EDGAR 10-K Filing

Company CIK: 1085913
Filing Year: 2025
Filename: 1085913_10-K_2025_0001140361-25-008871.json

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ITEM 1. BUSINESS
Item 1.
Business
Organizational Structure
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 Board of Governors of the Federal Reserve System (“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 the Bank and for other banking or banking related subsidiaries, which the Company may establish or acquire. As a legal entity separate and distinct from its subsidiary, the Company’s principal source of funds is, and will continue to be, dividends paid by and other funds received from the Bank. Legal limitations are imposed on the amount of dividends that may be paid and loans that may be made by the Bank to the Company. See “Supervision and Regulation - Dividends and Other Transfer of Funds.” The Company’s outstanding common stock as of December 31, 2024, consisted of 699,798 shares of common stock, $0.01 par value. No shares of preferred stock were issued or outstanding as of December 31, 2024.
The Company operates all financial service activities through its wholly-owned banking subsidiary, Farmers & Merchants Bank of Central California (the “Bank”), which was organized in 1916. The Bank was incorporated 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’s two wholly-owned subsidiaries are Farmers & Merchants Investment Corporation and Farmers/Merchants Corporation. Farmers & Merchants Investment Corporation is currently dormant, and Farmers/Merchants Corporation acts as trustee on deeds of trust originated by the Bank. The Bank’s deposit accounts are insured under the Federal Deposit Insurance Act, as amended (“FDIA”), up to applicable limits. See “Supervision and Regulation - Deposit Insurance.”
In March 2002, F & M Bancorp, Inc. was created to protect the name “F & M Bank.” During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name, “F & M Bank,” as part of a larger effort to enhance the Company’s image and build brand name recognition. Since 2002, the Company has converted all of its daily operating and image advertising to the “F & M Bank” name and the Company’s logo, slogan and signage were redesigned to incorporate the trade name, “F & M Bank.”
In 2003, the Company formed a wholly-owned Connecticut statutory business trust, FMCB Statutory Trust I, for the sole purpose of issuing trust-preferred securities. See Note 9 “Long-Term Subordinated Debentures”, located in Item 8. “Financial Statements and Supplementary Data” in this Form 10-K.
Market Area
The Company’s primary service area is the mid Central Valley of California, including Sacramento, San Joaquin, Solano, Stanislaus and Merced counties, and the east region of the San Francisco Bay Area, including Napa, Alameda, and Contra Costa counties. The Company operates 30 full-service branches and 3 stand-alone ATMs. The following statistical data, for the counties in our market area, as of the most recent date available, are set forth below:
•
Sacramento County, with branches in Sacramento, Elk Grove, Galt and Walnut Grove. This county had a Population of 1.6 million and a Median Household Income of approximately $88,724. Significant employment sectors include the following: government, education & health trade, and transportation & utilities. Unemployment was at 4.6%.
•
San Joaquin County with branches in Lodi, Linden, Stockton, Lockeford, and Manteca. This county had a Population of 0.8 million and a Median Household Income of approximately $88,531. Significant employment sectors include the following: trade, transportation & utilities, government, and education & health services. Unemployment was at 6.4%.
•
Solano County, with a branch in Rio Vista. This county had a Population of 0.45 million and a Median Household Income of approximately $99,994. Significant employment in the following industries: education and health services, trade, transportation and utilities, and government. Unemployment was at 5.1%.
•
Stanislaus County, with branches in Modesto, Riverbank and Turlock. This county had a Population of 0.55 million and a Median Household Income of approximately $79,661. Significant employment in the following sectors: trade, transportation & utilities, educational & health services, and government. Unemployment was at 6.8%.
•
Merced County, with branches in Hilmar and Merced. This county had a Population of 0.29 million and a Median Household Income of approximately $65,044. Significant employment in the following sectors: government, trade, transportation & utilities, and farming. Unemployment was at 9.5%.
•
Alameda County, with a branch in Oakland. This county had a Population of 1.6 million and a Median Household Income of approximately $126,240. Significant employment in the following sectors: professional & business services, educational & health services, trade, and transportation & utilities. Unemployment was at 4.5%.
•
Contra Costa County, with branches in Concord, Danville, and Walnut Creek. This county had a Population of 1.2 million and a Median Household Income of approximately $125,727. Significant employment in the following sectors: professional & business services, educational & health services, trade, and transportation & utilities. Unemployment was at 4.6%.
•
Napa County, with a branch in Napa. This county had a Population of 0.13 million and a Median Household Income of approximately $108,970. Significant employment in the following sectors: manufacturing, leisure & hospitality, trade, and educational & health services. Unemployment was at 4.3%.
Through its network of banking offices, the Company emphasizes personalized service along with a broad range of banking services to businesses and individuals located in the service areas of its offices. Although the Company focuses on marketing its services to small and medium-sized businesses, a broad range of retail banking services are also made available to the local consumer market.
The Company offers a wide range of deposit products. These include checking, savings, money market, time certificates of deposit, individual retirement accounts and online banking services for both business and personal accounts.
The Company provides a broad complement of lending products, including commercial, commercial real estate, real estate construction, agribusiness, consumer, credit card, residential real estate loans, and equipment leases. Commercial products include term loans, leases, lines of credit and other working capital financing and letters of credit. Financing products for individuals include automobile financing, lines of credit, residential real estate, home improvement and home equity lines of credit.
The Company also offers a wide range of specialized services designed for the needs of its commercial accounts. These services include a credit card program for merchants, lockbox and other collection services, account reconciliation, investment sweep, on-line account access, and electronic funds transfers by way of domestic and international wire and automated clearinghouse.
The Company makes investment products available to customers, including mutual funds and annuities. These investment products are offered through a third party, which employs investment advisors to meet with and provide investment advice to the Company’s customers.
Competition
The banking and financial services industry in California generally, and in the Company’s market areas specifically, is highly competitive. The competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial service providers. The Company competes with other major commercial banks, diversified financial institutions, credit unions, savings institutions, money market and other mutual funds, mortgage companies, and a variety of other non-banking financial services and advisory companies. Federal legislation encourages competition between different types of financial service providers and has fostered new entrants into the financial services market. Non-traditional financial services firms, such as financial technology companies, are less regulated and continue to expand their offerings of services traditionally provided by financial institutions. It is anticipated that this trend will continue. Using the financial holding company structure, insurance companies and securities firms may compete more directly with banks and bank holding companies. Further, the new Trump Administration is expected to seek to promote innovation across the financial services industry through a regulatory environment that is favorable to cryptocurrencies, digital assets, open banking initiatives and financial technology companies, which has the potential to further increase competition within the banking industry.
Many of our competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader range of financial services than the Company. In order to compete with other financial service providers, the Company relies upon personal contact by its officers, directors, employees, and shareholders, along with various promotional activities and specialized services. In those instances where the Company is unable to accommodate a customer’s needs, the Company may arrange for those services to be provided through its correspondents.
The market shares of the Bank and all other banks within the eight counties in California in which we operate, at June 30, 2024 (the most recent data available), as reported by FDIC, are as follows:
County
F&M Bank
Deposits
All Banks
Deposits
F&M Bank
Deposit Share
(Dollars in thousands)
San Joaquin
$
1,922,064
$
14,907,748
12.89
%
Stanislaus
976,973
11,271,643
8.67
%
Merced
276,371
3,260,495
8.48
%
Solano
163,815
6,790,106
2.41
%
Sacramento
723,148
69,846,819
1.04
%
Contra Costa
485,516
52,224,470
0.93
%
Napa
25,534
4,619,081
0.55
%
Alameda
27,021
66,045,246
0.04
%
Total
$
4,600,442
$
228,965,608
2.01
%
Human Capital Resources
As of December 31, 2024, we employed 373 full-time-equivalent employees. The Company believes that its employee relations are satisfactory. For the year ended December 31, 2024, salaries and employee benefits expense totaled $72.5 million, representing 69% of our total non-interest expense. The Company makes significant investments in employee education, training, and recruiting.
We are led by an experienced management team with substantial experience in the markets we serve and the financial products we offer. Our business strategy focuses on providing products and services through long-term relationship managers. As a result, our success depends heavily on the performance of our employees, as well as on our ability to attract, motivate and retain highly qualified employees at all levels of the Company. We believe that our work environment contributes to employee satisfaction and retention.
We are committed to maintaining a work environment where every employee is treated with dignity and respect, free from the threat of discrimination and harassment. As stated in our Board approved (i) Code of Conduct and (ii) Prohibited Harassment Policy, we expect these same standards to apply to all stakeholders, and to our interactions with customers, vendors and independent contractors.
We are firmly committed to providing equal employment and advancement opportunities to all qualified individuals and will not tolerate any discrimination or harassment of any kind. Team members are encouraged to immediately report any discrimination or harassment to their supervisor and human resources.
Policies and Planning
We are proud to be an Equal Opportunity Employer and enforce those values throughout all of our operations. We prohibit discrimination in hiring or advancement against any individual on the basis of race, color, religion, gender, sex, national origin, age, marital status, pregnancy, physical or mental disability, genetics, veteran status, sexual orientation, or any other characteristic protected by applicable law.
We strive to ensure our team members have access to working conditions that provide a safe and healthy environment, free from work-related injuries and illnesses. Many of our locations employ badges and keypads to enter or to enter restricted areas of locations that have a public presence.
Each year our annual planning and budgeting process involves an assessment of staffing levels and skills and results in the development of targets for recruitment and training. In addition, our Board of Directors reviews all succession plans in place for key personnel.
Recruitment
We strive to recruit talent from both local educational institutions and the banking industry. The Company has full-time staff dedicated to our recruitment efforts and we utilize many of the major recruitment firms and websites. Annually we visit local colleges and universities for job fairs and other recruitment events, which we believe allows us to identify those students who have the skills and aptitudes we need in the Company. The results of these efforts has been a consistent flow of candidates to fill our staffing needs as we grow.
Compensation
Salary and Bonuses
We have job descriptions and salary grade ranges for all of our positions. Annually, we use outside survey firms to provide information on market pay. We also pay performance-based bonuses to our employees. We use different performance based bonus programs for those in business generating roles and those in administrative support roles to ensure incentives align with job responsibilities and proper segregation of duties. During 2024, total cash bonus compensation amounted to nearly 30% of base salaries. We believe that this “pay-for-performance” approach allows us to effectively recruit and retain key employees.
Retirement Plans
All employees are eligible to participate in our Profit Sharing Plan after one year of service and having worked at the Company at least 1,000 hours. The Company makes contributions equal to 5% of the employee’s eligible compensation plus a discretionary contribution determined annually by the Board of Directors. This is not a matching based program; employees receive these contributions regardless of whether they make individual contributions to our 401(K) program. During 2024, total contributions by the Company for the Profit Sharing Plan amounted to approximately 9.4% of eligible wages, a level that we believe helps us in recruitment and retention.
The Company, through the Bank, sponsors an Executive Retirement Plan (“ERP”) for certain executive level employees and a Senior Management Retention Plan (“SMRP”) for certain senior level employees. The ERP and SMRP are a non-qualified deferred compensation plans and were developed to supplement the Company’s Profit Sharing Plan. Effective November 29, 2024 both plans were terminated and frozen. The liquidation of both plans will occur sometime between the 12-month anniversary and the 24-month anniversary of the termination of the plans pursuant to regulations promulgated by the Department of the Treasury. These plans were replaced with a new restricted stock compensation plan.
Stock Compensation Plan
At the special meeting of shareholders held on November 25, 2024, the Company’s shareholders approved the Farmers & Merchants Bancorp 2025 Restricted Stock Retirement Plan (the “2025 Plan”). The 2025 Plan permits stock-based compensation awards to employees, officers and directors of the Company and its subsidiaries and affiliates. The 2025 Plan authorized awards up to 80,000 shares. No shares have been issued under the 2025 Plan as of December 31, 2024. The first grant awards under the 2025 Plan occurred in February 2025.
Medical and Other Benefits
In addition to competitive salaries, incentives and retirement benefits, we provide comprehensive medical, dental, and vision plans, health savings accounts, paid sick time, long-term disability, basic life and AD&D insurance, flexible spending accounts, and employee assistance and wellness programs.
Training
Job Related
We support team members, should they wish to continue their education in subjects and fields that are directly related to our operations, activities, and objectives. We encourage our team members to pursue educational opportunities that will help improve job performance and professional development. To further this goal, we reimburse tuition and certain fees for satisfactory completion of approved educational courses and certain certifications. Included are college credit courses at accredited colleges and universities, continuing education courses and certification exams.
Harassment Prevention
The Company assigns all employees harassment prevention training. Every two years non-supervisory employees receive one hour of harassment prevention training while supervisors receive two hours of harassment prevention training. Newly hired employees are assigned harassment prevention and must complete the training within six months of hire or promotion. Following the initial training, all employees must complete training every two years, at minimum. As of December 31, 2024, all employees had met their harassment prevention training requirements for 2024.
Performance Evaluation
The Company has implemented a Performance Planning, Coaching and Evaluation (“PPC&E”) system that requires each year that employees and their managers establish detailed goals and objectives. Annually, employees are reviewed relative to their progress in achieving those goals, with the objective of reducing performance surprises and encouraging behavior that is consistent with Company objectives. We believe that this PPC&E discipline is important in retaining and growing the skills of our employees.
Succession Planning
The Company has a succession planning process led by the Board of Directors and executive management. The Board engages in strategic planning sessions, which includes board succession plans and succession plans for executive management and other key positions. Succession plans are designed to ensure a smooth and orderly transition. These succession plans are discussed with our regulators during the examination process.
Government Policies
The Company’s profitability, like that of most financial institutions, is significantly dependent on interest rate differentials. The difference between the interest rates received by the Company on its interest-earning assets, such as loans and leases extended to its customers and securities held in its investment portfolio, and the interest rates paid by the Company on interest-bearing liabilities, such as deposits and other borrowings, comprise the major portion of the Company’s earnings.
These rates are highly sensitive to many factors that are beyond the control of the Company and the Bank, such as inflation, recession, unemployment, and the monetary policy of the Federal Reserve. The impact that changes in economic conditions and governmental policies might have on the Company and the Bank cannot be predicted.
The business of the Company is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Federal Reserve. The Federal Reserve implements national monetary policies (with objectives such as curbing inflation and maximum employment, stable prices, and moderate long-term interest rates) through its open-market operations in U.S. Government securities by adjusting the required level of reserves for depository institutions subject to its reserve requirements, and by varying the target federal funds and discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve in these areas influence the growth of bank loans and leases, investments, and deposits and affect interest rates earned on interest-earning assets and paid on interest-bearing liabilities. The nature and impact on the Company of any future changes in monetary and fiscal policies cannot be predicted.
From time to time, legislative acts, as well as regulations, are enacted which have the effect of increasing the Company’s cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies, and other financial institutions and financial services providers are frequently made in the U.S. Congress, in the state legislatures including California’s, and before various regulatory agencies. This legislation may change banking statutes and the operating environment of the Company and the Bank in substantial and unpredictable ways. If enacted, such legislation or regulations could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings institutions, credit unions, and other financial institutions and financial service providers. The Company cannot predict whether any of this potential legislation will be enacted, and if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company or any of its subsidiaries.
Supervision and Regulation
General
Bank holding companies and banks are extensively regulated under both federal and state law. The regulation is intended primarily for the protection of the banking system and the Deposit Insurance Fund (“DIF”) and clients of insured depository institutions and not for the benefit of shareholders of the Company. This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that, while not publicly available, can affect the conduct and growth of their businesses. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.
Set forth below is a summary description of the material laws and regulations, which relate to the operations of the Company and the Bank. This description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.
The Company
The Company is a registered bank holding company and is subject to regulation under the Bank Holding Company Act of 1956, as amended (“BHCA”). Accordingly, the Company’s operations are subject to extensive regulation, supervision, and examination by the Federal Reserve. The Company is required to file with the Federal Reserve quarterly and annual reports and such additional information as the Federal Reserve may require pursuant to the BHCA. The Federal Reserve conducts periodic examinations of the Company.
The Federal Reserve may require that the Company terminate an activity, terminate control of, liquidate, or divest certain subsidiaries or affiliates when the Federal Reserve believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The Federal Reserve also has the authority to regulate provisions of certain bank holding company debt. Under certain circumstances, the Company must file written notice with, and obtain approval from, the Federal Reserve prior to purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve, a bank holding company and its non-banking subsidiaries are prohibited from requiring certain tie-in arrangements in connection with an extension of credit, lease or sale of property, or furnishing of services. For example, with certain exceptions, a bank may not condition an extension of credit on a promise by its customer to obtain other services provided by it, its holding company or other subsidiaries, or on a promise by its customer not to obtain other services from a competitor. In addition, federal law imposes certain restrictions on transactions between Farmers & Merchants Bancorp and its subsidiaries. Further, the Company is required by the Federal Reserve to maintain certain levels of capital. See “Capital Standards.”
The Company is prohibited by the BHCA, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to its subsidiaries. However, the Company, subject to the prior notice to, and/or approval of, the Federal Reserve, may engage in any, or acquire shares of companies engaged in any, activities that are deemed by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve’s policy, that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. This support may be required at times when a bank holding company may not be able to provide such support. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve’s regulations or both. The Company is not a financial holding company for purposes of the BHCA.
The Company is also a bank holding company within the meaning of the California Financial Code. As such, the Company and its subsidiaries are subject to examination by, and may be required to file reports with, the DFPI.
The Company’s common stock is registered with the Securities and Exchange Commission (“SEC”) under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, the Company is subject to the reporting, proxy solicitation and other requirements and restrictions of the Exchange Act.
The Bank
The Bank, as a California-chartered non-Federal Reserve member bank, is subject to primary supervision, periodic examination and regulation by the DFPI and the FDIC. If, as a result of an examination of the Bank, the FDIC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory, or that the Bank or its management is violating or has violated any law or regulation, various remedies are available to the FDIC.
Such remedies include the power to issue cease and desist orders regarding or to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove or suspend officers and directors, and ultimately to terminate the Bank’s deposit insurance, which for a California-chartered bank would result in a revocation of the Bank’s charter. The DFPI has many of the same remedial powers.
Various requirements and restrictions under the laws of the State of California and the United States affect the operations of the Bank. State and federal statutes and regulations relate to many aspects of the Bank’s operations, including reserves against deposits, ownership of deposit accounts, interest rates payable on deposits, loans and leases, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, and capital requirements. Further, the Bank is required to maintain certain levels of capital. See “Capital Standards.”
The Dodd Frank Wall Street Reform and Consumer Protection Act (the “Dodd Frank Act”) - The Dodd-Frank Act implemented sweeping reform across the U.S. financial regulatory framework, including, among other changes:
•
creating a Financial Stability Oversight Council tasked with identifying and monitoring systemic risks in the financial system;
•
creating the Consumer Financial Protection Bureau (“CFPB”), which is responsible for implementing, examining and enforcing compliance with federal consumer financial protection laws;
•
requiring the FDIC to make its capital requirements for insured depository institutions countercyclical, so that capital requirements increase in times of economic expansion and decrease in times of economic contraction;
•
imposing more stringent capital requirements on bank holding companies and subjecting certain activities, including interstate mergers and acquisitions, to heightened capital conditions;
•
changing the assessment base for federal deposit insurance from the amount of the insured deposits held by the depository institution to the depository institution’s average total consolidated assets less tangible equity, eliminating the ceiling on the size of the FDIC’s DIF and increasing the floor on the size of the FDIC’s DIF;
•
eliminating all remaining restrictions on interstate banking by authorizing state banks to establish de novo banking offices in any state that would permit a bank chartered in that state to open a banking office at that location;
•
repealing the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts; and
•
in the so-called “Volcker Rule,” subject to numerous exceptions, prohibiting insured depository institutions and affiliates from certain investments in, and sponsorship of, hedge funds and private equity funds and from engaging in proprietary trading.
Many of the law’s provisions have been implemented by rules and regulations of the federal banking agencies. The law contains many provisions which have particular relevance to our business, including provisions that have resulted in adjustments to our FDIC deposit insurance premiums and that resulted in increased capital and liquidity requirements, increased supervision, increased regulatory and compliance risks and costs and other operational costs and expenses, reduced fee-based revenues and restrictions on some aspects of our operations, and increased interest expense on our demand deposits.
On May 24, 2018, President Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act (“Economic Growth Act”), which repealed or modified certain provisions of the Dodd-Frank Act and eased regulations on all but the largest banks.
The Economic Growth Act’s highlights include improving consumer access to mortgage credit that, among other things: (i) exempt banks with less than $10 billion in assets from the ability-to-repay requirements for certain qualified residential mortgage loans; (ii) do not require appraisals for certain transactions valued at less than $400,000 in rural areas; (iii) exempt banks and credit unions that originate fewer than 500 open-end and 500 closed-end mortgages from the Home Mortgage Disclosure Act’s (“HMDA”) expanded data disclosures (the provision would not apply to nonbanks and would not exempt institutions from HMDA reporting altogether); (iv) amend the SAFE Mortgage Licensing Act by providing registered mortgage loan originators in good standing with 120 days of transitional authority to originate loans when moving from a federal depository institution to a non-depository institution or across state lines; (v) require the CFPB to clarify how Truth in Lending Disclosure (“TRID”) rules apply to mortgage assumption transactions and construction-to-permanent home loans as well as outline certain liabilities related to model disclosure use; and (vi) provide that federal banking regulators may not impose higher capital standards on High Volatility Commercial Real Estate exposures unless they are for acquisition, development or construction (“ADC”), and clarifies ADC status. In addition, the Economic Growth Act’s highlights also include regulatory relief for certain institutions, including among other things, simplifying capital calculations by requiring regulators to adopt a threshold for a community bank leverage ratio of between 8% to 10%.
Institutions under $10 billion in assets that meet such community bank leverage ratio will automatically be deemed to be “well-capitalized”, although regulators retain the flexibility to determine that a depository institution may not qualify for the community bank leverage ratio test based on the institution’s risk profile. The Economic Growth Act also exempts community banks from Section 13 of the BHCA if they have less than $10 billion in total consolidated assets; and exempts banks with less than $10 billion in assets, and total trading assets and liabilities not exceeding more than five percent of their total assets, from the Volcker Rule restrictions on trading with their own capital.
The Economic Growth Act also added certain protections for consumers, including veterans and active duty military personnel, expanded credit freezes and created an identity theft protection database. The Economic Growth Act also made changes applicable to bank holding companies, as it raises the threshold for automatic designation as a systemically important financial institution from $50 billion to $250 billion in assets, subjects banks with $100 billion to $250 billion in total assets to periodic stress tests, exempts from stress test requirements entirely banks with under $100 billion in assets, and required the federal banking regulators , within 180 days of passage, to raise the asset threshold under the Small Bank Holding Company Policy Statement from $1 billion to $3 billion. The Economic Growth Act also added certain protections for student borrowers.
The new Trump Administration has indicated a desire to reduce the regulatory burden on U.S. companies, including financial institutions. Further, in a recent statement, the Acting Chairman of the FDIC indicated that a matter of FDIC focus (among other things) will include conducting a “wholesale” review of the agency’s regulations, guidance and manuals. President Trump is likely to appoint, or has already appointed, new acting leadership of bank regulatory agencies, including the CFPB, and, once appointed, this new agency leadership can rescind informal agency guidance, including advisory opinions, interpretive rules and policy statements, creating opportunities for deregulation. On January 20, 2025, President Trump signed an executive order to pause all pending regulations. Sweeping in nature, the order applies to “all executive departments and agencies” while directing them to “not propose or issue any rule in any manner, including by sending a rule to the Office of the Federal Register (the “OFR”), until a department or agency head appointed or designated by the President after noon on January 20, 2025, reviews and approves the rule.” The order also states that agencies must “immediately withdraw any rules that have been sent to the OFR but not published in the Federal Register, so that they can be reviewed and approved.” The executive order also states that agencies must “consider postponing for 60 days from the date of this memorandum the effective date for any rules that have been published in the Federal Register, or any rules that have been issued in any manner but have not taken effect, for the purpose of reviewing any questions of fact, law, and policy that the rules may raise.”
At this time, no details on potential or proposed reforms have been published, and we are uncertain whether the intended deregulation will, in fact, occur, or have a significant impact on the Company. Whether and the extent to which any new legislation will result in additional regulatory initiatives and policies, or modifications of existing regulations and policies, which may impact our business, cannot be predicted at this time. No current assurance may be given that any other such legislative changes will not have a negative impact on the results of operations and financial condition of the Company and the Bank.
Capital Standards
The federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations, both for transactions reported on the balance sheet as assets and for transactions, such as letters of credit and recourse arrangements, that are recorded as off-balance sheet items. In 2013, the Federal Reserve, FDIC, and Office of the Comptroller of the Currency issued final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations.
The rules implement the Basel Committee’s December 2010 framework, commonly referred to as Basel III, for strengthening international capital standards, as well as implementing certain provisions of the Dodd-Frank Act.
The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015 (subject to phase-in periods for some of their components). The Basel III Capital Rules: (i) introduce a new capital measure called Common Equity Tier 1 (“CET1”), and a related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments, which are instruments treated as Tier 1 instruments under the prior capital rules that meet certain revised requirements; (iii) mandate that most deductions or adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital, as compared to existing regulations. Under the Basel III Capital Rules, for most banking organizations, the most common form of additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for credit losses, in each case, subject to the Basel III Capital Rules’ specific requirements.
Under the Basel III Capital Rules, the following are the minimum capital ratios applicable to the Company and the Bank:
•
4.0% Tier 1 leverage ratio;
•
4.5% CET1 to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7%;
•
6.0% Tier 1 capital to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum Tier 1 capital ratio of at least 8.5%; and
•
8.0% total capital to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum total capital ratio of at least 10.5%.
The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that: (i) mortgage servicing rights, (ii) deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks, and (iii) significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income or loss items are not excluded for the purposes of determining regulatory capital ratios; however, non-advanced approaches banking organizations (i.e., banking organizations with less than $250 billion in total consolidated assets or with less than $10 billion of on-balance sheet foreign exposures), including the Company and the Bank, may make a one-time permanent election to exclude these items. The Company and the Bank made this election in 2015 in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of its available-for-sale investment securities portfolio, changes of which are included in accumulated other comprehensive income or loss.
The Basel III Capital Rules prescribe a standardized approach for risk weightings that expands the risk weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, generally ranging from 0% for U.S. Government and agency securities, to 600% for certain equity exposures, depending on the nature of the assets. The Basel III capital rules generally result in higher risk weights for a variety of asset classes. Additional aspects of the Basel III Capital Rules that are relevant to the Company and the Bank include:
•
consistent with the Basel I risk-based capital rules, assigning exposures secured by single-family residential properties to either a 50% risk weight for first-lien mortgages that meet prudent underwriting standards or a 100% risk weight category for all other mortgages;
•
providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (set at 0% under the Basel I risk-based capital rules);
•
assigning a 150% risk weight to all exposures that are nonaccrual or 90 days or more past due (set at 100% under the Basel I risk-based capital rules), except for those secured by single-family residential properties, which will be assigned a 100% risk weight, consistent with the Basel I risk-based capital rules;
•
applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction loans; and
•
applying a 250% risk weight to the portion of mortgage servicing rights and deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks that are not deducted from CET1 capital (set at 100% under the Basel I risk-based capital rules).
With respect to the Bank, the Basel III capital rules also revise the prompt corrective action regulations pursuant to Section 38 of the FDIA.
As of December 31, 2024, the Company’s and the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements of the federal banking agencies for a “well capitalized” institution under the Basel III capital rules on a fully phased-in basis.
In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms, which standards are commonly referred to as Basel IV. Among other things, these standards revise the Basel Committee’s standardized approach for credit risk (including the recalibration of the risk weights and the introduction of new capital requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and provides a new standardized approach for operational risk capital.
Under the Basel framework, these standards were generally effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027.
On July 27, 2023, the federal banking agencies issued a proposed rule to implement the final components of the Basel III standards set by the Basel Committee on Banking Supervision in 2017. The proposed rule, which would not apply to the Company and the Bank as proposed, would substantially revise the existing regulatory capital framework for institutions with $100 billion or more of assets.
Under the current U.S. capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Bank. The impact of Basel IV on us will depend on how it is implemented by the federal bank regulators.
The new Trump Administration may consider adjustments to these capital and liquidity rules. Whether and the extent to which these proposed rules, or modifications of existing regulations and policies, which may impact our business, will be enacted and implemented is uncertain and cannot be predicted at this time.
Prompt Corrective Action (“PCA”)
The FDIA requires federal banking agencies to take PCA in respect of depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The Basel III Capital Rules revised the PCA requirements effective January 1, 2015. Under the revised PCA provisions of the FDIA, an insured depository institution generally will be classified in the following categories based on the capital measures indicated:
Minimum to be Categorized as
"Well Capitalized"
Minimum to be Categorized as "Adequately Capitalized"
Under-capitalized
Significantly Under-capitalized
Critically Under-capitalized
Risk-based capital to risk-weighted assets
10.00
%+
8.00
%+
< 8.00%
< 6.00%
N/A
Tier 1 capital to risk-weighted assets
8.00
%+
6.00
%+
< 6.00%
< 4.00%
N/A
CET1 capital to risk-weighted assets
6.50
%+
4.50
%+
< 4.50%
< 3.00%
N/A
Tier 1 leverage capital ratio
5.00
%+
4.00
%+
< 4.00%
< 3.00%
N/A
Tangible equity to assets
N/A
N/A
N/A
N/A
< 2.00%
Supplemental leverage ratio
N/A
3.00
%+
< 3.00%
N/A
N/A
An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios, if it is determined to be operating in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying PCA regulations and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company, if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit capital restoration plans. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator by the bank regulators.
The capital classification of a bank holding company and a bank affects the frequency of regulatory examinations, the bank holding company’s and the bank’s ability to engage in certain activities and the deposit insurance premium paid by the bank to the FDIC. As of December 31, 2024, we met the requirements to be classified as “well-capitalized” based upon the aforementioned ratios for purposes of the PCA regulations.
The Community Bank Leverage Ratio
On November 4, 2019, the federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of capital adequacy, known as the community bank leverage ratio (“CBLR”) framework, for qualifying community banking organizations consistent with Section 201 of the Economic Growth Act. The CBLR framework is designed to reduce the capital burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. The final rule was effective on January 1, 2020.
In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, off-balance-sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the “well capitalized” ratio requirements under the PCA regulations. Such a community banking organization would not be subject to other risk-based and leverage capital requirements (including the Basel III and Basel IV requirements). The CBLR is determined by dividing a financial institution’s tangible equity capital by its average total consolidated assets. The rule describes what is included in tangible equity capital and average total consolidated assets. The CBLR framework was available for banks to use in their March 31, 2020, call report. A CBLR bank that ceases to meet any of the qualifying criteria in a future period but maintains a leverage ratio greater than 8% will be allowed a grace period of two reporting periods to satisfy the CBLR qualifying criteria or to otherwise comply with the generally applicable capital requirements. Further, a CBLR bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable capital requirements. While we are a qualifying community banking organization, the Company and Bank did not opt into the CBLR framework.
Anti-Money Laundering and Office of Foreign Assets Control Regulation
Title III of the United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”), is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money.
The USA Patriot Act mandates financial services companies to have policies and procedures with respect to measures designed to address any or all of the following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation between financial institutions and law enforcement authorities. Regulatory authorities routinely examine financial institutions for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.
The U.S. Treasury’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and regimes under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. Financial institutions are responsible for, among other things, blocking accounts of and transactions with such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Banking regulators examine banks for compliance with the economic sanctions regulations administered by OFAC, and failure of a financial institution to maintain and implement adequate OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.
Privacy Restrictions
The Gramm-Leach-Bliley Act (“GLBA”) requires financial institutions in the U.S. to provide certain privacy disclosures to customers and consumers, to comply with certain restrictions on the sharing and usage of personally identifiable information, and to implement and maintain commercially reasonable customer information safeguarding standards.
The Company believes that it complies with all provisions of the GLBA and all implementing regulations and that the Bank has developed appropriate policies and procedures to meet its responsibilities in connection with the privacy provisions of the GLBA.
Certain state laws and regulations designed to protect the privacy and security of customer information also apply to us and our subsidiaries, including laws requiring notification to affected individuals and regulators of data security breaches and laws prohibiting sharing of customer information without the customer’s prior permission.
In June 2018, the State of California enacted The California Consumer Privacy Act of 2018 (“CCPA”). This law became effective on January 1, 2020, and provides consumers with expansive rights and controls over their personal information which is obtained by or shared with “covered businesses”, which includes the Bank and most other banking institutions subject to California law. The CCPA gives consumers the right to request disclosure of information collected about them and whether that information has been sold or shared with others, the right to request deletion of personal information subject to certain exceptions, the right to opt out of the sale of the consumer’s personal information and the right not to be discriminated against because of choices regarding the consumer’s personal information. The CCPA provides for certain monetary penalties and for its enforcement by the California Attorney General or consumers whose rights under the law are not observed. It also provides for damages as well as injunctive or declaratory relief if there has been unauthorized access, theft or disclosure of personal information due to failure to implement reasonable security procedures. The CCPA contains several exemptions, including a provision to the effect that the CCPA does not apply where the information is collected, processed, sold or disclosed pursuant to the GLBA if the GLBA is in conflict with the CCPA. In November 2020, California voters approved state-wide Proposition 24, also known as the California Privacy Rights and Enforcement Act of 2020 (the “CPREA”) which expanded and amended certain provisions of the CCPA and created the California Privacy Protection Agency to enforce privacy rights for Californians and impose fines for violations of such rights. The CPREA requires businesses to share a consumer’s personal information upon the consumer’s request, provides consumers with an opt-out option for having their sensitive personal information used or disclosed for advertising or marketing, to obtain permission for collecting data on certain minors, and to correct a consumer’s inaccurate information upon the consumer’s request. It also removed the ability of businesses to remedy violations before being penalized for violations and increased the penalties for such violations. Most of the provisions of the CPREA took effect in 2023 but some portions, such as the creation of the new state agency, went into effect immediately. While GLBA-regulated nonpublic, personal information generally is exempt under the CCPA, the CCPA and certain other state laws apply to the personal information of representatives of any business contacts that the Bank engages with who are California residents, employees who are California residents, and any other personal information that the Bank collects outside of the scope of GLBA, such as with respect to certain data collected from visitors to our website. The impact of these laws on the business of the Bank could result in increased operating expenses as well as additional exposure to the risk of litigation by or on behalf of consumers.
Dividends and Other Transfer of Funds
Dividends from the Bank constitute the principal source of cash to the Company. The Company is a legal entity separate and distinct from the Bank. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Company. Under such restrictions, the amount available for payment of dividends to the Company by the Bank totaled $129.9 million at December 31, 2024. During 2024, the Bank paid $60.9 million in dividends to the Company of which $13.0 million was used for cash dividends to shareholders, $45.3 million was allocated for share repurchases and $2.6 million was used to cover expenses and maintain a cash reserve.
The FDIC and the DFPI also have authority to prohibit the Bank from engaging in activities that, in their opinion, constitute unsafe or unsound practices in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the FDIC or the DFPI could assert that the payment of dividends or other payments might, under some circumstances, be an unsafe or unsound practice. Further, the Federal Reserve and the FDIC have established guidelines with respect to the maintenance of appropriate levels of capital by banks and bank holding companies under their jurisdiction. Compliance with the standards set forth in such guidelines and the restrictions that are or may be imposed under the PCA provisions of federal law could limit the amount of dividends that the Bank or the Company may pay. An insured depository institution is prohibited from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized. The DFPI may impose similar limitations on the Bank. See “Prompt Corrective Action” and “Capital Standards”, above, for a discussion of these additional restrictions on capital distributions.
Transactions with Affiliates
The Bank is subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of the Company or other affiliates, the purchase of, or investments in, stock or other securities of the Company or other affiliates, the taking of such securities as collateral for loans and leases, and the purchase of assets of the Company or other affiliates. Such restrictions prevent the Company and other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by the Bank to or in the Company or to or in any other affiliates are limited, individually, to 10% of the Bank’s capital and surplus (as defined by federal regulations), and such secured loans and investments are limited, in the aggregate as to all affiliates, to 20% of the Bank’s capital and surplus (as defined by federal regulations).
In addition, the Company and its operating subsidiaries generally may not purchase a low-quality asset from an affiliate, and other specified transactions between the Company or its operating subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices.
Also, the Bank and its operating subsidiaries may engage in transactions with affiliates only on terms and under conditions that are substantially the same, or at least as favorable to the Bank or its subsidiaries, as those prevailing at the time for comparable transactions with (or that in good faith would be offered to) non-affiliated companies. California law also imposes certain restrictions with respect to transactions with affiliates. Additionally, limitations involving the transactions with affiliates may be imposed on the Bank under the PCA provisions of federal law. See “Prompt Corrective Action.”
Safety and Soundness Standards
The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation; credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the financial institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If a financial institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the financial institution’s rate of growth, require the financial institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.
Since the financial crisis of 2008-2009, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the financial institutions they supervise. Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of banking markets. The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal, and reputational risk.
In particular, regulatory pronouncements in the past few years have focused on operational risk, which arises from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses. New products and services, third-party risk management and cyber-security are critical sources of operational risk that financial institutions are expected to address in the current environment. The Bank is expected to have active board and senior management oversight; adequate policies, procedures, and limits; adequate risk measurement, monitoring, and management information systems; and comprehensive internal controls.
Deposit Insurance
As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The premiums fund the Deposit Insurance Fund (“DIF”). The FDIC assesses a quarterly deposit insurance premium on each insured institution based on risk characteristics of the institution and may also impose special assessments in emergency situations. Effective July 1, 2016, the FDIC changed the deposit insurance assessment system for banks, such as the Bank, with less than $10 billion in assets that have been federally insured for at least five years. Among other changes, the FDIC eliminated risk categories for such banks and now uses the “financial ratios method” to determine assessment rates for all such banks. Under the financial ratios method, the FDIC determines assessment rates based on a combination of financial data and supervisory ratings that estimate a bank’s probability of failure within three years. The assessment rate determined by considering such information is then applied to the amount of the institution’s average assets minus average tangible equity to determine the institution’s insurance premium.
On October 18, 2022, the FDIC adopted a final rule, applicable to all insured depository institutions to increase the initial base deposit insurance assessment rate schedules uniformly by two basis points consistent with the Amended Restoration Plan approved by the FDIC on June 21, 2022. The FDIC indicated that it was taking this action in order to restore the DIF reserve ratio to the required statutory minimum of 1.35% by the statutory deadline of September 30, 2028. The FDIC said that the reserve ratio had declined below this level because of the increase in insured deposits since the start of the COVID-19 pandemic and other factors that affect the level of the DIF. Under the final rule, the increase in rates began with the first quarterly assessment period of 2023 and will remain in effect unless and until the reserve ratio meets or exceeds 2% in order to support growth in the DIF in progressing toward the FDIC’s long-term goal of a 2% reserve ratio.
On November 16, 2023, the FDIC issued a final rule to implement a special assessment to recover the loss to the DIF associated with protecting uninsured depositors following the closures in early 2023 of Silicon Valley Bank and Signature Bank. Under the final rule, the assessment base for an insured depository institution will be equal to the institution’s estimated uninsured deposits as of December 31, 2022, adjusted to exclude the first $5 billion in estimated uninsured deposits. Under the final rule, the FDIC will collect the special assessment at an annual rate of 13.4 basis points beginning with the first quarterly assessment period of 2024 and will continue to collect special assessments for an anticipated total of eight quarterly assessment periods. This special assessment does not apply to the Bank.
The Bank’s FDIC premiums were $2.4 million, $2.4 million, and $1.4 million for the three years ended December 31, 2024, 2023, and 2022, respectively. Future increases in insurance premiums could have adverse effects on the operating expenses and results of operations of the Company. Management cannot predict what the FDIC insurance assessment rates will be in the future.
Insurance of a bank’s deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or the Bank’s primary regulator. Management of the Company is not aware of any practice, condition or violation that might lead to termination of the Company’s deposit insurance.
Community Reinvestment Act (“CRA”) and Fair Lending
The Bank is subject to certain fair lending requirements involving lending, investing, and other CRA activities. CRA requires each insured depository institution to identify the communities served by the institution’s offices and to identify the types of credit and investments the institution is prepared to extend within such communities including low and moderate-income neighborhoods. It also requires the institution’s regulators to assess the institution’s performance in meeting the credit needs of its community and to consider such assessment in reviewing applications for mergers, acquisitions, relocation of existing branches, opening of new branches, and other transactions. A bank may be subject to substantial penalties and corrective measures for a violation of certain fair lending laws.
A bank’s compliance with the CRA is assessed using an evaluation system, which bases CRA ratings on an institution’s lending, service and investment performance. An unsatisfactory rating may be the basis for denying a merger application. The Bank’s latest CRA examination was completed by the FDIC in August 2022 and the Bank received an overall Outstanding rating in complying with its CRA obligations.
On October 24, 2023, the federal banking agencies jointly issued a final rule to strengthen and modernize the existing CRA regulations. Under the final rule, the agencies will evaluate a bank’s CRA performance based upon the varied activities that it conducts and the communities in which it operates. CRA evaluations and data collection requirements will be tailored based on bank size and type. The Bank would be considered a large bank under the final rule (with assets greater than $2 billion) and therefore will be evaluated under new lending, retail services and products, community development financing, and community development services tests. The final rule includes CRA assessment areas associated with mobile and online banking, and new metrics and benchmarks to assess retail lending performance. In addition, the final rule emphasizes smaller loans and investments that can have a high impact and be more responsive to the needs of low- and moderate-income communities. The rule imposes new data collection requirements on large banks, although certain data collection and reporting requirements will be limited to larger banks with assets greater than $10 billion. The final rule took effect on April 1, 2024; however, on March 21, 2024 the agencies issued a supplemental final rule extending the applicability date for certain provisions. Specifically, the requirements for facility-based assessment areas and public file provisions, initially effective on April 1, 2024, were extended to January 1, 2026. This extension aligns these provisions with the compliance date for other aspects of the final rule. The supplemental final rule also clarifies that banks are not required to make changes to their public files until January 1, 2026, providing institutions additional time to comply with the updated public notice requirements. These developments indicate ongoing legal and regulatory adjustments affecting the implementation timeline of the CRA final rule. The Bank continues to monitor and stay informed on changes to ensure compliance with the evolving regulatory framework.
Consumer Protection Regulations
Banks and other financial institutions are subject to numerous laws and regulations intended to protect consumers in their transactions with banks. These laws include, among others, laws regarding unfair and deceptive acts and practices and usury laws, as well as the following consumer protection statutes: Truth in Lending Act, Truth in Savings Act, Electronic Fund Transfer Act, Expedited Funds Availability Act, Equal Credit Opportunity Act, Fair and Accurate Credit Transactions Act, Fair Housing Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, GLBA, Home Mortgage Disclosure Act, Right to Financial Privacy Act, Servicemembers Civil Relief Act, Military Lending Act and Real Estate Settlement Procedures Act. The FDIC regularly conducts compliance examinations of insured depository institutions to determine whether the institution is meeting its responsibility to comply with the requirements of consumer protection laws and regulations.
Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those listed above. These federal, state and local laws regulate the manner in which financial institutions deal with customers when taking deposits, making loans or conducting other types of transactions. Failure to comply with these laws and regulations could give rise to regulatory sanctions, customer rescission rights, action by state and local attorneys general and civil or criminal liability. Failure to comply with consumer protection requirements may also result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions we may wish to pursue or our prohibition from engaging in such transactions even if approval is not required.
The structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB commenced operations to supervise and enforce federal consumer protection laws. The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a more intense and complex environment for consumer finance regulation. The CFPB has significant authority to implement and enforce federal consumer protection laws and new requirements for financial services products provided for in the Dodd-Frank Act, as well as the authority to identify and prohibit unfair, deceptive or abusive acts and practices. The review of products and practices to prevent such acts and practices have been a continuing focus of the CFPB, and of banking regulators more broadly. The ultimate impact of this heightened scrutiny is uncertain but could result in changes to pricing, practices, products and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination, additional remediation efforts and possible penalties. The Dodd-Frank Act also provided the CFPB with broad supervisory, examination and enforcement authority over various consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices. The CFPB also has the authority to obtain cease and desist orders providing for affirmative relief or monetary penalties. The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards. While the new Trump Administration appointee to lead the CFPB and Administration policies could result in the rollback of rules implementing and enforcing consumer financial law and regulatory enforcement activities, there is an expectation of increased activity at the state level to enforce consumer protection, data privacy, and banking regulations to address potential gaps in federal oversight. State regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition or results of operations.
The CFPB is authorized to issue rules for both bank and non-bank companies that offer consumer financial products and services, subject to consultation with the prudential banking regulators. In general, however, banks with assets of $10 billion or less, such as the Bank, will continue to be examined for consumer compliance by their primary bank regulator.
In February 2025, the director of the CFPB was dismissed by the new Trump Administration and the new Director of the Office of Management and Budget was appointed as acting director of the CFPB. The acting director of the CFPB directed agency staff to stop virtually all work, including supervision activities and pending investigations, and announced that the CFPB would not be taking its next draw of federal funding. Later in February 2025, President Trump nominated a new director of the CFPB who, if confirmed by the Senate, will replace the acting CFPB director. It cannot be predicted at this time what impact these changes will have on the CFPB and its regulatory responsibilities in the consumer protection area.
Notice and Approval Requirements Related to Control
Banking laws impose notice, approval and ongoing regulatory requirements on any stockholder or other party that seeks to acquire direct or indirect "control" of an FDIC-insured depository institution. These laws include the BHCA and the Change in Bank Control Act. Among other things, these laws require regulatory filings by a stockholder or other party that seeks to acquire direct or indirect "control" of an FDIC-insured depository institution or bank holding company. The determination whether an investor "controls" a depository institution is based on all of the facts and circumstances surrounding the investment. As a general matter, a party is deemed to control a depository institution or other company if the party owns or controls 25% or more of any class of voting stock. Subject to rebuttal, a party may be presumed to control a depository institution or other company if the investor owns or controls 10% or more of any class of voting stock. Ownership by family members, affiliated parties, or parties acting in concert, is typically aggregated for these purposes. If a party's ownership of the Company were to exceed certain thresholds, the investor could be deemed to "control" the Company for regulatory purposes. This could subject the investor to regulatory filings or other regulatory consequences.
In addition, except under limited circumstances, bank holding companies are prohibited from acquiring, without prior approval:
•
control of any other bank or bank holding company or all or substantially all the assets thereof; or
•
more than 5% of the voting shares of a bank or bank holding company which is not already a subsidiary.
In September 2024, the FDIC and the Office of the Comptroller of the Currency issued new policy statements on bank merger transactions. The FDIC’s new policy statement, which supersedes the agency’s prior policy statement and was intended to provide transparency and clarity around the FDIC’s approach to bank mergers, was opposed by the now Acting Chairman of the FDIC, who argued that this new supervisory guidance potentially makes the bank merger process longer, more difficult and less predictable. Further, in his recent statement, the Acting Chairman of the FDIC has indicated that a matter of FDIC focus (among other things) will include improving the bank merger approval process and replacing the 2024 Statement of Policy to ensure that merger transactions that satisfy the Bank Merger Act are approved in a timely way. At this time, it cannot be predicted whether and the extent to which this supervisory guidance might be modified or withdrawn, or a new approach to bank merger transactions might be implemented.
Incentive Compensation
In 2010, the federal bank regulatory agencies issued comprehensive guidance intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of those organizations by encouraging excessive risk-taking. The incentive compensation guidance sets expectations for banking organizations concerning their incentive compensation arrangements and related risk management, control and governance processes. The incentive compensation guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon three primary principles: (1) balanced risk-taking incentives; (2) compatibility with effective controls and risk management; and (3) strong corporate governance. Any deficiencies in compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or take other actions. In addition, under the incentive compensation guidance, a banking organization’s federal supervisor may initiate enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the organization.
In 2016, several federal financial agencies (including the Federal Reserve and FDIC) re-proposed restrictions on incentive-based compensation pursuant to Section 956 of the Dodd-Frank Act for financial institutions with $1 billion or more in total consolidated assets.
For institutions with at least $1 billion but less than $50 billion in total consolidated assets, the proposal would impose principles-based restrictions that are broadly consistent with existing interagency guidance on incentive-based compensation. Such institutions would be prohibited from entering into incentive compensation arrangements that encourage inappropriate risks by the institution: (i) by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits; or (ii) that could lead to material financial loss to the institution. The comment period for these proposed regulations has closed, but a final rule has not been published. Depending upon the outcome of the rule making process, the application of this rule to us could require us to revise our compensation strategy, increase our administrative costs and adversely affect our ability to recruit and retain qualified employees. Further, as discussed above, the Basel III Capital Rules limit discretionary bonus payments to bank executives if the institution’s regulatory capital ratios fail to exceed certain thresholds that started being phased in on January 1, 2016.
In May 2024, several federal financial agencies (including the FDIC) adopted a notice of proposed rulemaking to address incentive-based compensation arrangements for financial institutions, re-proposing the regulatory text previously proposed in June 2016 and seeking public comment on certain related matters. The 2024 proposed rule requires enhanced disclosure and reporting of compensation arrangements by covered institutions and prohibits incentive compensation arrangements that involve inappropriate risks or could lead to material financial loss. The Federal Reserve and the SEC have not joined in issuing the 2024 proposed rule, which has not yet been published in the Federal Register or opened for formal public comment. At this time, it cannot be predicted whether this proposed rule will be modified or implemented.
Recent Developments
Following a bankruptcy filing by a financial services company known as Synapse, in October 2024, the FDIC approved a proposal which will require banks and their “fin-tech” partners holding certain custodial accounts to maintain timely and accurate records to determine the actual consumers who own funds held in the pooled custodial accounts and the account balance attributable to each consumer so that the FDIC can meet insured deposit claims to beneficial owners underlying the custody accounts upon the failure of the bank. At the present time, the Bank does not have any such “fin-tech” partners.
Available Information
Company reports filed with the SEC, including the Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and ownership reports filed by directors, executive officers and principal shareholders, can be accessed free of charge through the Company’s website at http://www.fmbonline.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The link to the SEC is on the About Us page. The Company’s reports may also be accessed at the SEC’s Internet website (http://www.sec.gov).

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ITEM 1A. RISK FACTORS
Item 1A.
Risk Factors
An investment in our common stock is subject to risks inherent in our business. The material risks and uncertainties that management believes may affect our business are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this Form 10-K. The risks and uncertainties described below are not the only ones facing our business. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment.
Risks Relating to the Industry and Geographic Area in Which We Operate and the U.S. Economy
As a financial services company, our business and operations may be adversely affected by weak economic conditions. Our business operations, which primarily consist of lending money to clients in the form of loans, borrowing money from clients in the form of deposits and investing in securities, are sensitive to general business and economic conditions in the United States and California. The tightening of the Federal Reserve’s monetary policies, including repeated and aggressive increases in target range for the federal funds rate as well as the conclusion of the Federal Reserve’s tapering of asset purchases, together with ongoing economic and geopolitical instability, increases the risk of an economic recession. The prolonged inverted yield curve and the actions by the Treasury Department in recent years such as financing more of the U.S. debt with short-term instruments resulted in higher short-term borrowing costs. Despite rate cuts by the Federal Reserve between September and December 2024, the Federal Reserve has signaled caution in easing monetary policy citing strong economic performance, robust GDP growth, and persistent inflation as reasons to move slowly with any further rate cuts. If the U.S. economy weakens, our growth and profitability from our lending, deposit and investment operations could be constrained and our asset quality, deposit levels, loan demand and results of operations may be adversely affected. In addition, economic conditions in foreign countries could affect the stability of global financial markets, which could hinder U.S. economic growth. Our business is also significantly affected by monetary and related policies of the U.S. federal government and its agencies. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control. Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on our financial condition and operations. Our clients businesses are also impacted by the strong US dollar which impacts commodity prices and hurts U.S. exports.
A large portion of our loan portfolio is tied to the real estate market where we operate and we may be negatively impacted by downturns in that market. A significant percentage of our loans are real estate related, consisting of loans for construction and land development projects, and for the purchase, improvement or refinancing of residential and commercial real estate. A downturn in the real estate market could increase loan delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Real estate collateral provides an alternate source of repayment in the event of default by the client and may deteriorate in value during the time the credit is extended. If values decline, it is also more likely that we would be required to increase our allowance for credit losses. If during a period of reduced real estate values we are required to liquidate the property collateralizing a loan to satisfy the debt or to increase our allowance for credit losses, it could materially reduce our profitability and adversely affect our financial condition.
Although only 5.3% of our loan portfolio consisted of real estate construction, and acquisition and land development loans as of December 31, 2024, such loans generally have a higher degree of risk than long-term financing of existing properties because repayment depends on the completion of the project and usually on the sale or long term financing of the property. In addition, these loans are often “interest-only loans,” which normally require only the payment of interest accrued prior to maturity. Interest-only loans carry greater risk than other loans because no principal is paid prior to maturity. This risk is particularly apparent during periods of rising interest rates and declining real estate values. If there is a significant decline in the real estate market due to a material increase in interest rates or for other reasons, many of these loans could default and result in foreclosure. If we are forced to foreclose on a project prior to completion, we may not be able to recover the entire unpaid portion of the loan or we may be required to fund additional money to complete the project or hold the property for an indeterminate period. In addition, real estate exposes us to incurring costs and liabilities for environmental contamination and remediation. Any of these outcomes may result in losses and reduce our earnings.
The FDIC has given guidance recommending that if the sum of (i) certain categories of CRE loans and (ii) acquisition, development and construction loans (“ADC loans”) exceeds 300% of total risk-based capital, or if ADC loans exceed 100% of total risk-based capital, heightened risk management practices should be employed to mitigate risk. As of December 31, 2024, our ratio of the sum of CRE and ADC loans to total risk-based capital was 172% and our ratio of ADC loans to total risk-based capital was 31.26%. Our concentration in ADC loans is cyclical and tends to increase in the second and third quarters of each year as demand for ADC loans increases. An increase in ADC loan concentration could cause our ratio for ADC loans to increase and even exceed the FDIC’s guidance. We have exceeded these guidance ratios at times in the past and may do so in the future. We actively monitor and believe that we effectively manage our CRE and ADC loan concentrations. If we exceed the FDIC’s guidance and do not effectively manage the risk of our CRE and ADC loans, we may be subject to regulatory scrutiny, including a requirement to raise additional capital, reduce our loan concentrations, or undertake other remedial actions.
We could suffer material credit losses if the overall economy and/or a particular industry suffers an economic recession and we do not appropriately manage our credit risk. There are risks inherent in making any loan, including risks in dealing with individual clients, risks of non-payment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. Changes in the economy may cause the assumptions that we made at origination to change and may cause clients to be unable to make payments on their loans. There is no assurance that our credit risk monitoring and loan approval procedures are or will be adequate to address the inherent risks associated with lending. Any failure to manage such risks may materially adversely affect our financial condition and results of operations.
The small to medium-sized businesses, including agricultural businesses, that we lend to may have fewer resources to weather adverse business and economic developments, which may impair their ability to repay a loan, and such impairment could adversely affect our operations and financial condition. Our business strategy targets primarily small to medium-sized businesses, which frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete, and may experience substantial volatility in operating results, any of which may impair a client’s ability to repay a loan. During recessions, demand for goods and services slows down which may negatively affect business sales, levels of profits, and asset values, particularly real estate which may decrease in value. During recent years, the strong U.S. dollar, high inflation rates and the inverted yield curve have had a negative impact on many of our borrowers, particularly in agri-business.
In February 2025, the new Trump Administration announced that it would be imposing increases in tariffs on goods imported to the U.S. from Canada, Mexico, and China and has also indicated that tariffs may be imposed at increased levels on imports to the U.S. from other countries. If other countries, in retaliation to the U.S.’s tariff measures, were to impose increased levels of tariffs on goods exported to such countries by companies in the U.S. such tariff increases may negatively impact companies in the U.S. whose business involves exports to other countries. This could be of particular concern to U.S. companies operating in the agricultural sector who export to other countries. The Company’s customers included a number of agricultural business, which could be negatively affected. Preliminary indications have been that the new Trump Administration tariff increases to Canada and Mexico may be delayed or decreased if such countries adopt various policies urged by the U.S., such as enhanced border security and control measures. The outcome of this process cannot be predicted with any certainty at this time.
The success of a small to medium-sized business often depends on the management skills, talents and efforts of one or a small number of people, and the death, disability or resignation of one or more of these people could have a material adverse impact on the business and its ability to repay its loan. If general economic conditions negatively affect California and small to medium-sized businesses are adversely affected or our clients are otherwise affected by adverse business conditions or developments, our business, financial condition and operations could be adversely affected.
Our profitability depends on interest rates generally, and we may be adversely affected by changes in market interest rates. Our profitability depends in substantial part on our net interest income. Our net interest income depends on many factors that are partly or completely outside of our control, including competition, monetary and fiscal policies, and economic conditions generally. Our net interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments. An inverted yield curve, such as the one that has existed in recent years, places further stress on interest rate risk management. In addition, an increase in interest rates could adversely affect clients’ ability to pay the principal or interest on existing loans or reduce their borrowings. This may lead to an increase in our non-performing assets, a decrease in loan originations, or a reduction in the value of and income from our loans, any of which could have a material and negative effect on our operations. Asset liability mismatches caused by normal fluctuations in market interest rates could also materially and adversely impact profitability. Fluctuations in market rates and other market disruptions are neither predictable nor controllable and may adversely affect our financial condition and earnings.
Since 2022, inflationary pressures have affected many aspects of the U.S. economy, including gasoline and fuel prices, and global and domestic supply-chain issues have also had a disruptive effect on many industries, including the agricultural industry. In January 2022, due to elevated levels of inflation and corresponding pressure to raise interest rates, the Federal Reserve announced after several periods of historically low federal funds rates and yields on Treasury notes that it would be slowing the pace of its bond purchasing and increasing the target range for the federal funds rate over time. The FOMC increased the target range 11 times or 525 basis points from March 2022 to July 2023. The target range remained unchanged through much of 2024 until the FOMC decreased the rate 100 basis points during the last four months of the year. As of December 31, 2024, the federal funds rate decreased to 4.50%. It remains uncertain whether the FOMC will further decrease the target range for the federal funds rate to attain a monetary policy sufficiently restrictive to return inflation to more normalized levels, begin to increase the federal funds rate or leave the rate at its current elevated level for a lengthy period of time. As noted previously, the new Trump Administration has taken steps to increase tariffs on goods imported to the U.S. from certain countries. Retaliation by such countries through the imposition of higher tariffs on exports from the U.S. appears to be a possibility. The imposition of increased tariffs on imports and exports is believed by some economists to entail the possibility of increased inflationary pressures on the U.S. economy. The impact of these developments on the business of our clients and on our business cannot be predicted with certainty but could present challenges in 2025 and beyond.
Beginning in 2021, the U.S. economy began to reflect relatively rapid rates of increase in the consumer price index, inflation rates, and other economic indices; a prolonged elevated rate of inflation could present risks for the U.S. banking industry and our business. During the latter part of 2021 and into 2023, the U.S. economy exhibited relatively rapid rates of increase in the consumer price index, inflation rate, and other economic indices. If the U.S. economy encounters a significant, prolonged rate of inflation, this could pose higher relative risks to the banking industry and our business. Such inflationary periods have historically corresponded with relatively weaker earnings and higher loan losses for banks.
In the past, inflationary environments have caused financing conditions to tighten and have increased borrowing costs for some marginal borrowers, which, in turn, has impacted bank credit quality and loan growth. Additionally, a sustained period of inflation could prompt broad-based selling of longer-duration, fixed-rate debt, which could have negative implications for equity and real estate markets. Small businesses and leveraged loan borrowers can be challenged in a materially higher-rate environment. Higher interest rates can also present challenges for commercial real estate projects, pressuring valuations and loan-to-value ratios.
In addition, the conflict between Russia and Ukraine and global reactions thereto have increased U.S. domestic and global energy prices. Oil supply disruptions related to the Russia-Ukraine conflict, and sanctions and other measures taken by the U.S. or its allies, have led to higher costs for gas, food and goods in the U.S. and exacerbated the inflationary pressures on the economy, with potentially adverse impacts on our customers and on our business, results of operations and financial condition.
We face strong competition from banks, credit unions and other financial services providers that offer banking services, which may limit our ability to attract and retain banking clients. Competition in the banking industry generally, and in our geographic market specifically, is strong. Competitors include banks, as well as other financial services providers, such as savings and loan institutions, consumer finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. Our competitors include several larger national and regional financial institutions whose greater resources may afford them a marketplace advantage inasmuch as they may offer a wider array of banking services at better rates and be able to target a broader client base through more extensive promotional and advertising campaigns. Moreover, larger competitors may not be as vulnerable as we are to downturns in the local economy and real estate market since they have a broader geographic area and their loan portfolio is more diversified. While our deposit base has increased, several banks have grown their deposit market share in our markets faster than we have resulting in a declining relative deposit market share for us in our existing markets. We believe our declining relative market share in deposits has resulted primarily from aggressive marketing and advertising, in-migration of more competitors, expanded delivery channels and more attractive rates offered by larger bank competitors. We also compete against community banks, credit unions and non-bank financial services companies that have strong local ties. These smaller institutions are likely to cater to the same small to medium-sized businesses that we target. Additionally, non-traditional financial services firms, such as financial technology companies, are less regulated and continue to expand their offerings of services traditionally provided by financial institutions. If we are unable to attract and retain customers, we may be unable to continue to grow our loan and deposit portfolios and our operations and financial condition may otherwise be adversely affected. Ultimately, we may be unable to compete successfully against current and future competitors.
Our financial results may be impacted by the cyclicality and seasonality of our agricultural lending business. The Company has provided financing to agricultural customers in the mid Central Valley of California throughout its history. We recognize the cyclical nature of the industry, often caused by fluctuating commodity prices, changing climatic conditions and the availability of seasonal labor, and manage these risks accordingly. The Company remains committed to providing credit to agricultural customers and will always have a material exposure to this industry. Although the Company’s loan portfolio is believed to be well diversified, at various times during 2024 a significant portion of the Company’s loans (as much as 29.2%) were outstanding to agricultural borrowers. Commitments are well diversified across various commodities, including dairy, grapes, walnuts, almonds, cherries, apples, pears, and various row crops. Additionally, many individual borrowers are themselves diversified across commodity types, reducing their exposure, and therefore the Company’s, to cyclical downturns in any one commodity.
The Company’s service areas can also be significantly impacted by the seasonal operations of the agricultural industry. As a result, the Company’s financial results can be influenced by the banking needs of its agricultural customers. Generally speaking, during the spring and summer customers draw down their deposit balances and increase loan borrowings to fund the purchase of equipment and the planting of crops. Deposit balances are replenished and loans repaid in late fall and winter as crops are harvested and sold.
As previously noted, increased tariffs by foreign countries on goods exported to such countries from the U.S. could adversely impact agricultural producers in the U.S., including the Company’s customers in the agricultural sector.
The impact of climate change and governmental and societal responses to climate change, including on the availability of water and the transition to a low-carbon economy, could adversely affect our business and our clients’ businesses. Despite the fact that 2024 had above-average levels of precipitation in California, the State has experienced severe drought conditions at times over the past several years. These weather patterns reinforce the fact that the long-term risks associated with the availability of water are significant. The farming belt of the Central Valley is often cited as an example of an area that experienced extreme drought. However, not all areas of the state are impacted equally, and this is particularly true in the Central Valley, which stretches some 450 miles from Bakersfield in the south to Redding in the north. The vast majority of the Company’s agricultural customers are located in the mid Central Valley, an area that benefits from the drainage of the Sacramento, American, Mokelumne and Stanislaus rivers.
In addition to the impact that climate has on the availability of water, State and Federal regulators ultimately manage this resource, which may also impact the access of our customers’ water. For example, in 2014, the State of California passed the Sustainable Groundwater Management Act. All Water Districts must develop plans to comply with the Act, including groundwater recharge programs. Although the exact impact of compliance is not currently known, and even prior to 2014 most of the water districts in the Bank’s service area had been developing and implementing management plans, it is possible that some water districts will have to ultimately fallow some ground to achieve compliance with the Act.
In recent years, the federal banking agencies have increased their focus on climate-related risks impacting the operations of banks, the communities they serve and the broader financial system. Accordingly, the agencies have begun to enhance their supervisory expectations regarding the climate risk management practices of larger banking organizations, including by encouraging such banks to: ensure that management of climate-related risk exposures has been incorporated into existing governance structures; evaluate the potential impact of climate-related risks on the bank’s financial condition, operations and business objectives as part of its strategic planning process; account for the effects of climate change in stress testing scenarios and systemic risk assessments; revise expectations for credit portfolio concentrations based on climate-related factors; consider investments in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change; evaluate the impact of climate change on the bank’s borrowers and consider possible changes to underwriting criteria to account for climate-related risks to mortgaged properties; incorporate climate-related financial risk into the bank’s internal reporting, monitoring and escalation processes; and prepare for the transition risks to the bank associated with the adjustment to a low-carbon economy and related changes in laws, regulations, governmental policies, technology, and consumer behavior and expectations.
On October 21, 2021, the Financial Stability Oversight Council published a report identifying climate-related financial risks as an “emerging threat” to financial stability. On October 24, 2023, the FDIC, the OCC and the Federal Reserve jointly finalized principles for climate-related financial risk management for national banks with more than $100 billion in total assets. Although these risk management principles do not apply to the Bank directly based upon our current size, the FDIC has indicated that all banks, regardless of their size, may have material exposures to climate-related financial and other risks that require prudent management. As climate-related supervisory guidance is formalized, and relevant risk areas and corresponding control expectations are further refined, we may be required to expend significant capital and incur compliance, operating, maintenance and remediation costs in order to conform to such requirements.
Climate-related physical changes and hazards, such as wildfires, could also pose credit risks for us. For example, our borrowers may have collateral properties or operations located in areas at risk of wildfires or subject to the risk of drought in California. The properties pledged as collateral on our loan portfolio could also be damaged by wildfires, earthquakes or other natural disasters, and thereby the recoverability of loans could be impaired. A number of factors can affect credit losses, including the extent of damage to the collateral, the extent of damage not covered by insurance, the extent to which unemployment and other economic conditions caused by the natural disaster adversely affect the ability of borrowers to repay their loans, and the cost of collection and foreclosure to us. Additionally, there could be increased insurance premiums and deductibles, or a decrease in the availability of coverage, due to severe losses resulting from wildfires or other climate-related physical hazards. The ultimate outcome on our business of a natural disaster, whether or not caused by climate change, is difficult to predict but could have a material adverse effect on financial condition, results of operations or profitability.
Additional legislation and regulatory requirements and changes in consumer preferences, including those associated with the transition to a low-carbon economy, could increase expenses of, or otherwise adversely impact, the Company, its businesses or its customers. We and our customers may face cost increases, asset value reductions, operating process changes, reduced availability of insurance, and the like, as a result of governmental actions or societal responses to climate change. New and/or more stringent regulatory requirements relating to climate change or environmental sustainability could materially affect the Company’s results of operations by increasing our compliance costs. Regulatory changes or market shifts to low-carbon products could also impact the creditworthiness of some of our customers or reduce the value of assets securing loans, which may require the Company to adjust our lending portfolios and business strategies.
Risks Related to Our Growth
If we are not able to manage our growth effectively, our future prospects and competitive position could be diminished and our profitability could be reduced. We may also incur higher than anticipated costs, and our ability to execute our growth strategy could be impaired. It is our objective to continue to grow our assets and deposits by increasing our product and service offerings and expanding our operations organically. Our ability to manage growth successfully will depend on our ability to (i) identify suitable markets for expansion; (ii) attract and retain qualified management; (iii) attract funding to support additional growth; (iv) maintain asset quality and cost controls; (v) maintain adequate regulatory capital and profitability to support our lending activities; and (vi) may include finding attractive acquisition targets and successfully acquire and integrate the acquisitions in an efficient manner. If we do not manage our growth effectively, we may be unable to realize the benefit from our investments in technology, infrastructure, and personnel that we have made to support our expansion. In addition, we may incur higher costs and realize less revenue growth, which would reduce our earnings and diminish our future prospects. Failing to maintain effective financial and operational controls as we grow, such as appropriate loan underwriting procedures, adequate allowances for credit losses and compliance with regulatory requirements, could have a negative effect on our financial condition and operations, such as increased credit losses, reduced earnings and potential regulatory restrictions on growth.
Entering new market areas, new lines of business, or new products and services may subject us to additional risks. A failure to successfully manage these risks may have a material adverse effect on our business. As part of our growth strategy, we have implemented and may continue to enter new market areas and new lines of business. We have expanded into the East Bay area of San Francisco and Napa, which are relatively new market areas for us. We introduced commercial equipment leasing as a new product line a few years ago. There are risks and uncertainties associated with these efforts, particularly in instances where such product lines are not fully mature. In developing and marketing new lines of business and/or new products and services and/or shifting the focus of our asset mix and/or expanding into new markets, we may invest significant time and resources. Initial timetables may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives in these markets and shifting market preferences, may also affect or limit their successful implementation. Failure to successfully manage these risks could have an adverse effect on our business, financial condition and results of operations.
Risks Related to Our Personnel
We may have difficulty attracting additional necessary personnel, which may divert resources and limit our ability to successfully expand our operations. Our
business plan includes, and is dependent upon, our hiring and retaining highly qualified and motivated associates at every level. We have experienced, and expect to continue to experience, substantial competition in identifying, hiring and retaining top-quality associates due to low unemployment rate and new financial institutions entering our markets. If we are unable to hire and retain qualified personnel, we may be unable to successfully execute our business strategy and manage our growth.
The unexpected loss of key officers would materially and adversely affect our ability to execute our business strategy, and diminish our future prospects. Our
success to date and our prospects for success in the future depend substantially on our senior management team. The loss of key members of our senior management team could materially and adversely affect our ability to successfully implement our business plan and, as a result, our future prospects. The loss of senior management without qualified successors who can execute our strategy would also have an adverse impact on us.
As a community bank, our ability to maintain our positive reputation is critical to the success of our business. The failure to maintain that reputation may materially and adversely affect our financial performance. Our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our clients. If our reputation is negatively affected by the actions of our employees or otherwise, our business and, therefore, our operating results may be materially and adversely affected.
Risks Related to Our Financial Practices
Our allowance for credit losses may not be adequate to cover actual losses. A significant source of risk arises from the possibility that we could sustain losses due to adverse economic conditions which, among other factors, could cause loan defaults and non-performance on loans. We maintain an allowance for credit losses in accordance with U.S. generally accepted accounting principles to provide for such defaults and other non-performance. The determination of the appropriate level of this allowance is an inherently difficult process and is based on numerous assumptions. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control. In addition, our underwriting policies, adherence to credit monitoring processes, and risk management systems and controls may not prevent unexpected losses. Our allowance for credit losses may not be adequate to cover actual credit losses. Moreover, any increase in our allowance for credit losses will adversely affect our earnings.
Our financial and accounting estimates and risk management framework rely on analytical forecasting and models, and our risk exposures and losses could be significantly greater than our models indicated. The processes we use to estimate our inherent credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and operations, depend upon the use of analytical and forecasting models. Some of our tools and metrics for managing risk are based upon our use of observed historical market behavior. We rely on quantitative models to measure risks and to estimate certain financial values. Models may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring interest rate and other market risks, predicting losses, assessing capital adequacy and calculating regulatory capital levels, as well as estimating the value of financial instruments and balance sheet items.
Poorly designed or implemented models present the risk that our business decisions based on information incorporating such models will be adversely affected due to the inadequacy of that information. Moreover, our models may fail to predict future risk exposures if the information used in the model is incorrect, obsolete or not sufficiently comparable to actual events as they occur.
We seek to incorporate appropriate historical data in our models, but the range of market values and behaviors reflected in any period of historical data is not at all times predictive of future developments in any particular period and the period of data we incorporate into our models may prove to be inappropriate for the period being modeled. In such case, our ability to manage risk would be limited and our risk exposure and losses could be significantly greater than our models indicated. This could harm our reputation as well as our revenues and profits. Finally, information we provide to our regulators based on poorly designed or implemented models could also be inaccurate or misleading. Some of the decisions that our regulators make, including those related to capital distributions to our shareholders, could be affected adversely due to their perception that the quality of the models used to generate the relevant information is insufficient.
Impairment of investment securities could require charges to earnings, which would negatively affect our operations. We maintain a significant amount of our assets in investment securities, and must periodically evaluate investment securities for current expected credit losses as required by ASC 326. We evaluate our investment securities portfolio for impairment as of each reporting date. At December 31, 2024, we had no investment securities that were impaired.
Changes in accounting standards could materially affect our financial statements. The Company’s consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America, called GAAP. The financial information contained within our consolidated financial statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. Other estimates that we use are fair value of our securities and expected useful lives of our depreciable assets. From time to time, the FASB and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements or new interpretations of existing standards emerge. These changes can be difficult to predict and operationally complex to implement and can materially affect how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, resulting in our restating prior period financial statements.
Risks Related to Our Access to Capital
We may be unable to, or choose not to, pay dividends on our common shares. We have consistently declared an annual cash dividend for 89 years. Our ability to continue to pay dividends depends on various factors. The Company is a legal entity separate and distinct from the Bank, and does not conduct stand-alone operations, which means that the Bank must first pay dividend(s) to the Company. The FDIC, the DFPI and California corporate and banking laws may, under certain circumstances, prohibit the Bank’s payment of dividends to the Company. Federal Reserve policy requires bank holding companies to pay cash dividends on common shares only out of net income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The Company’s Board of Directors may determine that, even though funds are available for dividend payments, retaining the funds for other internal uses, such as expansion of our operations, is necessary or appropriate in light of our business plan and objectives. A failure to pay dividends may negatively affect your investment.
The price of our common shares may fluctuate significantly particularly given the illiquid nature of our common stock and our stock may have low trading volumes, which may make it difficult for a shareholder to resell common shares owned at times or prices they find attractive. The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility. The markets may produce downward pressure on stock prices for certain issuers without regard to those issuers’ underlying financial strength. As a result, the trading volume in our common shares may fluctuate and cause significant price variations to occur.
The low trading volume in our common shares on the OTCQX, under the symbol “FMCB,” means that our shares may have less liquidity than other companies, whose shares are more broadly traded. We cannot ensure that the volume of trading in our common shares or the price of our common shares will be maintained or will increase in the future. Our stock price can fluctuate significantly in response to a variety of factors discussed in this section, including, among other things: actual or anticipated variations in quarterly results of operations; operating and stock price performance of other companies that investors deem comparable to our Company; news reports relating to trends, concerns and other issues in the financial services industry; available investment liquidity in our market area since our stock is not listed on any exchange; and perceptions in the marketplace regarding our Company and/or its competitors.
If we need additional capital in the future to continue our growth, we may not be able to obtain it on terms that are favorable. We may need to raise additional capital in the future to support our continued growth and to maintain our capital levels. Our ability to raise capital through the sale of additional securities will depend primarily upon our financial condition and the condition of financial markets at that time. Accordingly, we may not be able to obtain additional capital in the amounts or on terms satisfactory to us. Our growth may be constrained if we are unable to generate or raise additional capital as needed.
Our funding sources may prove insufficient to provide liquidity, replace deposits and support our future growth. We rely on customer deposits, advances from the Federal Home Loan Bank of San Francisco (“FHLB”), lines of credit at other financial institutions and the Federal Reserve Bank (“FRB”) to fund our operations. Although we have historically been able to replace maturing deposits and advances if desired, we may not be able to replace such funds in the future if our financial condition, the financial condition of the FHLB or market conditions were to change. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our profitability would be adversely affected. FHLB borrowings and other current sources of liquidity may not be available or, if available, may not be sufficient to provide adequate funding for operations. Furthermore, our own actions could result in a loss of adequate funding. For example, our borrowing capacity at the FHLB could be reduced if we are deemed to have poor documentation or processes. Accordingly, we may be required to seek additional higher-cost debt in the future to achieve our long-term business objectives. Additional borrowings, if sought, may not be available to us or, if available, may not be available on favorable terms. If additional financing sources are unavailable or are not available on reasonable terms, our growth and future prospects could be adversely affected.
We may be adversely affected by the lack of soundness of other financial institutions or financial market utilities. Financial institutions are interrelated because of trading, clearing, counterparty or other relationships. Our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions.
The rapid contraction of the M1 and M2 money supply in 2022 and the first quarter of 2023 materially impacted liquidity levels at many financial institutions. The high-profile bank failures of Silicon Valley Bank, Signature Bank and First Republic Bank in 2023, and related negative media attention, also generated significant market trading volatility among publicly-traded bank holding companies and, in particular, regional and community banks. These developments negatively impacted customer confidence in the safety and soundness of regional and community banks.
These events may also result in potentially adverse changes to laws or regulations governing banks and bank holding companies, enhanced regulatory supervision and examination policies and priorities, and/or the imposition of restrictions through regulatory supervisory or enforcement activities, including higher capital requirements and/or an increase in the Bank’s deposit insurance assessments. Although these legislative and regulatory actions cannot be predicted with certainty, any of these potential legislative or regulatory actions could, among other things, subject us to additional costs, limit the types of financial services and products we may offer, and reduce our profitability, any of which could materially and adversely affect our business, results of operations or financial condition. Defaults by, or even rumors or questions about, one or more financial institutions or financial market utilities, or the financial services industry generally, may lead to market-wide liquidity problems and losses of client, creditor and counterparty confidence and could lead to losses or defaults by us or by other financial institutions.
Risks Related to Cybersecurity and Information Technology
Cyber-attacks or other security breaches could have a material adverse effect on our business. In the normal course of business, we collect, process, and retain sensitive and confidential information regarding our clients. We also have arrangements in place with other third parties through which we share and receive information about their clients who are or may become our clients. Although we devote significant resources and management focus to ensuring the integrity of our systems through information security and business continuity programs, our facilities and systems, and those of third-party service providers, are vulnerable to external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors or other similar events.
Information security risks for financial institutions have increased recently in part because of new technologies, the use of the Internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions, and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists, nation-state adversaries, and others. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks against large financial institutions, particularly denial of service and ransomware attacks that are designed to disrupt key business services, such as client-facing websites. We are not able to anticipate or implement effective preventive measures against all potential security breaches, because the techniques used change frequently and because attacks can originate from a wide variety of sources. We employ detection and response mechanisms designed to contain and mitigate security incidents, but early detection may be thwarted by sophisticated attacks and malware designed to avoid detection.
We also face risks related to cyber-attacks and other security breaches in connection with credit and debit card transactions that typically involve the transmission of sensitive information regarding our clients through various third parties, including merchant acquiring banks, payment processors, payment card networks and our core processors. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments such as the point of sale that we do not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them. We also rely on numerous other third-party service providers to conduct other aspects of our business operations and face similar risks relating to them. While we regularly conduct security assessments on these third parties, we cannot be sure that their information security protocols are sufficient at all times to withstand a cyber-attack or other security breach. The access by unauthorized persons to, or the improper disclosure by us of, confidential information regarding our clients or our own proprietary information, software, methodologies, and business secrets could result in significant legal and financial exposure, supervisory liability, damage to our reputation or a loss of confidence in the security of our systems, products and services, which could have a material adverse effect on our financial condition or operations. In the past several years, there have been a number of well-publicized attacks or breaches affecting others in our industry that have heightened concern by consumers and have resulted in increased regulatory focus. Furthermore, cyber-attacks or other breaches in the future, whether affecting others or us, could intensify consumer concern and regulatory focus and result in reduced use of our cards and increased costs, all of which could have a material adverse effect on our business. To the extent we are involved in any future cyber-attacks or other breaches, our brand and reputation could be affected, and this could have a material adverse effect on our financial condition and operations. If we experience a cyber-attack, our insurance coverage may not cover all losses, and furthermore, we may experience a loss of reputation.
We rely on our information technology and telecommunications systems and third-party servicers, and the failure of these systems could adversely affect our business. Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers. We rely on these systems to process deposit services, electronic funds transfer services (including wires and ACH), new and renewal loans, provide client service, facilitate collections and share data across our organization. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to process deposit services, electronic funds transfer services (including wires and ACH), new and renewal loans and provide client service or compromise our ability to collect loan payments in a timely manner. Our ability to adopt new information technology and technological products needed to meet our clients’ banking needs may be limited if our third-party servicers are slow to adopt or choose not to adopt such new technology and products. Such a failure to provide this technology and products to our clients could result in a loss of clients, which would negatively affect our financial condition and operations.
Other Operational Risks
Our risk management framework may not be effective in mitigating risks and losses to us. Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our framework also includes financial or other modeling methodologies that involve management assumptions and judgment. Our risk management framework may not be effective under all circumstances and may not adequately mitigate any risk of loss to us. If our framework is not effective, we could suffer unexpected losses and our financial condition, operations or business prospects could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.
We are subject to certain operating risks, related to client or employee fraud, which could harm our reputation and business. Employee error, or employee or client misconduct, could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our clients or improper use of confidential information. It is not always possible to prevent employee error and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee error could also subject us to financial claims for negligence. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured, excess insurance coverage is denied or not available, it could have a material adverse effect on our financial condition and operations.
We depend on the accuracy and completeness of information about clients and counterparties, and our financial condition, operations, financial reporting and reputation could be negatively affected if this information is materially misleading, false, inaccurate or fraudulent. In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. In deciding whether to extend credit, we may rely upon our clients’ representations that their financial statements conform to U.S. generally accepted accounting principles, or GAAP, and present fairly, in all material respects, the financial condition, operations and cash flows of the client. We also may rely on client representations and certifications, or other auditors’ reports, with respect to the business and financial condition of our clients. Our financial condition, operations, financial reporting and reputation could be negatively affected if we rely on materially misleading, false, inaccurate or fraudulent information provided by or about clients and counterparties.
Catastrophic events including, but not limited to, hurricanes, tornadoes, earthquakes, fires, floods, prolonged drought, and pandemics may adversely affect the general economy, financial and capital markets, specific industries, and the Bank. The Bank has significant operations and a significant customer base in regions where natural and other disasters may occur. These regions are known for being vulnerable to natural disasters and other risks, such as earthquakes, fires, floods, and prolonged drought. These types of natural catastrophic events at times have disrupted the local economy, the Bank’s business and clients, and could pose physical risks to the Bank’s property. In addition, catastrophic events, such as natural disasters or global pandemics, occurring in other regions of the world may have an impact on the Bank’s clients and in turn on the Bank. Although we have business continuity and disaster recovery programs in place, a significant catastrophic event could materially adversely affect the Bank’s operating results.
Risks Related to Our Regulatory Environment
We are subject to regulation, which increases the cost and expense of regulatory compliance, and may restrict our growth and our ability to acquire other financial institutions. Supervision, regulation, and examination of the Company and the Bank by the bank regulatory agencies are intended primarily for the protection of consumers, bank clients and the DIF of the FDIC, rather than holders of our common shares. As a bank holding company under federal law, we are subject to regulation under the BHCA, and the examination and reporting requirements of the Federal Reserve. In addition to supervising and examining us, the Federal Reserve, through its adoption of regulations implementing the BHCA, places certain restrictions on the permissible activities for bank holding companies. Changes in the number or scope of permissible activities could have an adverse effect on our ability to realize our strategic goals. As a California state-chartered bank that is not a member of the Federal Reserve System, the Bank is separately subject to regulation by both the FDIC and the DFPI. The FDIC and DFPI regulate numerous aspects of the Bank’s operations, including adequate capital and financial condition, permissible types and amounts of extensions of credit and investments, permissible non-banking activities and restrictions on dividend payments. We may be required to invest significant management attention and resources to evaluate and make any changes necessary to comply with applicable laws and regulations. This allocation of resources, as well as any failure to comply with applicable requirements, may negatively affect our operations and financial condition.
Banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any regulatory actions to which we become subject because such examinations could materially and adversely affect us. The DFPI, the FDIC, and the Federal Reserve periodically conduct examinations of our business, including compliance with laws and regulations. Accommodating such examinations may require management to reallocate resources that would otherwise be used in the day-to-day operation of other aspects of our business. If, as a result of an examination, the DFPI or a federal banking agency were to determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of our operations had become unsatisfactory, or that we or our management were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions could include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against us, our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to clients, to terminate our deposit insurance. FDIC deposit insurance is critical to the continued operation of the Bank. If we become subject to such regulatory actions, our business operations could be materially and adversely affected.
Changes in laws, government regulation and monetary policy may have a material adverse effect on our operations. Financial institutions have been the subject of significant legislative and regulatory changes (including the Dodd-Frank Act) and may be the subject of further significant legislation or regulation in the future, none of which is within our control. This may result in repeals of or amendments to, existing laws, treaties, regulations, guidance, reporting, recordkeeping requirements, and other government policies. Significant new laws or regulations or changes in, or repeals of, existing laws or regulations, including those with respect to federal and state taxation, may cause our results of operations to differ materially. In addition, the costs and burden of compliance could adversely affect our ability to operate profitably. Further, federal monetary policy significantly affects the Bank’s credit conditions, as well as the Bank’s clients, particularly as implemented through the Federal Reserve, primarily through open market operations in U.S. government securities, the discount rate for bank borrowings and reserve requirements. A material change in any of these conditions could have a material impact on us, the Bank and the Bank’s clients, and therefore on our financial condition and operations.
New and future rulemaking by the CFPB and other regulators, as well as enforcement of existing consumer protection laws, may have a material effect on our operations and operating costs. The CFPB has the authority to implement and enforce a variety of existing federal consumer protection statutes and to issue new regulations. However, with respect to institutions of our size, it does not have primary examination and enforcement authority. The authority to examine depository institutions with $10 billion or less in assets, such as the Bank, for compliance with federal consumer laws remains largely with our primary federal regulator, the FDIC. However, the CFPB may participate in examinations of smaller institutions on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators. In some cases, regulators such as the Federal Trade Commission, or FTC, and the Department of Justice also retain certain rulemaking or enforcement authority, and we remain subject to certain state consumer protection laws. The CFPB has placed significant emphasis on consumer complaint management and has established a public consumer complaint database to encourage consumers to file complaints they may have against financial institutions. We are expected to monitor and respond to these complaints, including those that we deem frivolous, and doing so may require management to reallocate resources away from more profitable endeavors.
The CFPB has adopted a number of significant rules that affect nearly every aspect of the lifecycle of a residential mortgage. These rules implement the Dodd-Frank Act amendments to the Equal Credit Opportunity Act, the Truth in Lending Act and the Real Estate Settlement Procedures Act. The rules require banks to, among other things: (i) develop and implement procedures to ensure compliance with a new “reasonable ability to repay” test and identify whether a loan meets a new definition for a “qualified mortgage”; (ii) implement new or revised disclosures, policies and procedures for servicing mortgages including, but not limited to, early intervention with delinquent clients and specific loss mitigation procedures for loans secured by a client’s principal residence; (iii) comply with additional restrictions on mortgage loan originator compensation; and (iv) comply with new disclosure requirements and standards for appraisals and escrow accounts maintained for “higher priced mortgage loans.” These rules create operational and strategic challenges for us, as we are both a mortgage originator and a servicer.
As noted previously, the new Trump Administration has made leadership changes at the CFPB. The long-term impact of these and other changes at the CFPB cannot be predicted at this time.
We are subject to stringent capital requirements. Pursuant to the Dodd-Frank Act, the federal banking agencies adopted final rules, or the U.S. Basel III Capital Rules, to update their general risk-based capital and leverage capital requirements to incorporate agreements reflected in the Third Basel Accord adopted by the Basel Committee on Banking Supervision, or Basel III Capital Standards, as well as the requirements of the Dodd-Frank Act. The U.S. Basel III Capital Rules are described in more detail in “Supervision and Regulation - Capital Standards” in this Form 10-K.
The failure to meet the established capital requirements could result in one or more of our regulators placing limitations or conditions on our activities or restricting the commencement of new activities. Such failure could subject us to a variety of enforcement remedies available to the federal regulatory authorities, including limiting our ability to pay dividends, issuing a directive to increase our capital and terminating our FDIC deposit insurance. FDIC deposit insurance is critical to the continued operation of the Bank. Our failure to meet applicable regulatory capital requirements, or to maintain appropriate capital levels in general, could affect client and investor confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common shares, our ability to make acquisitions, and our operations and financial condition, generally.
We may be required to contribute capital or assets to the Bank that could otherwise be invested or deployed more profitably elsewhere. Federal law and regulatory policy impose a number of obligations on bank holding companies designed to reduce potential loss exposure to the clients of insured depository subsidiaries and to the FDIC’s DIF. For example, a bank holding company is required to serve as a source of financial strength to its FDIC-insured depository subsidiaries and to commit financial resources to support such institutions where it might not do so otherwise. These situations include guaranteeing the compliance of an “undercapitalized” bank with its obligations under a capital restoration plan.
A capital injection into the Bank may be required at times when we do not have the resources to provide it at the holding company level; therefore, we may be required to issue common shares or debt to obtain the required capital. Issuing additional common shares would dilute our current shareholders’ percentage of ownership and could cause the price of our common shares to decline. Any debt would be entitled to a priority of payment over the claims of the Company’s general unsecured creditors or equity holders. Thus, any Company borrowing to make the required capital injection may be expensive and adversely affect our cash flows, financial condition, operations, and business prospects.
We face a risk of non-compliance and enforcement actions with respect to the Bank Secrecy Act (“BSA”) and other anti-money laundering statutes and regulations. Like
all U.S. financial institutions, we are subject to monitoring requirements under federal law, including anti-money laundering, or AML, and BSA matters. Since September 11, 2001, banking regulators have intensified their focus on AML and BSA compliance requirements, particularly the AML provisions of the USA Patriot Act. There is also increased scrutiny of compliance with the rules enforced by the U.S. Treasury Department’s OFAC, which involve sanctions for dealing with certain persons or countries. While the Bank has adopted policies, procedures and controls to comply with the BSA, other AML statutes and regulations and OFAC regulations, this aggressive supervision and examination and increased likelihood of enforcement actions may increase our operating costs, which could negatively affect our operations and reputation.
We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties. Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose non-discrimination lending requirements on financial institutions. The FDIC, the Department of Justice, the CFPB and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair lending laws and regulations could adversely impact our rating under the CRA, and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, financial condition and operations.
Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities. We are subject to various privacy, information security and data protection laws, including requirements concerning security breach notification, and these laws could negatively affect us. Federal law imposes requirements for the safeguarding of certain client information. Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Moreover, legislators and regulators in the United States are increasingly adopting or revising privacy, information security and data protection laws that potentially could have a significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of consumer or employee information, and some of our current or planned business activities. This could also increase our costs of compliance and business operations and could reduce income from certain business initiatives.
Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting client or employee data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have a material adverse effect on our financial conditions or operations.
Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory or governmental investigations or actions, litigation, fines, sanctions and damage to our reputation, which could have a material adverse effect on our financial condition or operations.
Possible changes in the U.S. tax laws could adversely affect our business and result of operations in a variety of ways. We are subject to changes in tax law that could increase our effective tax rates. These law changes may be retroactive to previous periods and as a result could negatively affect our current and future financial performance. In particular, the Tax Cuts and Jobs Act, which was signed into law in December 2017, includes a number of provisions impacting the banking industry and the borrowers and the market for residential and commercial real estate. Changes include a lower limit on the deductibility of interest on residential mortgage loans and home equity loans; a limitation on the deductibility of business interest expense; and a limitation on the deductibility of property taxes and state and local income taxes. The law's limitation on the mortgage interest deduction and state and local tax deduction for individual taxpayers has increased the after-tax cost of owning a home for many of our existing clients. The Inflation Reduction Act, which was signed into law in the United States in August 2022, among other things, imposes a surcharge on stock repurchases. The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations. Further, these changes implemented by these tax laws could make some businesses and industries less inclined to borrow, potentially reducing demand for our commercial loan products.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B.
Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2.
Properties
Farmers & Merchants Bancorp and its subsidiaries are headquartered in Lodi, California. Executive offices are located at 111 W. Pine Street. We own our headquarters, loan servicing center, administrative offices, warehouses and parking lots along with land for future banking locations. Banking services are provided in 30 branch locations in the Company's service area. Of the 30 branches, 20 are owned and 10 are leased. The expiration of these leases occurs between the years 2025 and 2030, however most of these leases have extension options that typically range from 5 to 10 years. See Note 13 “Leases”, located in Item 8. “Financial Statements and Supplementary Data” in this Form 10-K.

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ITEM 3. LEGAL PROCEEDINGS
Item 3.
Legal Proceedings
Certain lawsuits and claims arising in the ordinary course of business may be filed or pending against the Company or its subsidiaries. Based upon information available to the Company, its review of such lawsuits and claims and consultation with its counsel, the Company believes the liability relating to these actions, if any, would not have a material adverse effect on its consolidated financial statements.
There are no material proceedings adverse to the Company to which any director, officer or affiliate of the Company is a party.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4.
Mine Safety Disclosures
Not Applicable
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The common stock of Farmers & Merchants Bancorp is not widely held or listed on any exchange. However, trades are reported on the OTCQX under the symbol “FMCB.”
The following tables summarize the actual high, low, and close sale prices for the Company's common stock since the first quarter of 2023. These figures are based on activity posted on the OTCQX:
Year Ended December 31, 2024
High
Low
Close
Dividend Declared
First quarter
$
1,075.00
$
950.00
$
980.00
$
-
Second quarter
1,100.00
951.00
961.20
8.80
Third quarter
971.06
930.12
971.06
-
Fourth quarter
1,099.00
960.00
1,060.00
9.30
Year Ended December 31, 2023
High
Low
Close
Dividend Declared
First quarter
$
1,087.99
$
975.02
$
1,015.00
$
-
Second quarter
1,020.00
950.00
965.00
8.30
Third quarter
1,000.00
934.00
955.00
-
Fourth quarter
1,057.50
932.00
1,057.50
8.80
As of February 28, 2025, there were approximately 1,274 shareholders of record of the Company’s common stock. The Company and, before the Company was formed, the Bank, has paid cash dividends for the past 89 consecutive years. There are limitations under Delaware corporate law as to the amounts of cash dividends that may be paid by the Company. Additionally, if we decided to defer interest on our 2003 subordinated debentures, we would be prohibited by the terms of the debentures from paying cash dividends on the Company’s common stock. The Company is dependent on cash dividends paid by the Bank to fund its cash dividend payments to its shareholders. There are regulatory limitations on cash dividends that may be paid by the Bank. See “Item 1. Business - Supervision and Regulation.”
On November 14, 2023, the Board of Directors authorized an extension to the Company’s share repurchase program through December 31, 2024 for an additional $25.0 million of the Company’s common stock, which represented approximately 4% of outstanding shareholders’ equity at the time of approval. On September 10, 2024, the share repurchase program authorized in November 2023 was cancelled. On September 10, 2024, the Company authorized a new share repurchase program for $55.0 million of the Company’s common stock, which represented approximately 9% of outstanding shareholders’ equity at the time of approval. Repurchases by the Company under the repurchase plan may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means.
During 2024, the Company spent $45.3 million, inclusive of the excise tax, on the repurchase of 48,173 shares, or approximately 6.44% of the total shares outstanding as of December 31, 2023. The Company repurchased 9,936 shares, or $10.1 million, under the $25.0 million share repurchase program authorized in November 2023, which was cancelled on September 10, 2024. The Company repurchased 38,237 shares, or $35.1 million, under the new share purchase program authorized on September 10, 2024. All of these shares were purchased at prices ranging from $917.00 to $1,090.00 per share, for an average of $937.43 per share, based upon the then current price on the OTCQX or reflecting a negotiated block discount. The Company did not issue any shares of common stock during 2024.
The actual means and timing of any repurchases, the quantity of purchased shares and prices will be subject to certain limitations, including, without limitation, market prices of the Company’s common shares, general market and economic conditions, the Company’s financial performance, capital position, and applicable legal and regulatory requirements, and the discretion of the Chief Executive Officer and Chief Financial Officer.
Repurchases under the repurchase plan may be initiated, discontinued, suspended, or restarted at any time in the Company’s discretion. The Company is not obligated to repurchase any shares under the repurchase plan. No shares may be repurchased pursuant to the authority granted in the repurchase plan after December 31, 2026. Repurchased shares may be used to fund the Company’s non-qualified retirement plans, may be returned to the status of authorized but unissued common shares of the Company or may be retired.
The following table reports information regarding repurchases of our common stock during the fourth quarter of 2024:
Period
Total number
of shares
purchased
Average price
paid per share(1)
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)
October 1, 2024 to October 31, 2024
38,069
$
917.33
38,069
$
20,040
November 1, 2024 to November 30, 2024
1,000.00
20,029
December 1, 2024 to December 31, 2024
1,027.83
19,909
Total 4th Quarter 2024
38,197
$
917.69
38,197
$
19,909
Total 2024
48,173
$
937.43
48,173
$
19,909
(1)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 year ended December 31, 2024, the excise tax expense totaled $452,000.
Shareholder Rights Plan
On August 5, 2008, the Board of Directors approved a Share Purchase Rights Plan (the “Rights Plan”), pursuant to which the Company entered into a Rights Agreement dated August 5, 2008 (the “2008 Rights Agreement”), with Computershare as Rights Agent, and the Company declared a dividend of a right to acquire one preferred share purchase right (a “Right”) for each outstanding share of the Company’s common stock, $0.01 par value per share, to shareholders of record at the close of business on August 15, 2008. Generally, the Rights are only triggered and become exercisable if a person or group (the “Acquiring Person”), without the consent of the Company’s Board of Directors, acquires beneficial ownership of 10 percent or more of the Company’s common stock or announces a tender offer for 10 percent or more of the Company’s common stock.
The Rights Plan is similar to plans adopted by many other publicly traded companies. The effect of the Rights Plan is to discourage any potential acquirer from triggering the Rights without first convincing the Company’s Board of Directors that the proposed acquisition is fair to, and in the best interest of, all of the shareholders of the Company. The provisions of the Plan, if triggered by the Acquiring Person, will substantially dilute the equity and voting interest of any potential acquirer unless the Board of Directors approves of the proposed acquisition (under Article XV of the Company’s Certificate of Incorporation, the Board of Directors has the authority to consider any and all factors in determining whether an acquisition is in the best interests of the Company and its shareholders). Each Right, if and when exercisable, will entitle the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, no par value (“Preferred Share”), at the purchase price set forth in the Rights Plan for each one one-hundredth of a share, subject to adjustment.
Each holder of a Right (except for the Acquiring Person, whose Rights will be null and void upon such event) shall thereafter have the right to receive, upon exercise, that number of Common shares of the Company having a market value of two times the exercise price of the Right. At any time before a person becomes an Acquiring Person, the Rights can be redeemed, in whole, but not in part, by the Company’s Board of Directors at a price of $0.001 per Right.
The Rights Plan was set to expire on August 5, 2018. On November 19, 2015, the Board of Directors approved a seven-year extension of the term of the Rights Plan. Pursuant to an Amendment to the 2008 Rights Agreement dated February 18, 2016, the term of the Rights Plan was extended from August 5, 2018 to August 5, 2025. The extension of the term of the Rights Plan was intended as a means to continue to guard against abusive takeover tactics and was not in response to any particular proposal. The Board also increased the purchase price under the Rights Plan from $1,200 to $1,600 per one one-hundredth of a Preferred Share, to reflect the increase in the market price of the Company’s common stock over the past several years.
On April 5, 2024, the Company entered into an Amended and Restated Rights Agreement (the “Amended Rights Agreement”), which amended and restated the 2008 Rights Agreement. The Amended Rights Agreement extends the expiration date of the Company’s Rights Plan from the close of business on August 5, 2025, to the close of business on August 5, 2034. At the time of the termination of the Amended Rights Agreement, all of the Rights distributed to holders of the Company’s Preferred Shares pursuant to the Amended Rights Agreement will expire. The Amended Rights Agreement also increases the purchase price per unit under the Rights Agreement from $1,600 per one one-hundredth of a Preferred Share, to $3,900 per one one-hundredth of a Preferred Share. The other changes reflected in the Amended Rights Agreement generally clarify the legal relationship between the Rights Agent and the Company and were made to conform the agreement to provisions that have become customary in such agreements since the Rights Plan was originally adopted in 2008.
For information regarding securities authorized for issuance under equity compensation plans, see Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report on Form 10-K.
Performance Graph
The following graph compares the Company’s cumulative total stockholder return on common stock from December 31, 2019 to December 31, 2024 to that of: (i) the S&P 600 Regional Banks (Sub Ind) (TR) Index; and (ii) the cumulative total return of the New York Stock Exchange AMEX Composite market index. The graph assumes an initial investment of $100 on December 31, 2019 and reinvestment of dividends. The stock price performance set forth in the following graph is not necessarily indicative of future price performance. The Company’s stock price data is based on activity posted on the OTCQX and on private transactions between individual shareholders that are reported to the Company. This data was furnished by Zacks SEC Compliance Services Group.
This graph shall not be deemed filed or incorporated by reference into any filing under the Securities Act or the Exchange Act.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6.
Reserved

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is intended to provide a comprehensive review of the Company’s operating results and financial condition. The information contained in this section should be read in conjunction with the Audited Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements in this Form 10-K. Information related to the comparison of the results of operations for the years December 31, 2023 to 2022 is found in “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.
Overview
Farmers & Merchants Bancorp (the “Company” or “FMCB”) is a Delaware registered bank holding company organized in 1999. As a registered bank holding company, FMCB is subject to regulation, supervision, and examination by the Federal Reserve and by the California Department of Financial Protection and Innovation (“DFPI”). The Company’s principal business is to serve as a holding company for Farmers & Merchants Bank of Central California (the “Bank” or “F&M Bank”) and for other banking or banking related subsidiaries, which the Company may establish or acquire. Over 108 years ago, August 1, 1916, marked the first day of business for Farmers & Merchants Bank (the “Bank”). The Bank was incorporated under the laws of the State of California and licensed as a state-chartered bank. The Bank’s first venture out of Lodi occurred when the Galt office opened in 1948. Since then the Bank has opened full-service branches in Linden, Manteca, Riverbank, Modesto, Sacramento, Elk Grove, Turlock, Hilmar, Stockton, Merced, Walnut Creek, Concord, Walnut Grove, Oakland, Napa, and Danville. As a legal entity separate and distinct from its subsidiary, the Company’s principal source of funds is, and will continue to be, dividends paid by and other funds received from the Bank. Legal limitations are imposed on the amount of dividends that may be paid and loans that may be made by the Bank to the Company.
In March 2002, F & M Bancorp, Inc. was created to protect the name “F & M Bank.” During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name, “F & M Bank,” as part of a larger effort to enhance the Company’s image and build brand name recognition. Since 2002, the Company has converted all of its daily operating and image advertising to the “F & M Bank” name and the Company’s logo, slogan and signage were redesigned to incorporate the trade name, “F & M Bank.”
The Company’s outstanding common stock as of December 31, 2024, consisted of 699,798 shares of common stock, $0.01 par value. No shares of preferred stock were issued or outstanding as of December 31, 2024. The common stock of the Company is not widely held or listed on any exchange. However, trades are reported on the OTCQX under the symbol “FMCB.”
The primary source of funding for the Company’s growth has been the generation of 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.
Selected Financial Data
The following condensed consolidated statements of financial condition and operations and selected performance ratios as of December 31, 2024, 2023, and 2022 and for the years then ended have been derived from our audited consolidated financial statements. The information below is qualified in its entirety by the detailed information included elsewhere herein and should be read along with this “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8, Financial Statements and Supplementary Data.”
Years Ended December 31
(Dollars in thousands, except per share data)
Selected Income Statement Information:
Interest income
$
271,977
$
253,754
$
198,413
Interest expense
65,301
38,369
4,840
Net interest income
206,676
215,385
193,573
Provision for credit losses
-
9,407
6,450
Net interest income after provision for credit losses
206,676
205,978
187,123
Non-interest income
20,700
14,914
6,178
Non-interest expense
105,132
104,339
93,560
Income before income tax expense
122,244
116,553
99,741
Income tax expense
33,787
28,239
24,651
Net income
$
88,457
$
88,314
$
75,090
Selected financial ratios:
Basic and diluted earnings per share
$
121.02
$
116.61
$
96.55
Cash dividends per common share
18.10
17.10
16.15
Dividend payout ratio
14.96
%
14.66
%
16.73
%
Net interest margin (tax equivalent)
4.05
%
4.30
%
3.81
%
Non-interest income to average assets
0.38
%
0.28
%
0.12
%
Non-interest expense to average assets
1.95
%
1.98
%
1.75
%
Efficiency ratio
46.24
%
45.31
%
46.84
%
Return on average assets
1.64
%
1.68
%
1.41
%
Return on average equity
15.49
%
17.05
%
16.04
%
Net charge-offs (recoveries) to average loans
0.02
%
(0.01
%)
0.01
%
As of December 31,
(Dollars in thousands, except per share data)
Selected Balance Sheet Information:
Cash and cash equivalents
$
212,563
$
410,642
$
588,257
Investment securities
1,233,407
999,750
997,817
Gross loans held for investment
3,690,221
3,665,397
3,521,718
Total assets
5,370,196
5,308,928
5,327,399
Total deposits
4,699,139
4,668,095
4,759,269
Shareholders' equity
573,072
549,755
485,308
Average Balances:
Average earning assets
5,118,165
5,027,990
5,091,684
Average assets
5,389,132
5,270,352
5,341,901
Average shareholders' equity
571,086
518,035
468,001
Selected financial ratios:
Book value per share
$
818.91
$
735.00
$
631.63
Tangible book value per share
$
800.52
$
717.05
$
613.42
Allowance for credit losses to total loans
2.04
%
2.05
%
1.90
%
Non-performing assets to total assets
0.03
%
0.02
%
0.03
%
Loans held for investment to deposits
78.53
%
78.52
%
74.00
%
Capital ratios:
Common equity tier 1 capital to risk-weighted assets
13.04
%
12.30
%
11.57
%
Tier 1 capital to risk-weighted assets
13.26
%
12.53
%
11.80
%
Risk-based capital to risk-weighted assets
14.52
%
13.78
%
13.06
%
Tier 1 leverage capital ratio
10.95
%
10.38
%
9.36
%
Tangible common equity ratio (1)
10.46
%
10.13
%
8.87
%
(1) See “Non-GAAP Measurements”.
Critical Accounting Policies and Estimates
The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements and the notes thereto, which have been prepared in accordance with U.S. GAAP. The preparation of the consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable; however, actual results may ultimately differ significantly from these estimates and assumptions, which could have a material adverse effect on the carrying value of assets and liabilities at the balance sheet dates and on our results of operations for the reporting periods.
Our significant accounting policies and practices are described in Note 1 “Summary of Significant Accounting Policies”, located in Item 8: “Financial Statements and Supplementary Data” in this Form 10-K. We have identified one policy and estimate as being critical because it requires 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. This policy relates to the allowance for credit losses on loans and leases held for investment.
Allowance for Credit Losses on Loans and Leases Held for Investment - The allowance for credit losses (“ACL”) on loans and leases represents management’s estimate of all expected credit losses over the expected life of the loan portfolio, utilizing the current expected credit loss (“CECL”) accounting standard as prescribed under GAAP. 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. Determining the appropriateness of the ACL is complex and requires judgment by management about inherently uncertain factors.
Management utilizes the weighted average remaining maturity (“WARM”) methodology given its size and level of 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 pool. 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 pool’s current expected credit losses. Among the significant 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) application of a reasonable and supportable forecast based on macro- and micro-economic factors expected to influence losses; (iv) value of collateral and strength of borrowers; and (v) the determination of the qualitative loss factors. All of these estimates are susceptible to significant change.
Qualitative factors are evaluated each period and applied in instances when management assesses that additional risks not captured in the quantitative estimate should be factored into the overall ACL estimate. These risks include loan performance trends, collateral value risk and changes in the nature and volume of the loan portfolio. Changes in the assessment of these qualitative factors could significantly impact the calculated estimated credit loss.
The ACL represents management’s best estimate of potential loan losses, but significant changes in prevailing economic conditions could result in material changes in the allowance. Generally, an improving economic environment generates a lower ACL estimate than a weakening economic environment. Changes in the macro-economic and micro-economic conditions, especially those impacting the agricultural industry in California, could significantly impact the calculated estimated credit loss. Changes in economic conditions and/or interest rates can also impact the duration assumption. An increase in the duration of loans would increase the allowance while a decrease in the duration would decrease the allowance. The economic information utilized in the ACL process is inherently uncertain and many external factors could impact the information. Management reviews the inputs to the WARM model to ensure they are reasonable and supportable; however, changes in local and national economic conditions will impact the allowance level. While management utilizes its best judgment and current information available, the adequacy of the ACL is significantly determined by certain factors outside the Company’s control, such as the performance of our loan portfolio, changes in the economic environment including economic uncertainty, changes in interest rates, and any regulatory changes. Additionally, the level of ACL may fluctuate based on the balance and mix of the loan portfolio. See Note 1 “Summary of Significant Accounting Policies”, located in Item 8. “Financial Statements and Supplementary Data”, of this Form 10-K for a detailed discussion of the Company’s allowance for credit losses.
Impact of Recently Issued Accounting Standards
See Note 1. “Summary of Significant Accounting Policies” to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” in this Form 10-K.
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-K:
•
Tangible common equity ratio and tangible book value per common share: Given that the use of these measures is prevalent among banking regulators, investors, and analysts, we disclose them in addition to the related GAAP measures of return on average equity and book value per common share. The reconciliations of these non-GAAP measurements to the GAAP measurements are presented in the following tables for and as of the periods presented.
Tangible Common Equity Ratio and
December 31,
Tangible Book Value Per Common Share
(Dollars in thousands, except per share data)
Shareholders' equity
$
573,072
$
549,755
$
485,308
Less: Intangible assets
12,870
13,419
13,992
Tangible common equity
$
560,202
$
536,336
$
471,316
Total Assets
$
5,370,196
$
5,308,928
$
5,327,399
Less: Intangible assets
12,870
13,419
13,992
Tangible assets
$
5,357,326
$
5,295,509
$
5,313,407
Tangible common equity ratio(1)
10.46
%
10.13
%
8.87
%
Book value per common share(2)
$
818.91
$
735.00
$
631.63
Tangible book value per common share(3)
$
800.52
$
717.05
$
613.42
Common shares outstanding
699,798
747,971
768,337
(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 performance during each of the years in the two-year period ended December 31, 2024 and the material changes in financial condition, operating income, and expense of the Company and its subsidiaries as shown in the accompanying consolidated financial statements. Information related to the comparison of the results of operations for the years ended December 31, 2023 and 2022 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2023 Annual Report on Form 10-K filed with the SEC on March 14, 2024.
Factors that determine the level of net income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, fee income, non-interest expense, the level of non-performing loans and other non-earning assets, and the amount of non-interest bearing liabilities supporting earning assets. Non-interest income includes card processing fees, service charges on deposit accounts, bank-owned life insurance income, gains/losses on the sale of investment securities, and gains/losses on deferred compensation plan investments. Non-interest expense consists primarily of salaries and employee benefits, cost of deferred compensation benefits, occupancy, data processing, deposit insurance, marketing, professional services, and other expenses.
Earnings Performance
The following table presents performance metrics for the periods indicated:
December 31,
(dollars in thousands, except per share amounts)
Earnings Summary:
Interest income
$
271,977
$
253,754
Interest expense
65,301
38,369
Net interest income
206,676
215,385
Provision for credit losses
-
9,407
Non-interest income
20,700
14,914
Non-interest expense
105,132
104,339
Income before taxes
122,244
116,553
Income tax expense
33,787
28,239
Net Income
$
88,457
$
88,314
Per Common Share Data:
Diluted earnings per common share
$
121.02
$
116.61
Book value per common share
$
818.91
$
735.00
Tangible book value per common share(1)
$
800.52
$
717.05
Performance Ratios:
Return on average assets
1.64
%
1.68
%
Return on average equity
15.49
%
17.05
%
Net interest margin (tax equivalent)
4.05
%
4.30
%
Yield on average loans and leases (tax equivalent)
6.08
%
5.84
%
Cost of average total deposits
1.35
%
0.80
%
Efficiency ratio
46.24
%
45.31
%
Loan-to-deposit ratio
78.53
%
78.52
%
Percentage of checking deposits to total deposits
51.08
%
51.76
%
Capital Ratios Bancorp:
Common equity tier 1 capital to risk-weighted assets
13.04
%
12.30
%
Tier 1 capital to risk-weighted assets
13.26
%
12.53
%
Risk-based capital to risk-weighted assets
14.52
%
13.78
%
Tier 1 leverage capital ratio
10.95
%
10.38
%
Tangible common equity ratio(1)
10.46
%
10.13
%
(1)
See "Non-GAAP Measurements"
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.
Year ended December 31,
(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
$
314,892
$
16,860
5.35
%
$
519,331
$
26,872
5.17
%
Investment securities:(1)
Taxable securities
1,053,601
28,074
2.66
%
929,503
18,886
2.03
%
Non-taxable securities(2)
61,863
2,994
4.84
%
61,029
2,888
4.73
%
Total investment securities
1,115,464
31,068
2.79
%
990,532
21,774
2.20
%
Loans:(3)
Real estate:
Commercial
1,342,623
72,091
5.37
%
1,295,101
67,955
5.25
%
Agricultural
729,648
41,426
5.68
%
732,241
40,446
5.52
%
Residential and home equity
403,736
19,646
4.87
%
393,100
17,605
4.48
%
Construction
212,941
14,904
7.00
%
179,297
12,638
7.05
%
Total real estate
2,688,948
148,067
5.51
%
2,599,739
138,644
5.33
%
Commercial & industrial
498,898
37,319
7.48
%
479,552
33,941
7.08
%
Agricultural
305,703
25,378
8.30
%
292,079
23,399
8.01
%
Commercial leases
173,208
12,131
7.00
%
125,680
8,160
6.49
%
Consumer and other
5,503
6.74
%
5,528
6.11
%
Total loans and leases
3,672,260
223,266
6.08
%
3,502,578
204,482
5.84
%
Non-marketable securities
15,549
1,374
8.84
%
15,549
1,213
7.80
%
Total interest earning assets
5,118,165
272,568
5.33
%
5,027,990
254,341
5.06
%
Allowance for credit losses
(75,674
)
(71,461
)
Non-interest earning assets
346,641
313,823
Total average assets
$
5,389,132
$
5,270,352
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits:
Demand
$
908,561
$
4,277
0.47
%
$
983,340
$
2,357
0.24
%
Savings and money market accounts
1,614,117
30,304
1.88
%
1,631,818
21,831
1.34
%
Certificates of deposit greater than $250,000
413,077
13,579
3.29
%
245,094
7,680
3.13
%
Certificates of deposit less than $250,000
349,933
15,284
4.37
%
273,281
5,655
2.07
%
Total interest bearing deposits
3,285,688
63,444
1.93
%
3,133,533
37,523
1.20
%
Short-term borrowings
16,940
5.82
%
-
0.00
%
Subordinated debentures
10,310
8.45
%
10,310
8.21
%
Total interest bearing liabilities
3,312,938
65,301
1.97
%
3,143,844
38,369
1.22
%
Non-interest bearing deposits
1,417,121
1,528,375
Total funding
4,730,059
65,301
1.38
%
4,672,219
38,369
0.82
%
Other non-interest bearing liabilities
87,987
80,098
Shareholders' equity
571,086
518,035
Total average liabilities and shareholders' equity
$
5,389,132
$
5,270,352
Net interest income and margin(4)
$
207,267
4.05
%
$
215,972
4.30
%
Interest rate spread
3.36
%
3.84
%
Tax equivalent adjustment
(591
)
(587
)
Net interest income
$
206,676
4.04
%
$
215,385
4.28
%
(1)
Excludes average unrealized losses of ($19.5) million and ($25.8) million for the years ended December 31, 2024, and 2023, respectively, which are included in non-interest earning assets.
(2)
Yields and interest income are calculated on a fully taxable equivalent basis using the current statutory federal tax rate of 21%.
(3)
Loan interest income includes loan fees of $5.6 million and $6.1 million for the years ended December 31, 2024 and 2023, respectively.
(4)
Net interest margin is computed by dividing net interest income by average interest earning assets.
Interest-bearing deposits with banks and FRB balances are earning assets available to the Company. Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 5.35% and 5.17% for the years ended December 31, 2024 and 2023, respectively. The increase was primarily the result of the Federal Reserve increasing rates by 100 basis points from February 2023 to July 2023. The Federal Reserve dropped rates 100 basis points from September 2024 to December 2024. Average interest-bearing deposits with banks was $314.9 million and $519.3 million for the years ended December 31, 2024 and 2023, respectively, and decreased primarily to fund loan and lease growth and the purchases of investment securities. Interest income on interest-bearing deposits with banks was $16.9 million and $26.9 million for the years ended December 31, 2024 and 2023, respectively.
The investment portfolio is also a component of the Company’s earning assets. Historically, the Company invested primarily in: (1) mortgage-backed securities issued by government-sponsored entities; (2) debt securities issued by the U.S. Treasury, government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, at certain times the Company has selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 7 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity. Since the risk factor for these types of investments is generally lower than that of loans and leases, the yield earned on investments is generally less than that of loans and leases.
Average total investment securities were $1.1 billion and $990.5 million for the years ended December 31, 2024 and 2023, respectively. The average yield on total investment securities was 2.79% and 2.20% for the years ended December 31, 2024 and 2023, respectively. The increase in the yield reflects the higher yields on investment purchases during the year. See “Investment Securities” for a discussion of the Company’s investment strategy in 2024.
Average loans and leases held for investment were $3.7 billion and $3.5 billion for the years ended December 31, 2024 and 2023, respectively. The average yield on the loan and lease portfolio was 6.08% and 5.84% for the years ended December 31, 2024 and 2023, respectively. The increase in the loan yield reflects the increase in market interest rates over the prior year.
Average interest-bearing deposits were $3.3 billion and $3.1 billion for the years ended December 31, 2024 and 2023, respectively. The average rate paid on interest-bearing deposits was 1.93% and 1.20% for the years ended December 31, 2024 and 2023, respectively. Total interest expense on interest-bearing deposits was $63.4 million and $37.5 million for the years ended December 31, 2024 and 2023, respectively, with the increase driven by increases in short-term market interest rates during 2023 and customers seeking higher rates on deposit products. The average rate paid on total funding costs was 1.38% and 0.82% for the years ended December 31, 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.
Year Ended December 31, 2024 compared with 2023
Increase (Decrease) Due to:
(Dollars in thousands)
Volume
Rate
Net
Interest income:
Interest earnings deposits in other banks and federal funds sold
$
(10,916
)
$
$
(10,012
)
Investment securities:
Taxable securities
2,757
6,431
9,188
Non-taxable securities
Total investment securities
2,797
6,497
9,294
Loans:
Real estate:
Commercial
2,529
1,607
4,136
Agricultural
(144
)
1,124
Residential and home equity
1,555
2,041
Construction
2,355
(89
)
2,266
Total real estate
5,226
4,197
9,423
Commercial & industrial
1,402
1,976
3,378
Agricultural
1,114
1,979
Commercial leases
3,287
3,971
Consumer and other
(2
)
Total loans and leases
11,027
7,757
18,784
Non-marketable securities
-
Total interest income
2,908
15,319
18,227
Interest expense:
Interest bearing deposits:
Demand
(192
)
2,112
1,920
Savings and money market accounts
(239
)
8,712
8,473
Certificates of deposit greater than $250,000
5,505
5,899
Certificates of deposit less than $250,000
1,941
7,688
9,629
Total interest bearing deposits
7,015
18,906
25,921
Short-term borrowings
Subordinated debentures
-
Total interest expense
8,000
18,932
26,932
Net interest income
$
(5,092
)
$
(3,613
)
$
(8,705
)
Comparison of Results of Operations for the Years Ended December 31, 2024 and 2023
Years Ended
December 31
(Dollars in thousands)
$ Better / (Worse)
% Better / (Worse)
Selected Income Statement Information:
Interest income
$
271,977
$
253,754
$
18,223
7.18
%
Interest expense
65,301
38,369
(26,932
)
(70.19
%)
Net interest income
206,676
215,385
(8,709
)
(4.04
%)
Provision for credit losses
-
9,407
9,407
100.00
%
Net interest income after provision for credit losses
206,676
205,978
0.34
%
Non-interest income
20,700
14,914
5,786
38.80
%
Non-interest expense
105,132
104,339
(793
)
(0.76
%)
Income before income tax expense
122,244
116,553
5,691
4.88
%
Income tax expense
33,787
28,239
(5,548
)
(19.65
%)
Net income
$
88,457
$
88,314
$
0.16
%
For the years ended December 31, 2024 and 2023, net income was $88.5 million compared with $88.3 million, respectively. The increase in net income was primarily the result of no provision for credit losses in 2024 compared to $9.4 million in 2023 and an increase in non-interest income of $5.8 million. This increase was offset by a decrease in net interest income of $8.7 million, higher income tax expense of $5.5 million and a higher non-interest expense $0.8 million.
Net Interest Income and Net Interest Margin
For the year ended December 31, 2024, net interest income decreased $8.7 million, or 4.04%, to $206.7 million compared with $215.4 million for the same period a year earlier. The decrease was primarily due to an increase in interest expense from $37.5 million to $63.4 million in 2024 as the average cost of total deposits increased from 0.80% in 2023 to 1.35% in 2024 and average total deposits increased from $4.66 billion for 2023 to $4.70 billion in 2024. The cost of funds for the year ended December 31, 2024, increased by 56 basis points from 0.82% to 1.38% compared to the same period a year earlier. The increase in interest expense was partially offset by an increase in loan and lease interest and fee income from $204.5 million in 2023 to $223.3 million in 2024 as the average loan yield increased from 5.84% in 2023 to 6.08% in 2024 and average loan and lease balances increased from $3.50 billion in 2023 to $3.67 billion in 2024.
Provision for Credit Losses. The provision for credit losses in each period is a charge against earnings in that period. The provision is the amount required to maintain the allowance for credit losses at a level that, in management’s judgment, is adequate to absorb expected losses, over the life of the loans and leases, unfunded loan commitments and HTM securities portfolios.
Based on the Company’s credit quality of the loan and lease portfolio, modest loan growth of 0.65% and the calculations of the allowance for credit losses under CECL, no provision for credit losses for the year ended December 31, 2024 was necessary compared with $9.4 million for the same period a year earlier comprised of $7.8 million for the provision for credit losses on loans and leases and $1.6 million for the provision for credit losses on unfunded commitments. Net charge-offs for the year ended December 31, 2024 were $0.7 million compared to net recoveries of $0.3 million for the same period a year earlier. The provision of $9.4 million in 2023 was due to loan growth of 4.05% and higher estimated losses inherent in the loan and lease portfolio based on the then current economic environment.
Non-interest Income
Years Ended December 31
(Dollars in thousands)
$ Better / (Worse)
% Better / (Worse)
Non-interest Income:
Card processing
$
6,950
$
6,686
$
3.95
%
Gain on BOLI death benefit
4,346
(4,342
)
(99.91
%)
Net gain on deferred compensation benefits
3,270
2,974
9.95
%
Service charges on deposit accounts
3,054
2,755
10.85
%
Increase in cash surrender value of BOLI
2,430
2,027
19.88
%
Net gain/(loss) on sale of securities available-for-sale
(8,199
)
8,942
109.06
%
Other
4,249
4,325
(76
)
(1.76
%)
Total non-interest income
$
20,700
$
14,914
$
5,786
38.80
%
Non-interest income increased $5.8 million to $20.7 million for 2024 compared with $14.9 million for the same period a year earlier. The year-over-year increase in non-interest income was primarily a result of recording a $0.7 million gain on sale of available-for-sale securities in 2024 compared to a loss on sale of available-for-sale securities of $8.2 million in 2023, offset by a reduction of $4.3 million in non-taxable death benefit gains on bank-owned life insurance (“BOLI”) as 2023 included the death of a former employee with a significant BOLI policy.
The Company recorded net gains on deferred compensation plan investments of $3.3 million in 2024 compared to net gains of $3.0 million in 2023. See Note 10 “Employee Benefit Plans”, located in Item 8. “Financial Statements and Supplementary Data” in this Form 10-K 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 be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no net-effect on the Company’s net income.
Non-interest Expense
Years Ended December 31
(Dollars in thousands)
$ Better / (Worse)
% Better / (Worse)
Non-interest Expense:
Salaries and employee benefits
$
72,472
$
70,883
$
(1,589
)
(2.24
%)
Data Processing
6,055
5,293
(762
)
(14.40
%)
Occupancy
5,090
4,837
(253
)
(5.23
%)
Net gain on deferred compensation benefits
3,270
2,974
(296
)
(9.95
%)
Deposit insurance
2,852
2,769
(83
)
(3.00
%)
Professional services
3,587
2,334
(1,253
)
(53.68
%)
Marketing
1,967
1,885
(82
)
(4.35
%)
Other
9,839
13,364
3,525
26.38
%
Total non-interest expense
$
105,132
$
104,339
$
(793
)
(0.76
%)
Non-interest expense increased $0.8 million to $105.1 million for 2024 compared with $104.3 million for the same period a year earlier. The year-over-year increase was primarily comprised of a $1.6 million increase in salaries and employee benefits, a $1.3 million increase in professional services and a $0.8 million increase in data processing. The increase in professional services was due primarily to an increase in legal services related to corporate initiatives. The increase in data processing was due primarily to upgrades in technology systems. These increases were partially offset by a decrease in other non-interest expense of $3.5 million primarily from the adoption of the proportional amortization approach under GAAP which shifts the amortization of low-income housing tax credits from other non-interest expense to income tax expense. For the year ended December 31, 2024, the Company’s expense efficiency ratio was 46.24% compared with 45.31% for the same period a year earlier as the reduction in revenue outpaced the slight increase in expenses.
Net gains on deferred compensation plan obligations were $3.3 million in 2024 compared to net gains of $3.0 million in 2023. See Note 10 “Employee Benefit Plans”, located in “Item 8. “Financial Statements and Supplementary Data” in this Form 10-K, for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these gains on obligations to be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no net-effect on the Company’s net income.
Income Tax Expense
For the year ended December 31, 2024, income tax expense was $33.8 million, compared with $28.2 million for the same period a year earlier. For the year ended December 31, 2024, the effective tax rate was 27.64% compared with 24.23% for the same period a year earlier. The Company’s higher income tax expense and effective tax rates for 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 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 year to year due to changes in the mix of taxable and tax-exempt earning sources.
Balance Sheet Analysis
Total assets were $5.37 billion at December 31, 2024, an increase of $61.3 million or 1.15% compared to December 31, 2023. Loans and leases held for investment grew $23.7 million or 0.65% to $3.68 billion at December 31, 2024, compared with $3.65 billion at December 31, 2023. Total deposits were $4.70 billion at December 31, 2024 compared with $4.67 billion at December 31, 2023, an increase of $31.0 million, or 0.67%.
Cash and Cash Equivalents
The Company’s cash and cash equivalents consist of interest bearing deposits with banks and overnight investments in Federal Reserve balances. Interest bearing deposits with banks consisted primarily of FRB deposits. Since balances at the FRB are effectively risk free, the Company elected to maintain its excess cash at the FRB. Interest bearing deposits with banks totaled $141.5 million at December 31, 2024 and $338.4 million at December 31, 2023. The decrease was primarily due to funding loan and lease growth and the purchase of available-for-sale securities during the year. The Company’s total cash and cash equivalents as of December 31, 2024 represented 4.0% of the Company’s total assets as compared to 7.7% as of December 31, 2023.
Investment Securities
The Company’s net investment portfolio increased by $233.7 million to $1.2 billion at December 31, 2024 compared to $1.0 billion at December 31, 2023. The increase was due to the purchase of $389.5 million in investment securities during 2024 offset by normal principal maturities and pay downs and the sale of $69.5 million in available-for-sale securities. During 2024, as part of managing the investment portfolio and balance sheet, the portfolio mix shifted as available-for-sale securities increased from $182.5 million as of December 31, 2023 to $464.4 million as of December 31, 2024 while the held-to-maturity securities decreased from $817.7 million as of December 31, 2023 to $769.4 million as of December 30, 2024. The Company uses its investment portfolio to manage interest rate and liquidity risks. The Company's total investment portfolio as of December 31, 2024 represented 22.98% of the Company’s total assets as compared to 18.84% at December 31, 2023.
Available-for-sale securities are carried at fair value and held-to-maturity securities are carried at amortized cost under GAAP. The carrying value of our portfolio of investment securities was as follows:
As of December 31,
(Dollars in thousands)
Available-for-Sale Securities
U.S. Government-sponsored securities
$
2,644
$
3,224
Mortgage-backed securities(1)
439,858
161,681
Commercial mortgage-backed securities(1)
1,212
2,157
Collateralized mortgage obligations(1)
5,497
Corporate securities
14,856
14,605
Other
Total available-for-sale securities
$
464,414
$
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.
As of December 31,
(Dollars in thousands)
Held-to-Maturity Securities
Mortgage-backed securities(1)
$
626,427
$
664,728
Collateralized mortgage obligations(1)
68,377
74,170
Municipal securities
74,639
78,790
Total held-to-maturity securities
$
769,443
$
817,688
Allowance for credit losses
(450
)
(450
)
Total held-to-maturity securities
$
768,993
$
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 table shows the carrying value for final contractual maturities of investment securities and the weighted average yields of such securities, including the benefit of tax-exempt securities:
As of December 31, 2024
Within One Year
After One but
Within Five Years
After Five but
Within Ten Years
After Ten Years
Total
(Dollars in thousands)
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Securities available-for-sale
U.S. Government-sponsored securities
$
3.00
%
$
5.64
%
$
6.15
%
$
2,330
5.89
%
2,644
5.92
%
Mortgage-backed securities(1)
2.83
%
3,074
2.57
%
1,949
3.92
%
434,761
4.70
%
439,858
4.70
%
Commercial mortgage-backed securities (1)
-
0.00
%
-
0.00
%
-
0.00
%
1,212
0.00
%
1,212
0.00
%
Collateralized mortgage obligations(1)
-
0.00
%
-
0.00
%
-
0.00
%
5,497
6.01
%
5,497
6.01
%
Corporate securities
-
0.00
%
14,856
5.63
%
-
0.00
%
-
0.00
%
14,856
5.63
%
Other
3.72
%
-
0.00
%
-
0.00
%
-
0.00
%
3.72
%
Total securities available-for-sale
$
3.56
%
$
17,963
5.10
%
$
2,228
4.20
%
$
443,800
4.71
%
$
464,414
4.74
%
(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, 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
%
$
3,426
0.82
%
$
7,756
1.66
%
$
615,245
1.89
%
$
626,427
1.88
%
Collateralized mortgage obligations(1)
-
0.00
%
-
0.00
%
-
0.00
%
68,377
1.75
%
68,377
1.75
%
Municipal securities
1,180
2.62
%
18,365
3.64
%
6,733
3.95
%
48,361
2.60
%
74,639
3.93
%
Total securities held-to-maturity
$
1,180
2.62
%
$
21,791
3.19
%
$
14,489
2.72
%
$
731,983
1.92
%
$
769,443
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.
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
$
5.91
%
$
6.47
%
$
6.65
%
$
2,855
6.44
%
3,224
6.46
%
Mortgage-backed securities(1)
1.79
%
6,138
2.57
%
3,982
3.61
%
151,392
3.50
%
161,681
3.44
%
Commercial mortgage-backed securities (1)
-
0.00
%
-
0.00
%
4.52
%
1,223
5.89
%
2,157
5.30
%
Collateralized mortgage obligations(1)
-
0.00
%
-
0.00
%
-
0.00
%
2.27
%
2.27
%
Corporate securities
-
0.00
%
14,605
5.71
%
-
0.00
%
-
0.00
%
14,605
5.71
%
Other
8.20
%
-
0.00
%
-
0.00
%
-
0.00
%
8.20
%
Total securities available-for-sale
$
5.94
%
$
20,842
4.79
%
$
5,185
3.93
%
$
156,005
3.57
%
$
182,512
3.70
%
(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
4.01
%
15,962
4.23
%
10,703
3.76
%
51,250
3.88
%
78,790
3.93
%
Total securities held-to-maturity
$
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. Common examples of loans and leases made by the Company include:
Commercial and Agricultural Real Estate - These are loans secured by owner-occupied real estate, non-owner-occupied real estate, owner-occupied farmland, and multifamily residential properties. Commercial mortgage term loans can be made if the property is either income producing or scheduled to become income producing based upon acceptable pre-leasing, or the income will be the Bank's primary source of repayment for the loan. Loans are made both on owner occupied and investor properties; maturities generally do not exceed 15 years (and may have pricing adjustments on a shorter timeframe); amortizations of up to 25 years (30 years for multifamily residential properties); have debt service coverage ratios of 1.00 or better with a target of 1.25 or greater; and fixed rates that are most often tied to Treasury indices with an appropriate spread based on the amount of perceived risk in the loan.
Real Estate Construction - These are loans for acquisition, development and construction and are secured by commercial or residential real estate. These loans are generally made only to experienced local developers with a successful track record; for projects in our service area; with Loan to Value (“LTV”) below 75%; and where the property can generally be developed and sold within 2 years. Commercial construction loans are generally made only when there is an approved take-out commitment from the Bank or an acceptable financial institution or government agency. Most acquisition, development and construction loans are tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan.
Single Family Residential Real Estate - These are loans primarily made on owner occupied residences; generally underwritten to income and LTV guidelines similar to those used by FNMA and FHLMC. However, the Company will make loans on rural residential properties up to 41 acres. Most residential loans have terms from ten to thirty years and carry fixed or variable rates priced to Treasury rates. The Company has always underwritten mortgage loans based upon traditional underwriting criteria and does not make loans that are known in the industry as “subprime,” “no or low doc,” or “stated income” loans.
Home Equity Lines and Loans - These are loans made to individuals for home improvements and other personal needs. Generally, amounts do not exceed $500,000; but can be made for up to $1,000,000 in high cost counties. Combined Loan to Value (“CLTV”) does not exceed 75%; FICO scores are at or above 670; Total Debt Ratios do not exceed 43%; and in some situations the Company is in a 1st lien position.
Agricultural - These are non-real estate loans and lines of credit made to farmers to finance agricultural production. Lines of credit are extended to finance the seasonal needs of farmers during peak growing periods; are usually established for periods no longer than 12 to 36 months; are often secured by general filing liens on livestock, crops, crop proceeds and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a processing plant, or orchard/vineyard development; have maturities from five to seven years; and fixed rates that are most often tied to Treasury indices or variable rates tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan.
Commercial - These are non-real estate loans and lines of credit to businesses that are sole proprietorships, partnerships, LLC’s and corporations. Lines of credit are extended to finance the seasonal working capital needs of customers during peak business periods; are usually established for periods no longer than 12 to 36 months; are often secured by general filing liens on accounts receivable, inventory and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a plant or purchase of a business; have maturities from three to seven years; and fixed rates that are most often tied to Treasury indices or variable rates tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan.
Consumer - These are loans to individuals for personal use, and primarily include loans to purchase automobiles or recreational vehicles, and unsecured lines of credit. The Company has a minimal consumer loan portfolio.
Commercial Leases - These are leases primarily to businesses and farmers for financing the acquisition of equipment. They can be either “finance leases” where the lessee retains the tax benefits of ownership but obtains 100% financing on their equipment purchases; or “true tax leases” where the Company, as lessor, places reliance on equipment residual value and in doing so obtains the tax benefits of ownership. Leases typically have a maturity of three to ten years, and fixed rates that are most often tied to Treasury indices with an appropriate spread based on the amount of perceived risk. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed with qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.
The Company accounts for leases with Investment Tax Credits (“ITC”) under the deferred method as established in ASC 740-10. ITCs are viewed and accounted for as a reduction of the cost of the related assets and presented as deferred income in the Company’s financial statements.
Each loan or lease type involves risks specific to the: (1) borrower; (2) collateral; and (3) loan or lease structure. See “Results of Operations - Allowance for Credit Losses - Loans and Leases” for a more detailed discussion of risks by loan and lease type. The Company’s current underwriting policies and standards are designed to mitigate the risks involved in each loan and lease type. The Company’s policies require that loans and leases be approved only to those borrowers exhibiting a clear source of repayment and the ability to service existing and proposed debt. The Company’s underwriting procedures for all loan and lease types require careful consideration of the borrower, the borrower’s financial condition, the borrower’s management capability, the borrower’s industry, and the economic environment affecting the loan or lease.
Most loans and leases made by the Company are secured, but collateral is the secondary or tertiary source of repayment; cash flow is our primary source of repayment. The quality and liquidity of collateral are important and must be confirmed before the loan or lease is made.
In order to be responsive to borrower needs, the Company prices loans and leases: (1) on both a fixed rate and adjustable rate basis; (2) over different terms; and (3) based upon different rate indices as long as these structures are consistent with the Company’s interest rate risk management policies and procedures. See Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in this Form 10-K for further details.
The Company's loan and lease portfolio at December 31, 2024 totaled $3.7 billion, an increase of $23.7 million or 0.65% over December 31, 2023.
The following table sets forth the distribution of the loan and lease portfolio by type and percent at the end of each period presented:
December 31,
(Dollars in thousands)
Dollars
Percent of Total
Dollars
Percent of Total
Gross Loans and Leases
Real estate:
Commercial
$
1,360,841
36.88
%
$
1,323,038
36.10
%
Agricultural
751,026
20.35
%
742,009
20.24
%
Residential and home equity
404,399
10.96
%
399,982
10.91
%
Construction
194,903
5.28
%
212,362
5.80
%
Total real estate
2,711,169
73.47
%
2,677,391
73.05
%
Commercial & industrial
504,403
13.67
%
499,373
13.62
%
Agricultural
289,847
7.85
%
313,737
8.56
%
Commercial leases
179,718
4.87
%
169,684
4.63
%
Consumer and other
5,084
0.14
%
5,212
0.14
%
Total gross loans and leases
$
3,690,221
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 December 31, 2024.
Loan Contractual Maturity
(Dollars in thousands)
One Year or Less
After One But Within Five Years
After Five But Within Fifteen Years
After Fifteen Years
Total
Gross loan and leases:
Real estate:
Commercial
$
108,988
$
428,896
$
787,878
$
35,079
$
1,360,841
Agricultural
64,271
156,759
487,567
42,429
751,026
Residential and home equity
4,419
113,101
286,833
404,399
Construction
185,689
9,214
-
-
194,903
Total real estate
358,994
599,288
1,388,546
364,341
2,711,169
Commercial & industrial
202,174
198,271
101,664
2,294
504,403
Agricultural
183,017
93,816
13,014
-
289,847
Commercial leases
3,857
52,909
122,952
-
179,718
Consumer and other
3,786
5,084
Total gross loans and leases
$
748,694
$
948,070
$
1,626,360
$
367,097
$
3,690,221
Rate Structure for Loans
Fixed Rate
$
241,953
$
619,494
$
1,048,539
$
202,940
$
2,112,926
Variable Rate
506,741
328,576
577,821
164,157
1,577,295
Total gross loans and leases
$
748,694
$
948,070
$
1,626,360
$
367,097
$
3,690,221
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):
December 31,
(Dollars in thousands)
Non-performing assets:
Non-accrual loans and leases
Real estate:
Commercial
$
$
-
Agricultural
-
-
Residential and home equity
-
-
Construction
-
-
Total real estate
-
Commercial & industrial
-
Agricultural
-
-
Commercial leases
-
-
Consumer and other
-
-
Total non-performing loans and leases
-
Other real estate owned ("OREO")
Total non-performing assets
$
1,802
$
Selected ratios:
Non-performing loans to total loans and leases
0.03
%
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 $929,000 in non-accrual loans and leases as of December 31, 2024, and no non-accrual loans or leases 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 4 “Loans and Leases”, located in Item 8. “Financial Statements and Supplementary Data” in this Form 10-K for an allocation of the allowance classified to collateral dependent loans and leases.
Other Real Estate Owned - OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower. The Company records all OREO properties at amounts equal to or less than the fair market value of the properties based on current independent appraisals reduced by estimated selling costs. The Company reported $873,000 of foreclosed OREO at December 31, 2024, and 2023.
Loan Modifications to Borrowers Experiencing Financial Difficulties - In the normal course of business, the Company may execute loan modifications to borrowers experiencing financial difficulties. Some of these modifications include: term extension, principal forgiveness, rate reduction, other-than-insignificant payment delay, or any combination of those. ASU 2022-02 requires certain disclosure of loans and leases that have been modified within the past 12 months and the effects that those modifications had on the modified loans and leases. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses and because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness that is deemed to be uncollectable; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.
The Company modified six loans, with two borrowers, in the aggregate amount of $13.2 million, during the year ended December 31, 2024. These loans were current as of December 31, 2024.
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 individually evaluated. 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 size and complexity. See “ - Critical Accounting Policies and Estimates” above, and Note 1 “Summary of Significant Accounting Policies”, located in Item 8. “Financial Statements and Supplementary Data”, of this Form 10-K for a detailed discussion of the Company’s allowance for credit losses.
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 sets forth the activity in our allowance for credit losses on loans and leases held for investment and unfunded loan commitments for the periods indicated:
Year Ended December 31,
(Dollars in thousands)
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
7,750
Allowance for credit losses- unfunded loan commitments
(1,000
)
1,600
Total provision for credit losses
-
9,350
Provision for credit losses
Charge-offs:
Real estate:
Commercial
-
-
Agricultural
-
-
Residential and home equity
(29
)
(14
)
Construction
-
-
Total real estate
(29
)
(14
)
Commercial & industrial
(736
)
-
Agricultural
-
-
Commercial leases
-
-
Consumer and other
(93
)
(46
)
Total charge-offs
(858
)
(60
)
Recoveries:
Real estate:
Commercial
-
Agricultural
-
-
Residential and home equity
Construction
-
-
Total real estate
Commercial & industrial
Agricultural
Commercial leases
-
-
Consumer and other
Total recoveries
Net (charge-offs) / recoveries
(682
)
Balance at end of year
$
77,973
$
78,655
Allowance for credit losses - loans and leases
75,283
74,965
Allowance for credit losses - unfunded loan commitments
2,690
3,690
Total allowance for credit losses
$
77,973
$
78,655
Selected financial information:
Net loans and leases held for investment
$
3,678,388
$
3,654,689
Average loans and leases
$
3,672,260
$
3,502,578
Non-performing loans and leases
$
$
-
Allowance for credit losses to non-performing loans and leases
N/M
(1)
0.00
%
Net (charge-offs) / recoveries to average loans and leases
0.02
%
(0.01
%)
Provision for credit losses to average loans and leases
0.00
%
0.27
%
Allowance for loan and lease losses to loans and leases held for investment
2.04
%
2.05
%
(1) Not meaningful
The following table indicates management’s allocation of the ACL for loan and leases by loan type as of each of the following dates:
December 31,
(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
$
20,382
36.88
%
1.50
%
$
26,093
36.10
%
1.97
%
Agricultural
23,615
20.35
%
3.14
%
7,744
20.24
%
1.04
%
Residential and home equity
7,340
10.96
%
1.82
%
7,770
10.91
%
1.94
%
Construction
3,055
5.28
%
1.57
%
4,432
5.80
%
2.09
%
Total real estate
54,392
73.47
%
2.01
%
46,039
73.05
%
1.72
%
Commercial & industrial
7,791
13.67
%
1.54
%
13,380
13.62
%
2.68
%
Agricultural
6,725
7.85
%
2.32
%
8,872
8.56
%
2.83
%
Commercial leases
6,153
4.87
%
3.42
%
6,537
4.63
%
3.85
%
Consumer and other
0.14
%
4.37
%
0.14
%
2.63
%
Total allowance for credit losses
$
75,283
100.00
%
2.04
%
$
74,965
100.00
%
2.05
%
Deposits
Total deposits were $4.70 billion and $4.67 billion at December 31, 2024 and 2023, respectively, or an increase of $31.0 million or 0.67%. The modest increase in total deposits was primarily due to a $35.7 million or 2.41% increase in non-interest bearing deposits. The Company experienced fluctuations in deposits during the year due in part to the seasonality within our agriculture client base along with changes in customer behavior over the last year as customers were seeking higher yielding deposit products or other investment alternatives such as U.S. Treasuries or money market funds given the interest rate environment.
Non-interest bearing demand deposits grew $35.7 million from $1.48 billion at December 31, 2023 to $1.52 billion at December 31, 2024. Non-interest bearing deposits were 32.31% and 31.76% of total deposits, at December 31, 2024 and 2023, respectively. Interest bearing deposits were $3.18 billion and $3.19 billion as of December 31, 2024 and 2023, respectively. Interest bearing deposits are comprised of interest-bearing transaction accounts, money market accounts, regular savings accounts, and certificates of deposit. Interest-bearing transaction accounts decreased $51.3 million, or 5.5%, to $882.1 million at December 31, 2024, compared with $933.4 million at December 31, 2023. Savings and money market accounts decreased $24.3 million, or 1.51%, to $1.58 billion at December 31, 2024 compared with $1.61 billion at December 31, 2023. Certificates of deposit accounts increased $70.9 million, or 11.0%, to $715.5 million at December 31, 2024, compared with $664.6 million at 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:
As of December 31,
(Dollars in thousands)
Average Balance
Interest Expense
Average Rate
Average Balance
Interest Expense
Average Rate
Average Balance
Interest Expense
Average Rate
Total deposits:
Interest bearing deposits:
Demand
$
908,561
$
4,277
0.47
%
$
983,340
$
2,357
0.24
%
$
1,120,198
$
1,497
0.13
%
Savings and money market
1,614,117
30,304
1.88
%
1,631,818
21,831
1.34
%
1,542,310
1,981
0.13
%
Certificates of deposit greater than $250,000
413,077
13,579
3.29
%
245,094
7,680
3.13
%
157,623
0.29
%
Certificates of deposit less than $250,000
349,933
15,284
4.37
%
273,281
5,655
2.07
%
215,044
0.19
%
Total interest bearing deposits
3,285,688
63,444
1.93
%
3,133,533
37,523
1.20
%
3,035,175
4,349
0.14
%
Non-interest bearing deposits
1,417,121
1,528,375
1,751,797
Total deposits
$
4,702,809
$
63,444
1.35
%
$
4,661,908
$
37,523
0.80
%
$
4,786,972
$
4,349
0.09
%
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 during 2024. The Company did reduce interest rates during the last four months of 2024 after the Federal Reserve cut interest rates by 100 basis points between September and December. The average cost of total deposits, including non-interest bearing deposits, increased to 1.35% for 2024 compared to 0.80% for 2023 due to the higher interest rate environment during the year before the Federal Reserve rate cuts. The Company had no brokered deposits at December 31, 2024.
The following table shows deposits with a balance greater than $250,000 at December 31, 2024 and 2023:
December 31
(Dollars in thousands)
Non-Maturity Deposits greater than $250,000
$
2,486,450
$
2,496,749
Certificates of deposit greater than $250,000, by maturity:
Less than 3 months
153,662
84,460
3 months to 6 months
146,341
111,866
6 months to 12 months
81,643
107,080
More than 12 months
3,427
15,423
Total certificates of deposit greater than $250,000
$
385,073
$
318,829
Total deposits greater than $250,000
$
2,871,523
$
2,815,578
Refer to the Average Balance and Yield Schedule located in this "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for information on separate deposit categories.
The Bank participates in a program wherein the State of California places time deposits with the Bank at the Bank’s option. At December 31, 2024 and 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 December 31, 2024 and December 31, 2023, respectively.
Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings
Lines of Credit with the Federal Home Loan Bank and FRB are other key sources of funds to support earning assets and liquidity. These sources of funds are also used to manage the Company’s interest rate risk exposure and, as opportunities arise, to borrow and invest the proceeds at a positive spread through the investment portfolio. There were no FHLB advances at December 31, 2024 or 2023. There were no Federal Funds purchased or advances from the FRB at December 31, 2024 or 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 this Form 10-K. Although this amount is reflected as subordinated debt on the Company’s balance sheet, under current regulatory guidelines, our Trust Preferred Securities 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 March 17, 2025) and the rate was 7.35% as of December 31, 2024. The average rate paid for these securities was 8.45% in 2024 and 8.21% in 2023. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited, by the terms of the debentures, from paying cash dividends on the Company’s common stock.
Capital Resources
The Company relies primarily on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to ensure depositor protection. Shareholders’ Equity totaled $573.1 million at December 31, 2024, and $549.8 million at the end of 2023, an increase of $23.3 million or 4.24%.
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 December 31, 2024, the Company was in compliance with all of these capital requirements and there were no restrictions on the Company’s business activity. As of December 31, 2024 the Bank met the requirements to be categorized as “well-capitalized” under the FDIC regulatory framework for prompt corrective action. To be categorized as “well-capitalized,” the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables as of December 31, 2024 and 2023.
The Company’s and the Bank’s actual and required capital amounts and ratios are as follows:
December 31, 2024
Actual
Required for Capital Adequacy Purposes
Minimum to be Categorized as
"Well Capitalized" Under
Prompt Corrective Action
Regulation
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Bancorp
CET1 capital to risk-weighted assets
$
579,602
13.04
%
$
200,046
4.50
%
N/A
N/A
Tier 1 capital to risk-weighted assets
589,602
13.26
%
266,728
6.00
%
N/A
N/A
Risk-based capital to risk-weighted assets
645,453
14.52
%
355,637
8.00
%
N/A
N/A
Tier 1 leverage capital ratio
589,602
10.95
%
215,379
4.00
%
N/A
N/A
Bank
CET1 capital to risk-weighted assets
$
591,072
13.30
%
$
200,038
4.50
%
$
288,944
6.50
%
Tier 1 capital to risk-weighted assets
591,072
13.30
%
266,718
6.00
%
355,624
8.00
%
Risk-based capital to risk-weighted assets
646,920
14.55
%
355,624
8.00
%
444,530
10.00
%
Tier 1 leverage capital ratio
591,072
10.99
%
215,213
4.00
%
269,016
5.00
%
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 at market prices through open market purchases, trading plans established in accordance with SEC rules and privately negotiated transactions. In August 2022, the Inflation Reduction Act of 2022 (“IRA”) was enacted. Among other things, the IRA imposes an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions.
During 2024, the Company repurchased 48,173 shares under the Repurchase Plan, for a total of $45.3 million, inclusive of the excise tax. The largest repurchase transaction occurred on October 3, 2024, when 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. As of December 31, 2024, there remains $19.9 million authorized for repurchases under the new Repurchase Plan.
Off-Balance-Sheet Arrangements
Off-balance-sheet arrangements are any contractual arrangement to which an unconsolidated entity is a party, under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity, or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to the Company, or engages in leasing, hedging, or research and development services with the Company.
The following table sets forth our off-balance sheet lending commitments as of December 31, 2024:
Amount of Commitment Expiration per Period
(Dollars in thousands)
Total Committed Amount
Less than
One Year
One to Three Years
Three to Five Years
After Five Years
Off-balance sheet commitments
Commitments to extend credit
$
1,006,649
$
469,573
$
343,508
$
27,956
$
165,612
Standby letters of credit
15,411
11,568
3,343
-
Total off-balance sheet commitments
$
1,022,060
$
481,141
$
346,851
$
28,456
$
165,612
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 December 31, 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 and non-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 $212.6 million or 4.0% of total assets as of December 31, 2024. The majority of cash is on deposit with the FRB and amounted to $141.5 million. Potential sources of liquidity also include our ability to sell or pledge our available-for-sale securities portfolio, our held-to-maturity portfolio which can be pledged for borrowing purposes, 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. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets. We actively monitor our liquidity on a daily basis and manage our liquidity and overall balance sheet positions through both our management and Board level Asset and Liability Management committees (ALCO), which meet regularly during the year.
We had the following borrowing lines available at December 31, 2024:
As of December 31, 2024
(Dollars in thousands)
Total Credit Line Limit
Outstanding Amount
Remaining Credit Line Available
Value of Collateral Pledged
Additional liquidity sources:
Federal Reserve BIC
$
1,149,330
$
-
$
1,149,330
$
1,439,235
Federal Home Loan Bank
803,208
-
803,208
1,033,427
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
$
2,070,538
$
-
$
2,070,538
$
2,472,662
We continued our focus on maintaining a strong liquidity position throughout 2024 and we believe our liquid assets and short-term borrowing credit lines are adequate to meet our cash flow needs for loan and lease funding and deposit cash withdrawal for the foreseeable future. As of December 31, 2024, we had internal sources of liquidity comprised of $212.6 million in cash and $465.8 million of unencumbered investment securities, which represented in the aggregate 12.63% 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 $2.7 billion. Our pledged collateral on short-term borrowing lines was comprised of $2.5 billion in loans and $1.6 million in investment securities held at market value. 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 can, as needed, 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 can increase liquidity by soliciting higher levels of deposit accounts through promotional activities and/or borrowing from our correspondent banks as well as the Federal Reserve and 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 our liquidity 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 net cash provided by operating activities for 2024 was $103.7 million driven by record net income of $88.5 million.
Our primary investing activities are the origination of loans and leases and purchases and sales of investment securities. Net cash used in investing activities was $274.6 million during 2024 driven by a net increase in loans and leases of $24.3 million and activity in our investment portfolio, including purchases of $389.5 million in available-for-sale securities offset by proceeds from the sale, maturities, calls, and pay downs of investment securities of $152.6 million. As of December 31, 2024, we had unfunded loan commitments of $1.0 billion and unfunded letters of credit of $15.4 million. At December 31, 2024, we believe that we had sufficient funds available to meet current loan commitments.
Net cash used in financing activities totaled $27.2 million in 2024 driven by the repurchase of $45.3 million in common stock, $13.0 million in cash dividends paid to shareholders offset by an increase in deposits of $31.0 million.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Our market risk arises primarily from interest rate risk inherent in our lending and deposit taking activities. Management actively monitors and manages our interest rate risk exposure. We do not have any market-risk sensitive instruments entered into for trading purposes. In monitoring interest rate risk we continually analyze and manage our earning assets and funding liabilities based on their payment streams and interest rates, the timing of their maturities and/or prepayments, and their sensitivity to actual or potential changes in market interest rates.
Management uses various asset/liability strategies to manage the re-pricing characteristics of our assets and liabilities designed to ensure that exposure to interest rate fluctuations is limited within our guidelines of acceptable levels of risk-taking. Hedging strategies, including the terms and pricing of loans and deposits, and managing the deployment of our securities, are considered to reduce mismatches in interest rate re-pricing opportunities of portfolio assets and their funding sources.
Since our earnings are primarily dependent on our ability to generate net interest income, we focus on actively monitoring and managing the effects of adverse changes in interest rates on our net interest income. Our Asset Liability Management Committee (“ALCO”), which is comprised of members of the Board of Directors and Executive Officers, manages market risk. ALCO monitors interest rate risk by analyzing the potential impact on net interest income from potential changes in interest rates, and considers the impact of alternative strategies or changes in balance sheet structure. ALCO manages our balance sheet in part to maintain the potential impact of changes in interest rates on net interest income within acceptable ranges despite changes in interest rates. ALCO and management utilize a third party to assist with asset liability management including the use of simulation models.
Our exposure to interest rate risk is reviewed on at least a quarterly basis by ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in net interest income in the event of hypothetical changes in interest rates. If potential changes to net interest income resulting from hypothetical interest rate changes are not within risk tolerances determined by ALCO, and approved by the full Board of Directors, management may make adjustments to the Company’s asset and liability mix to bring interest rate risk levels within the Board approved limits.
Net Interest Income Simulation. In order to measure interest rate risk, we use a simulation model to project changes in net interest income that result from forecasted changes in interest rates. This analysis calculates the difference between net interest income forecasted using a rising and a falling interest rate scenario and a net interest income forecast using a base market interest rate derived from the current Treasury yield curve. The income simulation model includes various assumptions regarding the re-pricing relationships for each of our products. Many of our assets are floating rate loans, which are assumed to re-price immediately, and to the same extent as the change in market rates according to their contracted index.
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 generally 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 is 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 ALCO. Our simulation model highlights the fact that our balance sheet is asset sensitive, which means that our net interest income rises in a rising interest rate environment as rates earned on our interest-bearing assets reprice higher and at a faster pace than rates paid on our interest-bearing liabilities.
The ratio of variable to fixed-rate loans in our loan portfolio, the ratio of short-term (maturing at a given time within 12 months) to long-term loans, and the ratio of our demand, money market and savings deposits to CDs (and their time periods), are the primary factors affecting the sensitivity of our net interest income to changes in market interest rates. Our short-term loans are typically priced at prime plus a margin, and our long-term loans are typically priced based on a specific term of the Treasury Curve for comparable maturities, plus a margin. The composition of our rate-sensitive assets or liabilities is subject to change and could result in a more unbalanced position that would cause market rate changes to have a greater impact on our net interest margin. As of December 31, 2024, our loan and lease portfolio was comprised of 57.26% fixed rate and 42.74% 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.
The following table presents the projected change in the Company’s net interest income over the next twelve months and the economic value of equity at December 31, 2024, that would occur upon an immediate change in interest rates based on the models discussed above, but without giving effect to any steps that management might take to counteract such changes:
Estimated Change in
Net Interest Income (NII)
(as a % of NII)
Estimated Change in
Economic Value of Equity
(EVE)
(as a % of EVE)
December 31, 2024
+300 bps
(3.1
%)
(12.9
%)
+200 bps
(2.5
%)
(9.1
%)
+100 bps
(1.5
%)
(3.8
%)
0 bps
-
-
-100 bps
0.1
%
0.8
%
-200 bps
(0.7
%)
(1.2
%)
-300 bps
(2.0
%)
(6.1
%)

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (Crowe LLP, Sacramento, California, PCAOB ID: 173)
Report of Independent Registered Public Accounting Firm (Eide Bailly LLP, San Ramon, California, PCAOB ID: 286)
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2024, and 2023
Consolidated Statements of Income for the three years ended December 31, 2024, 2023 and 2022
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2024, 2023 and 2022
Consolidated Statements of Changes in Shareholders’ Equity for the three years ended December 31, 2024, 2023 and 2022
Consolidated Statements of Cash Flows for the three years ended December 31, 2024, 2023 and 2022
Notes to the Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of
Farmers & Merchants Bancorp
Lodi, California
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of Farmers & Merchants Bancorp (the “Company”) as of December 31, 2024, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the period ended December 31, 2024, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2024, and the results of its operations and its cash flows for the period ended December 31, 2024 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
(Continued)
Our audit of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses on Loans and Leases - Reasonable and Supportable Forecasts - Refer to Notes 1 and 4 to the Financial Statements
The allowance for credit losses on loans and leases is an accounting estimate of expected credit losses over the estimated life of the Company’s loan and lease portfolio, measured at amortized cost, to be presented at the net amount expected to be collected. The allowance for credit losses on loans and leases was $75,283,000 as of December 31, 2024.
(Continued)
The allowance for credit losses on loans and leases under the current expected credit loss methodology required by ASC 326 is based on relevant available information from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The economic forecast used in the current expected credit loss methodology includes consideration of national, regional, and local economic expectations, and is applied as a top of model adjustment through the use of management’s qualitative factors framework, incorporating their maximum loss rate.
We identified the auditing of the reasonable and supportable forecasts used in the allowance for credit losses on loans and leases as a critical audit matter because of the significant auditor judgment and audit effort needed, including the need to involve more experienced audit personnel to evaluate the significant judgments made by management in determination of the forecasts.
The primary procedures we performed to address this critical audit matter included:
•
Testing the effectiveness of controls over the determination of reasonable and supportable forecasts, including controls addressing:
o
The conceptual design of the reasonable and supportable forecast methodology,
o
The significant judgments and assumptions in the reasonable and supportable forecasts methodology,
o
The application of the reasonable and supportable forecasts,
o
The relevance and reliability of the underlying data used in the reasonable and supportable forecasts.
•
Substantively testing management’s process for the determination of reasonable and supportable forecasts, including:
o
Evaluating the conceptual design of the reasonable and supportable forecast methodology,
o
Evaluating significant judgments and assumptions in the reasonable and supportable forecasts methodology,
o
Testing the application of the reasonable and supportable forecasts,
o
The relevance and reliability of the underlying external data used in the reasonable and supportable forecasts.
/s/ Crowe LLP
We have served as the Company’s auditor since 2024.
Sacramento, California
March 14, 2025
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders Farmers &
Merchants Bancorp
Lodi, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Farmers & Merchants Bancorp and subsidiaries (the “Company”) as of December 31, 2023, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2023, and the consolidated results of its operations and its cash flows for each of the years in the two- year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Eide Bailly LLP
We served as the Company’s auditor from 2022 to 2023.
San Ramon, California
March 14, 2024
Farmers & Merchants Bancorp
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollars in thousands, except share and per share amounts)
ASSETS
Cash and due from banks
$
71,058
$
72,267
Interest bearing deposits with banks
141,505
338,375
Total cash and cash equivalents
212,563
410,642
Securities available-for-sale, amortized cost $490,992 and $199,374, respectively
464,414
182,512
Securities held-to-maturity, fair value $610,953 and $671,585, respectively
769,443
817,688
Allowance for credit losses - securities held-to-maturity
(450 )
(450 )
Total investment securities
1,233,407
999,750
Non-marketable securities
15,549
15,549
Loans and leases held for investment, net of unearned income
3,678,388
3,654,689
Allowance for credit losses - loans and leases
(75,283
)
(74,965
)
Loans held for investment, net
3,603,105
3,579,724
Bank-owned life insurance
74,085
74,931
Premises and equipment, net
51,367
51,907
Deferred income tax assets and income taxes receivevable
36,729
50,071
Accrued interest receivable
30,152
28,520
Goodwill
11,183
11,183
Other intangibles
1,687
2,236
Other real estate owned
Other assets
99,496
83,542
TOTAL ASSETS
$
5,370,196
$
5,308,928
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing
$
1,518,267
$
1,482,571
Interest bearing:
Demand
882,123
933,417
Savings and money market
1,583,202
1,607,479
Certificates of deposit
715,547
644,628
Total interest bearing
3,180,872
3,185,524
Total deposits
4,699,139
4,668,095
Subordinated debentures
10,310
10,310
Interest payable and other liabilities
87,675
80,768
TOTAL LIABILITIES
4,797,124
4,759,173
COMMITMENTS AND CONTINGENCIES (Note 12)
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, 699,798 and 747,971 issued and outstanding at December 31, 2024 and 2023, respectively
Additional paid-in capital
-
36,852
Retained earnings
592,431
525,360
Accumulated other comprehensive loss, net of taxes
(19,366
)
(12,464
)
TOTAL SHAREHOLDERS’ EQUITY
573,072
549,755
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
5,370,196
$
5,308,928
See accompanying notes to the consolidated financial statements.
Farmers & Merchants Bancorp
Consolidated Statements of Income
Year Ended December 31,
(Dollars in thousands, except share and per share amounts)
Interest income
Interest and fees on loans and leases
$
223,266
$
204,482
$
164,022
Interest and dividends on investment securities
31,851
22,400
22,289
Interest on deposits with others
16,860
26,872
12,102
Total interest income
271,977
253,754
198,413
Interest expense
Deposits
63,444
37,523
4,349
Borrowed funds
-
-
Subordinated debentures
Total interest expense
65,301
38,369
4,840
Net interest income
206,676
215,385
193,573
Provision for credit losses
-
9,407
6,450
Net interest income after provision for credit losses
206,676
205,978
187,123
Non-interest income
Card processing
6,950
6,686
7,123
Service charges on deposit accounts
3,054
2,755
2,794
Increase in cash surrender value of BOLI
2,430
2,027
2,233
Gain on BOLI death benefit
4,346
-
Net gain/(loss) on sale of securities available-for-sale
(8,199
)
(10,689
)
Net gain on deferred compensation benefits
3,270
2,974
Other
4,249
4,325
4,266
Total non-interest income
20,700
14,914
6,178
Non-interest expense
Salaries and employee benefits
72,472
70,883
64,250
Net gain on deferred compensation benefits
3,270
2,974
Data processing
6,055
5,293
4,968
Occupancy
5,090
4,837
4,717
Deposit insurance
2,852
2,769
1,771
Professional services
3,587
2,334
2,459
Marketing
1,967
1,885
1,324
Other
9,839
13,364
13,620
Total non-interest expense
105,132
104,339
93,560
INCOME BEFORE INCOME TAXES
122,244
116,553
99,741
Income tax expense
33,787
28,239
24,651
NET INCOME
$
88,457
$
88,314
$
75,090
Earnings per common share:
Basic
$
121.02
$
116.61
$
96.55
Diluted
$ 121.02
$ 116.61
$ 96.55
Weighted average number of common shares
Basic
730,914
757,336
777,726
Diluted
730,914
757,336
777,726
See accompanying notes to the consolidated financial statements.
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Comprehensive Income
Year Ended December 31,
(Dollars in thousands)
Net income
$
88,457
$
88,314
$
75,090
Other comprehensive income
Unrealized (losses)/gains on available-for-sale securities
(8,973
)
5,246
(39,015
)
Reclassification adjustment for (gains)/losses on available-for-sale securities
(743
)
8,199
10,689
Amortization of unrecognized loss on securities transferred to held-to-maturity
(82 )
(136 )
(238 )
Net unrealized (losses)/gains on securities
(9,798 )
13,309
(28,564 )
Income tax benefit/(expense)
2,896
(3,935
)
8,445
Other comprehensive (loss)/income, net of tax
(6,902
)
9,374
(20,119
)
Total comprehensive income
$
81,555
$
97,688
$
54,971
See accompanying notes to the consolidated financial statements.
Farmers & Merchants Bancorp
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except share and per share amounts)
Common
Shares
Amount
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss)/Income
Total
Balance as of January 1, 2022
789,646
$
$
77,516
$
387,331
$
(1,719
)
$
463,136
Net income
-
-
-
75,090
-
75,090
Other comprehensive loss, net of tax
-
-
-
-
(20,119 )
(20,119 )
Cash dividends declared ($16.15 per share)
-
-
-
(12,489
)
-
(12,489
)
Repurchase of common stock
(21,309 )
-
(20,310 )
-
-
(20,310 )
Balance as of December 31, 2022
768,337
$
$
57,206
$
449,932
$
(21,838
)
$
485,308
Net income
-
-
-
88,314
-
88,314
Other comprehensive income, net of tax
-
-
-
-
9,374
9,374
Cash dividends declared ($17.10 per share)
-
-
-
(12,886
)
-
(12,886
)
Repurchase of common stock
(20,366 )
(1 )
(20,354 )
-
-
(20,355 )
Balance as of December 31, 2023
747,971
$
$
36,852
$
525,360
$
(12,464
)
$
549,755
Cumulative change from adoption of ASU 2023-02
-
-
-
-
Net income
-
-
-
88,457
-
88,457
Other comprehensive loss, net of tax
-
-
-
-
(6,902 )
(6,902 )
Cash dividends declared ($18.10 per share)
-
-
-
(13,017
)
-
(13,017
)
Repurchase of common stock
(48,173 )
-
(36,852 )
(8,409 )
-
(45,261 )
Balance as of December 31, 2024
699,798
$
$
-
$
592,431
$
(19,366
)
$
573,072
See accompanying notes to the consolidated financial statements.
Farmers & Merchants Bancorp
Consolidated Statements of Cash Flows
Year Ended December 31,
(Dollars in thousands)
Cash flows from operating activities:
Net income
$
88,457
$
88,314
$
75,090
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
-
9,407
6,450
Depreciation and amortization
2,937
2,491
2,428
Net (accretion) amortization of securities premiums and discounts
(1,381
)
(109
)
Increase in cash surrender value of BOLI
(2,430 )
(2,027 )
(2,233 )
Gain on BOLI death benefit
(4 )
(4,346 )
-
Decrease (Increase) in deferred income taxes, net
8,128
(5,603
)
4,330
Net realized (gain) loss on sale of securities available-for-sale
(743
)
8,199
10,689
Net changes in:
Other assets
(6,729 )
(16,792 )
(8,262 )
Other liabilities
15,500
13,814
12,910
Net cash provided by operating activities
103,735
93,348
101,778
Cash flows from investing activities:
Net increase in loans and leases held for investment
(24,344 )
(156,433 )
(275,061 )
Purchase of available-for-sale securities
(389,349
)
(84,114
)
(10,217
)
Purchase of held-to-maturity securities
(4,218
)
(6,850
)
(173,907
)
Proceeds from sales, maturities, calls and pay downs of available-for-sale securities
99,908
59,557
88,504
Proceeds from maturities, calls and pay downs of held-to-maturity securities
52,675
49,063
65,493
Purchase of bank-owned life insurance
-
(7,271 )
-
Purchase of premises and equipment
(2,399 )
(4,972
)
(4,190
)
Purchase of other investments
(16,050 )
(7,306 )
(6,600 )
Redemption of other investments
5,917
-
-
Proceeds from bank-owned life insurance
3,280
11,751
Proceeds from sale of assets
-
Net cash used in investing activities
(274,580
)
(146,548
)
(315,299
)
Cash flows from financing activities:
Net increase (decrease) in deposits
31,044
(91,174
)
119,117
Cash dividends paid
(13,017 )
(12,886 )
(12,489 )
Net cash used in share repurchase of common stock
(45,261
)
(20,355
)
(20,310
)
Net cash (used in) provided by financing activities
(27,234
)
(124,415
)
86,318
Net change in cash and cash equivalents
(198,079
)
(177,615
)
(127,203
)
Cash and cash equivalents, beginning of year
410,642
588,257
715,460
Cash and cash equivalents, end of year
$
212,563
$
410,642
$
588,257
Supplemental disclosures of cash flow information:
Cash paid for interest
$ 65,085
$ 29,280
$ 5,785
Income taxes paid
$
8,391
$
12,662
$
12,469
Supplemental disclosures of non-cash transactions:
Net change in unrealized gains/(losses) on securities available-for-sale
$ 9,716
$ (13,445 )
$ 28,326
See accompanying notes to the consolidated financial statements.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1-Summary of Significant Accounting Policies
Nature of Operations and basis of consolidation - Farmers & Merchants Bancorp (the “Company” or “FMCB”) is a Delaware corporation headquartered in Lodi, California and is the bank holding company for Farmers & Merchants Bank of Central California (the “Bank” or “F&M Bank”). The Company operates all business activities through the Bank, which was organized in 1916. F&M Bank is a California state-chartered bank. F&M Bank operates under the supervision of the California Department of Financial Protection and Innovation (“DFPI”), and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). F&M Bank is not a member of the Federal Reserve System; however, FMCB operates as a bank holding company under the Federal Bank Holding Company Act of 1956, subject to and under the supervision of and examination by the Federal Reserve and is the sole shareholder of F&M Bank. Both FMCB and F&M Bank are subject to periodic examination by these applicable federal and state regulatory agencies and file periodic reports and other information with the agencies. The Company considers F&M Bank to be its sole operating segment.
The Company’s other wholly-owned subsidiaries include F & M Bancorp, Inc. and FMCB Statutory Trust I. F & M Bancorp, Inc. was created in March 2002 to protect the name F & M Bank. During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name “F & M Bank” as part of a larger effort to enhance the Company’s image and build brand name recognition. In December 2003, the Company formed a wholly owned subsidiary, FMCB Statutory Trust I, for the sole purpose of issuing Trust Preferred Securities and related subordinated debentures. In accordance with generally accepted accounting principles in the United States (“GAAP”), FMCB Statutory Trust I is a non-consolidated subsidiary.
Through its network of 30 banking offices and 3 free-standing ATMs, F&M Bank emphasizes personalized service along with a broad range of banking services to businesses and individuals located in the service areas of its offices. Although the Company focuses on marketing its services to small and medium-sized businesses, a broad range of retail banking services are also made available to the local consumer market. F&M Bank branches are located through the mid Central Valley of California, including Sacramento, San Joaquin, Solano, Stanislaus and Merced counties and the east region of the San Francisco Bay Area including Napa, Alameda and Contra Costa counties.
F&M Bank provides a broad complement of lending products, including commercial, commercial real estate, real estate construction, agribusiness, consumer, credit card, residential real estate loans, and equipment leases. Commercial products include term loans, leases, lines of credit and other working capital financing and letters of credit. Financing products for individuals include automobile financing, lines of credit, residential real estate, home improvement and home equity lines of credit.
F&M Bank also offers a wide range of deposit products. These include checking, savings, money market, time certificates of deposit, individual retirement accounts and online banking services for both business and personal accounts.
F&M Bank offers a wide range of specialized services designed for the needs of its commercial accounts. These services include a credit card program for merchants, lockbox and other collection services, account reconciliation, investment sweep, on-line account access, and electronic funds transfers by way of domestic and international wire and automated clearinghouse.
F&M Bank makes investment products available to customers, including mutual funds and annuities. These investment products are offered through a third-party, which employs investment advisors to meet with and provide investment advice to the Company’s customers.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1-Summary of Significant Accounting Policies-Continued
The consolidated financial statements of the Company include the accounts of Farmers & Merchants Bancorp, a bank holding company incorporated in the State of Delaware and its wholly owned subsidiary, Farmers & Merchants Bank of Central California. All intercompany transactions and balances have been eliminated.
Use of estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Reclassifications - Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation. There was no impact on net income or retained earnings as a result of any reclassification.
Cash and cash equivalents - Cash and cash equivalents consist of cash on hand, amounts due from banks, interest bearing deposits, and federal funds sold, all of which have original maturities of three months or less. The Company places its cash with high credit quality institutions. The amounts on deposit fluctuate and, at times, exceed the insured limit by the FDIC, which potentially subjects the Company to credit risk. For these instruments, the carrying amount is a reasonable estimate of fair value.
Statement of cash flows - For purposes of presentation on the consolidated statements of cash flows, “cash and cash equivalents” are defined as those amounts included in “Cash and cash equivalents” on the consolidated balance sheets.
Investment securities - Investment securities are classified as held-to-maturity (“HTM”) when the Company has the positive intent and ability to hold the securities to maturity. Investment securities are classified as available-for-sale (“AFS”) when the Company has the intent of holding the security for an indefinite period of time, but not necessarily to maturity. The Company determines the appropriate classification at the time of purchase, and periodically thereafter. Investment securities classified as HTM are carried at amortized cost. Investment securities classified as AFS are reported at fair value. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Debt securities classified as HTM are carried at cost, net of the allowance for credit losses - securities, adjusted for amortization of premiums and discounts to the earliest callable date. Debt securities classified as AFS are measured at fair value. Unrealized holding gains and losses on debt securities classified as AFS are excluded from earnings and are reported net of tax as accumulated other comprehensive income (or loss) (“AOCI”), a component of shareholders’ equity, until realized. When AFS securities, specifically identified, are sold, the unrealized gain or loss is reclassified from AOCI to non-interest income.
Allowance for Credit Losses - Securities - Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. The Company’s HTM portfolio contains securities issued by U.S. government entities and agencies and municipalities. The Company uses industry historical credit loss information adjusted for current conditions to establish the allowance for credit losses on its HTM municipal bond portfolio. Further information regarding our policies and methodology used to estimate the allowance for credit losses on HTM securities is presented in Note 2 - Investment Securities.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1-Summary of Significant Accounting Policies-Continued
For AFS investment securities in an unrealized loss position, the Company first assesses whether it intends to sell, or is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. Projected cash flows are discounted by the current effective interest rate. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to AOCI.
Changes in the allowance for credit losses-securities are recorded as provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the non-collectability of a security is confirmed or when either criteria regarding intent of requirement to sell is met. The Company has elected the practical expedient not to measure an allowance for credit losses for accrued interest receivables. The Company has also made the election that all interest accrued but ultimately not received is reversed against interest income.
Non-marketable equity securities - Non-marketable equity securities primarily consist of Federal Home Loan Bank (“FHLB”) stock. FHLB stock is restricted because such stock may only be sold to the FHLB at its par value. Due to the restrictive terms, and the lack of a readily determinable market value, FHLB stock is carried at cost. The investments in FHLB stock are required investments related to the Bank’s borrowings from FHLB. FHLB obtains its funding primarily through issuance of consolidated obligations of the FHLB system. The U.S. government does not guarantee these obligations, and each of the regional FHLBs are jointly and severally liable for repayment of each other’s debt.
Loans and leases held for investment - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for credit losses on loan and leases, any deferred fees or costs on originated loans and unamortized premiums or discounts on acquired loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the effective interest method.
Interest on loans is accrued based upon the principal amount outstanding. The Company has elected the practical expedient to exclude all accrued interest receivable from all required disclosures of amortized cost. Additionally, an election was made not to measure an allowance for credit losses for accrued interest receivables. The Company has also made the election that all interest accrued but ultimately not received is reversed against interest income.
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.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1-Summary of Significant Accounting Policies-Continued
Modifications for Borrowers Experiencing Financial Difficulty - The Company may renegotiate the terms of existing loans for a variety of reasons. When refinancing or restructuring a loan, the Company evaluates where the borrower is experiencing financial difficulty. In making this determination, the Company considers whether the borrower is currently in default on any of its debt. In addition, the Company evaluates whether it is probable that the borrower would be in payment default on any of its debt in the foreseeable future without the modification and if the borrower (without the current modification) could obtain equivalent financing from another creditor at a market rate for similar debt. Modifications of loans to borrowers in these situations may indicate that the borrower is facing financial difficulty. Modifications of loans to borrowers experiencing financial difficulty that are in the form of principal forgiveness, interest rate reductions, other-than-insignificant payment delays, or a term extension (or a combination thereof) require disclosure. The Company’s disclosures are included in Note 4 “Loans and Leases.”
Credit Quality Indicators - 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. For smaller balance loans and leases, such as consumer and residential real estate, a credit grade is established at inception, and then updated only when the loan or lease becomes contractually delinquent or when the borrower requests a modification. For larger balance loans, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans and leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into five major categories, defined as follows:
Pass - 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.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1-Summary of Significant Accounting Policies-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.
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 delayed recognition until it was probable a loss had been incurred with the current expected credit losses 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 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 pool. 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.
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 and leases 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 significant 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) application of a reasonable and supportable forecast based on macro- and micro-economic factors expected to influence losses; (iv) value of collateral and strength of borrowers; and (v) the determination of the qualitative loss factors. All of these estimates are susceptible to significant change.
The Company extends loans and leases to commercial and consumer customers primarily in Central California. These lending activities expose the Company to the risk borrowers will default, causing credit 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 segment 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.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1-Summary of Significant Accounting Policies-Continued
The ACL is a valuation account that is deducted from the amortized cost basis of loans and leases 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 approximately 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, and current economic conditions.
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 which includes 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 the COVID-19 pandemic. 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.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1-Summary of Significant Accounting Policies-Continued
Management has collected historical loss information on its own loan and lease 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 16th 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 economic forecasts which include consideration of national, regional, and local economic expectations, and are applied as a top of model adjustment through the use of management’s qualitative factors framework, incorporating their maximum loss rate which management believes reduces the extent of management judgments in determination of the forecast.
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.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1-Summary of Significant Accounting Policies-Continued
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 on the consolidated balance sheets and noted that the updates had no material impact to the Company’s consolidated financial statements.
Other real estate owned - Other real estate owned, is expected to be sold and is comprised of properties no longer utilized for business operations and property acquired through foreclosure in satisfaction of indebtedness. These properties are recorded at fair value less estimated selling costs upon acquisition. Revised estimates to the fair value less cost to sell are reported as adjustments to the carrying amount of the asset, provided that such adjusted value is not in excess of the carrying amount at acquisition. Initial losses on properties acquired through full or partial satisfaction of debt are treated as credit losses and charged to the allowance for credit losses at the time of acquisition. Subsequent declines in value from the recorded amounts, routine holding costs, and gains or losses upon disposition, if any, are included in non-interest expense as incurred.
Fair value estimates - We measure some of our assets and liabilities on a fair value basis. 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. To increase consistency and comparability in fair value measurements, we prioritize valuation inputs in accordance with a three-level hierarchy. We prioritize quoted prices in active markets and minimize reliance on unobservable inputs when possible. When observable market prices are not available, fair value is estimated using modeling techniques requiring professional judgment to estimate the appropriate fair value. We believe we use assumptions that market participants would consider in pricing the asset or the liability. Changes in market conditions may reduce the availability of quoted prices or observable data. See Note 11 “Fair Value” for further information regarding the use of fair value estimates.
Premises and equipment - Land is carried at cost. Premises and equipment are carried at cost, net of accumulated depreciation and amortization. Depreciation and amortization expense is computed using the straight-line method based on the estimated useful lives of the related assets below:
Building and building improvements
30 to 40 years
Leasehold improvements
term of lease
Furniture and equipment
3 to 7 years
Computers, software and equipment
3 to 7 years
Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1-Summary of Significant Accounting Policies-Continued
Bank-owned life insurance (“BOLI”) - The Bank has purchased life insurance policies. These policies provide protection against the adverse financial effects that could result from the death of a key employee and provide tax-exempt income to offset expenses associated with certain employee benefit plans. It is the Bank’s intent to hold these policies as a long-term investment; however, there may be an income tax impact if the Bank chooses to surrender certain policies. Although the lives of individual current or former management-level employees are insured, the Bank is the owner and sole or partial beneficiary. BOLI is carried at the cash surrender value (“CSV”) of the underlying insurance contract. Changes in the CSV and any death benefits received in excess of the CSV are recognized as non-interest income.
Goodwill - Goodwill represents the excess of the purchase considerations paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination and is not amortized but is reviewed annually as of December 31, or more frequently as current circumstances and conditions warrant, for impairment. An assessment of qualitative factors is completed to determine if it is more likely than not that, the fair value of a reporting unit is less than its carrying amount. If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed. The quantitative goodwill impairment compares the reporting unit’s estimated fair values, including goodwill, to its carrying amount. If the carrying amount exceeds its reporting unit’s fair value, then an impairment loss would be recognized as a charge to earnings but is limited by the amount of goodwill allocated to that reporting unit.
Other intangible assets - Other intangible assets consist primarily of core deposit intangibles (“CDI”), which are amounts recorded in business combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the client relationships associated with the deposits. Core deposit intangibles are amortized over the estimated useful lives of such deposits. These assets are reviewed at least annually for events or circumstances that could affect their recoverability. These events could include loss of the underlying core deposits, increased competition or adverse changes in the economy. The amortization of our CDI is recorded in other non-interest expense. To the extent other identifiable intangible assets are deemed unrecoverable; impairment losses are recorded in other non-interest expense to reduce the carrying amount of the assets.
Right of use lease asset & lease liability - Accounting Standards Codification (“ASC”) 842, Leases (“ASC 842”), establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. We record an operating lease right of use (“ROU”) asset and an operating lease liability (lease liability) for operating leases with a lease term greater than 12 months. The ROU asset and lease liability are recorded in other assets and other liabilities, respectively, in the consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Accordingly, ROU assets are reduced by tenant improvement allowances from property owners plus any prepaid rent. We do not separate lease and non-lease components of contracts. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date.
The Company leases retail space and office space under operating leases. Most leases require the Company to pay real estate taxes, maintenance, insurance and other similar costs in addition to the base rent. Certain leases also contain lease incentives, such as tenant improvement allowances and rent abatement. Variable lease payments are recognized as lease expense as they are incurred.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1-Summary of Significant Accounting Policies-Continued
Many of our leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule, which are factored into our determination of lease payments when determinable. A majority of the leases provide the Company with the option to extend the lease term one or more times following expiration of the initial term. The ROU asset and lease liability terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Off-balance sheet credit related financial instruments - In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.
Allowance for credit losses - unfunded loan commitments - An allowance for credit losses - unfunded loan commitments is maintained at a level that, in the opinion of management, is adequate to absorb current expected credit losses associated with the life of the Company’s commitments to lend funds under existing agreements such as letters or lines of credit. The Company uses a methodology for determining the allowance for credit losses - unfunded loan commitments that applies the same loan segmentation and loss rate to each pool as the funded exposure adjusted for probability of funding. The Company also analyzes the estimated utilization rates based upon an average from the trailing 4 quarters and then applies the same historical loss rates used for the outstanding amounts to determine the appropriate reserve. However, given that a utilization rate represents a difference between the funded portion quarter to quarter, management analyzes the utilized balances of the commitments for a trailing 4 quarters in order to assess the maximum advance rate variance over the year. The utilization rates represent the max variance for each loan category within the last 4 quarters. In order to get an accurate depiction of the utilization rate. Draws on unfunded loan commitments that are considered uncollectible are charged to the allowance for credit losses on off-balance sheet exposures. Provisions for credit losses - unfunded loan commitments are recognized in the provision for credit losses, and added to the allowance for credit losses - unfunded loan commitments, which is included in other liabilities in the consolidated balance sheets. Prior to the first quarter of 2023, the provision for credit-losses - unfunded loan commitments was recognized in non-interest expense.
Revenue from contracts with customers - The Company records revenue from contracts with customers in accordance with ASC Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.
The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income is not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is limited judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1-Summary of Significant Accounting Policies-Continued
Income taxes - Deferred income tax assets and deferred income tax liabilities represent the tax effect of temporary differences between financial reporting and tax reporting measured at enacted tax rates in effect for the year in which the differences are expected to reverse. The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority.
Developing the provision for income taxes, including the effective tax rate and analysis of potential tax exposure items, if any, requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred income tax assets and liabilities and any estimated valuation allowances deemed necessary to value deferred income tax assets. Judgments and tax strategies are subject to audit by various taxing authorities. While the Company believes it has no significant uncertain income tax positions in the consolidated financial statements, adverse determinations by these taxing authorities could have a material adverse effect on the consolidated balance sheets, statements of income, or cash flows.
Basic and diluted earnings per common share - Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. There are no common stock equivalent shares. Therefore, there is no difference between presentation of diluted and basic earnings per common share.
Comprehensive income - Comprehensive income includes net income and changes in fair value of its available-for-sale investment securities and amortization of net unrealized gains or losses on securities transferred from available-for-sale to held-to-maturity, net of related taxes.
Segment Reporting - The Company is a holding company for the Bank, which offers a wide array of products and services to its customers. Pursuant to its banking strategy, emphasis is placed on building relationships with its customers, as opposed to building specific lines of business. The Company is not organized around discernible lines of business, but rather operates as an integrated unit to customize solutions for its customers with business line emphasis and product offerings changing over time as customer needs and demands change. Operations are managed, and financial performance is evaluated on a Company-wide basis by the Chief Executive Officer (“CEO”) who is the chief operating decision maker (“CODM”). The CODM evaluates the financial performance of the Company by evaluating revenues, significant expenses, and budget to actual results in setting the Company’s strategic plan and initiatives. The CODM uses revenues to evaluate product pricing and significant expenses to assess performance and evaluate return on assets and return on equity. The CODM uses consolidated net income to benchmark the Company against its competitors. The benchmarking analysis coupled with monitoring of budget to actual results are used in determining discretionary compensation. Loans, leases, and investments provide the revenues in the banking operation. Interest expense, provisions for credit losses, and salaries and employee benefits provide the significant expenses in the banking operation. Discrete financial information is not available other than on a Company-wide basis. Accordingly, all of the operations of the Company are considered by management to be aggregated in one reportable operating segment.
Loss contingencies - Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such loss contingencies that will have a material and adverse effect on the consolidated financial statements.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1-Summary of Significant Accounting Policies-Continued
Adoption of New Accounting Standards - The Accounting Standards Codification (“ASC”) is the FASB officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities. Periodically, the FASB will issue Accounting Standard Updates (“ASU”) to its ASC. Rules and interpretive releases of the SEC under the authority of the federal securities laws are also sources of authoritative GAAP for the Company as an SEC registrant. All other accounting literature is non-authoritative.
On January 1, 2024, the Company adopted 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, with no material impact on the Company’s consolidated financial statements.
On January 1, 2024, the Company adopted 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.
On December 31, 2024, the Company adopted 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. The Company adopted this standard with no material impact on the Company’s consolidated financial statements, however additional required disclosures have been added to the Segment Reporting accounting policy within this footnote.
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.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1-Summary of Significant Accounting Policies-Continued
In July 2023, the FASB issued ASU 2023-03, Presentation of Financial Statements (Topic 205), Income Statement-Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation-Stock Compensation (Topic 718). This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280-General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company is currently evaluating the impact this ASU will have on its disclosures.
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Updated and Simplification Initiative. ASU 2023-06 amends the disclosure or presentation requirements related to various subtopics in the FASB Accounting Standards Codification (the “Codification”). The ASU was issued in response to the SEC’s August 2018 final rule that updated and simplified disclosure requirements that the SEC believed were “redundant, duplicative, overlapping, outdated, or superseded.” The new guidance is intended to align U.S. GAAP requirements with those of the SEC and to facilitate the application of U.S. GAAP for all entities. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company is currently evaluating the impact this ASU will have on its disclosures.
In
December 2023, the FASB issued ASU 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 and the income tax disclosures will be updated 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 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.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1-Summary of Significant Accounting Policies-Continued
In November 2024, the FASB issued Accounting Standards Update No. 2024-03, “Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses” (“ASU 2024-03”), and in January 2025, the FASB issued Accounting Standards Update No. 2025-01, “Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date” (“ASU 2025-01”). ASU 2024-03 requires additional disclosure of the nature of expenses included in the income statement as well as disclosures about specific types of expenses included in the expense captions presented in the income statement. ASU 2024-03, as clarified by ASU 2025-01, is effective for public business entities for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Both early adoption and retrospective application are permitted. The Company is currently evaluating the impact that the adoption of these standards will have on its consolidated financial statements and disclosures.
Note
2-Investment Securities
The amortized cost, fair values, and unrealized gains and losses of the securities available-for-sale are as follows:
Gross Unrealized
(Dollars in thousands)
Amortized
Cost
Gains
Losses
Fair Value
As of December 31, 2024
U.S. Government-sponsored securities
$
2,657
$
$
$
2,644
Mortgage-backed securities(1)
466,302
26,908
439,858
Commercial mortgage-backed obligations(1)
1,228
-
1,212
Collateralized mortgage obligations(1)
5,653
-
5,497
Corporate securities
14,800
-
14,856
Other
-
Total available-for-sale securities
$
490,992
$
$
27,102
$
464,414
(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.
Gross Unrealized
(Dollars in thousands)
Amortized
Cost
Gains
Losses
Fair Value
As of December 31, 2023
U.S. Government-sponsored securities
$
3,230
$
$
$
3,224
Mortgage-backed securities(1)
178,392
3,015
19,726
161,681
Commercial mortgage-backed obligations(1)
2,151
2,157
Collateralized mortgage obligations(1)
-
Corporate securities
14,743
14,605
Other
-
-
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.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2-Investment Securities-Continued
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 December 31, 2024
Mortgage-backed securities(1)
$
626,427
$
-
$
143,544
$
482,883
$ -
Collateralized mortgage obligations(1)
68,377
-
13,876
54,501
-
Municipal securities
74,639
1,116
73,569
Total held-to-maturity securities
$
769,443
$
$
158,536
$
610,953
$
(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.
Allowance
Amortized
Gross Unrecognized
for
Credit
(Dollars in thousands)
Cost
Gains
Losses
Fair Value
Losses
As of December 31, 2023
Mortgage-backed securities(1)
$
664,728
$
$
132,043
$
532,715
$ -
Collateralized mortgage obligations(1)
74,170
-
14,017
60,153
-
Municipal securities
78,790
78,717
Total held-to-maturity securities
$
817,688
$
$
146,240
$
671,585
$
(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 basis 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.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2-Investment Securities-Continued
The following tables show the gross unrealized losses for available-for-sale securities, for which an allowance for credit losses has not been recorded, that have been in an unrealized loss position for less than 12 months or 12 months or more:
December 31, 2024
Less Than 12 Months
12 Months or More
Total
(Dollars in thousands)
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Available-for-Sale Securities
U.S. Government-sponsored securities
$
$
$
$
$
1,488
$
Mortgage-backed securities(1)
324,202
5,772
67,319
21,136
391,521
26,908
Commerical mortgage-backed securities(1)
1,212
-
-
1,212
Collateralized mortgage obligations(1)
5,043
5,497
Other
-
-
Total available-for-sale securities
$
331,404
$
5,941
$
68,661
$
21,161
$
400,065
$ 27,102
(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.
December 31, 2023
Less Than 12 Months
12 Months or More
Total
(Dollars in thousands)
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Available-for-Sale Securities
U.S. Government-sponsored securities
$
$
-
$
1,235
$
$
1,268
$
Mortgage-backed securities(1)
80,746
19,716
81,152
19,726
Commerical mortgage-backed securities(1)
1,223
-
-
1,223
Collateralized mortgage obligations
-
-
Corporate securities
-
-
9,853
9,853
Total available-for-sale securities
$
1,662
$
$
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 December 31, 2024, the Company held 186 available-for-sale securities of which 47 securities were in an unrealized loss position for less than twelve months and 114 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 on these securities. 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:
December 31, 2024
(Dollars in thousands)
Municipal
securities
Mortgage-backed
securities
Collateralized
mortgage
obligations
Total
Allowance for credit losses - securities
Beginning Balance
$
$
-
$
-
$
Provision for credit losses
-
-
-
-
Ending Balance
$
$
-
$
-
$
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2-Investment Securities-Continued
December 31, 2023
(Dollars in thousands)
Municipal
securities
Mortgage-backed
securities
Collateralized
mortgage
obligations
Total
Allowance for credit losses - securities
Beginning Balance
$
$
-
$
-
$
Provision for credit losses
-
-
Ending Balance
$
$
-
$
-
$
The amortized cost and estimated fair values of investment securities at December 31, 2024 by contractual final maturity are shown in the following table:
Available-for-Sale
Held-to-Maturity
(Dollars in thousands)
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Securities
maturing in:
One year or less
$
$
$
1,180
$
1,169
After one year through five years
17,968
17,963
21,791
21,306
After five years through ten years
2,272
2,228
14,489
13,682
After ten years
470,323
443,800
731,983
574,796
Total
$
490,992
$
464,414
$
769,443
$
610,953
Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Expected maturities of mortgage-backed and CMO securities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
The Company monitors the credit quality of those held-to-maturity securities not issued by the U.S. government or one of its agencies or government sponsored entities, through the use of credit ratings. Credit ratings are reviewed and updated quarterly. Nonrated municipal investments consist primarily of bonds issued by political subdivisions such as housing authorities and reclamation districts. Nonrated municipal investments are monitored through financial covenants and review of repayment history. As of December 31, 2024, there were no past due principal or interest payments associated with held-to-maturity municipal securities. There were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.
The following tables summarize the amortized cost of held-to-maturity municipal securities by credit rating as of the dates indicated:
Held-to-Maturity
Amortized Cost
(Dollars in thousands)
AAA/AA/A
BBB/BB/B
Not Rated
Total
December 31, 2024
Municipal securities
$
19,022
$
$
55,214
$
74,639
Total
$
19,022
$
$
55,214
$
74,639
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2-Investment Securities-Continued
Held-to-Maturity
Amortized Cost
(Dollars in thousands)
AAA/AA/A
BBB/BB/B
Not Rated
Total
December 31, 2023
Municipal securities
$
20,203
$
$
58,192
$
78,790
Total
$
20,203
$
$
58,192
$
78,790
Proceeds from sales and calls of investment securities were as follows:
(Dollars in thousands)
Gross Proceeds
Gross Gains
Gross Losses
$
70,721
$
$
$
39,901
$
-
$
8,199
$
51,359
$
$
10,691
Pledged Securities
As of December 31, 2024, investment securities carried at $712.5 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) borrowings, and other government agency deposits as required by law. This amount was $794.1 million at December 31, 2023.
Note 3-Federal Home Loan Bank Stock and Other Non-Marketable Securities
The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock and other equity securities are carried at cost, classified as restricted securities, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. FHLB stock and other equity securities are reported in Non-Marketable Securities on the Company’s consolidated balance sheets and totaled $15.5 million at both December 31, 2024 and 2023.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4-Loans and Leases
Loans and leases as of the dates indicated consisted of the following:
December 31,
(Dollars in thousands)
Loans and leases held for investment, net
Real estate:
Commercial
$
1,360,841
$
1,323,038
Agricultural
751,026
742,009
Residential and home equity
404,399
399,982
Construction
194,903
212,362
Total real estate
2,711,169
2,677,391
Commercial & industrial
504,403
499,373
Agricultural
289,847
313,737
Commercial leases
179,718
169,684
Consumer and other
5,084
5,212
Total gross loans and leases
3,690,221
3,665,397
Unearned income
(11,833
)
(10,708
)
Total net loans and leases
3,678,388
3,654,689
Allowance for credit losses
(75,283
)
(74,965
)
Total loans and leases held for investment, net
$
3,603,105
$
3,579,724
At December 31, 2024, the portion of loans that were approved for pledging as collateral on borrowing lines with the FHLB and the Federal Reserve Bank (“FRB”) were $1.2 billion and $1.4 billion, respectively. The borrowing capacity on these loans was $801.7 million from FHLB and $1.1 billion from the FRB at December 31, 2024.
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:
December 31, 2024
(Dollars in thousands)
30-89 Days
Past Due
90+ Days
Past Due
Non-accrual
Total Past
Due and
Nonaccrual
Current
Total
Non-accrual
with no ACL
Loans and leases held for investment, net
Real estate:
Commercial
$
-
$
-
$
$
$
1,353,101
$
1,353,271
$
Agricultural
-
-
-
-
751,026
751,026
-
Residential and home equity
-
-
-
-
404,399
404,399
-
Construction
-
-
-
-
194,903
194,903
-
Total real estate
-
-
2,703,429
2,703,599
Commercial & industrial
-
503,611
504,403
-
Agricultural
-
-
289,811
289,847
-
Commercial leases
-
-
-
-
175,455
175,455
-
Consumer and other
-
-
5,079
5,084
-
Total loans and leases, net
$
$
-
$
$
1,003
$
3,677,385
$
3,678,388
$
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4-Loans and Leases-Continued
December 31, 2023
(Dollars in thousands)
30-89 Days
Past Due
90+ Days
Past Due
Non-accrual
Total Past
Due and
Nonaccrual
Current
Total
Non-accrual
with no ACL
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
399,982
-
Construction
-
-
-
-
212,362
212,362
-
Total real estate
-
-
2,669,245
2,669,281
-
Commercial & industrial
-
-
499,341
499,373
-
Agricultural
-
-
-
-
313,737
313,737
-
Commercial leases
-
-
-
-
167,086
167,086
-
Consumer and other
-
-
5,209
5,212
-
Total loans and leases, net
$
$
-
$
-
$
$
3,654,618
$
3,654,689
$ -
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.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4-Loans and Leases-Continued
The following tables present the amortized cost of loans that were both experiencing financial difficulty and modified, by portfolio segment and type of modification, during the periods presented. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each portfolio segment of financing receivable is also presented below:
December 31, 2024
Amortized cost associated with the following modification types:
(Dollars in thousands)
Interest
Rate
reduction
Maturity
or term
extension
Principal
foregiveness
Payment
deferral
Multiple
modification
types1
Total2
Percentage
of total loan
segment
Loans and leases held for investment, net
Real estate:
Commercial
$
-
$
-
$
-
$
-
$
-
$
-
0.00
%
Agricultural
-
-
-
8,567
2,197
10,764
1.43
%
Residential and home equity
-
-
-
-
-
-
0.00
%
Construction
-
-
-
-
-
-
0.00
%
Total real estate
-
-
-
8,567
2,197
10,764
0.40
%
Commercial & industrial
-
2,500
-
-
-
2,500
0.50
%
Agricultural
-
-
-
-
-
-
0.00
%
Commercial leases
-
-
-
-
-
-
0.00
%
Consumer and other
-
-
-
-
-
-
0.00
%
Total
$
-
$
2,500
$
-
$
8,567
$
2,197
$
13,264
0.36
%
1 Includes modifications that resulted from a combination of interest rate reduction, maturity or term extension, principal forgiveness, and payment deferral modifications.
2 Unfunded lending commitments related to loans modified to borrowers experiencing financial difficulty totaled $0 million at December 31, 2024.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4-Loans and Leases-Continued
During the twelve months ended December 31, 2024, the Company had one agricultural real estate borrower with five loans that had principal and interest deferrals ranging from two to four months. One of the agricultural real estate loans had the contractual term extended by four months. In addition, the Company had one commercial & industrial loan where the contractual term was extended by two months.
December 31, 2023
Amortized cost associated with the following modification types:
(Dollars in thousands)
Interest
Rate
reduction
Maturity
or term
extension
Principal
foregiveness
Payment
deferral
Multiple
modification
types1
Total2
Percentage
of total loan
segment
Loans and leases held for investment, net
Real estate:
Commercial
$
-
$
1,600
$
-
$
-
$
-
$
1,600
0.12
%
Agricultural
-
-
-
-
-
-
0.00
%
Residential and home equity
-
-
-
-
0.03
%
Construction
-
-
-
-
-
-
0.00
%
Total real estate
-
1,600
-
-
1,721
0.06
%
Commercial & industrial
-
4,669
-
-
-
4,669
0.93
%
Agricultural
-
-
-
-
-
-
0.00
%
Commercial leases
-
-
-
-
-
-
0.00
%
Consumer and other
-
-
-
-
-
-
0.00
%
Total
$
-
$
6,269
$
-
$
-
$
$
6,390
0.17
%
Includes modifications that resulted from a combination of interest rate reduction, maturity or term extension, principal forgiveness, and payment deferral modifications.
2 Unfunded lending commitments related to loans modified to borrowers experiencing financial difficulty totaled $3.3 million at December 31, 2023.
During the twelve months ended December 31, 2023, we had one residential real estate loan that had the contractual interest rate decreased by 1.00% and the contractual term was extended by 120 months. In addition, we had an additional borrower with one commercial real estate loan that had the contractual term extended by 119 months, and two commercial & industrial loans that had the contractual term extended by eleven months.
The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of the modification efforts. A payment default is defined as a loan having a payment past due 90 days or more after a modification took place. The modified loans presented in the tables above were current as of December 31, 2024 and 2023.
The effect of modifications made to borrowers experiencing financial difficulty is already included in the ACL because of the measurement methodologies used to estimate the ACL; therefore, a change to the ACL is generally not recorded upon modification. If principal forgiveness is provided, that portion of the loan will be charged-off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the ACL. An assessment of whether the borrower is experiencing financial difficulty is made on the date of a modification.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4-Loans and Leases-Continued
The following table presents outstanding loan and lease balances held for investment net of unearned income by segment, credit risk rating categories, vintage year by segment of financing receivable, and current period gross charge-offs by year of origination as follows:
December 31, 2024
Term Loans Amortized Cost Basis by Origination Year
(Dollars in thousands)
Prior
Revolving
Loans
Amortized
Cost
Revolving
Loans
Converted
to Term
Total
Net loans and leases held for investment
Real estate:
Commercial
Pass
$
63,216
$
117,550
$
163,875
$
209,222
$
134,254
$
292,326
$
270,231
$
99,819
$
1,350,493
Special mention
-
-
1,138
-
-
1,470
-
2,778
Substandard
-
-
-
-
-
-
-
-
-
Total Commercial
$
63,216
$
117,550
$
165,013
$
209,222
$
134,254
$
292,496
$
271,701
$ 99,819
$
1,353,271
Commercial
Current-period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$ -
$
-
Agricultural
Pass
$
24,877
$
36,693
$
69,209
$
38,847
$
46,452
$
169,301
$
309,661
$ 32,086
$
727,126
Special mention
-
-
-
-
2,099
5,011
16,790
-
23,900
Substandard
-
-
-
-
-
-
-
-
-
Total Agricultural
$
24,877
$
36,693
$
69,209
$
38,847
$
48,551
$
174,312
$
326,451
$ 32,086
$
751,026
Agricultural
Current-period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Residential and home equity
Pass
$
33,036
$
37,378
$
57,760
$
82,936
$
72,304
$
72,360
$
47,669
$
$
403,508
Special mention
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
Total Residential and home equity
$
33,036
$
37,378
$
57,760
$
82,936
$
72,304
$
73,048
$
47,872
$
$
404,399
Residential and home equity
Current-period gross charge-offs
$
-
$
$
-
$
-
$
-
$
-
$
-
$ -
$
Construction
Pass
$
5,774
$
-
$
1,000
$
-
$
-
$
1,375
$
186,754
$ -
$
194,903
Special mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
Total construction
$
5,774
$
-
$
1,000
$
-
$
-
$
1,375
$
186,754
$ -
$
194,903
Construction
Current-period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Total Real estate
$
126,903
$
191,621
$
292,982
$
331,005
$
255,109
$
541,231
$
832,778
$ 131,970
$
2,703,599
Commercial & industrial
Pass
$
23,235
$
39,415
$
20,065
$
16,715
$
3,525
$
6,192
$
363,947
$
24,269
$
497,363
Special mention
-
2,280
-
1,017
2,500
6,248
Substandard
-
-
-
-
Total Commercial & industrial
$
23,235
$
41,802
$
20,132
$
16,751
$
3,525
$
6,573
$
365,386
$ 26,999
$
504,403
Commercial & industrial
Current-period gross charge-offs
$
$
$
-
$
$
$
$
-
$ -
$
Agricultural
Pass
$
2,831
$
2,820
$
2,584
$
1,708
$
$
2,471
$
270,595
$ 6,325
$
289,727
Special mention
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
Total Agricultural
$
2,831
$
2,820
$
2,625
$
1,708
$
$
2,471
$
270,631
$ 6,368
$
289,847
Agricultural
Current-period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$ -
$
-
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4-Loans and Leases-Continued
December 31, 2024
Term Loans Amortized Cost Basis by Origination Year
(Dollars in thousands)
Prior
Revolving
Loans
Amortized
Cost
Revolving
Loans
Converted
to Term
Total
Net loans and leases held for investment
Commercial leases
Pass
$
31,977
$
74,956
$
21,859
$
8,314
$
8,065
$
26,182
$
-
$ -
$
171,353
Special mention
-
-
4,102
-
-
-
-
-
4,102
Substandard
-
-
-
-
-
-
-
-
-
Total Commercial leases
$
31,977
$
74,956
$
25,961
$
8,314
$
8,065
$
26,182
$
-
$
-
$
175,455
Commercial leases
Current-period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$ -
$
-
Consumer and other
Pass
$
1,049
$
1,195
$
$
$
$
1,349
$
$ -
$
4,905
Special mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
Total Consumer and other
$
1,210
$
1,195
$
$
$
$
1,367
$
$
-
$
5,084
Consumer and other
Current-period gross charge-offs
$
$
$
-
$
-
$
-
$
$
-
$ -
$
Total net loans and leases
Pass
$
185,995
$
310,007
$
336,887
$
357,813
$
265,006
$
571,556
$
1,449,550
$ 162,564
$
3,639,378
Special mention
-
2,280
5,348
2,099
5,647
19,277
2,543
37,197
Substandard
-
-
1,813
Total net loans and leases
$
186,156
$
312,394
$
342,235
$
357,849
$
267,105
$
577,824
$
1,469,488
$ 165,337
$
3,678,388
Total current-period gross charge-offs
$
$
$
-
$
$
$
$
-
$ -
$
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4-Loans and Leases-Continued
December 31, 2023
Term Loans Amortized Cost Basis by Origination Year
(Dollars in thousands)
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
-
-
-
2,020
9,715
-
-
12,329
Substandard
-
-
-
-
-
-
-
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
$
$
399,217
Special mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
Total Residential and home equity
$
41,173
$
62,505
$
88,559
$
78,810
$
13,299
$
71,104
$
44,463
$
$
399,982
Residential and home equity
Current-period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
$
-
$ -
$
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
4,903
-
-
4,519
12,458
Substandard
-
-
-
-
-
-
-
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
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$ -
$
-
Agricultural
Pass
$
3,013
$
4,585
$
2,296
$
$
1,026
$
2,116
$
292,391
$ 4,381
$
310,496
Special mention
-
-
-
-
3,109
-
3,236
Substandard
-
-
-
-
-
-
-
Total Agricultural
$
3,013
$
4,637
$
2,371
$
$
1,031
$
2,116
$
295,500
$ 4,381
$
313,737
Agricultural
Current-period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$ -
$
-
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4-Loans and Leases-Continued
December 31, 2023
Term Loans Amortized Cost Basis by Origination Year
(Dollars in thousands)
Prior
Revolving
Loans
Amortized
Cost
Revolving
Loans
Converted
to Term
Total
Net loans and leases held for investment
Commercial leases
Pass
$
81,287
$
31,954
$
10,786
$
9,514
$
4,667
$
28,872
$
-
$ -
$
167,080
Special mention
-
-
-
-
-
-
-
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
$
$
$
$
$
1,400
$
$ -
$
5,036
Special mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
Total Consumer and other
$
1,802
$
$
$
$
$
1,424
$
$ -
$
5,212
Consumer and other
Current-period gross charge-offs
$
$
$
-
$
-
$
-
$
$
-
$ -
$
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
34,240
Substandard
-
-
-
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
$
$
$
-
$
-
$
-
$
$
-
$ -
$
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4-Loans and Leases-Continued
The Company, 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:
December 31,
(Dollars in thousands)
Balance at beginning of the period
$
17,035
$
17,521
New loans or advances during year
1,871
1,706
Repayments
(3,280
)
(2,192
)
Balance at end of period
$
15,626
$
17,035
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 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 the dates indicated:
December 31, 2024
(Dollars in thousands)
Real Estate
Vehicles and Equipment
Total
Collateral dependent loans and leases
Real estate:
Commercial
$
$
-
$
Agricultural
-
-
-
Residential and home equity
-
-
-
Construction
-
-
-
Total Real estate
-
Commercial & industrial
-
Agricultural
-
-
-
Commercial leases
-
-
-
Consumer and other
-
-
-
Total gross loans and leases
$
$
$
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4-Loans and Leases-Continued
December 31, 2023
(Dollars in thousands)
Real Estate
Vehicles and Equipment
Total
Collateral dependent loans and leases
Real estate:
Commercial
$
1,517
$
-
$
1,517
Agricultural
6,118
-
6,118
Residential and home equity
1,607
-
1,607
Construction
-
-
-
Total Real estate
9,242
-
9,242
Commercial & industrial
-
Agricultural
-
Commercial leases
-
-
-
Consumer and other
-
Total gross loans and leases
$
9,242
$
$
9,884
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:
Year Ended December 31,
(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
)
-
7,750
1,600
9,350
Charge-offs
(858
)
-
(858
)
(60
)
-
(60
)
Recoveries
-
-
Net (charge-offs)/recoveries
(682
)
-
(682
)
-
Balance at end of period
$
75,283
$
2,690
$
77,973
$
74,965
$
3,690
$
78,655
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4-Loans and Leases-Continued
Changes in the allowance for credit losses on loans and leases are as follows:
Year Ended December 31, 2024
(Dollars in thousands)
Balance at
beginning of
year
Provision
for/(recapture
of) credit losses
Charge-Offs
Recoveries
Balance at
end of year
Allowance for credit losses:
Real estate:
Commercial
$
26,093
$
(5,711
)
$
-
$
-
$
20,382
Agricultural
7,744
15,871
-
-
23,615
Residential and home equity
7,770
(424
)
(29
)
7,340
Construction
4,432
(1,377
)
-
-
3,055
Total real estate
46,039
8,359
(29
)
54,392
Commercial & industrial
13,380
(4,939
)
(736
)
7,791
Agricultural
8,872
(2,163
)
-
6,725
Commercial leases
6,537
(384
)
-
-
6,153
Consumer and other
(93
)
Total allowance for credit losses
$
74,965
$
1,000
$
(858
)
$
$
75,283
Year Ended December 31, 2023
(Dollars in thousands)
Balance at
beginning of
year
Provision
for/(recapture
of) credit losses
Charge-Offs
Recoveries
Balance at
end of year
Allowance for credit losses:
Real estate:
Commercial
$
18,055
$
7,868
$
-
$
$
26,093
Agricultural
14,496
(6,752
)
-
-
7,744
Residential and home equity
7,508
(14
)
7,770
Construction
3,026
1,406
-
-
4,432
Total real estate
43,085
2,733
(14
)
46,039
Commercial & industrial
11,503
1,804
-
13,380
Agricultural
10,202
(1,381
)
-
8,872
Commercial leases
1,924
4,613
-
-
6,537
Consumer and other
(19
)
(46
)
Total allowance for credit losses
$
66,885
$
7,750
$
(60
)
$
$
74,965
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5-Premises and Equipment
Premises and equipment consisted of the following:
December 31,
(Dollars in thousands)
Premises and equipment:
Buildings and land
$
64,598
$
63,991
Furniture, fixtures, and equipment
20,762
24,236
Leasehold improvements
4,559
3,982
Subtotal
89,919
92,209
Accumulated depreciation and amortization
(38,552
)
(40,302
)
Total premises and equipment
$
51,367
$
51,907
Depreciation and amortization on premises and equipment included in occupancy expense amounted to $2.9 million, $2.5 million, and $2.4 million for the years ended December 31, 2024, 2023 and 2022, respectively. Rental income was $726,000, $749,000, and $640,000 for the years ended December 31, 2024, 2023, and 2022, respectively, and was recorded in other income.
Note 6-Other Real Estate Owned
The Company reported $873,000 in other real estate owned at December 31, 2024 and 2023, which includes property no longer utilized for business operations and property acquired through foreclosure proceedings. These properties are carried at fair value less selling costs determined at the date acquired. Losses, if any, arising from properties acquired through foreclosure are charged against the allowance for loan losses at the time of foreclosure. Subsequent declines in value, periodic holding costs, and net gains or losses on disposition are included in other operating expense as incurred.
Note 7-Deposits
Certificates of deposit greater than and less than or equal to the FDIC insurance limit of $250,000 are summarized as follows:
December 31,
(Dollars in thousands)
Certificates of deposit:
Certificates of deposit less than or equal to $250,000
$ 330,475
$ 325,798
Certificates of deposit greater than $250,000
385,072
318,830
Total certificates of deposit
$
715,547
$
644,628
Scheduled maturities for certificates of deposit are as follows for the years ending December 31:
(Dollars in thousands)
Amount
$
696,279
16,074
2,055
Total certificates of deposit
$
715,547
Overdrawn deposit balances of $156,000 and $149,000 were classified as consumer loans at December 31, 2024 and 2023, respectively.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8-Short-term borrowings
As of December 31, 2024 and 2023, committed lines of credit arrangements totaling $2.1 billion and $2.2 billion, respectively, were available to the Company from the FHLB, FRB, and unaffiliated banks.
The Company is a member of the FHLB of San Francisco and has a committed credit line of $803.2 million, which is secured by $1.0 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 4.59% as of December 31, 2024.
The Company has $1.4 billion in pledged loans with the FRB. As of December 31, 2024, the Company’s overnight borrowing capacity using the primary credit facilities from the Fed account was $1.1 billion. The borrowing rate was 4.50% as of December 31, 2024.
There were no outstanding advances on the above borrowing facilities or from unaffiliated banks as of December 31, 2024 and 2023.
Note 9-Long-term Subordinated Debentures
In 2003, the Company formed a wholly-owned Connecticut statutory business trust, FMCB Statutory Trust I (“Statutory Trust I”), which issued $10.0 million of guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures (the “Trust Preferred Securities”). The Company is not considered the primary beneficiary of the trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. These debentures qualify as Tier 1 capital under current regulatory guidelines. All of the common securities of Statutory Trust I are owned by the Company. The proceeds from the issuance of the common securities and the Trust Preferred Securities were used by FMCB Statutory Trust to purchase $10.3 million of junior subordinated debentures of the Company, which carry a variable rate based on 3-month SOFR plus 2.85%. As of December 31, 2024, the interest rate on the junior subordinated debentures was 7.35% and the next reset date is March 17, 2025. The debentures represent the sole asset of Statutory Trust I. The Trust Preferred Securities accrue and pay distributions at a variable rate based on 3-month SOFR plus 2.85% per annum of the stated liquidation value of $1,000 per capital security. The Company has entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment to the extent that Statutory Trust I has funds available therefor of: (i) accrued and unpaid distributions required to be paid on the Trust Preferred Securities; (ii) the redemption price with respect to any Trust Preferred Securities called for redemption by Statutory Trust I; and (iii) payments due upon a voluntary or involuntary dissolution, winding up, or liquidation of Statutory Trust I.
The Trust Preferred Securities are mandatorily redeemable upon maturity of the subordinated debentures on December 17, 2033, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the subordinated debentures purchased by Statutory Trust I, in whole or in part, on or after December 17, 2008. As specified in the indenture, if the subordinated debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited, by the terms of the debentures, from paying cash dividends on the Company’s common stock.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10-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. Effective November 29, 2024 each component of the ERP was terminated and frozen and no future contributions are permitted to be made. For each existing participant, the account balances will be liquidated and paid out to each participant at a time to be determined, but which will occur sometime between the 12-month anniversary and the 24-month anniversary of the termination of the plans pursuant to regulations promulgated by the Department of the Treasury.
The Company incurred a net expense of $9.0 million to the ERP during the year ended December 31, 2024, $9.1 million during the year ended December 31, 2023 and $7.4 million during the year ended December 31, 2022. The Company’s carrying value of the liability under the ERP was $61.4 million as of December 31, 2024 and $57.5 million as of December 31, 2023, which is included in interest payable and 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 December 31, 2024 and 2023 totaled 48,877 and 49,276 with an historical cost basis of $31.8 million and $31.6 million, respectively. All amounts have been fully funded into the Rabbi Trust as of December 31, 2024 and 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 $2.7 million in 2024 compared to net gains of $2.6 million in 2023 and $0.1 million in 2022. 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.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10-Employee Benefit Plans-Continued
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 non-qualified 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. Effective November 29, 2024 the SMRP was terminated and frozen and no future contributions are permitted to be made. For each existing participant, the account balances will be liquidated and paid out to each participant at a time to be determined, but which will occur sometime between the 12-month anniversary and the 24-month anniversary of the termination of the plan pursuant to regulations promulgated by the Department of the Treasury.
The Company incurred a net expense of $4.0 million to the SMRP during the year ended December 31, 2024, $4.1 million during the year ended December 31, 2023 and $3.0 million during the year ended December 31, 2022. The Company’s carrying value of the liability under the SMRP was $21.2 million as of December 31, 2024 and $16.9 million as of December 31, 2023, which is included in interest payable and other liabilities on the balance sheet. The Company’s shares of stock held as investments in the Rabbi Trust of the SMRP as of December 31, 2024 and December 31, 2023 totaled 19,647 and 17,806 shares with an historical cost basis of $14.6 million and $12.8 million, respectively. All amounts have been fully funded into the Rabbi Trust as of December 31, 2024 and 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 in 2024, $0.4 million in 2023 and $0.4 million in 2022. 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.
Stock-Based Compensation
At the special meeting of shareholders held on November 25, 2024, the Company’s shareholders approved the Farmers & Merchants Bancorp 2025 Restricted Stock Retirement Plan (the “2025 Plan”). The 2025 Plan permits stock-based compensation awards to employees, officers and directors of the Company and its subsidiaries and affiliates. The 2025 Plan authorized awards up to 80,000 shares. No shares have been issued under the 2025 Plan as of December 31, 2024.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10-Employee Benefit Plans-Continued
Profit Sharing Plan
The Company, through the Bank, sponsors a Profit Sharing Plan for substantially all full-time employees of the Company with one or more years of service. Participants receive up to two annual employer contributions, one is discretionary and the other is mandatory. The discretionary contributions to the Profit Sharing Plan are determined annually by the Board of Directors. The discretionary contributions totaled $1.8 million, $1.9 million, and $1.8 million for the years ended December 31, 2024, 2023, and 2022, respectively. The mandatory contributions to the Profit Sharing Plan are made according to a predetermined set of criteria. Mandatory contributions totaled $2.0 million, $2.0 million, and $1.6 million for the years ended December 31, 2024, 2023, and 2022, respectively. Company employees are permitted, within limitations imposed by tax law, to make pretax contributions and after tax (Roth) contributions to the 401(k) feature of the Profit Sharing Plan. The Company does not match employee contributions within the 401(k) feature of the Profit Sharing Plan and the Company can terminate the Profit Sharing Plan at any time. Benefits pursuant to the Profit Sharing Plan vest 0% during the first year of participation, 25% per full year thereafter and after five years such benefits are fully vested.
Bank-Owned Life Insurance
The Company has purchased single premium life insurance policies on the lives of certain key employees of the Company. These policies provide: (1) financial protection to the Company in the event of the death of a key employee; and (2) significant income to the Company to offset the expense associated with the ERP and other employee benefit plans, since the interest earned on the cash surrender value of the policies is tax exempt as long as the policies are used to finance employee benefits. As compensation to each employee for agreeing to allow the Company to purchase an insurance policy on his or her life, split dollar agreements have been entered into with those employees. These agreements provide for a division of the life insurance death proceeds between the Company and each employee’s designated beneficiary or beneficiaries.
The Company earned tax-exempt interest on the life insurance policies of $2.4 million, $2.0 million, and $2.2 million for the three years ended December 31, 2024, 2023, and 2022, respectively. As of December 31, 2024 and 2023, the total cash surrender value of the insurance policies was $74.1 million and $74.9 million, respectively.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11-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 judgments regarding future expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties, and cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.
Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.
Securities classified as available-for-sale are reported at fair value on a recurring basis utilizing Level 1, 2 and 3 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11-Fair Value-Continued
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 specific reserves 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.
The following tables present 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.
December 31, 2024
Fair Value Measurements
(Dollars in thousands)
Carrying Amount
Level 1
Level 2
Level 3
Total Fair
Value
Fair valued on a recurring basis:
Available-for-sale securities
U.S. Government-sponsored securities
$
2,644
$
-
$
2,644
$
-
$
2,644
Mortgage-backed securities
439,858
-
439,858
-
439,858
Commercial mortgage-backed securities
1,212
-
1,212
-
1,212
Collateralized mortgage obligations
5,497
-
5,497
-
5,497
Corporate securities
14,856
-
14,856
-
14,856
Other
-
-
Fair valued on a non-recurring basis:
Collateral dependent loans
$
$ -
$ -
$
$
Other real estate owned
-
-
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11-Fair Value-Continued
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
161,681
-
161,681
-
161,681
Commercial mortgage-backed securities
2,157
-
2,157
-
2,157
Collateralized mortgage obligations
-
-
Corporate securities
14,605
-
14,605
-
14,605
Other
-
-
Fair valued on a non-recurring basis:
Collateral dependent loans
$
9,884
$
-
$
-
$
9,884
$
9,884
Other real estate owned
-
-
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 specific reserves 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.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11-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.
December 31, 2024
Fair Value Measurements
(Dollars in thousands)
Carrying Amount
Level 1
Level 2
Level 3
Total Fair Value
Financial Assets:
Cash and cash equivalents
$
212,563
$
212,563
$
-
$
-
$
212,563
Held-to-maturity securities, net
768,993
-
537,384
73,569
610,953
Non-marketable securities, at cost
15,549
-
15,549
-
15,549
Loans and leases, net
3,603,105
-
-
3,523,057
3,523,057
Financial Liabilities:
Total deposits
$
4,699,139
$
-
$
4,695,388
$
-
$
4,695,388
Subordinated debentures
10,310
-
11,738
-
11,738
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, net
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 stock and TIB, National Association 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.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12-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.
December 31,
(Dollars in thousands)
Commitments to extend credit, including unsecured commitments of $20,535 and $19,858 as of December 31, 2024 and 2023, respectively
$
1,006,649
$
1,150,142
Stand-by letters of credit, including unsecured commitments of $4,490 and $7,010 as of December 31, 2024 and 2023, respectively
15,411
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 and $3.7 million for the years ended December 31, 2024 and 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. Outstanding standby letters of credit have maturity dates ranging from 1 to 48 months with a final expiration in some cases up to 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. The Company invests in LIHTC partnerships and solar tax funds that are designed to generate a return primarily through the realization of federal tax credits. The Company accounts for these investments by amortizing the cost of tax credit investments over the life of the investment using a proportional amortization method and tax credit investment amortization expense is a component of the provision for income taxes. At December 31, 2024 and 2023, the balance of the investments in LIHTC was $43.8 million and $36.5 million, respectively. These balances are reflected in the other assets line on the consolidated balance sheets. Total unfunded commitments related to the investments in LIHTC totaled $18.9 million and $15.5 million at December 31, 2024 and 2023, respectively. These balances are reflected in the interest payable and other liabilities line on the consolidated balance sheets. The Company expects to fulfill these commitments through 2039. Additionally, during the years ended December 31, 2024 and 2023, the Company recognized tax credits from its investments in LIHTC of $4.4 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.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13-Leases
Lessee - Operating Leases
Operating leases in which we are the lessee are recorded as operating lease right-of-use (“ROU”) assets and operating lease liabilities, included in other assets and other liabilities, respectively, on our consolidated balance sheets. We do not currently have any significant finance leases in which we are the lessee.
Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded net in occupancy expense in the consolidated statements of income.
Our leases relate primarily to office space and bank branches with remaining lease terms of generally nine months to 7 years. Certain lease arrangements contain extension options that typically range from 5 to 10 years at the then fair market rental rates. ASC 842 requires lessees to evaluate whether option periods, if available, will be exercised in order to determine the full life of the lease. The Company used the first option period, unless it is a relatively new lease that has a long initial lease term or other extenuating circumstances.
As of December 31, 2024, operating lease ROU assets and liabilities were $2.2 million and $2.3 million, respectively. As of December 31, 2023, operating lease ROU assets and liabilities were $2.7 million and $2.8 million, respectively. Operating lease expenses totaled $758,000, $737,000 and $730,000 for the years ended December 31, 2024, 2023 and 2022, respectively.
The table below summarizes the information related to our operating leases:
Year Ended December 31,
(in thousands except for percent and period data)
Cash Paid for Amounts Included in the Measurement of Lease Liabilities
Operating Cash Flow from Operating Leases
$
$
Weighted-Average Remaining Lease Term - Operating Leases, in Years
3.56
4.62
Weighted-Average Discount Rate - Operating Leases
2.7
%
2.6
%
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13-Leases-Continued
The table below summarizes the maturity of remaining lease liability:
(Dollars in thousands)
Amount
$
Total lease payments
2,456
Discount
(182
)
Net present value of lease liabilities
$
2,274
As of December 31, 2024, we have no additional operating leases for office space that have not yet commenced or that are anticipated to commence during the first quarter of 2025.
Lessor - Direct Financing Leases
The Company is the lessor in direct finance lease arrangements. Leases are recorded at the principal balance outstanding, net of unearned income and charge-offs. Interest income is recognized using the interest method. Leases typically have a maturity of three to ten years, and fixed rates that are most often tied to Treasury indices with an appropriate spread based on the amount of perceived risk. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed with qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.
Lease payments due to the Company are typically fixed and paid in equal installments over the lease term. Variable lease payments that do not depend on an index or a rate (e.g., property taxes) that are paid directly by the Company are minimal. The majority of property taxes are paid directly by the client to third-parties and are not considered part of variable payments and therefore are not recorded by the Company.
As a lessor, the Company leases certain types of agriculture equipment, solar equipment, construction equipment and other equipment to its customers. The Company’s net investment in direct financing leases, included in the line item “Loans and leases held for investment, net of unearned income” on the balance sheet, was $175.5 million at December 31, 2024 and $167.1 million at December 31, 2023.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14-Income Taxes
The components of income tax expense (benefit) are as follows:
Year Ended December 31,
(Dollars in thousands)
Income tax expense (benefit)
Current:
Federal
$
14,196
$
23,025
$
10,638
State
8,574
10,817
9,683
Total current income tax expense
22,770
33,842
20,321
Deferred:
Federal
7,284
(6,546
)
3,744
State
3,733
Total deferred income tax expense (benefit)
11,017
(5,603
)
4,330
Total provision for income tax expense
$
33,787
$
28,239
$
24,651
The combined federal and state income tax expense differs from that computed at the federal statutory corporate tax rate as follows:
Year Ended December 31,
(Dollars in thousands)
Amount
Rate
Amount
Rate
Amount
Rate
Effective income tax rate
Federal statutory rate
$
25,671
21.00
%
$
24,476
21.00
%
$
20,946
21.00
%
State taxes, net of federal income tax benefit
9,730
7.96
%
9,290
7.97
%
8,112
8.13
%
Low-income housing tax credits
(608
)
(0.50
%)
(3,528
)
(3.03
%)
(3,031
)
(3.04
%)
Compensation expense
(137 )
(0.11 %)
(267 )
(0.23 %)
(578 )
(0.58 %)
Bank-owned life insurance
(521
)
(0.43
%)
(1,338
)
(1.15
%)
(494
)
(0.49
%)
Tax-exempt interest income
(512
)
(0.42
%)
(470
)
(0.40
%)
(326
)
(0.32
%)
Other, net
0.14
%
0.07
%
0.02
%
Total income tax expense and effective tax rate
$
33,787
27.64
%
$
28,239
24.23
%
$
24,651
24.72
%
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14-Income Taxes-Continued
The components of net deferred tax assets and liabilities at the periods shown are summarized as follows:
December 31,
(Dollars in thousands)
Deferred tax assets:
Allowance for credit losses
$
23,185
$
23,386
Deferred compensation
23,849
21,562
Unrealized losses on debt securities
8,250
5,377
Accrued liabilities
3,685
3,986
Tax credit carry forward
2,402
2,911
State income taxes
1,793
2,271
Lease liabilities
Acquired net operating losses
Low-income housing tax investments
-
Acquired loans fair valuation
Acquired OREO fair valuation
Other
-
Total deferred tax assets
64,520
61,483
Deferred tax liabilities:
Commercial leasing
$
(25,704
)
$
(16,017
)
Premises and equipment
(2,034
)
(1,740
)
Deferred loan and lease costs
(936 )
(1,000 )
Right of use leasing asset
(659
)
(802
)
Core deposit intangible asset
(499
)
(661
)
Accretion on investment securities
(1,200
)
(659
)
FHLB dividends
(348
)
(348
)
Investments
(225 )
(225 )
Prepaid assets
(17
)
(52
)
Total deferred tax liabilities
(31,622
)
(21,504
)
Net deferred tax assets
$
32,898
$
39,979
The Company believes, based on available information, that more likely than not, the net deferred tax asset will be realized in the normal course of operations. Accordingly, no valuation allowance has been recorded at December 31, 2024 and 2023. The decrease in net deferred tax assets of $7.0 million was primarily due to sale of investment tax credits related to commercial leasing activities of $7.4 million.
The impact of a tax position is recognized in the financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. As of December 31, 2024 and 2023, the Company did not have any significant uncertain tax positions. The Company includes any interest and penalties associated with unrecognized tax benefits within the provision for income taxes. The Company does not expect a material change to the total amount of unrecognized tax benefits in the next twelve months.
The Company files U.S. and state income tax returns in jurisdictions with various statutes of limitations. The 2020 through 2024 tax years remain subject to selection for examination as of December 31, 2024. As of December 31, 2024 and 2023, the Company had net operating loss carryovers of $1.6 million and $1.7 million, respectively. The Company had $2.4 million and $2.9 million in tax credit carry-forwards as of December 31, 2024 and December 31, 2023, respectively.
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note
15-Condensed Financial Statements of Parent Company
Financial information pertaining only to Farmers and Merchants Bancorp, on a parent-only basis, is as follows:
December 31,
(Dollars in thousands)
Balance Sheets
Assets
Cash and cash equivalents
$
$
Investment in subsidiaries
584,851
561,521
Other assets
Total assets
$
585,299
$
561,698
Liabilities and shareholders’ equity
Subordinated debentures
$
10,310
$
10,310
Other liabilities
1,917
1,633
Shareholders’ equity
573,072
549,755
Total liabilities and shareholders’ equity
$
585,299
$
561,698
Year Ended December 31,
(Dollars in thousands)
Statements of Income
Dividend and other income from subsidiaries
$
60,900
$
33,300
$
34,700
Interest and dividends
Total income
60,926
33,325
34,714
Reimbursement of expenses from subsidiaries
Other expenses
2,994
2,321
2,388
Total expense
3,740
3,026
3,102
Income before income taxes
57,186
30,299
31,612
Income tax benefit
1,078
58,264
31,186
32,525
Equity in undistributed net income of subsidiaries
30,193
57,128
42,565
Net income
$
88,457
$
88,314
$
75,090
FARMERS & MERCHANTS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15-Condensed Financial Statements of Parent Company-Continued
Year Ended December 31,
(Dollars in thousands)
Statements of Cash Flows
Cash flows from operating activities:
Net income
$ 88,457
$ 88,314
$ 75,090
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of the Bank
(30,193 )
(57,128 )
(42,565 )
Change in other assets and liabilities
Net cash provided by operating activities
58,433
31,789
32,722
Cash flows from investing activities:
Securities sold or matured
-
-
Net cash used in investing activities
-
-
Cash flows from financing activities:
Common stock repurchases
(45,261 )
(20,355 )
(20,310 )
Cash dividends paid
(13,017 )
(12,886 )
(12,489 )
Net used in financing activities
(58,278 )
(33,241 )
(32,799 )
Net change in cash and cash equivalents
(1,452 )
Cash and cash equivalents, beginning of year
1,582
1,535
Cash and cash equivalents, end of year
$
$
$ 1,582
Note 16-Subsequent Events
In accordance with ASC Topic 855, “Subsequent Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, the Company has evaluated all events or transactions that occurred after December 31, 2024 up through the date the Company issued the financial statements. During this period, there were no subsequent events that required recognition or disclosure.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A.
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 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.
REPORT OF MANAGEMENT
To the Board of Directors and Shareholders of Farmers & Merchants Bancorp
The management of Farmers & Merchants Bancorp (the “Company”) is responsible for the preparation, integrity, and fair presentation of its published financial statements and all other information presented in this annual report. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, as such, include amounts based on informed judgments and estimates made by management. In the opinion of management, the financial statements and other information herein present fairly the financial condition and operations of the Company at the dates indicated in conformity with accounting principles generally accepted in the United States of America.
Management is responsible for establishing and maintaining an effective system of internal control over financial reporting. The internal control system is augmented by written policies and procedures and by audits performed by an internal audit staff (assisted in certain instances by outside third party audit resources other than the independent registered public accounting firm), which reports to the Audit & Risk Committee of the Board of Directors. Internal auditors monitor the operation of the internal and external control system and report findings to management and the Audit & Risk Committee. When appropriate, corrective actions are taken to address identified control deficiencies and other opportunities for improving the system. The Audit & Risk Committee provides oversight to the financial reporting process. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time.
The Audit & Risk Committee of the Board of Directors is comprised entirely of outside directors who are independent of the Company’s management. The Audit & Risk Committee is responsible for the selection of the independent registered public accounting firm. It meets periodically with management, the independent auditors and the internal auditors to ensure that they are carrying out their responsibilities.
The Audit & Risk Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting, and auditing procedures of the Company in addition to reviewing the Company’s financial reports. The independent auditors and the internal auditors have full and free access to the Audit & Risk Committee, with or without the presence of management, to discuss the adequacy of the internal control structure for financial reporting and any other matters, which they believe should be brought to the attention of the Committee.
/s/ Kent A. Steinwert
/s/ Bart R. Olson
Kent A. Steinwert
Bart R. Olson
Chairman, President, and Chief Executive Officer
Executive Vice President and Chief Financial Officer
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Farmers & Merchants Bancorp management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed by, or under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer and effected by management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s internal control over financial reporting includes those policies and procedures that:
(1)
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(2)
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(3)
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
There are inherent limitations in any internal control, no matter how well designed and misstatements due to error or fraud may occur and not be detected, including the possibility of circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time.
Management assessed the effectiveness of the internal control structure over financial reporting as of December 31, 2024. This assessment was based on criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management believes that the Company’s internal control over financial reporting is effective as of December 31, 2024.
The Company’s independent registered public accounting firm has audited the consolidated financial statements for the year ended December 31, 2024, has issued an audit report on the Company’s internal control over financial reporting. Such audit report expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board as of December 31, 2024 that appears on page 74.
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 year ended December 31, 2024, to which this report relates that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B.
Other Information
During the quarter ended December 31, 2024, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted, modified, or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement” as each term is defined in Item 408(a) of Regulation S-K.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10.
Directors, Executive Officers and Corporate Governance
Information regarding “Directors and Executive Officers” is set forth under the headings “Annual Meeting Business Matters - Proposal No. 1 - Election of Directors” and “Executive Compensation - Compensation Discussion and Analysis - Executive Officers Who Are Not Directors” of the Company’s 2025 Annual Meeting Proxy Statement (“Proxy Statement”) and is incorporated herein by reference.
Information regarding “Delinquent Section 16(a) Reports” is set forth under the section “Other Matters - Delinquent Section 16(a) Reports” of the Company’s Proxy Statement and is incorporated herein by reference.
The information required by Item 10 regarding our insider trading policies is incorporated by reference from the information under the caption “Corporate Governance - Code of Ethics and Insider Trading Policy” in our Proxy Statement. A copy of our insider trading policy is filed as Exhibit 19 to this Form 10-K.
Information regarding the Company’s corporate governance and board committees is set forth under the heading “Corporate Governance - Board of Directors Meetings” and “- Committees of the Board” in the Company’s Proxy Statement and is incorporated herein by reference.
Consistent with the requirements of the Sarbanes-Oxley Act, the Company has a Code of Conduct applicable to senior financial officers including the principal executive officer, principal financial officer and principal accounting officer. The Company will provide, without charge, a copy of the Code of Conduct to any stockholder by mail. Requests should be sent to the Company’s address, Attention: Shareholders Relations. The Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to and waivers of the Code of Conduct by posting such information on its website, at www.fmbonline.com.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11.
Executive Compensation
Information regarding “Executive Compensation” is set forth under the headings “Director Compensation” and “Executive Compensation” of the Company’s Proxy Statement and is incorporated herein by reference.
Information regarding “Compensation Committee Interlocks and Insider Participation” is set forth under such heading under “Executive Compensation” in the Company’s Proxy Statement and is incorporated herein by reference.
Information regarding the “Compensation Committee Report” is set forth under the heading “Report of the Personnel Committee of the Board of Directors on Executive Compensation” under “Executive Compensation” in the Company’s Proxy Statement and is incorporated herein by reference.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding “Security Ownership of Certain Beneficial Owners and Management” is set forth under such heading of the Company’s Proxy Statement and is incorporated herein by reference.
Information regarding “Equity Compensation Plan Information” is set forth under the heading “Executive Compensation - Compensation Discussion and Analysis - Qualified and Non-Qualified Retirement Programs” of the Company’s Proxy Statement and is incorporated herein by reference.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Information regarding “Certain Relationships and Related Transactions, and Director Independence” is set forth under the heading “Corporate Governance - Certain Relationships and Related Person Transactions” and “ - Director Independence” of the Company’s Proxy Statement and is incorporated herein by reference.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14.
Principal Accountant Fees and Services
Information regarding “Principal Accountant Fees and Services” is set forth under the heading “Fees and Services of Independent Registered Public Accounting Firm” of the Company’s Proxy Statement and is incorporated herein by reference.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15.
Exhibits and Financial Statement Schedules
List of Financial Statements and Financial Statement Schedules
(a)
The following documents are filed as a part of this Form 10-K:
(1)
Financial Statements and
(2)
Financial Statement schedules required to be filed by Item 8 of this Form 10-K.
(3)
The following exhibits are required by Item 601 of Regulation S-K and are included as part of this Form 10-K:
Exhibit
Number
Description
3.1
Amended and Restated Certificate of Incorporation filed on Registrant’s Form 10-K for the year ended December 31, 2022, and incorporated herein by reference.
3.2
Amended By-Laws, as amended February 11, 2025, filed as Exhibit 3.1 to the Registrant’s Form 8-K filed on February 13, 2025, and incorporated herein by reference.
3.3
Certificate of Designation for the Series A Junior Participating Preferred Stock (included as Exhibit A to the Rights Agreement between Farmers & Merchants Bancorp and Registrar and Transfer Company, dated as of August 5, 2008, filed as Exhibit 4.1 below), filed on the Registrant’s Form 10-Q for the quarter ended June 30, 2008, is incorporated herein by reference.
4.1
Amended and Restated Rights Agreement, dated as of April 5, 2024, between the Company and Computershare Trust, N.A., a federally chartered, limited purpose trust company (as successor to Registrar and Transfer Company), as Rights Agent, incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K filed on April 5, 2024.
4.2
Description of F&M Bancorp Capital Stock, filed on Registrant’s Form 10-K for the year ended December 31, 2019.
10.1
Amended and Restated Employment Agreement effective April 1, 2024, between Farmers & Merchants Bank of Central California and Kent A. Steinwert, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024, is incorporated herein by reference.**
10.2
Amended and Restated Employment Agreement effective April 1, 2024, between Farmers & Merchants Bank of Central California and Bart R. Olson, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024, is incorporated herein by reference. **
10.3
Amended and Restated Employment Agreement effective April 1, 2024, between Farmers & Merchants Bank of Central California and Ryan J. Misasi, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024, is incorporated herein by reference. **
10.4
Amended and Restated Employment Agreement effective April 1, 2024, between Farmers & Merchants Bank of Central California and David M. Zitterow, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024, is incorporated herein by reference. **
10.5
Amended and Restated Employment Agreement effective April 1, 2024, between Farmers & Merchants Bank of Central California and John W. Weubbe, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024, is incorporated herein by reference. **
10.6
Employment Agreement effective April 22, 2024, between Farmers & Merchants Bank of Central California and Thomas Bennett, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024, is incorporated herein by reference. **
10.7
Employment Agreement effective December 9, 2024, between Farmers & Merchants Bank of Central California and Troy D. Harper.* **
10.8
Executive Retirement Plan - Performance Component as amended on November 5, 2010, filed on Registrant’s Form 10-Q for the period ended September 30, 2010, is incorporated herein by reference. **
10.9
Executive Retirement Plan - Retention Component as amended on November 5, 2010, filed on Registrant’s Form 10-Q for the period ended September 30, 2010, is incorporated herein by reference. **
10.10
Executive Retirement Plan - Salary Component, amended and restated on November 29, 2014, filed on Registrant’s Form 10-K for the year ended December 31, 2014, is incorporated herein by reference. **
10.11
Executive Retirement Plan - Equity Component, amended and restated on November 29, 2014, filed on Registrant’s Form 10-K for the year ended December 31, 2014, is incorporated herein by reference. **
10.12
Senior Management Retention Plan, amended and restated on November 29, 2014, filed on Registrant’s Form 10-K for the year ended December 31, 2014, is incorporated herein by reference. **
10.13
Farmers & Merchants Bancorp 2025 Restricted Stock Retirement Plan, filed on Registrant’s Form 8-K filed on December 2, 2024, is incorporated herein by reference. **
10.14
Farmers & Merchants Bancorp 2025 Restricted Stock Award Agreement, filed on Registrant’s Form 8-K filed on January 16, 2025, is incorporated herein by reference. **
Insider Trading Policy*
Subsidiaries of the Registrant, filed on Registrant’s Form 10-K for the year ended December 31, 2003, is incorporated herein by reference.
23.1
Consent of Independent Registered Public Accounting Firm (Crowe LLP)*
23.2
Consent of Independent Registered Public Accounting Firm (Eide Bailly LLP)*
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.*
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.
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
*Filed herewith
** Management contract or compensatory plan or arrangement