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Item 7. Management’s Discussion and Analysis

2023-03-15 compared with 2022-03-16 · 434 added, 372 removed, 589 unchanged (58% of the section changed)

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

The information contained in this section should be read in conjunction

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

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

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

The information contained in this section should be read in

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

Information related to the comparison of the results of operations for the years

December 31, 2021 to 2020 is found in “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.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Exchange Act.

These forward-looking statements

reflect our current views and are not historical facts.

These forward-looking

statements reflect our current views and are not historical facts.

These statements may include statements regarding projected performance for periods following the date of this report.

These statements can generally be identified by use of phrases such as

“believe,” “expect,” “will,” “seek,” “should,” “anticipate,” “estimate,” “intend,” “plan,” “target,” “project,” “commit” or other words of similar import.

Similarly, statements that describe our future financial condition, results of operations,

objectives, strategies, plans, goals or future performance and business are also forward-looking statements.

Statements that project future financial conditions, results of operations and shareholder value are not guarantees of performance and many

of the factors that will determine these results and values are beyond our ability to control or predict.

For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation

Reform Act of 1995.

These forward-looking statements involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial

Condition and Results of Operations” sections and other parts of this Annual Report on Form 10-K that could cause our actual results to differ materially from those anticipated in these forward-looking statements.

The following is a non-exclusive

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

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

These statements can generally be identified by use of

phrases such as “believe,” “expect,” “will,” “seek,” “should,” “anticipate,” “estimate,” “intend,” “plan,” “target,” “project,” “commit” or other words of similar import.

Similarly, statements that describe our future financial condition, results

of operations, objectives, strategies, plans, goals or future performance and business are also forward-looking statements.

Statements that project future financial conditions, results of operations and shareholder value are not guarantees of

performance and many of the factors that will determine these results and values are beyond our ability to control or predict.

For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the

Private Securities Litigation Reform Act of 1995.

and Analysis of Financial Condition and Results of Operations” sections and other parts of this Annual Report on Form 10-K that could cause our actual results to differ materially from those anticipated in these forward-looking statements.

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

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

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

the future impact of the COVID-19 virus;

higher defaults in our loan portfolio than we expect;

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technological changes;

failure to raise the debt limit on U.S.

regulatory or judicial proceedings;

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

The Bank is a full-service community bank providing

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

The Bank is a full-service community bank

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

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

The Bank has 29 branch locations and 3

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

The Bank has 29 branch

locations and 3 ATMs that have been serving communities in the mid-Central Valley and East Bay of California for over 100 years.

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

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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.

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.

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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

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.

Selected Financial Data

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Summary of Critical Accounting Policies and Estimates

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

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

In the opinion of management, the accompanying Consolidated Statements of Financial Condition and related Consolidated Statements of Operations, 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.

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.

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.

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.

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

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

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

Allowance for credit losses is provided on both a specific

and general basis.

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

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

various quantitative and qualitative factors.

Under the guidance of Financial Accounting Standards Board Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“CECL”), we

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

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

Allowance for credit losses is provided on both a specific and general basis.

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

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

qualitative factors.

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

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

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

in estimating credit losses;

elsewhere in estimating credit losses;

changes in national and local economic conditions and forecasts;

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

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

other relevant staff;

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

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

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

changes in the experience, ability, and depth of lending

management and other relevant staff;

changes in the volume and severity of past due status, the volume of non-accrual 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;

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

and regulatory requirements on the level of estimated credit losses.

and the effect of other external factors such

as competition and legal and regulatory requirements on the level of estimated credit losses.

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

The estimates are reviewed periodically and,

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

The estimates are reviewed periodically

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

For additional information, see Note 4, located in “Item 8.

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

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

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

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

The allowance for credit losses on unfunded loan commitments is classified in other liabilities on the Consolidated Statements of Financial Condition.

The allowance for credit losses on unfunded loan commitments

is increased by charging a provision for credit losses on unfunded commitments, which was reported in other non-interest expenses for 2022 and prior.

We believe that our allowance for credit losses was adequate to absorb probable losses inherent in the loan portfolio as of December 31, 2022 and 2021.

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

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

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

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

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

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

than temporary.

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

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

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

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

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

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

recognized as a charge to other comprehensive income.

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

the entire impairment loss is

recognized as a charge to earnings.

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

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.

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

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

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.

At December 31, 2022, we had no investment securities that were impaired.

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

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

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

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

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.

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.

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

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.

impairment losses are recorded in other non-interest expense to reduce the carrying

amount of the assets.

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

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

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

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

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

origination of the instrument and its expected realization.

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

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

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

period between origination of the instrument and its expected realization.

For additional information, see “Item 7A.

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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 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

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“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.

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.

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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 taken are not offset or aggregated with other

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.

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 statements of financial condition along

with any associated interest and penalties that would be payable to the taxing authorities upon examination.

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

statements of income.

Impact of Recently Issued Accounting Standards

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

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

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

Results of Operations

The following discussion and analysis is intended to provide a better understanding of Farmers & Merchants Bancorp and its subsidiaries’ performance during each of the years in the two-year period ended December

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

Information related to the comparison of the results of

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

Factors that determine the level of net income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, fee income, non-interest expense, the level of non-performing loans

and other non-earning assets, and the amount of non-interest bearing liabilities supporting earning assets.

Non-interest income includes card processing fees, service charges on deposit accounts, bank-owned life insurance income, gains/losses on the

sale of investment securities, and gains/losses on deferred compensation investments.

Non-interest expense consists primarily of salaries and employee benefits, cost of deferred compensation benefits, occupancy, data processing, FDIC insurance,

marketing, legal and other expenses.

December 31, 2022 and the material changes in financial condition, operating income, and expense of the Company and its subsidiaries as shown in the accompanying consolidated financial statements.

Information related to the comparison of the

results of operations for the years December 31, 2021 and 2020 can be found in “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.

loans and other non-earning assets, and the amount of non-interest bearing liabilities supporting earning assets.

Non-interest income includes card processing fees, service charges on deposit accounts, bank-owned life insurance income,

gains/losses on the sale of investment securities, and gains/losses on deferred compensation investments.

Non-interest expense consists primarily of salaries and employee benefits, cost of deferred compensation benefits, occupancy, data

processing, FDIC insurance, marketing, legal and other expenses.

Average Balance and Yields .

The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield, cost

and net interest margin information for the periods presented.

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.

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(Dollars in thousands)

Average Balance

Income / Expense

Average Balance

Income / Expense

Interest earnings deposits in other banks

Interest earnings deposits in other banks and federal

Investment securities:

Taxable securities

Non-taxable securities (2)

Total securities

Total investment securities

Residential and home equity

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Net interest margin (4)

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

Excludes average unrealized (losses) gains of ($24.5) million and $3.4 million for the years ended December 31, 2022, and 2021, respectively, which are included in non-interest earning assets.

The average yield does not include the federal tax benefits at an assumed effective yield of 26% related to income earned on tax-exempt municipal securities totaling $415,000 and $436,000 for the years ended December 31, 2022, and

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Balances with the FRB earned an average interest rate of 1.72% and 0.14% for the years ended December 31, 2022 and 2021, respectively.

Average interest-bearing deposits was $666 million and

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

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

The increase was primarily the result of

the FRB increasing rates by 425 basis points during 2022.

Average interest-bearing deposits was $704 million and $666 million for the years ended December 31, 2022 and 2021, respectively.

Interest income on

interest-bearing deposits with banks was $12.1 million and $902,000 for the years ended December 31, 2022 and 2021, respectively.

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

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(floating rate and fixed rate with maturities less than 5 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity.

Since the risk factor for these types of investments is generally lower than

that of loans and leases, the yield earned on investments is generally less than that of loans and leases.

Average total investment securities were $891 million and $584 million for the years ended December 31, 2021 and 2020, respectively.

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

ended December 31, 2021 and 2020, respectively.

Since the risk factor for these types of investments is generally lower

than that of loans and leases, the yield earned on investments is generally less than that of loans and leases.

Average total investment securities were $1.1 billion and $891 million for the years ended December 31, 2022 and 2021, respectively.

The average yield on total investment securities were 1.94% and 1.83 % for the

years ended December 31, 2022 and 2021, respectively.

See “Investment Securities and Federal Reserve balances” for a discussion of the Company’s investment strategy in 2022.

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Average interest-bearing liabilities was $3.0 billion and $2.8 billion for the years ended December 31, 2022 and 2021, respectively.

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

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

Total interest expense on interest-bearing liabilities was $4.8 million, $4.3

million for the years ended December 31, 2022 and 2021, respectively.

The average rate paid on interest-bearing liabilities was 0.16% and 0.16% for the years ended December 31, 2022 and 2021, respectively.

The decline was primarily the result of the FRB

lowering rates to near zero due to the pandemic.

Rate/Volume Analysis .

The following table shows the change in interest income and interest expense and the amount of change attributable to variances in volume, rates and the

combination of volume and rates based on the relative changes of volume and rates.

For purposes of this table, the change in interest due to both volume and rate has been allocated to change due to volume and rate in proportion to the relationship of

absolute dollar amounts of change in each.

Year Ended December 31, 2021 compared with 2020

The following table shows the change in interest income and interest expense and the amount of change attributable to variances in volume, rates and

the combination of volume and rates based on the relative changes of volume and rates.

For purposes of this table, the change in interest due to both volume and rate has been allocated to change due to volume and rate in proportion to the

relationship of absolute dollar amounts of change in each.

Year Ended December 31, 2022

compared with 2021

Increase (Decrease) Due to:

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Interest income:

Interest earnings deposits in other banks

Interest earnings deposits in other banks and federal funds sold

Investment securities:

Taxable securities

Non-taxable securities

Total securities

Total investment securities

Residential and home equity

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Consumer and other (1)

Total loans and leases

Non-marketable securities

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Net interest income

(1) Consumer and other - These decreases respresent the end of the PPP loans which were $0 and $70,765 as of December 31, 2022 and 2021 respectively.

Net interest income was $193.6 million and $160.9 million for the two years ended December 31, 2022 and 2021, respectively.

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

were able to partially deploy into growing our loan portfolio.

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

The increase in net interest income was driven primarily by increased interest rates and

deposit growth, which we were able to partially deploy into growing our loan portfolio.

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

Comparison of Results of Operations for the Years Ended December 31, 2022 and 2021

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For the years ended December 31, 2022 and 2021, net income was $75.1 million compared with $66.3 million, respectively.

The increase in net income was primarily the

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

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

tax expense of $2.8 million.

The increase in net income was primarily

the result of higher net interest income of $32.6 million.

This increase was offset by a decrease in non-interest income of $14.9 million, higher provision for credit losses of $4.5 million, higher income tax expense of $2.7 million and an

increase in non-interest expense of $1.8 million.

Net Interest Income and Net Interest Margin.

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$160.9 million for the same period a year earlier.

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

Higher interest

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

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

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

by narrowing net interest margins.

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

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

rates to near zero over the past two years.

The increase is the result of:

(1) average interest earning assets increasing $435.4 million, or 9.35%, to $5.1 billion compared with $4.7 billion for the same period a year earlier;

net interest margin increasing 34 basis points to 3.80% for all of 2022 compared with 3.46% for the same period a year earlier.

The increase in the net interest margin was primarily the result of the FRB increasing the federal funds rate over

the past year.

Provision for Credit Losses.

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The provision is the amount required to maintain the

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

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 provision for credit losses for the year ended December 31, 2022, was $6.5 million compared with $1.9 million for the same period a year ago.

For the year ended December 31, 2022, the Company incurred net

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

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

Non-interest Income.

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

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

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

Non-interest income decreased $14.9 million, or 70.66%, to $6.2 million for 2022 compared with $21.1 million for the same period a year earlier.

year-over-year decrease in non-interest income was primarily due to:

(1) a $10.7 million loss on the sale of investment securities versus a $2.6 gain for the same period a year earlier;

and (2) $2.2 million decline in gains/(losses) on deferred

compensation plan investments.

The Company recorded net gains on deferred compensation plan investments of $0.45 million in 2022 compared to net gains of $2.6 million in 2021.

See Note 11, located in “Item 8.

Financial Statements and Supplementary Data” for a

description of these plans.

Financial Statements and

Supplementary Data” for a description of these plans.

Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices.

Although GAAP require these investment

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

Although GAAP

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

Non-interest Expense.

Non-interest expense increased $1.8 million, or 1.96%, to $93.6 million for 2022 compared with $91.8 million for the same period a year ago.

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

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

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

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

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

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

year-over-year increase was primarily comprised of:

(1) a $0.4 million increase in salaries and employee benefits;

(2) a $0.6 million increase in legal expenses;

(3) a $0.2 million increase in FDIC insurance;

(4) a $0.2 million increase in

marketing expenses;

and (5) an increase of $2.5 million in other miscellaneous expenses ($1.0 million of which was a provision for unused commitments).

These increases were partially off-set by a $2.2 million decline in gain/(losses) on deferred

compensation plan investments.

For the year ended December 31, 2022, the Company’s efficiency ratio was 46.84% compared with 50.42% for the same period a year ago.

Net gains on deferred compensation plan obligations were $0.4 million in 2022 compared to net gains of $2.6 million in 2021.

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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 require these gains on

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

Although GAAP requires these gains on

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

Income Tax Expense.

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31, 2022, compared with $3.2 billion at December 31, 2021.

Exclusive of SBA PPP loans, the loan portfolio grew $346 million, or 10.69%, over December 31, 2021.

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.

Total deposits increased $119.1 million, or 2.57%, to $4.8 billion at December 31, 2022 compared with $4.6 billion at December 31, 2021.

The increase in total assets and deposits was primarily

the result of strong organic deposit growth.

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 $130.8 million, or 14.92%, to $1.0 billion at December 31, 2021 compared to $877 million at December 31, 2020.

The Company uses its investment portfolio to manage interest

rate and liquidity risks.

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

Conversely, when rates are falling,

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

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

The Company’s investment portfolio decreased by less than 1.0%, to $1.0 billion at December 31, 2022.

This decrease is net of the impact of $47.7 million that the Company sold for interest rate risk management

The Company uses its investment portfolio to manage interest rate and liquidity risks.

The Company's total investment portfolio as of December 31, 2022 represents 18.72% of the Company’s total assets as compared to 19.45% at December

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.

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.

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 $515 million at December 31, 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 are classified as held-to-maturity and are carried at amortized cost, net of an

allowance for credit losses, when the Company has the intent and ability to hold the securities to maturity.

See Note 2 “Investment Securities” to the Consolidated Financial Statements in “Item 8.

Financial Statements and Supplementary Data” in

this Annual Report on Form 10-K.

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.

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

As of December 31, 2021, we held no investment

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

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 December 31, 2022, the Company held no investment securities from any

issuer (other than the U.S.

Treasury or an agency of the U.S.

government or a government-sponsored entity) that totaled over 10% of our shareholders’ equity.

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

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Total available-for-sale securities

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

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

As of December 31,

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Total held-to-maturity securities

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

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

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

(2) Municipal securities are net of allowance for credit losses of $393 and $0, respectively.

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

Investment Securities

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Within One Year

After One but Within Five Years

After Five but Within Ten Years

After One but

Within Five Years

After Five but

Within Ten Years

After Ten Years

(Dollars in thousands)

Securities available for sale

Debt securities available-for-sale

Treasury notes

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Collateralized mortgage obligations (1)

Total securities available for sale

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

Corporate securities

Total debt securities available-for-sale

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

As of December 31, 2022

Within One Year

After One but Within Five Years

After Five but Within Ten Years

After One but

Within Five Years

After Five but

Within Ten Years

After Ten Years

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Total securities held-to-maturity

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

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

Investment Securities

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Within One Year

After One but Within Five Years

After Five but Within Ten Years

After One but

Within Five Years

After Five but

Within Ten Years

After Ten Years

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Collateralized mortgage obligations (1)

Corporate securities

Total securities available-for-sale

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

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

As of December 31, 2021

Within One Year

After One but Within Five Years

After Five but Within Ten Years

After One but

Within Five Years

After Five but

Within Ten Years

After Ten Years

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Securities held-to-maturity

Mortgage-backed securities (1)

Collateralized mortgage obligations (1)

Municipal securities

Total securities held-to-maturity

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

We evaluate securities for impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

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

Expected maturities may differ from contractual maturities because issuers may have the right to call obligations with or without penalties including prepayments on mortgage-backed securities.

The Company evaluates

securities for expected credit losses at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

Loans and Leases

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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

Commercial and Agricultural Real Estate – These are loans secured by owner-occupied real estate, non-owner-occupied real estate, owner-occupied farmland,

and multifamily residential properties.

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

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.

maturities generally do not exceed 15 years (and may have pricing adjustments on a shorter timeframe) amortizations of up to 25 years (30 years for

multifamily residential properties);

have debt service coverage ratios of 1.00 or better with a target of 1.25 or greater;

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

risk in the loan.

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

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

loans are generally made only to experienced local developers with a successful track record;

for projects in our service area;

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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.

construction loans are made only when there is an approved take-out commitment from the Bank or an acceptable financial institution or government agency.

Most acquisition, development and construction loans are tied to the prime rate with an

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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.

However, the Company will make loans on rural residential properties up to 41 acres.

Most residential loans have terms from ten to thirty years and carry fixed or variable rates priced to treasury rates.

The Company has always underwritten mortgage loans based upon traditional underwriting criteria and does not make loans that are known in the industry as “subprime,” “no or low doc,” or “stated income” loans.

Home Equity Lines and Loans – These are loans made to individuals for home improvements and other personal needs.

Generally, amounts do not exceed

but can be made for up to $1,000,000 in high cost counties.

Combined Loan To Value (CLTV) does not exceed 75%;

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Total Debt Ratios do not exceed 43%;

and in some situations the Company is in a 1 st

lien position.

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;

Lines of credit are extended to

finance the seasonal needs of farmers during peak growing periods;

are usually established for periods no longer than 12 to 36 months;

are often secured by general filing liens on livestock, crops, crop proceeds and equipment;

and are most often tied to the

prime rate with an appropriate spread based on the amount of perceived risk in the loan.

and are most often

tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan.

Term loans are primarily made for the financing of equipment, expansion or modernization of a processing plant, or orchard/vineyard development;

have maturities

from five to seven years;

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.

have maturities from five to seven years;

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

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

credit are extended to finance the seasonal working capital needs of customers during peak business periods;

of credit are extended to finance the seasonal working capital needs of customers during peak business periods;

are usually established for periods no longer than 12 to 36 months;

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and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan.

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

purchase of a business;

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

or purchase of a business;

have maturities from five to seven years;

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

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

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.

and fixed rates that are most often tied to treasury indices or variable rates tied to the prime rate with an appropriate spread based on the amount of perceived risk in the

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

lines of credit.

The Company has a minimal consumer loan portfolio.

Commercial Leases – These are leases primarily to businesses and farmers for financing the acquisition of equipment.

They can be either “finance leases”

where the lessee retains the tax benefits of ownership but obtains 100% financing on their equipment purchases;

or “true tax leases” where the Company, as lessor, places reliance on equipment residual value and in doing so obtains the tax

benefits of ownership.

Leases typically have a maturity of three to ten years, and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk.

Credit risks are underwritten using the same credit criteria the

Company would use when making an equipment term loan.

Credit risks are underwritten using the

same credit criteria the Company would use when making an equipment term loan.

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

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The Company’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.

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;

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(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.

and (3) based upon different rate indices as long as

these structures are consistent with the Company’s interest rate risk management policies and procedures.

See “Item 7A.

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

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

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

of San Francisco and Napa.

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

Bay of San Francisco and Napa County.

This data constitutes non-GAAP financial data.

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Gross Loans and Leases

Commercial real estate

Residential and home equity

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Total gross loans and leases

(1) Includes SBA PPP loans.

(1) Includes SBA PPP loans of $0 and $70,765 as of December 31, 2022 and December 31, 2021, respectively.

The following table shows the maturity distribution and interest rate sensitivity of the loan portfolio of the Company as of December 31, 2022.

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(Dollars in thousands)

Fifteen Years

One Year or Less

But Within Five Years

But Within Fifteen Years

After Fifteen Years

Gross loan and leases:

Commercial real estate

Residential and home equity

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Total gross loans and leases

(1) Includes SBA PPP loans.

Non-Accrual Loans and Leases - Accrual of interest on loans and leases is generally discontinued when a loan or lease becomes contractually past due by 90 days or more with

respect to interest or principal.

When loans and leases are 90 days past due, but in management’s judgment are well secured and in the process of collection, they may not be classified as non-accrual.

When 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 nonaccrual.

When a loan or lease is placed on non-accrual

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Income on such loans and leases is then recognized only to the extent that cash is received and where the future collection of principal is probable.

Non-accrual loans and leases

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

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

Non-accrual loans and

leases totaled $571,000 and $516,000 for the years ended December 31, 2022 and 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.

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

not able to perform according to the original contractual terms.

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

management may keep the loan or lease on accrual.

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

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

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

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

133, as discussed below.

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 non-accrual status at the time they become TDR loans or leases, remain on non-accrual 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.

At December 31, 2022, restructured loans totaled $1.3 million compared with $2.3 million at December 31, 2021, all of which were performing.

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

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

We record all “ORE” properties

at amounts equal to or less than the fair market value of the properties based on current independent appraisals reduced by estimated selling costs.

The Company reported $873,000 of foreclosed assets at December 31, 2021, and at December

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

Other Real Estate Owned – OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower.

The Company records all OREO

properties at amounts equal to or less than the fair market value of the properties based on current independent appraisals reduced by estimated selling costs.

The Company reported $873,000 of foreclosed OREO at December 31, 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 but were not considered TDRs because

of the CARES Act and H.R.

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Non-accrual loans and leases, not TDRs

Commercial real estate

Residential and home equity

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Non-accrual loans and leases, are TDRs

Commercial real estate

Residential and home equity

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“Loans and Leases”, located in “Item 8.

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

allocation of the allowance classified to impaired loans and leases.

Except for non-performing loans and leases discussed above;

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

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

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

as non-performing at some future date.

Financial Statements and Supplementary Data” in this Annual Report on Form 10-K 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 December 31, 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.

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 winter of 2020-2021 was once again

After 2016, reasonable levels of rain and snow alleviated drought conditions in our primary service area, but the winter of 2020-2021 and 2021-2022

were once again dry (although 2023 has begun with significant levels of rain and snow).

Despite this, the availability of water in our primary service area was not an issue for the 2022 growing season.

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

the availability of water are significant.

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

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

However, the weather patterns over

the past nine years further reinforce the fact that the long-term risks associated with the availability of water are significant.

While significant progress has been made in fighting the COVID-19 virus, particularly with the development of vaccines, 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.

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

Allowance for Credit Losses—Loans and Leases

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

The allowance is established

through a provision for credit losses, which is charged to expense.

Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan & lease growth.

Credit exposures determined to be

uncollectible are charged against the allowance.

The Company maintains an allowance for credit losses (“ACL”) under the guidance of Financial Accounting Standards Board Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326),

Measurement of Credit Losses on Financial Instruments (“CECL”).

The allowance is established through a provision for credit losses, which is charged to expense.

Additions to the allowance are expected to maintain the adequacy of the total

allowance after credit losses and loan & lease growth.

Credit exposures determined to be uncollectible are charged against the allowance.

Cash received on previously charged off amounts is recorded as a recovery to the allowance.

The overall allowance consists of three primary components:

specific reserves related to impaired loans and

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

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

Note 5, located in “Item 8.

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

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;

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

See Note 1, located in “Item 8.

Financial Statements and Supplementary Data” for a detailed discussion on

the Company’s allowance for credit losses.

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

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Balance at beginning of year

Provision for credit losses

Commercial real estate

Provision / (recapture) for credit losses

Residential and home equity

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Total charge-offs

Commercial real estate

Residential and home equity

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Total recoveries

Net recoveries / (charge-offs)

Net charge-offs / recoveries

Balance at end of year

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Allowance for credit losses to non-performing loans and leases

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

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

Provision for credit losses to average loans and leases

Allowance for credit losses to loans and leases held for investment

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

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

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

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

experience credit losses.

The increase in ACL in both 2021 and 2022 was primarily related to higher expected probable losses inherent in the loan portfolio that was directly related to quantitative and qualitative factors associated with

the current economic environment and overall growth in the loan portfolio.

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

(Dollars in thousands)

Percent of Total

Allowance for credit losses:

Commercial real estate

Residential and home equity

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(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;

(2) the Company’s expansion of its

service area into Walnut Creek, Concord and Napa;

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

and (2) the Company’s expansion

of its service area into Walnut Creek, Oakland, Concord and Napa.

Non-interest bearing demand deposits increased to $1.76 billion, or 36.96% of total deposits, as of December 31, 2022 from $1.75 billion, or 37.72% of total deposits, 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.

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

Interest bearing

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

Total deposits have increased 2.57% since December 31, 2021:

Demand and interest-bearing transaction accounts totaled $2.88 billion at December 31, 2022, an increase of $36.1 million, or 1.27% from $2.85 billion held at December 31, 2021.

Savings and money market accounts increased $144.1 million, or 10.29%, to $1.54 billion at December 31, 2022 compared with $1.40 billion at December 31, 2021.

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

Certificates of deposit accounts decreased $61.1 million, or 15.56%, to $331.4 million at December 31, 2022 compared with $392.5 million at December 31, 2021.

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

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The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements.

continue to manage interest expense through deposit pricing.

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

zero by the Federal Reserve.

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

significant increase in short-term interest rates during 2022 has placed pressure on deposit pricing, and we will continue to manage this ongoing impact through careful deposit pricing.

The average cost of deposits, including non-interest

bearing deposits was 0.09% for all of 2022 and all of 2021.

The following table shows deposits with a balance greater than $250,000 at December 31, 2022 and 2021:

(Dollars in thousands)

Deposits greater than $250,000

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

Non-Maturity Deposits greater than $250,000

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

Less than 3 months

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More than 12 months

Total Time Deposits greater than $250,000

Total certificates of deposit greater than $250,000

Total deposits greater than $250,000

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There were no FHLB advances at December 31, 2022 or 2021.

There were no Federal Funds purchased or advances from the FRB

at December 31, 2021 or 2020.

There were no Federal Funds purchased or advances from the

FRB at December 31, 2022 or 2021.

Long-Term Subordinated Debentures

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

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

Preferred Securities will continue to qualify as regulatory capital.

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

Trust Preferred Securities will continue to qualify as regulatory capital.

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

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

of December 31, 2021.

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

Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on

the Company’s common stock.

Interest rates reset quarterly (the next reset is March 17, 2023) and the rate was 7.59% as of December 31, 2022.

rate paid for these securities was 4.76% in 2022 and 3.06% 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.

Capital Resources

The Company relies primarily on capital generated through the retention of earnings to satisfy its capital requirements.

The Company engages in an ongoing assessment of its capital needs in order to support business

growth and to insure depositor protection.

The Company engages in an ongoing assessment of its capital needs in order to support

business growth and to insure depositor protection.

Shareholders’ Equity totaled $485.3 million at December 31, 2022, and $463.1 million at the end of 2021.

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

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

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

risk-based capital ratio of 8.0%.

The 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.

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 as of December 31, 2022 and 2021.

The following table sets forth our capital ratios:

Minimum to be Categorized

as "Well Capitalized" under

Prompt Corrective Action

(Dollars in thousands)

Basel III Regulatory Well Capitalized Requirement

As of December

Farmers & Merchants Bancorp

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Tier 1 leverage capital ratio

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

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

On November 8, 2022, the Board of Directors authorized an extension to its share repurchase program through December 31, 2024 for an additional $20.0 million of the Company’s common stock (“Repurchase Plan”), which represents

approximately 4% of outstanding shareholders’ equity.

During 2022, the Company repurchased 21,309 shares under the Repurchase Plan, for a total of $20.3 million.

Off-Balance-Sheet Arrangements

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(Dollars in thousands)

Committed Amount

Total Committed Amount

Less than One Year

One to Three Years

Three to Five Years

After Five Years

Off-balance sheet commitments

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Standby letters of credit

Performance guarantees

Total off-balance sheet commitments

The Company’s exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual

notional amount of those instruments.

The Company's exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the

contractual notional amount of those instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

The Company uses the same credit policies in making commitments and

conditional obligations as it does for recorded balance sheet items.

The Company uses the same credit policies in making

commitments and conditional obligations as it does for recorded balance sheet items.

The Company may or may not require collateral or other security to support financial instruments with credit risk.

Evaluations of each customer’s creditworthiness are performed on a

case-by-case basis.

Evaluations of each customer's

creditworthiness are performed on a case-by-case basis.

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

Most standby letters of credit are issued for 12 months or less.

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.

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

do not anticipate any material losses because of these transactions.

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

Additionally, the Company maintains a reserve for off balance sheet commitments,

which totaled $ 2.1 million and $315,000 at December 31, 2022 and 2021, respectively.

The allowance for credit losses - unfunded loan commitments was $2.1 million at December 31, 2022 compared to $0.3 million at December 31, 2021.

The increase in ACL in 2022 was

primarily related to higher expected probable losses inherent in the loan portfolio that was directly related to quantitative and qualitative factors associated with the current economic environment and overall growth in the loan portfolio.

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 on a monthly basis the amount of

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

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 December 31, 2021:

We had the following borrowing lines

available at December 31, 2022:

As of December 31, 2022

(Dollars in thousands)

Credit Line Available

Total Credit Line Limit

Current Credit Line Available

Outstanding Amount

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US Bank Fed Funds

MUFG Union Bank Fed Funds

PCBB Fed Funds

Total additional liquidity sources

We believe our liquid assets and short-term borrowing credit lines are adequate to meet our cash flow needs for loan funding and deposit cash withdrawal for the next 60 to 90 days.

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 December 31, 2022, we had

billion in cash and unencumbered investment securities;

$958 million in cash and unencumbered investment securities;

$2.1 million in investment securities and $2.1 billion in loans pledged as collateral on short-term borrowing credit lines.

We have the option of either borrowing on our credit lines or selling

these investment securities for cash flow needs.

We have the option of either borrowing on our credit lines or

selling these investment securities for cash flow needs.

On a long-term basis, our liquidity will be met by changing the relative distribution of our asset portfolios by reducing our investment or loan volumes, or selling or encumbering assets.

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support loan originations and commitments and deposit withdrawals.

We believe we can meet all of these needs by cash flows from investment payments and maturities, and investment sales, if the need arises.

We believe we can meet all of these needs from existing liquidity sources.

Our liquidity is comprised of three primary classifications:

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and cash flows from or used in financing activities.

cash provided by or used in operating activities has consisted primarily of net income adjusted for certain non-cash income and expense items such as the credit loss provision, investment and other amortization and depreciation.

Our primary investing activities are the origination of real estate, commercial & industrial, consumer loans, and purchases and sales of investment securities.

As of December 31, 2021, we had outstanding loan

commitments of $937 million and outstanding letters of credit of $17.9 million.

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 December 31, 2022, we had unfunded loan commitments of $1.1 billion and unfunded letters of

credit of $17.1 million.

We anticipate that we will have sufficient funds available to meet current loan commitments.

Net cash provided by financing activities has been impacted significantly by higher deposit levels.

During the years ended December 31, 2021 and 2020, deposits increased $580 million and $782 million, respectively.

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 7. Management’s Discussion and Analysis