68 % Total securities held-to-maturity $ 700 1.51 % $ 7,089 2.81 % $ 30,641 2.06 % $ 829,954 1.90 % $ 868,383 1.91 % (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. As of December 31, 2021 Within One Year After One but Within Five Years After Five but Within Ten Years After Ten Years Total (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Securities available-for-sale U.S. Treasury notes $ 5,028 2.33 % $ 5,061 2.38 % $ - 0.00 % $ - 0.00 % $ 10,089 2.36 % U.S. Government-sponsored securities 2 1.80 % 148 2.29 % 512 1.55 % 5,712 1.26 % 6,374 1.30 % Mortgage-backed securities (1) 13 1.50 % 21,155 2.36 % 50,554 2.36 % 179,398 1.61 % 251,120 1.83 % Collateralized mortgage obligations (1) - 0.00 % - 0.00 % - 0.00 % 2,436 2.30 % 2,436 2.30 % Municipal securities - 0.00 % - 0.00 % - 0.00 % - 0.00 % - 0.00 % Corporate securities - 0.00 % - 0.00 % - 0.00 % - 0.00 % - 0.00 % Other 435 3.31 % - 0.00 % - 0.00 % - 0.00 % 435 3.31 % Total securities available-for-sale $ 5,478 2.41 % $ 26,364 2.36 % $ 51,066 2.35 % $ 187,546 1.61 % $ 270,454 1.84 % (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. As of December 31, 2021 Within One Year After One but Within Five Years After Five but Within Ten Years After Ten Years Total (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Securities held-to-maturity Mortgage-backed securities (1) $ - 0.00 % $ - 0.00 % $ 10,641 0.41 % $ 586,134 1.72 % $ 596,775 1.70 % Collateralized Mortgage Obligations (1) - 0.00 % - 0.00 % - 0.00 % 73,781 1.71 % 73,781 1.71 % Municipal securities 308 1.10 % 8,487 2.19 % 18,433 3.42 % 39,268 4.52 % 66,496 3.90 % Total securities held-to-maturity $ 308 1.10 % $ 8,487 2.19 % $ 29,074 2.32 % $ 699,183 1.88 % $ 737,052 1.90 % (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. Expected maturities may differ from contractual maturities because issuers may have the right to call obligations with or without penalties. We evaluate securities for expected credit losses at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Loans and Leases Loans and leases can be categorized by borrowing purpose and use of funds. Common examples of loans and leases made by the Company include: Commercial and Agricultural Real Estate – These are loans secured 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 the loan. Loans are made both on owner occupied and investor properties; generally do not exceed 15 years (and may have pricing adjustments on a shorter timeframe); have debt service coverage ratios of 1.00 or better with a target of greater than 1.25; 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. 47 Table Of Contents Real Estate Construction – These are loans for acquisition, development and construction and are secured by commercial or residential real estate. These loans are generally made only to experienced local developers with whom the Bank has a successful track record; for projects in our service area; with Loan to Value (LTV) below 75%; and where the property can be developed and sold within 2 years. Commercial construction loans are made only when there is 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 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 to treasury rates. The Company has always underwritten mortgage loans based upon traditional underwriting criteria and does not make loans that are known in the industry as “subprime,” “no or low doc,” or “stated income” loans. Home Equity Lines and Loans – These are loans made to individuals for home improvements and other personal needs. Generally, amounts do not exceed $250,000; Combined Loan To Value (CLTV) does not exceed 80%; FICO scores are at or above 670; Total Debt Ratios do not exceed 43%; and in some situations the Company is in a 1 st lien position. Agricultural – These are non-real estate loans and lines of credit made to farmers to finance agricultural production. Lines of credit are extended to finance the seasonal needs of farmers during peak growing periods; are usually established for periods no longer than 12 to 36 months; are often secured by general filing liens on livestock, crops, crop proceeds and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a processing plant, or orchard/vineyard development; have maturities from five to seven years; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan. Commercial – These are non-real estate loans and lines of credit to businesses that are sole proprietorships, partnerships, LLC’s and corporations. Lines of credit are extended to finance the seasonal working capital needs of customers during peak business periods; are usually established for periods no longer than 12 to 24 months; are often secured by general filing liens on accounts receivable, inventory and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a plant or purchase of a business; have maturities from five to seven years; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan. Consumer – These are loans to individuals for personal use, and primarily include loans to purchase automobiles or recreational vehicles, and unsecured lines of credit. The Company has a minimal consumer loan portfolio, 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 with qualified, independent appraisers that establish the residual values the Company uses in structuring a lease. 48 Table Of Contents The Company accounts for leases with Investment Tax Credits (“ITC”) under the deferred method as established in ASC 740-10. ITCs are viewed and accounted for as a reduction of the cost of the related assets and presented as deferred income on the Company’s financial statement. Each loan or lease type involves risks specific to the: (1) borrower; (2) collateral; and (3) loan & lease structure. 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 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 and leases: (1) on both a fixed rate and adjustable rate basis; (2) over different terms; and (3) based upon different rate indices as long as these structures are consistent with the Company’s interest rate risk management policies and procedures. See “Item 3. Quantitative and Qualitative Disclosures about Market Risk” in this Report on Form 10-Q for further details. Overall, the Company's loan & lease portfolio at June 30, 2022 totaled $3.2 billion, an increase of $13 million over December 31, 2021. Exclusive of SBA PPP loans, the loan portfolio grew $66 million, or 2.08%, over December 31, 2021. 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. 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: June 30, 2022 December 31, 2021 (Dollars in thousands) Dollars Percent of Total Dollars Percent of Total Gross Loans and Leases Real estate: Commercial $ 1,210,195 37.14 % $ 1,167,516 35.95 % Agricultural 709,624 21.78 % 672,830 20.72 % Residential and home equity 371,874 11.41 % 350,581 10.79 % Construction 162,713 4.99 % 177,163 5.45 % Total real estate 2,454,406 75.32 % 2,368,090 72.91 % Commercial & industrial 439,455 13.49 % 427,799 13.17 % Agricultural 261,856 8.04 % 276,684 8.52 % Commercial leases 89,095 2.73 % 96,971 2.99 % Consumer and other (1) 13,588 0.42 % 78,367 2.41 % Total gross loans and leases $ 3,258,400 100.00 % $ 3,247,911 100.00 % (1) Includes SBA PPP loans. 49 Table Of Contents The following table shows the maturity distribution and interest rate sensitivity of the loan portfolio of the Company as of June 30, 2022. Loan Contractual Maturity (Dollars in thousands) One Year or Less After One But Within Five Years After Five Years But Within Fifteen Years After Fifteen Years Total Gross loan and leases: Real estate: Commercial $ 89,939 $ 267,837 $ 818,910 $ 33,509 $ 1,210,195 Agricultural 34,682 154,188 447,414 73,340 709,624 Residential and home equity 120 4,023 118,208 249,523 371,874 Construction 115,397 47,316 - - 162,713 Total real estate 240,138 473,364 1,384,532 356,372 2,454,406 Commercial & industrial 163,698 222,395 47,140 6,222 439,455 Agricultural 160,447 86,559 14,850 - 261,856 Commercial leases 6,870 31,772 50,453 - 89,095 Consumer and other (1) 952 10,766 1,870 - 13,588 Total gross loans and leases $ 572,105 $ 824,856 $ 1,498,845 $ 362,594 $ 3,258,400 Rate Structure for Loans Fixed Rate $ 481,614 $ 492,971 $ 396,902 $ 123,043 $ 1,494,530 Adjustable Rate 90,491 331,885 1,101,943 239,551 1,763,870 Total gross loans and leases $ 572,105 $ 824,856 $ 1,498,845 $ 362,594 $ 3,258,400 (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 $3.0 million and $516,000 at June 30, 2022 and December 31, 2021, respectively. 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. 133. 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 terms. However, these loans or leases continue to be classified as collateral dependent and are individually evaluated for impairment. 50 Table Of Contents At June 30, 2022, restructured loans totaled $1.4 million compared with $2.3 million at December 31, 2021, all of which were performing. See Note 4 “Loans and Leases” to the Unaudited Consolidated Financial Statements in “Item 1. Financial Statements” in this quarterly Report on Form 10-Q. Other Real Estate Owned –OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower. We record all OREO properties at amounts equal to or less than the fair market value of the properties based on current independent appraisals reduced by estimated selling costs. The Company reported $873,000 of foreclosed OREO at June 30, 2022, and at December 31, 2021. 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. 133. Since April 2020, we have restructured $278 million of loans under the CARES Act and H.R. 133 guidelines. At June 30, 2022, 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) June 30, 2022 December 31, 2021 Non-performing assets: Non-accrual loans and leases, not TDRs Real estate: Commercial $ 1,674 $ - Agricultural 475 18 Residential and home equity - - Construction - - Total real estate 2,149 18 Commercial & industrial - - Agricultural 879 - Commercial leases - - Consumer and other - - Subtotal 3,028 18 Non-accrual loans and leases, are TDRs Real estate: Commercial - - Agricultural - 498 Residential and home equity - - Construction - - Total real estate - 498 Commercial & industrial - - Agricultural - - Commercial leases - - Consumer and other - - Subtotal - 498 Total non-performing loans and leases $ 3,028 $ 516 Other real estate owned ("OREO") $ 873 $ 873 Total non-performing assets $ 3,901 $ 1,389 Performing TDRs $ 1,389 $ 1,824 Selected ratios: Non-performing loans to total loans 0.09 % 0.02 % Non-performing assets to total assets 0.07 % 0.03 % 51 Table Of Contents Although management believes that non-performing loans and leases are generally well-secured and that potential losses are provided for in the Company’s allowance for credit losses, there can be no assurance that future deterioration in economic conditions and/or collateral values will not result in future credit losses. See Note 4. “Loans and Leases”, located in “Item 1. Financial Statements” in this Quarterly Report on Form 10-Q for an allocation of the allowance classified to collateral dependent loans and leases. Except for non-performing loans and leases discussed above, the Company’s management is not aware of any loans and leases as of June 30, 2022, for which known financial problems of the borrower would cause serious doubts as to the ability of these borrowers to materially comply with their present loan or lease repayment terms, or any known events that would result in the loan or lease being designated as non-performing at some future date. However: • The State of California experienced drought conditions from 2013 through most of 2016. After 2016, reasonable levels of rain and snow alleviated drought conditions in our primary service area, but the winters of 2020-2021 and 2021-2022 were once again dry. 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 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. Note 2). Allowance for Credit Losses—Loans and Leases The Company maintains an allowance for credit losses (“ACL”) on loans based on current expected credit losses 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 collateral dependent loans and leases; general reserves for current expected credit losses related to loans and leases that are not collateral dependent; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors. See “Summary of Critical Accounting Policies and Estimates - Allowance for Credit Losses — Loans.” 52 Table Of Contents The following table sets forth the activity in our ACL for the periods indicated: Six Months Ended June 30, (Dollars in thousands) 2022 2021 Allowance for credit losses: Balance at beginning of year $ 61,007 $ 58,862 Provision / (recapture) for credit losses 1,107 1,250 Charge-offs: Real estate: Commercial - - Agricultural - - Residential and home equity - - Construction - - Total real estate - - Commercial & industrial (276 ) - Agricultural - - Commercial leases - - Consumer and other (18 ) (16 ) Total charge-offs (294 ) (16 ) Recoveries: Real estate: Commercial - - Agricultural - - Residential and home equity 119 70 Construction - - Total real estate 119 70 Commercial & industrial 131 45 Agricultural 4 5 Commercial leases - - Consumer and other 6 13 Total recoveries 260 133 Net recoveries / charge-offs (34 ) 117 Balance at end of period $ 62,080 $ 60,229 Selected financial information: Gross loans held for investment $ 3,258,400 $ 3,046,492 Average loans 3,222,763 3,062,940 Non-performing loans 3,028 548 Allowance for credit losses to non-performing loans 2050.20 % 10990.69 % Net (recoveries)/charge-offs to average loans 0.00 % 0.00 % Provision for credit losses to average loans 0.03 % 0.04 % Allowance for credit losses to loans held for investment 1.91 % 1.98 % 53 Table Of Contents The following table indicates management’s allocation of the ACL by loan type as of each of the following dates: June 30, 2022 December 31, 2021 (Dollars in thousands) Dollars Percent of Total Dollars Percent of Total Allowance for credit losses: Real estate: Commercial $ 17,879 37.14 % $ 28,536 35.95 % Agricultural 16,837 21.78 % 9,613 20.72 % Residential and home equity 6,874 11.41 % 2,847 10.79 % Construction 2,876 4.99 % 1,456 5.45 % Total real estate 44,466 75.32 % 42,452 72.91 % Commercial & Industrial 10,139 13.49 % 11,489 13.17 % Agricultural 5,669 8.04 % 5,465 8.52 % Commercial leases 1,645 2.73 % 938 2.99 % Consumer and other 161 0.42 % 663 2.41 % Total allowance for credit losses $ 62,080 100.00 % $ 61,007 100.00 % Deposits Total deposits were $4.8 billion and $4.64 billion as of June 30, 2022 and December 31, 2021, 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, Oakland, Concord and Napa. Non-interest bearing demand deposits increased slightly by $0.3 million and were $1.75 billion as of June 30, 2022 and December 31, 2021. Non-interest bearing deposits were 36.77% of total deposits, as of June 30, 2022 and 37.72% as of December 31, 2021. Interest bearing deposits are comprised of interest-bearing transaction accounts, money market accounts, regular savings accounts, and certificates of deposit. The following table shows the average amount and average rate paid on the categories of deposits for each of the periods presented: Six Months Ended June 30, 2022 2021 (Dollars in thousands) Average Balance Interest Expense Average Rate Average Balance Interest Expense Average Rate Total deposits: Interest bearing deposits: Demand $ 1,116,436 578 0.10 % $ 968,496 $ 576 0.12 % Savings and money market 1,531,069 703 0.09 % 1,312,122 790 0.12 % Certificates of deposit greater than $250,000 166,725 203 0.25 % 169,967 444 0.53 % Certificates of deposit less than $250,000 221,487 192 0.17 % 243,583 461 0.38 % Total interest-bearing deposits 3,035,717 1,676 0.11 % 2,694,168 2,271 0.17 % Non-interest bearing deposits 1,728,962 1,522,029 Total deposits $ 4,764,679 $ 1,676 0.07 % $ 4,216,197 $ 2,271 0.11 % 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. We will continue to manage interest expense through deposit pricing. The average cost of deposits, including non-interest bearing deposits, declined to 0.07% for the six months ended June 2022 compared with 0.11% for the same period a year ago. 54 Table Of Contents The following table shows deposits with a balance greater than $250,000 at June 30, 2022 and December 31, 2021: June 30, December 31, (Dollars in thousands) 2022 2021 Deposits greater than $250,000 $ 2,817,460 $ 2,708,576 Certificates of deposit greater $250,000, by maturity: Less than 3 months 58,135 59,591 3 months to 6 months 46,841 37,182 6 months to 12 months 50,299 59,945 More than 12 months 6,965 12,147 Total time deposits greater than $250,000 $ 162,240 $ 168,865 Total deposits greater than $250,000 $ 2,979,700 $ 2,877,441 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. The Bank participates in a program wherein the State of California places time deposits with the Bank at the Bank’s option. At June 30, 2022 and December 31, 2021, 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; and, as opportunities arise, to borrow and invest the proceeds at a positive spread through the investment portfolio. There were no FHLB advances at June 30, 2022 or December 31, 2021. There were no Federal Funds purchased or advances from the FRB at June 30, 2022 or December 31, 2021. 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 10. “Long-Term Subordinated Debentures” located in “Item 8. Financial Statements and Supplementary Data” in our Annual Report on Form 10-K filed with the SEC on March 15, 2022. 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 September 17, 2022) and the rate was 4.88% as of June 30, 2022 and 2.97% at June 30, 2021. The average rate paid for these securities was 3.62% for the first half of 2022 and 3.09% for the first half of in 2021. 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. 55 Table Of Contents Capital Resources The Company relies primarily on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to insure depositor protection. Shareholders’ Equity totaled $461 million at June 30, 2022, and $463 million at December 31, 2021. The Company and the Bank are subject to various regulatory capital adequacy guidelines as outlined under Part 324 of the FDIC Rules and Regulations. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Company believes that it is currently in compliance with all of these capital requirements and that they will not result in any restrictions on the Company’s business activity. Management believes that the Bank meets the requirements to be categorized as “well capitalized” under the FDIC regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. The following table sets forth our capital ratios and the related regulatory guidelines: (Dollars in thousands) Minimum to be Categorized as "Well Capitalized" Minimum to be Categorized as "Adequately Capitalized" June 30, 2022 December 31, 2021 Farmers & Merchants Bancorp CET1 capital to risk-weighted assets N/A 4.50 % 11.55 % 11.68 % Tier 1 capital to risk-weighted assets N/A 6.00 % 11.80 % 11.94 % Risk-based capital to risk-weighted assets N/A 8.00 % 13.05 % 13.19 % Tier 1 leverage capital ratio N/A 4.00 % 8.94 % 8.92 % Farmers & Merchants Bank CET1 capital to risk-weighted assets 6.50 % 4.50 % 11.72 % 11.91 % Tier 1 capital to risk-weighted assets 8.00 % 6.00 % 11.72 % 11.91 % Risk-based capital to risk-weighted assets 10.00 % 8.00 % 12.97 % 13.17 % Tier 1 leverage capital ratio 5.00 % 4.00 % 8.89 % 8.91 % 56 Table Of Contents Off-Balance-Sheet Arrangements Off-balance-sheet arrangements are any contractual arrangement to which an unconsolidated entity is a party, under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity, or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to the Company, or engages in leasing, hedging, or research and development services with the Company. The Company had the following off balance sheet commitments as of the dates indicated. The following table sets forth our off-balance sheet lending commitments as of June 30, 2022: Amount of Commitment Expiration per Period (Dollars in thousands) Total Committed Amount Less than One Year One to Three Years Three to Five Years After Five Years Off-balance sheet commitments Commitments to extend credit $ 995,795 $ 402,558 $ 410,901 $ 27,166 $ 155,170 Standby letters of credit 16,484 7,076 7,662 1,470 276 Total off-balance sheet commitments $ 1,012,279 $ 409,634 $ 418,563 $ 28,636 $ 155,446 The Company's exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer's creditworthiness are performed on a case-by-case basis. Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third-party. Most standby letters of credit have maturity dates ranging from 1 to 60 months with final expiration in January 2027. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. 57 Table Of Contents Liquidity The ability to have readily available funds sufficient to repay 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 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 June 30, 2022: June 30, 2022 (Dollars in thousands) Total Credit Line Limit Current Credit Line Available Outstanding Amount Remaining Credit Line Available Value of Collateral Pledged Additional liquidity sources: Federal Home Loan Bank $ 796,368 $ 796,368 $ - $ 796,368 $ 1,169,949 Federal Reserve BIC 656,756 656,756 - 656,756 869,376 FHLB Fed Funds 18,000 18,000 - 18,000 - US Bank Fed Funds 35,000 35,000 - 35,000 - MUFG Union Bank Fed Funds 15,000 15,000 - 15,000 - PCBB Fed Funds 50,000 50,000 - 50,000 - Total additional liquidity sources $ 1,571,124 $ 1,571,124 $ - $ 1,571,124 $ 2,039,325 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 foreseeable future. As of June 30, 2022, we had $1.3 billion in cash and unencumbered investment securities; $2.5 million in investment securities and $2.0 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. Our liquidity is comprised of three primary classifications: cash flows from or used in operating activities; cash flows from or used in investing activities; and cash flows from or used in financing activities. Net cash provided by or used in operating activities has consisted primarily of net income adjusted for certain non-cash income and expense items such as the credit loss provision, investment and other amortization and depreciation. Our primary investing activities are the origination of loans and purchases and sales of investment securities. As of June 30, 2022, we had outstanding loan commitments of $996 million and outstanding letters of credit of $16.5 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. At June 30, 2022 and 2021, deposits increased $151 million and $352 million compared to December 31, 2021 and 2020, respectively. 58 Table Of Contents Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company’s assessment of market risk at June 30, 2022 indicates there have been no material changes in the quantitative and qualitative disclosures from those made in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2022. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(a)) at June 30, 2022. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective and timely, providing them with material information relating to the Company required to be disclosed in the reports the Company files or submits under the Exchange Act. Changes in Internal Controls There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the six months ended June 30, 2022, to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. PART II – OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in various claims, legal actions, and complaints that arise in the ordinary course of business. In the Company’s opinion, all such matters are adequately covered by insurance, are without merit or are of such kind, or involve such amounts, that unfavorable disposition would not have a material adverse effect on the financial condition or results of operations of the Company. Item 1A. Risk Factors There have been no material changes in the risk factors previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds On November 15, 2021, the Board of Directors reauthorized the Company’s share repurchase program for up to $20.0 million of the Company’s common stock (“Repurchase Plan”), representing approximately 4% of outstanding shareholders’ equity. Repurchases by the Company under the Repurchase Plan may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means. During the first half of 2022 the Company repurchased 12,456 shares under the Repurchase Plan, for a total of $11.845 million. All of these shares were purchased at prices ranging from $925.00 to $966.00 per share, based upon the then current price on the OTCQX. Item 3. Defaults upon Senior Securities Not Applicable 59 Table Of Contents Item 4. Mine Safety Disclosures Not Applicable Item 5. Other Information Not Applicable Item 6. Exhibits List of Financial Statements and Financial Statement Schedules (a) The following documents are filed as a part of this Quarterly Report on Form 10-Q: (1) Financial Statements and (2) Financial Statement schedules required to be filed by Item 1 of this Quarterly Report on Form 10-Q. (3) The following exhibits are required by Item 601 of Regulation S-K and are included as part of this Quarterly Report on Form 10-Q: Exhibit Number Description 31(a) Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 31(b) Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 32 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* 101.INS Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) *Filed herewith 60 Table Of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FARMERS & MERCHANTS BANCORP Date: August 8, 2022 /s/ Kent A. Steinwert Kent A. Steinwert Director, Chairman, President and Chief Executive Officer (Principal Executive Officer) Date: August 8, 2022 /s/ Stephen W. Haley Stephen W. Haley Executive Vice President and Chief Financial Officer (Principal Financial Officer) 61