What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-03-16 compared with 2021-03-15 · 1431 added, 1105 removed, 279 unchanged (90% of the section changed)

1 unchanged sentence

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (Moss Adams LLP, San Francisco, California, PCAOB ID:

Consolidated Financial Statements

Consolidated Balance Sheets – December 31, 2020, and 2019

Consolidated Statements of Income – Years ended December 31, 2020, 2019 and 2018

Consolidated Statements of Comprehensive Income – Years Ended December 31, 2020, 2019 and 2018

Consolidated Statements of Changes in Shareholders' Equity – Years ended December 31, 2020, 2019 and 2018

Consolidated Statements of Cash Flows - Years Ended December 31, 2020, 2019 and 2018

Consolidated Balance Sheets as of December 31, 2021, and 2020

Consolidated Statements of Income for the three years ended December 31, 2021, 2020 and 2019

Consolidated Statements of Comprehensive Income for the three years ended December 31, 2021, 2020 and 2019

Consolidated Statements of Changes in Shareholders’ Equity for the three years ended December 31, 2021, 2020 and 2019

Consolidated Statements of Cash Flows for the three years ended December 31, 2021, 2020 and 2019

Notes to the Consolidated Financial Statements

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Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Farmers & Merchants Bancorp and subsidiaries (the “Company”) as of December 31, 2020 and 2019 , the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020 , and the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company’s internal control over financial reporting as of December 31, 2020 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019 , and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 , in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020 , based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

We have audited the

accompanying consolidated balance sheets of Farmers & Merchants Bancorp and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders’

equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company’s internal control

over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the

Treadway Commission (“COSO”).

In our opinion, the

consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021 and 2020, and the consolidated results of its operations and its

cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the Company maintained, in all material

respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting included in Item 9A.

Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial

reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting in Item 9A.

Our responsibility is to

express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in

accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audits also included performing such other procedures as we considered necessary in the circumstances.

Those standards require that we plan and perform the audits to obtain

reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal

control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to

assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks.

Such procedures included examining, on a test basis, evidence

regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made

by management, as well as evaluating the overall presentation of the consolidated financial statements.

Our audit of internal control over financial reporting included obtaining

an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

audits also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial

reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that

(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(2) provide reasonable assurance that transactions are recorded as

necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management

and directors of the Company;

financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Also, projections of any

evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that was

communicated or required to be communicated to the audit committee and (1) relates to accounts or disclosures that are material to the consolidated financial statements;

and (2) involved our especially challenging, subjective, or

complex judgments.

providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses

As described in Notes 1 and 6 to the consolidated financial statements, the Company’s consolidated allowance for credit losses balance was $58.8 million at December 31, 2020.

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.

As described in Notes 1 and 5 to the consolidated financial statements, the Company ’ s

allowance for credit losses balance was $61 million at December 31, 2021.

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

The overall allowance consists of three primary components:

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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, 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.

We identified management’s risk ratings of loans and the estimation of qualitative factors, both of which are used in the allowance for credit losses calculation, as a critical audit matter.

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.

The qualitative factors are used to estimate losses related to factors that are not captured in the historical loss rates such as economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, and the character of the loan & lease portfolio, and are based on management’s evaluation of available internal and external data and involves significant management judgement.

Auditing management’s judgments regarding the determination of risk ratings and qualitative factors applied to the allowance for credit losses involved a high degree of subjectivity.

The primary procedures we performed to address this critical audit matter included:

Testing the design, implementation, and operating effectiveness of controls relating to management’s calculation of the allowance for credit losses, including controls over the accuracy of risk ratings of loans and the determination of the qualitative factors used.

Testing a risk-based targeted selection of loans to gain substantive evidence that the Company is appropriately rating these loans in accordance with its policies, and that the risk ratings for the loans are reasonable.

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 including, 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.

We identified management’s risk ratings of loans and the estimation of qualitative factors, both of which are used in the allowance for credit losses calculation and

require significant management judgment as critical audit matters.

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.

The qualitative factors are used to estimate losses related to factors that are not captured in the historical loss rates such as economic trends in the Company’s service areas,

industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, and the character of the loan & lease portfolio, and are based on management’s evaluation of available

internal and external data and involves significant management judgement.

Auditing management’s judgments regarding the determination of risk ratings and qualitative factors applied to the allowance for credit losses involved a high

degree of subjectivity and judgement.

The following are the primary procedures we performed to address these critical audit matters.

We evaluated the design and tested the operating effectiveness of

certain internal controls related to the Company’s calculation of the allowance for credit losses, including:

Determination of the accuracy of risk ratings of loans

Determination of the appropriateness of the changes in risk ratings of loans

Evaluating the appropriate approval of the changes in risk ratings of loans

Identification and determination of the significant assumptions used in the measurement of the qualitative factors

Evaluation of the appropriateness of the changes made to the qualitative factors

We also tested management’s process to develop the risk ratings of loans and the estimation of qualitative factors which involved the following:

Testing a risk-based targeted selection of loans to gain substantive evidence that the Company is appropriately rating these loans in accordance with its policies, and that the

risk ratings for the loans are reasonable

Performing a loan grade analysis by loan type to determine whether any large fluctuations occurred that could not be reasonably explained

Obtaining management’s analysis and supporting documentation related to the qualitative factors, and testing whether the qualitative factors used in the calculation of the allowance for credit losses are supported by the analysis provided by management and are used in a manner consistent with management’s established policies and procedures.

Performing an independent sensitivity analysis to evaluate the reasonableness of the qualitative factors used by management to account for inherent losses that are not captured in the calculation of the allowance for credit losses based on historical loss rates alone.

Obtaining management’s analysis and supporting documentation related to the qualitative factors and testing whether the qualitative factors used in the calculation of the

allowance for credit losses are reasonable

Performing an independent analysis to evaluate the reasonableness of the qualitative factors used by management to account for inherent losses that are not captured in the

calculation of the allowance for credit losses based on historical loss rates alone

/s/ Moss Adams LLP

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Consolidated Balance Sheets

(in thousands except share and per share data)

Cash and Cash Equivalents:

(Dollars in thousands, except share and per share amounts)

Cash and due from banks

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Total cash and cash equivalents

Investment Securities:

Available-for-Sale, amortized cost $ 789,175 , and $ 502,693 , respectively

Held-to-Maturity, fair value $ 70,049 and $ 61,097 , respectively

Securities available for sale, at fair value

Securities held to maturity, at amortized cost

Total investment securities

Loans & Leases:

Non-marketable securities

Loans and leases held for investment

Allowance for credit losses

Loans& Leases, Net

Loans held for investment, net

Bank-owned life insurance

Premises and equipment, net

Bank Owned Life Insurance, Net

Interest Receivable and Other Assets

Interest-Bearing Transaction

Deferred income tax assets, net

Accrued interest receivable

Other intangibles

Other real estate owned

LIABILITIES AND SHAREHOLDERS’ EQUITY

Noninterest bearing

Interest bearing:

Savings and money market

Certificate of deposits

Total interest bearing

Total deposits

Subordinated debentures

Interest Payable and Other Liabilities

Other liabilities

TOTAL LIABILITIES

Commitments & Contingencies (See Note 19)

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, 789,646 and 793,033

Shares Issued and Outstanding at December 31, 2020 and 2019, respectively.

Preferred shares, no par value, 1,000,000 shares authorized and, no ne issued or outstanding

Common shares, $ 0.01 par value, 7,500,000 authorized, 789,646 issued and outstanding at December 31, 2021 and 2020, respectively

Additional paid in capital

Retained earnings

Accumulated Other Comprehensive Income, Net of Taxes

Accumulated other comprehensive (loss) / income

TOTAL SHAREHOLDERS’ EQUITY

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

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

See accompanying notes to the consolidated financial statements.

Farmers & Merchants Bancorp

Consolidated Statements of Income

(in thousands except per share data)

Year Ended December 31,

(Dollars in thousands, except share and per share amounts)

Interest income

Interest and Fees on Loans & Leases

Interest on Deposits with Banks

Interest on Investment Securities:

Exempt from Federal Tax

Interest and fees on loans and leases

Interest and dividends on investments

Interest on deposits with others

Total interest income

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Net interest income after provision for credit losses

Non-Interest Income

Noninterest income

Card processing

Service charges on deposit accounts

Net Gain (Loss) on Sales Investment Securities

Increase in Cash Surrender Value of Bank Owned Life Insurance

Debit Card and ATM Fees

Increase in cash surrender value of BOLI

Gain on sale of investment securities

Net gain on deferred compensation investments

Total Non-Interest Income

Non-Interest Expense

Total noninterest income

Noninterest expense

Salaries and employee benefits

Net Gain on Deferred Compensation Plan Investments

Net gain on deferred compensation benefits

Data Processing

FDIC insurance

Acquisition Expenses

Total Non-Interest Expense

Income Before Provision for Income Taxes

Provision for Income Taxes

Basic and Diluted Earnings Per Common Share

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

Total noninterest expense

INCOME BEFORE INCOME TAXES

Income tax expense

Earnings per common share:

See accompanying notes to the consolidated financial statements.

FARMERS & MERCHANTS BANCORP

Consolidated Statements of Comprehensive Income

(in thousands)

Year Ended December 31,

Other Comprehensive Loss

Net Unrealized Gain (Loss) on Available-for-Sale Securities

Deferred Tax (Benefit) Expense Related to Unrealized (Gain) Losses

Reclassification Adjustment for Realized (Gain) Loss on Sales of Available-for-Sale Securities Included in Net Income

Deferred Tax Related to Reclassification Adjustment

Total Other Comprehensive Income (Loss)

Comprehensive Income

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

(Dollars in thousands)

Other comprehensive income

Unrealized holding (losses)/gains on securities available for sale

Reclassification adjustment for (gains)/losses on available for sale securities

Amortization of unrealized loss on securities transferred to held to maturity

Net unrealized holding (losses)/gains on securities available for sale

Income tax income/(expense)

Other comprehensive (loss)/income, net of tax

Total comprehensive income

See accompanying notes to the consolidated financial statements.

Farmers & Merchants Bancorp

Consolidated Statements of Changes in Shareholders’ Equity

(in thousands except share and per share data)

For the Three Years Ended December 31, 2021

(Dollars in thousands, except share amounts)

Comprehensive

(Loss)/Income

Shareholders’

Balance, January 1, 2018

Cash Dividends Declared on Common Stock ($ 13.90 per share)

Repurchase of Common Stock

Balance as of January 1, 2019

Other comprehensive income, net of tax

Cash dividends declared ($ 14.20

Issuance of common stock

Change in Net Unrealized Loss on Securities Available-for-Sale

Balance, December 31, 2018

Cash Dividends Declared on Common Stock ($ 14.20 per share)

Balance as of December 31, 2019

Other comprehensive income, net of tax

Cash dividends declared ($ 14.75

Issuance of common stock

Change in Net Unrealized Gain on Securities Available-for-Sale

Balance, December 31, 2019

Cash Dividends Declared on Common Stock ($ 14.75 per share)

Repurchase of common stock

Issuance of Common Stock

Change in Net Unrealized Gain on Securities Available-for-Sale

Balance, December 31, 2020

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

Balance as of December 31, 2020

Other comprehensive loss, net of tax

Cash dividends declared ($ 15.30

Balance as of December 31, 2021

See accompanying notes to the consolidated financial statements.

Farmers & Merchants Bancorp

Consolidated Statements of Cash Flows

(in thousands)

Year Ended December 31,

Operating Activities

(Dollars in thousands)

Cash flows from operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

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Depreciation and amortization

(Benefit) Provision for Deferred Income Taxes

Net Amortization of Investment Security Premiums & Discounts

Amortization of Core Deposit Intangible

Accretion of Discount on Acquired Loans

Net (Gain) Loss on Sale of Investment Securities

Net Loss (Gain) on Sale of Property & Equipment

Earnings from Equity Investment

Dividends from Equity Investment

Gain on Remeasurement of Previously Held Equity Investment

Net Change in Operating Assets & Liabilities:

Net (Increase) Decrease in Interest Receivable and Other Assets

Net (Decrease) Increase in Interest Payable and Other Liabilities

Net amortization of securities premiums and discounts

Increase in cash surrender value of BOLI

Decrease/(increase) in deferred income taxes, net

(Gains)/losses on sale of securities available for sale

Net changes in:

Other liabilities

Net cash provided by operating activities

Investing Activities:

Purchase of Investment Securities Available-for-Sale

Proceeds from Sold, Matured, or Called Securities Available-for-Sale

Purchase of Investment Securities Held-to-Maturity

Proceeds from Matured, or Called Securities Held-to-Maturity

Net Loans & Leases Paid, Originated or Acquired

Principal Collected on Loans & Leases Previously Charged Off

Cash Paid for Acquisition, Net

Additions to Premises and Equipment, Net

Cash flows from investing activities:

Net change in loans held for investment

Purchase of available for sale securities

Purchase of held to maturity securities

Purchase of non-marketable securities

Maturities/sales of available for sale securities

Maturities of held to maturity securities

Purchase of premises and equipment

Purchase of other investments

Proceeds from Sale of Property & Equipment

Redemption of other investments

Proceeds from sale of assets

Net cash used in investing activities

Financing Activities:

Cash flows from financing activities:

Net increase in deposits

Stock Repurchases

Cash Dividends

Net Cash Provided by Financing Activities

Cash dividends paid

Net cash used in share repurchase program

Net provided by financing activities

Net change in cash and cash equivalents

Cash and Cash Equivalents at Beginning of Year

Cash and Cash Equivalents at End of Year

Supplementary Data

Cash Payments Made for Income Taxes

Issuance of Common Stock to the Bank’s Non-Qualified Retirement Plans

Interest Paid

Supplementary Noncash Disclosure

Lease Liabilities Arising from Obtaining Right-of-Use Assets

Acquisitions:

Fair Value of Assets Acquired

Fair Value of Liabilities Acquired

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

Notes to Consolidated Financial Statements

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 wholly owned subsidiaries include F & M Bancorp, Inc.

Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

Supplemental disclosures of cash flow information:

Cash paid for interest

Income taxes paid

Issuance of common stock

Supplemental disclosures of non-cash transactions:

Investment securities available for sale transferred to held to maturity

Unrealized (losses)/gains on securities available for sale

Lease liabilities from obtaining right-of-use assets

See accompanying notes to the consolidated financial statements.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS

Note 1—Summary of Significant

Accounting Policies

Nature of Operations and basis of consolidation — Farmers & Merchants Bancorp (“FMCB”) is a Delaware corporation headquartered in Lodi, California and is the bank holding company for

Farmers & Merchants Bank of Central California (the “Bank” or “F&M Bank” and together with FMCB, the “Company”).

The Company operates all business activities through the Bank, which was organized in 1916.

F&M Bank is a California

state-chartered bank.

F&M Bank operates under the supervision of the California Department of Financial Protection and Innovation (“DFPI”), and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”).

is not a member of the Federal Reserve System;

however, FMCB operates as a bank holding company under the Federal Bank Holding Company Act of 1956, subject to and under the supervision of and examination by the Board of Governors of the

Federal Reserve System (“FRB”) and is the sole shareholder of F&M Bank.

Both FMCB and F&M Bank are subject to periodic examination by these applicable federal and state regulatory agencies and file periodic reports and other

information with the agencies.

The Company considers F&M Bank to be its sole operating segment.

The Company’s other wholly-owned subsidiaries include F & M

Bancorp, Inc.

and FMCB Statutory Trust I.

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was created in March 2002 to protect the name F & M Bank.

During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name “F & M Bank” as part of a larger effort to enhance the Company’s image and build brand name recognition.

In December 2003, the Company formed a wholly owned subsidiary, FMCB Statutory Trust I, for the sole purpose of issuing Trust Preferred Securities and related subordinated debentures, in accordance with generally accepted accounting principles in the United States (“U.S.

During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name “F

& M Bank” as part of a larger effort to enhance the Company’s image and build brand name recognition.

In December 2003, the Company formed a wholly owned subsidiary, FMCB Statutory Trust I, for the sole purpose of issuing Trust Preferred

Securities and related subordinated debentures, in accordance with generally accepted accounting principles in the United States (“U.S.

FMCB Statutory Trust I is a non-consolidated subsidiary.

On October 10, 2018, Farmers & Merchants Bancorp completed the acquisition of the Bank of Rio Vista, headquartered in Rio Vista, California, a locally owned and operated community bank established in 1904.

As of the acquisition date, Bank of Rio Vista had approximately $ 217.5 million in assets and three branch locations in the communities of Rio Vista, Walnut Grove, and Lodi.

Since the Company had a 39.65 % interest in Bank of Rio Vista prior to the acquisition of the remaining interest, the transaction was accounted for as a business combination achieved in stages or a step acquisition.

The Company, through an independent valuation, remeasured its previously held equity interest in Bank of Rio Vista at fair value, which resulted in a gain for the excess of the acquisition-date fair value over its carrying value of $ 997,000 which is included in other non-interest income in the consolidated statements of income.

At the effective time of the acquisition, Bank of Rio Vista was merged into Farmers & Merchants Bank of Central California.

Basis of Presentation

The accounting and reporting policies of the Company conform to U.S.

GAAP and prevailing practice within the banking industry.

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.

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 U.S.

GAAP and under the rules and regulations of U.S.

Securities and Exchange Commission, 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.

Accounting Guidance Pending Adoption at December 31, 2020

The following paragraphs provide descriptions of newly issued but not yet effective accounting standards that could have a material effect on the Company’s financial position or results of operations.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.

The ASU will require the earlier recognition of credit losses on loans and other financial instruments based on an expected loss model, replacing the incurred loss model that is currently in use.

Under the new guidance, an entity will measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts.

The expected loss model will apply to loans and leases, unfunded lending commitments, held-to-maturity debt securities and other debt instruments measured at amortized cost.

The impairment model for available-for-sale debt securities will require the recognition of credit losses through a valuation allowance when fair value is less than amortized cost, regardless of whether the impairment is considered to be other-than-temporary.

During 2019, the Company completed an assessment of its CECL data and system needs, and engaged a third-party vendor to assist in developing a CECL model.

The Company, in conjunction with this vendor, researched and analyzed modeling standards, loan segmentation, as well as potential external inputs to supplement our historical loss history.

Model validation began in the third quarter, enabling the Company to complete parallel runs using data beginning with the second quarter of 2019 .

The new guidance had been effective on January 1, 2020.

However, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) and H.R.

133, resulted in federal banking regulators issuing an interim final rule allowing banks the option of delaying the implementation of CECL until January 1, 2022.

In addition, the national banking regulators have issued a joint statement allowing financial institutions to mitigate the effects of CECL in their regulatory capital calculations for up to two years.

The Company has elected to delay CECL adoption, but continues to run its CECL model quarterly to accumulate data for the ultimate implementation.

Management is currently evaluating the impact that the standard will have on its consolidated financial statements .

Out of Period Adjustment

During the quarter ended September 30, 2018, while preparing 2017 tax returns, the Company identified certain items related to IRS Code Section 162(m) that were not appropriately reflected in the 2014 through 2017 Provision for Income Taxes.

To reflect this change, the cumulative impact of $ 990,000 was recognized by reducing the Company’s Provision for Income Taxes in the third quarter of 2018.

After evaluating the quantitative and qualitative aspects of the adjustment, the Company concluded that its 2017 financial statements were not materially misstated and, therefore, no restatement was required.

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 and Federal Funds Sold, which have original maturity dates of 3 months or less.

For these instruments, the carrying amount is a reasonable estimate of fair value.

Through its network of 29 banking offices and 3 ATMs, F&M Bank emphasizes

personalized service along with a broad range of banking services to businesses and individuals located in the service areas of its offices.

Although the Company focuses on marketing its services to small and medium-sized businesses, a

broad range of retail banking services are also made available to the local consumer market.

F&M Bank branches are located through the mid Central Valley of California, including Sacramento, San Joaquin, Solano, Stanislaus and Merced

counties and the east region of the San Francisco Bay Area including Napa and Contra Costa counties.

F&M Bank provides a broad complement of lending products,

including commercial, commercial real estate, real estate construction, agribusiness, consumer, credit card, residential real estate loans, and equipment leases.

Commercial products include term loans, leases, lines of credit and other

working capital financing and letters of credit.

Financing products for individuals include automobile financing, lines of credit, residential real estate, home improvement and home equity lines of credit.

F&M Bank also offers a wide range of deposit instruments.

These include checking, savings, money market, time certificates of deposit, individual retirement accounts and online banking services for both business and personal accounts.

F&M Bank offers a wide range of specialized services designed

for the needs of its commercial accounts.

These services include a credit card program for merchants, lockbox and other collection services, account reconciliation, investment sweep, on-line account access, and electronic funds transfers by

way of domestic and international wire and automated clearinghouse.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

F&M Bank makes investment products available to customers, including mutual funds and annuities.

These investment products are offered through a third-party, which employs investment

advisors to meet with and provide investment advice to the Company’s customers.

The consolidated financial statements of the Company include the accounts of FMCB together with the Bank.

All intercompany

transactions and balances have been eliminated.

estimates — The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions.

These estimates

and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.

results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses (“ACL”), the determination of the fair value of certain financial instruments, and deferred income tax assets.

Reclassifications — Certain amounts in the prior years’

financial statements have been reclassified to conform to the current year’s presentation.

There was no impact on net income or retained earnings as a result of any reclassification.

and cash equivalents — Cash and cash equivalents consist of cash on hand, amounts due from banks, interest bearing deposits, and federal funds sold, all of which have original maturities of three months or less.

places its cash with high credit quality institutions.

The amounts on deposit fluctuate and, at times, exceed the insured limit by the FDIC, which potentially subjects the Company to credit risk.

For these instruments, the carrying amount is a

reasonable estimate of fair value.

securities — Investment securities are classified as held to maturity (“HTM”)

when the Company has the positive intent and ability to hold the securities to maturity.

Investment securities are classified as available for sale (“AFS”) when the Company has the intent of holding the security for an indefinite period of

time, but not necessarily to maturity.

The Company determines the appropriate classification at the time of purchase, and periodically thereafter.

Investment securities classified at HTM are carried at amortized cost.

Investment securities

Investment securities are classified at the time of purchase as held-to-maturity (“HTM”) 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 over the term through the earliest call date 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 (“AFS”) if it is management’s intent, at the time of purchase, to hold the securities for an unstated period of time and may be used 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 earnings.

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.

Equity securities, are carried at fair value, with unrealized and realized gains recognized through earnings .

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.

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.

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.

classified at AFS are reported at fair value.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

Debt securities classified as held to maturity are carried at cost.

securities classified as available for sale are measured at fair value.

Unrealized holding gains and losses on debt securities classified as available for sale are excluded from earnings and are reported net of tax as accumulated other

comprehensive income (AOCI), a component of shareholders’ equity, until realized.

When AFS securities, specifically identified, are sold, the unrealized gain or loss is reclassified from AOCI to non-interest income.

When the estimated fair value of a security is

lower than the book value, a security is considered impaired and the Company evaluates it for other-than-temporary impairment (“OTTI”).

If there is intent to sell the security, or if the Company will be required to sell the security, or if

the Company believes it will not recover the entire cost basis of the security, the security is other-than-temporarily impaired and impairment is recognized.

The amount of impairment resulting from credit loss is recognized in earnings and

impairment related to all other factors, such as general market conditions, is recognized in AOCI.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant

Accounting Policies—Continued

Management considers a number of factors in its analysis of whether a

decline in a security’s estimated fair value is OTTI.

Certain factors considered include, but are not limited to:

(a) the length of time and the extent to which the security has been in an unrealized loss position, (b) changes in the financial

condition of the issuer, (c) the payment structure of debt securities, (d) adverse changes in ratings issued by rating agencies, (e) and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any

anticipated recovery in fair value.

Interest income is recognized based on the coupon rate, and is

increased by the accretion of discounts earned or decreased by the amortization of premiums paid.

The amortization of premiums or the accretion of discounts are recognized in interest income using the effective interest method over the period of

Non-marketable

equity securities — Non-marketable equity securities primarily consist

of Federal Home Loan Bank (“FHLB”) stock.

FHLB stock is restricted because such stock may only be sold to FHLB at its par value.

Due to the restrictive terms, and the lack of a readily determinable market value, FHLB stock is carried at cost.

The investments in FHLB stock are required investments related to the Bank’s borrowings from FHLB.

FHLB obtains its funding primarily through issuance of consolidated obligations of the FHLB system.

government does not guarantee these

obligations, and each of the regional FHLBs are jointly and severally liable for repayment of each other’s debt.

Loans and leases held for investment — Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at

their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on acquired loans.

Interest income is accrued on the unpaid

principal balance.

Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the effective interest method.

placed on non-accrual status when they become 90 days or more past due or at such earlier time as management determines timely

recognition of interest to be in doubt.

Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, collection efforts, and the borrower’s financial condition, that the

borrower will be unable to make payments as they become due.

When interest accrual is discontinued, all unpaid accrued interest is reversed.

Interest income is subsequently recognized only to the extent cash payments are received, or

payment is considered certain.

Loans may be returned to accrual status when all delinquent interest and principal amounts contractually due are brought current and future payments are reasonably assured.

Impaired loan and leases — The Company considers loans impaired when, based on current information and events, it is probable the Company will be unable to collect all principal and interest payments due according to the

contractual terms of the loan agreement.

Such loans are generally classified as Substandard or Doubtful loans.

Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest

rate, the loan’s observable market price, or the fair value of the collateral, if the loan is collateral dependent.

Changes in these values are recorded to provision for loan losses and as adjustments to the ACL.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

Factors considered by management in determining impairment include

payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.

Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay,

the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.

Restructured loan and leases — 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 and

leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms.

If the restructured loan or lease was current on all payments at the time of restructure and management

reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual.

Loans and leases that are on nonaccrual status at the time they become TDR, 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 as described above.

Generally, the Company will not restructure loans or leases for borrowers unless:

However, these loans or leases continue to be classified as

impaired and are individually evaluated 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.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law, and was amended and extended by the Consolidated Appropriations Act of 2021 (“H.R.

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.

On March 27, 2020, the

Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law and was amended and extended by the Consolidated Appropriations Act of 2021 (“H.R.

133”) on December 21, 2020.

The CARES Act and H.R.

133 provide financial institutions, under specific circumstances, the opportunity to temporarily suspend certain requirements under generally accepted accounting principles related to modifications for a limited period of time to account for the effects of COVID-19.

In March 2020, a joint statement was issued by federal and state regulatory agencies, after consultation with the FASB, to clarify that short-term loan modifications are not TDRs if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to any relief.

133 provide financial

institutions, under specific circumstances, the opportunity to temporarily suspend certain requirements under generally accepted accounting principles related to modifications for a limited period to account for the effects of COVID-19.

2020, a joint statement was issued by federal and state regulatory agencies, after consultation with the FASB, to clarify that short-term loan modifications are not TDRs if made on a good-faith basis in response to COVID-19 to borrowers who were

current prior to any relief.

Under this guidance, six months is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification program is implemented.

The guidance also provides that these modified loans generally will not be classified as nonaccrual during the term of the modification.

The guidance also provides that these

modified loans generally will not be classified as nonaccrual during the term of the modification.

See “Note 2 – Risks and Uncertainties” for additional information on the CARES Act, H.R.

133 and the impact of COVID-19 on the Company.

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.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

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.

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).

specific reserves related to impaired loans and leases;

general reserves for inherent losses related to loans and 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 and 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:

8 unchanged sentences

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 allowance for credit losses attributable to each portfolio segment, which includes both individually evaluated impaired loans and leases and loans and 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 and leases and periodically

performs detailed reviews of all such loans and leases over a certain threshold to identify credit risks and assess overall collectability.

For smaller balance loans and leases, such as consumer and residential real estate, a credit grade is

established at inception, and then updated only when the loan or lease becomes contractually delinquent or when the borrower requests a modification.

For larger balance loans, management monitors and analyzes the financial condition of borrowers and

guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans and leases.

These credit quality indicators are used to assign a risk rating to each individual loan or lease.

These risk ratings are also subject to examination by independent specialists engaged by the Company.

The risk ratings can be grouped into five major categories, defined as follows:

These risk ratings

are also subject to examination by independent specialists engaged by the Company.

The risk ratings can be grouped into five major

categories, defined as follows:

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

This category also includes “Watch” loans, which is a loan with an emerging weakness in either the individual credit or industry that requires additional attention.

This category also includes “Watch” loans, which is a loan with

an emerging weakness in either the individual credit or industry that requires additional attention.

A credit may also be classified Watch if cash flows have not yet stabilized, such as in the case of a development project.

Included in this category are all loans in which the Bank entered into a CARES Act modification .

Included in this

category are all loans in which the Bank entered into a CARES Act modification.

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.

If left uncorrected, these potential weaknesses may result in deterioration of the repayment

prospects for the loan or lease or in the Company’s credit position at some future date.

Special mention loans and leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

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.

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:

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;

1 unchanged sentence

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.

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.

Trends in vacancy rates of commercial

properties affect 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.

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;

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 affect the credit quality of these loans, as property values determine the economic viability of construction

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.

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.

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.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

Commercial 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.

Residual value risk is managed with

qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

Residential 1st mortgages and home equity lines and loans – These loans are generally considered to possess a lower inherent risk of loss.

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.

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.

Most installment loans are made for consumer

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 Board (“FRB”), the Department of Financial Protection and Innovation (“DFPI”) 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 .

Acquired Loans

Loans acquired through purchase or through a business combination are recorded at their fair value at the acquisition date.

Credit discounts, which reflect estimates of credit losses, expected to be incurred over the life of the loan, are included in the determination of fair value;

therefore, an allowance for loan losses is not recorded at the acquisition date.

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.

Right of Use Lease Asset & Lease Liability

The Company leases retail space and office space under operating leases.

Most leases require the Company to pay real estate taxes, maintenance, insurance and other similar costs in addition to the base rent.

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 Board (“FRB”), the California Department of Financial Protection and Innovation (“DFPI”) 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.

equipment — Land is carried at cost.

Premises and equipment are carried at

cost, net of accumulated depreciation and amortization.

Depreciation and amortization expense is computed using the straight-line method based on the estimated useful lives of the related assets below:

Building and building improvements

30 to 40 years

Leasehold improvements

term of lease

Furniture and equipment

Computers, software and equipment

Maintenance and repairs are expensed as incurred while major

additions and improvements are capitalized.

Bank-owned life insurance (“BOLI”) — The Bank has purchased life insurance policies.

These policies provide protection against the adverse financial effects that could result from the

death of a key employee and provide tax-exempt income to offset expenses associated with the plans.

It is the Bank’s intent to hold these policies as a long-term investment;

however, there may be an income tax impact if the Bank chooses to

surrender certain policies.

Although the lives of individual current or former management-level employees are insured, the Bank is the owner and sole or partial beneficiary.

BOLI is carried at the cash surrender value (“CSV”) of the underlying

insurance contract.

Changes in the CSV and any death benefits received in excess of the CSV are recognized as non-interest income.

Goodwill — Goodwill represents the excess of the purchase considerations paid over the fair value

of the assets acquired, net of the fair values of liabilities assumed in a business combination and is not amortized but is reviewed annually, as of

December 31, or more frequently as current circumstances and conditions warrant, for impairment.

An assessment of qualitative factors is completed to determine if it is more likely than not that the fair value of a reporting unit is less than

its carrying amount.

If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed.

The quantitative goodwill impairment compares the reporting unit’s estimated fair values,

including goodwill, to its carrying amount.

If the carrying amount exceeds its reporting unit’s fair value, then an impairment loss would be

recognized as a charge to earnings but is limited by the amount of goodwill allocated to that reporting unit.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

Other intangible assets — Other intangible assets consist primarily of core deposit intangibles (“CDI”), which are amounts recorded in business combinations or deposit purchase transactions related to

the value of transaction-related deposits and the value of the client relationships associated with the deposits.

Core deposit intangibles are amortized over the estimated useful life of such deposits.

These assets are reviewed at

least annually for events or circumstances that could affect their recoverability.

These events could include loss of the underlying core deposits, increased competition or adverse changes in the economy.

To the extent other identifiable

intangible assets are deemed unrecoverable;

impairment losses are recorded in other non-interest expense to reduce the carrying amount of the assets.

financial assets — Transfers of financial assets are accounted for as sales

when control over the assets has been surrendered.

Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it

from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Right of use lease asset & lease liability — The Company leases retail space and office space under operating leases.

Most leases require the Company to pay real estate taxes, maintenance,

insurance and other similar costs in addition to the base rent.

Certain leases also contain lease incentives, such as tenant improvement allowances and rent abatement.

Variable lease payments are recognized as lease expense as they are incurred.

We record an operating lease right of use (ROU) asset and an operating lease liability (lease liability) for operating leases with a lease term greater than 12 months.

The ROU asset and lease liability are recorded in other assets and other liabilities, respectively, in the consolidated statement of financial condition.

We record an operating

lease right of use (“ROU”) asset and an operating lease liability (lease liability) for operating leases with a lease term greater than 12 months.

The ROU asset and lease liability are recorded in other assets and other liabilities, respectively,

in the consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.

ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

Accordingly, ROU assets are reduced by tenant improvement allowances from landlords plus any prepaid rent.

We do not separate lease and non-lease components of contracts.

As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date.

Many of our leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule, which are factored into our determination of lease payments when appropriate.

ROU assets and lease liabilities are

recognized at commencement date based on the present value of lease payments over the lease term.

Accordingly, ROU assets are reduced by tenant improvement allowances from property owners plus any prepaid rent.

We do not separate lease and

non-lease components of contracts.

at commencement date.

lease payments when appropriate.

A majority of the leases provide the Company with the option to extend the lease term one or more times following expiration of the initial term.

The ROU asset and lease liability terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

The ROU asset and lease liability terms may include options to extend

or terminate the lease when it is reasonably certain that we will exercise that option.

Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Revenue from Contracts with Customers

The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”).

Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation.

Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

Off-balance sheet

credit related financial instruments — In the ordinary course of business, the

Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, and standby letters of credit.

Such financial instruments are recorded when they are funded.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

Allowance for credit losses - unfunded loan commitments — An allowance for

credit losses - unfunded loan commitments is maintained at a level that, in the opinion of management, is adequate to absorb current expected credit losses associated with the contractual life of the Banks’ commitments to lend funds under existing

agreements such as letters or lines of credit.

The Banks use a methodology for determining the allowance for credit losses - unfunded loan commitments that applies the same segmentation and loss rate to each pool as the funded exposure adjusted for

probability of funding.

Draws on unfunded loan commitments that are considered uncollectible at the time funds are advanced are charged to the allowance for credit losses on off-balance sheet exposures.

Provisions for credit losses - unfunded loan

commitments are recognized in non-interest expense and added to the allowance for credit losses - unfunded loan commitments, which is included in other liabilities in the consolidated balance sheets.

contracts with customers — The Company records revenue from contracts with

customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”).

Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in

the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation.

Significant revenue has not been

recognized in the current reporting period that results from performance obligations satisfied in previous periods.

The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic

The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary.

Statements of Income was not necessary.

The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed;

charged either on a periodic basis or based on activity.

Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is limited judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

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 expense as incurred.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law, and was amended and extended by H.R.

133 on December 21, 2020.

The CARES Act and H.R.

133 restrict the ability of financial institutions to exercise their foreclosure rights on residential and multi-family properties backed by federally guaranteed mortgage loans.

The State of California has gone further and temporarily suspended all residential and commercial foreclosures through June 30, 2021.

The Company is working with its borrowers when they make requests to defer payments on their mortgage loans.

See “Note 2 – Risks and Uncertainties” for additional information on the CARES Act and the impact of COVID-19 on the Company.

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.

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.

The Company accounts for leases with Investment Tax Credits (ITC) under the deferred method as established in ASC 740-10.

ITC are viewed and accounted for as a reduction of the cost of the related assets and presented as deferred income on the Company’s financial statement.

The Company accounts for its interest in LIHTC using the cost method as established in ASC 323-740.

As an investor, the Company obtains income tax credits and deductions from the operating losses of these tax credit entities.

The income tax credits and deductions are allocated to the investors based on their ownership percentages and are recorded as a reduction of income tax expense (or an increase to income tax benefit) and a reduction of federal income taxes payable.

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 consolidated 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.

At December 31, 2020 and 2019, the Company has no material uncertain tax positions and recognized no interest or penalties.

The Company's policy is to recognize interest and penalties related to income taxes in the provision for income taxes in the Consolidated Statement of Income .

Basic and Diluted Earnings Per Common Share

The Company’s common stock is not traded on any exchange.

charged either on a periodic

basis or based on activity.

of the amount and timing of revenue from contracts with customers.

Income taxes — Deferred income tax assets and deferred income tax liabilities represent the tax effect of temporary differences between financial reporting and tax reporting measured

at enacted tax rates in effect for the year in which the differences are expected to reverse.

The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an

audit by the taxing authority.

Developing the provision for income taxes, including the effective tax rate and analysis of potential tax exposure items, if any, requires significant judgment

and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred income tax assets and liabilities and any estimated valuation allowances deemed necessary to value deferred income tax

Judgments and tax strategies are subject to audit by various taxing authorities.

While the Company believes it has no significant uncertain income tax positions in the consolidated financial statements, adverse determinations by

these taxing authorities could have a material adverse effect on the consolidated financial positions, result of operations, or cash flows.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

and diluted earnings per common share — The Company’s common

stock is not traded on any exchange.

However, trades are reported on the OTCQX under the symbol “FMCB”.

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.

Basic earnings per common share amounts are computed by

dividing net income by the weighted average number of common shares outstanding for the period.

There are no common stock

equivalent shares.

Therefore, there is no difference between presentation of diluted and basic earnings per common share.

See Note 15 – “Dividends and Basic and Diluted Earnings Per Common Share” for additional information .

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.

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.

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 refers to revenues, expenses, gains, and losses that U.S.

GAAP 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 consolidated financial statements.

Business Combinations And Related Matters

Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations.

Under the acquisition method, the acquiring entity in a business combination recognizes 100 percent of the acquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fair values as of the date of acquisition.

Any excess of the fair value over the purchase price of net assets and other identifiable intangible assets acquired is recorded as bargain purchase gain.

Assets acquired and liabilities assumed from contingencies must also be recognized at fair value, if the fair value can be determined during the measurement period.

Results of operations of an acquired business are included in the statement of operations from the date of acquisition.

Acquisition-related costs, including conversion charges, are expensed as incurred.

Goodwill and Other Intangible Assets :

Goodwill is determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.

Goodwill that arises from a business combination is periodically evaluated for impairment at the reporting unit level, at least annually.

Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.

Core deposit intangible ("CDI") represents the estimated future benefit of deposits related to an acquisition and is booked separately from the related deposits and evaluated periodically for impairment.

The CDI asset is amortized on a straight-line method over its estimated useful life of ten years .

At December 31, 2020, the future estimated amortization expense for the CDI arising from our past acquisitions is as follows:

(in thousands)

Core Deposit Intangible Amortization

We make a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit where goodwill is assigned is less than its carrying amount.

If we conclude that it is more likely than not that the fair value is more than its carrying amount, no impairment is recorded.

Goodwill is tested for impairment on an interim basis if circumstances change or an event occurs between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

The qualitative assessment includes adverse events or circumstances identified that could negatively affect the reporting units’ fair value as well as positive and mitigating events.

Such indicators may include, among others, a significant change in legal factors or in the general business climate, significant change in our stock price and market capitalization, unanticipated competition, and an action or assessment by a regulator.

If the fair value of a reporting unit is less than its carrying amount, an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value is recognized.

The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

Risks and Uncertainties

The COVID-19 pandemic has affected all of us.

Designated as an “essential business”, the Company’s subsidiary, Farmers & Merchants Bank of Central California, has kept all branches open and maintained regular business hours during these difficult times.

Our staffing levels have remained stable during the COVID-19 crisis.

We have taken what we believe are prudent measures to protect our employees and customers, while still providing core banking services.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law, and was amended and extended by the Consolidated Appropriations Act of 2021 (“H.R.

133”) on December 21, 2020.

Through this legislation, as well as related federal and state regulatory actions, the federal government has taken extraordinary efforts to provide financial assistance to individuals and companies to help them move through these difficult times.

GAAP recognize as changes in value to an enterprise but are excluded from

For the Company, comprehensive income includes net income and changes in fair value of its available-for-sale investment securities and amortization of net unrealized gains or losses on securities transferred from

available-for-sale to held-to-maturity, net of related taxes.

Segment reporting — The “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

as needs and demands change.

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

consolidated financial statements.

Advertising costs — Advertising costs are expensed when incurred and totaled $ 1.1 million in 2021, $ 0.9 million

in 2020, and $ 1.3 million in 2019.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

Impact of recent authoritative accounting guidance — The Accounting Standards Codification™ (“ASC”) is the FASB officially recognized

source of authoritative GAAP applicable to all public and non-public non-governmental entities.

Periodically, the FASB will issue Accounting Standard updates (“ASU”) to its ASC.

Rules and interpretive releases of the SEC under the

authority of the federal securities laws are also sources of authoritative GAAP for the Company as an SEC registrant.

All other accounting literature is non-authoritative.

In June 2016, FASB issued ASU No.

2016-13, Measurement of Credit Losses on Financial Instruments.

Current GAAP requires an “incurred loss” methodology for recognizing

credit losses that delays recognition until it is probable a loss has been incurred.

The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial

instruments and other commitments to extend credit held by a reporting entity at each reporting date.

The ASU affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance

receivables, and any other financial asset not excluded from the scope that have the contractual right to receive cash.

The ASU replaced the incurred loss impairment methodology in current GAAP with a methodology that reflects expected

credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to be

presented at the net amount expected to be collected.

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected

to be collected on the financial asset.

The measurement of expected credit losses will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that

affect the collectability of the reported amount.

This ASU broadens the information that an organization must use to develop its expected credit loss estimate for assets measured either collectively or individually.

The new guidance had been effective on January 1, 2020.

However, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) and H.R.

133, resulted in federal

banking regulators issuing an interim final rule allowing banks the option of delaying the implementation of CECL until January 1, 2022.

In addition, the national banking regulators have issued a joint statement allowing financial

institutions to mitigate the effects of CECL in their regulatory capital calculations for up to two years.

The Company elected to delay CECL adoption, but continued to run its CECL model quarterly to accumulate data for the ultimate

implementation.

The Company adopted this ASU effective January 1, 2022.

The Company formed an internal committee to oversee the project and engaged a third-party software vendor in the

development of its model.

The Company developed a reasonable and supportable forecast based upon economic forecast scenarios and incorporated the reasonable and supportable forecast into the models.

The Company also developed a qualitative

factor methodology and incorporated the qualitative factors into the models.

The Company expects greater volatility in its earnings after adoption due to the nature and time horizon used to calculate CECL, the mode

sensitivity to changes in economic forecasts, and other factors.

Lastly, the Company expects a lack of comparability with financial performance to its peers as it adopts this ASU, due to delayed adoption for some public companies and the

varying methodologies utilized by its peers.

The Company is in the process of finalizing its review of the model results related to the adoption of this ASU.

Based on our most recently determined model results, we

expect the combined adjustment to our Allowance for Credit Loss and Reserve for Unfunded Loan Commitments could be within ( 5.00 %)

to 5.00 % upon the adoption.

Based on the credit quality of debt securities held-to-maturity, the allowance for credit losses

recorded at adoption on this portfolio is expected to be nominal.

In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available-for-sale will be replaced with an allowance

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

1—Summary of Significant Accounting Policies—Continued

events — The Company has evaluated events occurring subsequent to

December 31, 2021 for disclosure in the consolidated financial statements.

The Company repurchased 4,500 shares of common

stock in February 2022.

The Company originated $ 497 million in SBA PPP loans, which has declined to $ 32.4 million at February 28, 2022.

Note 2—Risks and Uncertainties

The COVID-19 pandemic has affected the economy and businesses throughout the U.S., in California and in the markets served by the Company.

Designated as an “essential business”,

the Company’s subsidiary, Farmers & Merchants Bank of Central California, has kept all branches open and maintained regular business hours during the COVID-19 pandemic.

Our staffing levels have remained stable during the COVID-19 pandemic.

Through the CARES Act and H.R.

133, as well as related federal and state regulatory actions, the federal government has taken extraordinary efforts to provide financial assistance

to individuals and companies to help them move through these difficult times.

However, there are no guarantees how long the COVID-19 virus may continue to impact our economy, and therefore, the Company.

While we expect the effects of COVID-19 could have an adverse future impact on our business, financial condition and results of operations, we are unable to predict the full extent or nature of these impacts at the current time.

Investment Securities

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

(in thousands)

While we expect the effects of COVID-19 could have an adverse future impact on our business, financial condition and results of operations, we are unable to predict the full extent

or nature of these impacts at the current time.

Note 3 — Investment Securities

The amortized cost, fair values, and

unrealized gains and losses of the securities available-for-sale are as follows:

Available-for-Sale Securities

Gross Unrealized

December 31, 2020

US Treasury Notes

US Government Agency SBA

(Dollars in thousands)

As of December 31, 2021

Treasury notes

Government-sponsored securities

Mortgage-backed securities (1)

Corporate Securities

Collateralized Mortgage Obligations

Total available-for-sale securities

(1) All mortgage-backed securities were issued by an agency

or government sponsored entity of the U.S.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 3—Investment Securities—Continued

Available-for-Sale

Gross Unrealized

December 31, 2019

US Treasury Notes

US Government Agency SBA

(Dollars in thousands)

As of December 31, 2020

Treasury notes

Government-sponsored securities

Mortgage-backed securities (1)

Collateralized Mortgage Obligations

Corporate securities

Total available-for-sale securities

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

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

(in thousands)

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

Held-to-Maturity Securities

Gross Unrealized

December 31, 2020

Obligations of States and Political Subdivisions

(Dollars in thousands)

As of December 31, 2021

Municipal securities

Mortgage-backed securities (1)

Collateralized Mortgage Obligations

Total held-to-maturity securities

(1) All mortgage-backed securities were issued

by an agency or government sponsored entity of the U.S.

Held-to-Maturity

Gross Unrealized

December 31, 2019

Obligations of States and Political Subdivisions

(Dollars in thousands)

As of December 31, 2020

Municipal securities

Total held-to-maturity securities

Fair values are based on quoted market prices or dealer quotes.

If a quoted market price or dealer quote is not available, fair value is estimated using quoted market prices for similar securities.

The amortized cost and estimated fair values of investment securities at December 31, 2020 by contractual maturity are shown in the following tables.

(in thousands)

Available-for-Sale

Held-to-Maturity

quoted market price or dealer quote is not available, fair value is estimated using quoted market prices for similar securities.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

3—Investment Securities—Continued

The following tables show the gross unrealized losses for available-for-sale securities that are less than 12 months and 12 months or more:

Available-for-Sale Securities

December 31, 2021

Within One Year

After One Year Through Five Years

After Five Years Through Ten Years

After Ten Years

Investment Securities Not Due at a Single Maturity Date:

Mortgage Backed Securities

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

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

(Dollars in thousands)

Unrealized Losses

As of December 31, 2021

Government-sponsored securities

Mortgage-backed securities (1)

Total available-for-sale securities

(1) All mortgage-backed securities

were issued by an agency or government sponsored entity of the U.S.

Available-for-Sale Securities

December 31, 2020

Securities Available-for-Sale

US Government Agency SBA

Less Than 12 Months

12 Months or More

(Dollars in thousands)

As of December 31, 2020

Government-sponsored securities

Mortgage-backed securities (1)

Corporate securities

There were no HTM investments with gross unrealized losses at December 31, 2020.

Total available-for-sale securities

(1) All mortgage-backed

securities were issued by an agency or government sponsored entity of the U.S.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 3—Investment

Securities—Continued

The following tables show the gross unrealized losses for held-to-maturity securities that

are less than 12 months and 12 months or more:

Held-to-Maturity Securities

December 31, 2021

(Dollars in thousands)

Less Than 12 Months

12 Months or More

As of December 31, 2021

Mortgage-backed securities (1)

Collateralized Mortgage Obligations

Total held-to-maturity securities

(1) All mortgage-backed

securities were issued by an agency or government sponsored entity of the U.S.

There were no HTM investments with gross unrealized losses at

December 31, 2020.

Securities Available-for-Sale

US Government Agency SBA

As of December

31, 2021, the Company held 654 investment securities of which 82 were in an unrealized loss position for less than twelve months and 71

securities were in an unrealized 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.

The Company does not intend to sell the securities and believes it is able to more likely than not collect all amounts due according to the contractual terms of the underlying investment securities.

Management believes its debt securities are not OTTI.

Proceeds from sales and calls of these securities were as

(Dollars in thousands)

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 3—Investment Securities—Continued

The amortized cost

and estimated fair values of investment securities at December 31, 2021 by contractual maturity are shown in the following tables:

Available-for-Sale

Held-to-Maturity

(Dollars in thousands)

One year or less

After one year through five

After five years through ten

After ten years

Securities not due at a single

maturity date:

Mortgage-backed securities

Securities Held-to-Maturity

Obligations of States and Political Subdivisions

As of December 31, 2020, the Company held 649 investment securities of which 13 were in an unrealized loss position for less than twelve months and 83 securities were in an unrealized 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.

Securities of Government Agency and Government Sponsored Entities – At December 31, 2020 and December 31, 2019, no securities of government agency and government sponsored entities were in a loss position.

Treasury Notes – At December 31, 2020 and December 31, 2019 , no U.S.

Treasury Note security investments were in a loss position.

Government SBA – At December 31, 2020, 8 U.S.

Government SBA security investments were in a loss position for less than 12 months and 65 were in a loss position for 12 months or more.

The unrealized losses on the Company's investment in U.S.

Government SBA were $ 93,000 at December 31, 2020 and $ 113,000 at December 31, 2019.

The unrealized losses were caused by interest rate fluctuations.

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 did not consider these investments to be other-than-temporarily impaired at December 31, 2020 and December 31, 2019.

Mortgage Backed Securities - At December 31, 2020, 3 mortgage backed security investments were in a loss position for less than 12 months and 18 were in a loss position for 12 months or more.

The unrealized losses on the Company's investment in mortgage-backed securities were $ 48,000 at December 31, 2020 and $ 99,000 at December 31, 2019.

The unrealized losses 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.

Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment.

Corporate Securities - At December 30, 2020, 2 corporate securities were in an unrealized loss position for less than 12 months and no ne were in a loss position for 12 months or more.

The unrealized losses on the Company’s investment in corporate securities were $ 18,000 .

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.

The Company monitors the status of each of our corporate securities 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.

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 December 30, 2020.

Obligations of States and Political Subdivisions - At December 31, 2020, no obligations of states and political subdivisions were in a loss position for less than 12 months.

None were in a loss position for 12 months or more.

As of December 31, 2020, one-hundred percent of the Company’s bank-qualified municipal bond portfolio is rated at either the issue or the issuer level, and all of these ratings are “investment grade.” The Company monitors the status of all municipal investments in the portfolio, 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.

The unrealized losses on the Company’s investment in obligation of states and political subdivisions were $ 0 at December 31, 2020 and $ 12,000 at December 31, 2019.

Management believes that any unrealized losses on the Company's investments in obligations of states and political subdivisions were 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 would 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, 2020 and December 31, 2019.

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

(in thousands)

Gross Proceeds

Collateralized mortgage obligations

Expected maturities of

mortgage-backed and CMO securities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

Pledged Securities

1 unchanged sentence

This amount was $ 439.7 million at December 31, 2020.

Federal Home Loan Bank Stock and Other Equity Securities, at Cost

Note 4—Federal Home Loan Bank Stock and Other Non-Marketable Securities

The Bank is a member of the FHLB system.

Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts.

Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional

FHLB stock and other equity securities are carried at cost, classified as restricted securities, and periodically evaluated for impairment based on ultimate recovery of par value.

Both cash and stock dividends are reported as income.

FHLB stock and other equity securities are reported in Interest Receivable and Other Assets on the Company’s Consolidated Balance Sheets and totaled $ 12.7 million at December 31, 2020 and 2019.

Loans & Leases

Loans & leases as of December 31 consisted of the following:

(in thousands)

stock and other equity securities are reported in Non-Marketable Securities on the Company’s Consolidated Balance Sheets and totaled $ 15.5

million and $ 12.9 at December 31, 2021 and 2020, respectively.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 5—Loans and Leases

Loans and leases as of the dates indicated consisted of the following:

(Dollars in thousands)

Loans and leases held-for-investment, net

Commercial real estate

Agricultural Real Estate

Real Estate Construction

Residential 1st Mortgages

Home Equity Lines and Loans

Consumer & Other (1)

Total Gross Loans & Leases

Residential and home equity

Total real estate

Commercial & Industrial

Commercial leases

Consumer and other (1)

Total gross loans and leases

Unearned income

Total net loans and leases

Allowance for credit losses

Loans & Leases, Net

(1) Includes CARES Act Small Business Administration Paycheck Protection Program loans of $ 224,309 as of December 31, 2020.

Total loans and leases held-for-investment, net

(1) Includes SBA PPP loans.

Paycheck Protection Program (“PPP”) … Under the CARES Act and H.R.

133 (see “Note 2 – Risks and Uncertainties”) the Small Business Administration (“SBA”) was directed by Congress to provide loans to small businesses with less than 500 employees to assist these businesses in meeting their payroll and other financial obligations during the COVID-19 pandemic.

These government guaranteed loans are made with an interest rate of 1%, a risk weight of 0% under risk-based capital rules, have a term of 2 years, and under certain conditions the SBA will forgive them.

(see “Note 2 – Risks and Uncertainties”) the Small Business Administration (“SBA”) was directed by Congress to provide loans to small businesses with less than 500 employees to assist these businesses in meeting their payroll and other financial

obligations during the COVID-19 pandemic.

These government guaranteed loans are made with an interest rate of 1%, a risk weight of 0% under risk-based capital rules, have a term of 2 to 5 years, and under certain conditions the SBA will forgive

The Bank actively participated in the PPP, and since April 2020, the Bank has funded $ 494.39 million of loans for 2,680 small business customers.

At December 31, 2020, the portion of loans that were approved for pledging as collateral on borrowing lines with the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“FRB”) were $ 808.9 million and $ 706.2 million, respectively.

As of December 2021 and 2020, PPP loans outstanding were $ 70.8 million and $ 224.3 million, respectively.

At December 31, 2021, the portion of loans that were approved for

pledging as collateral on borrowing lines with the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“FRB”) were $ 1.1

billion and $ 767 million, respectively.

The borrowing capacity on these loans was $ 837.1 million from FHLB and $ 480.4 million from the FRB.

Allowance for Credit Losses

The Company was originally scheduled to implement ASU 2016-13, Financial Instruments – Credit Losses:

Measurement of Credit Losses on Financial Instruments (“CECL”) as of January 1, 2020.

The CARES Act and H.R.

133 provide the election to defer CECL implementation until January 1, 2022.

The Company has elected to delay CECL implementation.

The following tables show the allocation of the allowance for credit losses at December 31, 2020 and December 31, 2019 by portfolio segment and by impairment methodology (in thousands) :

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 5—Loans and Leases —Continued

The following tables show an aging analysis of the loan & lease portfolio, including unearned income, by the time past due at December 31, 2021 and 2020:

December 31, 2021

Residential 1st

Lines & Loans

Year-To-Date Allowance for Credit Losses:

Beginning Balance- January 1, 2020

Ending Balance- December 31, 2020

Ending Balance Individually Evaluated for Impairment

Ending Balance Collectively Evaluated for Impairment

Loans & Leases:

Ending Balance

Ending Balance Individually Evaluated for Impairment

Ending Balance Collectively Evaluated for Impairment

(Dollars in thousands)

30-89 Days Past Due

90+ Days Past Due

Loans and leases held-for-investment, net

Commercial real estate

Residential and home equity

Total real estate

Commercial & Industrial

Commercial leases

Consumer and other

Total loans and leases, net

December 31, 2020

Residential 1st

Lines & Loans

Year-To-Date Allowance for Credit Losses:

Beginning Balance- January 1, 2019

Ending Balance- December 31, 2019

Ending Balance Individually Evaluated for Impairment

Ending Balance Collectively Evaluated for Impairment

Loans & Leases:

Ending Balance

Ending Balance Individually Evaluated for Impairment

Ending Balance Collectively Evaluated for Impairment

The ending balance of loans individually evaluated for impairment includes restructured loans in the amount of $ 876,000 and $ 2.6 million at December 31, 2020 and 2019, respectively, which are no longer disclosed or classified as TDR’s, since they were restructured at market terms.

The following tables show the loan & lease portfolio, including unearned income allocated by management’s internal risk ratings at December 31, 2020 and December 31, 2019 (in thousands) :

(Dollars in thousands)

30-89 Days Past Due

90+ Days Past Due

Total Past Due

Loans and leases held-for-investment, net

Commercial real estate

Residential and home equity

Total real estate

Commercial & Industrial

Commercial leases

Consumer and other

Total loans and leases, net

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 5—Loans and Leases —Continued

Non-accrual loans are summarized as follows:

(Dollars in thousands)

Non-accrual loans and leases:

Non-accrual loans and leases, not TDRs

Commercial real estate

Residential and home equity

Total real estate

Commercial & Industrial

Commercial leases

Consumer and other

Non-accrual loans and leases, are TDRs

Commercial real estate

Residential and home equity

Total real estate

Commercial & Industrial

Commercial leases

Consumer and other

Total non-accrual loans and leases

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 5—Loans and Leases —Continued

Not included in the table below, but relevant to a discussion of asset quality are loans that were granted some form of relief because of COVID-19 and are not

considered TDRs because of the CARES Act and H.R.

Since April 2020, we have restructured $ 278.1 million of loans under the CARES

133 guidelines.

As of December 31, 2021, all loans that were restructured as part of the CARES Act and H.R.

133 have returned to the contractual terms and conditions of the loans, without exception.

The following table lists total troubled debt restructured loans that the Company is either accruing or not accruing interest by loan category:

(Dollars in thousands)

Troubled debt restructured loans and leases:

Accruing TDR loans and leases

Commercial real estate

Residential and home equity

Total real estate

Commercial & Industrial

Commercial leases

Consumer and other

Non-accruing TDR loans and leases

Commercial real estate

Residential and home equity

Total real estate

Commercial & Industrial

Commercial leases

Consumer and other

Total TDR loans and leases

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 5—Loans and Leases —Continued

Outstanding loan balances (accruing and non-accruing) categorized by these credit quality indicators are summarized as follows:

December 31, 2021

Loans & Leases:

(Dollars in thousands)

Total Loans & Leases

Total Allowance for Credit Losses

Loans and leases held-for-investment, net

Commercial real estate

Agricultural Real Estate

Real Estate Construction

Residential 1st Mortgages

Home Equity Lines and Loans

Consumer & Other

Includes “Watch” loans of $ 958.2 million.

Residential and home equity

Total real estate

Commercial & Industrial

Commercial leases

Consumer and other

Total loans and leases, net

December 31, 2020

Loans & Leases:

(Dollars in thousands)

Total Loans & Leases

for Credit Losses

Loans and leases held-for-investment, net

Commercial real estate

Agricultural Real Estate

Real Estate Construction

Residential 1st Mortgages

Home Equity Lines and Loans

Residential and home equity

Total real estate

Commercial & Industrial

Commercial leases

Consumer and other

Total loans and leases, net

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 5—Loans and Leases —Continued

Changes in the allowance for credit losses are as follows:

Year Ended December 31, 2021

(Dollars in thousands)

Commercial & Agricultural R/E

Residential & Home Equity

Commercial Leases

Consumer & Other

Includes “Watch” loans of $ 744.7 million.

“Significant Accounting Policies – Allowance for Credit Losses” for a description of the internal risk ratings used by the Company.

There were no loans & leases outstanding at December 31, 2020 and 2019 rated doubtful or loss.

The following tables show an aging analysis of the loan & lease portfolio, including unearned income, by the time past due at December 31, 2020 and December 31, 2019 (in thousands) :

Allowance for credit losses:

Balance at beginning of year

Provision / (recapture) for credit losses

Net (charge-offs) / recoveries

Balance at end of year

Year Ended December 31, 2020

(Dollars in thousands)

Commercial & Agricultural R/E

Residential & Home Equity

Commercial Leases

Consumer & Other

Allowance for credit losses:

Balance at beginning of year

Provision / (recapture) for credit losses

Net (charge-offs) / recoveries

Balance at end of year

Year Ended December 31, 2019

(Dollars in thousands)

Commercial & Agricultural R/E

Residential & Home Equity

Commercial Leases

Consumer & Other

Allowance for credit losses:

Balance at beginning of year

Provision / (recapture) for credit losses

Net (charge-offs) / recoveries

Balance at end of year

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 5—Loans and Leases —Continued

The ACL and outstanding loan balances reviewed according to the Company’s estimated credit loss methods were summarized as follows:

December 31, 2021

Still Accruing

Loans & Leases

Loans & Leases:

Commercial Real Estate

Agricultural Real Estate

Real Estate Construction

Residential 1st Mortgages

Home Equity Lines and Loans

(Dollars in thousands)

Commercial & Agricultural R/E

Residential & Home Equity

Commercial Leases

Consumer & Other

Allowance for credit losses:

Total loans and leases

Collectively evaluated for impairment

Individually evaluated for impairment

Total loans and leases

Allowance for credit losses:

Collectively evaluated for impairment

Individually evaluated for impairment

Total allowance for credit losses

December 31, 2020

Still Accruing

Loans & Leases

Loans & Leases:

Commercial Real Estate

Agricultural Real Estate

Real Estate Construction

Residential 1st Mortgages

Home Equity Lines and Loans

(Dollars in thousands)

Commercial & Agricultural R/E

Residential & Home Equity

Commercial Leases

Consumer & Other

Non-accrual loans & leases at December 31, 2020 were $ 495,000 .

There were no non-accrual loans & leases at December 31, 2019.

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 $ 22,000 , $ 0 , and $ 0 at December 31, 2020, 2019, and 2018 respectively.

The following tables show information related to impaired loans & leases at and for the year ended December 31, 2020 and December 31, 2019 (in thousands) :

Allowance for credit losses:

Total loans and leases

Collectively evaluated for impairment

Individually evaluated for impairment

Total loans and leases

Allowance for credit losses:

Collectively evaluated for impairment

Individually evaluated for impairment

Total allowance for credit losses

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 5—Loans and Leases —Continued

Information on individually evaluated loans was summarized as follows:

December 31, 2021

With no related allowance recorded:

Commercial Real Estate

Agricultural Real Estate

With an allowance recorded:

(Dollars in thousands)

Unpaid Principal Balance

With no Allowance

With Allowance

Total Recorded Investment

Related Allowance

Loans and leases individually evaluated:

Commercial real estate

Agricultural Real Estate

Residential 1st Mortgages

Home Equity Lines and Loans

Consumer & Other

Residential and home equity

Total real estate

Commercial & Industrial

Commercial leases

Consumer and other

Total gross loans and leases

December 31, 2020

With no related allowance recorded:

(Dollars in thousands)

Unpaid Principal Balance

With no Allowance

With Allowance

Total Recorded Investment

Related Allowance

Loans and leases individually evaluated:

Commercial real estate

Agricultural Real Estate

With an allowance recorded:

Residential and home equity

Total real estate

Commercial & Industrial

Commercial leases

Consumer and other

Total gross loans and leases

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 5—Loans and Leases —Continued

Interest income recognized on the average recorded investment of individually evaluated loans was as follows:

Year Ended December 31,

(Dollars in thousands)

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Interest Income

Loans and leases individually evaluated:

Commercial real estate

Residential 1st Mortgages

Home Equity Lines and Loans

Consumer & Other

Total recorded investment shown in the prior table will not equal the total ending balance of loans & leases individually evaluated for impairment on the allocation of allowance table.

This is because this table does not include impaired loans that were previously modified in a troubled debt restructuring, are currently performing and are no longer disclosed or classified as TDR’s, since they were restructured at market terms.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law, and was amended and extended by the Consolidated Appropriations Act 2021 (“H.R.

133”) on December 21, 2020.

The CARES Act and H.R.

133 provide financial institutions, under specific circumstances, the opportunity to temporarily suspend certain requirements under generally accepted accounting principles related to TDR’s for a limited period of time to account for the effects of COVID-19.

Under this guidance, six months is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification program is implemented.

The guidance also provides that these modified loans generally will not be classified as nonaccrual during the term of the modification.

Since April 2020, we have restructured $ 277.6 million of loans under the CARES Act and H.R.

133 guidelines.

As of December 31, 2020, $ 3.7 million of these loans remain in a deferral status, the other loans having returned to making principal and/or interest payments.

We believe that these actions will assist these borrowers in getting through these difficult times, but no guaranties can be made that at some time in the future these loans will not be required to be accounted for as a TDR.

For borrowers who are 30 days or more past due when enrolling in a loan modification program related to the COVID-19 pandemic, we evaluate the loan modifications under our existing TDR framework, and where such a loan modification would result in a more than insignificant concession to a borrower experiencing financial difficulty, the loan will be accounted for as a TDR and will generally not accrue interest.

See “Note 2 – Risks and Uncertainties” for additional information on the CARES Act, H.R.

133 and the impact of COVID-19 on the Company.

At December 31, 2020, there were no formal foreclosure proceedings in process for consumer mortgage loans secured by residential real estate properties.

At December 31, 2020, the Company allocated $ 158,000 of specific reserves to $ 7.9 million of troubled debt restructured loans, all of which were performing.

At December 31, 2019, the Company allocated $ 612,000 of specific reserves to $ 12.1 million of troubled debt restructured loans, all of which were performing.

The Company had no commitments at December 31, 2020 and December 31, 2019 to lend additional amounts to customers with outstanding loans that are classified 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 5 years.

Modifications involving an extension of the maturity date range from 3 months to 10 years.

The following table presents loans by class modified as troubled debt restructured loans for the year ended December 31, 2020 (in thousands) :

December 31, 2020

Troubled Debt Restructurings

Pre-Modification

Post-Modification

Residential 1st Mortgages

The troubled debt restructurings described above increased the allowance for credit losses by $ 120,000 .

There were no charge-offs for the twelve months ended December 31, 2020.

During the year ended December 31, 2020, there were no payment defaults on loans modified as troubled debt restructurings within twelve months following the modification.

The following table presents loans by class modified as troubled debt restructured loans for the year ended December 31, 2019 (in thousands) :

December 31, 2019

Troubled Debt Restructurings

Pre-Modification

Post-Modification

Consumer & Other

The troubled debt restructurings described above increased the allowance for credit losses by $ 101,000 .

There were no charge-offs for the twelve months ended December 31, 2019.

During the year ended December 31, 2019, there were no payment defaults on loans modified as troubled debt restructurings within twelve months following the modification.

Residential and home equity

Total real estate

Commercial & Industrial

Commercial leases

Consumer and other

Total loans and leases individually evaluated

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 6—Premises and Equipment

Premises and equipment consisted of the following:

(Dollars in thousands)

Premises and equipment:

Premises and equipment as of December 31 consisted of the following:

(in thousands)

Land and Buildings

Buildings and land

Furniture, fixtures, and equipment

Leasehold Improvement

Leasehold improvements

Accumulated depreciation and amortization

Total premises and equipment

Depreciation and amortization on premises and equipment included in occupancy and equipment expense amounted to $ 2,632 ,000, $ 2,769 ,000, and $ 2,756 ,000 for the years ended December 31, 2021, 2020 and 2019, respectively.

Rental income was $ 434,000 , $ 183,000 , and $ 173,000 for the years ended December 31, 2020, 2019, and 2018, respectively.

Other Real Estate

The Bank reported $ 873,000 in other real estate at December 31, 2020, and December 31, 2019.

Other real estate includes property no longer utilized for business operations and property acquired through foreclosure proceedings.

Rental income was $ 491,000 , $ 434,000 , and $ 183,000 for the years ended December 31, 2021, 2020, and 2019, respectively and is recorded in other income.

Note 7—Other Real Estate

The Bank reported $ 873,000 in other real estate at December 31,

2021 and 2020, which includes property no longer utilized for business operations and property acquired through foreclosure proceedings.

These properties are carried at fair value less selling costs determined at the date acquired.

Losses, if any, arising from properties acquired through foreclosure are charged against the allowance for loan losses at the time of foreclosure.

Subsequent declines in value, periodic holding costs, and net gains or losses on disposition are included in other operating expense as incurred.

Other real estate is reported in Interest Receivable and Other Assets on the Company’s Consolidated Balance Sheets.

Time Deposits

Time Deposits of $250,000 or more as of December 31 were as follows:

(in thousands)

At December 31, 2020, the scheduled maturities of time deposits were as follows:

(in thousands)

Scheduled Maturities

Current and deferred income tax expense (benefit) provided for the years ended December 31 consisted of the following:

(in thousands)

Total Current

Total Deferred

Total Provision for Taxes

The total provision for income taxes differs from the federal statutory rate as follows:

(in thousands)

Tax Provision at Federal Statutory Rate

Interest on Obligations of States and Political Subdivisions exempt from Federal Taxation

State and Local Income Taxes, Net of Federal Income Tax Benefit

Bank Owned Life Insurance

Low-Income Housing Tax Credit

Out of Period Adjustment

Total Provision for Taxes

The components of net deferred tax assets as of December 31 are as follows:

The net deferred tax assets are reported in Interest Receivable and Other Assets on the Company’s Consolidated Balance Sheet.

(in thousands)

Deferred Tax Assets

Allowance for Credit Losses

Accrued Liabilities

Deferred Compensation

State Franchise Tax

Tax Credit Carry Forward

Lease Liability

Acquired Net Operating Loss

Fair Value Adjustment on Loans Acquired

Fair Value Adjustment on ORE Acquired

PPP Loan Service Fee Income

Low-Income Housing Investment

Total Deferred Tax Assets

Deferred Tax Liabilities

Premises and Equipment

Securities Accretion

Unrealized Gain on Securities Available-for-Sale

Leasing Activities

Core Deposit Intangible Asset

ROU Lease Asset

Total Deferred Tax Liabilities

Net Deferred Tax Assets

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted in response to the COVID- 19 pandemic.

The CARES Act provides options for accelerating refunds associated with previously paid alternative minimum taxes.

The Company benefited from the alternative minimum tax refund provisions of the CARES Act and submitted accelerated refund claims during the year ended December 31, 2020.

Based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred tax assets are expected to be deductible, Management believes it is more likely than not we will realize the benefit of the remaining deferred tax assets.

The Company and its subsidiaries file income tax returns in the U.S.

federal and California jurisdictions.

With few exceptions, the Company is no longer subject to U.S.

federal, state and local, or non-U.S.

income tax examinations by the tax authorities for the years before 2016.

Short Term Borrowings

The Company had unused lines of credit available for short-term liquidity purposes of $ 1.3 billion at December 31, 2020 and 2019 .

Federal Funds purchased and advances are generally issued on an overnight basis.

There were no advances from the FHLB at December 31, 2020 or 2019.

There were no Federal Funds purchased or advances from the FRB at December 31, 2020 or 2019.

Federal Home Loan Bank Advances

The Company had no short-term or long-term advances from the Federal Home Loan Bank of San Francisco at December 31, 2020 or 2019.

In accordance with the Collateral Pledge and Security Agreement, advances are secured by all FHLB stock held by the Company.

At December 31, 2020, $ 808.9 million in loans were approved for pledging as collateral on borrowing lines with the FHLB.

The borrowing capacity on these loans was $ 630.5 million.

Long-term Subordinated Debentures

In December 2003, the Company formed a wholly owned Connecticut statutory business trust, FMCB Statutory Trust I (“Statutory Trust I”), which issued $ 10.0 million of guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures (the “Trust Preferred Securities”).

The Company is not considered the primary beneficiary of the trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.

Losses, if any,

arising from properties acquired through foreclosure are charged against the allowance for loan losses at the time of foreclosure.

Subsequent declines in value, periodic holding costs, and net gains or losses on disposition are included in other

operating expense as incurred.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 8 — Deposits

Certificate of deposits greater than and less than or equal to the FDIC insurance limit are summarized as follows:

(Dollars in thousands)

Certificate of deposits:

Certificates of deposits less than or equal to $250,000

Certificates of deposits greater than $250,000

Total certificate of deposits

Scheduled maturities for certificates of deposit are as follows for the years ending December 31:

(Dollars in thousands)

2026 and beyond

Total time deposits

Note 9 — Short-term borrowings

As of December 31, 2021 and 2020, committed lines of credit arrangements totaling $ 1.4 billion and $ 1.3 billion were available to the Company from

unaffiliated banks, respectively.

The average Federal Funds interest rate as of December 31, 2021 was 0.25 %.

The Company is a member of the FHLB of San Francisco and has a committed credit line of $ 837.1 million, which is secured by $ 1.14 billion in various

real estate loans and investment securities pledged as collateral.

Borrowings generally provide for interest at the then current published rate, which was 0.17 % as of December 31, 2021.

The Company has $ 767 million in pledged loans

with the Federal Reserve Bank (the “Fed”).

As of December 31, 2021, the Company’s overnight borrowing capacity using the primary credit facilities from the Fed account was $ 480.4 million.

The borrowing rate is 25 basis points.

were no outstanding advances on the above borrowing facilities as of December 31, 2021 and 2020.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 10—Long-term Subordinated Debentures

Securities”).

These debentures qualify as Tier 1 capital under current regulatory guidelines.

All of the common securities of Statutory Trust I are owned by the Company.

The proceeds from the issuance of the common securities and the Trust Preferred Securities were used by FMCB Statutory Trust to purchase $ 10.3 million of junior subordinated debentures of the Company, which carry a floating rate based on three-month LIBOR plus 2.85 %.

The proceeds from the issuance of the common securities and the Trust Preferred

Securities were used by FMCB Statutory Trust to purchase $ 10.3 million of junior subordinated debentures of the Company, which carry a

floating rate based on three-month LIBOR plus 2.85 %.

The debentures represent the sole asset of Statutory Trust I.

The Trust Preferred Securities accrue and pay distributions at a floating rate of three-month LIBOR plus 2.85 % per annum of the stated liquidation value of $ 1,000 per capital security.

The Trust Preferred Securities accrue and pay distributions at a floating rate of three-month LIBOR plus 2.85 % per annum of the stated liquidation value of $ 1,000 per

capital security.

The Company has entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment to the extent that Statutory Trust I has funds available therefore of:

(i) accrued and unpaid distributions required to be paid on the Trust Preferred Securities;

(i) accrued and unpaid distributions

required to be paid on the Trust Preferred Securities;

(ii) the redemption price with respect to any Trust Preferred Securities called for redemption by Statutory Trust I;

and (iii) payments due upon a voluntary or involuntary dissolution, winding up, or liquidation of Statutory Trust I.

and (iii) payments due upon a voluntary or involuntary dissolution, winding

up, or liquidation of Statutory Trust I.

The Trust Preferred Securities are mandatorily redeemable upon maturity of the subordinated debentures on December 17, 2033 , or upon earlier redemption as provided in the indenture.

The Company has the right to redeem the subordinated debentures purchased by Statutory Trust I, in whole or in part, on or after December 17, 2008.

The Company has the right to redeem the subordinated debentures purchased by Statutory Trust I, in

whole or in part, on or after December 17, 2008.

As specified in the indenture, if the subordinated debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest.

Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on the Company’s common stock.

Shareholders’ Equity

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 November 6, 2018, the Board of Directors approved an extension of the $ 20 million stock repurchase program to December 31, 2021.

Repurchases under the program may be made from time to time on the open market or through private transactions.

The repurchase program also requires that no repurchases may be made if the Bank would not remain “well-capitalized” after the repurchase.

There were no stock repurchases made in 2020 or 2019 under the Common Stock Repurchase Plan.

On November 23, 2020, the Board of Directors of Farmers & Merchants Bancorp approved, and all applicable regulators provided statements of non-objection regarding, the Company’s repurchase and retirement of up to $ 8.5 million of its outstanding common stock during the fourth quarter of 2020 and the first half of 2021.

These repurchases will be done outside of the Company’s current repurchase plan.

All repurchases will be made at the then prevailing market prices.

In the fourth quarter of 2020 the Company repurchased $ 2.8 million of shares from shareholders.

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 as Rights Agent, and the Company declared a dividend of a right to acquire one preferred share purchase right (a “Right”) for each outstanding share of the Company’s common stock, $ 0.01 par value per share, to stockholders of record at the close of business on August 15, 2008 .

Generally, the Rights are only triggered and become exercisable if a person or group (the “Acquiring Person”) acquires beneficial ownership of 10 percent or more of the Company’s common stock or announces a tender offer for 10 percent or more of the Company’s common stock.

The Rights Plan is similar to plans adopted by many other publicly traded companies.

The effect of the Rights Plan is to discourage any potential acquirer from triggering the Rights without first convincing the Company’s Board of Directors that the proposed acquisition is fair to, and in the best interest of, all of the stockholders of the Company.

The provisions of the Plan, if triggered by the Acquiring Person, will substantially dilute the equity and voting interest of any potential acquirer unless the Board of Directors approves of the proposed acquisition (under Article XV of the Company’s Certificate of Incorporation, the Board of Directors has the authority to consider any and all factors in determining whether an acquisition is in the best interests of the Company and its stockholders).

Each Right, if and when exercisable, will entitle the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, no par value, at a purchase price of $ 1,600 for each one one-hundredth of a share, subject to adjustment.

Each holder of a Right (except for the Acquiring Person, whose Rights will be null and void upon such event) shall thereafter have the right to receive, upon exercise, that number of Common Shares of the Company having a market value of two times the exercise price of the Right.

At any time before a person becomes an Acquiring Person, the Rights can be redeemed, in whole, but not in part, by Farmers and Merchants Bancorp’s Board of Directors at a price of $ 0.001 per Right.

The Rights Plan was set to expire on August 5, 2018.

On November 19, 2015, the Board of Directors approved a seven-year extension of the term of the Rights Plan.

Pursuant to an Amendment to the Rights Agreement dated February 18, 2016, the term of the Rights Plan was extended from August 5, 2018 to August 5, 2025.

The extension of the term of the Rights Plan was intended as a means to continue to guard against abusive takeover tactics and was not in response to any particular proposal.

The Board also increased the purchase price under the Rights Plan to $ 1,600 per one one-hundredth of a preferred share from $ 1,200 , to reflect the increase in the market price of the Company’s common stock over the past several years.

Dividends from the Bank constitute the principal source of cash to the Company.

The Company is a legal entity separate and distinct from the Bank.

Under regulations controlling California state chartered banks, the Bank is, to some extent, limited in the amount of dividends that can be paid to the Company without prior approval of the California DFPI.

These regulations require approval if total dividends declared by a state chartered bank in any calendar year exceed the Bank’s net profits for that year combined with its retained net profits for the preceding two calendar years.

During 2020, the Company issued a combined total 523 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans.

All of the shares were issued at a price of $ 770.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4 (a) (2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder.

The proceeds were contributed to the Bank as equity capital.

During 2019, the Company issued a combined total 9,312 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans.

All of the shares were issued at prices ranging from $ 715.00 to $ 770.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder.

The proceeds were contributed to the Bank as equity capital.

During 2018, the Company issued a combined total 13,520 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans.

There were also 2,400 shares issued to individuals during 2018.

All of the shares were issued at prices ranging from $ 635.00 to $ 690.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder.

The proceeds were contributed to the Bank as equity capital.

The Company and the Bank are subject to various federal regulatory capital requirements under the Basel III Capital Rules.

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 and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.

The Company and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The implementation of Basel III requirements increased the required capital levels that the Company and the Bank must maintain.

The final rules included new minimum risk-based capital and leverage ratios, which have been fully phased in.

The new minimum capital level requirements applicable to the Company and the Bank under the final rules are:

(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 established a “capital conservation buffer” of 2.5% above each of the new regulatory minimum capital ratios, which resulted 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.

The final rules also permit the Company’s subordinated debentures issued in 2003 to continue to be counted as Tier 1 capital.

The Company believes that it is currently in compliance with all of these capital requirements and that they will not result in any restrictions on the Company’s business activity.

In addition, the most recent notification from the FDIC categorized the Bank 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 tables.

There are no conditions or events since that notification that management believes have changed the Bank’s category.

(in thousands)

Regulatory Capital

Well Capitalized

Corrective Action

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.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 11—Shareholders’ Equity

The Company and the Bank are subject to various federal regulatory capital requirements under

the Basel III Capital Rules.

financial statements.

liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.

The Company and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk

weightings, and other factors.

The Company believes that it is currently in compliance with all of these capital requirements

and that they will not result in any restrictions on the Company’s business activity.

Management believes that the Company and the Bank meet the requirements to be categorized as

“well capitalized” under the FDIC regulatory framework for prompt corrective action.

To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following

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

December 31, 2021

Total Bank Capital to Risk Weighted Assets

Total Consolidated Capital to Risk Weighted Assets

Total Bank Common Equity Tier 1 Capital Ratio

Total Consolidated Common Equity Tier 1 Capital Ratio

Tier 1 Bank Capital to Risk Weighted Assets

Tier 1 Consolidated Capital to Risk Weighted Assets

Tier 1 Bank Capital to Average Assets

Tier 1 Consolidated Capital to Average Assets

(in thousands)

Regulatory Capital

Minimum Capital Requirement

Well Capitalized

Corrective Action

(Dollars in thousands)

Farmers & Merchants Bancorp

CET1 capital to risk-weighted assets

Tier 1 capital to risk-weighted assets

Risk-based capital to risk-weighted assets

Tier 1 leverage capital ratio

Farmers & Merchants Bank

CET1 capital to risk-weighted assets

Tier 1 capital to risk-weighted assets

Risk-based capital to risk-weighted assets

Tier 1 leverage capital ratio

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 11—Shareholders’ Equity—Continued

December 31, 2020

Total Bank Capital to Risk Weighted Assets

Total Consolidated Capital to Risk Weighted Assets

Total Bank Common Equity Tier 1 Capital Ratio

Total Consolidated Common Equity Tier 1 Capital Ratio

Tier 1 Bank Capital to Risk Weighted Assets

Tier 1 Consolidated Capital to Risk Weighted Assets

Tier 1 Bank Capital to Average Assets

Tier 1 Consolidated Capital to Average Assets

Dividends and Basic and Diluted Earnings Per Common Share

Total cash dividends during 2020 were $ 11,700,000 or $ 14.75 per share of common stock, an increase of 3.9 % per share from $ 11,221,000 or $ 14.20 per share in 2019.

In 2018, cash dividends totaled $ 11,151,000 or $ 13.90 per share.

Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period.

The Company has no securities or other contracts, such as stock options, that could require the issuance of additional common stock.

Accordingly, diluted earnings per share are equal to basic earnings per share.

The following table calculates the basic and diluted earnings per common share for the periods indicated.

( net income in thousands )

Minimum Capital Requirement

Well Capitalized

(Dollars in thousands)

Farmers & Merchants Bancorp

CET1 capital to risk-weighted assets

Tier 1 capital to risk-weighted assets

Risk-based capital to risk-weighted assets

Tier 1 leverage capital ratio

Farmers & Merchants Bank

CET1 capital to risk-weighted assets

Tier 1 capital to risk-weighted assets

Risk-based capital to risk-weighted assets

Tier 1 leverage capital ratio

Basic and dilluted earnings per

common share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period.

Earnings per common share have been computed based on the following:

Year Ended December 31,

(Dollars in thousands, except share and per share amounts)

Weighted average number of common shares outstanding

Basic and Diluted Earnings Per Common Share

Employee Benefit Plans

Weighted average number of dilutive shares outstanding

Basic earnings per common share

Diluted earning per commons share

The Company’s Board of Directors may declare cash or stock dividends out of retained earnings

provided the regulatory minimum capital ratios are met.

The Company plans to maintain capital ratios that meet the well-capitalized standards per the regulations.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 12—Employee Benefit Plans

Profit Sharing Plan

The Company, through the Bank, sponsors a Profit Sharing Plan for substantially all full-time employees of the Company with one or more years of service.

Participants receive up to two annual employer contributions, one is discretionary and the other is mandatory.

The discretionary contributions to the Profit Sharing Plan are determined annually by the Board of Directors.

The discretionary contributions totaled $ 1.5 million, $ 1.4 million, and $ 1.2 million for the years ended December 31, 2020, 2019, and 2018, respectively.

The plan assets reported at fair value are primarily invested in mutual funds and other investments, which are primarily Level 2 inputs.

Participants receive up to

two annual employer contributions, one is discretionary and the other is mandatory.

The discretionary contributions to the Profit Sharing

Plan are determined annually by the Board of Directors.

The discretionary contributions totaled $ 1.6 million, $ 1.5 million, and $ 1.4 million for the years

ended December 31, 2021, 2020, and 2019, respectively.

The mandatory contributions to the Profit Sharing Plan are made according to a predetermined set of criteria.

Mandatory contributions totaled $ 1.7 million, $ 1.7 million, and $ 1.6 million for the years ended December 31, 2021, 2020, and 2019, respectively.

Company employees are permitted, within limitations imposed by tax law, to make pretax contributions and after tax (Roth) contributions to the 401(k) feature of the Profit Sharing Plan.

The Company does not match employee contributions within the 401(k) feature of the Profit Sharing Plan and the Company can terminate the Profit Sharing Plan at any time.

Benefits pursuant to the Profit Sharing Plan vest 0 % during the first year of participation, 25 % per full year thereafter and after five years such benefits are fully vested.

Company employees are permitted, within limitations imposed by tax law, to make pretax

contributions and after tax (Roth) contributions to the 401(k) feature of the Profit Sharing Plan.

The Company does not match employee contributions within the 401(k) feature of the Profit Sharing Plan and the Company can terminate the Profit Sharing

Plan at any time.

Benefits pursuant to the Profit Sharing Plan vest 0 % during the first year of participation, 25 % per full year thereafter and after five years

such benefits are fully vested.

Executive Retirement Plan and Life Insurance Arrangements

The Company, through the Bank, sponsors an Executive Retirement Plan (“ERP”) for certain executive level employees.

The ERP is a non-qualified deferred compensation plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by the Internal Revenue Service.

The ERP is a non-qualified deferred compensation plan and was

developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by the Internal Revenue Service.

The ERP is comprised of:

(1) a Performance Component which makes contributions based upon long-term cumulative profitability and increase in market value of the Company;

(1) a Performance Component which makes contributions based

upon long-term cumulative profitability and increase in market value of the Company;

(2) a Salary Component which makes contributions based upon participant salary levels;

and (3) an Equity Component for which contributions are discretionary and subject to Board of Directors approval.

and (3) an Equity Component for which contributions are discretionary and

subject to Board of Directors approval.

The Company maintains a Rabbi Trust to fund, in part, the ERP.

The Rabbi Trust is an irrevocable grantor trust to which the Company may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan.

The Company may not use the assets of the Rabbi Trust for any purpose other than meeting its obligations under the ERP, however, the assets of the Rabbi Trust remain subject to the claims of its creditors and are included in the consolidated financial statements.

The Rabbi Trust is an irrevocable grantor trust to which the Company may contribute assets for the limited purpose of funding a nonqualified deferred

compensation plan.

The Company may not use the assets of the Rabbi Trust for any purpose other than meeting its obligations under the ERP;

however, the assets of the Rabbi Trust remain subject to the claims of its creditors and are included in the

consolidated financial statements.

The Company contributes cash to the Rabbi Trust from time to time for the sole purpose of funding the ERP.

The Rabbi Trust will use any cash the Company contributes to purchase shares of common stock of the Company, and other financial instruments, on the open market.

The Rabbi Trust will use any cash the Company contributes to purchase shares of common stock of the Company,

and other financial instruments, on the open market.

ERP contributions are invested in a mix of financial instruments;

however, the Equity Component contributions are invested primarily in common stock of the Company.

The Company expensed $ 6.8 million to the ERP during the year ended December 31, 2020, $ 6.6 million during the year ended December 31, 2019 and $ 6.2 million during the year ended December 31, 2018.

The Company’s carrying value of the liability under the ERP was $ 56.7 million as of December 31, 2020 and $ 50.5 million as of December 31, 2019.

The Company’s shares of common stock held as investments in the Rabbi Trust of the ERP as of December 31, 2020 and 2019 totaled 52,980 and 48,133 with an historical cost basis of $ 31.2 million and $ 29.1 million, respectively.

The Company expensed $ 9.0 million to

the ERP during the year ended December 31, 2021, $ 6.8 million during the year ended December 31, 2020 and $ 6.6 million during the year ended December 31, 2019.

The Company’s carrying value of the liability under the ERP was $ 63.9 million as of December 31, 2021 and $ 56.7

million as of December 31, 2020.

The Company’s shares of common stock held as investments in the Rabbi Trust of the ERP as of December 31, 2021 and 2020 totaled 55,436 and 52,980 with an historical cost basis of $ 33.2 million and $ 31.2 million,

respectively.

All amounts have been fully funded into the Rabbi Trust as of December 31, 2021 and 2020.

The consolidated investments held in the Rabbi Trust are recorded at fair value with changes in unrealized gains or losses recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income.

Net gains on ERP plan investments were $ 1.8 million in 2020 compared to net gains of $ 2.6 million in 2019.

The consolidated investments held in the Rabbi Trust are recorded at fair value with changes in unrealized gains or losses recorded within

non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income.

Net gains on ERP plan investments were $ 2.5 million in 2021 compared to

net gains of $ 1.8 million in 2020 and $ 2.6

million in 2019.

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.

The Company has purchased single premium life insurance policies on the lives of certain key employees of the Company.

These policies provide:

(1) financial protection to the Company in the event of the death of a key employee;

and (2) significant income to the Company to offset the expense associated with the Executive Retirement Plan and other employee benefit plans, since the interest earned on the cash surrender value of the policies is tax exempt as long as the policies are used to finance employee benefits.

As compensation to each employee for agreeing to allow the Company to purchase an insurance policy on his or her life, split dollar agreements have been entered into with those employees.

These agreements provide for a division of the life insurance death proceeds between the Company and each employee’s designated beneficiary or beneficiaries.

The Company earned tax-exempt interest on the life insurance policies of $ 2.1 million for the year ended December 31, 2020, $ 2.0 million for the year ended December 31, 2019, and $ 1.9 million for the year ended December 31, 2018.

As of December 31, 2020 and 2019, the total cash surrender value of the insurance policies was $ 69.2 million and $ 67.1 million, respectively.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 12—Employee Benefit Plans —Continued

Senior Management Retention Plan

The Company, through the Bank, sponsors a Senior Management Retention Plan (“SMRP”) for certain senior level employees.

The SMRP is a non-qualified deferred compensation plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by the Internal Revenue Service.

All contributions are discretionary and subject to the Board of Directors approval.

a non-qualified deferred compensation plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by the Internal Revenue Service.

All contributions are discretionary

and subject to the Board of Directors approval.

The Company maintains a Rabbi Trust to fund, in part, the SMRP.

The Rabbi Trust is an irrevocable grantor trust to which the Company may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan.

The Company may not use the assets of the Rabbi Trust for any purpose other than meeting its obligations under the SMRP, however, the assets of the Rabbi Trust remain subject to the claims of its creditors and are included in the consolidated financial statements.

The Rabbi Trust is an irrevocable grantor trust to which the Company may contribute assets for

the limited purpose of funding a nonqualified deferred compensation plan.

The Company may not use the assets of the Rabbi Trust for any purpose other than meeting its obligations under the SMRP;

however, the assets of the Rabbi Trust remain subject

to the claims of its creditors and are included in the consolidated financial statements.

The Company contributes cash to the Rabbi Trust from time to time for the sole purpose of funding the SMRP.

The Rabbi Trust will use any cash the Company contributes to purchase shares of common stock of the Company, and other financial instruments, on the open market.

The Rabbi Trust will use any cash the Company

contributes to purchase shares of common stock of the Company, and other financial instruments, on the open market.

Contributions to the SMRP are invested primarily in common stock of the Company.

The Company expensed $ 2.3 million to the SMRP during the year ended December 31, 2020, $ 1.3 million during the year ended December 31, 2019 and $ 1.5 million during the year ended December 31, 2018.

The Company expensed $ 2.7 million to the SMRP during the year ended

December 31, 2021, $ 2.3 million during the year ended December 31, 2020 and $ 1.3 million during the year ended December 31, 2019.

The Company’s carrying value of the liability under the SMRP was $ 11.1 million as of December 31, 2021 and $ 8.6 million as of December 31, 2020.

The Company’s shares of stock held as investments in the Rabbi Trust of the SMRP as of December 31, 2020 and December 31, 2019 totaled 12,548 and 9,822 shares with an historical cost basis of $ 7.9 million and $ 5.8 million, respectively.

All amounts have been fully funded into the Rabbi Trust as of December 31, 2020 and 2019.

Net gains on SMRP plan investments were $ 0.1 million in 2020 compared to zero in 2019.

Company’s shares of stock held as investments in the Rabbi Trust of the SMRP as of December 31, 2021 and December 31, 2020 totaled 14,192

and 12,548 shares with an historical cost basis of $ 9.5 million and $ 7.9 million, respectively.

All amounts have been fully funded into

the Rabbi Trust as of December 31, 2021 and 2020.

related liability are recorded in non-interest expense in the consolidated statements of income.

Net gains on SMRP plan investments were $ 0.1 million in 2021, $ 0.1 million in 2020 and zero in 2019.

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 .

Fair Value Measurements

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 13—Fair Value Measurements

The Company follows the “Fair Value Measurement and Disclosures” topic of the FASB ASC, which establishes a framework for measuring fair value in U.S.

GAAP and expands disclosures about fair value measurements.

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.

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:

1 unchanged sentence

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.

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.

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.

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.

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.

Treasury yield curve, live trading levels, trade execution data,

market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

The Company does not record all loans and leases at fair value on a recurring basis.

However, from time to time, a loan or lease is considered 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 “Receivable” topic of the FASB ASC.

The fair value of impaired loans or leases is estimated using one of several methods, including collateral value when the loan is collateral dependent, market value of similar debt, enterprise value, and discounted cash flows.

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.

The fair value of impaired loans or leases is

estimated using one of several methods, including collateral value when the loan is collateral dependent, market value of similar debt, enterprise value, and discounted cash flows.

Impaired loans and leases not requiring an allowance represent

loans and leases for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans and leases.

Impaired loans and leases where an allowance is established based on the fair value of collateral require

classification in the fair value hierarchy.

The fair value of collateral dependent impaired loans is generally based on recent real estate appraisals.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 13—Fair Value Measurements—Continued

These appraisals may utilize a single valuation approach or a combination of approaches including sales comparison, cost and the income approach.

Adjustments are often made in the appraisal process by the appraisers to take in to account differences between the comparable sales and income and other available data.

Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value.

Adjustments are often made

in the appraisal process by the appraisers to take in to account differences between the comparable sales and income and other available data.

Such adjustments can be significant and typically result in a Level 3 classification of the inputs for

determining fair value.

The valuation technique used for Level 3 nonrecurring impaired loans is primarily the sales comparison approach less selling costs of 10 %.

1 unchanged sentence

Fair values are based on recent real estate appraisals.

These appraisals may use a single valuation approach or a combination of approaches including sales comparison, cost and the income approach.

Adjustments are often made in the appraisal process by the appraisers to take in to account differences between the comparable sales and income and other available data.

These appraisals may use a

single valuation approach or a combination of approaches including sales comparison, cost and the income approach.

Adjustments are often made in the appraisal process by the appraisers to take in to account differences between the comparable sales

and income and other available data.

Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value.

The valuation technique used for Level 3 nonrecurring ORE is primarily the sales comparison approach less selling costs of 10 %.

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 December 31, 2020, Using

(in thousands)

Quoted Prices

Available-for-Sale Securities:

US Treasury Notes

US Government Agency SBA

Mortgage Backed Securities

Corporate Securities

Total Assets Measured at Fair Value On a Recurring Basis

Fair Value Measurements

At December 31, 2019, Using

(in thousands)

Quoted Prices

Available-for-Sale Securities:

US Treasury Notes

US Government Agency SBA

Mortgage Backed Securities

Total Assets Measured at Fair Value On a Recurring Basis

Fair values for Level 2 available-for-sale investment securities are based on quoted market prices for similar securities.

During the year ended December 31, 2020, there were no transfers in or out of level 1, 2, or 3.

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 December 31, 2020, Using

(in thousands)

Quoted Prices

Impaired Loans:

Residential 1st Mortgage

Home Equity Lines and Loans

Total Impaired Loans

Other Real Estate:

Real Estate Construction

Total Other Real Estate

Total Assets Measured at Fair Value On a Non-Recurring Basis

Fair Value Measurements

At December 31, 2019, Using

(in thousands)

Quoted Prices

Impaired Loans:

Commercial Real Estate

Residential 1st Mortgage

Home Equity Lines and Loans

Total Impaired Loans

Other Real Estate:

Real Estate Construction

Total Other Real Estate

Total Assets Measured at Fair Value On a Non-Recurring Basis

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.

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 December 31, 2020 and 2019:

December 31, 2020

(in thousands)

Valuation Technique

Unobservable Inputs

Range, Weighted Avg.

Impaired Loans:

Residential 1st Mortgage

Sales Comparison Approach

Adjustment for Difference

Between Comparable Sales

0.72 % - 4.13 %, 2.57

Home Equity Lines and Loans

Sales Comparison Approach

Adjustment for Difference

Between Comparable Sales

1.1 % - 1.4 %, 1.25

Income Approach

Capitalization Rate

Income Approach

Capitalization Rate

Income Approach

Adjustment for Difference

Between Comparable Sales

Other Real Estate:

Real Estate Construction

Sales Comparison Approach

Adjustment for Difference

Between Comparable Sales

December 31, 2019

(in thousands)

Valuation Technique

Unobservable Inputs

Range, Weighted Avg.

Impaired Loans:

Commercial Real Estate

Income Approach

Capitalization Rate

Residential 1st Mortgages

Sales Comparison Approach

Adjustment for Difference

Between Comparable Sales

0.8 % - 6.4 %, 3

Home Equity Lines and Loans

Sales Comparison Approach

Adjustment for Difference

Between Comparable Sales

1 % - 2 %, 1.3

Income Approach

Capitalization Rate

Income Approach

Capitalization Rate

Sales Comparison Approach

Adjustment for Difference

Between Comparable Sales

Other Real Estate:

Real Estate Construction

Sales Comparison Approach

Adjustment for Difference

Between Comparable Sales

Fair Value of Financial Instruments

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 fair value of loans held for investment, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses consistent with ASC 820.

The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, risk premium, credit, and nonperformance risk of the loans.

Loans are considered a Level 3 classification.

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

Fair Value of Financial Instruments Using

The valuation technique used for Level 3 nonrecurring ORE is primarily the sales

comparison approach less selling costs of 10 %.

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.

December 31, 2021

(in thousands)

Quoted Prices

Identical Assets

Fair Value Measurements

(Dollars in thousands)

Carrying Amount

Total Fair Value

Financial Assets:

Cash and cash equivalents

1 unchanged sentence

Investment securities held-to-maturity

Loans & Leases, Net

Accrued Interest Receivable

Non-marketable securities

Loans and leases, net

Bank-owned life insurance

Financial Liabilities:

Total deposits

Subordinated debentures

Accrued Interest Payable

Fair Value of Financial Instruments Using

December 31, 2020

(in thousands)

Quoted Prices

Fair Value Measurements

(Dollars in thousands)

Carrying Amount

Total Fair Value

Financial Assets:

Cash and cash equivalents

1 unchanged sentence

Investment securities held-to-maturity

Loans & Leases, Net

Accrued Interest Receivable

Non-marketable securities

Loans and leases, net

Bank-owned life insurance

Financial Liabilities:

Total deposits

Subordinated debentures

Accrued Interest Payable

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 13—Fair Value Measurements—Continued

Non-recurring Measurements:

Impaired loans are classified with Level 3 of the fair value hierarchy.

The estimated fair value of impaired loans is based on the fair value of

the collateral, less estimated costs to sell.

The Company receives an appraisal or performs an evaluation for each impaired loan.

The key inputs used to determine the fair value of impaired loans include selling costs, and adjustment to

comparable collateral.

Valuations and significant inputs obtained by independent sources are reviewed by the Company for accuracy and reasonableness.

Appraisals are typically obtained at least on an annual basis.

The Company also considers other

factors and events that may affect the fair value.

The appraisals or evaluations are reviewed at least on a quarterly basis to determine if any adjustments are needed.

After review and acceptance of the appraisal or evaluation, adjustments to

impaired loans may occur.

The following tables present information about the Bank’s assets and liabilities measured at fair value on a recurring and non-recurring basis and indicate the fair value

hierarchy of the valuation techniques utilized by the Bank to determine such fair value for the periods indicated.

December 31, 2021

Fair Value Measurements

(Dollars in thousands)

Carrying Amount

Total Fair Value

Fair valued on a recurring basis:

Investment securities available-for-sale

Treasury notes

Government-sponsored securities

Mortgage-backed securities

Collateralized Mortgage Obligations

Fair valued on a non-recurring basis:

Individually evaluated loans

Other Real Estate

December 31, 2020

Fair Value Measurements

(Dollars in thousands)

Carrying Amount

Total Fair Value

Fair valued on a recurring basis:

Investment securities available-for-sale

Treasury notes

Government-sponsored securities

Mortgage-backed securities

Collateralized Mortgage Obligations

Corporate securities

Fair valued on a non-recurring basis:

Individually evaluated loans

Other Real Estate

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Commitments and Contingencies

In the normal course of business, the Company enters into financial instruments with off balance sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates.

In the normal course of business, the Company enters into financial instruments with off balance sheet risk in order to meet the financing needs of its customers and to reduce its

own exposure to fluctuations in interest rates.

These instruments include commitments to extend credit, letters of credit, and other types of financial guarantees.

The Company had the following off balance sheet commitments as of the dates indicated.

(in thousands)

December 31, 2020

December 31, 2019

Commitments to Extend Credit

Letters of Credit

Performance Guarantees Under Interest Rate Swap Contracts Entered Into Between Our Borrowing Customers and Third Parties

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.

(Dollars in thousands)

Commitments to extend

credit, including unsecured commitments of $ 21,036 and $ 21,057 as of December 31, 2021 and 2020, respectively

Stand-by letters of credit, including unsecured commitments of $ 9,091 and $ 10,945 as of December 31, 2021 and 2020, respectively

Performance guarantees under interest rate swap contracts entered into our clients and third-parties

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 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.

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.

Outstanding standby letters of credit have maturity dates ranging from 1 to 25 months with final expiration in January 2022.

Outstanding standby letters of

credit have maturity dates ranging from 1 to 60

months with final expiration in January 2027.

Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

In the ordinary course of business, the Company becomes involved in litigation arising out of its normal business activities.

Management, after consultation with legal counsel, believes that the ultimate liability, if any, resulting from the disposition of such claims would not be material in relation to the financial position of the Company.

Management, after consultation with legal counsel,

believes that the ultimate liability, if any, resulting from the disposition of such claims would not be material in relation to the financial position of the Company.

The Company may be required to maintain average reserves on deposit with the Federal Reserve Bank primarily based on deposits outstanding.

Reserve requirements are offset by the Company’s vault cash and deposit balances maintained with the Federal Reserve Bank.

Reserve requirements are offset by the

Company’s vault cash and deposit balances maintained with the Federal Reserve Bank.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 15 — Leases

Lessee – Operating Leases

Effective January 1, 2019, the Company adopted the provisions of Accounting Standards Update (“ASU”) No.

2016-02, “Leases (Topic 842),” for all open leases with a term greater than one year as of the adoption date, using the modified retrospective approach.

Prior comparable periods are presented in accordance with previous guidance under Accounting Standards Codification ASC 840.

Operating leases in which we are the lessee are recorded as operating lease right-of-use (“ROU”) assets and operating lease liabilities, included in other assets and other liabilities , respectively, on our consolidated balance sheets.

We do not currently have any significant finance leases in which we are the lessee.

Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease.

ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date.

Operating leases in which we are the

lessee are recorded as operating lease right-of-use (“ROU”) assets and operating lease liabilities, included in other assets and other liabilities , respectively, on our consolidated balance sheets.

We do not currently have any significant finance leases in which we are the

Operating lease ROU assets represent

our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease.

ROU assets and operating lease liabilities are recognized at lease commencement based

on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date.

ROU assets are further adjusted for lease incentives.

Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded net in occupancy expense in the consolidated statements of income.

Our leases relate primarily to office space and bank branches with remaining lease terms of generally 1 to 10 years.

Certain lease arrangements contain extension options which typically range from 5 to 10 years at the then fair market rental rates.

ASC 842 requires lessees to evaluate whether option periods, if available, will be exercised in order to determine the full life of the lease.

Operating lease expense, which is

comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded net in occupancy expense in the consolidated statements of

Our leases relate primarily to office

space and bank branches with remaining lease terms of generally 1 to 10 years.

Certain lease arrangements contain extension options that typically range from 5

to 10 years at the then fair market rental rates.

ASC 842 requires lessees to evaluate whether option periods, if available, will be

exercised in order to determine the full life of the lease.

The Company used the first option period, unless it is a relatively new lease that has a long initial lease term or other extenuating circumstances.

As of December 31, 2020, operating lease ROU assets and liabilities were $ 4.80 million and $ 4.92 million, respectively.

As of December 31, 2021, operating

lease ROU assets and liabilities were $ 4.05 million and $ 4.13 million, respectively.

Operating lease expenses totaled $ 739,000 for the year ended December 31,

As of December 31, 2020, operating lease ROU assets and liabilities were $ 4.80 million and $ 4.92 million, respectively.

Operating leases totaled $ 836,000 for the year ended December 31, 2019.

In the 4th quarter of 2020, the lease term and payment of one lease was modified resulting in additional ROU assets and liabilities of $ 542,000 .

The table below summarizes the information related to our operating leases:

(in thousands except for percent and period data)

December 31, 2020

December 31, 2019

Cash Paid for Amounts Included in the Measurement of Lease Liabilities Operating Cash Flow from Operating Leases

Right-of-Use Assets Obtained in Exchange for New Operating Lease Liabilities

Weighted-Average Remaining Lease Term - Operating Leases, in Years

Weighted-Average Discount Rate - Operating Leases

The table below summarizes the maturity of remaining lease liability:

(in thousands)

December 31, 2020

2026 and thereafter

Operating lease expenses totaled $ 833,000 and $ 836,000 for the years ended December 31, 2020 and 2019, respectively.

The table below summarizes the

maturity of remaining lease liability:

(Dollars in thousands)

2026 and beyond

Total lease payments

Present Value of Lease Liabilities

Net present value of lease liabilities

As of December 31, 2021, we have no additional operating leases for office space that have not yet commenced or that are anticipated to commence during the first quarter of 2022.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 15—Leases — Continued

Lessor - Direct Financing Leases

The Company is the lessor in direct finance lease arrangements.

The Company is the lessor in direct

finance lease arrangements.

Leases are recorded at the principal balance outstanding, net of unearned income and charge-offs.

Interest income is recognized using the interest method.

Leases typically have a maturity of three to ten years , and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk.

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.

The impact of adopting Topic 842 for lessor accounting was not significant.

Lease payments due to the Company are typically fixed and paid in equal installments over the lease term.

Residual value risk is

managed with qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

Lease payments due to the Company are

typically fixed and paid in equal installments over the lease term.

Variable lease payments that do not depend on an index or a rate (e.g., property taxes) that are paid directly by the Company are minimal.

The majority of property taxes are paid directly by the client to a third party and are not considered part of variable payments and therefore are not recorded by the Company.

As a lessor, the Company leases certain types of agriculture equipment, solar equipment, construction equipment and other equipment to its customers.

The majority of property taxes are paid

directly by the client to third-parties and are not considered part of variable payments and therefore are not recorded by the Company.

As a lessor, the Company leases

certain types of agriculture equipment, solar equipment, construction equipment and other equipment to its customers.

The Company’s net investment in direct financing leases was $ 96.4 million at December 31, 2021 and $ 103.5 million at December 31, 2020.

Recent Accounting Pronouncements

Accounting Guidance Pending Adoption at December 31, 2020

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740).

The updated guidance simplifies the accounting for income taxes by removing certain exceptions and improves the consistent application of GAAP by clarifying and amending other existing guidance.

ASU 2019-012 will be effective for us on January 1, 2021 and is not expected to have any material impact on our consolidated financial statements.

In March 2020, the FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848) .

The amendments in this ASU are elective and provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform.

The amendments in this ASU provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.

The amendments in this ASU may be elected as of March 12, 2020 through December 31, 2022.

An entity may choose to elect the amendments in this update at an interim period subsequent to March 12, 2020 with adoption methods varying based on transaction type.

We have not elected to apply these amendments.

However, we will assess the applicability of the ASU to us and continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations.

Parent Company Financial Information

The following financial information is presented as of December 31 for the periods indicated.

Note 16 — Income Taxes

The components of income tax expense (benefit) are as follows:

Year Ended December 31,

(Dollars in thousands)

Income tax expense / (benefit)

Total current expense

Total current deferred benefit

Provision for

income tax expense

FARMERS & MERCHANTS BANCORP

Condensed Balance Sheets

(in thousands)

Investment in Farmers & Merchants Bank of Central California

Investment Securities

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 16 — Income Taxes—Continued

The combined federal and state income tax expense differs from that computed at the federal statutory corporate tax rate as follows:

Year Ended December 31,

(Dollars in thousands)

Effective income tax rate

Federal statutory rate

State taxes, net of Federal income tax benefit

Low-income housing tax credits

Bank owned life insurance

Tax-exempt interest income

Total provision for income tax expense and effective

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 16 — Income Taxes—Continued

The nature and components of the Company’s net deferred income tax assets are as follows:

(Dollars in thousands)

Deferred income tax assets:

Allowance for credit losses

Deferred compensation

Accrued liabilities

State income taxes

Lease liabilities

Unrealized losses on debt securities

SBA PPP loan fee income

Acquired net operating losses

Low-income housing tax investments

Acquired loans fair valuation

Acquired OREO fair valuation

Total deferred income tax assets

Deferred income tax liabilities:

Commercial leasing

Unrealized gains on debt securities

Premises and equipment

Right of use leasing asset

Core deposit intangible asset

Deferred loan and lease costs

Accretion on investment securities

FHLB dividends

Prepaid assets

Total deferred income tax liabilities

Net deferred income tax assets

The Company believes, based on available information, that more likely than not, the net deferred income tax asset will be realized in the

normal course of operations.

Accordingly, no valuation allowance has been recorded at December 31, 2021 and 2020.

The impact of a tax position is recognized in the financial statements if that position is more likely than not of being sustained on

audit, based on the technical merits of the position.

As of December 31, 2021 and 2020, the Company did no t have any significant

uncertain tax positions.

The Company includes any interest and penalties associated with unrecognized tax benefits within the provision for income taxes.

The Company does not expect a material change to the total amount of unrecognized tax benefits

in the next twelve months.

The Company files U.S.

and state income tax returns in jurisdictions with various statutes of limitations.

The 2017 through 2021 tax years remain subject to selection for examination as of December 31, 2021.

The Company’s California income tax returns for the years

2018, 2019 and 2020 are currently under audit.

As of December 31, 2021 and 2020, the Company has net operating loss of $ 2.0 million and $ 2.1 million carry-forwards and no tax

credit carry-forwards.

17 — Condensed Financial Statements of Parent Company

Financial information pertaining only to Farmers and Merchants Bancorp (“FMCB”), on a parent-only basis, is as follows:

(Dollars in thousands)

Balance Sheets

Cash and cash equivalents

Investment in subsidiaries

Liabilities and shareholders’ equity

Subordinated debentures

Other liabilities

Shareholders’ equity

1 unchanged sentence

FARMERS & MERCHANTS BANCORP

Condensed Statements of Income

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 17 — Condensed Financial Statements of Parent Company —Continued

Year Ended December 31,

(in thousands)

Equity (Loss) in Undistributed Earnings in Farmers & Merchants Bank of Central California

Dividends from Subsidiary

Interest Income

Other Expenses, Net

Farmers & Merchants Bancorp

Condensed Statements of Cash Flows

(Dollars in thousands)

Statements of Income

Dividend and other income from subsidiaries

Interest and dividends

Reimbursement of expenses from subsidiaries

Other expenses

Total expense

Income before income taxes

Income tax benefit

Equity in undistributed net income of subsidiaries

(Dollars in thousands)

Year Ended December 31,

(in thousands)

Cash Flows from Operating Activities:

Statements of Cash Flows

flows from operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

(Equity) Loss in Undistributed Net Earnings from Subsidiary

Net (Increase) in Other Assets

Net Increase (Decrease) in Liabilities

Equity in undistributed net income of the Bank

Change in other assets and liabilities

Net cash provided by operating activities

Investing Activities:

Payments for Business Acquisition

Payments for Investments in Non-Qualified Retirement Plan

Net Cash Used by Investing Activities

Financing Activities:

Stock Repurchased

Cash flows from investing activities:

Payments for investments in non-qualified retirement plans

Net cash used in investing activities

Cash flows from financing activities:

Common stock repurchases

Issuance of common stock

Cash Dividends

Net Cash Used by Financing Activities

Increase in Cash and Cash Equivalents

Cash and Cash Equivalents at Beginning of Year

Cash and Cash Equivalents at End of Year

Quarterly Unaudited Financial Data

The following tables set forth certain unaudited historical quarterly financial data for each of the eight consecutive quarters in 2020 and 2019.

This information is derived from unaudited consolidated financial statements that include, in management’s opinion, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation when read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-K.

(in thousands except per share data)

Total Interest Income

Total Interest Expense

Net Interest Income

Provision for Credit Losses

Net Interest Income After

Provision for Credit Losses

Total Non-Interest Income

Total Non-Interest Expense

Income Before Income Taxes

Provision for Income Taxes

Basic and Diluted Earnings Per Common Share

(in thousands except per share data)

Total Interest Income

Total Interest Expense

Net Interest Income

Provision for Credit Losses

Net Interest Income After

Provision for Credit Losses

Total Non-Interest Income

Total Non-Interest Expense

Income Before Income Taxes

Provision for Income Taxes

Basic and Diluted Earnings Per Common Share

Cash dividends paid

Net used in financing activities

Net change in cash and cash equivalents

Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data