FARMERS & MERCHANTS BANCORP 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2024 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number: 000-26099 FARMERS & MERCHANTS BANCORP (Exact name of registrant as specified in its charter) Delaware 94-3327828 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 111 W. Pine Street , Lodi , California 95240 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code ( 209 ) 367-2300 Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered None Not Applicable Not Applicable Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 Par Value Per Share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ As of April 30, 2024, the registrant had 742,095 shares of common stock $0.01 par value per share, outstanding. FARMERS & MERCHANTS BANCORP FORM 10-Q TABLE OF CONTENTS PART I. - FINANCIAL INFORMATION Page Item 1 - Financial Statements Unaudited Consolidated Balance Sheets 3 Unaudited Consolidated Statements of Income 4 Unaudited Consolidated Statements of Comprehensive Income 5 Unaudited Consolidated Statements of Changes in Shareholders’ Equity 6 Unaudited Consolidated Statements of Cash Flows 7 Notes to Unaudited Consolidated Financial Statements 8 Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations 30 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 50 Item 4 - Controls and Procedures 52 PART II. - OTHER INFORMATION Item 1 – Legal Proceedings 53 Item 1A – Risk Factors 53 Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds 53 Item 3 – Defaults upon Senior Securities 53 Item 4 – Mine Safety Disclosures 53 Item 5 – Other Information 54 Item 6 – Exhibits 54 Signatures 55 2 Table of Contents PART 1. FINANCIAL INFORMATION Item 1. Financial Statements FARMERS & MERCHANTS BANCORP UNAUDITED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share and per share amounts) March 31, 2024 December 31, 2023 ASSETS Cash and due from banks $ 65,796 $ 72,267 Interest bearing deposits with banks 672,601 338,375 Total cash and cash equivalents 738,397 410,642 Securities available-for-sale, amortized cost $ 259,318 and $ 199,374 , respectively 239,856 182,512 Securities held-to-maturity, fair value $ 649,775 and $ 671,585 respectively 806,971 817,688 Allowance for credit losses - securities held-to-maturity ( 450 ) ( 450 ) Total investment securities 1,046,377 999,750 Non-marketable securities 15,549 15,549 Loans and leases held-for-investment, net of unearned income 3,696,295 3,654,689 Allowance for credit losses - loans and leases ( 75,018 ) ( 74,965 ) Loans and leases held for investment, net 3,621,277 3,579,724 Bank-owned life insurance 75,525 74,931 Premises and equipment, net 51,618 51,907 Deferred income tax assets 34,818 39,979 Accrued interest receivable 23,740 28,520 Goodwill 11,183 11,183 Other intangibles 2,099 2,236 Other real estate owned 873 873 Other assets 93,117 93,634 Total Assets $ 5,714,573 $ 5,308,928 LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits: Non-interest bearing $ 1,410,487 $ 1,482,571 Interest bearing: Demand 1,038,920 933,417 Savings and money market 1,632,720 1,607,479 Certificates of deposit 877,462 644,628 Total interest bearing 3,549,102 3,185,524 Total deposits 4,959,589 4,668,095 Federal Home Loan Bank advances 100,000 - Subordinated debentures 10,310 10,310 Interest payable and other liabilities 79,457 80,768 Total Liabilities 5,149,356 4,759,173 SHAREHOLDERS’ EQUITY Preferred shares, no par value, 1,000,000 shares authorized and, none issued or outstanding - - Common shares, $ 0.01 par value, 7,500,000 authorized, 742,770 and 747,971 issued and outstanding at March 31, 2024 and December 31, 2023 , respectively 7 7 Additional paid-in capital 31,401 36,852 Retained earnings 548,123 525,360 Accumulated other comprehensive loss, net of taxes ( 14,314 ) ( 12,464 ) TOTAL SHAREHOLDERS’ EQUITY 565,217 549,755 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 5,714,573 $ 5,308,928 See accompanying notes to the unaudited consolidated financial statements. 3 Table of Contents FARMERS & MERCHANTS BANCORP UNAUDITED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, (Dollars in thousands, except share and per share amounts) 2024 2023 Interest income Interest and fees on loans and leases $ 55,408 $ 48,008 Interest and dividends on investment securities 6,703 5,663 Interest on deposits with others 4,530 5,961 Total interest income 66,641 59,632 Interest expense Deposits 14,645 3,714 Borrowed funds 62 - Subordinated debentures 221 196 Total interest expense 14,928 3,910 Net interest income 51,713 55,722 Provision for credit losses - 1,500 Net interest income after provision for credit losses 51,713 54,222 Non-interest income Card processing 1,629 1,591 Gain on BOLI death benefit - 4,346 Net gain on deferred compensation benefits 1,158 896 Service charges on deposit accounts 748 634 Increase in cash surrender value of BOLI 595 444 Net loss on sale of securities available-for-sale - ( 5,686 ) Other 945 1,235 Total non-interest income 5,075 3,460 Non-interest expense Salaries and employee benefits 17,503 19,584 Data processing 1,455 1,260 Occupancy 1,232 1,180 Net gain on deferred compensation benefits 1,158 896 Deposit insurance 712 692 Professional services 541 682 Marketing 480 470 Other 2,440 3,419 Total non-interest expense 25,521 28,183 INCOME BEFORE INCOME TAXES 31,267 29,499 Income tax expense 8,544 5,952 NET INCOME $ 22,723 $ 23,547 Earnings per common share: Basic $ 30.56 $ 30.80 Diluted $ 30.56 $ 30.80 Weighted average number of common shares Basic 743,515 764,603 Diluted 743,515 764,603 See accompanying notes to the unaudited consolidated financial statements. 4 Table of Contents FARMERS & MERCHANTS BANCORP UNAUDITED CONSOLIDATED S TATEMENTS OF COMPREHENSIVE INCOME Three Months Ended March 31, (Dollars in thousands) 2024 2023 Net income $ 22,723 $ 23,547 Other comprehensive income Unrealize d (losses)/gains on available-for-sale securities ( 2,600 ) 2,362 Reclassification adjustment for losses on available-for-sale securities - 5,685 Amortization of unrealized loss on securities transferred to held-to-maturity ( 27 ) ( 30 ) Net unrealized (losses)/gains on available-for-sale securities ( 2,627 ) 8,017 Income tax benefit/(expense) 777 ( 2,379 ) Other comprehensive (loss)/income, net of tax ( 1,850 ) 5,638 Total comprehensive income $ 20,873 $ 29,185 See accompanying notes to the unaudited consolidated financial statements. 5 Table of Contents FARMERS & MERCHANTS BANCORP UNAUDIT ED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY For the three months ended March 31, 2024 and 2023 (Dollars in thousands, except share amounts) Common Shares Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss)/Income Total Balance as of December 31, 2022 768,337 $ 8 $ 57,206 $ 449,932 $ ( 21,838 ) $ 485,308 Net income - - - 23,547 - 23,547 Other comprehensive income, net of tax - - - - 5,638 5,638 Repurchase of common stock ( 5,406 ) - ( 5,591 ) - - ( 5,591 ) Balance as of March 31, 2023 762,931 $ 8 $ 51,615 $ 473,479 $ ( 16,200 ) $ 508,902 Balance as of December 31, 2023 747,971 $ 7 $ 36,852 $ 525,360 $ ( 12,464 ) $ 549,755 Cumulative change from adoption of ASU 2023-02 40 40 Net income - - - 22,723 - 22,723 Other comprehensive loss, net of tax - - - - ( 1,850 ) ( 1,850 ) Repurchase of common stock ( 5,201 ) - ( 5,451 ) - - ( 5,451 ) Balance as of March 31, 2024 742,770 $ 7 $ 31,401 $ 548,123 $ ( 14,314 ) $ 565,217 See accompanying notes to the unaudited consolidated financial statements. 6 Table of Contents FARMERS & MERCHANTS BANCORP UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, (Dollars in thousands) 2024 2023 Cash flows from operating activities: Net income $ 22,723 $ 23,547 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses - 1,500 Depreciation and amortization 698 596 Net amortization of securities premiums and discounts ( 320 ) 33 Increase in cash surrender value of BOLI ( 595 ) ( 444 ) Gain on BOLI death benefit - ( 4,346 ) Decrease in deferred income taxes, net 3,296 3,933 Loss on sale of securities available-for-sale - 5,686 Net changes in: Other assets 8,502 6,307 Other liabilities 477 4,864 Net cash provided by operating activities 34,781 41,676 Cash flows from investing activities: Net change in loans and leases held-for-investment ( 41,541 ) 70,927 Purchase of available-for-sale securities ( 63,764 ) ( 3,585 ) Purchase of held-to-maturity securities ( 1,130 ) ( 1,350 ) Proceeds from sales, maturities, calls and pay downs of available-for-sale securities 4,318 40,348 Proceeds from maturities, calls and pay downs of held-to-maturity securities 11,743 10,817 Purchase of premises and equipment ( 410 ) ( 1,543 ) Purchase of other investments ( 2,285 ) ( 2,008 ) Proceeds from bank-owned life insurance - 11,752 Net cash (used in)/ provided by investing activities ( 93,069 ) 125,358 Cash flows from financing activities: Net increase/(decrease) in deposits 291,494 ( 220,107 ) Federal Home Loan Bank advances 100,000 - Net cash used in share repurchases of common stock ( 5,451 ) ( 5,591 ) Net cash provided by (used in) financing activities 386,043 ( 225,698 ) Net change in cash and cash equivalents 327,755 ( 58,664 ) Cash and cash equivalents, beginning of period 410,642 588,257 Cash and cash equivalents, end of period $ 738,397 $ 529,593 Supplemental disclosures of cash flow information: Cash paid for interest $ 12,852 $ 3,389 Income taxes paid $ - $ 1 Supplemental disclosures of non-cash transactions: Net change in unrealized gain/(losses) on securities available-for-sale $ 2,600 $ ( 8,047 ) See accompanying notes to the unaudited consolidated financial statements. 7 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 1—Basis of Presentation and Significant Accounting Policies The accompanying unaudited condensed consolidated financial statements include the accounts of Farmers & Merchants Bancorp (“FMCB” or “Bancorp”), a bank holding company incorporated in the State of Delaware and its wholly owned subsidiary, Farmers & Merchants Bank of Central Californi a (“F&M Bank” or the “Bank”) collectively (the “Company”). These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In preparing these financial statements, the Company has evaluated events and transactions subsequent to March 31, 2024 for potential recognition or disclosure. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and note disclosures have been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements. All significant intercompany transactions and balances have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are significant to an understanding of Bank’s financial statements. These policies relate to: (i) the methodology for the recognition of interest income; (ii) the determination of the provision and allowance for credit losses; (iii) the valuation of financial assets and liabilities recorded at fair value; (iv) the valuation of intangibles, such as goodwill and core deposit intangibles (“CDI”); (v) the valuation of other real estate owned (“OREO”); and (vi) the valuation or recognition of deferred tax assets and liabilities. These policies and judgments, estimates and assumptions are described in greater detail in subsequent notes to the Audited Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, Summary of Critical Accounting Policies and Estimates, in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 14, 2024 and Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Estimates included in this Quarterly Report on Form 10-Q. The information included in this Form 10-Q should be read in conjunction with our 2023 Form 10-K. Interim results are not necessarily indicative of results for a full year or any other interim period. Recently Adopted Accounting Standards — The Accounting Standards Codification™ (“ASC”) is the FASB officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities. Periodically, the FASB will issue Accounting Standard updates (“ASU”) to its ASC. Rules and interpretive releases of the SEC under the authority of the federal securities laws are also sources of authoritative GAAP for the Company as an SEC registrant. All other accounting literature is non-authoritative. On January 1, 2024, the company adopted the FASB issued guidance within ASU 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendments in this ASU affect all entities that have investments in equity securities measured at fair value that are subject to a contractual sale restriction. These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The company adopted this standard on January 1, 2024, with no material impact on the Company’s Consolidated Financial Statements. 8 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 1—Basis of Presentation and Significant Accounting Policies—Continued On January 1, 2024, the Company adopted the FASB issued ASU 2023-02, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method . ASU 2023-02 allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The Amendments in ASU 2023-02 apply to all reporting entities that hold (1) tax equity investments that meet the conditions for and elect to account for them using the proportional amortization method or (2) an investment in a low income housing tax credit investments (“LIHTC”) structure through a limited liability entity that is not accounted for using the proportional amortization method and to which certain LIHTC-specific guidance removed from FASB ASC 323-740, Investments – Equity Method and Joint Ventures: Income Taxes , has been applied. The amendments in ASU 2023-02 must be applied on either a modified retrospective or a retrospective basis (except as discussed in the ASU for LIHTC investments not accounted for using the proportional amortization method). The Company adopted this standard to use the proportional amortization method on January 1, 2024, with a $ 40,000 cumulative-effect adjustment to retained earnings under the modified retrospective method. Under the proportional amortization method the amortization of the LIHTC investments, income tax credits and other income tax benefits are now recognized in the income statement as a component of income tax expense (benefit) rather than other non-interest expense. Accounting Standards Pending Adoption —The following paragraphs provide descriptions of newly issued but not yet effective accounting standards that could have a material effect on the Company’s financial position or results of operations. In July 2023, the FASB issued ASU 2023-03, Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718) . This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company is currently evaluating the impact this ASU will have on its disclosures. In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Updated and Simplification Initiative . ASU 2023-06 amends the disclosure or presentation requirements related to various subtopics in the FASB Accounting Standards Codification (the “Codification”). The ASU was issued in response to the SEC’s August 2018 final rule that updated and simplified disclosure requirements that the SEC believed were “redundant, duplicative, overlapping, outdated, or superseded.” The new guidance is intended to align U.S. GAAP requirements with those of the SEC and to facilitate the application of U.S. GAAP for all entities. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company is currently evaluating the impact this ASU will have on its disclosures. In December 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures” . ASU 2023-07 Requires public entities to disclose significant segment expenses, an amount and description for other segment items, the title and position of the entity’s chief operating decision maker (“CODM”) and an explanation of how the CODM uses the reported measures of profit or loss to assess segment performance, and, on an interim basis, certain segment related disclosures that previously were required only on an annual basis. ASU 2023-07 also clarifies that entities with a single reportable segment are subject to both new and existing segment reporting requirements and that an entity is permitted to disclose multiple measures of segment profit or loss, provided that certain criteria are met. ASU 2023-07 requires annual disclosures for fiscal years beginning January 1, 2024 and interim disclosures for fiscal years beginning January 1, 2025. Early adoption is permitted. The Company is required to apply the amendments in this update retrospectively to all prior periods presented in the financial statements. The Company will update its segment related disclosures upon adoption. 9 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 1—Basis of Presentation and Significant Accounting Policies—Continued In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” ASU 2023-09 requires public business entities to disclose in their rate reconciliation table additional categories of information about federal, state and foreign income taxes and to provide more details about the reconciling items in some categories if items meet a quantitative threshold. ASU 2023-09 also requires all entities to disclose income taxes paid, net of refunds, disaggregated by federal, state and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold, among other things. ASU 2023-09 is effective for us on January 1, 2025, though early adoption is permitted. The Company will update its income tax disclosures upon adoption. Note 2—Investment Securities The amortized cost, fair values, and unrealized gains and losses of the securities available-for-sale are as follows: Amortized Gross Unrealized (Dollars in thousands) Cost Gains Losses Fair Value As of March 31, 2024 U.S. Government-sponsored securities $ 3,057 $ 9 $ 18 $ 3,048 Mortgage-backed securities (1) 235,499 1,739 21,145 216,093 Collateralized mortgage obligations (1) 5,695 - 41 5,654 Corporate securities 14,757 34 40 14,751 Other 310 - - 310 Total available-for-sale securities $ 259,318 $ 1,782 $ 21,244 $ 239,856 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. Amortized Gross Unrealized (Dollars in thousands) Cost Gains Losses Fair Value As of December 31, 2023 U.S. Government-sponsored securities $ 3,230 $ 12 $ 18 $ 3,224 Mortgage-backed securities (1) 180,543 3,022 19,727 163,838 Collateralized mortgage obligations (1) 548 - 13 535 Corporate securities 14,743 41 179 14,605 Other 310 - - 310 Total available-for-sale securities $ 199,374 $ 3,075 $ 19,937 $ 182,512 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. 10 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 2—Investment Securities—Continued The book values, estimated fair values and unrealized gains and losses of investments classified as held-to-maturity are as follows: Allowance Amortized Gross Unrealized for Credit (Dollars in thousands) Cost Gains Losses Fair Value Losses As of March 31, 2024 Mortgage-backed securities (1) $ 656,028 $ 3 $ 142,770 $ 513,261 $ - Collateralized mortgage obligations (1) 72,950 - 14,231 58,719 - Municipal securities 77,993 89 287 77,795 450 Total held-to-maturity securities $ 806,971 $ 92 $ 157,288 $ 649,775 $ 450 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government . Allowance Amortized Gross Unrealized for Credit (Dollars in thousands) Cost Gains Losses Fair Value Losses As of December 31, 2023 Mortgage-backed securities (1) $ 664,728 $ 30 $ 132,043 $ 532,715 $ - Collateralized mortgage obligations (1) 74,170 - 14,017 60,153 - Municipal securities 78,790 107 180 78,717 450 Total held-to-maturity securities $ 817,688 $ 137 $ 146,240 $ 671,585 $ 450 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government . The allowance for credit losses on held-to-maturity securities is a contra-asset valuation account that is deducted from the amortized cost basis of held-to-maturity securities to present the net amount expected to be collected. Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to residential mortgage-backed securities issued by the U.S. government, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by States and political subdivisions and other held-to-maturity securities, management considers (i) issuer bond ratings, (ii) historical loss rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) internal forecasts and (v) whether or not such securities are guaranteed or pre-refunded by the issuers. Fair values are based on quoted market prices or dealer quotes. If a quoted market price or dealer quote is not available, fair value is estimated using quoted market prices for similar securities. 11 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 2—Investment Securities—Continued The following tables show the gross unrealized losses for available-for-sale securities, for which an allowance for credit losses has not been recorded, that are less than 12 months and 12 months or more: March 31, 2024 Less Than 12 Months 12 Months or More Total (Dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-Sale Securities U.S. Government-sponsored securities $ 24 $ - $ 1,148 $ 18 $ 1,172 $ 18 Mortgage-backed securities (1) 4,560 51 77,695 21,094 82,255 21,145 Collateralized mortgage obligations (1) 5,138 29 516 12 5,654 41 Corporate securities - - 9,989 40 9,989 40 Total available-for-sale securities $ 9,722 $ 80 $ 89,348 $ 21,164 $ 99,070 $ 21,244 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government . December 31, 2023 Less Than 12 Months 12 Months or More Total (Dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-Sale Securities U.S. Government-sponsored securities $ 33 $ - $ 1,235 $ 18 $ 1,268 $ 18 Mortgage-backed securities (1) 1,629 11 80,746 19,716 82,375 19,727 Collateralized Mortgage Obligations (1) - - 535 13 535 13 Corporate securities - - 9,853 179 9,853 179 Total available-for-sale securities $ 1,662 $ 11 $ 92,369 $ 19,926 $ 94,031 $ 19,937 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government . As of March 31, 2024 the Company held 182 available-for-sale securities of which 6 were in an unrealized loss position for less than twelve months and 138 securities were in an unrealized loss position for twelve months or more without an allowance for credit losses. Because the decline in fair value is attributable to changes in interest rates and not credit quality and because the Company does not have the intent to sell these securities and it is more likely than not that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be impaired. Management evaluates the available-for-sale securities in an unrealized loss position, relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations. The following table presents the activity in the allowance for credit losses for held-to-maturity securities by major type: March 31, 2024 (Dollars in thousands) Municipal securities Mortgage-backed securities Collateralized mortgage obligations Total Allowance for credit losses - securities Beginning balance $ 450 $ - $ - $ 450 Provision for credit losses - - - - Ending balance $ 450 $ - $ - $ 450 12 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 2—Investment Securities—Continued December 31, 2023 (Dollars in thousands) Municipal securities Mortgage-backed securities Collateralized mortgage obligations Total Allowance for credit losses - securities Beginning Balance $ 393 $ - $ - $ 393 Provision for credit losses 57 - - 57 Ending Balance $ 450 $ - $ - $ 450 The amortized cost and estimated fair values of investment securities at March 31, 2024 by contractual final maturity are shown in the following table: Available-for-Sale Held-to-Maturity (Dollars in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Securities maturing in: One year or less $ 424 $ 423 $ 2,230 $ 2,230 After one year through five years 20,439 20,242 18,087 17,787 After five years through ten years 5,402 5,228 21,009 19,842 After ten years 233,053 213,963 765,645 609,916 Total $ 259,318 $ 239,856 $ 806,971 $ 649,775 Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Expected maturities of mortgage-backed and CMO securities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. The Company monitors the credit quality of those held-to-maturity securities not issued by the U.S. government or one of its agencies or government sponsored entities, through the use of credit ratings. Credit ratings are reviewed and updated quarterly. The following tables summarize the amortized cost of held-to-maturity municipal securities by credit rating as of the dates indicated: Held-to-Maturity Amortized Cost (Dollars in thousands) AAA/AA/A BBB/BB/B Not Rated Total March 31, 2024 Municipal securities $ 20,209 $ 397 $ 57,387 $ 77,993 Total $ 20,209 $ 397 $ 57,387 $ 77,993 As of March 31, 2024, there were no past due principal or interest payments associated with these securities. Held-to-Maturity Amortized Cost (Dollars in thousands) AAA/AA/A BBB/BB/B Not Rated Total December 31, 2023 Municipal securities $ 20,203 $ 395 $ 58,192 $ 78,790 Total $ 20,203 $ 395 $ 58,192 $ 78,790 13 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 2—Investment Securities—Continued Proceeds from sales and calls of these securities were as follows: (Dollars in thousands) Gross Proceeds Gross Gains Gross Losses Three months ended March 31, 2024 $ - $ - $ - Three months ended March 31, 2023 $ 30,482 $ - $ 5,686 Pledged Securities As of March 31, 2024, investment securities carried at $ 661.3 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) borrowings, and other government agency deposits as required by law. The amount of investments pledged was $ 794.1 million at December 31, 2023. Note 3— Loans and Leases Loans and leases as of the dates indicated consisted of the following: (Dollars in thousands) March 31, 2024 December 31, 2023 Loans and leases held-for-investment, net Real estate: Commercial $ 1,352,014 $ 1,323,038 Agricultural 726,041 742,009 Residential and home equity 405,526 399,982 Construction 227,415 212,362 Total real estate 2,710,996 2,677,391 Commercial & industrial 497,028 499,373 Agricultural 317,955 313,737 Commercial leases 174,657 169,684 Consumer and other 5,801 5,212 Total gross loans and leases 3,706,437 3,665,397 Unearned income ( 10,142 ) ( 10,708 ) Total net loans and leases 3,696,295 3,654,689 Allowance for credit losses ( 75,018 ) ( 74,965 ) Total loans and leases held-for-investment, net $ 3,621,277 $ 3,579,724 At March 31, 2024, the portion of loans that were approved for pledging as collateral on borrowing lines with the FHLB and the Federal Reserve Bank (“FRB”) were $ 1.3 billion and $ 1.6 billion, respectively. The borrowing capacity on these loans was $ 767.7 million from FHLB and $ 1.2 billion from the FRB at March 31, 2024. 14 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 3—Loans and Leases—Continued T he following tables show an aging analysi s of the loan and lease portfolio, net of unearned income, by the time past due for the periods indicated: March 31, 2024 (Dollars in thousands) Current 30-89 Days Past Due 90+ Days Past Due Non-accrual Total Past Due Total Loans and leases held-for-investment, net Real estate: Commercial $ 1,344,380 $ - $ - $ - $ - $ 1,344,380 Agricultural 715,367 7,124 3,550 - 10,674 726,041 Residential and home equity 404,832 694 - - 694 405,526 Construction 227,415 - - - - 227,415 Total real estate 2,691,994 7,818 3,550 - 11,368 2,703,362 Commercial & industrial 497,028 - - - - 497,028 Agricultural 317,955 - - - - 317,955 Commercial leases 172,149 - - - - 172,149 Consumer and other 5,767 34 - - 34 5,801 Total loans and leases, net $ 3,684,893 $ 7,852 $ 3,550 $ - $ 11,402 $ 3,696,295 December 31, 2023 (Dollars in thousands) Current 30-89 Days Past Due 90+ Days Past Due Non-accrual Total Past Due Total Loans and leases held-for-investment, net Real estate: Commercial $ 1,314,928 $ - $ - $ - $ - $ 1,314,928 Agricultural 742,009 - - - - 742,009 Residential and home equity 399,946 36 - - 36 399,982 Construction 212,362 - - - - 212,362 Total real estate 2,669,245 36 - - 36 2,669,281 Commercial & industrial 499,341 32 - - 32 499,373 Agricultural 313,737 - - - - 313,737 Commercial leases 167,086 - - - - 167,086 Consumer and other 5,209 3 - - 3 5,212 Total loans and leases, net $ 3,654,618 $ 71 $ - $ - $ 71 $ 3,654,689 There were no non-accrual loans at March 31, 2024 and December 31, 2023. 15 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 3—Loans and Leases—Continued The Company did not enter into any loan modifications with borrowers experiencing financial difficulty during the three months ended March 31, 2024 or 2023. When borrowers are experiencing financial difficulty, the Company may agree to modify the contractual terms of a loan to a borrower in order to assist the borrower in repaying principal and interest owed to the Company. The Company’s modifications of loans to borrowers experiencing financial difficulty are generally in the form of term extensions, repayment plans, payment deferrals, forbearance agreements, interest rate reductions, forgiveness of interest and/or fees, or any combination thereof. Commercial loans modified to borrowers experiencing financial difficulty are primarily loans that are substandard or non-accrual, where the maturity date was extended and/or the modified interest rate and payment terms are not commensurate with the current market. Modifications on personal real estate loans are primarily those placed on forbearance plans, repayment plans, or deferral plans where monthly payments are suspended for a period of time or past due amounts are paid off over a certain period of time in the future or set up as a balloon payment at maturity. Modifications to certain credit card and other small consumer loans are often modified under debt counseling programs that can reduce the contractual rate or, in certain instances, forgive certain fees and interest charges. Other consumer loans modified to borrowers experiencing financial difficulty consist of various other workout arrangements with consumer customers. There were no loans that were modified within the last 12 months that had a payment default or were past due during the three months ended March 31, 2024. The Company assigns a risk rating to all loans and leases and periodically performs detailed reviews of all such loans and leases over a certain threshold to identify credit risks and assess overall collectability. Risk ratings can be grouped into five major categories, defined as follows: Pass and watch — A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management’s close attention. This category also includes “Watch” loans, which is a loan with an emerging weakness in either the individual credit or industry that requires additional attention. A credit may also be classified Watch if cash flows have not yet stabilized, such as in the case of a development project. Special mention — A special mention loan or lease has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in the Company’s credit position at some future date. Special mention loans and leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Substandard — A substandard loan or lease is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans or leases classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well-defined weaknesses include a project’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project’s failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful — Loans or leases classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable or improbable. 16 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 3—Loans and Leases—Continued Loss — Loans or leases classified as loss are considered uncollectible. Once a loan or lease becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Company will estimate its probable loss and immediately charge-off some or all of the balance. The following table presents the credit risk rating categories for loans and leases held-for-investment (accruing and non-accruing) net of unearned income by loan portfolio segment and class as of the dates indicated. March 31, 2024 (Dollars in thousands) Pass Special Mention Sub- standard Doubtful Total Loans & Leases Total Allowance for Credit Losses Loans and leases held-for-investment, net Real estate: Commercial $ 1,337,274 $ 7,106 $ - $ - $ 1,344,380 $ 22,414 Agricultural 698,309 27,186 546 - 726,041 11,377 Residential and home equity 404,754 126 646 - 405,526 7,721 Construction 227,415 - - - 227,415 4,616 Total real estate 2,667,752 34,418 1,192 - 2,703,362 46,128 Commercial & industrial 482,584 13,950 494 - 497,028 11,559 Agricultural 315,136 2,764 55 - 317,955 10,292 Commercial leases 166,044 6,105 - - 172,149 6,923 Consumer and other 5,572 - 229 - 5,801 116 Total loans and leases, net $ 3,637,088 $ 57,237 $ 1,970 $ - $ 3,696,295 $ 75,018 December 31, 2023 (Dollars in thousands) Pass Special Mention Sub- standard Doubtful Total Loans & Leases Total Allowance for Credit Losses Loans and leases held-for-investment, net Real estate: Commercial $ 1,308,717 $ 6,211 $ - $ - $ 1,314,928 $ 26,093 Agricultural 729,135 12,329 545 - 742,009 7,744 Residential and home equity 399,217 - 765 - 399,982 7,770 Construction 212,362 - - - 212,362 4,432 Total real estate 2,649,431 18,540 1,310 - 2,669,281 46,039 Commercial & industrial 486,439 12,458 476 - 499,373 13,380 Agricultural 310,496 3,236 5 - 313,737 8,872 Commercial leases 167,080 6 - - 167,086 6,537 Consumer and other 5,036 - 176 - 5,212 137 Total loans and leases, net $ 3,618,482 $ 34,240 $ 1,967 $ - $ 3,654,689 $ 74,965 17 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 3—Loans and Leases—Continued The following table presents outstanding loan and lease balances held-for-investment net of unearned income by segment and class, credit quality indicators, vintage year by class of financing receivable, and current period gross charge-offs by year of origination as follows: March 31, 2024 Term Loans Amortized Cost Basis by Origination Year (Dollars in thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Amortized Cost Total Net loans and leases held-for-investment Real estate: Commercial Pass $ 30,385 $ 120,014 $ 166,306 $ 219,834 $ 141,997 $ 321,074 $ 337,664 $ 1,337,274 Special mention - - 3,664 - - 1,939 1,503 7,106 Substandard - - - - - - - - Doubtful - - - - - - - - Total Commercial $ 30,385 $ 120,014 $ 169,970 $ 219,834 $ 141,997 $ 323,013 $ 339,167 $ 1,344,380 Commercial Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - Agricultural Pass $ 2,706 $ 36,961 $ 70,840 $ 40,049 $ 49,772 $ 166,855 $ 331,126 $ 698,309 Special mention - - - - 800 10,172 16,214 27,186 Substandard - - - - - 546 - 546 Doubtful - - - - - - - - Total Agricultural $ 2,706 $ 36,961 $ 70,840 $ 40,049 $ 50,572 $ 177,573 $ 347,340 $ 726,041 Agricultural Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - Residential and home equity Pass $ 11,492 $ 40,743 $ 61,230 $ 87,405 $ 77,721 $ 80,780 $ 45,383 $ 404,754 Special mention - - - - - 126 - 126 Substandard - - - - - 646 - 646 Doubtful - - - - - - - - Total Residential and home equity $ 11,492 $ 40,743 $ 61,230 $ 87,405 $ 77,721 $ 81,552 $ 45,383 $ 405,526 Residential and home equity Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - Construction Pass $ 3,116 $ - $ 1,500 $ - $ - $ 1,575 $ 221,224 $ 227,415 Special mention - - - - - - - - Substandard - - - - - - - - Doubtful - - - - - - - - Total construction $ 3,116 $ - $ 1,500 $ - $ - $ 1,575 $ 221,224 $ 227,415 Construction Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - Total Real estate $ 47,699 $ 197,718 $ 303,540 $ 347,288 $ 270,290 $ 583,713 $ 953,114 $ 2,703,362 Commercial & industrial Pass $ 5,994 $ 47,400 $ 24,885 $ 20,443 $ 5,991 $ 9,417 $ 368,454 $ 482,584 Special mention - 2,281 25 4,167 395 - 7,082 13,950 Substandard - - - 41 - 453 - 494 Doubtful - - - - - - - - Total Commercial & industrial $ 5,994 $ 49,681 $ 24,910 $ 24,651 $ 6,386 $ 9,870 $ 375,536 $ 497,028 Commercial & industrial Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - Agricultural Pass $ 1,066 $ 3,937 $ 4,138 $ 2,140 $ 652 $ 2,724 $ 300,479 $ 315,136 Special mention - - 50 - - - 2,714 2,764 Substandard - - - - - 4 51 55 Doubtful - - - - - - - - Total Agricultural $ 1,066 $ 3,937 $ 4,188 $ 2,140 $ 652 $ 2,728 $ 303,244 $ 317,955 Agricultural Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - 18 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 3—Loans and Leases—Continued March 31, 2024 Term Loans Amortized Cost Basis by Origination Year (Dollars in thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Amortized Cost Total Net loans and leases held for investment Commercial leases Pass $ 9,285 $ 79,904 $ 25,545 $ 10,188 $ 8,987 $ 32,135 $ - $ 166,044 Special mention 594 - 5,511 - - - - 6,105 Substandard - - - - - - - - Doubtful - - - - - - - - Total Commercial leases $ 9,879 $ 79,904 $ 31,056 $ 10,188 $ 8,987 $ 32,135 $ - $ 172,149 Commercial leases Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - Consumer and other Pass $ 443 $ 1,628 $ 824 $ 236 $ 34 $ 1,746 $ 661 $ 5,572 Special mention - - - - - - - - Substandard 206 - - - - 23 - 229 Doubtful - - - - - - - - Total Consumer and other $ 649 $ 1,628 $ 824 $ 236 $ 34 $ 1,769 $ 661 $ 5,801 Consumer and other Current-period gross charge-offs $ 10 $ - $ - $ - $ - $ - $ - $ 10 Total net loans and leases Pass $ 64,487 $ 330,587 $ 355,268 $ 380,295 $ 285,154 $ 616,306 $ 1,604,991 $ 3,637,088 Special mention 594 2,281 9,250 4,167 1,195 12,237 27,513 57,237 Substandard 206 - - 41 - 1,672 51 1,970 Doubtful - - - - - - - - Total net loans and leases $ 65,287 $ 332,868 $ 364,518 $ 384,503 $ 286,349 $ 630,215 $ 1,632,555 $ 3,696,295 Total current-period gross charge-offs $ 10 $ - $ - $ - $ - $ - $ - $ 10 19 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 3—Loans and Leases—Continued December 31, 2023 Term Loans Amortized Cost Basis by Origination Year (Dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Total Net loans and leases held for investment Real estate: Commercial Pass $ 121,418 $ 169,171 $ 221,708 $ 143,502 $ 67,505 $ 261,344 $ 324,069 $ 1,308,717 Special mention - 2,395 - - - 2,216 1,600 6,211 Substandard - - - - - - - - Doubtful - - - - - - - - Total Commercial $ 121,418 $ 171,566 $ 221,708 $ 143,502 $ 67,505 $ 263,560 $ 325,669 $ 1,314,928 Commercial Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - Agricultural Pass $ 37,849 $ 71,367 $ 40,848 $ 50,445 $ 12,008 $ 165,267 $ 351,351 $ 729,135 Special mention - - - 594 2,020 9,715 - 12,329 Substandard - - - - - 545 - 545 Doubtful - - - - - - - - Total Agricultural $ 37,849 $ 71,367 $ 40,848 $ 51,039 $ 14,028 $ 175,527 $ 351,351 $ 742,009 Agricultural Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - Residential and home equity Pass $ 41,173 $ 62,505 $ 88,559 $ 78,810 $ 13,299 $ 70,339 $ 44,532 $ 399,217 Special mention - - - - - - - - Substandard - - - - - 765 - 765 Doubtful - - - - - - - - Total Residential and home equity $ 41,173 $ 62,505 $ 88,559 $ 78,810 $ 13,299 $ 71,104 $ 44,532 $ 399,982 Residential and home equity Current-period gross charge-offs $ - $ - $ - $ - $ - $ 14 $ - $ 14 Construction Pass $ - $ 2,500 $ - $ - $ 1,575 $ - $ 208,287 $ 212,362 Special mention - - - - - - - - Substandard - - - - - - - - Doubtful - - - - - - - - Total construction $ - $ 2,500 $ - $ - $ 1,575 $ - $ 208,287 $ 212,362 Construction Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - Total Real estate $ 200,440 $ 307,938 $ 351,115 $ 273,351 $ 96,407 $ 510,191 $ 929,839 $ 2,669,281 Commercial & industrial Pass $ 49,162 $ 25,795 $ 21,695 $ 7,193 $ 4,123 $ 6,674 $ 371,797 $ 486,439 Special mention 2,500 27 4,903 466 - - 4,562 12,458 Substandard - - - - - 476 - 476 Doubtful - - - - - - - - Total Commercial & industrial $ 51,662 $ 25,822 $ 26,598 $ 7,659 $ 4,123 $ 7,150 $ 376,359 $ 499,373 Commercial & industrial Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - Agricultural Pass $ 3,013 $ 4,585 $ 2,296 $ 688 $ 1,026 $ 2,116 $ 296,772 $ 310,496 Special mention - 52 75 - - - 3,109 3,236 Substandard - - - - 5 - - 5 Doubtful - - - - - - - - Total Agricultural $ 3,013 $ 4,637 $ 2,371 $ 688 $ 1,031 $ 2,116 $ 299,881 $ 313,737 Agricultural Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - 20 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 3—Loans and Leases—Continued December 31, 2023 Term Loans Amortized Cost Basis by Origination Year (Dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Total Net loans and leases held for investment Commercial leases Pass $ 81,287 $ 31,954 $ 10,786 $ 9,514 $ 4,667 $ 28,872 $ - $ 167,080 Special mention - - - - 6 - - 6 Substandard - - - - - - - - Doubtful - - - - - - - - Total Commercial leases $ 81,287 $ 31,954 $ 10,786 $ 9,514 $ 4,673 $ 28,872 $ - $ 167,086 Commercial leases Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - Consumer and other Pass $ 1,650 $ 930 $ 375 $ 48 $ 45 $ 1,400 $ 588 $ 5,036 Special mention - - - - - - - - Substandard 152 - - - - 24 - 176 Doubtful - - - - - - - - Total Consumer and other $ 1,802 $ 930 $ 375 $ 48 $ 45 $ 1,424 $ 588 $ 5,212 Consumer and other Current-period gross charge-offs $ 41 $ 3 $ - $ - $ - $ 2 $ - $ 46 Total net loans and leases Pass $ 335,552 $ 368,807 $ 386,267 $ 290,200 $ 104,248 $ 536,012 $ 1,597,396 $ 3,618,482 Special mention 2,500 2,474 4,978 1,060 2,026 11,931 9,271 34,240 Substandard 152 - - - 5 1,810 - 1,967 Doubtful - - - - - - - - Total net loans and leases $ 338,204 $ 371,281 $ 391,245 $ 291,260 $ 106,279 $ 549,753 $ 1,606,667 $ 3,654,689 Total current-period gross charge-offs $ 41 $ 3 $ - $ - $ - $ 16 $ - $ 60 Certain directors and executive officers of the Company are defined as related parties. These related parties, including their immediate families and companies in which they are principal owners, were loan customers of the Bank during the three months ended March 31, 2024 and year ended December 31, 2023. Such loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with borrowers not related to the Company. These loans did not involve more than the normal risk of collectibility or have other unfavorable features. A summary of the changes in those loans is as follows: March 31, December 31, (Dollars in thousands) 2024 2023 Balance at beginning of the period $ 17,035 $ 17,521 New loans or advances during year 250 1,706 Repayments ( 89 ) ( 2,192 ) Balance at end of period $ 17,196 $ 17,035 21 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 3—Loans and Leases—Continued A loan or lease is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. When management determines that foreclosure is probable, expected credit losses for collateral dependent loans or leases are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. The collateral on the loans and leases is a significant portion of what secures the collateral dependent loans or leases and significant changes to the fair value of the collateral can impact the ACL. During the three months ended March 31, 2024, there were no significant changes to the collateral that secures the collateral dependent loans, whether due to general deterioration or with credit quality indicators like appraisal value. The following tables present the amortized cost basis for collateral dependent loans and leases by type as of March 31, 2024 and December 31, 2023, respectively: March 31, 2024 (Dollars in thousands) Real Estate Vehicles and Equipment Total Collateral dependent loans and leases Real estate: Commercial $ - $ - $ - Agricultural 550 - 550 Residential and home equity 642 - 642 Construction - - - Total real estate 1,192 - 1,192 Commercial & industrial - 450 450 Agricultural - - - Commercial leases - - - Consumer and other - - - Total gross loans and leases $ 1,192 $ 450 $ 1,642 December 31, 2023 (Dollars in thousands) Real Estate Vehicles and Equipment Total Collateral dependent loans and leases Real estate: Commercial $ 1,517 $ - $ 1,517 Agricultural 6,118 - 6,118 Residential and home equity 1,607 - 1,607 Construction - - - Total real estate 9,242 - 9,242 Commercial & industrial - 473 473 Agricultural - 5 5 Commercial leases - - - Consumer and other - 164 164 Total gross loans and leases $ 9,242 $ 642 $ 9,884 22 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 3—Loans and Leases—Continued Changes in the allowance for credit losses are as follows: For the Three Months Ended March 31, 2024 (Dollars in thousands) Commercial & Agricultural R/E Construction Residential & Home Equity Commercial & Agricultural Commercial Leases Consumer & Other Total Allowance for credit losses: Balance at beginning of period $ 33,837 $ 4,432 $ 7,770 $ 22,252 $ 6,537 $ 137 $ 74,965 Provision for/(recapture of) for credit losses ( 46 ) 184 ( 57 ) ( 419 ) 386 ( 48 ) - Charge-offs - - - - - ( 10 ) ( 10 ) Recoveries - - 8 18 - 37 63 Net (charge-offs) / recoveries - - 8 18 - 27 53 Balance at end of period $ 33,791 $ 4,616 $ 7,721 $ 21,851 $ 6,923 $ 116 $ 75,018 Year Ended December 31, 2023 (Dollars in thousands) Commercial & Agricultural R/E Construction Residential & Home Equity Commercial & Agricultural Commercial Leases Consumer & Other Total Allowance for credit losses: Balance at beginning of year $ 32,551 $ 3,026 $ 7,508 $ 21,705 $ 1,924 $ 171 $ 66,885 Provision for/(recapture of) credit losses 1,116 1,406 211 423 4,613 ( 19 ) 7,750 Charge-offs - - ( 14 ) - - ( 46 ) ( 60 ) Recoveries 170 - 65 124 - 31 390 Net (charge-offs) / recoveries 170 - 51 124 - ( 15 ) 330 Balance at end of year $ 33,837 $ 4,432 $ 7,770 $ 22,252 $ 6,537 $ 137 $ 74,965 Note 4—Deposits Certificates of deposit greater than and less than or equal to the FDIC insurance limit of $250,000 are summarized as follows: (Dollars in thousands) March 31, 2024 December 31, 2023 Certificates of deposit: Certificates of deposit less than or equal to $250,000 $ 399,576 $ 325,798 Certificates of deposit greater than $250,000 477,886 318,830 Total certificates of deposit $ 877,462 $ 644,628 Scheduled maturities for certificates of deposit are as follows: (Dollars in thousands) Amount 2024 $ 730,301 2025 139,979 2026 5,109 2027 1,066 2028 954 Thereafter 53 Total certificates of deposit $ 877,462 23 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 5—Short-term borrowings As of March 31, 2024 and December 31, 2023, committed lines of credit arrangements totaling $ 1.9 billion and $ 2.2 billion, respectively, were available to the Company from unaffiliated banks, respectively. The average Federal Funds interest rate as of March 31, 2024 was 5.50 %. The Company is a member of the FHLB of San Francisco and has a committed credit line of $ 769.4 million, which is secured by $ 1.3 billion in various real estate loans and investment securities pledged as collateral. Borrowings generally provide for interest at the then current published rate, which was 5.63 % as of March 31, 2024. At March 31, 2024 there were $ 100.0 million in advances from the FHLB at a rate of 5.64 % with a maturity date of April 26, 2024 and $ 100.0 million in the form of a letter of credit to collateralize the State of California certificate of deposit. There were no outstanding advances on the above borrowing facilities as December 31, 2023. The Company has $ 1.6 billion in pledged loans with the FRB. As of March 31, 2024, the Company’s overnight borrowing capacity using the primary credit facilities from the Fed account was $ 1.2 billion . The borrowing rate was 5.50 % as of March 31, 2024. There were no outstanding advances on the above borrowing facilities at March 31, 2024 and December 31, 2023. Note 6—Employee Benefit Plans Executive Retirement Plan The Company, through the Bank, sponsors an Executive Retirement Plan (“ERP”) for certain executive level employees. The ERP is a non-qualified deferred compensation plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by the Internal Revenue Service. The ERP is comprised of: (1) a Performance Component which makes contributions based upon long-term cumulative profitability and increase in market value of the Company; (2) a Salary Component which makes contributions based upon participant salary levels; and (3) an Equity Component for which contributions are discretionary and subject to Board of Directors approval. The Company maintains a Rabbi Trust to fund, in part, the ERP. The Rabbi Trust is an irrevocable grantor trust to which the Company may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. The Company may not use the assets of the Rabbi Trust for any purpose other than meeting its obligations under the ERP; however, the assets of the Rabbi Trust remain subject to the claims of its creditors and are included in the consolidated financial statements. The Company contributes cash to the Rabbi Trust from time to time for the sole purpose of funding the ERP. The Rabbi Trust will use any cash the Company contributes to purchase shares of common stock of the Company, and other financial instruments, on the open market. ERP contributions are invested in a mix of financial instruments; however, the Equity Component contributions are invested primarily in common stock of the Company. The Company expensed $ 2.2 million to the ERP during the three months ended March 31, 2024 and $ 2.3 million during the three months ended March 31, 2023. The Company’s carrying value of the liability under the ERP was $ 57.7 million as of March 31, 2024 and $ 57.5 million as of December 31, 2 023 , which is included in other liabilities on the balance sheet. The Company’s shares of common stock held as investments in the Rabbi Trust of the ERP as of March 31, 2024 and December 31, 2023 totaled 49,044 and 49,276 with an historical cost basis of $ 31.7 million and $ 31.6 million , respectively. All amounts have been fully funded into the Rabbi Trust as of March 31, 2024 and December 31, 2023. The consolidated investments held in the Rabbi Trust are recorded at fair value with changes in unrealized gains or losses recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income. 24 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 6 —Employee Benefit Plans—Continued Net gains on ERP plan investments were $ 1.0 million and $ 0.7 million at March 31, 2024 and 2023, respectively. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Senior Management Retention Plan The Company, through the Bank, sponsors a Senior Management Retention Plan (“SMRP”) for certain senior level employees. The SMRP is a non-qualified deferred compensation plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by the Internal Revenue Service. All contributions are discretionary and subject to the Board of Directors approval. The Company maintains a Rabbi Trust to fund, in part, the SMRP. The Rabbi Trust is an irrevocable grantor trust to which the Company may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. The Company may not use the assets of the Rabbi Trust for any purpose other than meeting its obligations under the SMRP; however, the assets of the Rabbi Trust remain subject to the claims of its creditors and are included in the consolidated financial statements. The Company contributes cash to the Rabbi Trust from time to time for the sole purpose of funding the SMRP. The Rabbi Trust will use any cash the Company contributes to purchase shares of common stock of the Company, and other financial instruments, on the open market. Contributions to the SMRP are invested primarily in common stock of the Company. The Company expensed $ 1.1 million to the SMRP during the three months ended March 31, 2024 and $ 1.2 million for three months ended March 31, 2023. The Company’s carrying value of the liability under the SMRP was $ 17.8 million as of March 31, 2024 and $ 16.9 million as of December 31, 202 3 , which is included in other liabilities on the balance sheet. The Company’s shares of stock held as investments in the Rabbi Trust of the SMRP as of March 31, 2024 and December 31, 2023 totaled 18,734 and 17,806 shares with an historical cost basis of $ 13.8 million and $ 12.8 million , respectively. All amounts have been fully funded into the Rabbi Trust as of March 31, 2024 and December 31, 2023. The consolidated investments held in the Rabbi Trust are recorded at fair value with changes recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income. Net gains on SMRP plan investments were $ 0.2 million and $ 0.2 million at March 31, 2024 and 2023, respectively. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Note 7—Fair Value The Company uses fair value measurements to record fair value adjustments to certain financial and non-financial assets and liabilities and to determine fair value disclosures. Various financial instruments such as available-for-sale securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets and liabilities on a non-recurring basis, such as collateral dependent loans and other real estate owned. These non-recurring fair value adjustments typically involve lower of cost or fair value accounting or write-down of individual assets. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. For accounting disclosure purposes, a three-level valuation hierarchy of fair value measurements has been established. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: 25 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 7—Fair Value—Continued • Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. • Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs that are observable for the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds). • Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value. These may be internally developed, using the Company’s best information and assumptions that a market participant would consider. The carrying amounts and estimated fair values of financial instruments held by the Company are set forth below. Fair value estimates are made at a specific point in time based on relevant market information. They do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for many of the Company’s financial instruments, fair value estimates are based on judgements regarding future expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties, and cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. Securities classified as available-for-sale are reported at fair value on a recurring basis utilizing Level 1, 2 and 3 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The Company does not record all loans and leases at fair value on a recurring basis. However, from time to time, a loan or lease is considered collateral dependent and an allowance for credit losses is established. Once a loan or lease is identified as collaterally dependent, management measures impairment in accordance FASB ASC Topic 326. These appraisals may utilize a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take into account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 non-recurring collateral dependent loans is primarily the sales comparison approach less estimated selling costs. 26 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 7—Fair Value—Continued Other Real Estate Owned (“OREO”) is reported at fair value on a non-recurring basis. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take into account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 non-recurring OREO is primarily the sales comparison approach less estimated selling costs. The following tables presents information about the Bank’s assets and liabilities measured at fair value on a recurring and non-recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Bank to determine such fair value for the periods indicated. March 31 , 2024 Fair Value Measurements (Dollars in thousands) Carrying Amount Level 1 Level 2 Level 3 Total Fair Value Fair valued on a recurring basis: Available-for-sale securities U.S. Government-sponsored securities $ 3,048 $ - $ 3,048 $ - $ 3,048 Mortgage-backed securities 216,093 - 216,093 - 216,093 Collateralized mortgage obligations 5,654 - 5,654 - 5,654 Corporate securities 14,751 - 14,751 - 14,751 Other 310 - 310 - 310 Fair valued on a non-recurring basis: Collateral dependent loans $ 1,642 $ - $ - $ 1,642 $ 1,642 Other real estate owned 873 - - 873 873 December 31, 2023 Fair Value Measurements (Dollars in thousands) Carrying Amount Level 1 Level 2 Level 3 Total Fair Value Fair valued on a recurring basis: Available-for-sale securities U.S. Government-sponsored securities $ 3,224 $ - $ 3,224 $ - $ 3,224 Mortgage-backed securities 163,838 - 163,838 - 163,838 Collateralized mortgage obligations 535 - 535 - 535 Corporate securities 14,605 - 14,605 - 14,605 Other 310 - 310 - 310 Fair valued on a non-recurring basis: Collateral dependent loans $ 9,884 $ - $ - $ 9,884 $ 9,884 Other real estate owned 873 - - 873 873 Collateral dependent loans While the overall loan portfolio is not carried at fair value, the Company periodically records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral dependent loans when establishing the allowance for credit losses on loans. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. In determining the value of real estate collateral, the Company relies on external and internal appraisals of property values depending on the size and complexity of the real estate collateral. The Company maintains a list of qualified property appraisers who review appraisal reports for reasonableness. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists. Values of all loan collateral are regularly reviewed by credit administration. Unobservable inputs to these measurements, which include estimates and judgments often used in conjunction with appraisals, are not readily quantifiable. These measurements are classified as Level 3. 27 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 7—Fair Value—Continued The following tables summarize the carrying amount and estimated fair values of the Company’s financial assets and liabilities not carried at fair value, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated. March 31 , 2024 Fair Value Measurements (Dollars in thousands) Carrying Amount Level 1 Level 2 Level 3 Total Fair Value Financial Assets: Cash and cash equivalents $ 738,397 $ 738,397 $ - $ - $ 738,397 Held-to-maturity securities 806,521 - 607,853 57,387 665,240 Non-marketable securities, at cost 15,549 - 15,549 - 15,549 Loans and leases, net 3,621,277 - - 3,402,777 3,402,777 Financial Liabilities: Total deposits $ 4,959,589 $ - $ 4,082,127 $ 871,395 $ 4,953,522 Federal Home Loan Bank advances 100,000 - - 100,003 100,003 Subordinated debentures 10,310 - 12,418 - 12,418 December 31, 2023 Fair Value Measurements (Dollars in thousands) Carrying Amount Level 1 Level 2 Level 3 Total Fair Value Financial Assets: Cash and cash equivalents $ 410,642 $ 410,642 $ - $ - $ 410,642 Held-to-maturity securities 817,238 - 629,051 58,192 687,243 Non-marketable securities, at cost 15,549 - 15,549 - 15,549 Loans and leases, net 3,579,724 - - 3,369,255 3,369,255 Financial Liabilities: Total deposits $ 4,668,095 $ - $ 4,023,467 $ 639,315 $ 4,662,782 Subordinated debentures 10,310 - 12,763 - 12,763 Non-marketable securities include FHLB stock, Pacific Coast Bankers’ Bank (“PCBB”) stock and The Independent BankersBank (“TIB”) stock which are recorded at cost. Ownership of these stocks is restricted to member banks and the securities do not have a readily determinable market value. Purchases and sales of these securities are at par value with the issuer. The fair value of these investments is equal to the carrying amount. 28 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 8—Commitments and Contingencies In the normal course of business, the Company enters into financial instruments with off balance sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These instruments include commitments to extend credit, letters of credit, and other types of financial guarantees. The Company had the following off balance sheet commitments as of the dates indicated. (Dollars in thousands) March 31, 2024 December 31, 2023 Commitments to extend credit, including unsecured commitments of $ 20,085 and $ 19,858 as of March 31, 2024 and December 31, 2023, respectively $ 1,074,963 $ 1,150,142 Stand-by letters of credit, including unsecured commitments of $ 5,485 and $ 7,010 as of March 31, 2024 and December 31, 2023, respectively 14,889 16,858 The Company’s exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer’s creditworthiness are performed on a case-by-case basis. The estimated exposure to loss from these commitments is included in the reserve for unfunded loan commitments, which amounted to $ 3.7 million at March 31, 2024 and December 31, 2023. Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third-party. Outstanding standby letters of credit have maturity dates ranging from 1 to 60 months with final expiration in August 2028. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company has commitments to fund investments in LIHTC partnerships and limited liability companies. At March 31, 2024 and December 31, 2023, the balance of the investments in LIHTC was $ 35.8 million and $ 36.5 million, respectively. These balances are reflected in the other assets line on the consolidated balance sheets. Total unfunded commitments related to the investments in LIHTC totaled $ 13.7 million and $ 15.5 million at March 31, 2024 and December 31, 2023, respectively. These balances are reflected in the other liabilities line on the consolidated balance sheets. The Company expects to fulfill these commitments through 2039. Additionally, during the three months ended March 31, 2024 and the year ended December 31, 2023, the Company recognized tax credits from its investments in LIHTC of $ 1.1 million and $ 3.6 million, respectively. In the ordinary course of business, the Company becomes involved in litigation arising out of its normal business activities. Management, after consultation with legal counsel, believes that the ultimate liability, if any, resulting from the disposition of such claims would not be material in relation to the financial position of the Company. The Company may be required to maintain average reserves on deposit with the FRB primarily based on deposits outstanding. Reserve requirements are offset by the Company’s vault cash and deposit balances maintained with the FRB. 29 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion is intended to provide a more comprehensive review of the Company’s operating results and financial condition. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the accompanying Notes to Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q included in “Part I. Item 1. Financial Statements.” FORWARD-LOOKING INFORMATION This Quarterly Report on Form 10–Q may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act. These forward-looking statements reflect our current views and are not historical facts. These statements may include statements regarding projected performance for periods following the date of this report. These statements can generally be identified by use of phrases such as “believe,” “expect,” “will,” “seek,” “should,” “anticipate,” “estimate,” “intend,” “plan,” “target,” “project,” “commit” or other words of similar import. Similarly, statements that describe our future financial condition, results of operations, objectives, strategies, plans, goals or future performance and business are also forward-looking statements. Statements that project future financial conditions, results of operations, and shareholder value are not guarantees of performance and many of the factors that will determine these results and values are beyond our ability to control or predict. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and other parts of this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (“Form 10-K”), could cause actual results to differ materially from those anticipated in these forward-looking statements. The following is a non-exclusive list of factors which could cause actual results to differ materially from forward-looking statements in this Quarterly Report on Form 10-Q: ◾ changes in general economic conditions, either nationally, in California, or in our local markets; ◾ inflation, changes in interest rates, securities market volatility and monetary fluctuations; ◾ increases in competitive pressures among financial institutions and businesses offering similar products and services; ◾ risks associated with negative events in the banking industry in the past year, and any legislative and/or bank regulatory actions, that could potentially impact earnings, liquidity and/or the availability of capital or which could increase the cost of our deposit insurance by the FDIC; ◾ higher defaults in our loan and lease portfolio than we expect; ◾ changes in management’s estimate of the adequacy of the allowance for credit losses; ◾ risks associated with our growth and expansion strategy and related costs; ◾ increased lending risks associated with our high concentration of real estate loans; ◾ legislative or regulatory changes or changes in accounting principles, policies or guidelines; ◾ technological changes; ◾ operational risks, including processing, information systems, cybersecurity, vendor problems, business interruption, and fraud; ◾ regulatory or judicial proceedings; and ◾ other factors and risks including those described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed. Please take into account that forward-looking statements speak only as of the date of this Form 10-Q (or documents incorporated by reference, if applicable). 30 Table of Contents The Company does not undertake any obligation to publicly correct or update any forward-looking statements if it later becomes aware that actual results are likely to differ materially from those expressed in such forward-looking statements, except as required by law. Overview Farmers & Merchants Bancorp (the “Company” or “FMCB”) is a Delaware registered bank holding company organized in 1999. As a registered bank holding company, FMCB is subject to regulation, supervision, and examination by the Federal Reserve and by the California Department of Financial Protection and Innovation (“DFPI”). The Company’s principal business is to serve as a holding company for Farmers & Merchants Bank of Central California (the “Bank” or “F&M Bank”) and for other banking or banking related subsidiaries, which the Company may establish or acquire. Over 107 years ago, August 1, 1916, marked the first day of business for Farmers & Merchants Bank (the “Bank”). The Bank was incorporated under the laws of the State of California and licensed as a state-chartered bank. The Bank’s first venture out of Lodi occurred when the Galt office opened in 1948. Since then the Bank has opened full-service branches in Linden, Manteca, Riverbank, Modesto, Sacramento, Elk Grove, Turlock, Hilmar, Stockton, Merced, Walnut Creek, Concord, Walnut Grove, Oakland and Napa. As a legal entity separate and distinct from its subsidiary, the Company’s principal source of funds is, and will continue to be, dividends paid by and other funds received from the Bank. Legal limitations are imposed on the amount of dividends that may be paid and loans that may be made by the Bank to the Company. In March 2002, F & M Bancorp, Inc. was created to protect the name “F & M Bank.” During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name, “F & M Bank,” as part of a larger effort to enhance the Company’s image and build brand name recognition. Since 2002, the Company has converted all of its daily operating and image advertising to the “F & M Bank” name and the Company’s logo, slogan and signage were redesigned to incorporate the trade name, “F & M Bank.” The Company’s outstanding common stock as of March 31, 2024, consisted of 742,770 shares of common stock, $0.01 par value. No shares of preferred stock were issued or outstanding as of March 31, 2024. The common stock of the Company is not widely held or listed on any exchange. However, trades are reported on the OTCQX under the symbol “FMCB.” The primary source of funding for the Company’s growth has been the generation of core deposits, which the Company raises through its existing branch locations, newly opened branch locations, or through acquisitions. Loan growth over the years is the result of organic growth generated by the Company’s seasoned relationship managers and supporting associates who provide outstanding service and responsiveness to the Company’s clients. The Company’s results of operations are largely dependent on net interest income. Net interest income is the difference between interest income earned on interest earning assets, which are comprised of loans and leases, investment securities, short-term investments and interest bearing deposits at other banks, and the interest the Company pays on interest bearing liabilities, which are primarily deposits, and, to a lesser extent, other borrowings. Management strives to match the re-pricing characteristics of the interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve. The Company measures its performance by calculating the net interest margin, return on average assets, return on average equity and the efficiency ratio. Net interest margin is calculated by dividing net interest income, which is the difference between interest income on interest earning assets and interest expense on interest bearing liabilities, by average interest earning assets. Net interest income is the Company’s largest source of revenue. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to affect net interest income. The return on average assets is calculated by dividing the Company’s net income by its total average assets and the return on average equity is calculated by dividing the Company’s net income by its shareholder equity. The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and non-interest income. 31 Table of Contents Critical Accounting Policies and Estimates Our accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. We identify critical policies and estimates as those that require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies and estimates relate to the allowance for credit losses on loans and leases held for investment, investment securities, the carrying value of goodwill and other intangible assets, fair value measurements and the realization of deferred income tax assets and liabilities. Our critical accounting policies and estimates are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Form 10-K. Impact of Recently Issued Accounting Standards See Note 1. “Basis of Presentation and Significant Accounting Policies” to the Unaudited Consolidated Financial Statements in “Item 1. Financial Information” in this Quarterly Report on Form 10-Q. Non-GAAP Measurements We use certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies. We used the following non-GAAP measures in this Form 10-Q: • Tangible common equity ratio and tangible book value per common share: Given that the use of these measures is prevalent among banking regulators, investors, and analysts, we disclose them in addition to the related GAAP measures of return on average equity and book value per common share. The reconciliations of these non-GAAP measurements to the GAAP measurements are presented in the following tables for and as of the periods presented. Tangible Common Equity Ratio and Tangible Book Value Per Common Share March 31, 2024 December 31, 2023 March 31, 2023 (Dollars in thousands, except per share data) Shareholders' equity $ 565,217 $ 549,755 $ 508,902 Less: Intangible assets 13,282 13,419 13,849 Tangible common equity $ 551,935 $ 536,336 $ 495,053 Total Assets $ 5,714,573 $ 5,308,928 $ 5,133,771 Less: Intangible assets 13,282 13,419 13,849 Tangible assets $ 5,701,291 $ 5,295,509 $ 5,119,922 Tangible common equity ratio (1) 9.68 % 10.13 % 9.67 % Book value per common share (2) $ 760.96 $ 735.00 $ 667.04 Tangible book value per common share (3) $ 743.08 $ 717.05 $ 648.88 Common shares outstanding 742,770 747,971 762,931 (1) Tangible common equity divided by tangible assets (2) Total common equity divided by common shares outstanding. (3) Tangible common equity divided by common shares outstanding. 32 Table of Contents Results of Operations The following discussion and analysis is intended to provide a better understanding of the Company’s and its subsidiaries’ performance during each of the three month periods ended March 31, 2024 and 2023, and at December 31, 2023 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 ended December 31, 2023, and 2022 can be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2023 Annual Report on Form 10-K filed with the SEC on March 14, 2024. Factors that determine the level of net income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, fee income, non-interest expense, the level of non-performing loans and other non-earning assets, and the amount of non-interest bearing liabilities supporting earning assets. Non-interest income includes card processing fees, service charges on deposit accounts, bank-owned life insurance income, gains/losses on the sale of investment securities, and gains/losses on deferred compensation plan investments. Non-interest expense consists primarily of salaries and employee benefits, cost of deferred compensation benefits, occupancy, data processing, deposit insurance, marketing, professional services, and other expenses. Earnings Performance The following table presents performance metrics for the periods indicated: Three Months Ended (dollars in thousands, except per share amounts) March 31, 2024 December 31, 2023 March 31, 2023 Earnings Summary: Interest income $ 66,641 $ 67,392 $ 59,632 Interest expense 14,928 13,592 3,910 Net interest income 51,713 53,800 55,722 Provision for credit losses - 2,350 1,500 Non-interest income 5,075 2,401 3,460 Non-interest expense 25,521 24,866 28,183 Income before taxes 31,267 28,985 29,499 Income tax expense 8,544 7,560 5,952 Net Income $ 22,723 $ 21,425 $ 23,547 Per Common Share Data: Diluted earnings per common share $ 30.56 $ 28.55 $ 30.80 Book value per common share $ 760.96 $ 735.00 $ 667.04 Tangible book value per common share (1) $ 743.08 $ 717.05 $ 648.88 Performance Ratios: Return on average assets 1.71 % 1.63 % 1.80 % Return on average equity 16.33 % 16.54 % 18.93 % Net interest margin (tax equivalent) 4.14 % 4.24 % 4.55 % Yield on average loans and leases (tax equivalent) 6.09 % 6.10 % 5.69 % Cost of average total deposits 1.27 % 1.14 % 0.32 % Efficiency ratio 44.94 % 44.24 % 47.62 % Loan-to-deposit ratio 74.73 % 78.52 % 75.73 % Percentage of checking deposits to total deposits 49.39 % 51.76 % 55.89 % Capital Ratios Bancorp: Common equity tier 1 capital to risk-weighted assets 12.73 % 12.30 % 12.19 % Tier 1 capital to risk-weighted assets 12.95 % 12.53 % 12.43 % Risk-based capital to risk-weighted assets 14.21 % 13.78 % 13.68 % Tier 1 leverage capital ratio 10.83 % 10.38 % 9.94 % Tangible common equity ratio (1) 9.68 % 10.13 % 9.67 % (1) See "Non-GAAP Measurements" 33 Table of Contents Average Balance and Yields The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield, cost and net interest margin information for the periods presented. Average balances are derived from daily balances. Three Months Ended March 31, 2024 2023 (Dollars in thousands) Average Balance Interest Income / Expense Average Yield / Rate Average Balance Interest Income / Expense Average Yield / Rate ASSETS Interest earnings deposits in other banks and federal funds sold $ 332,575 $ 4,530 5.48 % $ 521,147 $ 5,961 4.64 % Investment Securities: (1) Taxable securities 969,234 5,708 2.37 % 967,699 4,805 2.01 % Non-taxable securities (2) 63,079 762 4.83 % 57,513 704 4.90 % Total investment securities 1,032,313 6,470 2.52 % 1,025,212 5,509 2.18 % Loans: (3) Real estate: Commercial 1,322,337 17,622 5.36 % 1,280,959 16,649 5.27 % Agricultural 725,078 10,322 5.73 % 715,756 9,614 5.45 % Residential and home equity 401,578 4,792 4.80 % 387,369 4,095 4.29 % Construction 225,430 3,898 6.95 % 169,913 2,937 7.01 % Total real estate 2,674,423 36,634 5.51 % 2,553,997 33,295 5.29 % Commercial & industrial 499,071 9,261 7.46 % 465,383 7,624 6.64 % Agricultural 313,653 6,479 8.31 % 280,467 5,204 7.52 % Commercial leases 168,526 2,946 7.03 % 116,948 1,805 6.26 % Consumer and other 5,619 88 6.30 % 5,580 80 5.81 % Total loans and leases 3,661,292 55,408 6.09 % 3,422,375 48,008 5.69 % Non-marketable securities 15,549 388 10.04 % 15,549 301 7.85 % Total interest earning assets 5,041,729 66,796 5.33 % 4,984,283 59,779 4.86 % Allowance for credit losses (75,448 ) (67,691 ) Non-interest earning assets 339,939 311,140 Total average assets $ 5,306,220 $ 5,227,732 LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing deposits: Demand $ 914,618 888 0.39 % $ 1,068,504 444 0.17 % Savings and money market accounts 1,618,678 7,186 1.79 % 1,561,684 2,503 0.65 % Certificates of deposit greater than $250,000 378,714 3,094 3.29 % 147,704 487 1.34 % Certificates of deposit less than $250,000 338,031 3,477 4.14 % 206,214 280 0.55 % Total interest bearing deposits 3,250,041 14,645 1.81 % 2,984,106 3,714 0.50 % Short-term borrowings 5,497 62 4.54 % 3 - 0.00 % Subordinated debentures 10,310 221 8.62 % 10,310 196 7.71 % Total interest bearing liabilities 3,265,848 14,928 1.84 % 2,994,419 3,910 0.53 % Non-interest bearing deposits 1,403,384 1,663,152 Total funding 4,669,232 14,928 1.29 % 4,657,571 3,910 0.34 % Other non-interest bearing liabilities 80,276 72,710 Shareholders' equity 556,712 497,451 Total average liabilities and shareholders' equity $ 5,306,220 $ 5,227,732 Net interest income and margin (4) $ 51,868 4.14 % $ 55,869 4.55 % Interest rate spread 3.49 % 4.33 % Tax equivalent adjustment (155 ) (147 ) Net interest income $ 51,713 4.13 % $ 55,722 4.53 % (1) Excludes average unrealized losses of $18.5 million and $28.2 million for the three months ended March 31, 2024, and 2023, respectively, which are included in non-interest earning assets. (2) Yields and interest income are calculated on a fully taxable equivalent basis using the current statutory federal tax rate of 21%. (3) Loan interest income includes loan fees of $1.4 million and $2.0 million for the three months ended March 31, 2024 and 2023, respectively. (4) Net interest margin is computed by dividing net interest income by average interest earning assets. 34 Table of Contents Interest-bearing deposits with banks and FRB balances are earning assets available to the Company. Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 5.48% and 4.64% for the three months ended March 31, 2024 and 2023, respectively. The increase was primarily the result of the Federal Reserve increasing rates by 75 basis points from March 2023 to July 2023. Average interest-bearing deposits with banks was $333 million and $521 million for the three months ended March 31, 2024 and 2023, respectively. Interest income on interest-bearing deposits with banks was $4.5 million and $6.0 million for the three months ended March 31, 2024 and 2023, respectively. The investment portfolio is also a component of the Company’s earning assets. Historically, the Company invested primarily in: (1) mortgage-backed securities issued by government-sponsored entities; (2) debt securities issued by the U.S. Treasury, government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, at certain times the Company has selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 7 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity. Since the risk factor for these types of investments is generally lower than that of loans and leases, the yield earned on investments is generally less than that of loans and leases. Average total investment securities were $1.0 billion for the three months ended March 31, 2024 and 2023, respectively. The average yield on total investment securities was 2.52% and 2.18% for the three months ended March 31, 2024 and 2023, respectively. The increase in the yield reflects the increase in yields on purchases over the last year. Average loans and leases held for investment were $3.7 billion and $3.4 billion for the three months ended March 31, 2024 and 2023, respectively. The average yield on the loan and lease portfolio was 6.09% and 5.69% for the three months ended March 31, 2024 and 2023, respectively. The increase in the loan yield reflects the increase in market interest rates over the last year. Average interest-bearing deposits were $3.3 billion and $3.0 billion for the three months ended March 31, 2024 and 2023, respectively. The average rate paid on interest-bearing deposits was 1.81% and 0.50% for the three months ended March 31, 2024 and 2023, respectively. Total interest expense on interest-bearing deposits was $14.6 million and $3.7 million for the three months ended March 31, 2024 and 2023, respectively, with the increases driven by increases in short-term market interest rates from March 2023 to July 2023 and customers seeking higher rates on deposit products. The average rate paid on total funding costs was 1.29% and 0.34% for the three months ended March 31, 2024 and 2023, respectively. 35 Table of Contents Rate/Volume Analysis The following table shows the change in interest income and interest expense and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates. For purposes of this table, the change in interest due to both volume and rate has been allocated to change due to volume and rate in proportion to the relationship of absolute dollar amounts of change in each. Three Months Ended March 31, 2024 compared with 2023 Increase (Decrease) Due to: (Dollars in thousands) Volume Rate Net Interest income: Interest earnings deposits in other banks and federal funds sold $ (6,787 ) $ 5,356 $ (1,431 ) Investment securities: Taxable securities 8 895 903 Non-taxable securities 118 (60 ) 58 Total investment securities 126 835 961 Loans: Real estate: Commercial 640 333 973 Agricultural 144 564 708 Residential and home equity 164 534 698 Construction 1,123 (162 ) 961 Total real estate 2,071 1,269 3,340 Commercial & industrial 605 1,032 1,637 Agricultural 678 597 1,275 Commercial leases 892 249 1,141 Consumer and other 1 7 8 Total loans and leases 4,247 3,154 7,401 Non-marketable securities - 87 87 Total interest income (2,414 ) 9,432 7,018 Interest expense: Interest bearing deposits: Demand (424 ) 868 444 Savings and money market accounts 96 4,587 4,683 Certificates of deposit greater than $250,000 1,350 1,257 2,607 Certificates of deposit less than $250,000 286 2,911 3,197 Total interest bearing deposits 1,308 9,623 10,931 Short-term borrowings - 62 62 Subordinated debentures - 25 25 Total interest expense 1,308 9,710 11,018 Net interest income $ (3,722 ) $ (278 ) $ (4,000 ) 36 Table of Contents Comparison of Results of Operations for the Three Months Ended March 31, 2024 and 2023 Three Months Ended March 31, $ Better / (Worse) $ Better / (Worse) (Dollars in thousands) 2024 2023 Selected Income Statement Information: Interest income $ 66,641 $ 59,632 $ 7,009 11.75 % Interest expense 14,928 3,910 (11,018 ) (281.79 %) Net interest income 51,713 55,722 (4,009 ) (7.19 %) Provision for credit losses - 1,500 1,500 N/A Net interest income after provision for credit losses 51,713 54,222 (2,509 ) (4.63 %) Non-interest income 5,075 3,460 1,615 46.68 % Non-interest expense 25,521 28,183 2,662 9.45 % Income before income tax expense 31,267 29,499 1,768 5.99 % Income tax expense 8,544 5,952 (2,592 ) (43.55 %) Net income $ 22,723 $ 23,547 $ (824 ) (3.50 %) For the three months ended March 31, 2024 and 2023, net income was $22.7 million compared with $23.5 million, respectively. The decrease in net income was primarily the result of lower net interest income of $4.0 million and a higher income tax expense of $2.6 million. The first quarter of 2023 benefited from cash proceeds from a non-taxable death benefited on bank-owned life insurance (“BOLI”) of $4.3 million which was partially offset by a $5.7 million loss on the sale of securities based on the decision to reposition the securities portfolio given the interest rate environment. This decrease was offset by an increase in non-interest income of $1.6 million, no provision for credits losses compared to $1.5 million in 2023 and a decrease in non-interest expense of $2.7 million. Net Interest Income and Net Interest Margin For the three months ended March 31, 2024 and 2023, net interest income was $51.7 million compared with $55.7 million, respectively. The decrease is primarily the result of the net interest margin (tax equivalent basis) decreasing 41 basis points to 4.14% compared with 4.55% for the same period a year earlier. The decrease in the net interest margin was primarily the result of the increase in deposit costs due the interest rate environment as the federal funds rate increased 75 basis points from March through July of 2023 and customer expectations for higher rates on deposit products. The loan yield increased 40 basis points from 5.69% to 6.09% compared to the first quarter of 2023. The deposit yield increased 131 basis points from 0.50% to 1.81% and outpaced the increase in loan yield over the same period a year earlier. Provision for Credit Losses . The provision for credit losses in each period is a charge against earnings in that period. The provision is the amount required to maintain the allowance for credit losses at a level that, in management’s judgment, is adequate to absorb expected credit losses, over the life of the loans and leases, unfunded loan commitments and HTM securities portfolios. The Company had no provision for credit losses during the first three months of 2024 compared to a $1.5 million provision for credit losses the same period a year earlier. For the three month ended March 31, 2024 net recoveries were $53,000 compared to net recoveries of $188,000 for the same period a year earlier. 37 Table of Contents Non-interest Income Three Months Ended March 31, (Dollars in thousands) 2024 2023 $ Better / (Worse) % Better / (Worse) Non-interest Income: Card processing 1,629 1,591 $ 38 2.39 % Gain on BOLI death benefit - 4,346 (4,346 ) - Net gain on deferred compensation benefits 1,158 896 262 29.24 % Service charges on deposit accounts 748 634 114 17.98 % Increase in cash surrender value of BOLI 595 444 151 34.01 % Net loss on sale of securities available-for-sale - (5,686 ) 5,686 - Other 945 1,235 (290 ) (23.48 %) Total non-interest income $ 5,075 $ 3,460 $ 1,615 46.68 % Non-interest income increased $1.6 million, or 46.7%, to $5.1 million for the three months ended March 31, 2024 compared with $3.5 million for the same period a year earlier. The year-over-year increase in non-interest income was primarily due to no loss on sale of investment securities during 2024 compared to a $5.7 million loss on sale of investment securities during the first quarter of 2023 and no gain on BOLI death benefits in the first quarter of 2024 compared to $4.3 million gain in the first quarter of 2023. Excluding these items, non-interest income in the first quarter of 2023 would have been $4.8 million with a net increase in the first quarter of 2024 of $0.3 million. The Company recorded net gains on deferred compensation plan investments of $1.2 million for the three months ended March 31, 2024 compared with net gains of $0.9 million for the same period a year earlier. See Note 10, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2023 Form 10-K filed on March 14, 2024 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these investment gains/losses to be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no net-effect on the Company’s net income. Non-interest Expense Three Months Ended March 31, (Dollars in thousands) 2024 2023 $ Better / (Worse) % Better / (Worse) Non-interest Expense: Salaries and employee benefits 17,503 19,584 $ 2,081 10.63 % Data processing 1,455 1,260 (195 ) (15.48 %) Occupancy 1,232 1,180 (52 ) (4.41 %) Net gain on deferred compensation benefits 1,158 896 262 29.24 % Deposit insurance 712 692 (20 ) (2.89 %) Professional services 541 682 141 20.67 % Marketing 480 470 (10 ) (2.13 %) Other 2,440 3,419 979 28.63 % Total non-interest expense $ 25,521 $ 28,183 $ 2,662 9.45 % 38 Table of Contents Non-interest expense decreased $2.7 million, or 9.45%, to $25.5 million for the three months ended March 31, 2024 compared with $28.2 million for the same period a year ago. This year-over-year decrease was primarily comprised of a $2.1 million decrease in salaries and employee benefits and a $1.0 million decrease in other miscellaneous expenses. The decrease in salaries and employee benefits was due primarily to reduced discretionary compensation. The decrease in miscellaneous expenses was due primarily to the adoption of ASU 2023-02 which shifts the benefits of low-income housing tax credits to the income tax line under the proportional amortization method. For the first quarter of 2024 this amounted to $1.0 million. These decreases were partially offset by a $0.3 million increase in net gains on deferred compensation plan investments and a $0.2 million increase in data processing expenses. Net gains on deferred compensation plan obligations were $1.2 million for the three months ended March 31, 2024 compared with net gains of $0.9 million for the same respective period. See Note 10, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2023 Form 10-K filed on March 14, 2024 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these gains on obligations to be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no net-effect on the Company’s net income. Income Tax Expense For the three months ended March 31, 2024, income tax expense was $8.5 million compared to $6.0 million for the same period a year earlier. For the three months ended March 31, 2024, the effective tax rate was 27.33% compared to 20.18% for the same period a year earlier. The Company’s effective tax rate for the three months ended March 31, 2023 was lower than its historical effective tax rate primarily due to a non-taxable BOLI death benefit of $4.3 million recognized during the three months ended March 31, 2023. The Company’s effective tax rate can fluctuate from quarter to quarter due primarily to changes in the mix of taxable and tax-exempt earning sources. The effective rates were lower than the combined Federal and State statutory rate of 30% credits associated with low income housing tax credit investments (LIHTC); and tax-exempt interest income on municipal securities and loans. Balance Sheet Analysis Total assets were $5.7 billion at March 31, 2024 compared with $5.3 billion at December 31, 2023, an increase of $405.6 million or 7.64%. Loans held for investment were $3.7 billion at March 31, 2024, an increase of $41.6 million, or 1.14% compared with $3.7 billion at December 31, 2023. Total deposits were $5.0 billion at March 31, 2024 compared with $4.7 billion at December 31, 2023, an increase of $291.5 million or 6.24%. Our loan to deposit ratio was 74.73% and 78.52% as of March 31, 2024 and December 31, 2023, respectively. Cash and Cash Equivalents The Company’s cash and cash equivalents consist of interest bearing deposits with banks and overnight investments in Federal Reserve balances. Interest bearing deposits with banks consisted primarily of FRB deposits. Since balances at the FRB are effectively risk free, the Company elected to maintain its excess cash at the FRB. Interest bearing deposits with banks totaled $672.6 million at March 31, 2024 and $338.4 million at December 31, 2023. The increase was primarily due to steps taken to manage on-balance sheet liquidity which included $200.0 million in brokered deposits and $100.0 million in FHLB advances. The Company’s total cash and cash equivalents as of March 31, 2024 represented 12.9% of the Company’s total assets as compared to 7.7% as of December 31, 2023. Investment Securities The Company’s net investment portfolio increased by $46.6 million or 4.66% to $1.0 billion at March 31, 2024 compared to December 31, 2023. During the first quarter of 2024 the Company purchased $64.9 million of investment securities. The Company uses its investment portfolio to manage interest rate and liquidity risks. The Company's total investment portfolio as of March 31, 2024 represents 18.32% of the Company’s total assets as compared to 18.84% at December 31, 2023. 39 Table of Contents The carrying value of our portfolio of investment securities was as follows: (Dollars in thousands) March 31, 2024 December 31, 2023 Available-for-Sale Securities U.S. Government-sponsored securities $ 3,048 $ 3,224 Mortgage-backed securities (1) 216,093 163,838 Collateralized mortgage obligations (1) 5,654 535 Corporate securities 14,751 14,605 Other 310 310 Total available-for-sale securities $ 239,856 $ 182,512 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. (Dollars in thousands) March 31, 2024 December 31, 2023 Held-to-Maturity Securities Mortgage-backed securities (1) $ 656,028 $ 664,728 Collateralized mortgage obligations (1) 72,950 74,170 Municipal securities 77,993 78,790 Total held-to-maturity securities $ 806,971 $ 817,688 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. The following tables show the carrying value for contractual maturities of investment securities and the weighted average yields of such securities, including the benefit of tax-exempt securities: As of March 31, 2024 Within One Year After One but Within Five Years After Five but Within Ten Years After Ten Years Total (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Securities available-for-sale U.S. Government-sponsored securities $ 1 6.87 % $ 88 6.40 % $ 242 6.63 % $ 2,717 6.43 % $ 3,048 6.44 % Mortgage-backed securities (1) 112 1.90 % 5,404 2.56 % 4,986 3.76 % 205,592 4.09 % 216,093 4.04 % Collateralized mortgage obligations (1) - 0.00 % - 0.00 % - 0.00 % 5,654 6.27 % 5,654 6.27 % Corporate securities - 0.00 % 14,750 5.80 % - 0.00 % - 0.00 % 14,751 5.80 % Other 310 8.44 % - 0.00 % - 0.00 % - 0.00 % 310 8.44 % Total securities available-for-sale $ 423 6.70 % $ 20,242 4.94 % $ 5,228 3.89 % $ 213,963 4.18 % $ 239,856 4.24 % (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. As of March 31, 2024 Within One Year After One but Within Five Years After Five but Within Ten Years After Ten Years Total (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Securities held-to-maturity Mortgage-backed securities (1) $ - 0.00 % $ 1,887 0.87 % $ 11,758 1.44 % $ 642,382 1.89 % $ 656,028 1.88 % Collateralized mortgage obligations (1) - 0.00 % - 0.00 % - 0.00 % 72,950 1.75 % 72,950 1.75 % Municipal securities 2,230 6.41 % 16,200 3.60 % 9,251 3.04 % 50,313 4.00 % 77,993 3.87 % Total securities held-to-maturity $ 2,230 6.41 % $ 18,087 3.32 % $ 21,009 2.14 % $ 765,645 2.02 % $ 806,971 2.06 % (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. 40 Table of Contents As of December 31, 2023 Within One Year After One but Within Five Years After Five but Within Ten Years After Ten Years Total (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Securities available-for-sale U.S. Government-sponsored securities $ 1 5.91 % $ 99 6.47 % $ 269 6.65 % $ 2,855 6.44 % $ 3,224 6.46 % Mortgage-backed securities (1) 169 1.79 % 6,138 2.57 % 4,916 3.78 % 152,615 3.52 % 163,838 3.44 % Collateralized mortgage obligations (1) - 0.00 % - 0.00 % - 0.00 % 535 2.27 % 535 2.27 % Corporate securities - 0.00 % 14,605 5.71 % - 0.00 % - 0.00 % 14,605 5.71 % Other 310 8.20 % - 0.00 % - 0.00 % - 0.00 % 310 8.20 % Total securities available-for-sale $ 480 5.94 % $ 20,842 4.79 % $ 5,185 3.93 % $ 156,005 3.57 % $ 182,512 3.68 % (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. As of December 31, 2023 Within One Year After One but Within Five Years After Five but Within Ten Years After Ten Years Total (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Securities held-to-maturity Mortgage-backed securities (1) $ - 0.00 % $ 2,058 0.78 % $ 12,418 1.41 % $ 650,252 1.90 % $ 664,728 1.88 % Collateralized mortgage obligations (1) - 0.00 % - 0.00 % - 0.00 % 74,170 1.75 % 74,170 1.75 % Municipal securities 875 4.01 % 15,962 4.23 % 10,703 3.76 % 51,250 3.88 % 78,790 3.93 % Total securities held-to-maturity $ 875 4.01 % $ 18,020 3.84 % $ 23,121 2.50 % $ 775,672 2.02 % $ 817,688 2.07 % (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Expected maturities of mortgage-backed and CMO securities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without penalties. The Company evaluates securities for expected credit losses at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Loans and Leases Loans and leases can be categorized by borrowing purpose and use of funds. For detailed descriptions of the various loan types offered by the Company see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC on March 14, 2024. The Company's loan and lease portfolio at March 31, 2024 totaled $3.7 billion, an increase of $41.6 million or 1.14% over December 31, 2023. The following table sets forth the distribution of the loan and lease portfolio by type and percent at the end of each period presented: March 31, 2024 December 31, 2023 (Dollars in thousands) Dollars Percent of Total Dollars Percent of Total Gross loans and leases Real estate: Commercial $ 1,352,014 36.48 % $ 1,323,038 36.10 % Agricultural 726,041 19.59 % 742,009 20.24 % Residential and home equity 405,526 10.94 % 399,982 10.91 % Construction 227,415 6.13 % 212,362 5.80 % Total real estate 2,710,996 73.14 % 2,677,391 73.05 % Commercial & industrial 497,028 13.41 % 499,373 13.62 % Agricultural 317,955 8.58 % 313,737 8.56 % Commercial leases 174,657 4.71 % 169,684 4.63 % Consumer and other 5,801 0.16 % 5,212 0.14 % Total gross loans and leases $ 3,706,437 100.00 % $ 3,665,397 100.00 % 41 Table of Contents The following table shows the maturity distribution and interest rate sensitivity of the loan and lease portfolio of the Company as of March 31, 2024. Loan Contractual Maturity (Dollars in thousands) One Year or Less After One But Within Five Years After Five Years But Within Fifteen Years After Fifteen Years Total Gross loan and leases: Real estate: Commercial $ 85,828 $ 388,701 $ 842,417 $ 35,068 $ 1,352,014 Agricultural 51,740 174,911 438,218 61,172 726,041 Residential and home equity 111 4,315 111,926 289,174 405,526 Construction 183,815 42,741 859 - 227,415 Total real estate 321,494 610,668 1,393,420 385,414 2,710,996 Commercial & industrial 216,756 179,670 98,271 2,331 497,028 Agricultural 194,378 102,542 21,035 0 317,955 Commercial leases 4,939 50,174 119,544 - 174,657 Consumer and other 731 3,677 922 471.00 5,801 Total gross loans and leases $ 738,298 $ 946,731 $ 1,633,192 $ 388,216 $ 3,706,437 Rate structure for loans and leases Fixed rate $ 200,541 $ 589,620 $ 1,138,467 $ 223,302 $ 2,151,930 Adjustable rate 537,757 357,111 494,725 164,914 1,554,507 Total gross loans and leases $ 738,298 $ 946,731 $ 1,633,192 $ 388,216 $ 3,706,437 The following table summarizes the loans for which the accrual of interest has been discontinued and loans more than 90 days past due and still accruing interest, and OREO (as hereinafter defined): (Dollars in thousands) March 31, 2024 December 31, 2023 Non-performing assets: Non-accrual loans and leases Real estate: Commercial $ - $ - Agricultural - - Residential and home equity - - Construction - - Total real estate - - Commercial & industrial - - Agricultural - - Commercial leases - - Consumer and other - - Subtotal - - Accruing loans and leases Real estate: Commercial $ - $ - Agricultural 3,550 - Residential and home equity - - Construction - - Total real estate 3,550 - Commercial & industrial - - Agricultural - - Commercial leases - - Consumer and other - - Subtotal 3,550 - Total non-performing loans and leases $ 3,550 $ - Other real estate owned ("OREO") $ 873 $ 873 Total non-performing assets $ 4,423 $ 873 Selected ratios: Non-performing loans to total loans and leases 0.10 % 0.00 % Non-performing assets to total assets 0.08 % 0.02 % 42 Table of Contents Non-Accrual Loans and Leases - Accrual of interest on loans and leases is generally discontinued when a loan or lease becomes contractually past due by 90 days or more with respect to interest or principal. When loans and leases are 90 days past due, but in management's judgment are well secured and in the process of collection, they may not be classified as non-accrual. When a loan or lease is placed on non-accrual status, all interest previously accrued but not collected is reversed. Income on such loans and leases is then recognized only to the extent that cash is received and where the future collection of principal is probable. Non-accrual loans and leases were zero at March 31, 2024 and December 31, 2023. The Company had one non-performing loan which was 90+ days past due and still accruing interest at March 31, 2024 as steps were already in process of bringing the loan current. Those steps were completed in early April 2024 and the loan returned to current and performing status. 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 March 31, 2024, and at December 31, 2023. Although management believes that non-performing loans and leases are generally well-secured and that potential losses are provided for in the Company’s allowance for credit losses, there can be no assurance that future deterioration in economic conditions and/or collateral values will not result in future credit losses. See Note 3. “Loans and Leases”, located in “Item 1. Financial Statements” in this Quarterly Report on Form 10-Q for an allocation of the allowance classified to collateral dependent loans and leases. Allowance for Credit Losses—Loans and Leases The Company maintains an allowance for credit losses (“ACL”) under ASC Topic 326, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“CECL”) . The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan and lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components: specific reserves related to impaired loans and leases and general reserves comprised of both quantitative and qualitative factors for current expected credit losses related to loans and leases that are not collateral dependent. The Company uses the Weighted Average Remaining Maturity (“WARM”) method to calculate the ACL, as this method is deemed the most appropriate given the Company’s current size and complexity. See “Critical Accounting Policies and Estimates - Allowance for Credit Losses – Loans and Leases.” 43 Table of Contents The following table sets forth the activity in our ACL for the periods indicated: Three Months Ended March 31, (Dollars in thousands) 2024 2023 Allowance for credit losses: Balance at beginning of year $ 74,965 $ 66,885 Provision for credit losses - 1,500 Charge-offs: Real estate: Commercial - - Agricultural - - Residential and home equity - (14 ) Construction - - Total real estate - (14 ) Commercial & industrial - - Agricultural - - Commercial leases - - Consumer and other (10 ) (10 ) Total charge-offs (10 ) (24 ) Recoveries: Real estate: Commercial - 170 Agricultural - - Residential and home equity 8 10 Construction - - Total real estate 8 180 Commercial & industrial 18 19 Agricultural - 1 Commercial leases - - Consumer and other 37 12 Total recoveries 63 212 Net recoveries / (charge-offs) 53 188 Balance at end of year $ 75,018 $ 68,573 Selected financial information: Net loans and leases held-for-investment $ 3,696,295 $ 3,427,133 Average loans and leases 3,661,292 3,422,375 Non-performing loans and leases 3,550 387 Allowance for credit losses to non-performing loans and leases 2113.18 % 17719.12 % Net (recoveries)/charge-offs to average loans and leases (0.00 %) (0.01 %) Provision for credit losses to average loans and leases 0.00 % 0.04 % Allowance for credit losses to gross loans and leases held-for-investment 2.02 % 1.99 % The increase in ACL during the first quarter of 2024 was related to net recoveries. (Dollars in thousands) March 31, 2024 December 31, 2023 ACL - Loans and leases $ 75,018 $ 74,965 ACL - Unfunded commitments 3,690 3,690 Total ACL 78,708 78,655 44 Table of Contents The following table indicates management’s allocation of the ACL for loan and leases by loan type as of each of the following dates: March 31, 2024 December 31, 2023 (Dollars in thousands) Dollars Percent of Each Loan Type to Total Loans Percent of ACL to Each Loan Type Dollars Percent of Each Loan Type to Total Loans Percent of ACL to Each Loan Type Allowance for credit losses: Real estate: Commercial $ 22,414 36.48 % 1.66 % $ 26,093 36.10 % 1.97 % Agricultural 11,377 19.59 % 1.57 % 7,744 20.24 % 1.04 % Residential and home equity 7,721 10.94 % 1.90 % 7,770 10.91 % 1.94 % Construction 4,616 6.13 % 2.03 % 4,432 5.80 % 2.09 % Total real estate 46,128 73.14 % 1.70 % 46,039 73.05 % 1.72 % Commercial & industrial 11,559 13.41 % 2.33 % 13,380 13.62 % 2.68 % Agricultural 10,292 8.58 % 3.24 % 8,872 8.56 % 2.83 % Commercial leases 6,923 4.71 % 3.96 % 6,537 4.63 % 3.85 % Consumer and other 116 0.16 % 2.00 % 137 0.14 % 2.63 % Total allowance for credit losses $ 75,018 100.00 % 2.02 % $ 74,965 100.00 % 2.05 % Deposits Total deposits were $5.0 billion and $4.7 billion as of March 31, 2024 and December 31, 2023, respectively an increase of $291.5 million or 6.24%. The increase in deposits was primarily due to $100.0 million in a State of California certificate of deposit and $200.0 million in brokered deposits. Deposits, net of this $300.0 million, had a slight decrease of $8.5 million. The slight decrease in deposits was primarily attributable to the shift in customer behavior over the last year as customers seek higher yielding deposit products or other investment alternatives such as U.S. Treasuries or money market funds given the interest rate environment. Non-interest bearing demand deposits were $1.4 billion as of March 31, 2024 and $1.5 billion at December 31, 2023. Non-interest bearing deposits were 28.44% of total deposits, as of March 31, 2024 and 31.76% as of December 31, 2023. Interest bearing deposits were $3.5 million and $3.2 million at March 31, 2024 and December 31, 2023, respectively. Interest bearing deposits are comprised of interest-bearing transaction accounts, money market accounts, regular savings accounts, and certificates of deposit. Interest bearing deposits are comprised of interest-bearing transaction accounts, money market accounts, regular savings accounts, and certificates of deposit. The decrease in non-interest bearing deposits and the increase in interest-bearing deposits primarily reflects changes in customer behavior as customers shifted from non-interest bearing accounts to higher interest earning accounts given the interest rate environment. Checking account deposits were 49.39% of total deposits as of March 31, 2024 compared to 51.76% of total deposits as of December 31, 2023. The following table shows the average amount and average rate paid on the categories of deposits for each of the periods presented: Three Months Ended March 31, 2024 2023 (Dollars in thousands) Average Balance Interest Expense Average Rate Average Balance Interest Expense Average Rate Total deposits: Interest bearing deposits: Demand $ 914,618 $ 888 0.39 % $ 1,068,504 $ 444 0.17 % Savings and money market 1,618,678 7,186 1.79 % 1,561,684 2,503 0.65 % Certificates of deposit greater than $250,000 378,714 3,094 3.29 % 147,704 487 1.34 % Certificates of deposit less than $250,000 338,031 3,477 4.14 % 206,214 280 0.55 % Total interest bearing deposits 3,250,041 14,645 1.81 % 2,984,106 3,714 0.50 % Non-interest bearing deposits 1,403,384 1,663,152 0.00 % Total deposits $ 4,653,425 $ 14,645 1.27 % $ 4,647,258 $ 3,714 0.32 % 45 Table of Contents Deposits are gathered from individuals and businesses in our market areas. The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements. The increase in short-term interest rates during 2023 and customers seeking higher yielding deposit products placed pressure on deposit pricing. The average cost of total deposits, including non-interest bearing deposits, increased to 1.27% for the three months ended March 31, 2024 compared with 0.32% for the same period a year ago and 1.14% as of December 31, 2023. The following table shows deposits with a balance greater than $250,000 at March 31, 2024 and December 31, 2023: March 31, December 31, (Dollars in thousands) 2024 2023 Non-maturity deposits greater than $250,000 $ 2,401,894 $ 2,496,749 Certificates of deposit greater than $250,000, by maturity: Less than 3 months 215,377 84,460 3 months to 6 months 109,740 111,866 6 months to 12 months 148,784 107,080 More than 12 months 3,985 15,423 Total certificates of deposit greater than $250,000 $ 477,886 $ 318,829 Total deposits greater than $250,000 $ 2,879,780 $ 2,815,578 Refer to the Year-To-Date Average Balances and Rate Schedules located in this "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" for information on separate deposit categories. The Bank participates in a program wherein the State of California places time deposits with the Bank at the Bank’s option. The Bank had $103.0 million and $3.0 million of these deposits at March 31, 2024 and December 31, 2023, respectively. Total estimated uninsured deposits based on our regulatory reporting amounted to $2.4 billion and $2.2 billion at March 31, 2024 and December 31, 2023, respectively. Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings Lines of Credit with the Federal Home Loan Bank and FRB are other key sources of funds to support earning assets and liquidity. These sources of funds are also used to manage the Company’s interest rate risk exposure; and, as opportunities arise, to borrow and invest the proceeds at a positive spread through the investment portfolio. FHLB advances as of March 31, 2024 were $100.0 million compared to no advances at December 31, 2023. The average rate on FHLB advances during the first quarter of 2024 was 4.54% compared to zero during the first quarter of 2023. The $100.0 million in FHLB advances have a one-month term and may or may not be renewed. There were no Federal Funds purchased or advances from the FRB at March 31, 2024 or December 31, 2023. Long-Term Subordinated Debentures On December 17, 2003, the Company raised $10.0 million through the sale of subordinated debentures to an off-balance-sheet trust and its sale of trust-preferred securities. See Note 9. “Long-Term Subordinated Debentures” located in “Item 8. Financial Statements and Supplementary Data” in our Annual Report on Form 10-K filed with the SEC on March 14, 2024. Although this amount is reflected as subordinated debt on the Company’s balance sheet, under current regulatory guidelines, our Trust Preferred Securities will continue to qualify as regulatory capital. These securities accrue interest at a variable rate based upon 3-month SOFR plus 2.85%. Interest rates reset quarterly (the next reset is June 18, 2024) and the rate was 8.44% as of March 31, 2024 and 8.49% at December 31, 2023. The average rate paid for these securities was 8.62% for the first three months of 2024 and 7.71% for the first three months of 2023. 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. 46 Table of Contents Capital Resources The Company relies primarily on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to insure depositor protection. Shareholders’ Equity totaled $565.2 million at March 31, 2024, and $549.8 million at December 31, 2023. The Company and the Bank are subject to various regulatory capital adequacy guidelines as outlined under Part 324 of the FDIC Rules and Regulations. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. As of March 31, 2024, the Company was in compliance with all of these capital requirements and there were no restrictions on the Company’s business activity. As of March 31, 2024 the Bank met 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 March 31, 2024 and December 31, 2023. The Company’s and Bank’s actual and required capital amounts and ratios are as follows: March 31, 2024 Actual Required for Capital Adequacy Purposes Minimum to be Categorized as "Well Capitalized" Under Prompt Corrective Action Regulation (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Bancorp: CET1 capital to risk-weighted assets $ 565,238 12.73 % $ 199,884 4.50 % N/A N/A Tier 1 capital to risk-weighted assets 575,238 12.95 % 266,511 6.00 % N/A N/A Risk-based capital to risk-weighted assets 631,053 14.21 % 355,349 8.00 % N/A N/A Tier 1 leverage capital ratio 575,238 10.83 % 212,410 4.00 % N/A N/A Bank: CET1 capital to risk-weighted assets $ 575,347 12.95 % $ 199,872 4.50 % $ 288,704 6.50 % Tier 1 capital to risk-weighted assets 575,347 12.95 % 266,496 6.00 % 355,328 8.00 % Risk-based capital to risk-weighted assets 631,159 14.21 % 355,328 8.00 % 444,159 10.00 % Tier 1 leverage capital ratio 575,347 10.84 % 212,322 4.00 % 265,403 5.00 % 47 Table of Contents December 31, 2023 Actual Required for Capital Adequacy Purposes Minimum to be Categorized as "Well Capitalized" Under Prompt Corrective Action Regulation (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Bancorp: CET1 capital to risk-weighted assets $ 546,045 12.30 % $ 199,724 4.50 % N/A N/A Tier 1 capital to risk-weighted assets 556,045 12.53 % 266,298 6.00 % N/A N/A Risk-based capital to risk-weighted assets 611,815 13.78 % 355,064 8.00 % N/A N/A Tier 1 leverage capital ratio 556,045 10.38 % 214,267 4.00 % N/A N/A Bank: CET1 capital to risk-weighted assets $ 557,500 12.56 % $ 199,722 4.50 % $ 288,487 6.50 % Tier 1 capital to risk-weighted assets 557,500 12.56 % 266,295 6.00 % 355,061 8.00 % Risk-based capital to risk-weighted assets 613,270 13.82 % 355,061 8.00 % 443,826 10.00 % Tier 1 leverage capital ratio 557,500 10.42 % 214,078 4.00 % 267,597 5.00 % On November 14, 2023, the Board of Directors authorized an extension to its share repurchase program through December 31, 2024 for an additional $25.0 million of the Company’s common stock (“Repurchase Plan”), which represented approximately 4% of outstanding shareholders’ equity at the time of approval. Repurchases by the Company under the Repurchase Plan may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means. During the first three months of 2024 the Company repurchased 5,201 shares under the Repurchase Plan, for a total of $5.5 million. As of March 31, 2024, there remains $19.1 million authorized for repurchases under the Repurchase Plan. Off-Balance-Sheet Arrangements Off-balance-sheet arrangements are any contractual arrangement to which an unconsolidated entity is a party, under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity, or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to the Company, or engages in leasing, hedging, or research and development services with the Company. The Company had the following off balance sheet commitments as of the dates indicated. The following table sets forth our off-balance-sheet lending commitments as of March 31, 2024: Amount of Commitment Expiration per Period (Dollars in thousands) Total Committed Amount Less than One Year One to Three Years Three to Five Years After Five Years Off-balance sheet commitments Commitments to extend credit $ 1,074,963 $ 508,786 $ 311,172 $ 75,258 $ 179,747 Standby letters of credit 14,889 12,629 1,760 500 - Total off-balance sheet commitments $ 1,089,852 $ 521,415 $ 312,932 $ 75,758 $ 179,747 The Company's exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer's creditworthiness are performed on a case-by-case basis. Additionally, the Company maintains an allowance for credit losses for unfunded loan commitments, which totaled $3.7 million at March 31, 2024 and December 31, 2023. 48 Table of Contents Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third-party. Most standby letters of credit have maturity dates ranging from 1 to 60 months with final expiration in August 2028. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Liquidity The ability to have readily available funds sufficient to repay maturing liabilities is of primary importance to depositors, creditors and regulators. In an effort to satisfy our liquidity needs, we actively manage our assets and liabilities. We have access to immediate liquid resources in the form of cash, which totaled $738.4 million or 12.92% of total assets as of March 31, 2024. The majority of cash is on deposit with the FRB and amounted to $672.6 million. Potential sources of liquidity also include investment securities in our available-for-sale securities portfolio, our ability to sell loans in the secondary market, and our ability borrow from the FRB and FHLB. Our diversified deposit portfolio has historically provided us with a long-term source of stable low cost funding. Maturities and payments on outstanding loans and investment securities also provide a steady flow of funds. Our liquidity, represented by cash borrowing lines, federal funds and available-for-sale securities, is a result of our operating, investing and financing activities and related cash flows. In order to ensure funds are available at all times, we devote resources to projecting the amount of funds that will be required and we maintain relationships with a diversified client base so funds are accessible. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets. We had the following borrowing lines available at March 31, 2024: March 31, 2024 (Dollars in thousands) Total Credit Line Limit Outstanding Amount Remaining Credit Line Available Value of Collateral Pledged Additional liquidity sources: Federal Reserve Bank $ 1,239,186 $ - $ 1,239,186 $ 1,583,638 Federal Home Loan Bank 769,429 200,000 569,429 1,263,816 US Bank Fed Funds 50,000 - 50,000 - PCBB Fed Funds 50,000 - 50,000 - FHLB Fed Funds 18,000 - 18,000 - Total additional liquidity sources $ 2,126,615 $ 200,000 $ 1,926,615 $ 2,847,454 We continued our focus on maintaining a strong liquidity position throughout the first three months of 2024 and we believe our liquid assets and short-term borrowing credit lines are adequate to meet our cash flow needs for loan and lease funding and deposit cash withdrawal for the foreseeable future. As of March 31, 2024, we had internal sources of liquidity comprised of $738.4 million in cash and $287.4 million unencumbered investment securities, which represented in the aggregate 17.95% of total assets. We also had $1.9 billion in external sources of liquidity as outlined in the table above bringing our total available liquidity to $2.9 billion. Our pledged collateral on short-term borrowing lines was comprised of $2.8 billion in loans and $1.7 million in investment securities. We have the option of either borrowing on our credit lines or selling these investment securities for cash flow needs. The $200.0 million in outstanding at the FHLB represents $100.0 million in FHLB advances and $100.0 million in the form of a letter of credit to collateralize the State of California certificate of deposit. The letter of credit is not an on balance sheet liability but it does reduce our borrowing capacity as illustrated in the table above. On a long-term basis, we intend to meet our liquidity needs by changing the relative distribution of our asset portfolios by reducing our investment or loan and lease volumes, or selling or encumbering assets. Further, we would increase liquidity by soliciting higher levels of deposit accounts through promotional activities and/or borrowing from our correspondent banks as well as the FHLB. At the current time, our long-term liquidity needs primarily relate to funds required to support loan and lease originations and commitments and deposit withdrawals. 49 Table of Contents We believe we can meet all of these needs from existing liquidity sources. Our liquidity is comprised of three primary classifications: cash flows from or used in operating activities; cash flows from or used in investing activities; and cash flows from or used in financing activities. Net cash provided by or used in operating activities has consisted primarily of net income adjusted for certain non-cash income and expense items such as the credit loss provision, investment and other amortization and depreciation. Our primary investing activities are the origination of loans and lease and purchases and sales of investment securities. As of March 31, 2024, we had unfunded loan commitments of $1.1 billion and unfunded letters of credit of $14.9 million. At March 31, 2024, we believe that we had sufficient funds available to meet current loan commitments. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company’s assessment of market risk at March 31, 2024 indicates there have been no material changes in the quantitative and qualitative disclosures from those made in the Company’s Annual Report on Form 10-K filed with the SEC on March 14, 2024. Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Our market risk arises primarily from interest rate risk inherent in our lending and deposit taking activities. Management actively monitors and manages our interest rate risk exposure. We do not have any market-risk sensitive instruments entered into for trading purposes. In monitoring interest rate risk we continually analyze and manage our earning assets and funding liabilities based on their payment streams and interest rates, the timing of their maturities and/or prepayments, and their sensitivity to actual or potential changes in market interest rates. Management uses various asset/liability strategies to manage the re-pricing characteristics of our assets and liabilities designed to ensure that exposure to interest rate fluctuations is limited within our guidelines of acceptable levels of risk-taking. Hedging strategies, including the terms and pricing of loans and deposits, and managing the deployment of our securities, are considered to reduce mismatches in interest rate re-pricing opportunities of portfolio assets and their funding sources. Since our earnings are primarily dependent on our ability to generate net interest income, we focus on actively monitoring and managing the effects of adverse changes in interest rates on our net interest income. Our Asset Liability Management Committee (“ALCO”), which is comprised of members of the Board of Directors and Executive Officers, manages market risk. ALCO monitors interest rate risk by analyzing the potential impact on net interest income from potential changes in interest rates, and considers the impact of alternative strategies or changes in balance sheet structure. ALCO manages our balance sheet in part to maintain the potential impact of changes in interest rates on net interest income within acceptable ranges despite changes in interest rates. ALCO and management utilize a third party to assist with asset liability management including the use of simulation models. Our exposure to interest rate risk is reviewed on at least a quarterly basis by ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in net interest income in the event of hypothetical changes in interest rates. If potential changes to net interest income resulting from hypothetical interest rate changes are not within risk tolerances determined by ALCO, and approved by the full Board of Directors, management may make adjustments to the Company’s asset and liability mix to bring interest rate risk levels within the Board approved limits. Net Interest Income Simulation. In order to measure interest rate risk, we use a simulation model to project changes in net interest income that result from forecasted changes in interest rates. This analysis calculates the difference between net interest income forecasted using a rising and a falling interest rate scenario and a net interest income forecast using a base market interest rate derived from the current Treasury yield curve. The income simulation model includes various assumptions regarding the re-pricing relationships for each of our products. Many of our assets are floating rate loans, which are assumed to re-price immediately, and to the same extent as the change in market rates according to their contracted index. 50 Table of Contents Some loans and investment vehicles include the opportunity of prepayment (embedded options), and accordingly the simulation model uses various proprietary models to estimate these prepayments and assumes the reinvestment of the proceeds at current yields. Our non-term deposit products re-price more slowly, usually changing less than the change in market rates and at our discretion. This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions. It assumes the balance sheet size remains static throughout the simulation horizon by replacing existing cash flows/amortization into similar products at current rates to try and capture the ongoing activity of the balance sheet without forecasting any level of growth. It does not account for all factors that affect this analysis, including changes by management to mitigate the effect of interest rate changes or secondary impacts such as changes to our credit risk profile as interest rates change. Furthermore, loan prepayment-rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in this analysis. Changes that vary significantly from the assumptions may have significant effects on our net interest income. For the rising and falling interest rate scenarios, the base market interest rate forecast was increased or decreased, on an instantaneous and sustained basis, by 100, 200 and 300 basis points. We then evaluate the simulation results using two approaches: Net Interest Income at Risk (“NII at Risk”) and Economic Value of Equity (“EVE”). Under NII at Risk, the impact on net interest income from the changes in interest rates on interest-earning assets and interest-bearing liabilities is modeled using various assumptions of assets and liabilities. EVE measures the period-end present value of assets minus the present value of liabilities. Management uses this value to measure the changes in the economic value of the Company under various interest rate scenarios. Based on our quarterly simulations, our net interest margin exposure related to these hypothetical changes in market interest rates was within the current guidelines established by us. Our simulation model highlights the fact that our balance sheet is asset sensitive, which means that our net interest income rises in a rising interest rate environment as rates earned on our interest-bearing assets reprice higher and at a faster pace than rates paid on our interest-bearing liabilities. The ratio of variable to fixed-rate loans in our loan portfolio, the ratio of short-term (maturing at a given time within 12 months) to long-term loans, and the ratio of our demand, money market and savings deposits to CDs (and their time periods), are the primary factors affecting the sensitivity of our net interest income to changes in market interest rates. Our short-term loans are typically priced at prime plus a margin, and our long-term loans are typically priced based on a specific term of the Treasury Curve for comparable maturities, plus a margin. The composition of our rate-sensitive assets or liabilities is subject to change and could result in a more unbalanced position that would cause market rate changes to have a greater impact on our net interest margin. As of March 31, 2024, our loan and lease portfolio was comprised of 58.1% fixed rate and 41.9% variable rate loans. The vast majority of our variable loans also contain interest rate floors which are designed to mitigate the impact of decreases in interest rates as index rates drop. 51 Table of Contents The following table presents the projected change in the Company’s net interest income over the next twelve months and the economic value of equity at March 31, 2024, that would occur upon an immediate change in interest rates, but without giving effect to any steps that management might take to counteract that change: Estimated Change in Net Interest Income (NII) (as a % of NII) Estimated Change in Economic Value of Equity (EVE) (as a % of EVE) March 31, 2024 +300 bps (0.2 %) (10.1 %) +200 bps (0.4 %) (7.3 %) +100 bps 0.0 % (2.9 %) 0 bps - - -100 bps (1.5 %) (0.6 %) -200 bps (3.2 %) (3.6 %) -300 bps (5.3 %) (9.2 %) Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(a)). Based on that evaluation, the CEO and CFO have concluded that as of the end of the period covered by this Report, the disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed by the Company in reports that are filed or submitted under the Exchange Act are recorded, processed, summarized and timely reported as provided in the SEC’s rules and forms. Changes in Internal Controls There have been no material changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2024, to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 52 Table of Contents PART II – OTHER INFORMATION Item 1. Legal Proceedings Certain lawsuits and claims arising in the ordinary course of business have been filed or are pending against the Company or its subsidiaries. Based upon information available to the Company, its review of such lawsuits and claims and consultation with its counsel, the Company believes the liability relating to these actions, if any, would not have a material adverse effect on its consolidated financial statements. There are no material proceedings adverse to the Company to which any director, officer or affiliate of the Company is a party. Item 1A. Risk Factors There have been no material changes in the risk factors previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The following table reports information regarding repurchases of our common stock during the three months ended March 31, 2024: Period Total number of shares purchased Average price paid per share (2) Total number of shares purchased as part of publicly announced plans or programs Maximum number (or approximate dollar value) of shares that may yet purchased under the plans or programs ( In thousands ) (1) January 1, 2024 to January 31, 2024 4,853 $ 1,042.00 4,853 $ 19,479 February 1, 2024 to February 29, 2024 87 971.00 87 19,394 March 1, 2024 to March 31, 2024 261 974.00 261 19,140 Total 1st Quarter 2024 5,201 $ 1,038.00 5,201 $ 19,140 (1) As of November 14, 2023 the Board approved a further extension to the repurchase program through December 31, 2024 and for an additional $25 million of the Company's common stock. (2) The aggregate purchase price and weighted average price per share does not include the effect of excise tax expense incurred on net stock repurchases. For the three months ended March 31, 2024, the excise tax expense accrual totaled $54 ,000. On November 14, 2023, the Board of Directors authorized an extension to its share repurchase program through December 31, 2024 for an additional $25.0 million of the Company’s common stock (“Repurchase Plan”), which represented approximately 4% of outstanding shareholders’ equity at the time of approval. Repurchases by the Company under the Repurchase Plan may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means. During the first three months of 2024 the Company repurchased 5,201 shares under the Repurchase Plan, for a total of $5.5 million. As of March 31, 2024, there remains $19.1 million authorized for repurchases under the Repurchase Plan. All of these shares were purchased at prices ranging from $960.00 to $1,065.00 per share, based upon the then current price on the OTCQX. Item 3. Defaults upon Senior Securities Not Applicable Item 4. Mine Safety Disclosures Not Applicable 53 Table of Contents Item 5. Other Information During the three months ended March 31, 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K. Item 6. Exhibits List of Financial Statements and Financial Statement Schedules (a) The following documents are filed as a part of this Quarterly Report on Form 10-Q: (1) Financial Statements and (2) Financial Statement schedules required to be filed by Item 1 of this Quarterly Report on Form 10-Q. (3) The following exhibits are required by Item 601 of Regulation S-K and are included as part of this Quarterly Report on Form 10-Q: Exhibit Number Description 10.1 Amended and Restated Employment Agreement effective April 1, 2024, between Farmers & Merchants Bank of Central California and Kent A. Steinwert, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024. 10.2 Amended and Restated Employment Agreement effective April 1, 2024, between Farmers & Merchants Bank of Central California and Deborah E. Skinner, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024. 10.3 Amended and Restated Employment Agreement effective April 1, 2024, between Farmers & Merchants Bank of Central California and Bart R. Olson, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024. 10.4 Amended and Restated Employment Agreement effective April 1, 2024, between Farmers & Merchants Bank of Central California and Ryan J. Misasi, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024. 10.5 Amended and Restated Employment Agreement effective April 1, 2024, between Farmers & Merchants Bank of Central California and David M. Zitterow, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024. 10.6 Amended and Restated Employment Agreement effective April 1, 2024, between Farmers & Merchants Bank of Central California and John W. Weubbe, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024. 10.7 Employment Agreement effective April 22, 2024, between Farmers & Merchants Bank of Central California and Thomas Bennett, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024. 31(a) Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 31(b) Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 32 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* 101.INS Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) *Filed herewith 54 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FARMERS & MERCHANTS BANCORP Date: May 9, 2024 /s/ Kent A. Steinwert Kent A. Steinwert Director, Chairman, President and Chief Executive Officer (Principal Executive Officer) Date: May 9, 2024 /s/ Bart R. Olson Bart R. Olson Executive Vice President and Chief Financial Officer (Principal Financial Officer) 55