FARMERS & MERCHANTS BANCORP - FORM 10-Q

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - FARMERS & MERCHANTS BANCORP	Financial_Report.xls
EX-31.A - EXHIBIT 31 (A) - FARMERS & MERCHANTS BANCORP	ex31_a.htm
EX-32 - EXHIBIT 32 - FARMERS & MERCHANTS BANCORP	ex32.htm
EX-31.B - EXHIBIT 31(B) - FARMERS & MERCHANTS BANCORP	ex31_b.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from ________ to ________

Commission File Number: 000-26099

FARMERS & MERCHANTS BANCORP

(Exact name of registrant as specified in its charter)

Delaware		94-3327828
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

111 W. Pine Street, Lodi, California		95240
(Address of principal Executive offices)		(Zip Code)

Registrant's telephone number, including area code (209) 367-2300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o	Accelerated filer x	Non-accelerated filer o	Smaller Reporting Company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Number of shares of common stock of the registrant: Par value $0.01, authorized 7,500,000 shares; issued and outstanding 777,882 as of October 31, 2014.

FARMERS & MERCHANTS BANCORP

FORM 10-Q

TABLE OF CONTENTS

PART I. - FINANCIAL INFORMATION		Page

Item 1 -	Financial Statements

	Consolidated Balance Sheets (Unaudited) as of September 30, 2014, December 31, 2013 and September 30, 2013	3

	Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended September 30, 2014 and 2013	4

	Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2014 and 2013	5

	Consolidated Statements of Changes in Shareholders' Equity (Unaudited) for the Nine Months Ended September 30, 2014 and 2013	6

	Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2014 and 2013	7

	Notes to the Consolidated Financial Statements (Unaudited)	8

Item 2 -	Management's Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3 -	Quantitative and Qualitative Disclosures About Market Risk	56

Item 4 -	Controls and Procedures	58

PART II. - OTHER INFORMATION

Item 1 -	Legal Proceedings	59

Item 1A -	Risk Factors	59

Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	59

Item 3 -	Defaults Upon Senior Securities	59

Item 4 -	Mine Safety Disclosures	59

Item 5 -	Other Information	59

Item 6 -	Exhibits	59

Signatures		60

Index to Exhibits		60

31(a) Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31(b) Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32 Certifications 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.

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FARMERS & MERCHANTS BANCORP

Consolidated Balance Sheets

(in thousands except per share data)	Sept. 30, 2014		December 31, 2013			Sept. 30, 2013
Assets	(Unaudited)					(Unaudited)
Cash and Cash Equivalents:
Cash and Due from Banks	$	34,293	$	40,966		$	46,234
Interest Bearing Deposits with Banks		4,923		42,711			1,391
Total Cash and Cash Equivalents		39,216		83,677			47,625

Investment Securities:
Available-for-Sale		336,526		404,639			421,765
Held-to-Maturity		69,441		68,505			70,961
Total Investment Securities		405,967		473,144			492,726

Loans & Leases		1,615,771		1,388,236			1,297,811
Less: Allowance for Credit Losses		34,267		34,274			34,111
Loans & Leases, Net		1,581,504		1,353,962			1,263,700

Premises and Equipment, Net		24,927		22,887			21,814
Bank Owned Life Insurance		53,514		52,109			51,652
Interest Receivable and Other Assets		92,541		90,294			87,259
Total Assets	$	2,197,669	$	2,076,073		$	1,964,776

Liabilities
Deposits:
Demand	$	516,093	$	495,963		$	435,778
Interest Bearing Transaction		326,368		291,795			257,650
Savings and Money Market		614,137		589,511			561,277
Time		419,615		430,422			439,081
Total Deposits		1,876,213		1,807,691			1,693,786

Federal Home Loan Bank Advances		36,000		-			5,900
Subordinated Debentures		10,310		10,310			10,310
Interest Payable and Other Liabilities		47,910		48,168			43,739
Total Liabilities		1,970,433		1,866,169			1,753,735

Shareholders' Equity
Preferred Stock: No Par Value, 1,000,000 Shares Authorized, None Issued or Outstanding		-		-			-
Common Stock: Par Value $0.01, 7,500,000 Shares Authorized, 777,882 Shares Issued and Outstanding at September 30, 2014, December 31, 2013 and September 30, 2013, respectively		8		8			8
Additional Paid-In Capital		75,014		75,014			75,014
Retained Earnings		151,268		137,350			136,357
Accumulated Other Comprehensive Income (Loss)		946		(2,468	)		(338	)
Total Shareholders' Equity		227,236		209,904			211,041
Total Liabilities and Shareholders' Equity	$	2,197,669	$	2,076,073		$	1,964,776

The accompanying notes are an integral part of these unaudited consolidated financial statements

Table of Contents

FARMERS & MERCHANTS BANCORP

Consolidated Statements of Income (Unaudited)

(in thousands except per share data)	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014		2013
Interest Income
Interest and Fees on Loans & Leases	$	18,166		$	16,679		$	51,178	$	48,030
Interest on Deposits with Banks		5			2			110		49
Interest on Investment Securities:
Taxable		1,849			2,297			6,073		6,785
Exempt from Federal Tax		594			637			1,758		1,951
Total Interest Income		20,614			19,615			59,119		56,815

Interest Expense
Deposits		621			632			1,819		1,943
Borrowed Funds		5			7			5		16
Subordinated Debentures		82			82			242		245
Total Interest Expense		708			721			2,066		2,204

Net Interest Income		19,906			18,894			57,053		54,611
Provision for Credit Losses		-			-			-		250
Net Interest Income After Provision for Credit Losses		19,906			18,894			57,053		54,361

Non-Interest Income
Service Charges on Deposit Accounts		1,022			1,139			2,944		3,312
Net Gain (Loss) on Sale of Investment Securities		4			(1,137	)		38		(248	)
Increase in Cash Surrender Value of Life Insurance		477			473			1,405		1,399
Debit Card and ATM Fees		797			774			2,322		2,295
Net (Loss) Gain on Deferred Compensation Investments		(37	)		875			1,493		2,279
Other		657			1,324			1,823		2,872
Total Non-Interest Income		2,920			3,448			10,025		11,909

Non-Interest Expense
Salaries and Employee Benefits		9,336			8,244			26,710		25,184
Net (Loss) Gain on Deferred Compensation Investments		(37	)		875			1,493		2,279
Occupancy		724			649			1,981		1,899
Equipment		714			705			2,117		2,078
FDIC Insurance		264			246			778		732
Other		1,541			1,466			4,137		5,074
Total Non-Interest Expense		12,542			12,185			37,216		37,246

Income Before Income Taxes		10,284			10,157			29,862		29,024
Provision for Income Taxes		3,852			3,805			11,044		10,856
Net Income	$	6,432		$	6,352		$	18,818	$	18,168
Basic Earnings Per Common Share	$	8.27		$	8.17		$	24.19	$	23.36

The accompanying notes are an integral part of these consolidated financial statements

Table of Contents

FARMERS & MERCHANTS BANCORP

Consolidated Statements of Comprehensive Income (Unaudited)

(in thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Net Income		6,432		$	6,352		$	18,818		$	18,168

Other Comprehensive Income (Loss)
(Decrease) Increase in Net Unrealized (Losses) Gains on Available-for-Sale Securities		(1,752	)		1,681			5,929			(12,907	)
Reclassification Adjustment for Realized (Gains) Losses on Available-for-Sale Securities Included in Net Income		(4	)		1,137			(38	)		248
Deferred Tax Benefit (Expense)		738			(1,185	)		(2,477	)		5,322
Change in Net Unrealized (Losses) Gains on Available-for-Sale Securities, Net of Tax		(1,018	)		1,633			3,414			(7,337	)

Total Other Comprehensive (Loss) Income		(1,018	)		1,633			3,414			(7,337	)

Comprehensive Income	$	5,414		$	7,985		$	22,232		$	10,831

The accompanying notes are an integral part of these unaudited consolidated financial statements

Table of Contents

FARMERS & MERCHANTS BANCORP

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

(in thousands except share data)	Common Shares Outstanding		Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net			Total Shareholders' Equity
Balance, January 1, 2013		777,882	$	8	$	75,014	$	123,012		$	6,999		$	205,033
Net Income				-		-		18,168			-			18,168
Cash Dividends Declared on Common Stock ($6.20 per share)				-		-		(4,823	)		-			(4,823	)
Change in Net Unrealized Loss on Securities Available for Sale, Net of Tax				-		-		-			(7,337	)		(7,337	)
Balance, September 30, 2013		777,882	$	8	$	75,014	$	136,357		$	(338	)	$	211,041

Balance, January 1, 2014		777,882	$	8	$	75,014	$	137,350		$	(2,468	)	$	209,904
Net Income				-		-		18,818			-			18,818
Cash Dividends Declared on Common Stock ($6.30 per share)				-		-		(4,900	)		-			(4,900	)
Change in Net Unrealized Loss on Securities Available for Sale, Net of Tax				-		-		-			3,414			3,414
Balance, September 30, 2014		777,882	$	8	$	75,014	$	151,268		$	946		$	227,236

The accompanying notes are an integral part of these unaudited consolidated financial statements

Table of Contents

FARMERS & MERCHANTS BANCORP

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)	Nine Months Ended September 30,
	2014			2013
Operating Activities:
Net Income	$	18,818		$	18,168
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses		-			250
Depreciation and Amortization		991			1,152
Net Amortization of Investment Security Premiums & Discounts		1,249			2,543
Net (Gain) Loss on Sale of Investment Securities		(38	)		248
Net Gain on Sale of Property & Equipment		(15	)		(705	)
Net Change in Operating Assets & Liabilities:
Net Increase in Interest Receivable and Other Assets		(5,984	)		(10,253	)
Net (Decrease) Increase in Interest Payable and Other Liabilities		(258	)		6,422
Net Cash Provided by Operating Activities		14,763			17,825
Investing Activities:
Purchase of Investment Securities Available-for-Sale		(65,637	)		(221,100	)
Proceeds from Sold, Matured or Called Securities Available-for-Sale		138,298			195,339
Purchase of Investment Securities Held-to-Maturity		(15,660	)		(355	)
Proceeds from Matured or Called Securities Held-to-Maturity		14,711			4,278
Net Loans & Leases Paid, Originated or Acquired		(227,739	)		(51,649	)
Principal Collected on Loans & Leases Previously Charged Off		197			384
Additions to Premises and Equipment		(3,045	)		(187	)
Proceeds from Sale of Property & Equipment		29			827
Net Cash Used by Investing Activities		(158,846	)		(72,463	)
Financing Activities:
Net Increase (Decrease) in Deposits		68,522			(28,240	)
Net Changes in Other Borrowings		36,000			5,900
Cash Dividends		(4,900	)		(4,823	)
Net Cash Provided (Used) by Financing Activities		99,622			(27,163	)
Decrease in Cash and Cash Equivalents		(44,461	)		(81,801	)
Cash and Cash Equivalents at Beginning of Period		83,677			129,426
Cash and Cash Equivalents at End of Period	$	39,216		$	47,625
Supplementary Data
Loans Transferred to Foreclosed Assets (ORE)	$	-		$	3,458
Cash Payments Made for Income Taxes	$	10,900		$	13,886
Interest Paid	$	2,103		$	2,346

The accompanying notes are an integral part of these unaudited consolidated financial statements

Table of Contents

FARMERS & MERCHANTS BANCORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Significant Accounting Policies

Farmers & Merchants Bancorp (the “Company”) was organized March 10, 1999. Primary operations are related to traditional banking activities through its subsidiary Farmers & Merchants Bank of Central California (the “Bank”) which was established in 1916. The Bank’s wholly owned subsidiaries include Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Farmers & Merchants Investment Corporation has been dormant since 1991. Farmers/Merchants Corp. acts as trustee on deeds of trust originated by the Bank.

The Company’s other 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. FMCB Statutory Trust I is a non-consolidated subsidiary per Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”) and was formed for the sole purpose of issuing Trust Preferred Securities.

The accounting and reporting policies of the Company conform to U.S. GAAP and prevailing practice within the banking industry. The following is a summary of the significant accounting and reporting policies used in preparing the consolidated financial statements.

Basis of Presentation

The accompanying consolidated financial statements and notes thereto have been prepared in accordance with accounting principles generally accepted in the United States of America for financial information.

These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting on Form 10-Q. Accordingly, certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with U.S. GAAP have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The results of operations for the three-month and nine-month periods ended September 30, 2014 may not necessarily be indicative of future operating results.

The accompanying consolidated financial statements include the accounts of the Company and the Company’s wholly owned subsidiaries, F & M Bancorp, Inc. and the Bank, along with the Bank’s wholly owned subsidiaries, Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Significant inter-company transactions have been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Certain amounts in the prior years' financial statements and related footnote disclosures have been reclassified to conform to the current-year presentation. These reclassifications had no effect on previously reported net income or total shareholders’ equity. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the periods presented.

Table of Contents

Cash and Cash Equivalents

For purposes of the Consolidated Statements of Cash Flows, the Company has defined cash and cash equivalents as those amounts included in the balance sheet captions Cash and Due from Banks, Interest Bearing Deposits with Banks, Federal Funds Sold and Securities Purchased Under Agreements to Resell. For these instruments, the carrying amount is a reasonable estimate of fair value.

Investment Securities

Investment securities are classified at the time of purchase as held-to-maturity if it is management’s intent and the Company has the ability to hold the securities until maturity. These securities are carried at cost, adjusted for amortization of premium and accretion of discount using a level yield of interest over the estimated remaining period until maturity. Losses, reflecting a decline in value judged by the Company to be other than temporary, are recognized in the period in which they occur.

Securities are classified as available-for-sale if it is management’s intent, at the time of purchase, to hold the securities for an indefinite period of time and/or to use the securities as part of the Company’s asset/liability management strategy. 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. Fair values are based on quoted market prices or broker/dealer price quotations on a specific identification basis. Gains or losses on the sale of these securities are computed using the specific identification method.

Trading securities, if any, are acquired for short-term appreciation and are recorded in a trading portfolio and are carried at fair value, with unrealized gains and losses recorded in non-interest income.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement; and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

Loans & Leases

Loans & leases are reported at the principal amount outstanding net of unearned discounts and deferred loan & lease fees and costs. Interest income on loans & leases is accrued daily on the outstanding balances using the simple interest method. Loan & lease origination fees are deferred and recognized over the contractual life of the loan or lease as an adjustment to the yield. Loans & leases are placed on non-accrual status when the collection of principal or interest is in doubt or when they become past due for 90 days or more unless they are both well-secured and in the process of collection. For this purpose a loan or lease is considered well-secured if it is collateralized by property having a net realizable value in excess of the amount of the loan or lease or is guaranteed by a financially capable party. When a loan or lease is placed on non-accrual status, the accrued and unpaid interest receivable is reversed and charged against current income; thereafter, interest income is recognized only as it is collected in cash. Additionally, cash would be applied to principal if all principal was not expected to be collected. Loans & leases placed on non-accrual status are returned to accrual status when the loans or leases are paid current as to principal and interest and future payments are expected to be made in accordance with the contractual terms of the loan or lease.

Table of Contents

A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Impaired loans & leases are either: (1) non-accrual loans & leases; or (2) restructured loans & leases that are still accruing interest. Loans or leases determined to be impaired are individually evaluated for impairment. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan or lease's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan or lease's observable market price, or the fair value of the collateral if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral.

A restructuring of a loan or lease constitutes a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the borrower’s (the term “borrower” is used herein to describe a customer who has entered into either a loan or lease transaction) financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured loans & leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans & leases that are reported as TDRs are considered impaired and measured for impairment as described above.

Generally, the Company will not restructure loans or leases for borrowers unless: (1) the existing loan or lease is brought current as to principal and interest payments; and (2) the restructured loan or lease can be underwritten to reasonable underwriting standards. If these standards are not met other actions will be pursued (e.g., foreclosure) to collect outstanding loan or lease amounts. After restructure a determination is made whether the loan or lease will be kept on accrual status based upon the underwriting and historical performance of the restructured credit.

Allowance for Credit Losses

The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company's loan & lease portfolio as of the balance sheet date. The allowance is established through a provision for credit losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan & lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of three primary components: specific reserves related to impaired loans & leases; general reserves for inherent losses related to loans & leases that are not impaired; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors.

The determination of the general reserve for loans & leases that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, qualitative factors that include economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, the character of the loan & lease portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1^st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer and other; and (9) equipment leases. The allowance for credit losses attributable to each portfolio segment, which includes both individually evaluated impaired loans & leases and loans & leases that are collectively evaluated for impairment, is combined to determine the Company's overall allowance, which is included on the consolidated balance sheet.

The Company assigns a risk rating to all loans & leases and periodically performs detailed reviews of all such loans & leases over a certain threshold to identify credit risks and assess overall collectability. For smaller balance loans & 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 & 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:

Table of Contents

Pass – A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management's close attention.

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 & 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.

Loss – Loans or leases classified as loss are considered uncollectible. Once a loan or lease becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Company will estimate its probable loss and immediately charge-off some or all of the balance.

The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management's assessment of the following for each portfolio segment: (1) inherent credit risk; (2) historical losses; and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below:

Commercial Real Estate – Commercial real estate mortgage loans are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.

Real Estate Construction – Real estate construction loans, including land loans, are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.

Commercial – These loans are generally considered to possess a moderate inherent risk of loss because they are shorter-term; typically made to relationship customers; generally underwritten to existing cash flows of operating businesses; and may be collateralized by fixed assets, inventory and/or accounts receivable. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

Agricultural Real Estate and Agricultural – These loans are generally considered to possess a moderate inherent risk of loss since they are typically made to relationship customers and are secured by crop production, livestock and related real estate. These loans are vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.

Leases – Equipment leases are generally considered to possess a moderate inherent risk of loss. As Lessor, the company is subject to both the credit risk of the borrower and the residual value risk of the equipment. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

Table of Contents

Residential 1st Mortgages and Home Equity Lines and Loans – These loans are generally considered to possess a low inherent risk of loss, although this is not always true as evidenced by the weakness in residential real estate values over the past five years. The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

Consumer & Other – A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company's and Bank's regulators, including the Federal Reserve Bank (“FRB”), the California Department of Business Oversight (“DBO”) and the Federal Deposit Insurance Corporation (“FDIC”), as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.

Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures

The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off-balance-sheet commitments is included in Interest Payable and Other Liabilities on the Company’s Consolidated Balance Sheet.

Premises and Equipment

Premises, equipment, and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation is computed principally by the straight line method over the estimated useful lives of the assets. Estimated useful lives of buildings range from 30 to 40 years, and for furniture and equipment from 3 to 7 years. Leasehold improvements are amortized over the lesser of the terms of the respective leases, or their useful lives, which are generally 5 to 10 years. Remodeling and capital improvements are capitalized while maintenance and repairs are charged directly to occupancy expense.

Other Real Estate

Other real estate, which is included in other assets, 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 income or expense as incurred.

Income Taxes

The Company uses the liability method of accounting for income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount combined with the current taxes payable or refundable results in the income tax expense for the current year.

Table of Contents

The Company follows the standards set forth in the “Income Taxes” topic of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This standard prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. 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 sheet 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, if any, are included in the provision for income taxes in the Unaudited Consolidated Statements of Income.

Dividends and Basic Earnings Per Common Share

The Company’s common stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. 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 presentation of diluted basic earnings per common share. See Note 6.

Segment Reporting

The “Segment Reporting” topic of the FASB ASC requires that public companies report certain information about operating segments. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is a holding company for a community 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. As a result, the Company is not organized around discernible lines of business and prefers to work as an integrated unit to customize solutions for its customers, with business line emphasis and product offerings changing over time as needs and demands change. Therefore, the Company only reports one segment.

Derivative Instruments and Hedging Activities

The “Derivatives and Hedging” topic of the FASB ASC establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. Changes in the fair value of those derivatives are accounted for depending on the intended use of the derivative and the resulting designation under specified criteria. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, designed to minimize interest rate risk, the effective portions of the change in the fair value of the derivative are recorded in other comprehensive income (loss), net of related income taxes. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.

From time to time, the Company utilizes derivative financial instruments such as interest rate caps, floors, swaps, and collars. These instruments are purchased and/or sold to reduce the Company’s exposure to changing interest rates. The Company marks to market the value of its derivative financial instruments and reflects gain or loss in earnings in the period of change or in other comprehensive income (loss). The Company was not utilizing any derivative instruments as of or for the period ended September 30, 2014, December 31, 2013 or September 30, 2013.

Table of Contents

Comprehensive Income

The “Comprehensive Income” topic of the FASB ASC establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Other comprehensive income (loss) refers to revenues, expenses, gains, and losses that generally accepted accounting principles recognize as changes in value to an enterprise but are excluded from net income. For the Company, comprehensive income includes net income and changes in fair value of its available-for-sale investment securities.

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 now are such matters that will have a material effect on the financial statements.

2. Investment Securities

The amortized cost, fair values, and unrealized gains and losses of the securities available-for-sale are as follows

(in thousands):

	Amortized		Gross Unrealized				Fair/Book
September 30, 2014	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	13,220	$	141	$	-	$	13,361
Mortgage Backed Securities⁽¹⁾		321,187		3,936		2,443		322,680
Other		485		-		-		485
Total	$	334,892	$	4,077	$	2,443	$	336,526

	Amortized		Gross Unrealized				Fair/Book
December 31, 2013	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	28,287	$	149	$	-	$	28,436
Mortgage Backed Securities⁽¹⁾		329,469		3,026		7,566		324,929
Corporate Securities		49,247		280		147		49,380
Other		1,894		-		-		1,894
Total	$	408,897	$	3,455	$	7,713	$	404,639

	Amortized		Gross Unrealized				Fair/Book
September 30, 2013	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	28,404	$	239	$	-	$	28,643
Mortgage Backed Securities⁽¹⁾		342,963		4,928		5,814		342,077
Corporate Securities		49,696		250		185		49,761
Other		1,284		-		-		1,284
Total	$	422,347	$	5,417	$	5,999	$	421,765

⁽¹⁾All Mortgage Backed Securities consist of securities collateralized by residential real estate and were issued by an agency or government sponsored entity of the U.S. government.

Table of Contents

The book values, estimated fair values and unrealized gains and losses of investments classified as held-to-maturity are as follows (in thousands):

	Book		Gross Unrealized				Fair
September 30, 2014	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	67,206	$	725	$	17	$	67,914
Other		2,235		-		-		2,235
Total	$	69,441	$	725	$	17	$	70,149

	Book		Gross Unrealized				Fair
December 31, 2013	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	65,685	$	812	$	627	$	65,870
Mortgage Backed Securities⁽¹⁾		45		-		-		45
Other		2,775		-		-		2,775
Total	$	68,505	$	812	$	627	$	68,690

	Book		Gross Unrealized				Fair
September 30, 2013	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	67,717	$	965	$	741	$	67,941
Mortgage Backed Securities⁽¹⁾		121		1		-		122
Other		3,123		-		-		3,123
Total	$	70,961	$	966	$	741	$	71,186

⁽¹⁾All Mortgage Backed Securities consist of securities collateralized by residential real estate and were issued by an agency or government sponsored entity of the U.S. government.

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.

In June 2014, the Company sold $375,000 of municipal bonds from a single issuer. The Company took this action under the provisions of ASC 320-10-25-6(a), which allow for the sale of HTM securities where there is “evidence of a significant deterioration in the issuer’s creditworthiness.” The resulting income statement impact was not material.

The amortized cost and estimated fair values of investment securities at September 30, 2014 by contractual maturity are shown in the following tables (in thousands):

	Available-for-Sale				Held-to-Maturity
September 30, 2014	Amortized Cost		Fair/Book Value		Book Value		Fair Value
Within one year	$	10,473	$	10,496	$	4,115	$	4,117
After one year through five years		3,232		3,350		17,518		17,814
After five years through ten years		-		-		13,440		13,589
After ten years		-		-		34,368		34,629
		13,705		13,846		69,441		70,149

Investment securities not due at a single maturity date:
Mortgage-backed securities		321,187		322,680		-		-

Total	$	334,892	$	336,526	$	69,441	$	70,149

Expected maturities of mortgage backed securities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

Table of Contents

The following tables show those investments with gross unrealized losses and their market value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at the dates indicated (in thousands):

	Less Than 12 Months				12 Months or More				Total
September 30, 2014	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss

Securities Available-for-Sale
Mortgage Backed Securities	$	62,825	$	240	$	64,968	$	2,203		127,793	$	2,443
Total	$	62,825	$	240	$	64,968	$	2,203	$	127,793	$	2,443

Securities Held-to-Maturity
Obligations of States and Political Subdivisions	$	1,943	$	11	$	2,556	$	6	$	4,499	$	17
Total	$	1,943	$	11	$	2,556	$	6	$	4,499	$	17

	Less Than 12 Months				12 Months or More				Total
December 31, 2013	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss

Securities Available-for-Sale
Mortgage Backed Securities	$	195,736	$	7,566	$	-	$	-	$	195,736	$	7,566
Corporate Securities		15,297		106		2,457		41		17,754		147
Total	$	211,033	$	7,672	$	2,457	$	41	$	213,490	$	7,713

Securities Held-to-Maturity
Obligations of States and Political Subdivisions	$	9,518	$	627	$	-	$	-	$	9,518	$	627
Total	$	9,518	$	627	$	-	$	-	$	9,518	$	627

	Less Than 12 Months				12 Months or More				Total
September 30, 2013	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities Available-for-Sale
Mortgage Backed Securities	$	129,198	$	5,814	$	-	$	-	$	129,198	$	5,814
Corporate Securities		19,881		185		-		-		19,881		185
Total	$	149,079	$	5,999	$	-	$	-	$	149,079	$	5,999

Securities Held-to-Maturity
Obligations of States and Political Subdivisions	$	9,411	$	741	$	-	$	-	$	9,411	$	741
Total	$	9,411	$	741	$	-	$	-	$	9,411	$	741

As of September 30, 2014, the Company held 280 investment securities of which 15 were in a loss position for less than twelve months. 12 securities were in a loss position for twelve months or more. Management periodically evaluates each investment security for other-than-temporary impairment relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities.

Table of Contents

Securities of Government Agency and Government Sponsored Entities – There were no unrealized losses on the Company’s investments in securities of government agency and government sponsored entities at September 30, 2014, December 31, 2013 and September 30, 2013.

Mortgage Backed Securities - The unrealized losses on the Company's investment in mortgage backed securities were $2.4 million, $7.6 million, and $5.8 million at September 30, 2014, December 31, 2013, and September 30, 2013, respectively. The unrealized losses on the Company’s investment in mortgage backed securities were caused by interest rate fluctuations. The contractual cash flows of these investments are guaranteed by an agency or government sponsored entity of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2014, December 31, 2013 and September 30, 2013, respectively.

Obligations of States and Political Subdivisions - The financial problems experienced by certain municipalities over the past five years, along with the financial stresses exhibited by some of the large monoline bond insurers have increased the overall risk associated with bank-qualified municipal bonds. As of September 30, 2014, over ninety-six percent of the Company’s bank-qualified municipal bond portfolio is rated at either the issue or issuer level, and all of these ratings are “investment grade.” The Company monitors the status of the four percent of the portfolio that is not rated and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security. In June 2014, the Company sold $375,000 of municipal bonds from a single issuer. The Company took this action under the provisions of ASC 320-10-25-6(a), which allow for the sale of HTM securities where there is “evidence of a significant deterioration in the issuer’s creditworthiness.” The resulting income statement impact was not material.

The unrealized losses on the Company’s investment in obligation of states and political subdivision were $17,000, $627,000, and $741,000 at September 30, 2014, December 31, 2013 and September 30, 2013, respectively. Management believes that any unrealized losses on the Company's investments in obligations of states and political subdivisions were primarily caused by interest rate fluctuations. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2014, December 31, 2013 and September 30, 2013, respectively.

Corporate Securities – The Company did not hold any corporate securities at September 30, 2014. The unrealized losses on the Company’s investment in corporate securities at December 31, 2013, and September 30, 2013, were $147,000, and $185,000, respectively. Changes in the prices of corporate securities are primarily influenced by: (1) changes in market interest rates; (2) changes in perceived credit risk in the general economy or in particular industries; (3) changes in the perceived credit risk of a particular company; and (4) day to day trading supply, demand and liquidity. Because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2013 and September 30, 2013, respectively.

Proceeds from sales and calls of securities were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2014		2013		2014		2013
Proceeds	$	85,433	$	28,297	$	95,349	$	77,912
Gains		811		285		845		1,189
Losses		807		1,422		807		1,437

Table of Contents

Pledged Securities

As of September 30, 2014, securities carried at $360.0 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 $334.8 million at December 31, 2013, and $310.5 million at September 30, 2013.

3. Loans & Leases and Allowance for Credit Losses

The following tables show the allocation of the allowance for credit losses by portfolio segment and by impairment methodology at the dates indicated (in thousands):

September 30, 2014	Commercial Real Estate		Agricultural Real Estate		Real Estate Construction		Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial		Consumer & Other			Leases		Unallocated			Total

Year-To-Date Allowance for Credit Losses:
Beginning Balance- January 1, 2014	$	5,178	$	3,576	$	654	$	1,108		$	2,767		$	12,205		$	5,697	$	176		$	639	$	2,274		$	34,274
Charge-Offs		-		-		-		(58	)		(70	)		-			-		(76	)		-		-			(204	)
Recoveries		12		-		-		-			54			3			83		45			-		-			197
Provision		2,608		370		1,026		92			(76	)		(6,426	)		2,135		76			1,206		(1,011	)		-
Ending Balance- September 30, 2014	$	7,798	$	3,946	$	1,680	$	1,142		$	2,675		$	5,782		$	7,915	$	221		$	1,845	$	1,263		$	34,267
Third Quarter Allowance for Credit Losses:
Beginning Balance- July 1, 2014	$	6,991	$	3,677	$	1,290	$	1,094		$	2,737		$	8,291		$	7,377	$	193		$	1,108	$	1,532		$	34,290
Charge-Offs		-		-		-		(25	)		(5	)		-			-		(31	)		-		-			(61	)
Recoveries		12		-		-		-			3			1			6		16			-		-			38
Provision		795		269		390		73			(60	)		(2,510	)		532		43			737		(269	)		-
Ending Balance- September 30, 2014	$	7,798	$	3,946	$	1,680	$	1,142		$	2,675		$	5,782		$	7,915	$	221		$	1,845	$	1,263		$	34,267
Ending Balance Individually Evaluated for Impairment		190		-		239		370			328			120			912		42			-		-			2,201
Ending Balance Collectively Evaluated for Impairment		7,608		3,946		1,441		772			2,347			5,662			7,003		179			1,845		1,263			32,066
Loans & Leases:
Ending Balance	$	473,505	$	364,161	$	104,463	$	168,310		$	33,283		$	237,521		$	192,804	$	4,816		$	36,908	$	-		$	1,615,771
Ending Balance Individually Evaluated for Impairment		20,175		-		4,419		1,847			1,658			518			4,877		42			-		-			33,536
Ending Balance Collectively Evaluated for Impairment		453,330		364,161		100,044		166,463			31,625			237,003			187,927		4,774			36,908		-			1,582,235

Table of Contents

December 31, 2013	Commercial Real Estate			Agricultural Real Estate			Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Leases		Unallocated			Total

Year-To-Date Allowance for Credit Losses:
Beginning Balance- January 1, 2013	$	6,464		$	2,877		$	986		$	1,219		$	3,235		$	10,437		$	7,963		$	182		$	-	$	854		$	34,217
Charge-Offs		(6	)		(575	)		-			(16	)		(91	)		(23	)		(60	)		(120	)		-		-			(891	)
Recoveries		-			-			-			-			115			42			312			54			-		-			523
Provision		(1,280	)		1,274			(332	)		(95	)		(492	)		1,749			(2,518	)		60			639		1,420			425
Ending Balance- December 31, 2013	$	5,178		$	3,576		$	654		$	1,108		$	2,767		$	12,205		$	5,697		$	176		$	639	$	2,274		$	34,274
Ending Balance Individually Evaluated for Impairment		-			-			-			414			209			122			820			51			-		-			1,616
Ending Balance Collectively Evaluated for Impairment		5,178			3,576			654			694			2,558			12,083			4,877			125			639		2,274			32,658
Loans & Leases:
Ending Balance	$	407,514		$	328,264		$	41,092		$	151,292		$	35,477		$	256,414		$	150,398		$	5,052		$	12,733	$	-		$	1,388,236
Ending Balance Individually Evaluated for Impairment		22,176			-			4,500			2,072			1,045			522			5,250			51			-		-			35,616
Ending Balance Collectively Evaluated for Impairment		385,338			328,264			36,592			149,220			34,432			255,892			145,148			5,001			12,733		-			1,352,620

September 30, 2013	Commercial Real Estate			Agricultural Real Estate			Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Leases		Unallocated			Total

Year-To-Date Allowance for Credit Losses:
Beginning Balance- January 1, 2013	$	6,464		$	2,877		$	986		$	1,219		$	3,235		$	10,437		$	7,963		$	182		$	-	$	854		$	34,217
Charge-Offs		(6	)		(575	)		-			(16	)		(23	)		(23	)		(4	)		(93	)		-		-			(740	)
Recoveries		-			-			-			-			30			36			281			37			-		-			384
Provision		(382	)		911			(48	)		(130	)		(492	)		(1,190	)		1,551			42			-		(12	)		250
Ending Balance- September 30, 2013	$	6,076		$	3,213		$	938		$	1,073		$	2,750		$	9,260		$	9,791		$	168		$	-	$	842		$	34,111
Third Quarter Allowance for Credit Losses:
Beginning Balance- July 1, 2013	$	5,732		$	3,481		$	977		$	1,037		$	2,984		$	10,557		$	9,075		$	168		$	-	$	224		$	34,235
Charge-Offs		(6	)		(175	)		-			-			(1	)		-			-			(29	)		-		-			(211	)
Recoveries		-			-			-			-			10			16			45			16			-		-			87
Provision		350			(93	)		(39	)		36			(243	)		(1,313	)		671			13			-		618			-
Ending Balance- September 30, 2013	$	6,076		$	3,213		$	938		$	1,073		$	2,750		$	9,260		$	9,791		$	168		$	-	$	842		$	34,111
Ending Balance Individually Evaluated for Impairment		788			-			229			75			147			126			1,858			53			-		-			3,276
Ending Balance Collectively Evaluated for Impairment		5,288			3,213			709			998			2,603			9,134			7,933			115			-		842			30,835
Loans & Leases:
Ending Balance	$	401,626		$	311,401		$	27,099		$	143,577		$	37,160		$	221,569		$	145,793		$	5,063		$	4,523	$	-		$	1,297,811
Ending Balance Individually Evaluated for Impairment		22,467			849			4,527			1,962			1,125			738			2,192			53			-		-			33,913
Ending Balance Collectively Evaluated for Impairment		379,159			310,552			22,572			141,615			36,035			220,831			143,601			5,010			4,523		-			1,263,898

Table of Contents

The ending balance of loans individually evaluated for impairment includes restructured loans in the amount of $26.6 million at September 30, 2014, $28.4 million at December 31, 2013 and $28.7 million at September 30, 2013, which are no longer disclosed or classified as TDR’s.

The following tables show the loan & lease portfolio allocated by management’s internal risk ratings at the dates indicated (in thousands):

September 30, 2014	Pass		Special Mention		Substandard		Total Loans & Leases
Loans & Leases:
Commercial Real Estate	$	464,714	$	8,683	$	108	$	473,505
Agricultural Real Estate		364,161		-		-		364,161
Real Estate Construction		102,831		1,632		-		104,463
Residential 1st Mortgages		166,884		752		674		168,310
Home Equity Lines & Loans		32,309		88		886		33,283
Agricultural		236,760		695		66		237,521
Commercial		168,215		22,929		1,660		192,804
Consumer & Other		4,520		-		296		4,816
Leases		36,908		-		-		36,908
Total	$	1,577,302	$	34,779	$	3,690	$	1,615,771

December 31, 2013	Pass		Special Mention		Substandard		Total Loans & Leases
Loans & Leases:
Commercial Real Estate	$	398,488	$	7,979	$	1,047	$	407,514
Agricultural Real Estate		325,926		2,338		-		328,264
Real Estate Construction		39,460		1,632		-		41,092
Residential 1st Mortgages		149,798		774		720		151,292
Home Equity Lines & Loans		34,821		-		656		35,477
Agricultural		255,443		889		82		256,414
Commercial		132,008		15,426		2,964		150,398
Consumer & Other		4,763		-		289		5,052
Leases		12,733		-		-		12,733
Total	$	1,353,440	$	29,038	$	5,758	$	1,388,236

September 30, 2013	Pass		Special Mention		Substandard		Total Loans
Loans & Leases:
Commercial Real Estate	$	389,137	$	7,765	$	4,724	$	401,626
Agricultural Real Estate		307,736		2,497		1,168		311,401
Real Estate Construction		25,467		1,632		-		27,099
Residential 1st Mortgages		142,036		780		761		143,577
Home Equity Lines & Loans		36,090		-		1,070		37,160
Agricultural		220,504		464		601		221,569
Commercial		135,303		8,958		1,532		145,793
Consumer & Other		4,761		-		302		5,063
Leases		4,523		-		-		4,523
Total	$	1,265,557	$	22,096	$	10,158	$	1,297,811

Table of Contents

See “Note 1. Significant Accounting Policies - Allowance for Credit Losses” for a description of the internal risk ratings used by the Company. There were no loans or leases outstanding at September 30, 2014, December 31, 2013, and September 30, 2013 rated doubtful or loss.

The following tables show an aging analysis of the loan & lease portfolio by the time past due at the dates indicated

(in thousands):

September 30, 2014	30-59 Days Past Due		60-89 Days Past Due		90 Days and Still Accruing		Nonaccrual		Total Past Due		Current		Total Loans
Loans & Leases:
Commercial Real Estate	$	-	$	-	$	-	$	-	$	-	$	473,505	$	473,505
Agricultural Real Estate		-		-		-		-		-		364,161		364,161
Real Estate Construction		-		-		-		-		-		104,463		104,463
Residential 1st Mortgages		-		-		-		283		283		168,027		168,310
Home Equity Lines & Loans		92		-		-		575		667		32,616		33,283
Agricultural		-		-		-		25		25		237,496		237,521
Commercial		-		-		-		1,600		1,600		191,204		192,804
Consumer & Other		12		-		-		14		26		4,790		4,816
Leases		-		-		-		-		-		36,908		36,908
Total	$	104	$	-	$	-	$	2,497	$	2,601	$	1,613,170	$	1,615,771

December 31, 2013	30-59 Days Past Due		60-89 Days Past Due		90 Days and Still Accruing		Nonaccrual		Total Past Due		Current		Total Loans
Loans & Leases:
Commercial Real Estate	$	773	$	-	$	-	$	-	$	773	$	406,741	$	407,514
Agricultural Real Estate		607		-		-		-		607		327,657		328,264
Real Estate Construction		-		-		-		-		-		41,092		41,092
Residential 1st Mortgages		-		-		-		324		324		150,968		151,292
Home Equity Lines & Loans		-		52		-		406		458		35,019		35,477
Agricultural		-		-		-		35		35		256,379		256,414
Commercial		-		-		-		1,815		1,815		148,583		150,398
Consumer & Other		19		-		-		16		35		5,017		5,052
Leases		-		-		-		-		-		12,733		12,733
Total	$	1,399	$	52	$	-	$	2,596	$	4,047	$	1,384,189	$	1,388,236

September 30, 2013	30-59 Days Past Due		60-89 Days Past Due		90 Days and Still Accruing		Nonaccrual		Total Past Due		Current		Total Loans
Loans & Leases:
Commercial Real Estate	$	592	$	-	$	-	$	176	$	768	$	400,858	$	401,626
Agricultural Real Estate		-		-		-		849		849		310,552		311,401
Real Estate Construction		-		-		-		-		-		27,099		27,099
Residential 1st Mortgages		-		-		-		455		455		143,122		143,577
Home Equity Lines & Loans		-		121		-		243		364		36,796		37,160
Agricultural		-		-		-		99		99		221,470		221,569
Commercial		-		-		-		1,944		1,944		143,849		145,793
Consumer & Other		14		94		-		17		125		4,938		5,063
Leases		-		-		-		-		-		4,523		4,523
Total	$	606	$	215	$	-	$	3,783	$	4,604	$	1,293,207	$	1,297,811

Table of Contents

The following tables show information related to impaired loans & leases for the periods indicated (in thousands):

							Three Months Ended September 30, 2014				Nine Months Ended September 30, 2014
September 30, 2014	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial Real Estate	$	-	$	-	$	-	$	49	$	-	$	82	$	4
Home Equity Lines & Loans		-		-		-		-		-		226		-
Agricultural		-		-		-		14		-		26		-
Commercial		-		-		-		1,575		-		2,740		54
	$	-	$	-	$	-	$	1,638	$	-	$	3,074	$	58
With an allowance recorded:
Commercial Real Estate	$	94	$	94	$	2	$	47	$	2	$	16	$	2
Residential 1st Mortgages		658		771		131		550		1		522		3
Home Equity Lines & Loans		955		1,008		191		934		3		710		6
Agricultural		483		493		119		478		7		477		21
Commercial		4,744		4,801		908		3,179		27		2,144		27
Consumer & Other		43		47		43		44		1		47		2
	$	6,977	$	7,214	$	1,394	$	5,232	$	41	$	3,916	$	61
Total	$	6,977	$	7,214	$	1,394	$	6,870	$	41	$	6,990	$	119


December 31, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial Real Estate	$	102	$	101	$	-	$	865	$	8
Agricultural Real Estate		-		-		-		2,185		-
Residential 1st Mortgages		-		-		-		450		11
Home Equity Lines and Loans		-		-		-		228		5
Agricultural		35		43		-		586		-
Commercial		3,474		3,532		-		939		13
	$	3,611	$	3,676	$	-	$	5,253	$	37
With an allowance recorded:
Commercial Real Estate	$	-	$	-	$	-	$	2	$	-
Agricultural Real Estate		-		-		-		823		-
Residential 1st Mortgages		769		826		154		254		6
Home Equity Lines and Loans		689		821		138		332		3
Agricultural		488		488		122		1,002		31
Commercial		1,641		1,657		820		1,072		6
Consumer & Other		50		53		50		126		3
	$	3,637	$	3,845	$	1,284	$	3,611	$	49
Total	$	7,248	$	7,521	$	1,284	$	8,864	$	86

							Three Months Ended Sept. 30, 2013				Nine Months Ended Sept. 30, 2013
September 30, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial Real Estate	$	279	$	299	$	-	$	1,626	$	2	$	953	$	6
Agricultural Real Estate		850		1,173		-		2,616		-		3,777		-
Residential 1st Mortgages		535		588		-		533		4		643		11
Home Equity Lines & Loans		287		306		-		331		3		379		5
Agricultural		99		121		-		278		-		1,239		-
Commercial		85		85		-		89		2		99		6
	$	2,135	$	2,572	$	-	$	5,473	$	11	$	7,090	$	28
With an allowance recorded:
Commercial Real Estate	$	-	$	-	$	-	$	4	$	-	$	2	$	-
Agricultural Real Estate		-		-		-		725		-		1,221		-
Residential 1st Mortgages		246		246		50		123		-		27		-
Home Equity Lines & Loans		243		290		132		243		-		195		-
Agricultural		488		488		122		766		8		1,562		24
Commercial		2,084		2,095		1,856		1,251		2		436		6
Consumer & Other		53		56		53		55		1		185		3
	$	3,114	$	3,175	$	2,213	$	3,167	$	11	$	3,628	$	33
Total	$	5,249	$	5,747	$	2,213	$	8,640	$	22	$	10,718	$	61

Table of Contents

Total recorded investment shown in the prior tables will not equal the total ending balance of loans & leases individually evaluated for impairment on the allocation of allowance tables. This is because the calculation of recorded investment takes into account charge-offs, net unamortized loan & lease fees & costs, unamortized premium or discount, and accrued interest. This table also excludes impaired loans that were previously modified in a troubled debt restructuring, are currently performing and are no longer disclosed or classified as TDR’s.

At September 30, 2014, the Company allocated $1.3 million of specific reserves to $6.4 million of troubled debt restructured loans, of which $4.5 million were performing. The Company had no commitments at September 30, 2014 to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the three and nine month periods ending September 30, 2014, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 5 years to 30 years. Modifications involving an extension of the maturity date were for periods ranging from 5 years to 30 years.

The following table presents loans by class, modified as troubled debt restructured loans & leases for the three and nine-month periods ended September 30, 2014 (in thousands):

	Three Months Ended September 30, 2014						Nine Months Ended September 30, 2014
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Residential 1st Mortgages		1	$	248	$	222		4	$	565	$	528
Home Equity Lines & Loans		1		51		47		3		98		89
Agricultural		-		-		-		1		32		32
Total		2	$	299	$	269		8	$	695	$	649

The TDRs described above increased the allowance for credit losses by $51,000 and $50,000 and resulted in charge-offs of $30,000 and $46,000 for the three and nine-month period ending September 30, 2014.

During the three and nine-months ended September 30, 2014, there were no payment defaults on loans or leases modified as troubled debt restructurings within twelve months following the modification The Company considers a loan or lease to be in payment default once it is greater than 90 days contractually past due under the modified terms.

At December 31, 2013, the Company allocated $1.2 million of specific reserves to $6.8 million of troubled debt restructured loans or leases, of which $4.6 million were performing. The Company had no commitments at December 31, 2013, to lend additional amounts to customers with outstanding loans or leases that are classified as troubled debt restructurings.

During the twelve-month period ending December 31, 2013, the terms of certain loans or leases were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate were for periods of 5 years. Modifications involving an extension of the maturity date were for periods ranging from 6 months to 10 years.

Table of Contents

The following table presents loans or leases by class modified as troubled debt restructured loans during the twelve-month period ended December 31, 2013 (in thousands):

	December 31, 2013
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Residential 1st Mortgages		4	$	306	$	290
Home Equity Lines and Loans		4		414		387
Commercial		4		5,016		5,016
Total		12	$	5,736	$	5,693

The TDRs described above did not increase the allowance for credit losses but did result in charge-offs of $43,000 during the year ended December 31, 2013.

During the twelve-month period ended December 31, 2013, there was one commercial loan with an outstanding balance of $174,000 that was previously modified as a troubled debt restructuring within the previous 12 months that subsequently defaulted during the twelve months ended December 31, 2013.

At September 30, 2013, the Company allocated $364,000 of specific reserves to $2.0 million of troubled debt restructured loans, of which $1.5 million were performing. The Company had no commitments at September 30, 2013 to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the three and nine month periods ending September 30, 2013, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan were for periods of 5 years. Modifications involving an extension of the maturity date were for periods ranging from 6 months to 10 years.

The following table presents loans by class, modified as troubled debt restructured loans & leases for the three and nine-month periods ended September 30, 2013 (in thousands):

	Three Months Ended September 30, 2013						Nine Months Ended September 30, 2013
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Residential 1st Mortgages		-	$	-	$	-		4	$	306	$	290
Home Equity Lines & Loans		-		-		-		2		195		184
Commercial		-		-		-		2		292		292
Total		-	$	-	$	-		8	$	793	$	766

The TDRs described above increased the allowance for credit losses by $0 and $4,000 and resulted in charge-offs of $0 and $27,000 for the three and nine-month period ending September 30, 2013.

As of September 30, 2013, there was one commercial loan with an outstanding balance of $277,000 that was previously modified as a troubled debt restructuring within the previous 12 months that subsequently defaulted during the nine months ended September 30, 2013. This defaulted loan did not increase the allowance for credit loss and did not result in any charge offs during the twelve-month period ending September 30, 2013.

Table of Contents

4. Fair Value Measurements

The Company follows the “Fair Value Measurement and Disclosures” topic, which establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. This standard applies whenever other standards require, or permit, assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, this standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2 inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

Securities classified as available-for-sale are reported at fair value on a recurring basis utilizing Level 1, 2 and 3 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things.

The Company does not record all loans & leases at fair value on a recurring basis. However, from time to time, a loan or lease is considered impaired and an allowance for credit losses is established. Once a loan or lease is identified as individually impaired, management measures impairment in accordance with the “Receivables” topic. The fair value of impaired loans & leases is estimated using one of several methods, including collateral value when the loan & lease is collateral dependent, market value of similar debt, enterprise value, and discounted cash flows. Those impaired loans & leases not requiring an allowance represent loans & leases for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans & leases. Impaired loans & leases where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value which uses observable data, the Company records the impaired loan or lease as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value or the appraised value contains a significant unobservable assumption, and there is no observable market price, the Company records the impaired loan or lease as nonrecurring Level 3.

Other Real Estate (“ORE”) is reported at fair value on a non-recurring basis. When the fair value of the ORE is based on an observable market price or a current appraised value which uses observable data, the Company records the ORE as nonrecurring Level 2. Otherwise, the Company records the ORE as nonrecurring Level 3. Other Real Estate is reported in Interest Receivable and Other Assets on the Company’s Consolidated Balance Sheets.

Table of Contents

The following tables present information about the Company’s assets and liabilities measured at fair value on a 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.

			Fair Value Measurements At September 30, 2014, Using
(in thousands)	Fair Value Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-Sale Securities:
Government Agency & Government-Sponsored Entities	$	13,361	$	13,361	$	-	$	-
Mortgage Backed Securities		322,680		39,566		283,114		-
Other		485		175		310		-
Total Assets Measured at Fair Value On a Recurring Basis	$	336,526	$	53,102	$	283,424	$	-

			Fair Value Measurements At December 31, 2013, Using
(in thousands)	Fair Value Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-Sale Securities:
Government Agency & Government-Sponsored Entities	$	28,436	$	23,394	$	5,042	$	-
Mortgage Backed Securities		324,929		-		324,929		-
Corporate Securities		49,380		8,191		41,189		-
Other		1,894		1,584		310		-
Total Assets Measured at Fair Value On a Recurring Basis	$	404,639	$	33,169	$	371,470	$	-

			Fair Value Measurements At September 30, 2013, Using
(in thousands)	Fair Value Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-Sale Securities:
Government Agency & Government-Sponsored Entities	$	28,643	$	23,587	$	5,056	$	-
Mortgage Backed Securities		342,077		-		342,077		-
Corporate Securities		49,761		8,171		41,590		-
Other		1,284		974		310		-
Total Assets Measured at Fair Value On a Recurring Basis	$	421,765	$	32,732	$	389,033	$	-

Table of Contents

Fair values for Level 2 available-for-sale investment securities are based on quoted market prices for similar securities. During the three and nine-months ended September 30, 2014, there were no transfers in or out of level 1, 2, or 3. During the three and nine-months ended September 30, 2013, $5.6 million were transferred out of level 3 available-for-sale investment securities into held-to-maturity investment securities. The following table presents changes in level 3 assets measured at fair value on a recurring basis.

	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	2014		2013			2014		2013
Balance at Beginning of Period	$	-	$	5,612		$	-	$	5,665
Total Realized and Unrealized Gains/(Losses) Included in Income		-		-			-		-
Total Unrealized Gains/(Losses) Included in Other Comprehensive Income		-		-			-		-
Purchase of Securities		-		-			-		-
Sales, Maturities, and Calls of Securities		-		(31	)		-		(84	)
Net Transfers out of Available for Sale Securities		-		(5,581	)		-		(5,581	)
Balance at End of Period	$	-	$	-		$	-	$	-

Available-for-sale investments securities categorized as Level 3 assets primarily consist of obligations of states and political subdivisions. These bonds were issued by local housing authorities and have no active market. These bonds are carried at historical cost, which approximates fair value, unless economic conditions for the municipality changes to a degree requiring a valuation adjustment. Due to the difficulty in valuing the senior housing authority bonds and the fact that the Company owns 100% of these bonds that were issued by a relationship banking customer, we transferred these bonds out of the available-for-sale category and into the held-to-maturity category as the Company intends to hold these bonds until maturity.

The following tables present information about the Company’s impaired loans & leases and other real estate, classes of assets or liabilities that the Company carries at fair value on a non-recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated. Not all impaired loans & leases are carried at fair value. Impaired loans & leases are only included in the following tables when their fair value is based upon an appraisal of the collateral, and if that appraisal results in a partial charge-off or the establishment of a specific reserve.

			Fair Value Measurements At September 30, 2014, Using
(in thousands)	Fair Value Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans
Commercial Real Estate	$	92	$	-	$	-	$	92
Residential 1st Mortgages		526		-		-		526
Home Equity Lines and Loans		763		-		-		763
Agricultural		363		-		-		363
Commercial		3,836		-		-		3,836
Total Impaired Loans		5,580		-		-		5,580
Other Real Estate
Real Estate Construction		2,441		-		-		2,441
Agricultural Real Estate		858		-		-		858
Total Other Real Estate		3,299		-		-		3,299
Total Assets Measured at Fair Value On a Non-Recurring Basis	$	8,879	$	-	$	-	$	8,879

Table of Contents

			Fair Value Measurements At December 31, 2013, Using
(in thousands)	Fair Value Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans
Residential 1st Mortgages	$	614	$	-	$	-	$	614
Home Equity Lines and Loans		551		-		-		551
Agricultural		366		-		-		366
Commercial		820		-		-		820
Total Impaired Loans		2,351		-		-		2,351
Other Real Estate
Real Estate Construction		2,399		-		-		2,399
Agricultural Real Estate		2,212		-		-		2,212
Total Other Real Estate		4,611		-		-		4,611
Total Assets Measured at Fair Value On a Non-Recurring Basis	$	6,962	$	-	$	-	$	6,962

			Fair Value Measurements At September 30, 2013, Using
(in thousands)	Fair Value Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans
Residential 1st Mortgages	$	477	$	-	$	-	$	477
Home Equity Lines and Loans		293		-		-		293
Agricultural		366		-		-		366
Commercial		228		-		-		228
Total Impaired Loans		1,364		-		-		1,364
Other Real Estate
Real Estate Construction		2,398		-		-		2,398
Agricultural Real Estate		1,268		-		-		1,268
Total Other Real Estate		3,666		-		-		3,666
Total Assets Measured at Fair Value On a Non-Recurring Basis	$	5,030	$	-	$	-	$	5,030

The Company’s property appraisals are primarily based on the sales comparison approach and the income approach methodologies, which consider recent sales of comparable properties, including their income generating characteristics, and then make adjustments to reflect the general assumptions that a market participant would make when analyzing the property for purchase. These adjustments may increase or decrease an appraised value and can vary significantly depending on the location, physical characteristics and income producing potential of each property. Additionally, the quality and volume of market information available at the time of the appraisal can vary from period to period and cause significant changes to the nature and magnitude of comparable sale adjustments.

Table of Contents

Given these variations, comparable sale adjustments are generally not a reliable indicator for how fair value will increase or decrease from period to period. Under certain circumstances, management discounts are applied based on specific characteristics of an individual property.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at September 30, 2014:

(in thousands)	Fair Value		Valuation Technique	Unobservable Inputs	Range, Weighted Avg.
Impaired Loans
Commercial Real Estate	$	92	Sales Comparison Approach	Adjustment for Difference Between Comparable Sales		1% -1%, 1	%
Residential 1st Mortgages	$	526	Sales Comparison Approach	Adjustment for Difference Between Comparable Sales		11% -24%, 17	%
Home Equity Lines and Loans	$	763	Sales Comparison Approach	Adjustment for Difference Between Comparable Sales		1% - 14%, 11	%
Agricultural	$	343	Income Approach	Capitalization Rate		14% - 14%, 14	%
Agricultural	$	20	Sales Comparison Approach	Adjustment for Difference Between Comparable Sales		1% -1%, 1	%
Commercial	$	3,836	Sales Comparison Approach	Adjustment for Difference Between Comparable Sales		1% - 13%, 4	%

Other Real Estate
Real Estate Construction	$	2,441	Sales Comparison Approach	Adjustment for Difference Between Comparable Sales		10% - 10%, 10	%
Agricultural Real Estate	$	858	Sales Comparison Approach	Adjustment for Difference Between Comparable Sales		10% - 10%, 10	%

Table of Contents

5. Fair Value of Financial Instruments

U.S. GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. In some cases, book value is a reasonable estimate of fair value due to the relatively short period of time between origination of the instrument and its expected realization.

The following tables summarize the book value and estimated fair value of financial instruments for the periods indicated:

				Fair Value of Financial Instruments Using
September 30, 2014 (in thousands)	Carrying Amount			Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Total Estimated Fair Value
Assets:
Cash and Cash Equivalents	$	39,216		$	39,216	$	-	$	-		$	39,216

Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		13,361			13,361		-		-			13,361
Mortgage Backed Securities		322,680			39,566		283,114		-			322,680
Other		485			175		310		-			485
Total Investment Securities Available-for-Sale		336,526			53,102		283,424		-			336,526

Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		67,206			-		54,375		13,539			67,914
Other		2,235			-		2,235		-			2,235
Total Investment Securities Held-to-Maturity		69,441			-		56,610		13,539			70,149

FHLB Stock		7,677			N/A		N/A		N/A			N/A
Loans & Leases, Net of Deferred Fees & Allowance:
Commercial Real Estate		465,707			-		-		462,469			462,469
Agricultural Real Estate		360,215			-		-		360,976			360,976
Real Estate Construction		102,783			-		-		103,095			103,095
Residential 1st Mortgages		167,168			-		-		169,971			169,971
Home Equity Lines and Loans		30,608			-		-		32,601			32,601
Agricultural		231,739			-		-		230,572			230,572
Commercial		184,889			-		-		184,466			184,466
Consumer & Other		4,595			-		-		4,619			4,619
Leases		35,063							33,519			33,519
Unallocated Allowance		(1,263	)		-		-		(1,263	)		(1,263	)
Total Loans & Leases, Net of Deferred Fees & Allowance		1,581,504			-		-		1,581,025			1,581,025
Accrued Interest Receivable		8,986			-		8,986		-			8,986

Liabilities:
Deposits:
Demand		516,093			516,093		-		-			516,093
Interest Bearing Transaction		326,368			326,368		-		-			326,368
Savings and Money Market		614,137			614,137		-		-			614,137
Time		419,615			-		419,663		-			419,663
Total Deposits		1,876,213			1,456,598		419,663		-			1,876,261
FHLB Advances		36,000			-		36,000		-			36,000
Subordinated Debentures		10,310			-		6,227		-			6,227
Accrued Interest Payable		314			-		314		-			314

Table of Contents

				Fair Value of Financial Instruments Using
December 31, 2013 (in thousands)	Carrying Amount			Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Total Estimated Fair Value
Assets:
Cash and Cash Equivalents	$	83,677		$	83,677	$	-	$	-		$	83,677

Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		28,436			23,394		5,042		-			28,436
Mortgage Backed Securities		324,929			-		324,929		-			324,929
Corporate Securities		49,380			8,191		41,189		-			49,380
Other		1,894			1,584		310		-			1,894
Total Investment Securities Available-for-Sale		404,639			33,169		371,470		-			404,639

Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		65,685			-		51,563		14,307			65,870
Mortgage Backed Securities		45			-		45		-			45
Other		2,775			-		2,775		-			2,775
Total Investment Securities Held-to-Maturity		68,505			-		54,383		14,307			68,690

FHLB Stock		7,187			N/A		N/A		N/A			N/A
Loans & Leases, Net of Deferred Fees & Allowance:
Commercial Real Estate		402,336			-		-		403,790			403,790
Agricultural Real Estate		324,688			-		-		328,704			328,704
Real Estate Construction		40,438			-		-		40,800			40,800
Residential 1st Mortgages		150,184			-		-		153,352			153,352
Home Equity Lines and Loans		32,710			-		-		35,250			35,250
Agricultural		244,209			-		-		242,950			242,950
Commercial		144,701			-		-		145,131			145,131
Consumer & Other		4,876			-		-		4,912			4,912
Leases		12,094			-		-		11,851			11,851
Unallocated Allowance		(2,274	)		-		-		(2,274	)		(2,274	)
Total Loans & Leases, Net of Deferred Fees & Allowance		1,353,962			-		-		1,364,466			1,364,466
Accrued Interest Receivable		6,941			-		6,941		-			6,941

Liabilities:
Deposits:
Demand		495,963			495,963		-		-			495,963
Interest Bearing Transaction		291,795			291,795		-		-			291,795
Savings and Money Market		589,511			589,511		-		-			589,511
Time		430,422			-		430,752		-			430,752
Total Deposits		1,807,691			1,377,269		430,752		-			1,808,021
Subordinated Debentures		10,310			-		6,224		-			6,224
Accrued Interest Payable		352			-		352		-			352

Table of Contents

				Fair Value of Financial Instruments Using
September 30, 2013 (in thousands)	Carrying Amount			Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Total Estimated Fair Value
Assets:
Cash and Cash Equivalents	$	47,625		$	47,625	$	-	$	-		$	47,625

Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		28,643			23,587		5,056		-			28,643
Mortgage Backed Securities		342,077			-		342,077		-			342,077
Corporate Securities		49,761			8,171		41,590		-			49,761
Other		1,284			974		310		-			1,284
Total Investment Securities Available-for-Sale		421,765			32,732		389,033		-			421,765

Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		67,717			-		55,188		12,753			67,941
Mortgage Backed Securities		121			-		122		-			122
Other		3,123			-		3,123		-			3,123
Total Investment Securities Held-to-Maturity		70,961			-		58,433		12,753			71,186

FHLB Stock		7,187			N/A		N/A		N/A			N/A
Loans & Leases, Net of Deferred Fees & Allowance:
Commercial Real Estate		395,550			-		-		399,792			399,792
Agricultural Real Estate		308,188			-		-		313,920			313,920
Real Estate Construction		26,161			-		-		26,437			26,437
Residential 1st Mortgages		142,504			-		-		145,778			145,778
Home Equity Lines and Loans		34,410			-		-		36,988			36,988
Agricultural		212,309			-		-		211,418			211,418
Commercial		136,002			-		-		137,033			137,033
Consumer & Other		4,895			-		-		4,945			4,945
Leases		4,523			-		-		4,523			4,523
Unallocated Allowance		(842	)		-		-		(842	)		(842	)
Total Loans & Leases, Net of Deferred Fees & Allowance		1,263,700			-		-		1,279,992			1,279,992
Accrued Interest Receivable		8,214			-		8,214		-			8,214

Liabilities:
Deposits:
Demand		435,778			435,778		-		-			435,778
Interest Bearing Transaction		257,650			257,650		-		-			257,650
Savings and Money Market		561,277			561,277		-		-			561,277
Time		439,081			-		439,485		-			439,485
Total Deposits		1,693,786			1,254,705		439,485		-			1,694,190
FHLB Advances		5,900			-		5,900		-			5,900
Subordinated Debentures		10,310			-		5,665		-			5,665
Accrued Interest Payable		357			-		357		-			357

Table of Contents

Fair value estimates presented herein are based on pertinent information available to management as of September 30, 2014, December 31, 2013, and September 30, 2013. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purpose of these financial statements since that date, and; therefore, current estimates of fair value may differ significantly from the amounts presented above. The methods and assumptions used to estimate the fair value of each class of financial instrument listed in the table above are explained below.

Cash and Cash Equivalents - The carrying amounts reported in the balance sheet for cash and due from banks, interest bearing deposits with banks, federal funds sold, and securities purchased under agreements to resell are a reasonable estimate of fair value. All cash and cash equivalents are classified as Level 1.

Investment Securities - Fair values for investment securities 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. Based on the available market information the classification level could be 1, 2, or 3.

Federal Home Loan Bank Stock - It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Loans & Leases, Net of Deferred Loan & Lease Fees & Allowance - Fair values of loans & leases are estimated as follows: For variable rate loans & leases that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans & leases are estimated using discounted cash flow analyses, using interest rates currently being offered for loans & leases with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans & leases are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans & leases do not necessarily represent an exit price.

Deposit Liabilities - The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for fixed-maturity certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

FHLB Advances & Securities Sold Under Agreement to Repurchase - The fair value of federal funds purchased and other short-term borrowings are approximated by the book value resulting in a Level 2 classification. The fair value for Federal Home Loan Bank advances is determined using discounted future cash flows resulting in a Level 2 classification.

Subordinated Debentures - The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Accrued Interest Receivable and Payable - The carrying amount of accrued interest receivable and payable approximates their fair value resulting in a Level 2 classification.

6. Dividends and Basic Earnings Per Common Share

Farmers & Merchants Bancorp common stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. On May 19, 2014, the Board of Directors of Farmers & Merchants Bancorp announced a mid-year cash dividend of $6.30 per share, a 1.6% increase over the $6.20 per share paid on July 1, 2013. The cash dividend was paid on July 1, 2014, to shareholders of record on June 9, 2014.

Table of Contents

Basic earnings per share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. The following table calculates the basic earnings per share for the three and nine months ended September 30, 2014 and 2013.

	Three Months Ended Sept. 30,				Nine Months Ended Sept. 30,
(net income in thousands)	2014		2013		2014		2013
Net Income	$	6,432	$	6,352	$	18,818	$	18,168
Weighted Average Number of Common Shares Outstanding		777,882		777,882		777,882		777,882
Basic Earnings Per Common Share	$	8.27	$	8.17	$	24.19	$	23.36

7. Recent Accounting Pronouncements

In May, 2014, the FASB has made available Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers: Topic 606. ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company does not anticipate that the adoption of this ASU will have a material impact on the Company’s financial position, results of operation, cash flows, or disclosure.

In January, 2014, the FASB issued Accounting Standards Update (ASU) 2014-04 - Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. This Update clarifies when an in-substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The objective of the amendments in this Update is to reduce diversity in practice. An in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The Company does not anticipate that the adoption of this ASU will have a material impact on the Company’s financial position, results of operation, cash flows, or disclosure.

Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

The following is management’s discussion and analysis of the major factors that influenced our financial performance for the three and nine months ended September 30, 2014. This analysis should be read in conjunction with our 2013 Annual Report to Shareholders on Form 10-K, and with the unaudited financial statements and notes as set forth in this report.

Table of Contents

Forward–Looking Statements

This Form 10-Q contains various forward-looking statements, usually containing the words “estimate,” “project,” “expect,” “objective,” “goal,” or similar expressions and includes assumptions concerning Farmers & Merchants Bancorp’s (together with its subsidiaries, the “Company” or “we”) operations, future results, and prospects. These forward-looking statements are based upon current expectations and are subject to risks and uncertainties. In connection with the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important factors which could cause the actual results of events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.

Such factors include the following: (1) continuing economic sluggishness in the Central Valley of California; (2) significant changes in interest rates and prepayment speeds; (3) credit risks of lending and investment activities; (4) changes in federal and state banking laws or regulations; (5) competitive pressure in the banking industry; (6) changes in governmental fiscal or monetary policies; (7) uncertainty regarding the economic outlook resulting from the continuing war on terrorism, as well as actions taken or to be taken by the U.S. or other governments as a result of further acts or threats of terrorism; (8) ongoing drought conditions in California and the resulting impact on the Company’s agricultural customers; and (9) other factors discussed in Item 1A. Risk Factors located in the Company’s 2013 Annual Report on Form 10-K.

Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made.

Introduction

Farmers & Merchants Bancorp, or the Company, is a bank holding company formed March 10, 1999. Its subsidiary, Farmers & Merchants Bank of Central California, or the Bank, is a California state-chartered bank formed in 1916. The Bank serves its primary service area, the mid Central Valley of California, through twenty-one full-service branches and two stand-alone ATM’s. The service area includes Sacramento, San Joaquin, Stanislaus and Merced Counties with branches in Sacramento, Elk Grove, Galt, Lodi, Stockton, Linden, Modesto, Turlock, Hilmar, and Merced.

During 2013: (1) the Company expanded its service area by establishing loan production offices (“LPO”) in Irvine, CA and Walnut Creek, CA; and (2) established equipment leasing as a new line of business. In March 2014, the Irvine LPO was converted to a full-service branch. The Company intends to convert the Walnut Creek LPO to a full-service branch in 4^th quarter of 2014. Experienced lending and equipment leasing professionals have been hired to staff these offices. Both of these areas have strong local economies, and will help diversify some of the concentration risks that the Company now has in the Central Valley and the agricultural industry. The Irvine location is also the headquarters for the Company’s equipment leasing activities.

As a bank holding company, the Company is subject to regulation and examination by the Board of Governors of the Federal Reserve System. As a California, state-chartered, non-fed member bank, the Bank is subject to regulation and examination by the DBO and FDIC.

Overview

At the present time, the Company’s primary service area remains the mid Central Valley of California, a region that can be significantly impacted by the seasonal needs of the agricultural industry. Accordingly, discussion of the Company’s Financial Condition and Results of Operations is influenced by the seasonal banking needs of its agricultural customers (e.g., during the spring and summer customers draw down their deposit balances and increase loan borrowing to fund the purchase of equipment and planting of crops. Correspondingly, deposit balances are replenished and loans repaid in fall and winter as crops are harvested and sold).

For the three and nine months ended September 30, 2014, Farmers & Merchants Bancorp reported net income of $6,432,000 and $18,818,000, basic earnings per common share of $8.27 and $24.19 and return on average assets of 1.19% and 1.18%, respectively. Return on average shareholders’ equity was 11.45% and 11.42% for the three and nine months ended September 30, 2014.

Table of Contents

For the three and nine months ended September 30, 2013, Farmers & Merchants Bancorp reported net income of $6,352,000 and $18,168,000, basic earnings per common share of $8.17 and $23.36 and return on average assets of 1.28% and 1.23%, respectively. Return on average shareholders’ equity was 12.38% and 11.67% for the three and nine months ended September 30, 2013.

The primary reasons for the Company’s improved earnings performance in the first nine months of 2014 as compared to the same period last year were: (1) a $2.4 million increase in net interest income; (2) a $250,000 decrease in the provision for credit losses; and (3) a $937,000 decrease in other non-interest expense mainly due to decreased legal fee expense and a decrease in operating losses. These positive impacts were partially offset by: (1) a $1.0 million decrease in other non-interest income, primarily due to no gain on the sale of fixed assets and reduced swap fee income; (2) a $368,000 decrease in service charges on deposit accounts; and (3) a $1.5 million increase in salaries and employee benefits.

The following is a summary of the financial results for the nine-month period ended September 30, 2014 compared to September 30, 2013.

·	Net income increased 3.6% to $18.8 million from $18.2 million.

·	Basic Earnings per common share increased 3.6% to $24.19 from $23.36.

·	Total assets increased 11.9% to $2.2 billion.

·	Total loans & leases increased 24.5% to $1.6 billion.

·	Total deposits increased 10.8% to $1.9 billion.

Results of Operations

Net Interest Income / Net Interest Margin

The tables on the following pages reflect the Company's average balance sheets and volume and rate analysis for the three and nine-month periods ended September 30, 2014 and 2013.

The average yields on earning assets and average rates paid on interest-bearing liabilities have been computed on an annualized basis for purposes of comparability with full year data. Average balance amounts for assets and liabilities are the computed average of daily balances.

Net interest income is the amount by which the interest and fees on loans & leases and other interest earning assets exceed the interest paid on interest bearing sources of funds. For the purpose of analysis, the interest earned on tax-exempt investments and municipal loans is adjusted to an amount comparable to interest subject to normal income taxes. This adjustment is referred to as “taxable equivalent” and is noted wherever applicable.

The Volume and Rate Analysis of Net Interest Income summarizes the changes in interest income and interest expense based on changes in average asset and liability balances (volume) and changes in average rates (rate). For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to: (1) changes in volume (change in volume multiplied by initial rate); (2) changes in rate (change in rate multiplied by initial volume); and (3) changes in rate/volume (allocated in proportion to the respective volume and rate components).

The Company’s earning assets and rate sensitive liabilities are subject to repricing at different times, which exposes the Company to income fluctuations when interest rates change. In order to minimize income fluctuations, the Company attempts to match asset and liability maturities. However, some maturity mismatch is inherent in the asset and liability mix. See “Item 3. Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Risk.”

Table of Contents

Farmers & Merchants Bancorp

Quarterly Average Balances and Interest Rates

(Interest and Rates on a Taxable Equivalent Basis)

(in thousands)

	Three Months Ended Sept 30, 2014									Three Months Ended Sept 30, 2013
Assets	Balance			Interest			Rate			Balance			Interest			Rate
Interest Bearing Deposits with Banks	$	7,921		$	5			0.25	%	$	2,625		$	2			0.30	%
Investment Securities:
U.S. Agencies		17,193			47			1.09	%		27,569			62			0.90	%
Municipals - Non-Taxable		68,404			912			5.33	%		68,722			982			5.72	%
Mortgage Backed Securities		307,586			1,721			2.24	%		384,201			2,083			2.17	%
Other		30,870			80			1.04	%		53,636			152			1.13	%
Total Investment Securities		424,053			2,760			2.60	%		534,128			3,279			2.46	%

Loans & Leases:
Real Estate		1,073,804			12,966			4.79	%		881,415			11,820			5.32	%
Home Equity Lines & Loans		33,716			462			5.44	%		37,501			538			5.69	%
Agricultural		232,929			2,338			3.98	%		214,833			2,354			4.35	%
Commercial		184,152			1,992			4.29	%		155,247			1,860			4.75	%
Consumer		4,742			65			5.44	%		5,101			73			5.68	%
Other		-			-			0.00	%		229			3			5.20	%
Leases		34,721			344			3.93	%		3,678.00			31.00			3.34	%
Total Loans & Leases		1,564,064			18,167			4.61	%		1,298,004			16,679			5.10	%
Total Earning Assets		1,996,038		$	20,932			4.16	%		1,834,757		$	19,960			4.32	%

Unrealized (Loss) Gain on Securities Available-for-Sale		2,975									(5,157	)
Allowance for Credit Losses		(34,297	)								(34,239	)
Cash and Due From Banks		31,758									32,580
All Other Assets		167,975									158,526
Total Assets	$	2,164,449								$	1,986,467

Liabilities & Shareholders' Equity
Interest Bearing Deposits:
Interest Bearing DDA	$	323,582		$	47			0.06	%	$	253,977		$	27			0.04	%
Savings and Money Market		626,248			277			0.18	%		580,391			251			0.17	%
Time Deposits		415,501			297			0.28	%		443,785			354			0.32	%
Total Interest Bearing Deposits		1,365,331			621			0.18	%		1,278,153			632			0.20	%
Federal Home Loan Bank Advances		13,139			5			0.15	%		24,254			7			0.11	%
Subordinated Debentures		10,310			82			3.16	%		10,310			82			3.16	%
Total Interest Bearing Liabilities		1,388,780		$	708			0.20	%		1,312,717		$	721			0.22	%
Interest Rate Spread								3.96	%								4.10	%
Demand Deposits (Non-Interest Bearing)		500,492									426,289
All Other Liabilities		50,392									42,236
Total Liabilities		1,939,664									1,781,242

Shareholders' Equity		224,785									205,225
Total Liabilities & Shareholders' Equity	$	2,164,449								$	1,986,467
Impact of Non-Interest Bearing Deposits and Other Liabilities								0.06	%								0.06	%
Net Interest Income and Margin on Total Earning Assets					20,224			4.02	%					19,239			4.16	%
Tax Equivalent Adjustment					(318	)								(345	)
Net Interest Income				$	19,906			3.96	%				$	18,894			4.09	%

Notes: Yields on municipal securities have been calculated on a fully taxable equivalent basis. Loan interest income includes fee income and unearned discount in the amount of $903,000 and $801,000 for the quarters ended September 30, 2014 and 2013, respectively. Yields on securities available-for-sale are based on historical cost.

Table of Contents

Farmers & Merchants Bancorp

Year-to-Date Average Balances and Interest Rates

(Interest and Rates on a Taxable Equivalent Basis)

(in thousands)

	Nine Months Ended Sept. 30, 2014									Nine Months Ended Sept. 30, 2013
Assets	Balance			Interest			Rate			Balance			Interest			Rate
Interest Bearing Deposits with Banks	$	57,889		$	110			0.25	%	$	25,458		$	49			0.26	%
Investment Securities:
U.S. Agencies		18,918			151			1.06	%		27,925			187			0.89	%
Municipals - Non-Taxable		65,425			2,698			5.50	%		70,009			2,988			5.69	%
Mortgage Backed Securities		320,742			5,536			2.30	%		387,623			6,152			2.12	%
Other		48,083			385			1.07	%		51,751			446			1.15	%
Total Investment Securities		453,168			8,770			2.58	%		537,308			9,773			2.43	%

Loans & Leases:
Real Estate		997,216			36,459			4.89	%		858,166			34,098			5.31	%
Home Equity Lines & Loans		34,299			1,429			5.57	%		38,843			1,669			5.74	%
Agricultural		221,024			6,632			4.01	%		197,386			6,333			4.29	%
Commercial		168,332			5,720			4.54	%		150,310			5,648			5.02	%
Consumer		5,249			210			5.35	%		4,932			229			6.21	%
Other		23			1			5.81	%		231			10			5.79	%
Leases		22,957			728			4.24	%		1,702.00			43			3.38	%
Total Loans & Leases		1,449,100			51,179			4.72	%		1,251,570			48,030			5.13	%
Total Earning Assets		1,960,157		$	60,059			4.10	%		1,814,336		$	57,852			4.26	%

Unrealized Gain on Securities Available-for-Sale		501									4,609
Allowance for Credit Losses		(34,280	)								(34,259	)
Cash and Due From Banks		31,500									33,369
All Other Assets		164,709									153,192
Total Assets	$	2,122,587								$	1,971,247

Liabilities & Shareholders' Equity
Interest Bearing Deposits:
Interest Bearing DDA	$	306,693		$	120			0.05	%	$	253,595		$	83			0.04	%
Savings and Money Market		621,501			770			0.17	%		574,882			714			0.17	%
Time Deposits		421,274			929			0.29	%		448,355			1,146			0.34	%
Total Interest Bearing Deposits		1,349,468			1,819			0.18	%		1,276,832			1,943			0.20	%
Federal Home Loan Bank Advances		4,692			5			0.14	%		16,398			16			0.13	%
Subordinated Debentures		10,310			242			3.14	%		10,310			245			3.18	%
Total Interest Bearing Liabilities		1,364,470		$	2,066			0.20	%		1,303,540		$	2,204			0.23	%
Interest Rate Spread								3.89	%								4.04	%
Demand Deposits (Non-Interest Bearing)		488,677									420,204
All Other Liabilities		49,772									40,014
Total Liabilities		1,902,919									1,763,758

Shareholders' Equity		219,668									207,489
Total Liabilities & Shareholders' Equity	$	2,122,587								$	1,971,247
Impact of Non-Interest Bearing Deposits and Other Liabilities								0.06	%								0.06	%
Net Interest Income and Margin on Total Earning Assets					57,993			3.96	%					55,648			4.10	%
Tax Equivalent Adjustment					(940	)								(1,037	)
Net Interest Income				$	57,053			3.89	%				$	54,611			4.02	%

Notes: Yields on municipal securities have been calculated on a fully taxable equivalent basis. Loan interest income includes fee income and unearned discount in the amount of $2.8 million and $2.7 million for the nine months ended September 30, 2014 and 2013, respectively. Yields on securities available-for-sale are based on historical cost.

Table of Contents

Farmers & Merchants Bancorp

Volume and Rate Analysis of Net Interest Revenue

(in thousands)	Three Months Ended Sept. 30, 2014 compared to Sept. 30, 2013									Nine Months Ended Sept. 30, 2014 compared to Sept. 30, 2013
Interest Earning Assets	Volume			Rate			Net Chg.			Volume			Rate			Net Chg.
Interest Bearing Deposits with Banks	$	3		$	-		$	3		$	62		$	(1	)	$	61
Investment Securities:
U.S. Agencies		(26	)		11			(15	)		(67	)		31			(36	)
Municipals - Non-Taxable		(5	)		(65	)		(70	)		(191	)		(99	)		(290	)
Mortgage Backed Securities		(427	)		65			(362	)		(1,123	)		507			(616	)
Other		(60	)		(12	)		(72	)		(30	)		(31	)		(61	)
Total Investment Securities		(518	)		(1	)		(519	)		(1,411	)		408			(1,003	)

Loans & Leases:
Real Estate		2,390			(1,244	)		1,146			5,239			(2,878	)		2,361
Home Equity Lines & Loans		(53	)		(23	)		(76	)		(190	)		(50	)		(240	)
Agricultural		189			(205	)		(16	)		728			(429	)		299
Commercial		322			(190	)		132			643			(571	)		72
Consumer		(5	)		(3	)		(8	)		14			(33	)		(19	)
Other		(3	)		-			(3	)		(9	)		-			(9	)
Leases		307			6			313			671			14			685
Total Loans & Leases		3,147			(1,659	)		1,488			7,096			(3,947	)		3,149
Total Earning Assets		2,632			(1,660	)		972			5,747			(3,540	)		2,207

Interest Bearing Liabilities
Interest Bearing Deposits:
Interest Bearing DDA		8			12			20			19			18			37
Savings and Money Market		21			5			26			58			(2	)		56
Time		(21	)		(36	)		(57	)		(66	)		(151	)		(217	)
Total Interest Bearing Deposits		8			(19	)		(11	)		11			(135	)		(124	)
Other Borrowed Funds		(4	)		2			(2	)		(12	)		1			(11	)
Subordinated Debentures		-			-			-			-			(3	)		(3	)
Total Interest Bearing Liabilities		4			(17	)		(13	)		(1	)		(137	)		(138	)
Total Change on a Tax Equivalent Basis	$	2,628		$	(1,643	)	$	985		$	5,748		$	(3,403	)	$	2,345

Notes: Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total "net change." The above figures have been rounded to the nearest whole number.

Table of Contents

3rd Quarter 2014 vs. 3rd Quarter 2013

Net interest income for the third quarter of 2014 increased 5.4% or $1.0 million to $19.9 million. On a fully taxable equivalent basis, net interest income increased 5.1% and totaled $20.2 million for the third quarter of 2014. As more fully discussed below, the increase in net interest income was due to: (1) an increase in earning assets; and (2) an increase in loans as a percentage of earning assets; that offset (3) a decrease in net interest margin.

Net interest income on a taxable equivalent basis, expressed as a percentage of average total earning assets, is referred to as the net interest margin. For the quarter ended September 30, 2014, the Company’s net interest margin was 4.02% compared to 4.16% for the quarter ended September 30, 2013. This decrease in net interest margin was due to a decline in earning asset yields that exceeded a corresponding drop in funding costs.

Average loans & leases totaled $1.6 billion for the quarter ended September 30, 2014; an increase of $266.1 million compared to the average balance for the quarter ended September 30, 2013. Loans & leases increased from 70.7% of average earning assets at September 30, 2013 to 78.4% at September 30, 2014. As a result of the continuing impact of the sustained low rate environment since late 2008, the annualized yield on the Company’s loan & lease portfolio declined to 4.61% for the quarter ended September 30, 2014, compared to 5.10% for the quarter ended September 30, 2013. See “Financial Condition – Loans and Leases” for a discussion of the Company’s loan strategy in 2014. Overall, the positive impact on interest revenue from the increase in loan & lease balances resulted in interest revenue from loans & leases increasing 8.9% to $18.2 million for quarter ended September 30, 2014. The Company has been experiencing aggressive competitor pricing for loans & leases to which it may need to continue to respond in order to retain key customers. This could place even greater negative pressure on future loan & lease yields and net interest margin.

The investment portfolio is the other main component of the Company’s earning assets. Since the risk factor for investments is typically lower than that of loans & leases, the yield earned on investments is generally less than that of loans & leases. Average investment securities totaled $424.1 million for the quarter ended September 30, 2014; a decrease of $110.1 million compared to the average balance for the quarter ended September 30, 2013. Tax equivalent interest income on securities decreased $519,000 to $2.76 million for the quarter ended September 30, 2014, compared to $3.27 million for the quarter ended September 30, 2013. The average investment portfolio yield, on a tax equivalent basis, for the quarter ended September 30, 2014, was 2.60% compared to 2.46% for the quarter ended September 30, 2013. See “Financial Condition – Investment Securities” for a discussion of the Company’s investment strategy in 2014. Net interest income on the Schedule of Year-to-Date Average Balances and Interest Rates is shown on a tax equivalent basis, which is higher than net interest income as reflected on the Consolidated Statement of Income because of adjustments that relate to income on securities that are exempt from federal income taxes.

Interest bearing deposits with banks and overnight investments in Federal Funds Sold are additional earning assets available to the Company. Average interest bearing deposits with banks consisted of FRB deposits. Deposits with the FRB earn interest at the Fed Funds rate, which has been 0.25% since December 2008. Average interest bearing deposits with banks for the quarter ended September 30, 2014, was $7.9 million, an increase of $5.3 million compared to the average balance for the quarter ended September 30, 2013. Interest income on interest bearing deposits with banks for the quarter ended September 30, 2014, increased $3,000 to $5,000 from the quarter ended September 30, 2013.

Average interest-bearing liabilities increased $76.1 million or 5.8% during the third quarter of 2014. Of that increase: (1) interest-bearing transaction deposits increased $69.6 million; (2) savings and money market deposits increased $45.9 million; (3) time deposits decreased $28.3 million (see “Financial Condition – Deposits” for a discussion of trends in the Company’s deposit base); (4) FHLB Advances decreased $11.1 million (see “Financial Condition – Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings”); and (5) subordinated debt remained unchanged (see “Financial Condition – Subordinated Debentures”).

Total interest expense on interest bearing deposits was $621,000 for the third quarter of 2014 as compared to $632,000 for the third quarter of 2013. The average rate paid on interest-bearing deposits was 0.18% for the third quarter of 2014 compared to 0.20% for the third quarter of 2013. The Company anticipates that future declines in deposit rates, if any, will continue to be modest.

Table of Contents

Nine Months Ending September 30, 2014 vs. Nine Months Ending September 30, 2013

During the first nine months of 2014, net interest income increased 4.5% to $57.1 million, compared to $54.6 million at September 30, 2013. On a fully taxable equivalent basis, net interest income increased 4.2% and totaled $58.0 million at September 30, 2014, compared to $55.6 million at September 30, 2013. The increase in net interest income was primarily due to growth in average earning assets that offset a decrease in net interest margin.

For the nine months ended September 30, 2014, the Company’s net interest margin was 3.96% compared to 4.10% for the same period in 2013. This decrease in net interest margin was due primarily to a decline in earning asset yields that exceeded a corresponding drop in funding costs.

The average balance of loans & leases increased by $197.5 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The yield on the loan & lease portfolio decreased 41 basis points to 4.72% for the nine months ended September 30, 2014 compared to 5.13% for the nine months ended September 30, 2013. This increase in loan & lease balances, offset somewhat by a decrease in yields resulted in interest income from loans & leases increasing 6.6% or $3.1 million for the first nine months of 2014.

Average investment securities were $453.2 million for the nine months ended September 30, 2014 compared to $537.3 million for the same period in 2013. The average yield (Tax Equivalent) for the nine months ended September 30, 2014 was 2.58% compared to 2.43% for the nine months ended September 30, 2013. This decrease in balances, offset somewhat by an increase in yields, resulted in a decrease in interest income of $1.0 million or 10.3%, for the nine months ended September 30, 2014.

Average interest bearing deposits with banks consisted of FRB deposits. Deposits with the FRB earn interest at the Fed Funds rate, which has been 0.25% since December 2008. Average interest bearing deposits with banks for the nine months ended September 30, 2014, was $57.9 million, an increase of $32.4 million compared to the average balance for the nine-months ended September 30, 2013. Interest income on interest bearing deposits with banks for the nine months ended September 30, 2014, increased $61,000 to $110,000 compared to the nine months ended September 30, 2013.

Average interest-bearing liabilities increased $60.9 million or 4.7% during the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. Of that increase: (1) interest-bearing deposits increased $72.6million; (2) FHLB advances decreased $11.7 million; and (3) subordinated debentures remained unchanged.

The $72.6 million increase in average interest-bearing deposits was primarily in interest bearing transaction and savings and money market deposits, which grew $99.7 million since September 30, 2014, while time deposits decreased by $27.1 million. Total interest expense on deposits was $1.8 million for the first nine months of 2014 as compared to $1.9 million for the first nine months of 2013. The average rate paid on interest-bearing deposits was 0.18% in the first nine months of 2014 and 0.20% in the first nine months of 2013.

Provision and Allowance for Credit Losses

As a financial institution that assumes lending and credit risks as a principal element of its business, credit losses will be experienced in the normal course of business. The Company has established credit management policies and procedures that govern both the approval of new loans & leases and the monitoring of the existing portfolio. The Company manages and controls credit risk through comprehensive underwriting and approval standards, dollar limits on loans & leases to one borrower (the term “borrower” is used herein to describe a customer who has entered into either a loan or lease transaction), and by restricting loans & leases made primarily to its principal market area where management believes it is best able to assess the applicable risk. Additionally, management has established guidelines to ensure the diversification of the Company’s credit portfolio such that even within key portfolio sectors such as real estate or agriculture, the portfolio is diversified across factors such as location, building type, crop type, etc. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk – Credit Risk.” Management reports regularly to the Board of Directors regarding trends and conditions in the loan & lease portfolio and regularly conducts credit reviews of individual loans & leases. Loans & leases that are performing but have shown some signs of weakness are subject to more stringent reporting and oversight.

Table of Contents

Allowance for Credit Losses

A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Loans & leases determined to be impaired are individually evaluated for impairment. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s or lease's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s or lease's observable market price, or the fair value of the collateral if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral.

A restructuring of a loan or lease constitutes a troubled debt restructuring (“TDR”) under ASC 310-40, if the Company for economic or legal reasons related to the borrower's financial difficulties grants a concession to the borrower that it would not otherwise consider. 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 & leases that are on nonaccrual status at the time they become TDR, 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 impaired and are individually evaluated for impairment.

The determination of the general reserve for loans or leases that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors that include economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, the character of the loan & lease portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1^st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer & other; and (9) equipment leases. See “Financial Condition – Loans & Leases” for examples of loans & leases made by the Company. The allowance for credit losses attributable to each portfolio segment, which includes both impaired loans & leases and loans & leases that are not impaired, is combined to determine the Company's overall allowance, which is included on the consolidated balance sheet.

Table of Contents

Pass – A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management's close attention.

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 position at some future date. Special Mention loans & 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.

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 Bank will estimate its probable loss and immediately charge-off some or all of the balance.

Table of Contents

In addition, the Company's and Bank's regulators, including the FRB, DBO and FDIC, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.

Provision for Credit Losses

Changes in the provision for credit losses between years are the result of management’s evaluation, based upon information currently available, of the adequacy of the allowance for credit losses relative to factors such as the credit quality of the loan & lease portfolio, loan & lease growth, current credit losses, and the prevailing economic climate and its effect on borrowers’ ability to repay loans & leases in accordance with the terms of the notes.

The Central Valley of California was one of the hardest hit areas in the country during the recession. In many areas housing prices declined as much as 60% and unemployment reached 15% or more. Although the economy appears to have stabilized throughout most of the Central Valley, housing prices for the most part have not recovered significantly and unemployment levels remain well above those in other areas of the state and country. While, in management’s opinion, the Company’s levels of net charge-offs and non-performing assets as of September 30, 2014, compare very favorably to our peers at the present time, carefully managing credit risk remains a key focus of the Company.

The state of California has experienced drought conditions during much of 2013 and 2014. Importantly, most of the Company’s agricultural customers have access to their own ground water supplies and, therefore, are not as dependent on the delivery of surface water as growers in other parts of California. Although Management does not expect current conditions to have a material impact on credit quality during 2014, the lack of rain will have some adverse impact on our agricultural customers’ operating costs, crop yields and crop quality. The longer the drought continues, the more significant this impact will become, particularly if ground water levels reach critical stage.

The Company made no provision for credit loss during the first nine months of 2014 compared to $250,000 for the first nine months of 2013. Net charge-offs for the nine months ended September 30, 2014 were $7,000 compared to net charge-offs of $356,000 for the same period in 2013. See “Overview – Looking Forward: 2014 and Beyond”, “Critical Accounting Policies and Estimates – Allowance for Credit Losses” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk-Credit Risk” located in the Company’s 2013 Annual Report on Form 10-K.

Table of Contents

After reviewing all factors above, based upon information currently available, management concluded that the allowance for credit losses as of September 30, 2014, was adequate.

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2014			2013			2014			2013
Balance at Beginning of Period	$	34,290		$	34,235		$	34,274		$	34,217
Charge-Offs		(61	)		(211	)		(204	)		(740	)
Recoveries		38			87			197			384
Provision		-			-			-			250
Balance at End of Period	$	34,267		$	34,111		$	34,267		$	34,111

The table below breaks out year-to-date and current quarter activity by portfolio segment (in thousands):

September 30, 2014	Commercial Real Estate		Agricultural Real Estate		Real Estate Construction		Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial		Consumer & Other			Leases		Unallocated			Total

Year-To-Date Allowance for Credit Losses:
Beginning Balance- January 1, 2014	$	5,178	$	3,576	$	654	$	1,108		$	2,767		$	12,205		$	5,697	$	176		$	639	$	2,274		$	34,274
Charge-Offs		-		-		-		(58	)		(70	)		-			-		(76	)		-		-			(204	)
Recoveries		12		-		-		-			54			3			83		45			-		-			197
Provision		2,608		370		1,026		92			(76	)		(6,426	)		2,135		76			1,206		(1,011	)		-
Ending Balance- September 30, 2014	$	7,798	$	3,946	$	1,680	$	1,142		$	2,675		$	5,782		$	7,915	$	221		$	1,845	$	1,263		$	34,267
Third Quarter Allowance for Credit Losses:
Beginning Balance- July 1, 2014	$	6,991	$	3,677	$	1,290	$	1,094		$	2,737		$	8,291		$	7,377	$	193		$	1,108	$	1,532		$	34,290
Charge-Offs		-		-		-		(25	)		(5	)		-			-		(31	)		-		-			(61	)
Recoveries		12		-		-		-			3			1			6		16			-		-			38
Provision		795		269		390		73			(60	)		(2,510	)		532		43			737		(269	)		-
Ending Balance- September 30, 2014	$	7,798	$	3,946	$	1,680	$	1,142		$	2,675		$	5,782		$	7,915	$	221		$	1,845	$	1,263		$	34,267

The Allowance for Credit Losses as of September 30, 2014 remained nearly unchanged from December 31, 2013. However, the allowance allocated to the following categories of loans did change materially during the first nine months of 2014:

Commercial Real Estate, Real Estate Construction and Commercial allowance balances increased from December 31, 2013, primarily as a result of increased loan balances.

Agricultural allowance balances decreased $6.4 million, primarily as a result of decreased loan balances.

Leasing allowance balances increased $1.2 million, primarily as a result of increased lease balances.

See “Management’s Discussion and Analysis - Financial Condition – Classified Loans & Leases and Non-Performing Assets” for further discussion regarding these loan categories.

See “Note 3. Allowance for Credit Losses” for additional details regarding the provision and allowance for credit losses.

Non-Interest Income

Non-interest income includes: (1) service charges and fees from deposit accounts; (2) net gains and losses from investment securities; (3) increases in the cash surrender value of bank owned life insurance; (4) debit card and ATM fees; (5) net gains and losses on non-qualified deferred compensation plans; and (6) fees from other miscellaneous business services.

Table of Contents

3rd Quarter 2014 vs. 3rd Quarter 2013

Non-interest income decreased $528,000 or 15.3% for the three months ended September 30, 2014, compared to the same period of 2013. This decrease was primarily due to: (1) a $117,000 decrease in service charges on deposits accounts, primarily NSF/OD fees; (2) a $912,000 decrease in the gain on deferred compensation investments; and (3) $667,000 decrease in other non-interest income, primarily related to a non-recurring gain on the sale of a Company office building that took place in 2013. Partially offsetting these decreases was a $1.1 million increase in net gain on sale of investment securities.

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

Nine Months Ending September 30, 2014 vs. Nine Months Ending September 30, 2013

Non-interest income decreased $1.9 million or 15.8% for the nine months ended September 30, 2014, compared to the same period of 2013. This decrease was primarily due to: (1) a $368,000 decrease in service charges on deposit accounts, primarily NSF/OD fees; (2) a $786,000 decrease in the gain on deferred compensation investments; and (3) $1.0 million decrease in other non-interest income, primarily related to a non-recurring gain on the sale of a Company office building that took place in 2013 and decreased SWAP referral fees. Partially offsetting these decreases was a $268,000 increase in net gain on sale of investment securities.

Non-Interest Expense

Non-interest expense for the Company includes expenses for: (1) salaries and employee benefits; (2) net gains and losses on non-qualified deferred compensation plan investments; (3) occupancy; (4) equipment; (5) ORE operating costs; (6) deposit insurance; (7) supplies; (8) legal fees; (9) professional services; (10) data processing; (11) marketing; and (12) other miscellaneous expenses.

3rd Quarter 2014 vs. 3rd Quarter 2013

Overall, non-interest expense increased $357,000 or 2.9% for the three months ended September 30, 2014, compared to the same period in 2013. This increase was primarily due to: (1) a $1.1 million increase in salaries and employee benefits and a $75,000 increase in occupancy, both increases primarily related to new staff and facilities added for the Walnut Creek and Irvine offices; (2) bank-wide raises; and (3) increased medical insurance costs. These increases were partially offset by a $912,000 decrease in net gain on deferred compensation investments.

Nine Months Ending September 30, 2014 vs. Nine Months Ending September 30, 2013

Non-interest expense decreased $30,000 or 0.1% for the nine months ended September 30, 2014, compared to the same period of 2013. This decrease was primarily due to: (1) a $786,000 decrease in net gain on deferred compensation investments; and (2) a $937,000 decrease in other non-interest expense primarily due to a $646,000 decrease in legal expense and a $250,000 decrease in operating losses. These decreases were partially offset by: (1) a $1.5 million increase in salaries and employee benefits and an $82,000 increase in occupancy, both increases primarily related to new staff and facilities added for the Walnut Creek and Irvine offices; (2) bank-wide raises, and (3) increased medical insurance costs.

Income Taxes

The provision for income taxes increased 1.2% to $3.9 million for the third quarter of 2014. The Company’s effective tax rate for the third quarter of 2014 and 2013 was 37.5%.

The provision for income taxes increased 1.7% to $11.0 million for the first nine months of 2014. The Company’s effective tax rate for the first nine months of 2014 was 37.0% compared to 37.4% for the same period in 2013.

Table of Contents

The Company’s effective tax rate fluctuates 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 statutory rate of 42% due primarily to benefits regarding the cash surrender value of life insurance; California enterprise zone interest income exclusion; and tax-exempt interest income on municipal securities and loans.

Current tax law causes the Company’s current taxes payable to approximate or exceed the current provision for taxes on the income statement. Three provisions have had a significant effect on the Company’s current income tax liability: (1) the restrictions on the deductibility of loans & lease losses; (2) deductibility of retirement and other long-term employee benefits only when paid; and (3) the statutory deferral of deductibility of California franchise taxes on the Company’s federal return.

Financial Condition

This section discusses material changes in the Company’s balance sheet at September 30, 2014, as compared to December 31, 2013 and to September 30, 2013. As previously discussed (see “Overview”) the Company’s financial condition can be influenced by the seasonal banking needs of its agricultural customers.

Investment Securities and Federal Funds Sold

The investment portfolio provides the Company with an income alternative to loans & leases. The debt securities in the Company’s investment portfolio have historically been comprised primarily of: (1) mortgage-backed securities issued by federal government-sponsored entities; (2) debt securities issued by government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, during 2013, the Company began to selectively add investment grade corporate securities (floating rate and fixed rate with maturities less than 5 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity without subjecting the Company to the interest rate risk associated with mortgage-backed securities. This portfolio of corporate securities was sold during the 3^rd quarter of 2014 in order to fund the Company’s increase in loan balances.

The Company’s investment portfolio at September 30, 2014 was $405.9 million compared to $473.1 million at the end of 2013, a decrease of $67.2 million or14.2%. At September 30, 2013, the investment portfolio totaled $492.7 million. To protect against future increases in market interest rates, while at the same time generating some reasonable level of current yields, the Company has invested most of its available funds in either shorter term government agency & government-sponsored entity securities and shorter term (10, 15, and 20 year) mortgage-backed securities.

The Company's total investment portfolio currently represents 18.5% of the Company’s total assets as compared to 22.8% at December 31, 2013, and 25.1% at September 30, 2013.

As of September 30, 2014 the Company held $67.2 million of municipal investments, of which $53.7 million were bank-qualified municipal bonds, all classified as held-to-maturity. The financial problems experienced by certain municipalities over the past five years, along with the financial stresses exhibited by some of the large monoline bond insurers, has increased the overall risk associated with bank-qualified municipal bonds. This situation caused the Company not to purchase any municipal bonds between late 2006 and year-end 2011. However, during the first quarter of 2012 the Company began investing in bank-qualified municipals that were rated AA or better. In order to comply with Section 939A of the Dodd-Frank Act, the Company performs its own credit analysis on new purchases of municipal bonds. As of September 30, 2014 ninety-six percent of the Company’s bank-qualified municipal bond portfolio is rated at either the issue or issuer level, and all of these ratings are “investment grade.” The Company monitors the status of all municipal investments with particular attention paid to the approximately four percent ($2.4 million) of the portfolio that is not rated, and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security. In June 2014, the Company sold $375,000 of municipal bonds from a single issuer. The Company took this action under the provisions of ASC 320-10-25-6(a), which allow for the sale of HTM securities where there is “evidence of a significant deterioration in the issuer’s creditworthiness.” See Note 2 located in “Item I. Financial Statements.”

Not included in the investment portfolio are interest bearing deposits with banks and overnight investments in Federal Funds Sold. Interest bearing deposits with banks consist 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 $4.9 million at September 30, 2014, $42.7 million at December 31, 2013 and $1.4 million at September 30, 2013.

Table of Contents

The Company classifies its investments as held-to-maturity, trading, or available-for-sale. 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. Trading securities are securities acquired for short-term appreciation and are carried at fair value, with unrealized gains and losses recorded in non-interest income. As of September 30, 2014, December 31, 2013 and September 30, 2013, there were no securities in the trading portfolio. Securities classified as available-for-sale 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.

Loans & Leases

Loans & Leases can be categorized by borrowing purpose and use of funds. Common examples of loans & leases made by the Company include:

Commercial and Agricultural Real Estate - These are loans secured by farmland, commercial real estate, multifamily residential properties, and other non-farm, non-residential properties within our market area. 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, and 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 1.20; 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 development and construction (the Company generally requires the borrower to fund the land acquisition) 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.

Residential 1^st Mortgages - 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, we will make loans on rural residential properties up to 20 acres. Most residential loans have terms from ten to twenty years and carry fixed rates priced off of 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.”

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 1^st lien position.

Agricultural - These are 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 24 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.

Table of Contents

Commercial - These are 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 very minimal consumer loan portfolio, and loans are primarily made as an accommodation to deposit customers.

Leases –These are leases to businesses or individuals, for the purpose of 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 through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

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 & leases are 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 & lease.

Most loans & 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 & 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-Interest Rate Risk).

The Company's loan & lease portfolio at September 30, 2014 totaled $1.6 billion, an increase of $318.0 million or 24.5% over September 30, 2013 and $227.5 million or 16.4% over December 31, 2013. This increase has occurred despite the continuing sluggish economic conditions in the Central Valley of California and is a result of: (1) the Company’s intensified business development efforts directed toward credit-qualified borrowers; (2) entry into the equipment leasing business; and (3) expansion of our service area into Walnut Creek and Irvine. No assurances can be made that this growth in the loan & lease portfolio will continue.

Table of Contents

The following table sets forth the distribution of the loan & lease portfolio by type and percent as of the periods indicated.

Loan & Lease Portfolio	September 30, 2014					December 31, 2013					September 30, 2013
(in thousands)	$		%			$		%			$		%
Commercial Real Estate	$	477,726		30.6	%	$	411,037		29.5	%	$	404,740		30.6	%
Agricultural Real Estate		364,161		24.1	%		328,264		23.6	%		311,401		24.1	%
Real Estate Construction		104,463		2.5	%		41,092		3.0	%		27,099		2.5	%
Residential 1st Mortgages		168,310		10.5	%		151,292		10.9	%		143,577		10.5	%
Home Equity Lines & Loans		33,283		2.9	%		35,477		2.5	%		37,160		2.9	%
Agricultural		237,521		16.5	%		256,414		18.4	%		221,569		16.5	%
Commercial		192,804		12.3	%		150,398		10.8	%		145,793		12.3	%
Consumer & Other		4,816		0.4	%		5,052		0.4	%		5,063		0.4	%
Leases		36,908		0.2	%		12,733		0.9	%		4,523		0.2	%
Total Gross Loans & Leases		1,619,992		100.0	%		1,391,759		100.0	%		1,300,925		100.0	%
Less: Unearned Income		4,221					3,523					3,114
Subtotal		1,615,771					1,388,236					1,297,811
Less: Allowance for Credit Losses		34,267					34,274					34,111
Net Loans & Leases	$	1,581,504				$	1,353,962				$	1,263,700

Classified Loans & Leases and Non-Performing Assets

All loans & leases are assigned a credit risk grade using grading standards developed by bank regulatory agencies. See “Results of Operations - Provision and Allowance for Credit Losses” for more detail on risk grades. The Company utilizes the services of a third-party independent loan & lease review firm to perform evaluations of individual loans & leases and review the credit risk grades the Company places on loans & leases. Loans & leases that are judged to exhibit a higher risk profile are referred to as “classified,” and these loans & leases receive increased management attention. As of September 30, 2014, classified loans & leases totaled $3.7 million compared to $5.8 million at December 31, 2013 and $10.2 million at September 30, 2013.

Classified loans & leases with higher levels of credit risk can be further designated as “impaired.” A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. See “Results of Operations - Provision and Allowance for Credit Losses” for further details. Impaired loans or leases consist of: (1) non-accrual loans & leases; and/or (2) restructured loans & leases that are still performing (i.e., accruing interest).

Non-Accrual Loans & Leases - Accrual of interest on loans & 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 or 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 & leases is then recognized only to the extent that cash is received and where the future collection of principal is probable. Non-accrual loans & leases totaled $2.5 million as of September 30, 2014. At December 31, 2013 and September 30, 2013, non-accrual loans & leases totaled $2.6 million and $3.8 million, respectively.

Restructured Loans & Leases - A restructuring of a loan or lease constitutes a troubled debt restructuring (“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 debtor that it would not otherwise consider. 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 & leases that are on nonaccrual status at the time they become TDR loans, 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 impaired and are individually evaluated for impairment.

Table of Contents

As of September 30, 2014, restructured loans & leases on accrual totaled $4.5 million as compared to $4.6 million at December 31, 2013. Restructured loans & leases on accrual at September 30, 2013, were $1.5 million.

Other Real Estate - Loans where the collateral has been repossessed are classified as other real estate ("ORE") or, if the collateral is personal property, the property is classified as other assets on the Company's financial statements.

The following table sets forth the amount of the Company's non-performing loans & leases (defined as non-accrual loans & leases plus accruing loans & leases past due 90 days or more) and ORE as of the dates indicated.

Non-Performing Assets

(in thousands)	September 30, 2014			Dec. 31, 2013			September 30, 2013
Non-Performing Loans & Leases	$	2,497		$	2,596		$	3,783
Other Real Estate		3,299			4,611			3,666
Total Non-Performing Assets	$	5,796		$	7,207		$	7,449

Non-Performing Loans & Leases as a % of Total Loans & Leases		0.15	%		0.19	%		0.29	%
Restructured Loans & Leases (Performing)	$	4,476		$	4,649		$	1,463

Although management believes that non-performing loans & 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. Specific reserves of $990,000, $983,000, and $1.9 million have been established for non-performing loans & leases at September 30, 2014, December 31, 2013 and September 30, 2013, respectively.

Foregone interest income on non-accrual loans & leases which would have been recognized during the period, if all such loans & leases had been current in accordance with their original terms, totaled $75,000 for the nine months ended September 30, 2014, $52,000 for the year ended December 31, 2013, and $80,000 for the nine months ended September 30, 2013.

The Company reported $3.3 million of ORE at September 30, 2014, $4.6 million at December 31, 2013 and $3.7 million at September 30, 2013. These values are net of a reserve for ORE valuation allowance in the amount of $3.7 million at September 30, 2014, $4.1 million at December 31, 2013 and $3.7 million at September 30, 2013.

Except for those classified and non-performing loans & leases discussed above, the Company’s management is not aware of any loans & leases as of September 30, 2014, 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 Central Valley was one of the hardest hit areas in the country during the recession. In many areas housing prices declined as much as 60% and unemployment reached 15% or more. Although the economy appears to have stabilized throughout most of the Central Valley, housing prices for the most part have not recovered significantly and unemployment levels remain well above those in other areas of the state and country.

Table of Contents

See “Part I, Item 1A. Risk Factors” in the Company’s 2013 Annual Report on Form 10-K.

Deposits

One of the key sources of funds to support earning assets (loans, leases and investments) is the generation of deposits from the Company’s customer base. The ability to grow the customer base and subsequently deposits is a significant element in the performance of the Company.

The Company's deposit balances at September 30, 2014 have increased $182.4 million or 10.8% compared to September 30, 2013. In addition to the Company’s ongoing business development activities for deposits, the following factors positively impacted year-over-year deposit growth: (1) the Federal government’s decision to permanently increase FDIC deposit insurance limits from $100,000 to $250,000 per depositor; and (2) the Company’s strong financial results and position which has built F&M Bank’s reputation as one of the most safe and sound banks in its market territory. The Company expects that, at some point, deposit customers may begin to diversify how they invest their money (e.g., move funds back into the stock market or other investments) and this could impact future deposit growth.

Although total deposits have increased 10.8% since September 30, 2013, the Company’s focus has been on increasing low cost transaction and savings accounts, which have grown at a much faster pace:

·	Demand and interest-bearing transaction accounts have increased $149.0 million or 21.5% since September 30, 2013.

·	Savings and money market accounts have increased $52.9 million or 9.4% since September 30, 2013.

·	Time deposit accounts have decreased $19.5 million or 4.4% since September 30, 2013.

The Company's deposit balances at September 30, 2014 have increased $68.5 million or 3.8% compared to December 31, 2013. Demand and interest-bearing transaction accounts increased 6.9% or $54.7 million, savings and money market accounts increased $24.6 million or 4.2% and time deposit accounts decreased by $10.8 million or 2.5%. Deposit trends in the first nine months of the year can be impacted by the seasonal needs of our agricultural customers.

Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings

Lines of credit with the Federal Reserve Bank and the Federal Home Loan Bank are other key sources of funds to support earning assets See “Item 3. Quantitative and Qualitative Disclosures About Market Risk and Liquidity Risk.” These sources of funds are also used to manage the Company’s interest rate risk exposure. FHLB advances were $36.0 million at September 30, 2014. There were no FHLB Advances at December 31, 2013 and there were $5.9 million at September 30, 2013. There were no amounts outstanding on the Company’s line of credit with the FRB as of September 30, 2014.

As of September 30, 2014 the Company had additional borrowing capacity of $374.0 million with the Federal Home Loan Bank and $321.3 million with the Federal Reserve Bank. Any borrowings under these lines would be collateralized with loans that have been accepted for pledging at the FHLB and FRB.

Securities Sold Under Agreement to Repurchase

Securities Sold Under Agreement to Repurchase are used as secured borrowing alternatives to FHLB Advances or FRB Borrowings.

At September 30, 2014, December 31, 2013, and September 30, 2013, the Company had no securities sold under agreement to repurchase

Table of Contents

Subordinated Debentures

On December 17, 2003, the Company raised $10 million through an offering of trust-preferred securities (“TPS”). See Note 13 located in “Item 8. Financial Statements and Supplementary Data” of the Company’s 2013 Annual Report on Form 10-K. Although this amount is reflected as subordinated debt on the Company’s balance sheet, under current regulatory guidelines, our TPS will continue to qualify as regulatory capital (See “Basel III Regulatory Capital Rules”). These securities accrue interest at a variable rate based upon 3-month LIBOR plus 2.85%. Interest rates reset quarterly and were 3.08% as of September 30, 2014, 3.09% at December 31, 2013 and 3.10% at September 30, 2013. The average rate paid for these securities for the nine months of 2014 was 3.14% compared to 3.18% for the first nine months of 2013. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on the Company’s common stock.

Capital

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 $227.2 million at September 30, 2014, $209.9 million at December 31, 2013, and $211.0 million at September 30, 2013.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. 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 Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank's assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios set forth in the table below of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets (all terms as defined in the regulations). Management believes, as of September 30, 2014, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

In its most recent notification from the FDIC the Bank was categorized as “well capitalized” under the 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 table. There are no conditions or events since that notification that management believes have changed the institution’s categories.

Table of Contents

(in thousands)	Actual					Regulatory Capital Requirements					To Be Well Capitalized Under Prompt Corrective Action Provisions
The Company:	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2014
Total Capital to Risk Weighted Assets	$	260,660		13.44	%	$	155,169		8.0	%		N/A		N/A
Tier 1 Capital to Risk Weighted Assets	$	236,290		12.18	%	$	77,584		4.0	%		N/A		N/A
Tier 1 Capital to Average Assets	$	236,290		10.92	%	$	86,542		4.0	%		N/A		N/A

(in thousands)	Actual					Regulatory Capital Requirements					To Be Well Capitalized Under Prompt Corrective Action Provisions
The Bank:	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2014
Total Capital to Risk Weighted Assets	$	260,591		13.44	%	$	155,157		8.0	%	$	193,946		10.0	%
Tier 1 Capital to Risk Weighted Assets	$	236,222		12.18	%	$	77,579		4.0	%	$	116,368		6.0	%
Tier 1 Capital to Average Assets	$	236,222		10.92	%	$	86,509		4.0	%	$	108,136		5.0	%

As previously discussed (see “Subordinated Debentures”), in order to supplement its regulatory capital base, during December 2003 the Company issued $10 million of TPS. On March 1, 2005, the Federal Reserve Board issued its final rule effective April 11, 2005, concerning the regulatory capital treatment of TPS by Bank Holding Companies (“BHCs”). Under the final rule BHCs may include TPS in Tier 1 capital in an amount equal to 25% of the sum of core capital net of goodwill. Any portion of TPS not qualifying as Tier 1 capital would qualify as Tier 2 capital subject to certain limitations. The Company has received notification from the Federal Reserve Bank of San Francisco that all of the Company’s TPS currently qualify as Tier 1 capital. The Company is not considered the primary beneficiary of this 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.

In 1998, the Board approved the Company’s first common stock repurchase program. This program has been extended and expanded several times since then, and most recently, on September 11, 2012, the Board of Directors approved increasing the funds available for the Company’s common stock repurchase program to $20 million over the three-year period ending September 30, 2015. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of the Company’s 2013 Annual Report on Form 10-K for additional information.

There were no stock repurchases during the third quarter of 2014 or 2013. The remaining dollar value of shares that may yet be purchased under the Company’s Common Stock Repurchase Plan is approximately $20 million.

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, with Computershare Trust Company, N.A. as Rights Agent. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of the Company’s 2013 Annual Report on Form 10-K for further explanation.

Basel III Regulatory Capital Rules

Both the FRB and FDIC have approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Company and the Bank. These rules would implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.

The final rules include new minimum risk-based capital and leverage ratios, which would be phased in over time. The new minimum capital level requirements applicable to the Company and the Bank under the final rules will be: (i) a common equity Tier 1 capital ratio of 4.5% of Risk Weighted Assets (“RWA”); (ii) a Tier 1 capital ratio of 6% of RWA; (iii) a total capital ratio of 8% of RWA; and (iv) a Tier 1 leverage ratio of 4% of total assets. The final rules also establish a "capital conservation buffer" of 2.5% above each of the new regulatory minimum capital ratios which would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0% of RWA; (ii) a Tier 1 capital ratio of 8.5% of RWA, and (iii) a total capital ratio of 10.5% of RWA. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount.

Table of Contents

The final rules also implement other revisions to the current capital rules but, in general, those revisions are not as onerous as originally thought when the proposed rules were issued in June 2012. For instance, the Company’s subordinated debentures will continue to qualify for Tier 1 under the rules. The Company believes that it is currently in compliance with all of these new capital requirements (as fully phased-in) and that they will not result in any restrictions on the Company’s business activity.

Critical Accounting Policies and Estimates

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In preparing the Company’s financial statements management makes estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These judgments govern areas such as the allowance for credit losses, the fair value of financial instruments and accounting for income taxes.

For a full discussion of the Company’s critical accounting policies and estimates see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2013 Annual Report on Form 10-K.

Off Balance Sheet Commitments

In the normal course of business the Company enters into financial instruments with off balance sheet risks in order to meet the financing needs of its customers. These financial instruments consist of 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.

(in thousands)	September 30, 2014		December 31, 2013		September 30, 2013
Commitments to Extend Credit	$	543,595	$	445,294	$	473,475
Letters of Credit		7,470		7,393		7,434
Performance Guarantees Under Interest Rate Swap Contracts Entered Into Between Our Borrowing Customers and Third Parties		263		-		-

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.

Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third party. Most standby letters of credit are issued for 18 months or less. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Additionally, the Company maintains a reserve for off balance sheet commitments which totaled $142,000 at September 30, 2014, December 31, 2013, and September 30, 2013. We do not anticipate any material losses as a result of these transactions.

Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Management

The Company has adopted risk management policies and procedures, which aim to ensure the proper control and management of all risk factors inherent in the operation of the Company, most importantly credit risk, interest rate risk and liquidity risk. These risk factors are not mutually exclusive. It is recognized that any product or service offered by the Company may expose the Company to one or more of these risk factors.

Credit Risk

Credit risk is the risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract or otherwise fail to perform as agreed. Credit risk is found in all activities where success depends on counterparty, issuer, or borrower performance.

Credit risk in the investment portfolio and correspondent bank accounts is addressed through defined limits in the Company’s policy statements. In addition, certain securities carry insurance to enhance credit quality of the bond.

In order to control credit risk in the loan & lease portfolio the Company has established credit management policies and procedures that govern both the approval of new loans & leases and the monitoring of the existing portfolio. The Company manages and controls credit risk through comprehensive underwriting and approval standards, dollar limits on loans & leases to one borrower, and by restricting loans & leases made primarily to its principal market area where management believes it is best able to assess the applicable risk. Additionally, management has established guidelines to ensure the diversification of the Company’s credit portfolio such that even within key portfolio sectors such as real estate or agriculture, the portfolio is diversified across factors such as location, building type, crop type, etc. However, as a financial institution that assumes credit risks as a principal element of its business, credit losses will be experienced in the normal course of business. The allowance for credit losses is maintained at a level considered by management to be adequate to provide for risks inherent in the loan & lease portfolio. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs.

The Company’s methodology for assessing the appropriateness of the allowance is applied on a regular basis and considers all loans & leases. The systematic methodology consists of three parts.

Part 1 - includes a detailed analysis of the loan & lease portfolio in two phases. The first phase is conducted in accordance with the “Receivables” topic of the FASB ASC. Individual loans & leases are reviewed to identify them for impairment. A loan or lease is impaired when principal and interest are deemed uncollectible in accordance with the original contractual terms of the loan or lease. Impairment is measured as either the expected future cash flows discounted at each loan’s or lease’s effective interest rate, the fair value of the loan’s or lease’s collateral if the loan or lease is collateral dependent, or an observable market price of the loan or lease, if one exists. Upon measuring the impairment, the Company will ensure an appropriate level of allowance is present or established.

Central to the first phase of the analysis of the loan & lease portfolio is the risk rating system. The originating credit officer assigns each borrower an initial risk rating, which is based primarily on a thorough analysis of that borrower’s financial position in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior credit administration personnel. Credits are monitored by credit administration personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary. Risk ratings are reviewed by both the Company’s independent third-party credit examiners and bank examiners from the DBO and FDIC.

Based on the risk rating system, specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates that the loan or lease is impaired and there is a probability of loss. Management performs a detailed analysis of these loans & leases, including, but not limited to, cash flows, appraisals of the collateral, conditions of the marketplace for liquidating the collateral, and assessment of the guarantors. Management then determines the inherent loss potential and allocates a portion of the allowance for losses as a specific allowance for each of these credits.

Table of Contents

The second phase is conducted by segmenting the loan & lease portfolio by risk rating and into groups of loans & leases with similar characteristics in accordance with the “Contingency” topic of the FASB ASC. In this second phase, groups of loans & leases with similar characteristics are reviewed and the appropriate allowance factor is applied based on the historical average charge-off rate for each particular group of loans or leases.

Part 2 - considers qualitative internal and external factors that may affect a loan or lease’s collectability, is based upon management’s evaluation of various conditions, the effects of which are not directly measured in the determination of the historical and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the second element of the analysis of the allowance include, but are not limited to the following conditions that existed as of the balance sheet date:

§	general economic and business conditions affecting the key service areas of the Company;

§	credit quality trends (including trends in collateral values, delinquencies and non-performing loans & leases);

§	loan & lease volumes, growth rates and concentrations;

§	loan & lease portfolio seasoning;

§	specific industry and crop conditions;

§	recent loss experience; and

§	duration of the current business cycle.

Part 3 - An unallocated allowance often occurs due to the imprecision in estimating and allocating allowance balances associated with macro factors such as: (1) the continuing sluggish economic conditions in the Central Valley; and (2) the long term impact of drought conditions currently being experienced in California.

Management reviews all of these conditions in discussion with the Company’s senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable impaired credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable impaired credit or portfolio segment as of the evaluation date, management’s evaluation of the inherent loss related to such condition is reflected in the second element of the allowance or in the unallocated allowance.

Management believes, that based upon the preceding methodology, and using information currently available, the allowance for credit losses at September 30, 2014 was adequate. No assurances can be given that future events may not result in increases in delinquencies, non-performing loans & leases, or net loan & lease charge-offs that would require increases in the provision for credit losses and thereby adversely affect the results of operations.

Interest Rate Risk

The mismatch between maturities of interest sensitive assets and liabilities results in uncertainty in the Company’s earnings and economic value and is referred to as interest rate risk. The Company does not attempt to predict interest rates and positions the balance sheet in a manner, which seeks to minimize, to the extent possible, the effects of changing interest rates.

The Company measures interest rate risk in terms of potential impact on both its economic value and earnings. The methods for governing the amount of interest rate risk include: (1) analysis of asset and liability mismatches (Gap analysis); (2) the utilization of a simulation model; and (3) limits on maturities of investment, loan & lease, and deposit products, which reduces the market volatility of those instruments.

The Gap analysis measures, at specific time intervals, the divergence between earning assets and interest bearing liabilities for which repricing opportunities will occur. A positive difference, or Gap, indicates that earning assets will reprice faster than interest-bearing liabilities. This will generally produce a greater net interest margin during periods of rising interest rates and a lower net interest margin during periods of declining interest rates. Conversely, a negative Gap will generally produce a lower net interest margin during periods of rising interest rates and a greater net interest margin during periods of decreasing interest rates.

The interest rates paid on deposit accounts do not always move in unison with the rates charged on loans & leases. In addition, the magnitude of changes in the rates charged on loans & leases is not always proportionate to the magnitude of changes in the rate paid for deposits. Consequently, changes in interest rates do not necessarily result in an increase or decrease in the net interest margin solely as a result of the differences between repricing opportunities of earning assets or interest bearing liabilities.

Table of Contents

The Company also utilizes the results of a dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. The sensitivity of the Company’s net interest income is measured over a rolling one-year horizon.

The simulation model estimates the impact of changing interest rates on interest income from all interest earning assets and the interest expense paid on all interest bearing liabilities reflected on the Company’s balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given a 200 basis point upward and a 100 basis point downward shift in interest rates. A shift in rates over a 12-month period is assumed. Results that exceed policy limits, if any, are analyzed for risk tolerance and reported to the Board with appropriate recommendations. At September 30, 2014, the Company’s estimated net interest income sensitivity to changes in interest rates, as a percent of net interest income was an increase in net interest income of 1.04% if rates increase by 200 basis points and a decrease in net interest income of 0.19% if rates decline 100 basis points. Comparatively, at December 31, 2013, the Company’s estimated net interest income sensitivity to changes in interest rates, as a percent of net interest income was an increase in net interest income of 0.83% if rates increase by 200 basis points and a decrease in net interest income of 0.31% if rates decline 100 basis points.

The estimated sensitivity does not necessarily represent a Company forecast and the results may not be indicative of actual changes to the Company’s net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape; prepayments on loans & leases and securities; pricing strategies on loans & leases and deposits; replacement of asset and liability cash flows; and other assumptions. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change.

Liquidity Risk

Liquidity risk is the risk to earnings or capital resulting from the Company’s inability to meet its obligations when they come due without incurring unacceptable losses. It includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect the Company’s ability to liquidate assets or acquire funds quickly and with minimum loss of value. The Company endeavors to maintain a cash flow adequate to fund operations, handle fluctuations in deposit levels, respond to the credit needs of borrowers, and to take advantage of investment opportunities as they arise.

The Company’s principal operating sources of liquidity include (see “Item 8. Financial Statements and Supplementary Data – Consolidated Statements of Cash Flows” of the Company’s 2013 Annual Report on Form 10-K) cash and cash equivalents, cash provided by operating activities, principal payments on loans & leases, proceeds from the maturity or sale of investments, and growth in deposits. To supplement these operating sources of funds the Company maintains Federal Funds credit lines of $71.0 million and repurchase lines of $100.0 million with major banks. As of September 30, 2014 the Company has additional borrowing capacity of $374.4 million with the Federal Home Loan Bank and $321.6 million with the Federal Reserve Bank. Borrowings under these lines are collateralized with loans or securities that have been accepted for pledging at the FHLB and FRB.

At September 30, 2014, the Company had available sources of liquidity, which included cash and cash equivalents and unpledged investment securities available-for-sale of approximately $68.7 million, which represents 3.17% of total assets.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures designed to ensure that information is recorded and reported in all filings of financial reports. Such information is reported to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer to allow timely and accurate disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e). In designing these controls and procedures, management recognizes that they can only provide reasonable assurance of achieving the desired control objectives. Management also evaluated the cost-benefit relationship of possible controls and procedures.

Table of Contents

As of the end of the period covered by this report, the Company carried out an evaluation of the effectiveness of Company’s disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer, the Chief Financial Officer and other senior management of the Company. The evaluation was based, in part, upon reports and affidavits provided by a number of executives. Based on the foregoing, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls over financial reporting subsequent to the date the Company completed its evaluation.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

Certain lawsuits and claims arising in the ordinary course of business have been filed or are pending against the Company or its subsidiaries. Based upon information available to the Company, its review of such lawsuits and claims and consultation with its counsel, the Company believes the liability relating to these actions, if any, would not have a material adverse effect on its consolidated financial statements.

There are no material proceedings adverse to the Company to which any director, officer or affiliate of the Company is a party.

ITEM 1A. Risk Factors

See “Item 1A. Risk Factors” in the Company’s 2013 Annual Report to Shareholders on Form 10-K. In management’s opinion, there have been no material changes in risk factors since the filing of the 2013 Form 10-K.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no shares repurchased by Farmers & Merchants Bancorp during the third quarter of 2014. The remaining dollar value of shares that may yet be purchased under the Company’s Stock Repurchase Plan is approximately $20.0 million.

The common stock of Farmers & Merchants Bancorp is not widely held nor listed on any exchange. However, trades may be reported on the Over-The-Counter Bulletin Board under the symbol “FMCB.” Additionally, management is aware that there are private transactions in the Company’s common stock.

ITEM 3. Defaults Upon Senior Securities

Not applicable

ITEM 4. Mine Safety Disclosures

Not applicable

ITEM 5. Other Information

None

ITEM 6. Exhibits

See “Index to Exhibits”

Table of Contents

SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FARMERS & MERCHANTS BANCORP

Date: November 7, 2014	/s/ Kent A. Steinwert

	Kent A. Steinwert
	Chairman, President
	& Chief Executive Officer
	(Principal Executive Officer)

Date: November 7, 2014	/s/ Stephen W. Haley

	Stephen W. Haley
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial & Accounting Officer)

Index to Exhibits

Exhibit No.	Description

31(a)	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certifications 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	XBRL Instance Document
101.SCH	XBRL Schema Document
101.CAL	XBRL Calculation Linkbase Document
101.LAB	XBRL Label Linkbase Document
101.PRE	XBRL Presentation Linkbase Document
101.DEF	XBRL Definition Linkbase Document

Attached files

Stock widget

Investing forum

FARMERS & MERCHANTS BANCORP Reports