What changed in this filing

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Item 1. Business

2023-03-15 compared with 2022-03-16 · 313 added, 308 removed, 326 unchanged (66% of the section changed)

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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.

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

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.

See “Supervision and Regulation - Dividends and Other Transfer of Funds.” The Company’s outstanding common stock as of

December 31, 2021, consisted of 789,646 shares of common stock, $0.01 par value and no shares of preferred stock were issued or outstanding.

See “Supervision and Regulation - Dividends and Other Transfer of Funds.” The Company’s outstanding common

stock as of December 31, 2022, consisted of 768,337 shares of common stock, $0.01 par value, and no shares of preferred stock were issued or outstanding.

During 2003, the Company formed a wholly-owned Connecticut statutory business trust, FMCB Statutory Trust I, for the sole purpose of issuing trust-preferred securities.

See Note 10 “Long-Term Subordinated Debentures”

located in Item 8.

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

See Note 9 “Long-Term Subordinated

Debentures” located in “Item 8.

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

The Company operates all financial service activities through its wholly-owned banking subsidiary, Farmers & Merchants Bank of Central California, which was organized in 1916.

The Bank was incorporated under the

laws of the State of California as a non-FRB member, California state-chartered bank subject to primary regulation, supervision and examination by the Federal Deposit Insurance Corporation (“FDIC”) and by the DFPI.

The Bank was incorporated under

the laws of the State of California as a non-FRB member, California state-chartered bank subject to primary regulation, supervision and examination by the Federal Deposit Insurance Corporation (“FDIC”) and by the DFPI.

The Bank’s two wholly-owned

subsidiaries are Farmers & Merchants Investment Corporation and Farmers/Merchants Corporation.

Farmers & Merchants Investment Corporation is currently dormant and Farmers/Merchants Corporation acts as trustee on deeds of trust originated by

Farmers & Merchants Investment Corporation is currently dormant, and Farmers/Merchants Corporation acts as trustee on deeds of trust originated

The Bank’s deposit accounts are insured under the Federal Deposit Insurance Act, as amended (“FDIA”), up to applicable limits.

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F & M Bancorp, Inc.

was created in March 2002 to protect the name “F & M Bank.” During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name, “F & M Bank,”

as part of a larger effort to enhance the Company’s image and build brand name recognition.

Since 2002, the Company has converted all of its daily operating and image advertising to the “F & M Bank” name and the Company’s logo, slogan and signage

were redesigned to incorporate the trade name, “F & M Bank”.

The Company’s primary service area is the mid Central Valley of California, including Sacramento, San Joaquin, Solano, Stanislaus and Merced counties, and the east region of the San Francisco Bay Area including Napa,

Alameda, and Contra Costa counties.

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.”

Napa, Alameda, and Contra Costa counties.

The Company operates 29 full-service branches and 3 stand-alone ATMs.

The Company’s market areas include the following Metropolitan Statistical Areas (“MSA”), which most recent data as of January 18, 2022:

The Company’s market areas include the following Metropolitan Statistical Areas (“MSA”), with data as of January 23, 2023 (the most

recent data available) set forth below:

The Sacramento MSA (Sacramento County Only), with branches in Sacramento, Elk Grove, Galt and Walnut Grove.

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Unemployment was at 5.2%.

The Vallejo-Fairfield MSA (Rio Vista Only, census tract 2535.00), with branches in Rio Vista.

This census tract had a Population of 9,221 and a Weighted Average of Median Family Income of $64,022.

The city includes significant employment

in the following industries:

The Vallejo-Fairfield MSA (Rio Vista Only, census tract 2535.01 & 2535.02), with a branch in Rio Vista.

This census tract had a Population of approximately 10,000 and a Per Capita Income of approximately $44,012.

The city includes

significant employment in the following industries:

agriculture, manufacturing, tourism and other services.

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Unemployment was at 7.4%.

The Oakland-Hayward-Berkeley MD, with branches in Concord, Walnut Creek, and Oakland.

The Oakland-Hayward-Berkeley MSA, with branches in Concord, Walnut Creek, and Oakland.

This MSA had a Population of 2.8 million and a Per Capita Income of approximately $53,736.

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The MSA includes significant employment in the following sectors:

manufacturing, leisure & hospitality,

trade, and transportation & utilities.

manufacturing, leisure &

hospitality, trade, and educational & health services.

Unemployment was at 3.0%.

Through its network of banking offices, the Company emphasizes personalized service along with a broad range of banking services to businesses and individuals located in the service areas of its offices.

Company focuses on marketing its services to small and medium-sized businesses, a broad range of retail banking services are also made available to the local consumer market.

The Company offers a wide range of deposit instruments.

the Company focuses on marketing its services to small and medium-sized businesses, a broad range of retail banking services are also made available to the local consumer market.

The Company offers a wide range of deposit products.

These include checking, savings, money market, time certificates of deposit, individual retirement accounts and online banking services for both business and

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The Company also offers a wide range of specialized services designed for the needs of its commercial accounts.

These services include a credit card program for merchants, lockbox and other collection services, account

reconciliation, investment sweep, on-line account access, and electronic funds transfers by way of domestic and international wire and automated clearinghouse.

These services include a credit card program for merchants, lockbox and other collection services,

account reconciliation, investment sweep, on-line account access, and electronic funds transfers by way of domestic and international wire and automated clearinghouse.

The Company makes investment products available to customers, including mutual funds and annuities.

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The banking and financial services industry in California generally, and in the Company’s market areas specifically, is highly competitive.

The increasingly competitive environment is a result primarily of changes in

regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial service providers.

The Company competes with other major commercial banks, diversified financial institutions, credit unions,

savings institutions, money market and other mutual funds, mortgage companies, and a variety of other non-banking financial services and advisory companies.

Federal legislation encourages competition between different types of financial service

providers and has fostered new entrants into the financial services market.

The increasingly competitive environment is a result primarily of changes

in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial service providers.

The Company competes with other major commercial banks, diversified financial institutions, credit

unions, savings institutions, money market and other mutual funds, mortgage companies, and a variety of other non-banking financial services and advisory companies.

Federal legislation encourages competition between different types of financial

service providers and has fostered new entrants into the financial services market.

It is anticipated that this trend will continue.

Using the financial holding company structure, insurance companies and securities firms may compete more directly with banks

and bank holding companies.

Using the financial holding company structure, insurance companies and securities firms may compete more directly

with banks and bank holding companies.

Many of our competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader range of financial services than the Company.

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accommodate a customer’s needs, the Company may arrange for those services to be provided through its correspondents.

The market shares of the Bank and its largest competitors in the eight counties in California in which we operate, ranked by deposit market share at June 30, 2021 (the most recent data available), as reported by

S&P Global Market Intelligence, are as follows:

Wells Fargo Bank

Bank of the West

Bank of America

JPMorgan Chase Bank

The market shares of the Bank and all other banks within the eight counties in California in which we operate, at June 30, 2022 (the most recent data available), as reported by FDIC, are as follows:

Deposit Share

(Dollars in thousands)

Human Capital Resources

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The Company believes that its employee relations are satisfactory.

For the year ended December 31, 2021, salaries and employee benefits expense

totaled $64 million, representing 70% of our total non-interest expense.

Expenses related to education, training, recruiting and placement exceeded $300,000 for the three-year period ended December 31, 2021.

We are led by an experienced management team with substantial experience in the markets that we serve and the financial products that we offer.

For the year ended December 31, 2022, salaries and employee benefits

expense totaled $64 million, representing 69% of our total non-interest expense.

Expenses related to education, training, recruiting and placement exceeded $500,000 for the period ended December 31, 2022.

We are led by an experienced management team with substantial experience in the markets we serve and the financial products we offer.

Our business strategy focuses on providing products and services through

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As a result, our success depends heavily on the performance of our employees, as well as on our ability to attract, motivate and retain highly qualified employees at all levels of the Company.

We believe that our work

environment contributes to employee satisfaction and retention.

We believe that our

work environment contributes to employee satisfaction and retention.

We are committed to maintaining a work environment where every employee is treated with dignity and respect, free from the threat of discrimination and harassment.

As stated in our Board approved (i) Code of Conduct

and (ii) Prohibited Harassment Policy, we expect these same standards apply to all stakeholders, to our interactions with customers, vendors and independent contractors.

As stated in our Board approved (i) Code of

Conduct and (ii) Prohibited Harassment Policy, we expect these same standards to apply to all stakeholders, and to our interactions with customers, vendors and independent contractors.

We are firmly committed to providing equal employment and advancement opportunities to all qualified individuals and will not tolerate any discrimination or harassment of any kind.

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enter or to enter restricted areas of locations that have a public presence.

As a company having been designated as an “essential industry” during the COVID-19 pandemic, we focused on safety and health regimens that are designed to protect our

employees who have reported to work during this difficult time.

This has resulted in our ability to keep all of our branches open for business while providing a safe work environment for our employees.

Each year our annual planning and budgeting process involves an assessment of staffing levels and skills and results in the development of targets for recruitment and training.

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We strive to recruit talent from both local educational institutions and the banking industry.

The Company has full-time staff dedicated to our recruitment efforts and we utilize many of the major recruitment firms and

The Company has full-time staff dedicated to our recruitment efforts and we utilize many of the major recruitment firms

and websites.

Annually we visit local colleges and universities for job fairs and other recruitment events, which we believe allows us to identify those students who have the skills and aptitudes we need in the Company.

The results of these efforts has

been a consistent flow of candidates to fill our staffing needs as we grow.

The results of these

efforts has been a consistent flow of candidates to fill our staffing needs as we grow.

Salary and Bonuses

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Retirement Plans

All employees are eligible to participate in our Profit Sharing Plan after 1 year of service and having worked at least 1,000 hours.

The Company makes contributions equal to 5% of the employee’s eligible compensation

and discretionary contributions determined annually by the Board of Directors.

All employees are eligible to participate in our Profit Sharing Plan after one year of service and having worked at least 1,000 hours.

The Company makes contributions equal to 5% of the employee’s eligible

compensation and discretionary contributions determined annually by the Board of Directors.

This is not a matching based program;

employees receive these contributions regardless of whether they make individual contributions to our 401(K) program.

total expenses for the profit sharing plan amounted to over 10% of base salaries, a level that we believe helps us in recruitment and retention.

employees receive these contributions regardless of whether they make individual contributions to our 401(K)

During 2022 total expenses for the Profit Sharing Plan amounted to over 10% of base salaries, a level that we believe helps us in recruitment and retention.

Medical and Other Benefits

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We support team members, should they wish to continue their education in subjects and fields that are directly related to our operations, activities, and objectives.

We encourage our team members to pursue educational

opportunities that will help improve job performance and professional development.

We encourage our team members to pursue

educational opportunities that will help improve job performance and professional development.

To further this goal, we reimburse tuition and certain fees for satisfactory completion of approved educational courses and certain certifications.

college credit courses at accredited colleges and universities, continuing education courses and certification exams.

Included are college credit courses at accredited colleges and universities, continuing education courses and certification exams.

Diversity and Inclusion

To foster a deeper understanding regarding diversity and inclusion, the Company assigns all employees diversity and inclusion training - Diversity Made Simple.

The diversity

course is mandatory for all staff.

As of December 31, 2021, all employees have met their diversity and inclusion training obligations.

diversity course is mandatory for all staff.

As of December 31, 2022, all employees had met their diversity and inclusion training obligations.

Harassment Prevention

The Company assigns all employees prohibitive harassment training.

Every two years nonsupervisory employees receive one hour of harassment prevention training while supervisors

receive two hours of harassment prevention training.

Every two years non-supervisory employees receive one hour of harassment prevention training while

supervisors receive two hours of harassment prevention training.

Newly hired employees are assigned harassment prevention and must complete the training within six months of hire or promotion.

Following the initial training, all employees must complete training

every two years, at minimum.

As of December 31, 2021, all employees have met their harassment prevention training requirements.

Following the initial training, all employees must

complete training every two years, at minimum.

As of December 31, 2022, all employees had met their harassment prevention training requirements for 2022.

Performance Evaluation

The Company has implemented a Performance Planning, Coaching and Evaluation (“PPC&E”) system that requires each year that employees and their managers establish detailed goals and objectives.

Annually, employees

are reviewed relative to their progress in achieving those goals, with the objective of reducing performance surprises and encouraging behavior that is consistent with Company objectives.

We believe that this PPC&E discipline is important in

retaining and growing our employees.

employees are reviewed relative to their progress in achieving those goals, with the objective of reducing performance surprises and encouraging behavior that is consistent with Company objectives.

We believe that this PPC&E discipline is

important in retaining and growing our employees.

Government Policies

The Company’s profitability, like most financial institutions, is primarily dependent on interest rate differentials.

The difference between the interest rates paid by the Company on interest-bearing liabilities, such

as deposits and other borrowings, and the interest rates received by the Company on its interest-earning assets, such as loans and leases extended to its customers and securities held in its investment portfolio, comprise the major portion of the

Company’s earnings.

The Company’s profitability, like that of most financial institutions, is significantly dependent on interest rate differentials.

The difference between the interest rates paid by the Company on interest-bearing

liabilities, such as deposits and other borrowings, and the interest rates received by the Company on its interest-earning assets, such as loans and leases extended to its customers and securities held in its investment portfolio, comprise the

major portion of the Company’s earnings.

These rates are highly sensitive to many factors that are beyond the control of the Company and the Bank, such as inflation, recession, unemployment, and the monetary policy of the FRB.

The impact that changes in economic

conditions might have on the Company and the Bank cannot be predicted.

The impact that

changes in economic conditions might have on the Company and the Bank cannot be predicted.

The business of the Company is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the FRB.

The FRB implements national monetary policies

(with objectives such as curbing inflation and such as maximum employment, stable prices, and moderate long-term interest rates) through its open-market operations in U.S.

The FRB implements national monetary

policies (with objectives such as curbing inflation and maximum employment, stable prices, and moderate long-term interest rates) through its open-market operations in U.S.

Government securities by adjusting the required level of reserves for

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The actions of the FRB in these areas influence the growth of bank loans and leases, investments, and deposits and affect interest rates earned on interest-earning assets and paid on interest-bearing liabilities.

nature and impact on the Company of any future changes in monetary and fiscal policies cannot be predicted.

The nature and impact on the Company of any future changes in monetary and fiscal policies cannot be predicted.

From time to time, legislative acts, as well as regulations, are enacted which have the effect of increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive

balance between banks and other financial services providers.

Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies, and other financial institutions and financial services providers are

frequently made in the U.S.

Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies, and other financial institutions and financial services providers

are frequently made in the U.S.

Congress, in the state legislatures, and before various regulatory agencies.

This legislation may change banking statutes and the operating environment of the Company and the Bank in substantial and unpredictable ways.

enacted, such legislation or regulations could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings institutions, credit unions, and other financial

institutions.

The Company cannot predict whether any of this potential legislation will be enacted, and if enacted, the effect that it, or any implemented regulations, would have on the financial condition or results of operations of the Company or

any of its subsidiaries.

This legislation may change banking statutes and the operating environment of the Company and the Bank in substantial and unpredictable

If enacted, such legislation or regulations could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings institutions, credit unions, and other

financial institutions.

the Company or any of its subsidiaries.

Supervision and Regulation

Bank holding companies and banks are extensively regulated under both federal and state law.

The regulation is intended primarily for the protection of the banking system and the Deposit Insurance Fund and clients of

insured depository institutions and not for the benefit of stockholders of the Company.

This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which

results in examination reports and ratings that, while not publicly available, can affect the conduct and growth of their businesses.

These examinations consider not only compliance with applicable laws and regulations, but also capital levels,

asset quality and risk, management ability and performance, earnings, liquidity, and various other factors.

The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where

the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.

The regulation is intended primarily for the protection of the banking system and the Deposit Insurance Fund and

clients of insured depository institutions and not for the benefit of stockholders of the Company.

This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective regulatory

agencies, which results in examination reports and ratings that, while not publicly available, can affect the conduct and growth of their businesses.

These examinations consider not only compliance with applicable laws and regulations, but also

capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors.

The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a

regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these

Set forth below is a summary description of the material laws and regulations, which relate to the operations of the Company and the Bank.

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The Company is a registered bank holding company and is subject to regulation under the Bank Holding Company Act of 1956, as amended (“BHCA”).

Accordingly, the Company’s operations are subject to extensive regulation

and examination by the FRB.

Accordingly, the Company’s operations are subject to extensive

regulation and examination by the FRB.

The Company is required to file with the FRB quarterly and annual reports and such additional information as the FRB may require pursuant to the BHCA.

The FRB conducts periodic examinations of the Company.

The FRB may require that the Company terminate an activity, terminate control of, liquidate, or divest certain subsidiaries or affiliates when the FRB believes the activity or the control of the subsidiary or affiliate

constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries.

affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries.

The FRB also has the authority to regulate provisions of certain bank holding company debt.

Under certain circumstances, the Company

must file written notice and obtain approval from the FRB prior to purchasing or redeeming its equity securities.

Under the BHCA and regulations adopted by the FRB, a bank holding company and its non-banking subsidiaries are prohibited from requiring certain tie-in arrangements in connection with an extension of credit, lease or

sale of property, or furnishing of services.

For example, with certain exceptions, a bank may not condition an extension of credit on a promise by its customer to obtain other services provided by it, its holding company or other subsidiaries, or on

a promise by its customer not to obtain other services from a competitor.

Under certain circumstances,

the Company must file written notice with, and obtain approval from, the FRB prior to purchasing or redeeming its equity securities.

or sale of property, or furnishing of services.

For example, with certain exceptions, a bank may not condition an extension of credit on a promise by its customer to obtain other services provided by it, its holding company or other subsidiaries,

or on a promise by its customer not to obtain other services from a competitor.

In addition, federal law imposes certain restrictions on transactions between Farmers & Merchants Bancorp and its subsidiaries.

Further, the Company is required by the FRB

to maintain certain levels of capital.

Further, the Company is required

by the FRB to maintain certain levels of capital.

See “Capital Standards.”

The Company is prohibited by the BHCA, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is

not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to its subsidiaries.

However, the Company, subject to the prior notice and/or

approval of the FRB, may engage in any, or acquire shares of companies engaged in, activities that are deemed by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to its subsidiaries.

However, the Company, subject to the prior notice

to, and/or approval of, the FRB, may engage in any, or acquire shares of companies engaged in, any activities that are deemed by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner.

In addition, it is the FRB’s

policy, that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity

and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks.

This support may be required at times when a bank holding company may not be able to provide such support.

bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound banking practice or a violation of the FRB’s regulations or both.

adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks.

This support may be required at times when a bank holding company may not be able to provide

such support.

A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound banking practice or a violation of the FRB’s

regulations or both.

The Company is not a financial holding company for purposes of the BHCA.

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As such, the Company and its subsidiaries are subject to examination by, and may be required to file reports with, the

The Company’s common stock are registered with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

The Company’s common stock is registered with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

As such, the Company is subject to the

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The Bank, as a California-chartered non-FRB member bank, is subject to primary supervision, periodic examination and regulation by the DFPI and the FDIC.

If, as a result of an examination of the Bank, the FDIC should

determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory, or that the Bank or its management is violating or has violated any law

or regulation, various remedies are available to the FDIC.

Such remedies include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be

judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove officers and directors, and ultimately to terminate the Bank’s deposit insurance, which for a

If, as a result of an examination of the Bank, the FDIC

should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory, or that the Bank or its management is violating or has

violated any law or regulation, various remedies are available to the FDIC.

be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove officers and directors, and ultimately to terminate the Bank’s deposit insurance, which for a

California-chartered bank would result in a revocation of the Bank’s charter.

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Various requirements and restrictions under the laws of the State of California and the United States affect the operations of the Bank.

State and federal statutes and regulations relate to many aspects of the Bank’s

operations, including reserves against deposits, ownership of deposit accounts, interest rates payable on deposits, loans and leases, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, and capital requirements.

State and federal statutes and regulations relate to many aspects of the

Bank’s operations, including reserves against deposits, ownership of deposit accounts, interest rates payable on deposits, loans and leases, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, and capital

requirements.

Further, the Bank is required to maintain certain levels of capital.

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imposing more stringent capital requirements on bank holding companies and subjecting certain activities, including interstate mergers and acquisitions, to heightened capital conditions;

changing the assessment base for federal deposit insurance from the amount of the insured deposits held by the depository institution to the depository institution’s average total consolidated assets less tangible equity, eliminating the

ceiling on the size of the FDIC’s Deposit Insurance Fund and increasing the floor on the size of the FDIC’s Deposit Insurance Fund;

the ceiling on the size of the FDIC’s Deposit Insurance Fund and increasing the floor on the size of the FDIC’s Deposit Insurance Fund;

eliminating all remaining restrictions on interstate banking by authorizing state banks to establish de novo banking offices in any state that would permit a bank chartered in that state to open a banking office at that location;

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in the so-called “Volcker Rule,” subject to numerous exceptions, prohibiting depository institutions and affiliates from certain investments in, and sponsorship of, hedge funds and private equity funds and from engaging in proprietary

On May 24, 2018 President Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act (“Economic Growth Act”), which repeals or modifies certain provisions of the Dodd-Frank

Act and eases regulations on all but the largest banks.

On May 24, 2018, President Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act (“Economic Growth Act”), which repealed or modified certain provisions of the Dodd-Frank

Act and eased regulations on all but the largest banks.

The Economic Growth Act’s highlights include improving consumer access to mortgage credit that, among other things:

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500 closed-end mortgages from the Home Mortgage Disclosure Act’s (“HMDA”) expanded data disclosures (the provision would not apply to nonbanks and would not exempt institutions from HMDA reporting altogether);

(iv) amend the SAFE Mortgage Licensing Act

by providing registered mortgage loan originators in good standing with 120 days of transitional authority to originate loans when moving from a federal depository institution to a non-depository institution or across state lines;

(v) require the

CFPB to clarify how Truth in Lending Disclosure (“TRID”) rules apply to mortgage assumption transactions and construction-to-permanent home loans as well as outline certain liabilities related to model disclosure use;

and (vi) provide that federal

banking regulators may not impose higher capital standards on High Volatility Commercial Real Estate exposures unless they are for acquisition, development or construction (“ADC”), and clarifies ADC status.

In addition, the Economic Growth Act’s

highlights also include regulatory relief for certain institutions, including among other things, simplifying capital calculations by requiring regulators to adopt a threshold for a community bank leverage ratio of between 8% to 10%.

(iv) amend the SAFE Mortgage

Licensing Act by providing registered mortgage loan originators in good standing with 120 days of transitional authority to originate loans when moving from a federal depository institution to a non-depository institution or across state lines;

(v) require the CFPB to clarify how Truth in Lending Disclosure (“TRID”) rules apply to mortgage assumption transactions and construction-to-permanent home loans as well as outline certain liabilities related to model disclosure use;

provide that federal banking regulators may not impose higher capital standards on High Volatility Commercial Real Estate exposures unless they are for acquisition, development or construction (“ADC”), and clarifies ADC status.

In addition, the

Economic Growth Act’s highlights also include regulatory relief for certain institutions, including among other things, simplifying capital calculations by requiring regulators to adopt a threshold for a community bank leverage ratio of between

Institutions under $10 billion in assets that meet such community bank leverage ratio will automatically be deemed to be “well-capitalized”, although regulators retain the flexibility to determine

that a depository institution may not qualify for the community bank leverage ratio test based on the institution’s risk profile, and exempts community banks from Section 13 of the BHCA if they have less than $10 billion in total consolidated

and exempts banks with less than $10 billion in assets, and total trading assets and liabilities not exceeding more than five percent of their total assets, from the Volcker Rule restrictions on trading with their own capital.

that a depository institution may not qualify for the community bank leverage ratio test based on the institution’s risk profile.

The Economic Growth Act also exempts community banks from Section 13 of the BHCA if they have less than $10

billion in total consolidated assets;

with their own capital.

The Economic Growth Act also added certain protections for consumers, including veterans and active duty military personnel, expanded credit freezes and created an identity theft protection

The Economic Growth Act also made changes applicable to bank holding companies, as it raises the threshold for automatic designation as a systemically important financial institution from $50 billion to $250 billion in assets, subjects

banks with $100 billion to $250 billion in total assets to periodic stress tests, exempts from stress test requirements entirely banks with under $100 billion in assets, and required the federal banking regulators , within 180 days of passage, to

raise the asset threshold under the Small Bank Holding Company Policy Statement from $1 billion to $3 billion.

subjects banks with $100 billion to $250 billion in total assets to periodic stress tests, exempts from stress test requirements entirely banks with under $100 billion in assets, and required the federal banking regulators , within 180 days of

passage, to raise the asset threshold under the Small Bank Holding Company Policy Statement from $1 billion to $3 billion.

The Economic Growth Act also added certain protections for student borrowers.

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Capital Standards

The federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking

organization’s operations, both for transactions reported on the balance sheet as assets and for transactions, such as letters of credit and recourse arrangements, that are recorded as off-balance sheet items.

In 2013, the FRB, FDIC, and Office of

the Comptroller of the Currency issued final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S.

The federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s

operations, both for transactions reported on the balance sheet as assets and for transactions, such as letters of credit and recourse arrangements, that are recorded as off-balance sheet items.

In 2013, the FRB, FDIC, and Office of the

Comptroller of the Currency issued final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S.

banking organizations.

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a new capital measure called Common Equity Tier 1 (“CET1”), and a related regulatory capital ratio of CET1 to risk-weighted assets;

(ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments, which are instruments

treated as Tier 1 instruments under the prior capital rules that meet certain revised requirements;

(iii) mandate that most deductions or adjustments to regulatory capital measures be made to CET1 and not to the other components of capital;

(iv) expand the scope of the deductions from and adjustments to capital, as compared to existing regulations.

Under the Basel III Capital Rules, for most banking organizations, the most common form of additional Tier 1 capital is noncumulative

perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for credit losses, in each case, subject to the Basel III Capital Rules’ specific requirements.

(ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments, which are

instruments treated as Tier 1 instruments under the prior capital rules that meet certain revised requirements;

(iii) mandate that most deductions or adjustments to regulatory capital measures be made to CET1 and not to the other components of

and (iv) expand the scope of the deductions from and adjustments to capital, as compared to existing regulations.

Under the Basel III Capital Rules, for most banking organizations, the most common form of additional Tier 1 capital is

non-cumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for credit losses, in each case, subject to the Basel III Capital Rules’ specific requirements.

Under the Basel III Capital Rules, the following are the minimum capital ratios applicable to the Company and the Bank:

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exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.

Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income or loss items are not excluded for the purposes of determining regulatory

capital ratios;

however, non-advanced approaches banking organizations (i.e., banking organizations with less than $250 billion in total consolidated assets or with less than $10 billion of on-balance sheet foreign exposures), including the Company

and the Bank, may make a one-time permanent election to exclude these items.

The Company and the Bank made this election in 2015 in order to avoid significant variations in the level of capital depending upon the impact of interest rate

fluctuations on the fair value of its available-for-sale investment securities portfolio, changes of which are included in accumulated other comprehensive income or loss.

Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income or loss items are not excluded for the purposes of determining

regulatory capital ratios;

including the Company and the Bank, may make a one-time permanent election to exclude these items.

The Company and the Bank made this election in 2015 in order to avoid significant variations in the level of capital depending upon the impact of

interest rate fluctuations on the fair value of its available-for-sale investment securities portfolio, changes of which are included in accumulated other comprehensive income or loss.

The Basel III Capital Rules prescribe a standardized approach for risk weightings that expands the risk weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and

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Government and agency securities, to 600% for certain equity exposures, depending on the nature of the assets.

The Basel III capital rules generally

result in higher risk weights for a variety of asset classes.

The Basel III capital rules

generally result in higher risk weights for a variety of asset classes.

Additional aspects of the Basel III Capital Rules that are relevant to the Company and the Bank include:

consistent with the Basel I risk-based capital rules, assigning exposures secured by single-family residential properties to either a 50% risk weight for first-lien mortgages that meet prudent underwriting standards or a 100% risk weight

category for all other mortgages;

weight category for all other mortgages;

providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (set at 0% under the Basel I risk-based capital rules);

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In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms, which standards are commonly referred to as Basel

Among other things, these standards revise the Basel Committee’s standardized approach for credit risk (including the recalibration of the risk weights and the introduction of new capital requirements for certain “unconditionally cancellable

commitments,” such as unused credit card lines of credit) and provides a new standardized approach for operational risk capital.

Under the Basel framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027.

cancellable commitments,” such as unused credit card lines of credit) and provides a new standardized approach for operational risk capital.

Under the Basel framework, these standards were generally effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027.

Under the current U.S.

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The Basel III Capital Rules revised the PCA requirements effective January 1, 2015.

Under the revised PCA provisions of the FDIA, an insured depository institution generally

will be classified in the following categories based on the capital measures indicated:

Under the revised PCA provisions of the FDIA, an insured depository institution

generally will be classified in the following categories based on the capital measures indicated:

Minimum to be

Categorized as

Minimum to be

Categorized as

Significantly

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depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit capital restoration plans.

If a depository institution fails to submit an acceptable plan,

it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately

capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks.

“Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator by the bank regulators.

If a depository institution fails to submit an acceptable

plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become

“adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks.

“Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator by the bank

The capital classification of a bank holding company and a bank affects the frequency of regulatory examinations, the bank holding company’s and the bank’s ability to engage in certain activities

and the deposit insurance premium paid by the bank to the FDIC.

As of December 31, 2021, we met the requirements to be classified as a “well-capitalized” based upon the aforementioned ratios for purposes of the prompt corrective action regulations,

as currently in effect.

As of December 31, 2022, we met the requirements to be classified as “well-capitalized” based upon the aforementioned ratios for purposes of the PCA regulations, as currently in

The Community Bank Leverage Ratio

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A qualifying community banking organization that opts into the CBLR framework and meets all

requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations.

Such a community banking organization would not be subject to other risk-based and leverage

capital requirements (including the Basel III and Basel IV requirements).

requirements under the framework will be considered to have met the “well-capitalized” ratio requirements under the PCA regulations.

Such a community banking organization would not be subject to other risk-based and leverage capital

requirements (including the Basel III and Basel IV requirements).

The CBLR is determined by dividing a financial institution’s tangible equity capital by its average total consolidated assets.

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The CBLR framework was available for banks to use in their March 31, 2020, call report.

A CBLR bank that ceases to meet any of the qualifying criteria in a future period but maintains a leverage

ratio greater than 8% will be allowed a grace period of two reporting periods to satisfy the CBLR qualifying criteria or to otherwise comply with the generally applicable capital requirements.

Further, a CBLR bank may opt out of the framework at

any time, without restriction, by reverting to the generally applicable capital requirements.

A CBLR bank that ceases to meet any of the qualifying criteria in a future period but maintains a

leverage ratio greater than 8% will be allowed a grace period of two reporting periods to satisfy the CBLR qualifying criteria or to otherwise comply with the generally applicable capital requirements.

Further, a CBLR bank may opt out of the

framework at any time, without restriction, by reverting to the generally applicable capital requirements.

The Company and Bank did not opt into the CBLR framework.

Anti-Money Laundering and Office of Foreign Assets Control Regulation

Title III of the United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”), is designed to deny terrorists and criminals the ability to

obtain access to the U.S.

ability to obtain access to the U.S.

financial system and has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money.

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(i) customer identification programs;

money laundering;

(iii) terrorist financing;

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and (vi) cooperation between financial institutions and law enforcement authorities.

Regulatory authorities

routinely examine financial institutions for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the

relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required

or to prohibit such transactions even if approval is not required.

authorities routinely examine financial institutions for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with

all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory

approval is required or to prohibit such transactions even if approval is not required.

Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.

Treasury’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and regimes under authority of various laws, including designated

foreign countries, nationals and others.

designated foreign countries, nationals and others.

OFAC publishes lists of specially designated targets and countries.

Financial institutions are responsible for, among other things, blocking accounts of and transactions with such targets and countries,

prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence.

Banking regulators examine banks for compliance with the economic sanctions regulations administered by OFAC and failure of a

financial institution to maintain and implement adequate OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

Financial institutions are responsible for, among other things, blocking accounts of and transactions with such targets and

countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence.

Banking regulators examine banks for compliance with the economic sanctions regulations administered by OFAC,

and failure of a financial institution to maintain and implement adequate OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

Privacy Restrictions

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personally identifiable information, and to implement and maintain commercially reasonable customer information safeguarding standards.

The Company believes that it complies with all provisions of the GLBA and all implementing regulations and the Bank has developed appropriate policies and procedures to meet its responsibilities in connection with the

privacy provisions of GLBA.

The Company believes that it complies with all provisions of the GLBA and all implementing regulations and that the Bank has developed appropriate policies and procedures to meet its responsibilities in connection

with the privacy provisions of the GLBA.

Dividends and Other Transfer of Funds

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The Company is a legal entity separate and distinct from the Bank.

The Bank is subject to various statutory and regulatory restrictions on

its ability to pay dividends to the Company.

The Bank is subject to various statutory and regulatory

restrictions on its ability to pay dividends to the Company.

Under such restrictions, the amount available for payment of dividends to the Company by the Bank totaled $141.2 million at December 31, 2022.

During 2021, the Bank paid $9.9 million in dividends to the

During 2022, the Bank paid $34.7 million

in dividends to the Company.

The FDIC and the DFPI also have authority to prohibit the Bank from engaging in activities that, in their opinion, constitute unsafe or unsound practices in conducting its business.

It is possible, depending upon the

financial condition of the bank in question and other factors, that the FDIC or the DFPI could assert that the payment of dividends or other payments might, under some circumstances, be an unsafe or unsound practice.

Further, the FRB and the FDIC

have established guidelines with respect to the maintenance of appropriate levels of capital by banks and bank holding companies under their jurisdiction.

Compliance with the standards set forth in such guidelines and the restrictions that are or may

be imposed under the prompt corrective action provisions of federal law could limit the amount of dividends that the Bank or the Company may pay.

An insured depository institution is prohibited from paying management fees to any controlling persons

or, with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized.

It is possible, depending upon

the financial condition of the bank in question and other factors, that the FDIC or the DFPI could assert that the payment of dividends or other payments might, under some circumstances, be an unsafe or unsound practice.

Further, the FRB and the

FDIC have established guidelines with respect to the maintenance of appropriate levels of capital by banks and bank holding companies under their jurisdiction.

Compliance with the standards set forth in such guidelines and the restrictions that

are or may be imposed under the PCA provisions of federal law could limit the amount of dividends that the Bank or the Company may pay.

An insured depository institution is prohibited from paying management fees to any controlling persons or,

with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized.

The DFPI may impose similar limitations on the Bank.

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Transactions with Affiliates

The Bank is subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of the Company or other affiliates, the purchase of, or

investments in stock or other securities of the Company or other affiliates, the taking of such securities as collateral for loans and leases, and the purchase of assets of the Company or other affiliates.

Such restrictions prevent the Company and

other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts.

Further, such secured loans and investments by the Bank to or in the Company or to or in any other affiliates are limited,

individually, to 10% of the Bank’s capital and surplus (as defined by federal regulations), and such secured loans and investments are limited, in the aggregate as to all affiliates, to 20% of the Bank’s capital and surplus (as defined by federal

regulations).

or investments in, stock or other securities of the Company or other affiliates, the taking of such securities as collateral for loans and leases, and the purchase of assets of the Company or other affiliates.

Such restrictions prevent the

Company and other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts.

Further, such secured loans and investments by the Bank to or in the Company or to or in any other affiliates

are limited, individually, to 10% of the Bank’s capital and surplus (as defined by federal regulations), and such secured loans and investments are limited, in the aggregate as to all affiliates, to 20% of the Bank’s capital and surplus (as

defined by federal regulations).

In addition, the Company and its operating subsidiaries generally may not purchase a low-quality asset from an affiliate, and other specified transactions between the Company or its operating subsidiaries and an

affiliate must be on terms and conditions that are consistent with safe and sound banking practices.

Also, the Company and its operating subsidiaries may engage in transactions with affiliates only on terms and under conditions that are substantially the same, or at least as favorable to the Company or its

subsidiaries, as those prevailing at the time for comparable transactions with (or that in good faith would be offered to) non-affiliated companies.

Also, the Bank and its operating subsidiaries may engage in transactions with affiliates only on terms and under conditions that are substantially the same, or at least as favorable to the Bank or its subsidiaries,

as those prevailing at the time for comparable transactions with (or that in good faith would be offered to) non-affiliated companies.

California law also imposes certain restrictions with respect to transactions with affiliates.

Additionally, limitations involving the transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of federal law.

Additionally,

limitations involving the transactions with affiliates may be imposed on the Bank under the PCA provisions of federal law.

See “Prompt Corrective Action.”

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institution to cure the deficiency.

Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the financial institution’s rate of growth, require the financial institution to increase its capital, restrict the rates

the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances.

Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds

for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.

rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances.

Noncompliance with the standards established by the safety and soundness guidelines may also

constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.

Since the financial crisis of 2008-2009, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating

the activities of the financial institutions they supervise.

Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and

the size and speed of financial transactions have changed the nature of banking markets.

The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal, and

reputational risk.

In particular, recent regulatory pronouncements have focused on operational risk, which arises from the potential that inadequate information system, operational problems, breaches in internal

controls, fraud, or unforeseen catastrophes will result in unexpected losses.

New products and services, third-party risk management and cyber-security are critical sources of operational risk that financial institutions are expected to address in

the current environment.

Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation,

and the size and speed of financial transactions have changed the nature of banking markets.

The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational,

legal, and reputational risk.

In particular, regulatory pronouncements in the past few years have focused on operational risk, which arises from the potential that inadequate information systems, operational problems, breaches

in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses.

New products and services, third-party risk management and cyber-security are critical sources of operational risk that financial institutions are

expected to address in the current environment.

The Bank is expected to have active board and senior management oversight;

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adequate risk measurement, monitoring, and management information systems;

and comprehensive internal

comprehensive internal controls.

Deposit Insurance

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deposit insurance premium on each insured institution based on risk characteristics of the institution and may also impose special assessments in emergency situations.

Effective July 1, 2016, the FDIC changed the deposit insurance assessment system

for banks, such as the Bank, with less than $10 billion in assets that have been federally insured for at least five years.

Among other changes, the FDIC eliminated risk categories for such banks and now uses the “financial ratios method” to

determine assessment rates for all such banks.

Under the financial ratios method, the FDIC determines assessment rates based on a combination of financial data and supervisory ratings that estimate a bank’s probability of failure within three years.

Effective July 1, 2016, the FDIC changed the deposit insurance assessment

system for banks, such as the Bank, with less than $10 billion in assets that have been federally insured for at least five years.

Among other changes, the FDIC eliminated risk categories for such banks and now uses the “financial ratios method”

to determine assessment rates for all such banks.

Under the financial ratios method, the FDIC determines assessment rates based on a combination of financial data and supervisory ratings that estimate a bank’s probability of failure within three

The assessment rate determined by considering such information is then applied to the amount of the institution’s average assets minus average tangible equity to determine the institution’s insurance premium.

The Dodd-Frank Act required the FDIC to ensure that the DIF reserve ratio, which is the amount in the DIF as a percentage of all DIF-insured deposits, reached 1.35% by September 3, 2020.

Dodd-Frank Act also altered the minimum designated reserve ratio for the DIF, increasing the minimum from 1.15% to 1.35%, and eliminated the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain

At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, may increase or decrease the assessment rates, following notice and comment on proposed rulemaking if required.

As a result, the Bank’s

FDIC deposit insurance premiums could increase.

The Bank’s FDIC premiums were $1.2 million, $517,000, and $624,000 for the three years ended December 31, 2021, 2020, and 2019, respectively.

In 2020 and 2019, the Bank’s FDIC premiums were reduced by a one-time small

On October 18, 2022, the FDIC adopted a final rule, applicable to all insured depository institutions to increase the initial base deposit insurance assessment rate schedules uniformly

by two basis points consistent with the Amended Restoration Plan approved by the FDIC on June 21, 2022.

The FDIC indicated that it was taking this action in order to restore the Deposit Insurance Fund

(DIF) reserve ratio to the required statutory minimum of 1.35% by the statutory deadline of September 30, 2028.

The FDIC said that the reserve ratio had declined below this level because of the increase in

insured deposits since the start of the COVID-19 pandemic and other factors that affect the level of the DIF.

Under the final rule, the increase in rates will begin with the first quarterly assessment period of 2023 and will remain in effect

unless and until the reserve ratio meets or exceeds 2% in order to support growth in the DIF in progressing toward the FDIC’s long-term goal of a 2% reserve ratio.

The increase in assessment rates will apply to F&M Bank and is

projected to have an insignificant effect on the Company’s capital levels and net income.

The Bank’s FDIC premiums were $1.4 million, $1.2 million, and $517,000 for the three years ended December 31, 2022, 2021, and 2020, respectively.

In 2020, the Bank’s FDIC premiums were reduced by a one-time small

bank assessment credit applied by the FDIC.

This assessment credit was not available in 2021.

This assessment credit was not available in 2021 or 2022.

Future increases in insurance premiums could have adverse effects on the operating expenses and results of operations of the Company.

Management cannot

predict what insurance assessment rates will be in the future.

Insurance of a bank’s deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated

any applicable law, regulation, rule, order, or condition imposed by the FDIC or the Bank’s primary regulator.

Management of the Company is not aware of any practice, condition or violation that might lead to termination of the Company’s deposit

Management cannot predict what the FDIC insurance assessment rates will be in the future.

violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or the Bank’s primary regulator.

Management of the Company is not aware of any practice, condition or violation that might lead to termination of the Company’s

deposit insurance.

Community Reinvestment Act (“CRA”) and Fair Lending

The Bank is subject to certain fair lending requirements involving lending, investing, and other CRA activities.

CRA requires each insured depository institution to identify the communities served by the institution’s

offices and to identify the types of credit and investments the institution is prepared to extend within such communities including low and moderate-income neighborhoods.

It also requires the institution’s regulators to assess the institution’s

performance in meeting the credit needs of its community and to consider such assessment in reviewing applications for mergers, acquisitions, relocation of existing branches, opening of new branches, and other transactions.

A bank may be subject to

substantial penalties and corrective measures for a violation of certain fair lending laws.

CRA requires each insured depository institution to identify the communities served by the

institution’s offices and to identify the types of credit and investments the institution is prepared to extend within such communities including low and moderate-income neighborhoods.

It also requires the institution’s regulators to assess the

institution’s performance in meeting the credit needs of its community and to consider such assessment in reviewing applications for mergers, acquisitions, relocation of existing branches, opening of new branches, and other transactions.

may be subject to substantial penalties and corrective measures for a violation of certain fair lending laws.

A bank’s compliance with the Community Reinvestment Act is assessed using an evaluation system, which bases CRA ratings on an institution’s lending, service and investment performance.

An unsatisfactory rating may be

the basis for denying a merger application.

The Bank’s latest CRA examination was completed by the FDIC in May 2019 and the Bank received an overall Outstanding rating in complying with its CRA obligations.

On December 12, 2019, the FDIC and the

Office of the Comptroller of the Currency (“OCC”) announced a proposal to modernize the agencies’ regulations under the CRA that have not been substantively updated for nearly 25 years.

On May 20, 2020, the OCC issued a final rule for CRA

modernization;

however, the FDIC did not join the OCC and finalize the rule.

An unsatisfactory rating may

be the basis for denying a merger application.

The Bank’s latest CRA examination was completed by the FDIC in August 2022 and the Bank received an overall Outstanding rating in complying with its CRA obligations.

On May 5, 2022, the FDIC, Board

of Governors of the Federal Reserve System (“FRB”) and the Office of the Comptroller of the Currency (“OCC”) announced a proposal to modernize the agencies’ regulations under the CRA that have not been substantively updated for over 25 years.

of the date hereof, a final rule has not been issued.

Consumer Protection Regulations

Banks and other financial institutions are subject to numerous laws and regulations intended to protect consumers in their transactions with banks.

These laws include, among others, laws

regarding unfair and deceptive acts and practices and usury laws, as well as the following consumer protection statutes:

Truth in Lending Act, Truth in Savings Act, Electronic Fund Transfer Act, Expedited Funds Availability Act, Equal Credit

Opportunity Act, Fair and Accurate Credit Transactions Act, Fair Housing Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, Gramm-Leach-Bliley Act, Home Mortgage Disclosure Act, Right to Financial Privacy Act, Servicemembers Civil

Relief Act, Military Lending Act and Real Estate Settlement Procedures Act.

These laws include, among others, laws regarding

unfair and deceptive acts and practices and usury laws, as well as the following consumer protection statutes:

Truth in Lending Act, Truth in Savings Act, Electronic Fund Transfer Act, Expedited Funds Availability Act, Equal Credit Opportunity

Act, Fair and Accurate Credit Transactions Act, Fair Housing Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, Gramm-Leach-Bliley Act, Home Mortgage Disclosure Act, Right to Financial Privacy Act, Servicemembers Civil Relief

Act, Military Lending Act and Real Estate Settlement Procedures Act.

Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those listed above.

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institutions deal with customers when taking deposits, making loans or conducting other types of transactions.

Failure to comply with these laws and regulations could give rise to regulatory sanctions, customer rescission rights, action by state and

local attorneys general and civil or criminal liability.

Failure to comply with consumer protection requirements may also result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions we may wish to

pursue or our prohibition from engaging in such transactions even if approval is not required.

Failure to comply with these laws and regulations could give rise to regulatory sanctions, customer rescission rights, action by state

and local attorneys general and civil or criminal liability.

Failure to comply with consumer protection requirements may also result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions we may wish

to pursue or our prohibition from engaging in such transactions even if approval is not required.

The structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB commenced

operations to supervise and enforce consumer protection laws.

The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a more

intense and complex environment for consumer finance regulation.

The CFPB has significant authority to implement and enforce federal consumer protection laws and new requirements for financial services products provided for in the Dodd-Frank Act,

as well as the authority to identify and prohibit unfair, deceptive or abusive acts and practices.

The review of products and practices to prevent such acts and practices is a continuing focus of the CFPB, and of banking regulators more broadly.

operations to supervise and enforce federal consumer protection laws.

The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created

a more intense and complex environment for consumer finance regulation.

The CFPB has significant authority to implement and enforce federal consumer protection laws and new requirements for financial services products provided for in the

Dodd-Frank Act, as well as the authority to identify and prohibit unfair, deceptive or abusive acts and practices.

The review of products and practices to prevent such acts and practices is a continuing focus of the CFPB, and of banking

regulators more broadly.

The ultimate impact of this heightened scrutiny is uncertain but could result in changes to pricing, practices, products and procedures.

It could also result in increased costs related to regulatory oversight, supervision and examination,

additional remediation efforts and possible penalties.

In addition, the Dodd-Frank Act provides the CFPB with broad supervisory, examination and enforcement authority over various consumer financial products and services, including the ability to

require reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices.

The CFPB also has the

authority to obtain cease and desist orders providing for affirmative relief or monetary penalties.

It could also result in increased costs related to regulatory oversight,

supervision and examination, additional remediation efforts and possible penalties.

In addition, the Dodd-Frank Act provides the CFPB with broad supervisory, examination and enforcement authority over various consumer financial products and

services, including the ability to require reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful

The CFPB also has the authority to obtain cease and desist orders providing for affirmative relief or monetary penalties.

The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards.

State regulation of financial products and

potential enforcement actions could also adversely affect our business, financial condition or results of operations.

The CFPB is authorized to issue rules for both bank and nonbank companies that offer consumer financial products and services, subject to consultation with the prudential banking regulators.

regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition or results of operations.

The CFPB is authorized to issue rules for both bank and non-bank companies that offer consumer financial products and services, subject to consultation with the prudential banking regulators.

general, however, banks with assets of $10 billion or less, such as the Bank, will continue to be examined for consumer compliance by their primary bank regulator.

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The determination whether an investor "controls" a depository institution is based on all of the facts and circumstances surrounding the investment.

As a general matter, a party is deemed to control a depository institution or other

company if the party owns or controls 25% or more of any class of voting stock.

Subject to rebuttal, a party may be presumed to control a depository institution or other company if the investor owns or controls 10% or more of any class of voting

As a general matter, a party is deemed to control a depository institution or

other company if the party owns or controls 25% or more of any class of voting stock.

Subject to rebuttal, a party may be presumed to control a depository institution or other company if the investor owns or controls 10% or more of any class of

voting stock.

Ownership by family members, affiliated parties, or parties acting in concert, is typically aggregated for these purposes.

If a party’s ownership of the Company were to exceed certain thresholds, the investor could be deemed to “control” the

Company for regulatory purposes.

If a party's ownership of the Company were to exceed certain thresholds, the investor could be deemed to

"control" the Company for regulatory purposes.

This could subject the investor to regulatory filings or other regulatory consequences.

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governance processes.

The incentive compensation guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon three primary principles:

(1) balanced risk-taking incentives;

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and (3) strong corporate governance.

Any deficiencies in compensation practices that are identified may be incorporated into the organization’s

supervisory ratings, which can affect its ability to make acquisitions or take other actions.

In addition, under the incentive compensation guidance, a banking organization’s federal supervisor may initiate enforcement action if the organization’s

incentive compensation arrangements pose a risk to the safety and soundness of the organization.

Any deficiencies in compensation practices that are identified may be incorporated into the

organization’s supervisory ratings, which can affect its ability to make acquisitions or take other actions.

In addition, under the incentive compensation guidance, a banking organization’s federal supervisor may initiate enforcement action if

the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the organization.

In 2016, several federal financial agencies (including the FRB and FDIC) re-proposed restrictions on incentive-based compensation pursuant to Section 956 of the Dodd-Frank Act for financial

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or (ii) that could lead to material financial loss to the institution.

The comment period for these proposed regulations has closed, but a final rule has

not been published.

Depending upon the outcome of the rule making process, the application of this rule to us could require us to revise our compensation strategy, increase our administrative costs and adversely affect our ability to recruit and

retain qualified employees.

Further, as discussed above, the Basel III Capital Rules limit discretionary bonus payments to bank executives if the institution’s regulatory capital ratios fail to exceed certain thresholds that started being phased in

on January 1, 2016.

The comment period for these proposed regulations has closed, but a final rule

has not been published.

recruit and retain qualified employees.

being phased in on January 1, 2016.

Available Information

Company reports filed with the SEC including the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and ownership reports filed by directors, executive officers

and principal stockholders can be accessed through the Company’s website at http://www.fmbonline.com.

officers and principal stockholders can be accessed through the Company’s website at http://www.fmbonline.com.

The link to the SEC is on the About Us page.

The Company’s reports may also be accessed at the SEC’s

Internet website (http://www.sec.gov).

The Company’s reports may also be accessed at

the SEC’s Internet website (http://www.sec.gov).

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business