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 September 30, 2024

☐ 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 October 31, 2024, the registrant had 699,982 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 - Consolidated Financial Statements (Unaudited)
		Consolidated Balance Sheets	3
		Consolidated Statements of Income	4
		Consolidated Statements of Comprehensive Income	5
		Consolidated Statements of Changes in Shareholders’ Equity	6
		Consolidated Statements of Cash Flows	7
		Notes to Consolidated Financial Statements	8

	Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		37

	Item 3 - Quantitative and Qualitative Disclosures about Market Risk		60

	Item 4 - Controls and Procedures		62

PART II. - OTHER INFORMATION

	Item 1 – Legal Proceedings		62
	Item 1A – Risk Factors		63
	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		63
	Item 3 – Defaults upon Senior Securities		63
	Item 4 – Mine Safety Disclosures		64
	Item 5 – Other Information		64
	Item 6 – Exhibits		64
	Signatures		65

Table of Contents

PART 1. FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

FARMERS & MERCHANTS BANCORP

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except share and per share amounts)	September 30, 2024			December 31, 2023
ASSETS
Cash and due from banks	$	94,613		$	72,267
Interest bearing deposits with banks		198,637			338,375
Total cash and cash equivalents		293,250			410,642
Securities available-for-sale, amortized cost $414,094 and $199,374, respectively		401,563			182,512
Securities held-to-maturity, fair value $652,701 and $671,585, respectively		780,510			817,688
Allowance for credit losses - securities held-to-maturity		(450	)		(450	)
Total investment securities		1,181,623			999,750
Non-marketable securities		15,549			15,549
Loans and leases held for investment, net of unearned income		3,704,109			3,654,689
Allowance for credit losses - loans and leases		(75,816	)		(74,965	)
Loans and leases held for investment, net		3,628,293			3,579,724
Bank-owned life insurance		73,453			74,931
Premises and equipment, net		51,127			51,907
Deferred income tax assets and income taxes receivable		33,689			50,071
Accrued interest receivable		30,155			28,520
Goodwill		11,183			11,183
Other intangibles		1,824			2,236
Other real estate owned		873			873
Other assets		97,113			83,542
TOTAL ASSETS	$	5,418,132		$	5,308,928

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	1,465,859		$	1,482,571
Interest bearing:
Demand		888,793			933,417
Savings and money market		1,596,678			1,607,479
Certificates of deposit		757,352			644,628
Total interest bearing		3,242,823			3,185,524
Total deposits		4,708,682			4,668,095
Subordinated debentures		10,310			10,310
Interest payable and other liabilities		96,444			80,768
TOTAL LIABILITIES		4,815,436			4,759,173

COMMITMENTS AND CONTINGENCIES (Note 8)

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, 737,995 and 747,971 issued and outstanding at September 30, 2024 and December 31, 2023, respectively		7			7
Additional paid-in capital		26,645			36,852
Retained earnings		585,504			525,360
Accumulated other comprehensive loss, net of taxes		(9,460	)		(12,464	)
TOTAL SHAREHOLDERS’ EQUITY		602,696			549,755
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	5,418,132		$	5,308,928

See accompanying notes to the consolidated financial statements.

Table of Contents

FARMERS & MERCHANTS BANCORP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
(Dollars in thousands, except share and per share amounts)	2024		2023			2024		2023
Interest income
Interest and fees on loans and leases	$	56,698	$	52,153		$	168,296	$	149,851
Interest and dividends on investment securities		8,044		5,485			22,171		16,593
Interest on deposits with others		3,893		8,075			14,640		19,918
Total interest income		68,635		65,713			205,107		186,362

Interest expense
Deposits		16,421		12,051			48,972		24,156
Borrowed funds		-		-			986		-
Subordinated debentures		221		221			662		621
Total interest expense		16,642		12,272			50,620		24,777
Net interest income		51,993		53,441			154,487		161,585
Provision for credit losses		-		3,000			-		7,057
Net interest income after provision for credit losses		51,993		50,441			154,487		154,528
Non-interest income
Card processing		1,777		1,693			5,170		4,996
Service charges on deposit accounts		794		722			2,291		2,046
Increase in cash surrender value of BOLI		606		512			1,803		1,462
Gain on BOLI death benefit		-		-			-		4,346
Net gain (loss) on sale of securities available-for-sale		743		-			743		(5,686	)
Net gain (loss) on deferred compensation benefits		1,277		(304	)		2,849		1,894
Other		1,083		983			3,266		3,455
Total non-interest income		6,280		3,606			16,122		12,513
Non-interest expense
Salaries and employee benefits		19,049		17,172			54,551		54,693
Net gain (loss) on deferred compensation benefits		1,277		(304	)		2,849		1,894
Data processing		1,513		1,254			4,503		3,821
Occupancy		1,318		1,191			3,793		3,599
Deposit insurance		705		687			2,119		2,052
Professional services		968		687			2,130		2,042
Marketing		504		440			1,546		1,335
Other		2,421		3,341			7,207		10,037
Total non-interest expense		27,755		24,468			78,698		79,473
INCOME BEFORE INCOME TAXES		30,518		29,579			91,911		87,568
Income tax expense		8,397		7,545			25,300		20,679
NET INCOME	$	22,121	$	22,034		$	66,611	$	66,889

Earnings per common share:
Basic	$	29.96	$	29.23		$	89.91	$	88.06
Diluted	$	29.96	$	29.23		$	89.91	$	88.06

Weighted average number of common shares
Basic		738,421		753,780			740,898		759,600
Diluted		738,421		753,780			740,898		759,600

See accompanying notes to the consolidated financial statements.

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FARMERS & MERCHANTS BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2024			2023			2024			2023
Net income	$	22,121		$	22,034		$	66,611		$	66,889
Other comprehensive income
Unrealized gains/(losses) on available-for-sale securities		8,769			(5,181	)		5,074			(4,011	)
Reclassification adjustment for (gains)/losses on available-for-sale securities		(743	)		-			(743	)		5,686
Amortization of unrealized loss on securities transferred to held-to-maturity		(17	)		(28	)		(66	)		(105	)
Net unrealized gains/(losses) on securities		8,009			(5,209	)		4,265			1,570
Income tax (expense)/benefit		(2,368	)		1,540			(1,261	)		(464	)
Other comprehensive income/(loss), net of tax		5,641			(3,669	)		3,004			1,106
Total comprehensive income	$	27,762		$	18,365		$	69,615		$	67,995

See accompanying notes to the consolidated financial statements.

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FARMERS & MERCHANTS BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

	For the three and nine months ended September 30, 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 June 30, 2024		739,308		$	7		$	27,931		$	563,383	$	(15,101	)	$	576,220
Net income		-			-			-			22,121		-			22,121
Other comprehensive income, net of tax		-			-			-			-		5,641			5,641
Repurchase of common stock		(1,313	)		-			(1,286	)		-		-			(1,286	)
Balance as of September 30, 2024		737,995		$	7		$	26,645		$	585,504	$	(9,460	)	$	602,696

Balance as of June 30, 2023		754,523		$	8		$	43,263		$	488,501	$	(17,063	)	$	514,709
Net income		-			-			-			22,034		-			22,034
Other comprehensive loss, net of tax		-			-			-			-		(3,669	)		(3,669	)
Repurchase of common stock		(2,510	)		(1	)		(2,450	)		-		-			(2,451	)
Balance as of September 30, 2023		752,013		$	7		$	40,813		$	510,535	$	(20,732	)	$	530,623

(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, 2023		747,971		$	7		$	36,852		$	525,360		$	(12,464	)	$	549,755
Cumulative change from adoption of ASU 2023-02		-			-			-			40			-			40
Net income		-			-			-			66,611			-			66,611
Other comprehensive income, net of tax		-			-			-			-			3,004			3,004
Cash dividends declared ($8.80 per share)		-			-			-			(6,507	)		-			(6,507	)
Repurchase of common stock		(9,976	)		-			(10,207	)		-			-			(10,207	)
Balance as of September 30, 2024		737,995		$	7		$	26,645		$	585,504		$	(9,460	)	$	602,696

Balance as of December 31, 2022		768,337		$	8		$	57,206		$	449,932		$	(21,838	)	$	485,308
Net income		-			-			-			66,889			-			66,889
Other comprehensive income, net of tax		-			-			-			-			1,106			1,106
Cash dividends declared ($8.30 per share)		-			-			-			(6,286	)		-			(6,286	)
Repurchase of common stock		(16,324	)		(1	)		(16,393	)		-			-			(16,394	)
Balance as of September 30, 2023		752,013		$	7		$	40,813		$	510,535		$	(20,732	)	$	530,623

See accompanying notes to the consolidated financial statements.

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FARMERS & MERCHANTS BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
(Dollars in thousands)	2024			2023
Cash flows from operating activities:
Net income	$	66,611		$	66,889
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		-			7,057
Depreciation and amortization		2,191			1,833
Net (accretion) amortization of securities premiums and discounts		(1,132	)		11
Increase in cash surrender value of BOLI		(1,803	)		(1,462	)
Gain on BOLI death benefit		-			(4,346	)
Decrease/(increase) in deferred income taxes, net		5,829			(1,994	)
(Gain)/Loss on sale of securities available-for-sale		(743	)		5,686
Net changes in:
Other assets		(3,146	)		2,368
Other liabilities		22,728			18,297
Net cash provided by operating activities		90,535			94,339
Cash flows from investing activities:
Net change in loans and leases held for investment		(49,540	)		(59,022	)
Purchase of available-for-sale securities		(300,456	)		(4,515	)
Purchase of held-to-maturity securities		(3,043	)		(3,814	)
Proceeds from sales, maturities, calls and pay downs of available-for-sale securities		87,693			46,751
Proceeds from maturities, calls and pay downs of held-to-maturity securities		40,247			37,524
Purchase of premises and equipment		(1,413	)		(4,493	)
Purchase of other investments		(14,486	)		(5,263	)
Redemption of other investments		5,917			-
Proceeds from bank-owned life insurance		3,281			11,752
Proceeds from sale of assets		-			27
Net cash (used in) provided by investing activities		(231,800	)		18,947
Cash flows from financing activities:
Net increase/(decrease) in deposits		40,587			(10,502	)
Cash dividends paid		(6,507	)		(6,286	)
Net cash used in share repurchases of common stock		(10,207	)		(16,394	)
Net cash provided by (used in) financing activities		23,873			(33,182	)
Net change in cash and cash equivalents		(117,392	)		80,104
Cash and cash equivalents, beginning of period		410,642			588,257
Cash and cash equivalents, end of period	$	293,250		$	668,361

Supplemental disclosures of cash flow information:
Cash paid for interest	$	12,631		$	18,664
Income taxes paid	$	4,241		$	16

Supplemental disclosures of non-cash transactions:
Net change in unrealized losses on securities available-for-sale	$	(4,331	)	$	(1,676	)

See accompanying notes to the consolidated financial statements.

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Basis of Presentation and Significant Accounting Policies

The accompanying unaudited consolidated financial statements include the accounts of Farmers & Merchants Bancorp (“FMCB” or “Bancorp”), a bank holding company incorporated in the State of Delaware and its wholly owned subsidiary, Farmers & Merchants Bank of Central California (“F&M Bank” or the “Bank”) collectively (the “Company”).

These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In 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 Unaudited 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 Summary of Critical Accounting Policies and Estimates included in this Quarterly Report on Form 10-Q.

The information included in this Form 10-Q should be read in conjunction with our 2023 Form 10-K. Interim results are not necessarily indicative of results for a full year or any other interim period.

Summary of Significant Accounting Policies

Allowance for Credit Losses — Loans and Leases — On January 1, 2022, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, as amended, which replaced the incurred loss methodology that delays recognition until it is probable a loss has been incurred with an expected loss methodology that is referred to as CECL. Both the FASB Staff Q&A Topic 326, No. 1 and the federal financial institution regulatory agencies (“Financial Institution Letter FIL-17-2019”), along with the Securities and Exchange Commission, have confirmed that smaller, less complex organizations are not required to implement complex models, developed by outside vendors to calculate current expected credit losses. Accordingly, in adopting ASU 2016-13 (Topic 326) Management determined that the Weighted Average Remaining Maturity (“WARM”) methodology was most appropriate given the Company’s current size and complexity. Under the WARM methodology, lifetime losses are calculated by determining the remaining life of the loan pool, and then applying a loss rate over the remaining life of the loan. The methodology considers historical loss experience to estimate credit losses for the remaining balance of the loan pool. The calculated loss rate is applied to the contractual term (adjusted for prepayments) to determine the loan pools current expected credit losses.

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1—Basis of Presentation and Significant Accounting Policies—Continued

The Company’s methodology is set forth in a formal policy and takes into consideration the need for a valuation allowance for loans evaluated on a collective (pool) basis, which have similar risk characteristics as well as allowances to individual loans that do not share similar risk characteristics. The methodology for determining the allowance for credit losses (“ACL”) on loans is considered a critical accounting policy by management because of the high degree of judgment involved. The subjectivity of the assumptions used and the potential for changes in the economic environment could result in changes to the amount of the recorded ACL. Among the material estimates required to establish the ACL are: (i) a weighted average loss estimate categorized by loan segmentation; (ii) average duration calculations in order to assess the loss factors over the life of the loan segment; (iii) an economic report to assess macro and micro-economic factors influencing loss potential; (iv) value of collateral and strength of borrowers; (v) the amount and timing of future cash flows for loans individually evaluated; and (vi) the determination of the qualitative loss factors. All of these estimates are susceptible to significant change.

The Company extends loans to commercial and consumer customers primarily in Central California. These lending activities expose the Company to the risk borrowers will default, causing loan losses. The Company’s lending activities are exposed to various qualitative risks. All loan segments are exposed to risks inherent in the economy and market conditions. Significant risk characteristics related to the commercial and industrial loan segment include the borrowers’ business performance and financial condition, and the value of collateral for secured loans. Significant risk characteristics related to the commercial real estate segment include the borrowers’ business performance and the value of properties collateralizing the loans. Significant risk characteristics related to the agricultural and agricultural real estate segments include the borrowers’ business performance, the value of properties collateralizing the loans, stemming from commodity market prices and yield risks associated with water availability, disease, and inclement weather. Significant risk characteristics related to the construction real estate loan segment include the borrowers’ performance in successfully developing the real estate into the intended purpose and the value of the property collateralizing the loans. Significant risk characteristics related to the commercial leasing portfolio include issues that may arise from bank ownership and conversion of collateral with shifting market values. Significant risk characteristics related to the residential real estate segment include the borrowers’ financial wherewithal to service the mortgages and the value of the property collateralizing the loans. Significant risk characteristics related to the consumer loan segment include the financial condition of the borrowers and the value of collateral securing the loans.

The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The provision for credit losses reflects the amount required to maintain the ACL at an appropriate level based upon management’s evaluation of the adequacy of the current expected credit losses. The Company increases its ACL by charging provisions for credit losses on its consolidated statement of income. Losses related to specific assets are applied as a reduction of the carrying value of the assets and charged against the ACL when management believes a loan balance is uncollectable. Recoveries on previously charged off loans are credited to the ACL.

Management estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, and economic forecasts. Management evaluates the reasonable and supportable forecasts over the expected duration of the loan portfolio segments which ranges from 6 months to 3.5 years. Historical credit loss experience, which is based on peer information, provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made, using qualitative factors, when management expects current conditions and economic forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The ACL is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. These factors include, among others, changes in the size and composition of the loan portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions.

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1—Basis of Presentation and Significant Accounting Policies—Continued

Management incorporates reasonable and supportable information in order to calculate the ACL. This includes the ability to reliably forecast and document exogenous events that may affect the credit performance of the Company’s loan portfolio.

Management utilizes the seventeen loan segments used in preparing regulatory Call Reports to segment its portfolio and to extract the relevant information needed to calculate its ACL. This allows management the ability to obtain historical loss information for itself as well as its peer groups. Additionally, management’s third party ALM application also utilizes a similar loan segmentation in calculating weighted average remaining life and duration including estimated prepayments. Management uses the duration of each loan segment to estimate the remaining life of loans to ensure that the model covers credit losses over the expected life of such loans.

The foundation of CECL modeling is the ability to estimate expected credit losses over the lifetime of a loan. Management must use relevant available information about past events (e.g. historical losses) current conditions, and economic forecasts about future conditions. Historical annual loss rates serve as the starting point to estimate expected credit losses. Management uses a “through-the-cycle” historical credit loss experience as its baseline for historical credit losses. Prior to the third quarter of 2024 the representative period used for the full economic credit cycle was the period from 2009 to 2023 for all loan segments. In the third quarter of 2024, the representative period was updated to be from the first quarter of 2008 to the fourth quarter of 2017 for all segments except farmland and agriculture for which the first quarter of 1985 to the fourth quarter of 1994 was used. These updated periods were deemed to be more comparable to a typical economic cycle as recent years were impacted by significant federal government stimulus in response to the effects of COVID-19. Additionally, due to the nature of the 1985 economic downturn and the specific impact that had on the farmland and agricultural lenders, we believe this is more comparable for the farmland and agricultural loan segments.

Management has collected historical loss information on its own loan portfolio as well as peer group information by the seventeen loan segments over this time horizon using information available from the Federal regulators using FFIEC call report data for all segments except for farmland and agricultural loan segments, which utilize Federal Reserve Economic Data (FRED). Federal regulators have placed the Company into a peer group of banks with assets between $3 billion to $10 billion. This peer group segmentation includes approximately 200 banks nationally. This peer group is similar in asset size and concentration with the exception of the agricultural portfolio as the Company is the 15^th largest agricultural lender in the country. As a result, none of the banks in the above national peer group have an agricultural concentration similar to the Company. Therefore, for purposes of historical losses, the Company uses the asset size peer group loss information for all loan segments except farmland and agricultural loans which uses a national peer group regardless of asset size. Using these peer groups, the model calculates the mean historical loss rate over the respective economic credit cycles described above for both the Company and its peer groups. Prior to the third quarter of 2024, the Company did use its own historical loss information for the farmland and agricultural loan segments, however this was changed to accommodate the new historical loss period discussed in the previous paragraph. Additionally, prior to the third quarter of 2024, the mean historical loss rates derived in the above process were then adjusted by a standard deviation calculation based on management’s reasonable and supportable forecasts. However, in the third quarter of 2024 the standard deviation calculation was removed and replaced with a linear loss calculation over the defined economic credit cycles which management believes reduces the extent of management judgments in determination of the forecast.

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1—Basis of Presentation and Significant Accounting Policies—Continued

In addition to the quantitative calculations described above, management employs the use of qualitative factors as defined by the Interagency Policy Statement on Allowance for Credit Losses (“SR 20-12”). Management considers qualitative or environmental factors that are likely to cause estimated credit losses associated with our existing portfolio to differ from historical loss experience, as defined in the Interagency guidance, including but not limited to:

■

Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments.

■

Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses.

■

Changes in the nature and volume of the portfolio and in the terms of loans.

■

Changes in the experience, ability, and depth of lending management and other relevant staff.

■

Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans.

■

Changes in the quality of the institution’s loan review system.

■

Changes in the value of underlying collateral for collateral-dependent loans.

■

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

■

The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.

Prior to the third quarter of 2024, the additional expected credit losses from qualitative factors associated with specific idiosyncratic risks relied upon specific data intensive inputs and calculations and generally relied upon more subjective inputs as part of the calculations resulting in a cumbersome and complex process. In the third quarter of 2024, in an effort to improve the process, while reducing the extent of management judgments, management implemented a risk setting scorecard approach which was applied to each loan portfolio segment to capture all risks across the various qualitative factors above utilizing a linear range of potential loss patterns to ensure potential losses are appropriately supported through historical losses.

As highlighted above, the Company made updates to certain assumptions and processes in the calculation of the ACL during the third quarter of 2024 including the forecast, economic credit cycle, the peer groups and the qualitative factor calculations process. The Company applied these updates to the current period and all prior periods presented and noted that the updates had no material impact to the Company’s consolidated financial statements.

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.

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1—Basis of Presentation and Significant Accounting Policies—Continued

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.

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.

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1—Basis of Presentation and Significant Accounting Policies—Continued

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 has only one operating segment therefore the impact of this new standard is not expected to have a material impact on the new disclosures upon adoption.

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.

In March 2024, the FASB issued ASU 2024-01, “Compensation - Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards”. This ASU provides an illustrative example intended to demonstrate how entities that account for profits interest and similar awards would determine whether a profits interest award should be accounted for in accordance with Topic 718. This ASU is effective for annual periods beginning after December 15, 2024, and interim periods within those annual periods. Early adoption is permitted. If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the annual period that includes that interim period. Transition can be done either retrospectively or prospectively. The Company does not expect the adoption of ASU 2024-01 to have a material impact on its consolidated financial statements.

In March 2024, the FASB issued ASU 2024-02, “Codification Improvements - Amendments to Remove References to the Concept Statements” (“ASU 2024-02”). ASU 2024-02 contains amendments to the FASB Accounting Standards Codification that remove references to various FASB Concepts Statements. In most instances, the references are extraneous and not required to understand or apply the guidance. In other instances, the references were used in prior Statements to provide guidance in certain topical areas. ASU 2024-02 is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is evaluating the impact of adopting this new standard but does not expect it to have a material impact on its consolidated financial statements.

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 1—Basis of Presentation and Significant Accounting Policies—Continued

The Company has considered all newly issued accounting guidance that is applicable to its operations and the preparation of its unaudited consolidated statements, including those it has not yet adopted. ASUs not listed above were assessed and either determined to be not applicable or expected to have a minimal impact on the Company’s consolidated financial statements.

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 September 30, 2024
U.S. Government-sponsored securities	$	2,791	$	11	$	14	$	2,788
Mortgage-backed securities⁽¹⁾		390,440		4,753		17,474		377,719
Collateralized mortgage obligations⁽¹⁾		5,725		99		10		5,814
Corporate securities		14,786		120		16		14,890
Other		352		-		-		352
Total available-for-sale securities	$	414,094	$	4,983	$	17,514	$	401,563

⁽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.

The book values, estimated fair values and unrecognized gains and losses of investments classified as held-to-maturity are as follows:

									Allowance
	Amortized		Gross Unrecognized						for Credit
(Dollars in thousands)	Cost		Gains		Losses		Fair Value		Losses
As of September 30, 2024
Mortgage-backed securities⁽¹⁾	$	635,630	$	47	$	116,056	$	519,621	$	-
Collateralized mortgage obligations⁽¹⁾		69,705		-		11,878		57,827		-
Municipal securities		75,175		163		85		75,253		450
Total held-to-maturity securities	$	780,510	$	210	$	128,019	$	652,701	$	450

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

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 2—Investment Securities—Continued

									Allowance
	Amortized		Gross Unrecognized						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.

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:

	September 30, 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	$	7	$	-	$	990	$	14	$	997	$	14
Mortgage-backed securities⁽¹⁾		10,700		61		72,950		17,413		83,650		17,474
Collateralized mortgage obligations⁽¹⁾		-		-		475		10		475		10
Corporate securities		10,008		16		-		-		10,008		16
Total available-for-sale securities	$	20,715	$	77	$	74,415	$	17,437	$	95,130	$	17,514

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

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 2—Investment Securities—Continued

					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 September 30, 2024, the Company held 180 available-for-sale securities of which 7 were in an unrealized loss position for less than twelve months and 116 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 and it is likely that the Company will not be required to sell the securities prior to their anticipated recovery at maturity, it has been determined that there is no expected credit loss. 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:

	September 30, 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

	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

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 2—Investment Securities—Continued

The amortized cost and estimated fair values of investment securities at September 30, 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	$	359	$	359	$	982	$	977
After one year through five years		18,598		18,632		22,486		22,283
After five years through ten years		2,233		2,206		14,939		14,403
After ten years		392,904		380,366		742,103		615,038
Total	$	414,094	$	401,563	$	780,510	$	652,701

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 summarizes 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
September 30, 2024
Municipal securities	$	19,484	$	401	$	55,290	$	75,175
Total	$	19,484	$	401	$	55,290	$	75,175

As of September 30, 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

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 2—Investment Securities—Continued

Proceeds from sales and calls of investment securities were as follows:

(Dollars in thousands)	Gross Proceeds		Gross Gains		Gross Losses
Nine months ended September 30, 2024	$	70,251	$	839	$	96
Nine months ended September 30, 2023	$	30,482	$	-	$	5,686

Pledged Securities

As of September 30, 2024, investment securities carried at $725.3 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) borrowings, and other government agency deposits as required by law. This 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)	September 30, 2024			December 31, 2023
Loans and leases held for investment, net
Real estate:
Commercial	$	1,352,983		$	1,323,038
Agricultural		737,274			742,009
Residential and home equity		403,096			399,982
Construction		205,877			212,362
Total real estate		2,699,230			2,677,391
Commercial & industrial		530,564			499,373
Agricultural		304,425			313,737
Commercial leases		174,293			169,684
Consumer and other		5,223			5,212
Total gross loans and leases		3,713,735			3,665,397
Unearned income		(9,626	)		(10,708	)
Total net loans and leases		3,704,109			3,654,689
Allowance for credit losses		(75,816	)		(74,965	)
Total loans and leases held for investment, net	$	3,628,293		$	3,579,724

At September 30, 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 $1.5 billion, respectively. The borrowing capacity on these loans was $789.6 million from FHLB and $1.2 billion from the FRB at September 30, 2024.

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 3—Loans and Leases—Continued

The following tables show an aging analysis of the loan and lease portfolio, net of unearned income, by the time past due for the periods indicated:

	September 30, 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	$	1,345,487	$	170	$	-	$	-	$	170	$	1,345,657
Agricultural		731,270		6,004		-		-		6,004		737,274
Residential and home equity		402,419		-		-		677		677		403,096
Construction		205,877		-		-		-		-		205,877
Total real estate		2,685,053		6,174		-		677		6,851		2,691,904
Commercial & industrial		529,764		-		800		-		800		530,564
Agricultural		304,425		-		-		-		-		304,425
Commercial leases		171,993		-		-		-		-		171,993
Consumer and other		5,214		9		-		-		9		5,223
Total loans and leases, net	$	3,696,449	$	6,183	$	800	$	677	$	7,660	$	3,704,109

	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

Non-accrual loans are summarized as follows:

(Dollars in thousands)	September 30, 2024		December 31, 2023
Non-accrual loans and leases:
Real estate:
Commercial	$	-	$	-
Agricultural		-		-
Residential and home equity		677		-
Construction		-		-
Total real estate		677		-
Commercial & industrial		-		-
Agricultural		-		-
Commercial leases		-		-
Consumer and other		-		-
Total non-accrual loans and leases	$	677	$	-

There was no related allowance for the non-accrual loans at September 30, 2024.

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 3—Loans and Leases—Continued

The Company did not enter into any loan modifications with borrowers experiencing financial difficulty during the nine months ended September 30, 2024. During the nine months ended September 30, 2023, we had one residential real estate loan modified in the amount of $127,000 that had the contractual interest rate decreased by 1.00% and the contractual term extended by 120 months.

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 nine months ended September 30, 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.

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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.

	September 30, 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	$	1,344,017	$	1,640	$	-	$	-	$	1,345,657	$	21,038
Agricultural		707,492		29,782		-		-		737,274		23,418
Residential and home equity		402,081		101		914		-		403,096		6,967
Construction		205,877		-		-		-		205,877		3,473
Total real estate		2,659,467		31,523		914		-		2,691,904		54,896
Commercial & industrial		522,223		7,507		834		-		530,564		7,791
Agricultural		304,290		96		39		-		304,425		6,929
Commercial leases		167,848		4,145		-		-		171,993		5,969
Consumer and other		5,052		-		171		-		5,223		231
Total loans and leases, net	$	3,658,880	$	43,271	$	1,958	$	-	$	3,704,109	$	75,816

	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

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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:

	September 30, 2024
	Term Loans Amortized Cost Basis by Origination Year
(Dollars in thousands)	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost		Revolving Loans Converted to Term		Total
Net loans and leases held for investment
Real estate:
Commercial
Pass	$	44,140	$	118,495	$	167,481	$	212,230	$	138,838	$	302,518	$	263,727	$	96,588	$	1,344,017
Special mention		-		-		-		-		-		170		1,470		-		1,640
Substandard		-		-		-		-		-		-		-		-		-
Total Commercial	$	44,140	$	118,495	$	167,481	$	212,230	$	138,838	$	302,688	$	265,197	$	96,588	$	1,345,657
Commercial
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Agricultural
Pass	$	16,595	$	36,868	$	69,600	$	39,312	$	47,087	$	159,697	$	305,970	$	32,363	$	707,492
Special mention		-		-		-		-		2,101		11,073		16,608		-		29,782
Substandard		-		-		-		-		-		-		-		-		-
Total Agricultural	$	16,595	$	36,868	$	69,600	$	39,312	$	49,188	$	170,770	$	322,578	$	32,363	$	737,274
Agricultural
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Residential and home equity
Pass	$	24,213	$	39,320	$	58,992	$	84,421	$	73,839	$	75,063	$	46,165	$	68	$	402,081
Special mention		-		-		-		-		-		101		-		-		101
Substandard		-		-		-		-		-		708		206		-		914
Total Residential and home equity	$	24,213	$	39,320	$	58,992	$	84,421	$	73,839	$	75,872	$	46,371	$	68	$	403,096
Residential and home equity
Current-period gross charge-offs	$	-	$	29	$	-	$	-	$	-	$	-	$	-	$	-	$	29

Construction
Pass	$	5,787	$	-	$	1,500	$	-	$	-	$	1,575	$	197,015	$	-	$	205,877
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Total construction	$	5,787	$	-	$	1,500	$	-	$	-	$	1,575	$	197,015	$	-	$	205,877
Construction
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Total Real estate	$	90,735	$	194,683	$	297,573	$	335,963	$	261,865	$	550,905	$	831,161	$	129,019	$	2,691,904

Commercial & industrial
Pass	$	18,779	$	41,283	$	22,657	$	18,087	$	4,339	$	7,039	$	383,585	$	26,454	$	522,223
Special mention		-		2,465		73		11		-		404		1,798		2,756		7,507
Substandard		-		-		-		34		-		-		800		-		834
Total Commercial & industrial	$	18,779	$	43,748	$	22,730	$	18,132	$	4,339	$	7,443	$	386,183	$	29,210	$	530,564
Commercial & industrial
Current-period gross charge-offs	$	-	$	100	$	-	$	-	$	100	$	-	$	-	$	-	$	200

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 3—Loans and Leases—Continued

	September 30, 2024
	Term Loans Amortized Cost Basis by Origination Year
(Dollars in thousands)	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost		Revolving Loans Converted to Term		Total
Net loans and leases held for investment
Agricultural
Pass	$	1,207	$	3,481	$	3,710	$	1,828	$	431	$	2,621	$	279,706	$	11,306	$	304,290
Special mention		-		-		44		-		-		-		9		43		96
Substandard		-		-		-		-		-		-		39		-		39
Total Agricultural	$	1,207	$	3,481	$	3,754	$	1,828	$	431	$	2,621	$	279,754	$	11,349	$	304,425
Agricultural
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Commercial leases
Pass	$	21,673	$	76,638	$	23,646	$	8,880	$	8,302	$	28,709	$	-	$	-	$	167,848
Special mention		-		-		4,145		-		-		-		-		-		4,145
Substandard		-		-		-		-		-		-		-		-		-
Total Commercial leases	$	21,673	$	76,638	$	27,791	$	8,880	$	8,302	$	28,709	$	-	$	-	$	171,993
Commercial leases
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Consumer and other
Pass	$	754	$	1,292	$	631	$	161	$	16	$	1,450	$	748	$	-	$	5,052
Special mention		-		-		-		-		-		-		-		-		-
Substandard		153		-		-		-		-		18		-		-		171
Total Consumer and other	$	907	$	1,292	$	631	$	161	$	16	$	1,468	$	748	$	-	$	5,223
Consumer and other
Current-period gross charge-offs	$	50	$	2	$	-	$	-	$	-	$	-	$	-	$	-	$	52
Total net loans and leases
Pass	$	133,148	$	317,377	$	348,217	$	364,919	$	272,852	$	578,672	$	1,476,916	$	166,779	$	3,658,880
Special mention		-		2,465		4,262		11		2,101		11,748		19,885		2,799		43,271
Substandard		153		-		-		34		-		726		1,045		-		1,958
Total net loans and leases	$	133,301	$	319,842	$	352,479	$	364,964	$	274,953	$	591,146	$	1,497,846	$	169,578	$	3,704,109
Total current-period gross charge-offs	$	50	$	131	$	-	$	-	$	100	$	-	$	-	$	-	$	281

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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		Revolving Loans Converted to Term		Total
Net loans and leases held for investment
Real estate:
Commercial
Pass	$	121,418	$	169,171	$	221,708	$	143,502	$	67,505	$	261,344	$	249,087	$	74,982	$	1,308,717
Special mention		-		2,395		-		-		-		2,216		1,600		-		6,211
Substandard		-		-		-		-		-		-		-		-		-
Total Commercial	$	121,418	$	171,566	$	221,708	$	143,502	$	67,505	$	263,560	$	250,687	$	74,982	$	1,314,928
Commercial
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Agricultural
Pass	$	37,849	$	71,367	$	40,848	$	50,445	$	12,008	$	165,267	$	328,105	$	23,246	$	729,135
Special mention		-		-		-		594		2,020		9,715		-		-		12,329
Substandard		-		-		-		-		-		545		-		-		545
Total Agricultural	$	37,849	$	71,367	$	40,848	$	51,039	$	14,028	$	175,527	$	328,105	$	23,246	$	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	$	44,463	$	69	$	399,217
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		765		-		-		765
Total Residential and home equity	$	41,173	$	62,505	$	88,559	$	78,810	$	13,299	$	71,104	$	44,463	$	69	$	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		-		-		-		-		-		-		-		-		-
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	$	831,542	$	98,297	$	2,669,281

Commercial & industrial
Pass	$	49,162	$	25,795	$	21,695	$	7,193	$	4,123	$	6,674	$	352,502	$	19,295	$	486,439
Special mention		2,500		27		4,903		466		-		-		4,519		43		12,458
Substandard		-		-		-		-		-		476		-		-		476
Total Commercial & industrial	$	51,662	$	25,822	$	26,598	$	7,659	$	4,123	$	7,150	$	357,021	$	19,338	$	499,373
Commercial & industrial
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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		Revolving Loans Converted to Term		Total
Net loans and leases held for investment
Agricultural
Pass	$	3,013	$	4,585	$	2,296	$	688	$	1,026	$	2,116	$	292,391	$	4,381	$	310,496
Special mention		-		52		75		-		-		-		3,109		-		3,236
Substandard		-		-		-		-		5		-		-		-		5
Total Agricultural	$	3,013	$	4,637	$	2,371	$	688	$	1,031	$	2,116	$	295,500	$	4,381	$	313,737
Agricultural
Current-period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Commercial leases
Pass	$	81,287	$	31,954	$	10,786	$	9,514	$	4,667	$	28,872	$	-	$	-	$	167,080
Special mention		-		-		-		-		6		-		-		-		6
Substandard		-		-		-		-		-		-		-		-		-
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
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	$	1,475,423	$	121,973	$	3,618,482
Special mention		2,500		2,474		4,978		1,060		2,026		11,931		9,228		43		34,240
Substandard		152		-		-		-		5		1,810		-		-		1,967
Total net loans and leases	$	338,204	$	371,281	$	391,245	$	291,260	$	106,279	$	549,753	$	1,484,651	$	122,016	$	3,654,689
Total current-period gross charge-offs	$	41	$	3	$	-	$	-	$	-	$	16	$	-	$	-	$	60

The Bank, in the ordinary course of business, grants loans to the Company’s executive officers and directors, including their families and firms in which they are principal owners. Activity in such loans is summarized as follows:

	September 30,			December 31,
(Dollars in thousands)	2024			2023

Balance at beginning of the period	$	17,035		$	17,521
New loans or advances during year		1,571			1,706
Repayments		(3,145	)		(2,192	)
Balance at end of period	$	15,461		$	17,035

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 allowance for credit losses. During the nine months ended September 30, 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 September 30, 2024 and December 31, 2023, respectively:

	September 30, 2024
(Dollars in thousands)	Real Estate		Vehicles and Equipment		Other		Total
Collateral dependent loans and leases
Real estate:
Commercial	$	-	$	-	$	-	$	-
Agricultural		-		-		-		-
Residential and home equity		914		-		-		914
Construction		-		-		-		-
Total real estate		914		-		-		914
Commercial & industrial		-		-		800		800
Agricultural		-		73		-		73
Commercial leases		-		-		-		-
Consumer and other		-		18		-		18
Total gross loans and leases	$	914	$	91	$	800	$	1,805

	December 31, 2023
(Dollars in thousands)	Real Estate		Vehicles and Equipment		Other		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

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 3—Loans and Leases—Continued

Allowance for Credit Losses

The allowance for credit losses (“ACL”) is the combination of the allowance for credit losses for loan and lease losses and the allowance for credit losses for unfunded loan commitments. The ACL for unfunded loan commitments is included within “Interest payable and other liabilities” on the consolidated balance sheets.

The following tables present a summary of the activity in the ACL for loan and lease losses and ACL for unfunded loan commitments for the periods indicated:

	For the Three Months Ended September 30,
	2024									2023
(Dollars in thousands)	ACL for Loans and Leases			ACL for Unfunded Commitments			Allowance for Credit Losses			ACL for Loans and Leases			ACL for Unfunded Commitments		Allowance for Credit Losses
Balance at beginning of period	$	75,032		$	3,690		$	78,722		$	71,112		$	2,090	$	73,202
Provision for/(reversal of) credit losses		1,000			(1,000	)		-			3,000			-		3,000
Charge-offs		(255	)		-			(255	)		(15	)		-		(15	)
Recoveries		39			-			39			62			-		62
Net (charge-offs)/recoveries		(216	)		-			(216	)		47			-		47
Balance at end of period	$	75,816		$	2,690		$	78,506		$	74,159		$	2,090	$	76,249

	For the Nine Months Ended September 30,
	2024									2023
(Dollars in thousands)	ACL for Loans and Leases			ACL for Unfunded Commitments			Allowance for Credit Losses			ACL for Loans and Leases			ACL for Unfunded Commitments		Allowance for Credit Losses
Balance at beginning of period	$	74,965		$	3,690		$	78,655		$	66,885		$	2,090	$	68,975
Provision for/(reversal of) credit losses		1,000			(1,000	)		-			7,000			-		7,000
Charge-offs		(281	)		-			(281	)		(47	)		-		(47	)
Recoveries		132			-			132			321			-		321
Net (charge-offs)/recoveries		(149	)		-			(149	)		274			-		274
Balance at end of period	$	75,816		$	2,690		$	78,506		$	74,159		$	2,090	$	76,249

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 3—Loans and Leases—Continued

Changes in the allowance for credit losses on loans and leases are as follows:

	For the Three Months Ended September 30, 2024
(Dollars in thousands)	Commercial & Agricultural R/E		Construction		Residential & Home Equity			Commercial & Agricultural			Commercial Leases			Consumer & Other			Total
ACL for loans and leases:
Balance at beginning of period	$	39,094	$	2,165	$	7,584		$	17,880		$	7,597		$	712		$	75,032
Provision for/(reversal of) credit losses		5,362		1,308		(593	)		(2,988	)		(1,628	)		(461	)		1,000
Charge-offs		-		-		(29	)		(200	)		-			(26	)		(255	)
Recoveries		-		-		5			28			-			6			39
Net (charge-offs)/recoveries		-		-		(24	)		(172	)		-			(20	)		(216	)
Balance at end of period	$	44,456	$	3,473	$	6,967		$	14,720		$	5,969		$	231		$	75,816

	For the Three Months Ended September 30, 2023
(Dollars in thousands)	Commercial & Agricultural R/E			Construction		Residential & Home Equity		Commercial & Agricultural		Commercial Leases		Consumer & Other			Total
ACL for loans and leases:
Balance at beginning of period	$	34,695		$	3,195	$	7,179	$	24,194	$	1,657	$	192		$	71,112
Provision for/(reversal of) credit losses		(730	)		417		268		2,748		310		(13	)		3,000
Charge-offs		-			-		-		-		-		(15	)		(15	)
Recoveries		-			-		11		43		-		8			62
Net (charge-offs)/recoveries		-			-		11		43		-		(7	)		47
Balance at end of period	$	33,965		$	3,612	$	7,458	$	26,985	$	1,967	$	172		$	74,159

	For the Nine Months Ended September 30, 2024
(Dollars in thousands)	Commercial & Agricultural R/E		Construction			Residential & Home Equity			Commercial & Agricultural			Commercial Leases			Consumer & Other			Total
ACL for loans and leases:
Balance at beginning of period	$	33,837	$	4,432		$	7,770		$	22,252		$	6,537		$	137		$	74,965
Provision for/(reversal of) credit losses		10,619		(959	)		(793	)		(7,399	)		(568	)		100			1,000
Charge-offs		-		-			(29	)		(200	)		-			(52	)		(281	)
Recoveries		-		-			19			67			-			46			132
Net (charge-offs)/recoveries		-		-			(10	)		(133	)		-			(6	)		(149	)
Balance at end of period	$	44,456	$	3,473		$	6,967		$	14,720		$	5,969		$	231		$	75,816

	For the Nine Months Ended September 30, 2023
(Dollars in thousands)	Commercial & Agricultural R/E		Construction		Residential & Home Equity			Commercial & Agricultural		Commercial Leases		Consumer & Other			Total
ACL for loans and leases:
Balance at beginning of period	$	32,551	$	3,026	$	7,508		$	21,705	$	1,924	$	171		$	66,885
Provision for/(reversal of) credit losses		1,244		586		(78	)		5,196		43		9			7,000
Charge-offs		-		-		(14	)		-		-		(33	)		(47	)
Recoveries		170		-		42			84		-		25			321
Net (charge-offs)/recoveries		170		-		28			84		-		(8	)		274
Balance at end of period	$	33,965	$	3,612	$	7,458		$	26,985	$	1,967	$	172		$	74,159

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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)	September 30, 2024		December 31, 2023
Certificates of deposit:
Certificates of deposit less than or equal to $250,000	$	350,304	$	325,798
Certificates of deposit greater than $250,000		407,048		318,830
Total certificates of deposit	$	757,352	$	644,628

Scheduled maturities for certificates of deposit are as follows:

(Dollars in thousands)	Amount
2024	$	294,209
2025		449,006
2026		10,827
2027		2,175
2028		947
Thereafter		188
Total certificates of deposit	$	757,352

Overdrawn deposit balances of $144,000 and $149,000 were classified as consumer loans at September 30, 2024 and December 31, 2023, respectively.

Note 5—Short-term borrowings

As of September 30, 2024 and December 31, 2023, committed lines of credit arrangements totaling $2.1 billion and $2.2 billion, respectively, were available to the Company from unaffiliated banks.

The Company is a member of the FHLB of San Francisco and has a committed credit line of $791.2 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 based on the borrowing term. The overnight borrowing rate was 5.15% as of September 30, 2024.

The Company has $1.5 billion in pledged loans with the FRB. As of September 30, 2024, the Company’s overnight borrowing capacity using the primary credit facilities from the Fed account was $1.2 billion. The overnight borrowing rate was 5.00% as of September 30, 2024.

There were no outstanding advances on the above borrowing facilities as of September 30, 2024 or December 31, 2023.

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 incurred a net expense of $6.8 million to the ERP during the nine months ended September 30, 2024 and $6.8 million during the nine months ended September 30, 2023. The Company’s carrying value of the liability under the ERP was $60.0 million as of September 30, 2024 and $57.5 million as of December 31, 2023, 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 September 30, 2024 and December 31, 2023 totaled 48,861 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 September 30, 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.

Net gains on ERP plan investments were $2.4 million and $1.6 million at September 30, 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.

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6—Employee Benefit Plans—Continued

The Company incurred a net expense of $3.4 million to the SMRP during the nine months ended September 30, 2024 and $3.1 million for nine months ended September 30, 2023. The Company’s carrying value of the liability under the SMRP was $20.2 million as of September 30, 2024 and $16.9 million as of December 31, 2023, 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 September 30, 2024 and December 31, 2023 totaled 19,663 and 17,806 shares with an historical cost basis of $14.7 million and $12.8 million, respectively. All amounts have been fully funded into the Rabbi Trust as of September 30, 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.

Net gains on SMRP plan investments were $0.5 million compared to net gains of $0.3 million at September 30, 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:

•

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.

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 7—Fair Value—Continued

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 an allowance for credit losses 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.

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.

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 7—Fair Value—Continued

The following tables presents information about the Company’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 Company to determine such fair value for the periods indicated.

September 30, 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	$	2,788	$	-	$	2,788	$	-	$	2,788
Mortgage-backed securities		377,719		-		377,719		-		377,719
Collateralized mortgage obligations		5,814		-		5,814		-		5,814
Corporate securities		14,890		-		14,890		-		14,890
Other		352		-		352		-		352

Fair valued on a non-recurring basis:
Collateral dependent loans	$	1,805	$	-	$	-	$	1,805	$	1,805
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.

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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.

September 30, 2024			Fair Value Measurements
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total Fair Value
Financial Assets:
Cash and cash equivalents	$	293,250	$	293,250	$	-	$	-	$	293,250
Held-to-maturity securities		780,060		-		597,411		55,290		652,701
Non-marketable securities, at cost		15,549		-		15,549		-		15,549
Loans and leases, net		3,628,293		-		-		3,438,493		3,438,493

Financial Liabilities:
Total deposits	$	4,708,682	$	-	$	4,705,569	$	-	$	4,705,569
Subordinated debentures		10,310		-		13,246		-		13,246

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		-		613,393		58,192		671,585
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	$	-	$	4,662,782	$	-	$	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. 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.

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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)	September 30, 2024		December 31, 2023

Commitments to extend credit, including unsecured commitments of $20,322 and $19,858 as of September 30, 2024 and December 31, 2023, respectively	$	976,850	$	1,150,142
Stand-by letters of credit, including unsecured commitments of $4,587 and $7,010 as of September 30, 2024 and December 31, 2023, respectively		15,891		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 allowance for credit losses for unfunded loan commitments, which amounted to $2.7 million at September 30, 2024 and $3.7 million at 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 48 months with final expiration in October 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 September 30, 2024 and December 31, 2023, the balance of the investments in LIHTC was $42.4 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 $17.5 million and $15.5 million at September 30, 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 2041. Additionally, during the three and nine months ended September 30, 2024 and the year ended December 31, 2023, the Company recognized tax credits from its investments in LIHTC of $1.2 million, $3.5 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.

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 9—Subsequent Events

The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The Company evaluated subsequent events through the date and time its unaudited condensed consolidated financial statements were issued.

On October 3, 2024, the Company entered into and executed a Stock Purchase Agreement with the living trust of one of the Company’s largest shareholders under which the Company repurchased 37,990 shares of common stock of the Company at a cost of $34.8 million. At the time of purchase, this transaction represented the repurchase of 5.15% of the Company’s outstanding shares of common stock. The Company’s total shares of common stock outstanding were reduced from 737,987 as of October 2, 2024 to 699,997 shares as a result of this transaction. The common stock was repurchased under the Company’s $55.0 million share repurchase program which after the aforementioned transaction has approximately $20.1 million remaining which expires on December 31, 2026.

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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 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, 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 real estate loan portfolio;

■	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).

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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”). The Bank was organized and incorporated in 1916 under the laws of the State of California as a non-Federal Reserve member, California state-chartered bank subject to primary regulation, supervision and examination by the Federal Deposit Insurance Corporation (“FDIC”) and by the DFPI. The Bank serves its customers through 32 convenient locations including 29 full-service branches in Galt, Linden, Manteca, Riverbank, Modesto, Sacramento, Elk Grove, Turlock, Hilmar, Stockton, Merced, Walnut Creek, Concord, Walnut Grove, Oakland and Napa.

The Company’s outstanding common stock as of September 30, 2024, consisted of 737,995 shares of common stock, $0.01 par value and no shares of preferred stock were issued or outstanding as of September 30, 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.

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.

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Our critical accounting policies and estimates are described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K filed with the SEC on March 14, 2024. During the third quarter of 2024, updates were made to the accounting policy for the allowance for credit losses on loans and leases. See Note 1. in the “Notes to Consolidated Financial Statements” for further details on the updates that were made. The updates had no material impact to the Company’s consolidated financial statements.

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 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	September 30, 2024			December 31, 2023			September 30, 2023
(Dollars in thousands, except per share data)
Shareholders’ equity	$	602,696		$	549,755		$	530,623
Less: Intangible assets		13,007			13,419			13,563
Tangible common equity	$	589,689		$	536,336		$	517,060

Total Assets	$	5,418,132		$	5,308,928		$	5,375,375
Less: Intangible assets		13,007			13,419			13,563
Tangible assets	$	5,405,125		$	5,295,509		$	5,361,812

Tangible common equity ratio⁽¹⁾		10.91	%		10.13	%		9.64	%
Book Value per common share⁽²⁾	$	816.67		$	735.00		$	705.60
Tangible book value per common share⁽³⁾	$	799.04		$	717.05		$	687.57
Common shares oustanding		737,995			747,971			752,013

⁽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.

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 and nine month periods ended September 30, 2024 and 2023 and the material changes in financial condition, operating income, and expense of the Company and its subsidiaries as shown in the accompanying unaudited 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.

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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 September 30,						Nine Months Ended September 30,
(dollars in thousands, except per share amounts)	2024			2023			2024			2023
Earnings Summary:
Interest income	$	68,635		$	65,713		$	205,107		$	186,362
Interest expense		16,642			12,272			50,620			24,777
Net interest income		51,993			53,441			154,487			161,585
Provision for credit losses		-			3,000			-			7,057
Noninterest income		6,280			3,606			16,122			12,513
Noninterest expense		27,755			24,468			78,698			79,473
Income before taxes		30,518			29,579			91,911			87,568
Income tax expense		8,397			7,545			25,300			20,679
Net Income	$	22,121		$	22,034		$	66,611		$	66,889

Per Common Share Data:
Diluted earnings per common share	$	29.96		$	29.23		$	89.91		$	88.06
Book value per common share	$	816.67		$	705.60		$	816.67		$	705.60
Tangible book value per common share⁽¹⁾	$	799.04		$	687.57		$	799.04		$	687.57

Performance Ratios:
Return on average assets		1.65	%		1.65	%		1.65	%		1.70	%
Return on average equity		15.03	%		16.80	%		15.55	%		17.43	%
Net interest margin (tax equivalent)		4.07	%		4.17	%		4.04	%		4.33	%
Yield on average loans and leases (tax equivalent)		6.13	%		5.87	%		6.11	%		5.77	%
Cost of average total deposits		1.39	%		1.01	%		1.39	%		0.70	%
Efficiency ratio		47.63	%		42.89	%		46.13	%		45.65	%
Loan-to-deposit ratio		78.87	%		75.13	%		78.87	%		75.13	%
Percentage of checking deposits to total deposits		50.01	%		51.72	%		50.01	%		51.72	%

Capital Ratios Bancorp:
Common equity tier 1 capital to risk-weighted assets		13.47	%		12.48	%		13.47	%		12.48	%
Tier 1 capital to risk-weighted assets		13.70	%		12.72	%		13.70	%		12.72	%
Risk-based capital to risk-weighted assets		14.95	%		13.97	%		14.95	%		13.97	%
Tier 1 leverage capital ratio		11.32	%		10.22	%		11.32	%		10.22	%
Tangible common equity ratio⁽¹⁾		10.91	%		9.64	%		10.91	%		9.64	%

⁽¹⁾See “Non-GAAP Measurements”

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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 September 30,
	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	$	286,108		$	3,893			5.41	%	$	592,012		$	8,075			5.41	%
Investment securities:⁽¹⁾
Taxable securities		1,055,551			7,116			2.70	%		908,591			4,588			2.02	%
Non-taxable securities⁽²⁾		62,021			767			4.95	%		61,580			727			4.72	%
Total investment securities		1,117,572			7,883			2.82	%		970,171			5,315			2.19	%
Loans:⁽³⁾
Real estate:
Commercial		1,343,844			18,118			5.36	%		1,290,892			16,990			5.22	%
Agricultural		732,100			10,600			5.76	%		749,899			10,497			5.55	%
Residential and home equity		404,014			4,979			4.90	%		394,500			4,527			4.55	%
Construction		205,061			3,623			7.03	%		180,658			3,168			6.96	%
Total real estate		2,685,019			37,320			5.53	%		2,615,949			35,182			5.34	%
Commercial & industrial		507,504			9,693			7.60	%		479,113			8,729			7.23	%
Agricultural		308,530			6,547			8.44	%		296,973			6,138			8.20	%
Commercial leases		174,939			3,046			6.93	%		127,383			2,018			6.29	%
Consumer and other		5,500			92			6.65	%		5,432			86			6.28	%
Total loans and leases		3,681,492			56,698			6.13	%		3,524,850			52,153			5.87	%
Non-marketable securities		15,549			317			8.11	%		15,549			322			8.22	%
Total interest earning assets		5,100,721			68,791			5.37	%		5,102,582			65,865			5.12	%
Allowance for credit losses		(75,488	)								(72,639	)
Non-interest earning assets		350,420									324,105
Total average assets	$	5,375,653								$	5,354,048

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing deposits:
Demand	$	877,985			776			0.35	%	$	973,380			741			0.30	%
Savings and money market accounts		1,636,997			8,358			2.03	%		1,691,933			6,919			1.62	%
Certificates of deposit greater than $250,000		404,988			3,231			3.17	%		285,741			2,495			3.46	%
Certificates of deposit less than $250,000		354,311			4,056			4.55	%		302,826			1,896			2.48	%
Total interest bearing deposits		3,274,281			16,421			2.00	%		3,253,880			12,051			1.47	%
Short-term borrowings		-			-			0.00	%		-			-			0.00	%
Subordinated debentures		10,310			221			8.53	%		10,310			221			8.50	%
Total interest bearing liabilities		3,284,591			16,642			2.02	%		3,264,190			12,272			1.49	%
Non-interest bearing deposits		1,410,025									1,474,752
Total funding		4,694,616			16,642			1.41	%		4,738,942			12,272			1.03	%
Other non-interest bearing liabilities		92,147									90,510
Shareholders’ equity		588,890									524,596
Total average liabilities and shareholders’ equity	$	5,375,653								$	5,354,048

Net interest income and margin⁽⁴⁾				$	52,149			4.07	%				$	53,593			4.17	%
Interest rate spread								3.35	%								3.63	%
Tax equivalent adjustment					(156	)								(152	)
Net interest income				$	51,993			4.06	%				$	53,441			4.16	%

⁽¹⁾Excludes average unrealized losses of $17.0 million and $24.4 million for the three months ended September 30, 2024, and 2023, respectively, which are included in non-interest earning assets.

⁽²⁾Yield 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 $1.3 million for the three months ended September 30, 2024 and 2023.

⁽⁴⁾Net interest margin is computed by dividing net interest income by average interest earning assets.

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	For the Nine Months Ended September 30,
	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	$	358,180		$	14,640			5.46	%	$	524,288		$	19,918			5.08	%
Investment securities:⁽¹⁾
Taxable securities		1,012,943			19,309			2.54	%		932,901			14,019			2.00	%
Non-taxable securities⁽²⁾		62,483			2,289			4.88	%		60,238			2,144			4.75	%
Total investment securities		1,075,426			21,598			2.68	%		993,139			16,163			2.17	%
Loans:⁽³⁾
Real estate:
Commercial		1,338,178			53,711			5.36	%		1,292,817			50,383			5.21	%
Agricultural		727,478			31,361			5.76	%		728,035			29,873			5.49	%
Residential and home equity		403,737			14,666			4.85	%		390,788			12,889			4.41	%
Construction		217,368			11,502			7.07	%		171,223			9,033			7.05	%
Total real estate		2,686,761			111,240			5.53	%		2,582,863			102,178			5.29	%
Commercial & industrial		497,925			28,101			7.54	%		473,346			24,699			6.98	%
Agricultural		313,596			19,606			8.35	%		286,314			16,955			7.92	%
Commercial leases		173,474			9,064			6.98	%		123,534			5,770			6.24	%
Consumer and other		5,614			285			6.78	%		5,514			249			6.04	%
Total loans and leases		3,677,370			168,296			6.11	%		3,471,571			149,851			5.77	%
Non-marketable securities		15,549			1,038			8.92	%		15,549			878			7.55	%
Total interest earning assets		5,126,525			205,572			5.36	%		5,004,547			186,810			4.99	%
Allowance for credit losses		(75,518	)								(70,062	)
Non-interest earning assets		345,236									314,924
Total average assets	$	5,396,243								$	5,249,409

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing deposits:
Demand	$	914,908			3,568			0.52	%	$	994,113			1,629			0.22	%
Savings and money market accounts		1,623,784			23,253			1.91	%		1,626,444			14,575			1.20	%
Certificates of deposit greater than $250,000		419,528			10,641			3.39	%		220,973			4,637			2.81	%
Certificates of deposit less than $250,000		354,164			11,510			4.34	%		257,158			3,315			1.72	%
Total interest bearing deposits		3,312,384			48,972			1.97	%		3,098,688			24,156			1.04	%
Short-term borrowings		22,629			986			5.82	%		1			-			0.00	%
Subordinated debentures		10,310			662			8.58	%		10,310			621			8.05	%
Total interest bearing liabilities		3,345,323			50,620			2.02	%		3,108,999			24,777			1.07	%
Non-interest bearing deposits		1,393,955									1,547,327
Total funding		4,739,278			50,620			1.43	%		4,656,326			24,777			0.71	%
Other non-interest bearing liabilities		85,788									81,348
Shareholders’ equity		571,177									511,735
Total average liabilities and shareholders’ equity	$	5,396,243								$	5,249,409

Net interest income and margin⁽⁴⁾				$	154,952			4.04	%				$	162,033			4.33	%
Interest rate spread								3.34	%								3.92	%
Tax equivalent adjustment					(465	)								(448	)
Net interest income				$	154,487			4.03	%				$	161,585			4.32	%

⁽¹⁾Excludes average unrealized losses of $19.6 million and $25.0 million for the nine months ended September 30, 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 $4.1 million and $4.6 million for the nine months ended September 30, 2024 and 2023, respectively.

⁽⁴⁾Net interest margin is computed by dividing net interest income by average interest earning assets.

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Third Quarter 2024 vs. Third Quarter 2023

Interest-bearing deposits with banks and Federal Reserve 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 5.41% for the third quarter of 2024 and 2023, respectively. Average interest-bearing deposits with banks were $286.1 million and $592.0 million for the quarter ended September 30, 2024 and 2023, respectively. The decrease in average interest-bearing deposits with banks was primarily due to the purchases of investment securities and funding of loans. Interest income on interest-bearing deposits with banks was $3.9 million and $8.1 million for the quarter ended September 30, 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 $1.1 billion and $970.2 million for the quarter ended September 30, 2024 and 2023, respectively. The increase in average investment securities was due to purchases of investment securities as part of repositioning the balance sheet. The average yield on total investment securities was 2.82% and 2.19% for the quarter ended September 30, 2024 and 2023, respectively.

Average loans and leases held for investment were $3.7 billion and $3.5 billion for the quarter ended September 30, 2024 and 2023, respectively. The average yield on the loan and lease portfolio was 6.13% and 5.87% for the quarter ended September 30, 2024 and 2023, respectively. The increase in the loan yield reflects the increase in average loan balances and the increase in market interest rates over the last year.

Average interest-bearing deposits were $3.3 billion for the quarter ended September 30, 2024 and 2023, respectively. The average rate paid on interest-bearing deposits was 2.00% and 1.47% for the quarter ended September 30, 2024 and 2023, respectively. Total interest expense on interest-bearing deposits was $16.4 million and $12.1 million for the quarter ended September 30, 2024 and 2023, respectively, with the increases driven by increases in short-term market interest rates and customers seeking higher rates on deposit products. The average rate paid on total funding costs was 1.41% and 1.03% for the quarter ended September 30, 2024 and 2023, respectively.

Nine Months Ended September 30, 2024 vs. Nine Months Ended September 30, 2023

Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 5.46% and 5.08% for the first nine months ended of 2024 and 2023, respectively. Average interest-bearing deposits with banks were $358.2 million and $524.3 million for the nine months ended September 30, 2024 and 2023, respectively. The decrease in average interest-bearing deposits with banks was primarily due to the purchases of investment securities and funding of loans. Interest income on interest-bearing deposits with banks was $14.6 million and $19.9 million for the nine months ended September 30, 2024 and 2023, respectively.

Average total investment securities were $1.1 billion and $1.0 billion for the nine months ended September 30, 2024 and 2023, respectively. The increase in average investment securities was due to purchases of investment securities as part of repositioning the balance sheet. The average yield on total investment securities was 2.68% and 2.17% for the nine months ended September 30, 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 $3.5 billion for the nine months ended September 30, 2024 and 2023, respectively. The average yield on the loan and lease portfolio was 6.11% and 5.77% for the nine months ended September 30, 2024 and 2023, respectively. The increase in the loan yield reflects the increase in average loan balances and the increase market interest rates over the last year.

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Average interest-bearing deposits were $3.3 billion and $3.1 billion for the nine months ended September 30, 2024 and 2023, respectively. The average rate paid on interest-bearing deposits was 1.97% and 1.04% for the nine months ended September 30, 2024 and 2023, respectively. Total interest expense on interest-bearing deposits was $49.0 million and $24.2 million for the nine months ended September 30, 2024 and 2023, respectively, with the increases driven by increases in short-term market interest rates and customers seeking higher rates on deposit products. The average rate paid on total funding costs was 1.43% and 0.71% for the nine months ended September 30, 2024 and 2023, respectively.

Rate/Volume Analysis

The following table shows the change in interest income and interest expense and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates. For purposes of this table, the change in interest due to both volume and rate has been allocated to change due to volume and rate in proportion to the relationship of absolute dollar amounts of change in each.

	Three Months Ended September 30, 2024 compared with 2023									Nine Months Ended September 30, 2024 compared with 2023
	Increase (Decrease) Due to:									Increase (Decrease) Due to:
(Dollars in thousands)	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Interest earnings deposits in other banks and federal funds sold		(4,184	)		2		$	(4,182	)		(6,689	)		1,411		$	(5,278	)
Investment securities:
Taxable securities		823			1,705			2,528			1,281			4,009			5,290
Non-taxable securities		5			35			40			81			64			145
Total investment securities		828			1,740			2,568			1,362			4,073			5,435
Loans:
Real estate:
Commercial		678			450			1,128			1,823			1,505			3,328
Agricultural		(262	)		365			103			(23	)		1,511			1,488
Residential and home equity		108			344			452			441			1,336			1,777
Construction		423			32			455			2,450			19			2,469
Total real estate		947			1,191			2,138			4,691			4,371			9,062
Commercial & industrial		517			447			964			1,333			2,069			3,402
Agricultural		233			176			409			1,683			968			2,651
Commercial leases		807			221			1,028			2,552			742			3,294
Consumer and other		1			5			6			5			31			36
Total loans and leases		2,505			2,040			4,545			10,264			8,181			18,445
Non-marketable securities		-			(5	)		(5	)		-			160			160
Total interest income		(851	)		3,777			2,926			4,937			13,825			18,762

Interest expense:
Interest bearing deposits:
Demand		(77	)		112			35			(140	)		2,079			1,939
Savings and money market accounts		(230	)		1,669			1,439			(24	)		8,702			8,678
Certificates of deposit greater than $250,000		958			(222	)		736			4,877			1,127			6,004
Certificates of deposit less than $250,000		366			1,794			2,160			1,630			6,565			8,195
Total interest bearing deposits		1,017			3,353			4,370			6,343			18,473			24,816

Short-term borrowings		-			-			-			-			986			986
Subordinated debentures		-			0			-			-			41			41
Total interest expense		1,017			3,353			4,370			6,343			19,500			25,843
Net interest income	$	(1,868	)	$	424		$	(1,444	)	$	(1,406	)	$	(5,675	)	$	(7,081	)

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Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2024 and 2023

	Three Months Ended September 30,										Nine Months Ended September 30,
	Three Months Ended September 30,				$ Better / (Worse)			% Better / (Worse)			Nine Months Ended September 30,				$ Better / (Worse)			% Better / (Worse)
(Dollars in thousands)	2024		2023		$ Better / (Worse)			% Better / (Worse)			2024		2023		$ Better / (Worse)			% Better / (Worse)
Selected Income Statement Information:
Interest income	$	68,635	$	65,713	$	2,922			4.45	%	$	205,107	$	186,362	$	18,745			10.06	%
Interest expense		16,642		12,272		(4,370	)		(35.61	%)		50,620		24,777		(25,843	)		(104.30	%)
Net interest income		51,993		53,441		(1,448	)		(2.71	%)		154,487		161,585		(7,098	)		(4.39	%)
Provision for credit losses		-		3,000		3,000			N/A			-		7,057		7,057			N/A
Net interest income after provision for credit losses		51,993		50,441		1,552			3.08	%		154,487		154,528		(41	)		(0.03	%)
Non-interest income		6,280		3,606		2,674			74.15	%		16,122		12,513		3,609			28.84	%
Non-interest expense		27,755		24,468		(3,287	)		(13.43	%)		78,698		79,473		775			0.98	%
Income before income tax expense		30,518		29,579		939			3.17	%		91,911		87,568		4,343			4.96	%
Income tax expense		8,397		7,545		(852	)		(11.29	%)		25,300		20,679		(4,621	)		(22.35	%)
Net income	$	22,121	$	22,034	$	87			0.39	%	$	66,611	$	66,889	$	(278	)		(0.42	%)

For the three and nine months ended September 30, 2024, net income was $22.1 million and $66.6 million, respectively compared to $22.0 million and $66.9 million for the same periods a year ago. For the three months ended September 30, 2024 the slight increase in net income was primarily the result of no provision for credit losses compared to $3.0 million for the same period a year earlier and an increase in non-interest income of $2.7 million. These increases were offset by a $3.3 million increase in non-interest expense, a $1.4 million decrease in net interest income and higher income tax expense of $0.9 million.

For the nine months ended September 30, 2024, the decrease in net income was primarily the result of lower net interest income of $7.1 million and a higher income tax expense of $4.6 million. In the first nine months of 2023, the Company also recognized in non-interest income, a $4.3 million death benefit on bank-owned life insurance (“BOLI”) which was 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 during the nine months ended September 30, 2023. This decrease was offset by no provision for credit losses in 2024 compared to $7.1 million in 2023, and an increase in non-interest income of $3.6 million.

Net Interest Income and Net Interest Margin

For the quarter ended September 30, 2024 and 2023, net interest income was $52.0 million compared with $53.4 million, respectively. The decrease is primarily the result of the net interest margin (tax equivalent basis) decreasing 10 basis points to 4.07% compared with 4.17% 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 to the interest rate environment as the federal funds rate increased by 25 basis points during the third quarter of 2023 and customer expectations for higher rates on deposit products. The loan yield increased 26 basis points from 5.87% to 6.13% compared to the third quarter of 2023. The cost of interest bearing deposits increased 53 basis points from 1.47% to 2.00% and outpaced the increase in loan yield over the same period a year earlier. The cost of average total deposits increased 38 basis points from 1.01% to 1.39%.

For the nine months ended September 30, 2024 and 2023, net interest income was $154.5 million compared with $161.6 million, respectively. The decrease is primarily the result of the net interest margin (tax equivalent basis) decreasing 29 basis points to 4.04% compared with 4.33% 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 to the interest rate environment as the federal funds rate increased by 100 basis points during the first nine months of 2023 and customer expectations for higher rates on deposit products. The loan yield increased 34 basis points from 5.77% to 6.11% the first nine months of 2024. The cost of interest bearing deposits increased 93 basis points from 1.04% to 1.97% and outpaced the increase in loan yield over the same period a year earlier. The cost of average total deposits increased 69 basis points from 0.70% to 1.39%.

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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 three months ended September 30, 2024 compared to $3.0 million for the same period a year ago. Net charge-offs during the three months ended September 30, 2024 were $216,000 compared to net recoveries of $47,000 for the same period a year ago.

The Company had no provision for credit losses during the first nine months of 2024 compared to $7.1 million during the first nine months of 2023. Net charge-offs during the first nine months of 2024 were $149,000 compared to net recoveries of $274,000 in the first nine months of 2023.

Non-interest Income

	Three Months Ended September 30,										Nine Months Ended September 30,
(Dollars in thousands)	2024		2023			$ Better / (Worse)		% Better / (Worse)			2024		2023			$ Better / (Worse)			% Better / (Worse)
Non-interest income:
Card processing		1,777		1,693		$	84		4.96	%		5,170		4,996		$	174			3.48	%
Gain on BOLI death benefit		-		-			-		-			-		4,346			(4,346	)		-
Net gain (loss) on deferred compensation benefits		1,277		(304	)		1,581		(520.07	%)		2,849		1,894			955			50.42	%
Service charges on deposit accounts		794		722			72		9.97	%		2,291		2,046			245			11.97	%
Increase in cash surrender value of BOLI		606		512			94		18.36	%		1,803		1,462			341			23.32	%
Net gain (loss) on sale of securities available-for-sale		743		-			743		-			743		(5,686	)		6,429			(113.07	%)
Other		1,083		983			100		10.17	%		3,266		3,455			(189	)		(5.47	%)
Total non-interest income	$	6,280	$	3,606		$	2,674		74.15	%	$	16,122	$	12,513		$	3,609			28.84	%

Non-interest income was $6.3 million for the quarter ended September 30, 2024 compared with $3.6 million for the same period a year earlier. The increase in non-interest income was primarily due to a $1.6 million increase in net gains on deferred compensation plan investments and $0.7 million net gain on sale of investment securities and a $0.1 million increase in other non-interest income.

The Company recorded net gains on deferred compensation plan investments of $1.3 million for the quarter ended September 30, 2024 compared with net losses of $0.3 million for the same respective period a year ago. 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 income increased $3.6 million, or 28.84%, to $16.1 million for the nine months ended September 30, 2024 compared with $12.5 million for the same period of 2023. The year-over-year increase in non-interest income was primarily due to an increase of $6.4 million in net gains on sales of investment securities consisting of a $0.7 million net gain during the nine months ended September 30, 2024 compared to a $5.7 million loss on sale of investment securities during the first quarter of 2023, an increase in net gains on deferred compensation plan investments of $1.0 million and a $0.3 million increase in cash surrender value of BOLI. These increases were partially offset with no gain on BOLI death benefits in 2024 compared to a $4.3 million gain in 2023.

The Company recorded net gains on deferred compensation plan investments of $2.8 million for the nine months ended September 30, 2024 compared with net gains of $1.9 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.

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Non-interest Expense

	Three Months Ended September 30,											Nine Months Ended September 30,
(Dollars in thousands)	2024		2023			$ Better / (Worse)			% Better / (Worse)			2024		2023		$ Better / (Worse)			% Better / (Worse)
Non-interest expense:
Salaries and employee benefits		19,049		17,172		$	(1,877	)		(10.93	%)		54,551		54,693	$	142			0.26	%
Data processing		1,513		1,254			(259	)		(20.65	%)		4,503		3,821		(682	)		(17.85	%)
Occupancy		1,318		1,191			(127	)		(10.66	%)		3,793		3,599		(194	)		(5.39	%)
Net gain (loss) on deferred compensation benefits		1,277		(304	)		(1,581	)		520.07	%		2,849		1,894		(955	)		(50.42	%)
Deposit insurance		705		687			(18	)		(2.62	%)		2,119		2,052		(67	)		(3.27	%)
Professional services		968		687			(281	)		(40.90	%)		2,130		2,042		(88	)		(4.31	%)
Marketing		504		440			(64	)		(14.55	%)		1,546		1,335		(211	)		(15.81	%)
Other		2,421		3,341			920			27.54	%		7,207		10,037		2,830			28.20	%
Total non-interest expense	$	27,755	$	24,468		$	(3,287	)		(13.43	%)	$	78,698	$	79,473	$	775			0.98	%

Non-interest expense increased $3.3 million, or 13.43%, to $27.8 million for the quarter ended September 30, 2024 compared with $24.5 million for the same period a year ago. This increase was primarily comprised of a $1.9 million increase in salaries and employee benefits, a $1.6 million increase in net gains on deferred compensation plan investments, a $0.3 million increase in professional fees and a $0.3 million increase in data processing expenses. These increases were partially offset by a $1.0 million decrease in other non-interest expense. The decrease in other non-interest expenses was due primarily to the adoption of ASU 2023-02 which shifts the amortization of low-income housing tax credits to the income tax line under the proportional amortization method. For the third quarter of 2024 this amounted to $1.3 million.

Net gains on deferred compensation plan obligations were $1.3 million for the quarter ended September 30, 2024 compared with net losses of $0.3 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.

Non-interest expense decreased $0.8 million, or 0.98%, to $78.7 million for the nine months ended September 30, 2024 compared with $79.5 million for the same period a year ago. This decrease was primarily comprised of a $2.8 million decrease in other miscellaneous expenses. 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 nine months of 2024 this amounted to $3.5 million. This decrease was partially offset by an increase of $1.0 million in net gain of deferred compensation plan investment, an increase of $0.7 million in data processing expenses, an increase of $0.2 million in marketing expenses and an increase of $0.2 million in occupancy expenses.

The Company recorded net gains on deferred compensation plan investments of $2.8 million for the nine months ended September 30, 2024 compared with net gains of $1.9 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.

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Income Tax Expense

For the three and nine months ended September 30, 2024, income tax expense was $8.4 million and $25.3 million, respectively compared to $7.5 million and $20.7 million for the same periods a year ago. The Company’s effective tax rate for the three and nine months ended September 30, 2024 was 27.51% and 27.53%, respectively compared to 25.51% and 23.61% for the same period in 2023. The Company’s higher income tax expense and effective tax rates for the first nine months of 2024 compared to 2023 was due in part to the adoption of ASC 2023-02 which shifts the amortization of low-income housing tax credits from other non-interest expense to the income tax line under the proportional amortization method thereby increasing income tax expense resulting in an increase in the effective tax rate. The Company’s effective tax rate for the nine months ended September 30, 2023 was also lower than normal due to the non-taxable BOLI death benefit gain of $4.3 million in 2023. The Company’s effective tax rate can also fluctuate from quarter to quarter due to changes in the mix of taxable and tax-exempt earning sources.

Balance Sheet Analysis

Total assets were $5.4 billion at September 30, 2024 compared with $5.3 billion at December 31, 2023, an increase of $109.2 million or 2.06%. Total cash and cash equivalents decreased $117.4 million from $410.7 million as of December 31, 2023 to $293.3 million as of September 30, 2024 while investment securities increased $181.9 million from $1.0 billion as of December 31, 2023 to $1.18 billion as of September 30, 2024. Loans held for investment grew $48.6 million or 1.36% to $3.6 billion at September 30, 2024 compared to December 31, 2023. Total deposits were $4.71 billion at September 30, 2024 compared with $4.67 billion at December 31, 2023, an increase of $40.6 million or 0.87%. Our loan to deposit ratio was 78.87% and 78.52% as of September 30, 2024 and December 31, 2023, respectively. Total shareholders’ equity grew $52.9 million from $549.8 million as of December 31, 2023 to $602.7 million as of September 30, 2024.

Cash and Cash Equivalents

The Company’s cash and cash equivalents consists of interest bearing deposits with banks and overnight investments in Federal Reserve balances. Interest bearing deposits with banks consisted primarily of FRB deposits. Interest bearing deposits with banks totaled $198.6 million at September 30, 2024 and $338.4 million at December 31, 2023. The decrease in interest-bearing deposits with banks was primarily due to the purchases of investment securities and funding of loans. The Company’s total cash and cash equivalents as of September 30, 2024 represents 5.41% of the Company’s total assets as compared to 7.73% as of December 31, 2023.

Investment Securities

The Company’s net investment portfolio increased by $181.9 million or 18.19% to $1.18 billion at September 30, 2024 compared to $1.0 billion at December 31, 2023. The increase was due to the purchase of $301.4 million in investments securities during the first nine months of 2024 offset by normal principal maturities or pay downs and sales of $69.6 million. During the first nine months of 2024, as part of managing the investment portfolio and balance sheet, the portfolio mix has shifted as available-for-sale securities increased from $182.5 million as of December 31, 2023 to $401.6 million as of September 30, 2024 while the held-to-maturity securities decreased from $817.7 million as of December 31, 2023 to $780.5 million as of September 30, 2024. The Company’s total investment portfolio as of September 30, 2024 represents 21.82% of the Company’s total assets as compared to 18.84% at December 31, 2023.

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

(Dollars in thousands)	September 30, 2024		December 31, 2023
Available-for-sale securities
U.S. Government-sponsored securities	$	2,788	$	3,224
Mortgage-backed securities⁽¹⁾		377,719		163,838
Collateralized mortgage obligations⁽¹⁾		5,814		535
Corporate securities		14,890		14,605
Other		352		310
Total available-for-sale securities	$	401,563	$	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)	September 30, 2024			December 31, 2023
Held-to-maturity securities
Mortgage-backed securities⁽¹⁾	$	635,630		$	664,728
Collateralized mortgage obligations⁽¹⁾		69,705			74,170
Municipal securities		75,175			78,790
Total held-to-maturity securities	$	780,510		$	817,688
Allowance for credit losses		(450	)		(450	)
Total held-to-maturity securities, net	$	780,060		$	817,238

⁽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 final maturities of investment securities and the weighted average yields of such securities, including the benefit of tax-exempt securities:

	As of September 30, 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	$	4		4.12	%	$	46		6.26	%	$	297		6.70	%	$	2,441		6.43	%		2,788		6.45	%
Mortgage-backed securities⁽¹⁾		3		3.05	%		3,696		2.57	%		1,909		3.70	%		372,111		4.57	%		377,719		4.54	%
Collateralized mortgage obligations⁽¹⁾		-		0.00	%		-		0.00	%		-		0.00	%		5,814		6.10	%		5,814		6.10	%
Corporate securities		-		0.00	%		14,890		5.72	%		-		0.00	%		-		0.00	%		14,890		5.72	%
Other		352		3.72	%		-		0.00	%		-		0.00	%		-		0.00	%		352		3.72	%
Total securities available-for-sale	$	359		3.72	%	$	18,632		5.10	%	$	2,206		4.10	%	$	380,366		4.61	%	$	401,563		4.62	%

⁽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 September 30, 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	%	$	3,760		0.72	%	$	8,179		1.62	%	$	623,691		1.78	%	$	635,630		1.90	%
Collateralized mortgage obligations⁽¹⁾		-		0.00	%		-		0.00	%		-		0.00	%		69,705		1.74	%		69,705		1.76	%
Municipal securities		982		3.24	%		18,727		3.80	%		6,760		4.04	%		48,706		3.90	%		75,175		3.24	%
Total securities held-to-maturity	$	982		3.24	%	$	22,487		3.29	%	$	14,939		2.72	%	$	742,102		1.92	%	$	780,510		2.02	%

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

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	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 September 30, 2024 totaled $3.7 billion, an increase of $49.4 million or 1.35% over December 31, 2023.

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

	September 30, 2024					December 31, 2023

(Dollars in thousands)	Dollars		Percent of Total			Dollars		Percent of Total
Gross Loans and Leases
Real estate:
Commercial	$	1,352,983		36.43	%	$	1,323,038		36.10	%
Agricultural		737,274		19.85	%		742,009		20.24	%
Residential and home equity		403,096		10.85	%		399,982		10.91	%
Construction		205,877		5.55	%		212,362		5.80	%
Total real estate		2,699,230		72.68	%		2,677,391		73.05	%
Commercial & industrial		530,564		14.29	%		499,373		13.62	%
Agricultural		304,425		8.20	%		313,737		8.56	%
Commercial leases		174,293		4.69	%		169,684		4.63	%
Consumer and other		5,223		0.14	%		5,212		0.14	%
Total gross loans and leases	$	3,713,735		100.00	%	$	3,665,397		100.00	%

The following table shows the maturity distribution and interest rate sensitivity of the loan and lease portfolio of the Company as of September 30, 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	$	104,824	$	398,478	$	815,005	$	34,676	$	1,352,983
Agricultural		61,983		167,600		459,993		47,698		737,274
Residential and home equity		25		4,662		112,054		286,355		403,096
Construction		176,059		28,039		1,779		-		205,877
Total real estate		342,891		598,779		1,388,831		368,729		2,699,230
Commercial & industrial		224,104		202,189		101,962		2,309		530,564
Agricultural		184,969		99,653		19,803		-		304,425
Commercial leases		4,911		50,677		118,705		-		174,293
Consumer and other		477		3,954		327		465		5,223
Total gross loans and leases	$	757,352	$	955,252	$	1,629,628	$	371,503	$	3,713,735
Rate structure for loans and leases
Fixed Rate	$	221,688	$	590,433	$	1,100,542	$	206,125	$	2,118,788
Adjustable Rate		535,664		364,819		529,086		165,378		1,594,947
Total gross loans and leases	$	757,352	$	955,252	$	1,629,628	$	371,503	$	3,713,735

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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)	September 30, 2024			December 31, 2023
Non-performing assets:
Non-accrual loans and leases
Real estate:
Commercial	$	-		$	-
Agricultural		-			-
Residential and home equity		677			-
Construction		-			-
Total real estate		677			-
Commercial & industrial		-			-
Agricultural		-			-
Commercial leases		-			-
Consumer and other		-			-
Subtotal		677			-
Total non-performing loans and leases	$	677		$	-
Other real estate owned (“OREO”)		873			873
Total non-performing assets	$	1,550		$	873

Selected ratios:
Non-performing loans to total loans and leases		0.02	%		0.00	%
Non-performing assets to total assets		0.03	%		0.02	%

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. The Company had $677,000 in non-accrual loans and leases as of September 30, 2024 and no non-accrual loans at December 31, 2023.

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 September 30, 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 individually evaluated 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”) methodology to calculate the ACL, as this method is deemed the most appropriate given the Company’s current size and complexity. See “Summary of Significant Accounting Policies - Allowance for Credit Losses – Loans and Leases.”

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The allowance for credit losses is the combination of the allowance for credit losses on loan and lease losses and the allowance for credit losses on unfunded loan commitments. The ACL for unfunded loan commitments is included within “Interest payable and other liabilities” on the consolidated balance sheets. The following table presents information regarding the allowance for credit losses on loans and leases held for investment as of the dates indicated:

	September 30,			December 31,
(Dollars in thousands)	2024			2023

Allowance for credit losses - loans and leases	$	75,816		$	74,965
Allowance for credit losses - unfunded commitments		2,690			3,690
Total allowance for credit losses	$	78,506		$	78,655

Allowance for loan and lease losses to loans and leases held for investment		2.04	%		2.05	%
Total allowance for credit losses to loans and leases held for investment		2.11	%		2.15	%

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The following table sets forth the activity in our allowance for credit losses on loans and leases held for investment for the periods indicated:

	Nine Months Ended September 30,
(Dollars in thousands)	2024			2023
Allowance for credit losses:
Balance at beginning of year	$	78,655		$	68,975
Provision for credit losses:
Allowance for credit losses- loans and leases		1,000			7,000
Allowance for credit losses- unfunded loan commitments		(1,000	)		-
Total provision for credit losses		-			7,000
Charge-offs:
Real estate:
Commercial		-			-
Agricultural		-			-
Residential and home equity		(29	)		(14	)
Construction		-			-
Total real estate		(29	)		(14	)
Commercial & industrial		(200	)		-
Agricultural		-			-
Commercial leases		-			-
Consumer and other		(52	)		(33	)
Total charge-offs		(281	)		(47	)
Recoveries:
Real estate:
Commercial		-			170
Agricultural		-			-
Residential and home equity		19			42
Construction		-			-
Total real estate		19			212
Commercial & industrial		51			57
Agricultural		16			27
Commercial leases		-			-
Consumer and other		46			25
Total recoveries		132			321
Net (charge-offs) / recoveries		(149	)		274
Balance at end of year	$	78,506		$	76,249

Selected financial information:
Net loans and leases held for investment	$	3,628,293		$	3,557,203
Average loans and leases		3,677,370			3,471,571
Non-performing loans and leases		677			4,496
Allowance for credit losses to non-performing loans and leases		11596.16	%		1695.93	%
Net (charge-offs)/recoveries to average loans and leases		(0.004	%)		0.01	%
Provision for credit losses to average loans and leases		0.00	%		0.20	%
Allowance for credit losses to gross loans and leases held for investment		2.11	%		2.14	%

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

	September 30, 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	$	21,038		36.43	%		1.55	%	$	26,093		36.10	%		1.97	%
Agricultural		23,418		19.85	%		3.18	%		7,744		20.24	%		1.04	%
Residential and home equity		6,967		10.85	%		1.73	%		7,770		10.91	%		1.94	%
Construction		3,473		5.55	%		1.69	%		4,432		5.80	%		2.09	%
Total real estate		54,896		72.68	%		2.03	%		46,039		73.05	%		1.72	%
Commercial & industrial		7,791		14.29	%		1.47	%		13,380		13.62	%		2.68	%
Agricultural		6,929		8.20	%		2.28	%		8,872		8.56	%		2.83	%
Commercial leases		5,969		4.69	%		3.42	%		6,537		4.63	%		3.85	%
Consumer and other		231		0.14	%		4.42	%		137		0.14	%		2.63	%
Total allowance for credit losses	$	75,816		100.00	%		2.04	%	$	74,965		100.00	%		2.05	%

Deposits

Total deposits increased $40.6 million from $4.67 billion as of December 31, 2023 to $4.71 billion as of September 30, 2024. The Company has experienced fluctuations in deposits during the year due in part to the seasonality within our agriculture client base and 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. During the third quarter deposits increased $111.6 million or 2.4% compared to June 30, 2024. As of September 30, 2024, the Company has no brokered deposits.

Non-interest bearing demand deposits were $1.5 billion as of September 30, 2024 and December 31, 2023. Non-interest bearing deposits were 31.13% of total deposits, as of September 30, 2024 and 31.76% as of December 31, 2023. Interest bearing deposits were $3.2 billion as of September 30, 2024 and December 31, 2023. Interest bearing deposits are comprised of interest-bearing transaction accounts, money market accounts, regular savings accounts, and certificates of deposit. Checking account deposits were 50.01% of total deposits as of September 30, 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:

	Nine Months Ended September 30,
	2024							2023
(Dollars in thousands)	Average Balance		Interest Expense		Average Rate			Average Balance		Interest Expense		Average Rate
Total deposits:
Interest bearing deposits:
Demand	$	914,908	$	3,568		0.52	%	$	994,113	$	1,629		0.22	%
Savings and money market		1,623,784		23,253		1.91	%		1,626,444		14,575		1.20	%
Certificates of deposit greater than $250,000		419,528		10,641		3.39	%		220,973		4,637		2.81	%
Certificates of deposit less than $250,000		354,164		11,510		4.34	%		257,158		3,315		1.72	%
Total interest bearing deposits		3,312,384		48,972		1.97	%		3,098,688		24,156		1.04	%
Non-interest bearing deposits		1,393,955							1,547,327
Total deposits	$	4,706,339	$	48,972		1.39	%	$	4,646,015	$	24,156		0.70	%

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 continued to place pressure on deposit pricing. The average cost of total deposits, including non-interest bearing deposits, increased to 1.39% for the three months ended September 30, 2024, compared to 1.01% for the same period a year ago and 1.14% as of December 31, 2023. The Company did reduce interest rates in September after the Federal Reserve cut interest rates resulting in a decrease in interest expense during the month of September.

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The following table shows deposits with a balance greater than $250,000 at September 30, 2024 and December 31, 2023:

	September 30,		December 31,
(Dollars in thousands)	2024		2023
Non-maturity deposits greater than $250,000	$	2,458,997	$	2,496,749
Certificates of deposit greater than $250,000, by maturity:
Less than 3 months		175,834		84,460
3 months to 6 months		136,764		111,866
6 months to 12 months		89,499		107,080
More than 12 months		4,951		15,423
Total certificates of deposit greater than $250,000	$	407,048	$	318,829
Total deposits greater than $250,000	$	2,866,045	$	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. As of September 30, 2024 and December 31, 2023, the Bank had $3.0 million, of these deposits.

Total estimated uninsured deposits based on our regulatory reporting amounted to $2.3 billion and $2.2 billion at September 30, 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. There were no FHLB advances at September 30, 2024 or December 31, 2023. There were no Federal Funds purchased or advances from the FRB at September 30, 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 December 17, 2024) and the rate was 8.05% as of September 30, 2024 and 8.49% at December 31, 2023. The average rate paid for these securities was 8.58% for the first nine months of 2024 and 8.05% for the first nine 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.

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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 $602.7 million at September 30, 2024, an increase of $52.9 million or 9.6% from $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 September 30, 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 September 30, 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 September 30, 2024 and December 31, 2023.

The Company’s and Bank’s actual and required capital amounts and ratios are as follows:

	September 30, 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	$	599,214		13.47	%	$	200,151		4.50	%		N/A		N/A
Tier 1 capital to risk-weighted assets		609,214		13.70	%		266,868		6.00	%		N/A		N/A
Risk-based capital to risk-weighted assets		665,100		14.95	%		355,824		8.00	%		N/A		N/A
Tier 1 leverage capital ratio		609,214		11.32	%		215,176		4.00	%		N/A		N/A

Bank:
CET1 capital to risk-weighted assets	$	610,086		13.72	%	$	200,147		4.50	%	$	289,101		6.50	%
Tier 1 capital to risk-weighted assets		610,086		13.72	%		266,863		6.00	%		355,817		8.00	%
Risk-based capital to risk-weighted assets		665,971		14.97	%		355,817		8.00	%		444,771		10.00	%
Tier 1 leverage capital ratio		610,086		11.34	%		215,117		4.00	%		268,896		5.00	%

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	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 September 10, 2024 the Board of Directors authorized a new share repurchase program (the “Repurchase Plan”) in which the Company may repurchase up to $55.0 million of the Company’s common stock, which represented approximately 9% of outstanding shareholders’ equity at the time of approval. The new Repurchase Plan extends through December 31, 2026. The Board concurrently terminated the existing $25.0 million repurchase plan previously approved on November 14, 2023. 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 nine months of 2024 the Company repurchased 9,976 shares under the Repurchase Plan, for a total of $10.2 million. As of September 30, 2024, there remains $55.0 million authorized for repurchases under the new Repurchase Plan. On October 3, 2024, the Company entered into and executed a Stock Purchase Agreement with the living trust of one of the Company’s largest shareholders under which the Company repurchased 37,990 shares of common stock of the Company at a cost of $34.8 million. At the time of purchase, this transaction represented the repurchase of 5.15% of the Company’s outstanding shares of common stock. The Company’s total shares of common stock outstanding were reduced from 737,995 as of September 30, 2024 to 699,997 shares as a result of this transaction. The common stock was repurchased under the Company’s $55.0 million share repurchase program which after the aforementioned transaction has approximately $20.1 million remaining which expires on December 31, 2026.

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.

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The following table sets forth our off-balance-sheet lending commitments as of September 30, 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	$	976,850	$	428,771	$	338,991	$	32,816	$	176,272
Standby letters of credit		15,891		13,587		1,804		500		-
Total off-balance sheet commitments	$	992,741	$	442,358	$	340,795	$	33,316	$	176,272

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 $2.7 million and $3.7 million at September 30, 2024 and December 31, 2023, respectively.

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 48 months with final expiration in October 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 $293.3 million or 5.41% of total assets as of September 30, 2024. The majority of cash is on deposit with the FRB and amounted to $198.6 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 to 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 September 30, 2024:

	September 30, 2024
(Dollars in thousands)	Total Credit Line Limit		Outstanding Amount		Remaining Credit Line Available		Value of Collateral Pledged
Additional liquidity sources:
Federal Reserve Bank	$	1,225,674	$	-	$	1,225,674	$	1,534,369
Federal Home Loan Bank		791,211		-		791,211		1,280,523
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	$	2,134,885	$	-	$	2,134,885	$	2,814,892

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We continued our focus on maintaining a strong liquidity position throughout the first nine 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 withdrawals for the foreseeable future. As of September 30, 2024, we had internal sources of liquidity comprised of $293.3 million in cash and $381.4 million unencumbered investment securities, which represented in the aggregate 12.3% of total assets. We also had $2.1 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 is 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.

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.

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 leases and purchases and sales of investment securities. As of September 30, 2024, we had unfunded loan commitments of $1.0 billion and unfunded letters of credit of $15.9 million. At September 30, 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 September 30, 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.

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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.

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 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 September 30, 2024, our loan and lease portfolio was comprised of 57.1% fixed rate and 43.0% 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.

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The following table present the projected change in the Company’s net interest income over the next twelve months and the economic value of equity at September 30, 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)
September 30, 2024
+300 bps		(1.7	%)		(11.3	%)
+200 bps		(1.3	%)		(7.8	%)
+100 bps		(0.6	%)		(3.0	%)
0 bps		-			-
-100 bps		(0.7	%)		(0.8	%)
-200 bps		(1.9	%)		(4.4	%)
-300 bps		(3.3	%)		(11.1	%)

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 nine months ended September 30, 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.

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.

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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 nine months ended September 30, 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 be purchased under the plans or programs (In thousands) ⁽¹⁾
Total 1st Quarter 2024		5,201	$	1,038.00		5,201	$	19,140
Total 2nd Quarter 2024		3,462	$	992.00		3,462		15,704

July 1, 2024 to July 31, 2024		743	$	972.00		743	$	14,982
August 1, 2024 to August 31, 2024		515		968.00		515		14,483
September 1, 2024 to September 30, 2024		55		956.00		55		54,962
Total 3rd Quarter 2024		1,313	$	970.00		1,313	$	54,962

Total 2024		9,976	$	1,013.00		9,976	$	54,962

⁽¹⁾The Company has repurchased a total of 10,400 shares or $10.5 million under the $25.0 million share repurchase program authorized in November 2023 which was cancelled on September 10, 2024. On September 10, 2024, the Board approved a new share repurchase program for $55.0 million through December 31, 2026.

⁽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 nine months ended September 30, 2024, excise tax expense totaled $101,000.

During the first nine months of 2024 the Company repurchased 9,976 shares under the Repurchase Plan, for a total of $10.2 million. As of September 30, 2024, there remains $55.0 million authorized for repurchases under the new Repurchase Plan. On October 3, 2024, the Company entered into and executed a Stock Purchase Agreement with the living trust of one of the Company’s largest shareholders under which the Company repurchased 37,990 shares of common stock of the Company at a cost of $34.8 million At the time of purchase, this transaction represented the repurchase of 5.15% of the Company’s outstanding shares of common stock. The Company’s total shares of common stock outstanding were reduced from 737,995 as of September 30, 2024 to 699,997 shares as a result of this transaction. The common stock was repurchased under the Company’s $55.0 million share repurchase program which after the aforementioned transaction has approximately $20.1 million remaining which expires on December 31, 2026.

Item 3.

Defaults upon Senior Securities

Not Applicable

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Item 4.

Mine Safety Disclosures

Not Applicable

Item 5.

Other Information

During the three months ended September 30, 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

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

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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: November 08, 2024	/s/ Kent A. Steinwert
	Kent A. Steinwert
	Director, Chairman, President and Chief Executive Officer (Principal Executive Officer)


Date: November 08, 2024	/s/ Bart R. Olson
	Bart R. Olson
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)