FARMERS & MERCHANTS BANCORP The following discussion is intended to provide a more comprehensive review of the Company's operating results and financial condition than can be obtained from reading the Unaudited Consolidated Financial Statements alone. The discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto included in "Part I. Item 1. Financial Statements."
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q may contain certain forward-looking statements within the meaning of Section 27A the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements reflect the Company's current views and are not historical facts. These statements can generally be identified by use of phrases such as "believe," "expect," "will," "seek," "should," "anticipate," "estimate," "intend," "plan," "target," "project," "commit" or other words of similar import. Similarly, statements that describe the Company's future financial condition, results of operations, objectives, strategies, plans, goals or future performance and business are also forward-looking statements. Statements that project future financial conditions, results of operations, and shareholder value are not guarantees of performance and many of the factors that will determine these results and values are beyond the Company's ability to control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections in this report and the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 ("Form 10-K"), and other parts of this report that could cause actual results to differ materially from those anticipated in these forward-looking statements. The following is a non-exclusive list of factors which could cause actual results to differ materially from forward-looking statements in this Quarterly Report on Form 10-Q:
? the pendency, duration, and impact of the COVID-19 pandemic;
? changes in general economic conditions, either nationally, in
our local markets;
? inflation, changes in interest rates, securities market volatility and monetary
fluctuations;
? increases in competitive pressures among financial institutions and businesses
offering similar products and services;
? higher defaults in our loan portfolio than we expect;
? changes in management's estimate of the adequacy of the allowance for credit
losses;
? risks associated with our growth and expansion strategy and related costs;
? increased lending risks associated with our high concentration of real estate
loans;
? legislative or regulatory changes or changes in accounting principles, policies
or guidelines; ? technological changes; and
? regulatory or judicial proceedings.
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed.
Please take into account that forward-looking statements speak only as of the
date of this Form 10-Q. The Company does not undertake any obligation to release
publicly revisions to such forward-looking statements to reflect events or
circumstances after the date of this Form 10-Q, except as required by law.
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Overview
Farmers & Merchants Bancorp is aDelaware registered bank holding company organized in 1999. As a registered bank holding company, FMCB is subject to regulation, supervision, and examination by theBoard of Governors of theFederal Reserve System ("FRB") and by theCalifornia 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. The Company's outstanding common stock as ofJune 30, 2022 , consisted of 777,190 shares of common stock,$0.01 par value and no shares of preferred stock were issued or outstanding. The common stock ofFarmers & Merchants Bancorp is not widely held or listed on any exchange. However, trades are reported on the OTCQX under the symbol "FMCB."F & M Bancorp, Inc. was created inMarch 2002 to protect the name "F & M Bank." During 2002, the Company completed a fictitious name filing inCalifornia 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 primary source of funding for our asset growth has been the generation of core deposits, which we raise through our existing branch locations, newly opened branch locations, or through acquisitions. Our recent loan growth is primarily the result of organic growth generated by our seasoned relationship managers and supporting associates who provide outstanding service and responsiveness to our clients or through acquisitions. Our results of operations are largely dependent on net interest income. Net interest income is the difference between interest income we earn on interest earning assets, which are comprised of loans, investment securities and short-term investments, and the interest we pay on our interest bearing liabilities, which are primarily deposits, and, to a lesser extent, other borrowings. Management strives to match the re-pricing characteristics of the interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve. We measure our performance by calculating our net interest margin, return on average assets, and return on average equity. 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 our largest source of revenue. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to affect net interest income. We also measure our performance by our efficiency ratio, which is calculated by dividing non-interest expense by the sum of net interest income and non-interest income.
Summary of Critical Accounting Policies and Estimates
In the opinion of management, the accompanying Consolidated Statements of
Financial Condition and related Consolidated Statements of Income, Comprehensive
Income, Changes in Shareholders' Equity and Cash Flows reflect all adjustments
(which include reclassification and normal recurring adjustments) that are
necessary for a fair presentation in conformity with GAAP. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect amounts reported in the financial
statements.
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Various elements of our accounting policies, by their nature, are inherently
subject to estimation techniques, valuation assumptions and other subjective
assessments. In particular, management has identified certain accounting
policies that, due to the judgments, estimates and assumptions inherent in those
policies, are critical to an understanding of our financial statements.
Management believes the judgments, estimates and assumptions used in the
preparation of the financial statements are appropriate based on the factual
circumstances at the time. However, given the sensitivity of the financial
statements to these critical accounting policies, the use of other judgments,
estimates and assumptions could result in material differences in our results of
operations or financial condition. Further, subsequent changes in economic or
market conditions could have a material impact on these estimates and our
financial condition and operating results in future periods. For additional
information concerning critical accounting policies, see the Selected Notes to
the Consolidated Financial Statements and the following:
Use of Estimates - The preparation of our financial statements requires
management to make estimates and judgments that affect the reported amount of
assets, liabilities, revenues and expenses. On an ongoing basis, management
evaluates the estimates used. Estimates are based upon historical experience,
current economic conditions and other factors that management considers
reasonable under the circumstances and the actual results may differ from these
estimates under different assumptions. The allowance for credit losses, deferred
income taxes, and fair values of financial instruments are estimates, which are
particularly subject to change.
Allowance for Credit Losses - Loans - The methodology for determining the
allowance for credit losses ("ACL") on loans is considered a critical accounting
policy by Management because of the high degree of judgment involved. The
subjectivity of the assumptions used and the potential for changes in the
economic environment could result in changes to the amount of the recorded ACL.
Among the material estimates required to establish the ACL are: (i) a reasonable
and supportable forecast; (ii) a reasonable and supportable forecast period and
the reversion period; (iii) value of collateral; strength of guarantors; (iv)
the amount and timing of future cash flows for loans individually evaluated; and
(v) the determination of the qualitative loss factors. All of these estimates
are susceptible to significant change.
The Company has established systematic methodologies for the determination of
the adequacy of the ACL. The methodologies are set forth in a formal policy and
take 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 risk characteristics.
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 loss
reserves. 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
reasonable and supportable forecasts. Historical credit loss experience, either
internal or 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 reasonable
and supportable forecasts to differ from the conditions that existed for the
period over which historical information was evaluated. The ACL is maintained at
a level sufficient to provide for expected credit losses over the life of the
loan based on evaluating historical credit loss experience and making
adjustments to historical loss information for differences in the specific risk
characteristics in the current loan portfolio. These factors include, among
others, changes in the size and composition of the loan portfolio, differences
in underwriting standards, delinquency rates, actual loss experience and current
economic conditions.
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OnJanuary 1, 2022 , the Company adopted theFinancial Accounting Standards Board ("FASB") Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology that delays recognition until it is probable a loss has been incurred with an expected loss methodology that is referred to as CECL. Both theFinancial Accounting Standards Board ("FASB Staff Q&A Topic 326, No. 1") and the federal financial institution regulatory agencies ("Financial Institution Letter FIL-17-2019"), along with theSecurities 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") method was most appropriate given the Company's current size and complexity. Management will incorporate reasonable and supportable information in order to calculate CECL reserves.This includes the ability to reliably forecast and document exogenous events that may affect the credit performance of the Company's loan portfolio. Management is confident with its ability to effectively identify historical loss information by the appropriate portfolio segmentation. In addition, Management believes that it can reasonably obtain historical loss information by its respective peers to further improve historical loss information. Additionally, the Company believes that it can effectively evaluate the potential impact that both macro and micro-economic conditions can have on its loan portfolio. Management is also comfortable that it can rely on weighted average maturity calculations, including estimated prepayments with its existing third party Asset/Liability Management ("ALM") applications. Management determined that the most effective approach to segment its portfolio and to extract the relevant information it needed to calculate its CECL reserves was to utilize the seventeen loan segments used in preparing regulatory Call Reports. This allows Management the ability to obtain historical loss information for itself as well as its peer group. Additionally, Management's ALM application also utilizes a similar loan segmentation in calculating weighted average remaining terms. 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 reasonable and supportable forecasts about future conditions. Historical losses serve as the starting point to estimate expected credit losses. When available, historical losses should include cumulative actual losses incurred over the lifetime of the various loan segments of the loans being evaluated. In cases where such information is not available, companies may need to rely on external data, such as peer data of historical losses for similar loan segments. Management has determined to use a "through-the-cycle" historical credit loss experience as its baseline for historical credit losses. Management has determined a representative period for a full credit cycle would be from 2008 to 2022 (fifteen-year credit cycle). Management has collected historical loss information on its own loan portfolio as well as peer group information by the seventeen loan segments over this time horizon using information available from Federal Regulators on the Uniform Bank Performance Report ("UBPR"). 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 181 banks across the nation. The model calculates the mean historical loss rate over the fifteen year economic cycle for both the Bank and its peer group. The model calculates the stressed historical loss rate over the fifteen year economic cycle for both the Bank and its peer group. 35
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Management evaluates macro and micro economic information as well as internal
trends in credit performance on our loan portfolio to determine where we believe
we are in an economic credit cycle. Depending upon our estimation of what point
in the credit cycle the current economy may exist, we adjust, on a quantitative
basis, historical loss rates either upwards or downwards from the mean. If
Management believes we are nearing the end on a credit cycle, we may adjust
historical losses in increments higher from the mean (e.g. one standard
deviation from the mean). If the Company believes that we are in the recovery
stage of a credit cycle, we may adjust historical losses downwards from the
mean. Management understands that historical credit losses may not exactly
follow a normal bell-shaped curve, but that the approach provides consistency
across all loan segments as well as a measured probability of credit loss
coverage.
Management evaluated current economic metrics as its basis to determine that we
believe that we are at the beginning of an economic recession. Based on this
determination, management has used a one-standard deviation from the mean to
capture 68.2% of all credit losses over the 15-year economic cycle.
Management used the duration of each loan segment to estimate the remaining life
of loans to ensure that the model covers credit losses over the expect life of
such loans.
Management will continue to employ the use of qualitative factors as defined by
the Interagency Policy Statement on the Allowance for Loan and Lease Losses ("SR
2006-17"). Management will consider 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 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 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 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 nonaccrual
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.
These qualitative factors are applied primarily to our agriculture and agricultural real estate loan exposure.
Investment Securities - Investment securities are classified as held-to-maturity ("HTM") when the Company has the positive intent and ability to hold the securities to maturity. Investment securities are classified as available-for-sale ("AFS") when the Company has the intent of holding the security for an indefinite period of time, but not necessarily to maturity. The Company determines the appropriate classification at the time of purchase, and periodically thereafter. Investment securities classified at HTM are carried at amortized cost. Investment securities classified at AFS are reported at fair value. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Debt securities classified as held-to-maturity are carried at cost, net of the allowance for credit losses - securities, adjusted for amortization of premiums and discounts to the earliest callable date. Debt securities classified as available-for-sale are measured at fair value. Unrealized holding gains and losses on debt securities classified as available-for-sale are excluded from earnings and are reported net of tax as accumulated other comprehensive income (AOCI), a component of shareholders' equity, until realized. When AFS securities, specifically identified, are sold, the unrealized gain or loss is reclassified from AOCI to non-interest income. 36
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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 byU.S. government entities and agencies and municipalities. The Company uses industry historical credit loss information adjusted for current conditions to establish the allowance for credit losses on its HTM municipal bond portfolio. For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If the Company intends to sell the security or it is more likely than not that, the Company will be required to sell the security before recovering its cost basis; the entire impairment loss would be recognized in 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 costs, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. Projected cash flows are discounted by the current effective interest rate. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge 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 an available-for-sale security is confirmed or when either criteria regarding intent of requirement to sell is met.Goodwill -Goodwill represents the excess of the purchase considerations paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination it is not amortized but is reviewed annually, or more frequently as current circumstances and conditions warrant, for impairment. An assessment of qualitative factors is completed to determine if it is more likely than not that, the fair value of a reporting unit is less than its carrying amount. If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed. The quantitative goodwill impairment compares the reporting unit's estimated fair values, including goodwill, to its carrying amount. If the carrying amount exceeds its reporting unit's fair value, then an impairment loss would be recognized as a charge to earnings, but is limited by the amount of goodwill allocated to that reporting unit. Other Intangible Assets - Other intangible assets consists primarily of core deposit intangibles ("CDI"), which are amounts recorded in business combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the client relationships associated with the deposits. Core deposit intangibles are amortized over the estimated useful lives of such deposits. 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. 37
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Fair Value Measurements - The Company discloses the fair value of financial instruments and the methods and significant assumptions used to estimate those fair values. The Company, using available market information and appropriate valuation methodologies has determined the estimated fair value amounts. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. In some cases, book value is a reasonable estimate of fair value due to the relatively short period between origination of the instrument and its expected realization. Income Taxes - Income taxes are filed on a consolidated basis with our subsidiaries and allocate income tax expense (benefit) based on each entity's proportionate share of the consolidated provision for income taxes. Deferred income tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The determination of the amount of deferred income tax assets, that are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is "more likely than not" that all or a portion of the deferred income tax asset will not be realized. "More likely than not" is defined as greater than a 50% probability. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Only tax positions that meet the more likely than not recognition threshold are recognized. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that, the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest expense and penalties associated with unrecognized tax benefits are classified as income tax expense in the consolidated statements of income.
Impact of Recently Issued Accounting Standards
See Note 1. "Basis of Presentation and Significant Accounting Policies" to the Consolidated Financial Statements in "Item 1. Financial Information" in this Quarterly Report on Form 10-Q.
Results of Operations
The following discussion and analysis is intended to provide a better understanding ofFarmers & Merchants Bancorp and its subsidiaries' financial condition atJune 30, 2022 andDecember 31, 2021 and results of operations during the three and six months endedJune 30, 2022 and 2021, respectively. Information related to the comparison of the results of operations for the three years endedDecember 31, 2021 , 2020, and 2019 can be found in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2021 Annual Report on Form 10-K filed with theSEC onMarch 15, 2022 . Factors that determine the level of net income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, fee income, non-interest expense, the level of non-performing loans and other non-earning assets, and the amount of non-interest bearing liabilities supporting earning assets. Non-interest income includes card processing fees, service charges on deposit accounts, bank-owned life insurance income, gains/losses on the sale of investment securities, and gains/losses on deferred compensation investments. Non-interest expense consists primarily of salaries and employee benefits, cost of deferred compensation benefits, occupancy, data processing,FDIC insurance, marketing, legal and other expenses. 38
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Average Balance and Yields. The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield, cost and net interest margin information for the periods presented. Average balances are derived from daily balances.
For the Three Months Ended June 30,
2022 2021
Interest Income Average Yield / Interest Income Average Yield /
(Dollars in thousands) Average Balance / Expense Rate Average Balance / Expense Rate
ASSETS
Interest earnings deposits in other banks and federal funds sold $ 683,655 $ 1,409 0.83 % $ 590,936 $ 164 0.11 % Securities:(1) Taxable securities 1,090,507 5,107 1.87 % 839,121 3,694 1.76 % Non-taxable securities(2) 48,339 391 3.24 % 53,813 416 3.09 % Total investment securities 1,138,846 5,498 1.94 % 892,934 4,110 1.84 % Loans:(3) Real estate: Commercial 1,158,892 13,373 4.63 % 1,005,143 12,370 4.94 % Agricultural 701,905 8,415 4.81 % 622,977 7,447 4.79 % Residential and home equity 365,872 3,539 3.88 % 337,796 3,662 4.35 % Construction 205,491 2,508 4.90 % 189,930 2,150 4.54 % Total real estate 2,432,160 27,835 4.59 % 2,155,846 25,629 4.77 % Commercial & industrial 439,137 4,546 4.15 % 357,098 4,345 4.88 % Agricultural 264,791 2,988 4.53 % 227,206 2,557 4.51 % Commercial leases 90,855 1,377 6.08 % 101,848 1,428 5.62 % Consumer and other 21,457 1,824 34.10 % 223,877 2,705 4.85 % Total loans and leases 3,248,400 38,570 4.76 % 3,065,875 36,664 4.80 % Non-marketable securities 15,549 218 5.62 % 15,078 212 5.64 % Total interest earning assets 5,086,450 45,695 3.60 % 4,564,823 41,150 3.62 % Allowance for credit losses (61,439 ) (60,204 ) Non-interest earning assets 317,066 315,846 Total average assets$ 5,342,077 $ 4,820,465 LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing deposits: Demand$ 1,117,283 319 0.11 % $ 993,084 282 0.11 % Savings and money market accounts 1,544,753 361 0.09 % 1,332,799 372 0.11 % Certificates of deposit greater than$250,000 165,944 106 0.26 % 168,450 188 0.45 % Certificates of deposit less than$250,000 219,157 87 0.16 % 239,792 192 0.32 % Total interest bearing deposits 3,047,137 873 0.11 % 2,734,125 1,034 0.15 % Short-term borrowings - - 0.00 % - - 0.00 % Subordinated debentures 10,310 103 4.01 % 10,310 79 3.07 % Total interest bearing liabilities 3,057,447 976 0.13 % 2,744,435 1,113 0.16 % Non-interest bearing deposits 1,735,258 1,573,743 Total funding 4,792,705 976 0.08 % 4,318,178 1,113 0.10 % Other non-interest bearing liabilities 86,550 69,049 Shareholders' equity 462,822 433,238
Total average liabilities and shareholders' equity
$ 4,820,465 Net interest income$ 44,719 $ 40,037 Interest rate spread 3.48 % 3.45 % Net interest margin(4) 3.53 % 3.52 % (1)Excludes average unrealized (losses) gains of($24.7) million and$.3 million for the three months endedJune 30, 2022 , and 2021, respectively, which are included in non-interest earning assets. (2)The average yield does not include the federal tax benefits at an assumed effective yield of 26% related to income earned on tax-exempt municipal securities totaling$103,000 and$109,000 for the three months endedJune 30, 2022 , and 2021, respectively. (3)Loan interest income includes loan fees of$3.3 million and$4.4 million for the three months endedJune 30, 2022 and 2021, respectively. (4)Net interest margin is computed by dividing net interest income by average interest earning assets. 39
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For the Six Months Ended June 30,
2022 2021
Interest Income Average Yield / Interest Income Average Yield /
(Dollars in thousands) Average Balance / Expense Rate Average Balance / Expense Rate
ASSETS
Interest earnings deposits in other banks and federal funds sold $ 721,656 $ 1,775 0.50 % $ 501,105 $ 267 0.11 % Securities:(1) Taxable securities 1,056,670 9,695 1.84 % 836,501 7,498 1.79 % Non-taxable securities(2) 49,164 793 3.23 % 54,442 839 3.08 % Total investment securities 1,105,834 10,488 1.90 % 890,943 8,337 1.87 % Loans:(3) Real estate: Commercial 1,155,271 26,649 4.65 % 985,307 25,347 5.19 % Agricultural 691,128 16,208 4.73 % 630,592 14,583 4.66 % Residential and home equity 359,656 6,840 3.84 % 336,691 6,333 3.79 % Construction 198,626 4,580 4.65 % 191,638 4,147 4.36 % Total real estate 2,404,681 54,277 4.55 % 2,144,228 50,410 4.74 % Commercial & industrial 431,907 9,345 4.36 % 361,465 8,456 4.72 % Agricultural 256,648 5,743 4.51 % 226,706 5,121 4.56 % Commercial leases 92,844 2,793 6.07 % 102,205 2,772 5.47 % Consumer and other 36,683 3,845 21.14 % 228,336 6,992 6.18 % Total loans and leases 3,222,763 76,003 4.76 % 3,062,940 73,751 4.86 % Non-marketable securities 15,549 523 6.78 % 13,892 402 5.84 % Total interest earning assets 5,065,802 88,789 3.53 % 4,468,880 82,757 3.73 % Allowance for credit losses (61,232 ) (59,820 ) Non-interest earning assets 315,037 310,629 Total average assets$ 5,319,607 $ 4,719,689 LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing deposits: Demand$ 1,116,436 578 0.10 % $ 968,496 576 0.12 % Savings and money market accounts 1,531,069 703 0.09 % 1,312,122 790 0.12 % Certificates of deposit greater than$250,000 166,725 203 0.25 % 169,967 444 0.53 % Certificates of deposit less than$250,000 221,487 192 0.17 % 243,583 461 0.38 % Total interest bearing deposits 3,035,717 1,676 0.11 % 2,694,168 2,271 0.17 % Short-term borrowings 1 - 0.00 % 2 - 0.00 % Subordinated debentures 10,310 185 3.62 % 10,310 158 3.09 % Total interest bearing liabilities 3,046,028 1,861 0.12 % 2,704,480 2,429 0.18 % Non-interest bearing deposits 1,728,962 1,522,029 Total funding 4,774,990 1,861 0.08 % 4,226,509 2,429 0.12 % Other non-interest bearing liabilities 80,413 61,662 Shareholders' equity 464,204 431,518
Total average liabilities and shareholders' equity
$ 4,719,689 Net interest income$ 86,928 $ 80,328 Interest rate spread 3.41 % 3.55 % Net interest margin(4) 3.46 % 3.62 % (1)Excludes average unrealized (losses) gains of($15.9) million and$7.1 million for the six months endedJune 30, 2022 , and 2021, respectively, which are included in non-interest earning assets. (2)The average yield does not include the federal tax benefits at an assumed effective yield of 26% related to income earned on tax-exempt municipal securities totaling$210,000 and$220,000 for the six months endedJune 30, 2022 , and 2021, respectively. (3)Loan interest income includes loan fees of$7.2 million and$9.6 million for the six months endedJune 30, 2022 and 2021, respectively. (4)Net interest margin is computed by dividing net interest income by average interest earning assets. 40
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Second Quarter 2022 vs. Second Quarter 2021 Interest-bearing deposits with banks andFederal Reserve balances consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 0.83% and 0.11% during the second quarter of 2022 and 2021, respectively. Average interest-bearing deposits with banks were$684 million and$591 million for the quarterJune 30, 2022 and 2021, respectively. Interest income on interest-bearing deposits with banks was$1.4 million and$0.2 million for the quarter endedJune 30, 2022 and 2021, respectively. The investment securities portfolio consists primarily of: (1) mortgage-backed securities issued by government-sponsored entities; (2) debt securities issued by theU.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. Total investment securities averaged$1.1 billion and$893 million for the quarter endedJune 30, 2022 and 2021, respectively. The average yield on total investment securities was 1.94% and 1.84% for the quarter endedJune 30, 2022 and 2021, respectively. See "Investment Securities andFederal Reserve balances" for a discussion of the Company's investment strategy in 2022. Loans and leases held for investment averaged$3.2 billion and$3.1 billion for the quarter endedJune 30, 2022 and 2021, respectively. The yield on the loan & lease portfolio was 4.76% and 4.80% for the quarter endedJune 30, 2022 and 2021, respectively. The Company continues to experience aggressive competitor pricing for loans and leases to which it may need to respond in order to retain key customers. This could continue to place negative pressure on future loan & lease yields and net interest margin. Interest-bearing liabilities averaged$3.1 billion and$2.7 billion for the quarter endedJune 30, 2022 and 2021, respectively. Total interest expense on interest-bearing deposits was$0.9 million ,$1.0 million for the quarter endedJune 30, 2022 and 2021, respectively. The average rate paid on interest-bearing liabilities was 0.13% and 0.16% for the quarter endedJune 30, 2022 and 2021, respectively. As a result of recent increases in short-term market interest rates, the Company is experiencing more aggressive competitor rates on interest bearing deposits, which it may need to meet in order to retain key customers. This could place negative pressure on future deposit rates and net interest margin. Six Months EndedJune 30, 2022 vs. Six Months EndedJune 30, 2021 Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 0.50% and 0.11% for the first six months endedJune 30, 2022 and 2021, respectively. Average interest-bearing deposits were$722 million and$501 million for the six months endedJune 30, 2022 and 2021, respectively. Interest income on interest-bearing deposits with banks was$1.8 million and$0.3 million for the six months endedJune 30, 2022 and 2021, respectively. Average total investment securities were$1.1 billion and$891 million for the six months endedJune 30, 2022 and 2021, respectively. The average yield on total investment securities were 1.90% and 1.87% for the six months endedJune 30, 2022 and 2021, respectively. See "Investment Securities andFederal Reserve balances" for a discussion of the Company's investment strategy in 2022. Average loans and leases held for investment were$3.2 billion and$3.1 billion for the six months endedJune 30, 2022 and 2021, respectively. The yield on the loan & lease portfolio was 4.76% and 4.86% for the six months endedJune 30, 2022 and 2021, respectively. 41
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Average interest-bearing liabilities were$3.0 billion and$2.7 billion for the six months endedJune 30, 2022 and 2021, respectively. Total interest expense on interest-bearing deposits was$1.7 million ,$2.3 million for the six months endedJune 30, 2022 and 2021, respectively. The average rate paid on interest-bearing liabilities was 0.12% and 0.18% for the six months endedJune 30, 2022 and 2021, respectively. Rate/Volume Analysis. The following table shows the change in interest income and interest expense and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates. For purposes of this table, the change in interest due to both volume and rate has been allocated to change due to volume and rate in proportion to the relationship of absolute dollar amounts of change in each. Three Months Ended June 30, 2022 compared with 2021 Six Months Ended June 30, 2022 compared with 2021 Increase (Decrease) Due to: Increase (Decrease) Due to: (Dollars in thousands) Volume Rate Net Volume Rate Net Interest income: Interest earnings deposits in other banks and federal funds sold $ 30$ 1,215 $ 1,245 $ 164 $ 1,344 $ 1,508 Securities: Taxable securities 1,165 248 1,413 2,016 181 2,197 Non-taxable securities (123 ) 98 (25 ) (137 ) 91 (46 ) Total securities 1,042 346 1,388 1,879 272 2,151 Loans: Real estate: Commercial 5,108 (4,105 ) 1,003 7,420 (6,118 ) 1,302 Agricultural 946 22 968 1,417 208 1,625 Residential and home equity 1,325 (1,448 ) (123 ) 436 71 507 Construction 183 175 358 155 278 433 Total real estate 7,562 (5,356 ) 2,206 9,428 (5,561 ) 3,867 Commercial & industrial 3,275 (3,074 ) 201 2,491 (1,602 ) 889 Agricultural 424 7 431 762 (140 ) 622 Commercial leases (559 ) 508 (51 ) (547 ) 568 21 Consumer and other (17,178 ) 16,297 (881 ) (18,389 ) 15,242 (3,147 ) Total loans (6,477 ) 8,383 1,906 (6,257 ) 8,509 2,252 Non-marketable securities 10 (4 ) 6 51 70 121 Total interest income (5,395 ) 9,940 4,545 (4,162 ) 10,194 6,032 Interest expense: Interest bearing deposits: Demand 35 2 37 164 (162 ) 2 Savings and money market accounts 235 (246 ) (11 ) 276 (363 ) (87 ) Certificates of deposit greater than$250,000 (3 ) (79 ) (82 ) (8 ) (233 ) (241 ) Certificates of deposit less than$250,000 (15 ) (90 ) (105 ) (39 ) (230 ) (269 ) Total interest bearing deposits 252 (413 ) (161 ) 393 (988 ) (595 ) Short-term borrowings - - - - - - Subordinated debentures - 24 24 - 27 27 Total interest expense 252 (389 ) (137 ) 393 (961 ) (568 ) Net interest income$ (5,647 ) $ 10,329 $ 4,682 $ (4,556 )$ 11,156 $ 6,600 Net interest income increased by$6.6 million , or 8.22% to$86.9 million for the six months endedJune 30, 2022 compared to$40.0 million for the same quarter one year earlier. The increase in net interest income was driven primarily by strong deposit growth, which we were able to partially deploy into growing our loan portfolio. The remaining increase in deposits was held in Fed Funds sold and investment securities. 42
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Comparison of Results of Operations for the Three and Six Months EndedJune 30, 2022 and 2021 Three Months Six Months Ended Ended June 30, June 30, $ Better / % Better / $ Better / % Better / (Dollars in thousands) 2022 2021 (Worse) (Worse) 2022 2021 (Worse) (Worse) Selected Income Statement Information: Interest income$ 45,695 $ 41,150 $ 4,545 11.04 %$ 88,789 $ 82,757 $ 6,032 7.29 % Interest expense 976 1,113 137 12.31 % 1,861 2,429 568 23.38 % Net interest income 44,719 40,037 4,682 11.69 % 86,928 80,328 6,600 8.22 % Provision for credit losses 1,500 - (1,500 ) 0.00 % 1,500 1,250 (250 ) (20.00 %) Net interest income after provision for credit losses 43,219 40,037 3,182 7.95 % 85,428 79,078 6,350 8.03 % Non-interest income 3,512 4,959 (1,447 ) (29.18 %) 7,824 11,675 (3,851 ) (32.99 %) Non-interest expense 23,031 23,603 572 2.42 % 46,819 47,147 328 0.70 % Income before income tax expense 23,700 21,393 2,307 10.78 % 46,433 43,606 2,827 6.48 % Income tax expense 5,257 5,240 (17 ) (0.32 %) 10,932 10,740 (192 ) (1.79 %) Net income$ 18,443 $ 16,153 $ 2,290 14.18 %$ 35,501 $ 32,866 $ 2,635 8.02 % Net Income. For the three and six months endedJune 30, 2022 ,Farmers & Merchants Bancorp reported net income of$18.4 million and$35.5 million , earnings per share of$23.58 and$45.28 and return on average assets of 1.38% and 1.33%, respectively. Return on average shareholders' equity was 15.94% and 15.30% for the three and six months endedJune 30, 2022 . For the three and six months endedJune 30, 2021 ,Farmers & Merchants Bancorp reported net income of$16.2 million and$32.9 million , earnings per share of$20.45 and$41.62 and return on average assets of 1.34% and 1.39%, respectively. Return on average shareholders' equity was 14.91% and 15.23% for the three and six months endedJune 30, 2021 . Net Interest Income and Net Interest Margin. For the quarter endedJune 30, 2022 , net interest income increased$4.7 million , or 11.7%, to$44.7 million compared with$40.0 million for the same quarter a year earlier. The increase is primarily the result of average interest earning assets increasing$522 million , or 11.4% to$5.1 billion compared with$4.6 billion for the same period a year earlier. Total deposits grew$475 million , or 12.31%, to$4.8 billion compared with$4.3 billion for the same a year ago. Net interest margins increased slightly by 1 basis point to 3.53% for the quarter endedJune 30, 2022 , compared with 3.52% for the same period a year earlier. Net interest income for the six months endedJune 30, 2022 increased by$6.6 million , or 8.22%, to$86.9 million , compared to$80.3 million atJune 30, 2001 . The increase in net interest income was primarily due to a$597 million increase in average earning assets offset by a 16 basis point decrease in the net interest margin. For the six months endedJune 30, 2022 , the Company's net interest margin was 3.46% compared to 3.62% for the same period in 2021. This decrease in net interest margin was due primarily to a decrease of 20 basis points in the yield received on earning assets offset somewhat by a 6 basis point decrease in the cost of interest-bearing liabilities. 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 loan and HTM securities portfolios.
The Company made a
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Non-interest Income. Non-interest income decreased$1.4 million , or 29.2%, to$3.5 million for the quarter endedJune 30, 2022 compared with$5.0 million for the same period a year earlier. This decrease in non-interest income was primarily due to a$1.5 million decline in gains/(losses) loss on deferred compensation investments and a$0.7 million reduction in gain on sale of investment securities recorded in the first quarter of 2021. This decrease in non-interest income was partially off-set by an increase of$.4 million in other investment income. The Company recorded net losses on deferred compensation plan investments of$1 million for the quarter endedJune 30, 2022 compared with net gains of$0.5 million for the same respective period. See Note 12, located in "Item 8. Financial Statements and Supplementary Data" in the Company'sDecember 31, 2021 Form 10-K filed onMarch 15, 2022 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these investment gains/losses to be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no net-effect on the Company's net income. Non-interest income decreased$3.9 million , or 33%, to$7.8 million for the six months endedJune 30, 2022 compared with$11.7 million for the same period of 2021. The year-over-year decrease in non-interest income was primarily due to a$1.8 million reduction in gain on sale of investment securities recorded in the first quarter of 2021and a$2.5 million decline in gains/(losses) on deferred compensation plan investments. These reductions were primarily off-set by a$0.4 million increase in services charges received on deposit accounts. The Company recorded net losses on deferred compensation plan investments of$0.6 million for the six months endedJune 30, 2022 compared with net gains of$1.2 million for the same respective period. See Note 12, located in "Item 8. Financial Statements and Supplementary Data" in the Company'sDecember 31, 2021 Form 10-K filed onMarch 15, 2022 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these investment gains/losses to be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no net-effect on the Company's net income. Non-interest Expense. Non-interest expense decreased$0.6 million , or 2.4%, to$23 million for the quarter endedJune 30, 2022 compared with$23.6 million for the same period a year ago. This decrease was primarily due to the$1.5 million decline in gains/(losses) on deferred compensation plan investments. This decrease was partially off-set by a$0.5 million increase in outside professional fees, a$0.2 million increase in salaries and employee benefits and a$0.1 million increase in legal expenses. The Company recorded net losses on deferred compensation plan investments of$1.0 million for the quarter endedJune 30, 2022 compared with net gains of$0.5 million for the same respective period. See Note 12, located in "Item 8. Financial Statements and Supplementary Data" in the Company'sDecember 31, 2021 Form 10-K filed onMarch 15, 2022 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires gains/(losses) on deferred compensation plan investments to be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no net-effect on the Company's net income. Non-interest expense decreased$.3 million , or 0.7%, to$46.8 million for the six months endedJune 30, 2022 compared with$47.1 million for the same period a year ago. This decrease was primarily due to the$1.8 million decline in gains/(losses) on deferred compensation plan investments. This decrease was off-set by a$0.4 million increase in accounting expenses, a$0.3 million increase in legal expenses and a$0.3 million increase in employee salaries and benefits. The Company recorded net losses on deferred compensation plan investments of$0.6 million for the six months endedJune 30, 2022 compared with net gains of$1.2 million for the same period of 2021. See Note 12, located in "Item 8. Financial Statements and Supplementary Data" in the Company'sDecember 31, 2021 Form 10-K filed onMarch 15, 2022 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. 44
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Although GAAP requires gains/(losses) on deferred compensation plan investments 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. The Bank's provision for income taxes increased 1.79% to$10.9 million for the first six months of 2022 compared to the first six months of 2021. The Company's effective tax rate for the first six months of 2022 was 23.54% compared to 24.63% for the same period in 2021. The Company's effective tax rate can fluctuate from quarter to quarter due primarily to changes in the mix of taxable and tax-exempt earning sources. The effective rates were lower than the combined Federal and State statutory rate of 30% due primarily to benefits regarding the cash surrender value of life insurance; credits associated with low income housing tax credit investments (LIHTC); and tax-exempt interest income on municipal securities and loans.
Financial Condition
Total assets grew$149 million , or 2.88%, to$5.3 billion atJune 30, 2022 compared with$5.2 billion atDecember 31, 2021 . Loans held for investment were$3.2 billion atJune 30, 2022 , an increase of$12.7 million , or .39% compared toDecember 31, 2021 . Total deposits grew$129 million , or 2.8%, to$4.8 billion atJune 30, 2022 compared with$4.6 billion atDecember 31, 2021 . The increase in total assets and deposits was primarily the result of continued strong organic deposit growth.
The Company's investment portfolio increased$86 million , or 8.56%, to$1.1 billion atJune 30, 2022 compared to$1.0 billion atDecember 31, 2021 . The Company uses its investment portfolio to manage interest rate and liquidity risks. Accordingly, when market rates are increasing it invests most of its funds in shorter-termTreasury and Agency securities or shorter-term (10, 15 and 20 year) mortgage-backed securities. Conversely, when rates are falling, 30-year mortgage-backed securities or longer termTreasury and Agency securities may be increased. The Company's total investment portfolio currently represents 20.53% of the Company's total assets atJune 30, 2022 as compared with 19.46% atDecember 31, 2021 . Not included in the investment portfolio are interest bearing deposits with banks and overnight investments inFederal Reserve balances. Interest bearing deposits with banks consisted primarily of FRB deposits. The FRB currently pays interest on the deposits that banks maintain in their FRB accounts, whereas historically banks had to sell these Federal Funds to other banks in order to earn interest. Since balances at the FRB are effectively risk free, the Company elected to maintain its excess cash at the FRB. Interest bearing deposits with banks totaled$681 million atJune 30, 2022 and$663 million atDecember 31, 2021 . The Company classifies its investment securities as either held-to-maturity ("HTM") or available-for-sale ("AFS"). Securities are classified as held-to-maturity and are carried at amortized cost when the Company has the intent and ability to hold the securities to maturity. Securities classified as AFS include securities, which may be sold to effectively manage interest rate risk exposure, prepayment risk, satisfy liquidity demands and other factors. These securities are reported at fair value with aggregate, unrealized gains or losses excluded from income and included as a separate component of shareholders' equity, net of related income taxes. As ofJune 30, 2022 , we held no investment securities from any issuer that totaled over 10% of our shareholders' equity. 45
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The carrying value of our portfolio of investment securities was as follows:
June 30,
(Dollars in thousands) 2022 December 31, 2021
Available-for-Sale Securities
U.S. Treasury notes $ 4,952 $ 10,089
U.S. Government-sponsored securities 5,441 6,374
Mortgage-backed securities(1) 203,607 251,120
Collateralized mortgage obligations(1) 1,502 2,436
Corporate securities 9,526 -
Other 310 435
Total available-for-sale securities $ 225,338 $ 270,454
(1) All mortgage-backed securities and collateralized mortgage obligations were
issued by an agency or government sponsored entity of the
June 30,
(Dollars in thousands) 2022 December 31, 2021
Held-to-Maturity Securities
Mortgage-backed securities(1) $ 721,510 $ 596,775
Collateralized mortgage obligations(1) 84,414 73,781
Municipal securities 62,459 66,496
Total held-to-maturity securities $ 868,383 $ 737,052
(1) All mortgage-backed securities and collateralized mortgage obligations were
issued by an agency or government sponsored entity of the
The following table shows the carrying value for maturities of investment securities and the weighted average yields of such securities, including the benefit of tax-exempt securities:
As of June 30, 2022
After One but After Five but
Within One Year Within Five Years 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. Treasury notes$ 4,952 2.39 % $
- 0.00 % $ - 0.00 % $ - 0.00 %
12 1.09 % 104 2.90 % 380 1.70 % 4,945 1.52 % 5,441 1.56 % Mortgage-backed securities(1)
- 0.00 % 24,553 2.36 % 34,650 2.40 % 144,403 1.72 % 203,607 1.91 % Collateralized mortgage obligations(1)
- 0.00 % - 0.00 % - 0.00 % 1,502 2.30 % 1,502 2.30 %
Corporate securities - 0.00 % 4,738 0.78 % 4,788 0.90 % - 0.00 % 9,526 0.84 %
Other 310 1.72 % - 0.00 % - 0.00 % - 0.00 %
310 1.72 %
Total securities available-for-sale
(1) All mortgage-backed securities and collateralized mortgage obligations were
issued by an agency or government sponsored entity of the
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As of June 30, 2022
After One but After Five but
Within One Year Within Five Years 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 % $
- 0.00 %
- 0.00 % - 0.00 % 84,414 1.88 % 84,414 1.88 % Municipal securities 700 1.51 %
7,089 2.81 % 15,948 3.40 % 38,723 2.38 % 62,460 2.68 %
Total securities held-to-maturity
(1) All mortgage-backed securities and collateralized mortgage obligations were
issued by an agency or government sponsored entity of the
As of December 31, 2021
After One but Within After Five but
Within One Year Five Years 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. Treasury notes $ 5,028 2.33 % $ 5,061 2.38 % $ - 0.00 % $ - 0.00 % $ 10,089 2.36 %
U.S. Government-sponsored securities 2 1.80 % 148 2.29 % 512 1.55 % 5,712 1.26 % 6,374 1.30 % Mortgage-backed securities(1)
13 1.50 % 21,155 2.36 % 50,554 2.36 % 179,398 1.61 %
251,120 1.83 % Collateralized mortgage obligations(1) - 0.00 % - 0.00 % - 0.00 % 2,436 2.30 % 2,436 2.30 % Municipal securities - 0.00 % - 0.00 % - 0.00 % - 0.00 % - 0.00 % Corporate securities - 0.00 % - 0.00 % - 0.00 % - 0.00 % - 0.00 % Other 435 3.31 % - 0.00 % - 0.00 % - 0.00 %
435 3.31 %
Total securities available-for-sale
(1) All mortgage-backed securities and collateralized mortgage obligations were
issued by an agency or government sponsored entity of the
As of December 31, 2021
After One but Within After Five but
Within One Year Five Years 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 % $
- 0.00 %
- 0.00 % - 0.00 % 73,781 1.71 % 73,781 1.71 % Municipal securities 308 1.10 % 8,487 2.19 % 18,433 3.42 % 39,268 4.52 %
66,496 3.90 %
Total securities held-to-maturity
(1) All mortgage-backed securities and collateralized mortgage obligations were
issued by an agency or government sponsored entity of the
Expected maturities may differ from contractual maturities because issuers may have the right to call obligations with or without penalties. We evaluate 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 andAgricultural Real Estate - These are loans secured owner-occupied real estate, non-owner-occupied real estate, farmland, and multifamily residential properties. Commercial mortgage term loans can be made if the property is either income producing or scheduled to become income producing based upon acceptable pre-leasing, or the income will be the Bank's primary source of repayment for the loan. Loans are made both on owner occupied and investor properties; generally do not exceed 15 years (and may have pricing adjustments on a shorter timeframe); have debt service coverage ratios of 1.00 or better with a target of greater than 1.25; 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. 47
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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 whom the Bank has a successful track record; for projects in our service area; with Loan to Value (LTV) below 75%; and where the property can be developed and sold within 2 years. Commercial construction loans are made only when there is a written take-out commitment from the Bank or an acceptable financial institution or government agency. 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 byFNMA and FHLMC. However, we will make loans on rural residential properties up to 40 acres. Most residential loans have terms from ten to twenty years and carry fixed rates priced to treasury rates. The Company has always underwritten mortgage loans based upon traditional underwriting criteria and does not make loans that are known in the industry as "subprime," "no or low doc," or "stated income" loans. Home Equity Lines and Loans - These are loans made to individuals for home improvements and other personal needs. Generally, amounts do not exceed$250,000 ; Combined Loan To Value (CLTV) does not exceed 80%; 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 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 24 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 five to seven years; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan. Consumer - These are loans to individuals for personal use, and primarily include loans to purchase automobiles or recreational vehicles, and unsecured lines of credit. The Company has a minimal consumer loan portfolio, and loans are primarily made as an accommodation to deposit customers. Commercial Leases - These are leases primarily to businesses for financing the acquisition of equipment. They can be either "finance leases" where the lessee retains the tax benefits of ownership but obtains 100% financing on their equipment purchases; or "true tax leases" where the Company, as lessor, places reliance on equipment residual value and in doing so obtains the tax benefits of ownership. 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. 48
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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 on the Company's financial statement.
Each loan or lease type involves risks specific to the: (1) borrower; (2)
collateral; and (3) loan & lease structure. See "Results of Operations -
Provision and Allowance for Credit Losses" for a more detailed discussion of
risks by loan & lease type. The Company's current underwriting policies and
standards are designed to mitigate the risks involved in each loan & lease type.
The Company's policies require that loans and leases be approved only to those
borrowers exhibiting a clear source of repayment and the ability to service
existing and proposed debt. The Company's underwriting procedures for all loan &
lease types require careful consideration of the borrower, the borrower's
financial condition, the borrower's management capability, the borrower's
industry, and the economic environment affecting the loan or lease.
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 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 3. Quantitative and Qualitative Disclosures about Market
Risk" in this Report on Form 10-Q for further details.
Overall, the Company's loan & lease portfolio at June 30, 2022 totaled $3.2
billion , an increase of $13 million over December 31, 2021 . Exclusive of SBA PPP
loans, the loan portfolio grew $66 million , or 2.08%, over December 31, 2021 .
This increase in the non-PPP loans occurred as a result of: (1) the Company's
business development efforts directed toward credit-qualified borrowers; and (2)
expansion of our service area into the East Bay of San Francisco and Napa . This
data constitutes non-GAAP financial data. The Company believes that excluding
the temporary effect of the PPP loans furnishes useful information regarding the
Company's growth.
The following table sets forth the distribution of the loan & lease portfolio by type and percent at the end of each period presented:
June 30, 2022 December 31, 2021
Percent Percent
(Dollars in thousands) Dollars of Total Dollars of Total
Gross Loans and Leases
Real estate:
Commercial $ 1,210,195 37.14 % $ 1,167,516 35.95 %
Agricultural 709,624 21.78 % 672,830 20.72 %
Residential and home equity 371,874 11.41 % 350,581 10.79 %
Construction 162,713 4.99 % 177,163 5.45 %
Total real estate 2,454,406 75.32 % 2,368,090 72.91 %
Commercial & industrial 439,455 13.49 % 427,799 13.17 %
Agricultural 261,856 8.04 % 276,684 8.52 %
Commercial leases 89,095 2.73 % 96,971 2.99 %
Consumer and other(1) 13,588 0.42 % 78,367 2.41 %
Total gross loans and leases $ 3,258,400 100.00 % $ 3,247,911 100.00 %
(1) Includes SBA PPP loans.
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The following table shows the maturity distribution and interest rate
sensitivity of the loan portfolio of the Company as of
Loan Contractual Maturity
After Five
After One Years But After
One Year But Within Within Fifteen Fifteen
(Dollars in thousands) or Less Five Years Years Years Total
Gross loan and leases:
Real estate:
Commercial $ 89,939 $ 267,837 $ 818,910 $ 33,509 $ 1,210,195
Agricultural 34,682 154,188 447,414 73,340 709,624
Residential and home equity 120 4,023 118,208 249,523 371,874
Construction 115,397 47,316 - - 162,713
Total real estate 240,138 473,364 1,384,532 356,372 2,454,406
Commercial & industrial 163,698 222,395 47,140 6,222 439,455
Agricultural 160,447 86,559 14,850 - 261,856
Commercial leases 6,870 31,772 50,453 - 89,095
Consumer and other(1) 952 10,766 1,870 - 13,588
Total gross loans and leases $ 572,105 $ 824,856 $ 1,498,845 $ 362,594 $ 3,258,400
Rate Structure for Loans
Fixed Rate $ 481,614 $ 492,971 $ 396,902 $ 123,043 $ 1,494,530
Adjustable Rate 90,491 331,885
1,101,943 239,551 1,763,870
Total gross loans and leases
(1) Includes SBA PPP loans.
Non-Accrual Loans and Leases - Accrual of interest on loans and leases is generally discontinued when a loan or lease becomes contractually past due by 90 days or more with respect to interest or principal. When loans and leases are 90 days past due, but in management's judgment are well secured and in the process of collection, they may not be classified as non-accrual. When a loan or lease is placed on non-accrual status, all interest previously accrued but not collected is reversed. Income on such loans and leases is then recognized only to the extent that cash is received and where the future collection of principal is probable. Non-accrual loans and leases totaled$3.0 million and$516,000 atJune 30, 2022 andDecember 31, 2021 , respectively. Restructured Loans and Leases - A restructuring of a loan or lease constitutes a TDR under ASC 310-40, if the Company for economic or legal reasons related to the debtor's financial difficulties grants a concession to the borrower that it would not otherwise consider, except when subject to the CARES Act and H.R. 133. Restructured loans or leases typically present an elevated level of credit risk, as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans and leases that are on nonaccrual status at the time they become TDR loans or leases, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms. However, these loans or leases continue to be classified as collateral dependent and are individually evaluated for impairment. 50
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AtJune 30, 2022 , restructured loans totaled$1.4 million compared with$2.3 million atDecember 31, 2021 , all of which were performing. See Note 4 "Loans and Leases" to the Unaudited Consolidated Financial Statements in "Item 1. Financial Statements" in this quarterly Report on Form 10-Q. Other Real Estate Owned -OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower. We record 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 atJune 30, 2022 , and atDecember 31, 2021 . Not included in the table below, but relevant to a discussion of asset quality are loans that were granted some form of relief because of COVID-19 and are not considered TDRs because of the CARES Act and H.R. 133. SinceApril 2020 , we have restructured$278 million of loans under the CARES Act and H.R. 133 guidelines. AtJune 30, 2022 , all loans that were restructured as part of the CARES Act have returned to the contractual terms and conditions of the loans, without exception. The following table summarizes the loans for which the accrual of interest has been discontinued and loans more than 90 days past due and still accruing interest, including those non-accrual loans that are troubled debt restructured loans, and OREO (as hereinafter defined): June 30, (Dollars in thousands) 2022 December 31, 2021 Non-performing assets: Non-accrual loans and leases, not TDRs Real estate: Commercial$ 1,674 $ - Agricultural 475 18 Residential and home equity - - Construction - - Total real estate 2,149 18 Commercial & industrial - - Agricultural 879 - Commercial leases - - Consumer and other - - Subtotal 3,028 18 Non-accrual loans and leases, are TDRs Real estate: Commercial - - Agricultural - 498 Residential and home equity - - Construction - - Total real estate - 498 Commercial & industrial - - Agricultural - - Commercial leases - - Consumer and other - - Subtotal - 498 Total non-performing loans and leases$ 3,028 $ 516 Other real estate owned ("OREO")$ 873 $ 873 Total non-performing assets$ 3,901 $ 1,389 Performing TDRs$ 1,389 $ 1,824 Selected ratios: Non-performing loans to total loans 0.09 % 0.02 % Non-performing assets to total assets 0.07 % 0.03 % 51
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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 1. Financial Statements" in this Quarterly Report on Form 10-Q for an allocation of the allowance classified to collateral dependent loans and leases. Except for non-performing loans and leases discussed above, the Company's management is not aware of any loans and leases as ofJune 30, 2022 , for which known financial problems of the borrower would cause serious doubts as to the ability of these borrowers to materially comply with their present loan or lease repayment terms, or any known events that would result in the loan or lease being designated as non-performing at some future date. However:
• The
of 2016. After 2016, reasonable levels of rain and snow alleviated drought
conditions in our primary service area, but the winters of 2020-2021 and
2021-2022 were once again dry. Despite this, the availability of water in our
primary service area was not an issue for the 2021 growing season. However, the
weather patterns over the past eight years further reinforce the fact that the
long-term risks associated with the availability of water are significant.
• While tremendous strides have been made in fighting the COVID-19 virus,
particularly with the development of a vaccine, the effects of COVID-19 are
still with us, and it is impossible to predict the ultimate impact on classified and non-performing loans and leases (see Part I. Note 2).
Allowance for Credit Losses-Loans and Leases
The Company maintains an allowance for credit losses ("ACL") on loans based on
current expected credit losses as of the balance sheet date. The allowance is
established through a provision for credit losses, which is charged to expense.
Additions to the allowance are expected to maintain the adequacy of the total
allowance after credit losses and loan & lease growth. Credit exposures
determined to be uncollectible are charged against the allowance. Cash received
on previously charged off amounts is recorded as a recovery to the allowance.
The overall allowance consists of three primary components: specific reserves
related to collateral dependent loans and leases; general reserves for current
expected credit losses related to loans and leases that are not collateral
dependent; and an unallocated component that takes into account the imprecision
in estimating and allocating allowance balances associated with macro factors.
See "Summary of Critical Accounting Policies and Estimates - Allowance for
Credit Losses-Loans."
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The following table sets forth the activity in our ACL for the periods
indicated:
Six Months Ended June 30,
(Dollars in thousands) 2022 2021
Allowance for credit losses:
Balance at beginning of year $ 61,007 $ 58,862
Provision / (recapture) for credit losses 1,107 1,250
Charge-offs:
Real estate:
Commercial - -
Agricultural - -
Residential and home equity - -
Construction - -
Total real estate - -
Commercial & industrial (276 ) -
Agricultural - -
Commercial leases - -
Consumer and other (18 ) (16 )
Total charge-offs (294 ) (16 )
Recoveries:
Real estate:
Commercial - -
Agricultural - -
Residential and home equity 119 70
Construction - -
Total real estate 119 70
Commercial & industrial 131 45
Agricultural 4 5
Commercial leases - -
Consumer and other 6 13
Total recoveries 260 133
Net recoveries / charge-offs (34 ) 117
Balance at end of period $ 62,080 $ 60,229
Selected financial information:
Gross loans held for investment $ 3,258,400 $ 3,046,492
Average loans 3,222,763 3,062,940
Non-performing loans 3,028 548
Allowance for credit losses to non-performing
loans 2050.20 % 10990.69 %
Net (recoveries)/charge-offs to average loans 0.00 % 0.00 %
Provision for credit losses to average loans 0.03 % 0.04 %
Allowance for credit losses to loans held for
investment 1.91 % 1.98 %
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The following table indicates management's allocation of the ACL by loan type as of each of the following dates:
June 30, 2022 December 31, 2021
Percent Percent
(Dollars in thousands) Dollars of Total Dollars of Total
Allowance for credit losses:
Real estate:
Commercial $ 17,879 37.14 % $ 28,536 35.95 %
Agricultural 16,837 21.78 % 9,613 20.72 %
Residential and home equity 6,874 11.41 % 2,847 10.79 %
Construction 2,876 4.99 % 1,456 5.45 %
Total real estate 44,466 75.32 % 42,452 72.91 %
Commercial & Industrial 10,139 13.49 % 11,489 13.17 %
Agricultural 5,669 8.04 % 5,465 8.52 %
Commercial leases 1,645 2.73 % 938 2.99 %
Consumer and other 161 0.42 % 663 2.41 %
Total allowance for credit losses $ 62,080 100.00 % $ 61,007 100.00 %
Deposits
Total deposits were $4.8 billion and $4.64 billion as of June 30, 2022 and
December 31, 2021 , respectively. In addition to the Company's ongoing business
development activities for deposits, in management's opinion the following
factors positively impacted year-over-year deposit growth: (1) the Company's
strong financial results and position and F&M Bank's reputation as one of the
most safe and sound banks in its market area; and (2) the Company's expansion of
its service area into Walnut Creek , Oakland , Concord and Napa .
Non-interest bearing demand deposits increased slightly by $0.3 million and were
$1.75 billion as of June 30, 2022 and December 31, 2021 . Non-interest bearing
deposits were 36.77% of total deposits, as of June 30, 2022 and 37.72% as of
December 31, 2021 . Interest bearing deposits are comprised of interest-bearing
transaction accounts, money market accounts, regular savings accounts, and
certificates of deposit.
The following table shows the average amount and average rate paid on the categories of deposits for each of the periods presented:
Six Months Ended June 30,
2022 2021
(Dollars in thousands) Average Balance Interest Expense Average Rate Average Balance Interest Expense Average Rate
Total deposits:
Interest bearing deposits:
Demand $ 1,116,436 578 0.10 % $ 968,496 $ 576 0.12 %
Savings and money market 1,531,069 703 0.09 % 1,312,122 790 0.12 %
Certificates of deposit greater than $250,000 166,725 203 0.25 % 169,967 444 0.53 %
Certificates of deposit less than $250,000 221,487 192 0.17 % 243,583 461 0.38 %
Total interest-bearing deposits 3,035,717 1,676 0.11 % 2,694,168 2,271 0.17 %
Non-interest bearing deposits 1,728,962 1,522,029
Total deposits $ 4,764,679 $ 1,676 0.07 % $ 4,216,197 $ 2,271 0.11 %
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. We will continue to manage
interest expense through deposit pricing. The average cost of deposits,
including non-interest bearing deposits, declined to 0.07% for the six months
ended June 2022 compared with 0.11% for the same period a year ago.
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The following table shows deposits with a balance greater than
June 30 ,December 31 , (Dollars in thousands) 2022
2021
Deposits greater than$250,000 $ 2,817,460 $
2,708,576
Certificates of deposit greater$250,000 , by maturity: Less than 3 months 58,135 59,591 3 months to 6 months 46,841 37,182 6 months to 12 months 50,299 59,945 More than 12 months 6,965 12,147 Total time deposits greater than$250,000 $ 162,240 $
168,865
Total deposits greater than$250,000 $ 2,979,700 $
2,877,441
Refer to the Year-To-Date Average Balances and Rate Schedules 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 theState of California places time deposits with the Bank at the Bank's option. AtJune 30, 2022 andDecember 31, 2021 , the Bank had$3.0 million , of these deposits.
Lines of Credit with theFederal Reserve Bank andFederal Home Loan Bank are other key sources of funds to support earning assets. 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 atJune 30, 2022 orDecember 31, 2021 . There were no Federal Funds purchased or advances from the FRB atJune 30, 2022 orDecember 31, 2021 .
Long-Term Subordinated Debentures
OnDecember 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 10. "Long-Term Subordinated Debentures" located in "Item 8. Financial Statements and Supplementary Data" in our Annual Report on Form 10-K filed with theSEC onMarch 15, 2022 . Although this amount is reflected as subordinated debt on the Company's balance sheet, under current regulatory guidelines, our Trust Preferred Securities will continue to qualify as regulatory capital. These securities accrue interest at a variable rate based upon 3-month LIBOR plus 2.85%. Interest rates reset quarterly (the next reset isSeptember 17, 2022 ) and the rate was 4.88% as ofJune 30, 2022 and 2.97% atJune 30, 2021 . The average rate paid for these securities was 3.62% for the first half of 2022 and 3.09% for the first half of in 2021. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on the Company's common stock. 55
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Capital Resources
The Company relies primarily on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to insure depositor protection. Shareholders' Equity totaled$461 million atJune 30, 2022 , and$463 million atDecember 31, 2021 . 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.
The Company believes that it is currently in compliance with all of these capital requirements and that they will not result in any restrictions on the Company's business activity.
Management believes that the Bank meets the requirements to be categorized as "well capitalized" under theFDIC 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. The following table sets forth our capital ratios and the related regulatory guidelines: Minimum to be Minimum to be Categorized as Categorized as "Adequately December 31, (Dollars in thousands) "Well Capitalized"
Capitalized"
N/A 4.50 % 11.55 % 11.68 %
Tier 1 capital to risk-weighted assets N/A 6.00 % 11.80 % 11.94 %
Risk-based capital to risk-weighted assets N/A 8.00 % 13.05 % 13.19 %
Tier 1 leverage capital ratio N/A 4.00 % 8.94 % 8.92 %
Farmers & Merchants Bank
CET1 capital to risk-weighted assets 6.50 % 4.50 % 11.72 % 11.91 %
Tier 1 capital to risk-weighted assets 8.00 % 6.00 % 11.72 % 11.91 %
Risk-based capital to risk-weighted assets 10.00 % 8.00 % 12.97 % 13.17 %
Tier 1 leverage capital ratio 5.00 % 4.00 % 8.89 % 8.91 %
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Off-Balance-Sheet Arrangements
Off-balance-sheet arrangements are any contractual arrangement to which an unconsolidated entity is a party, under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity, or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to the Company, or engages in leasing, hedging, or research and development services with the Company. The Company had the following off balance sheet commitments as of the dates indicated.
The following table sets forth our off-balance sheet lending commitments as of
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