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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2023-03-15 compared with 2022-03-16 · 1775 added, 52 removed, 23 unchanged (99% of the section changed)

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Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices.

Our market risk arises primarily

from interest rate risk inherent in our lending and deposit taking activities.

Our market risk arises

primarily from interest rate risk inherent in our lending and deposit taking activities.

Management actively monitors and manages our interest rate risk exposure.

We do not have any market-risk sensitive instruments entered into for trading purposes.

our interest-rate sensitivity by matching the re-pricing opportunities on our earning assets to those on our funding liabilities.

Management uses various asset/liability strategies to manage the re-pricing characteristics of our assets and liabilities designed to ensure that exposure to interest rate fluctuations is limited within our guidelines

of acceptable levels of risk-taking.

Hedging strategies, including the terms and pricing of loans and deposits, and managing the deployment of our securities, are used to reduce mismatches in interest rate re-pricing opportunities of portfolio assets

and their funding sources.

We do not have any market-risk sensitive instruments entered into for trading

We manage our interest-rate sensitivity by matching the re-pricing opportunities on our earning assets to those on our funding liabilities.

guidelines of acceptable levels of risk-taking.

Hedging strategies, including the terms and pricing of loans and deposits, and managing the deployment of our securities, are used to reduce mismatches in interest rate re-pricing opportunities of

portfolio assets and their funding sources.

Our Asset Liability Management Committee (“ALCO”), which is comprised of members of the Board of Directors and executive officers, manages market risk.

ALCO monitors interest rate risk by analyzing the potential impact

on net interest income from potential changes in interest rates, and considers the impact of alternative strategies or changes in balance sheet structure.

ALCO manages our balance sheet in part to maintain the potential impact of changes in interest

rates on net interest income within acceptable ranges despite changes in interest rates.

ALCO monitors interest rate risk by analyzing the potential

impact on net interest income from potential changes in interest rates, and considers the impact of alternative strategies or changes in balance sheet structure.

ALCO manages our balance sheet in part to maintain the potential impact of changes

in interest rates on net interest income within acceptable ranges despite changes in interest rates.

Our exposure to interest rate risk is reviewed on at least a quarterly basis by ALCO.

Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in net interest income in

the event of hypothetical changes in interest rates.

Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in net interest income

in the event of hypothetical changes in interest rates.

If potential changes to net interest income resulting from hypothetical interest rate changes are not within risk tolerances determined by ALCO, and approved by the full Board of Directors,

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Net Interest Income Simulation.

In order to measure interest rate risk, we used a simulation model to project changes in net interest income that result from forecasted changes

in interest rates.

This analysis calculates the difference between net interest income forecasted using a rising and a falling interest rate scenario and a net interest income forecast using a base market interest rate derived from the current

treasury yield curve.

In order to measure interest rate risk, we used a simulation model to project changes in net interest income that result from forecasted

changes in interest rates.

current treasury yield curve.

The income simulation model includes various assumptions regarding the re-pricing relationships for each of our products.

Many of our assets are floating rate loans, which are assumed to re-price immediately, and to the same

extent as the change in market rates according to their contracted index.

Some loans and investment vehicles include the opportunity of prepayment (embedded options), and accordingly the simulation model uses national indexes to estimate these prepayments and assumes the reinvestment of the

proceeds at current yields.

Many of our assets are floating rate loans, which are assumed to re-price immediately, and to

the same extent as the change in market rates according to their contracted index.

the proceeds at current yields.

Our non-term deposit products re-price more slowly, usually changing less than the change in market rates and at our discretion.

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structure as of the period presented.

It does not account for all factors that affect this analysis, including changes by management to mitigate the effect of interest rate changes or secondary impacts such as changes to our credit risk profile as

interest rates change.

as interest rates change.

Furthermore, loan prepayment-rate estimates and spread relationships change regularly.

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For the rising and falling interest rate scenarios, the base market interest rate forecast was increased or decreased, on an instantaneous and sustained basis, by 200 basis points.

As of the periods presented, our net

interest margin exposure related to these hypothetical changes in market interest rates was within the current guidelines established by us.

Our simulation model highlights the fact that our balance sheet is asset sensitive, which means that our net

interest income rises in a rising interest rate environment.

The ratio of variable to fixed-rate loans in our loan portfolio, the ratio of short-term (maturing at a given time within 12 months) to long-term loans, and the ratio of our demand, money market and savings deposits to

CDs (and their time periods), are the primary factors affecting the sensitivity of our net interest income to changes in market interest rates.

Our short-term loans are typically priced at prime plus a margin, and our long-term loans are typically

priced based on a FHLB index for comparable maturities, plus a margin.

The composition of our rate-sensitive assets or liabilities is subject to change and could result in a more unbalanced position that would cause market rate changes to have a

greater impact on our net interest margin.

As of the periods presented, our

net interest margin exposure related to these hypothetical changes in market interest rates was within the current guidelines established by us.

Our simulation model highlights the fact that our balance sheet is asset sensitive, which means that

our net interest income rises in a rising interest rate environment.

deposits to CDs (and their time periods), are the primary factors affecting the sensitivity of our net interest income to changes in market interest rates.

Our short-term loans are typically priced at prime plus a margin, and our long-term loans

are typically priced based on a FHLB index for comparable maturities, plus a margin.

The composition of our rate-sensitive assets or liabilities is subject to change and could result in a more unbalanced position that would cause market rate

changes to have a greater impact on our net interest margin.

Gap Analysis.

Another way to measure the impact that future changes in interest rates will have on net interest income is through a cumulative gap measure.

The gap represents

the net position of assets and liabilities subject to re-pricing in specified periods.

A gap analysis highlights the distribution of re-pricing opportunities of our interest earning assets and interest-bearing liabilities, the interest rate

sensitivity gap (that is, interest rate sensitive assets less interest rate sensitive liabilities), cumulative interest earning assets and interest bearing liabilities, the cumulative interest rate sensitivity gap, the ratio of cumulative interest

earning assets to cumulative interest-bearing liabilities and the cumulative gap as a percentage of total assets and total interest earning assets as of the periods presented.

The analysis also sets forth the time periods during which interest

earning assets and interest bearing liabilities will mature or may re-price in accordance with their contractual terms.

The interest rate relationships between the re-priceable assets and re-priceable liabilities are not necessarily constant and may

be affected by many factors, including the behavior of clients in response to changes in interest rates.

This table should, therefore, be used only as a guide as to the possible effect changes in interest rates might have on our net interest

Our gap analysis also highlights the asset sensitivity of our balance sheet.

represents the net position of assets and liabilities subject to re-pricing in specified periods.

A gap analysis highlights the distribution of re-pricing opportunities of our interest earning assets and interest-bearing liabilities, the

interest rate sensitivity gap (that is, interest rate sensitive assets less interest rate sensitive liabilities), cumulative interest earning assets and interest bearing liabilities, the cumulative interest rate sensitivity gap, the ratio of

cumulative interest earning assets to cumulative interest-bearing liabilities and the cumulative gap as a percentage of total assets and total interest earning assets as of the periods presented.

The analysis also sets forth the time periods

during which interest earning assets and interest bearing liabilities will mature or may re-price in accordance with their contractual terms.

The interest rate relationships between the re-priceable assets and re-priceable liabilities are not

necessarily constant and may be affected by many factors, including the behavior of clients in response to changes in interest rates.

Gap analysis has certain limitations.

Measuring the volume of re-pricing or maturing assets and liabilities does not always measure the full impact on the portfolio value of equity or net interest income.

does not account for rate caps on products, dynamic changes such as increasing prepayment speeds as interest rates decrease, basis risk, embedded options or the benefit of no-rate funding sources.

The relation between product rate re-pricing and

market rate changes (basis risk) is not the same for all products.

The majority of interest earning assets generally re-price along with a movement in market rates, while non-term deposit rates in general move more slowly and usually incorporate only

a fraction of the change in market rates.

analysis does not account for rate caps on products, dynamic changes such as increasing prepayment speeds as interest rates decrease, basis risk, embedded options or the benefit of no-rate funding sources.

The relation between product rate

re-pricing and market rate changes (basis risk) is not the same for all products.

The majority of interest earning assets generally re-price along with a movement in market rates, while non-term deposit rates in general move more slowly and

usually incorporate only a fraction of the change in market rates.

Products categorized as non-rate sensitive, such as our non-interest bearing demand deposits, in the gap analysis behave like long-term fixed rate funding sources.

Management uses income simulation, net interest income

rate shocks and market value of portfolio equity as its primary interest rate risk management tools.

Management uses income simulation, net interest

income rate shocks and market value of portfolio equity as its primary interest rate risk management tools.

Financial Statements and Supplementary

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm ( Eide Bailly LLP , San Ramon, California , PCAOB ID:

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

Consolidated Financial Statements

Consolidated Statements of Financial Condition as of December 31, 2022, and 2021

Consolidated Statements of Income for the three years ended December 31, 2022, 2021 and 2020

Consolidated Statements of Comprehensive Income for the three years ended December 31, 2022, 2021 and 2020

Consolidated Statements of Changes in Shareholders’ Equity for the three years ended December 31, 2022, 2021 and 2020

Consolidated Statements of Cash Flows for the three years ended December 31, 2022, 2021 and 2020

Notes to the Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

Farmers & Merchants Bancorp

Lodi, California

Opinions on the Consolidated 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, 2022, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended, 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, 2022, based on criteria established in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring

Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company

as of December 31, 2022, and the consolidated results of its operations and its cash flows for the year then ended, 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, 2022, based on criteria established in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring

Organizations of the Treadway Commission (COSO).

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit

losses as of January 1, 2022 due to the adoption of the Financial Accounting Standards Board Accounting Standards Update 2016-13, Financial Instruments - Credit Losses, Measurement of Credit Losses on Financial Instruments.

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 Management’s Report on Internal Control Over Financial Reporting.

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

Our audit 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 that responds to those risks.

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

financial statements.

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

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.

We believe that our audits provide a reasonable basis for our

Definition and Limitations of Internal Control Over Financial Reporting

An entity’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 accounting principles generally accepted in the United States of America.

An entity’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 entity;

(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 entity are being made only in accordance with

authorizations of management and directors of the entity;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material

effect on the financial statements.

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

Also, projections of any

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

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the consolidated financial statements that was

communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved especially challenging, subjective, or complex

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.

Allowance for Credit Losses – Loans and Leases

The Company has a gross loan portfolio of $3.5 billion and related allowance for credit losses (ACL) of $66.9 million as of December 31, 2022.

discussed in Notes 1 & 5 of the Company’s consolidated financial statements, the ACL represents management’s estimate of expected credit losses over the contractual life of the loan portfolio.

The ACL is estimated using relevant

available information relating to past events, current economic conditions, and reasonable and supportable forecasts, as well as qualitative adjustments applied on a portfolio segment basis.

The qualitative adjustments are used to bring

the ACL to the level management believes is appropriate based on factors that are otherwise unaccounted for in the quantitative process.

Auditing these complex judgments and assumptions involves especially challenging auditor judgment due to the nature and extent of audit evidence

and effort required to address these matters, including the extent of specialized skill or knowledge needed.

Our considerations and procedures performed to address this critical audit matter included:

Obtaining an understanding of the Company’s process for establishing the ACL, including the models selected by management to estimate quantitative components of the ACL and qualitative

adjustments made to the ACL.

This includes the process utilized by management to challenge the model results and determine the best estimate of the ACL as of the balance sheet date.

Evaluating the design and testing the operating effectiveness of controls relating to the development and approval of the ACL methodology, management’s identification, determination and controls

related to the significant assumptions used in the models, controls around the reliability and accuracy of the data used in the models, analysis of the ACL results and management’s review and approval of the ACL.

Determining whether the loan portfolio is segmented by similar risk characteristics by comparing to the Company’s business environment and relevant industry practices.

Evaluating the identification and measurement of the qualitative adjustments, including the basis for concluding an adjustment was warranted and compared the adjustments utilized by management to

both internal portfolio metrics and external macroeconomic data to support the adjustments and evaluated the trends in such adjustments.

We searched for and evaluated information that corroborates or contradicts management’s

identification and measurement of qualitative factors.

Testing the completeness and accuracy of internal loan level data used as the basis for the calculation, including management’s controls.

Testing the mathematical accuracy and computation of the ACL.

/s/ Eide Bailly LLP

We have served as the Company’s auditor since 2022.

San Ramon, California

March 15, 2023

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

Farmers & Merchants Bancorp

Opinion on the Financial Statements

We have audited the accompanying consolidated statement of financial condition of Farmers & Merchants Bancorp and subsidiaries (the “Company”) as of December 31, 2021 , the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the year s in the two-year period ended December 31, 2021, and the

related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated

financial position of the Company as of December 31, 2021, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting

principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express

an opinion on the Company’s consolidated financial statements based on our audit s .

We are a public accounting firm

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

federal securities laws and the applicable rules and

regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit s in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the

audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial

statements, whether due to error or fraud, and performing procedures 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.

We believe that our audit s provide a reasonable basis for our opinion.

/s/ Moss Adams LLP

Sacramento, California

March 16, 2022

We have served as the Company’s auditor from 2013 through 2022.

Farmers & Merchants Bancorp

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

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

Cash and due from banks

Interest bearing deposits with banks

Total cash and cash equivalents

Securities available-for-sale, at fair value

Securities held-to-maturity, fair value $ 688,393 and $ 725,841 , respectively

Allowance for credit losses - securities

Total investment securities

Non-marketable securities

Loans and leases held for investment

Allowance for credit losses - loans and leases

Loans held for investment, net

Bank-owned life insurance

Premises and equipment, net

Deferred income tax assets

Accrued interest receivable

Other intangibles

Other real estate owned

LIABILITIES AND SHAREHOLDERS’ EQUITY

Non-interest bearing

Interest bearing:

Savings and money market

Certificates of deposit

Total interest bearing

Total deposits

Subordinated debentures

Interest payable and other liabilities

Total Liabilities

SHAREHOLDERS’ EQUITY

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, 768,337 and 789,646 issued and outstanding at

December 31, 2022 and 2021, respectively

Additional paid-in capital

Retained earnings

Accumulated other comprehensive (loss), net of taxes

TOTAL SHAREHOLDERS’ EQUITY

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

See accompanying notes to the consolidated financial statements.

Farmers & Merchants Bancorp

Consolidated Statements of Income

Year Ended December 31,

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

Interest income

Interest and fees on loans and leases

Interest and dividends on securities

Interest on deposits with others

Total interest income

Interest expense

Subordinated debentures

Total interest expense

Net interest income

Provision for credit losses

Net interest income after provision for credit losses

Non-interest income

Card processing

Service charges on deposit accounts

Increase in cash surrender value of BOLI

Net (loss)/gain on sale of investment securities available-for-sale

Net gain on deferred compensation benefits

Total non-interest income

Non-interest expense

Salaries and employee benefits

Net gain on deferred compensation benefits

Data Processing

FDIC insurance

Total non-interest expense

INCOME BEFORE INCOME TAXES

Income tax expense

Earnings per common share:

Weighted average number of common shares

See accompanying notes to the consolidated financial statements.

FARMERS & MERCHANTS BANCORP

Consolidated Statements of Comprehensive Income

Year Ended December 31,

(Dollars in thousands)

Other comprehensive income

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

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

Amortization of unrealized loss on debt securities transferred to held-to-maturity

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

Income tax benefit/(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

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

Comprehensive

(Loss)/Income

Balance as of January 1, 2020

Other comprehensive income, net of tax

Cash dividends declared ($ 14.75

Issuance of common stock

Repurchase of common stock

Balance as of December 31, 2020

Other comprehensive loss, net of tax

Cash dividends declared ($ 15.30

Balance as of December 31, 2021

Other comprehensive loss, net of tax

Cash dividends declared ($ 16.15

Repurchase of common stock

Balance as of December 31, 2022

See accompanying notes to the consolidated financial statements.

Farmers & Merchants Bancorp

Consolidated Statements of Cash Flows

Year Ended December 31,

(Dollars in thousands)

Cash flows from operating activities:

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

Provision for credit losses

Depreciation and amortization

Net amortization of securities premiums and discounts

Increase in cash surrender value of BOLI

Decrease/(increase) in deferred income taxes, net

Loss/(gains) on sale of securities available-for-sale

Net changes in:

Other liabilities

Net cash provided by operating activities

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

Proceeds from sales, maturities, calls and pay downs of available-for-sale securities

Proceeds from maturities, calls and pay downs of held-to-maturity securities

Purchase of premises and equipment

Purchase of other investments

Redemption of other investments

Proceeds from bank-owned life insurance

Proceeds from sale of assets

Net cash used in investing activities

Cash flows from financing activities:

Net increase in deposits

Cash dividends paid

Net cash used in share repurchase of common stock

Net provided by financing activities

Net change in cash and cash equivalents

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 arising 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

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”).

F&M Bank is not a member of the Federal Reserve System;

however, FMCB operates

as a bank holding company under the Federal Bank Holding Company Act of 1956, subject to and under the supervision of and examination by the 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.

F & M Bancorp, Inc.

was created in March 2002 to protect the name F

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.

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.

GAAP”), FMCB Statutory Trust I is a non-consolidated subsidiary.

Through its network of 29 banking offices and 3 free-standing ATMs, F&M Bank emphasizes personalized service along with a broad range of banking services to businesses and individuals located in

the service areas of its offices.

Although the Company focuses on marketing its services to small and medium-sized businesses, a broad range of retail banking services are also made available to the local consumer market.

F&M Bank branches are

located through the mid Central Valley of California, including Sacramento, San Joaquin, Solano, Stanislaus and Merced counties and the east region of the San Francisco Bay Area including Napa, Alameda and Contra Costa counties.

F&M Bank provides a broad complement of lending products, including commercial, commercial real estate, real estate construction, agribusiness, consumer, credit card,

residential real estate loans, and equipment leases.

Commercial products include term loans, leases, lines of credit and other working capital financing and letters of credit.

Financing products for individuals include automobile financing, lines

of credit, residential real estate, home improvement and home equity lines of credit.

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

These include checking, savings, money market, time certificates of deposit, individual retirement accounts and online

banking services for both business and personal accounts.

F&M Bank offers a wide range of specialized services designed for the needs of its commercial accounts.

These services include a credit card program for merchants, lockbox and

other collection services, account reconciliation, investment sweep, on-line account access, and electronic funds transfers by way of domestic and international wire and automated clearinghouse.

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.

Use of estimates — The preparation of consolidated

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

These estimates and assumptions affect the reported amounts of

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

Actual results could differ from those estimates.

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.

Cash and cash equivalents — Cash and cash

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

The Company places its cash with high credit quality institutions.

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.

Investment securities — Investment securities are

classified as held-to-maturity (“HTM”) when the Company has the positive intent and ability to hold the securities to maturity.

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

security for an indefinite period of time, but not necessarily to maturity.

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

Investment securities classified at HTM are carried at

amortized cost.

Investment securities classified at AFS are reported at fair value.

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

Debt securities classified as

held-to-maturity are carried at cost, net of the allowance for credit losses – securities, adjusted for amortization of premiums and discounts to the earliest callable date.

Debt securities classified as available-for-sale are measured at fair

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 (or loss) (AOCI), a component of shareholders’

equity, until realized.

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

Allowance for Credit Losses – Securities — Management measures expected credit losses on held-to- maturity debt securities on a collective basis by major security type.

The Company’s HTM portfolio

contains securities issued by U.S.

government entities and agencies and municipalities.

The Company uses industry historical credit loss information adjusted for current conditions to establish the allowance for credit losses on its HTM municipal

bond portfolio.

Further information regarding our policies and methodology used to estimate the allowance for credit losses on held-to-maturity securities is presented in Note 2 – Investment securities.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or is more likely than not that it will be required

to sell the security before recovery of its amortized cost basis.

If the Company intends to sell the security or it is more likely than not that, the Company will be required to sell the security before recovering its cost basis, the entire

impairment loss would be recognized in earnings.

If the Company does not intend to sell the security and it is not more likely than not that, the Company will be required to sell the security, the Company evaluates whether the decline in fair value

has resulted from credit losses or other factors.

In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions

specifically related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

Projected cash flows are discounted by the current effective interest rate.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for

the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair

value, is recognized as a charge to AOCI.

Changes in the allowance for credit losses-securities are recorded as provision for (or reversal of) credit losses.

Losses are charged against the allowance when management

believes the non-collectability of an available-for-sale security is confirmed or when either criteria regarding intent of requirement to sell is met.

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.

Non-Accrual Loans and Leases - Accrual of interest

on loans and leases is generally discontinued when a loan or lease becomes contractually past due by 90 days or more with respect to

interest or principal.

When loans and leases are 90 days past due, but in management’s judgment are well secured and in the process of

collection, they may not be classified as non-accrual.

When a loan or lease is placed on non-accrual status, all interest previously accrued but not collected is reversed.

Income on such loans and leases is then recognized only to the extent that

cash is received and where the future collection of principal is probable.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

Restructured loan and leases — A restructuring of a loan or lease constitutes a TDR under ASC 310-40, if the Company for economic or legal reasons related to the debtor’s financial

difficulties grants a concession to the borrower that it would not otherwise consider, except when subject to the CARES Act and H.R.

133, as discussed below.

Restructured loans or leases typically present an elevated level of credit risk, as the

borrowers are not able to perform according to the original contractual terms.

If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after

the restructure, management may keep the loan or lease on accrual.

Loans and leases that are on non-accrual status at the time they become TDR loans or leases, remain on non-accrual status until the borrower demonstrates a sustained period of

performance, which the Company generally believes to be six consecutive months of payments, or equivalent.

A loan or lease can be

removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms.

However, these loans or leases continue to be classified as collateral dependent and are individually

evaluated for impairment.

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;

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

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 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.

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.

As of December 31, 2022, all loans that were restructured as part of

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

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

Allowance for Credit

Losses — Loans — The methodology for determining the

allowance for credit losses (“ACL”) on loans is considered a critical accounting policy by Management because of the high degree of judgment involved.

The subjectivity of the assumptions used and the potential for changes in the economic

environment could result in changes to the amount of the recorded ACL.

Among the material estimates required to establish the ACL are:

(i) a reasonable and supportable forecast;

(ii) a reasonable and supportable forecast period and the

reversion period;

(iii) value of collateral;

strength of guarantors;

(iv) the amount and timing of future cash flows for loans individually evaluated;

and (v) the determination of the qualitative loss factors.

All of these estimates are

susceptible to significant change.

The Company has established systematic methodologies for the determination of the adequacy of the ACL.

The methodologies are set forth in a formal policy and take into

consideration the need for a valuation allowance for loans evaluated on a collective (pool) basis, which have similar risk characteristics as well as allowances to individual loans that do not share risk characteristics.

The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans.

The provision for credit

losses reflects the amount required to maintain the ACL at an appropriate level based upon management’s evaluation of the adequacy of loss reserves.

The Company increases its ACL by charging provisions for credit losses on its consolidated

statement of income.

Losses related to specific assets are applied as a reduction of the carrying value of the assets and charged against the ACL when management believes a loan balance is uncollectable.

Recoveries on previously charged off loans

are credited to the ACL.

Management estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable

Historical credit loss experience, either internal or peer information, provides the basis for the estimation of expected credit losses.

Adjustments to historical loss information are made, using qualitative factors, when management

expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated.

The ACL is maintained at a level sufficient to provide for expected

credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio.

These factors

include, among others, changes in the size and composition of the loan portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions.

On January 1, 2022, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic

326), Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology that delays recognition until it is probable a loss has been incurred with an expected loss methodology that is referred to as

Both the Financial Accounting Standards Board (“FASB Staff Q&A Topic 326, No.

1”) and the federal financial institution regulatory agencies (“Financial Institution Letter FIL-17-2019”), along with the Securities and Exchange Commission,

have confirmed that smaller, less complex organizations are not required to implement complex models, developed by outside vendors to calculate current expected credit losses.

Accordingly, in adopting ASU 2016-13 (Topic 326) Management determined

that the Weighted Average Remaining Maturity (“WARM”) method was most appropriate given the Company’s current size and complexity.

Management will incorporate reasonable and supportable information in order to calculate CECL reserves.

This includes the ability to reliably forecast and document exogenous

events that may affect the credit performance of the Company’s loan portfolio.

Management is confident with its ability to effectively identify

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

historical loss information by the appropriate portfolio segmentation.

In addition, Management believes that it can reasonably

obtain historical loss information by its respective peers to further improve historical loss information.

Additionally, the Company believes that it can effectively evaluate the potential impact that both macro and micro-economic conditions can

have on its loan portfolio.

Management is also comfortable that it can rely on weighted average maturity calculations, including estimated prepayments with its existing third party Asset/Liability Management (“ALM”) applications.

Management determined that the most effective approach to segment its portfolio and to extract the relevant information it needed to calculate its CECL reserves was to utilize the

seventeen loan segments used in preparing regulatory Call Reports.

This allows Management the ability to obtain historical loss

information for itself as well as its peer group.

Additionally, Management’s ALM application also utilizes a similar loan segmentation in calculating weighted average remaining terms.

The foundation of CECL modeling is the ability to estimate expected credit losses over the lifetime of a loan.

Management must use relevant available information about past events

historical losses) current conditions, and reasonable and supportable forecasts about future conditions.

Historical losses serve as the starting point to estimate expected credit losses.

When available, historical losses should include

cumulative actual losses incurred over the lifetime of the various loan segments of the loans being evaluated.

In cases where such information is not available, companies may need to rely on external data, such as peer data of historical losses for

similar loan segments.

Management has determined to use a “through-the-cycle” historical credit loss experience as its baseline for historical credit losses.

Management has determined a representative

period for a full credit cycle would be from 2008 to 2022 ( fifteen-year credit cycle).

Management has collected historical loss

information on its own loan portfolio as well as peer group information by the seventeen loan segments over this time horizon using information available from the Federal regulators on the Uniform Bank Performance Report (“UBPR”).

Federal Regulators have placed the Company into a peer group of banks with assets between $ 3 billion to $ 10 billion.

This peer group segmentation includes 181 banks across the nation.

The model calculates the mean historical loss rate over the 15 -year economic cycle for both the Bank and its peer group.

The model calculates the stressed historical loss rate over the 15-year economic cycle for both the Bank and its peer group.

Management evaluates macro and micro economic information as well as internal trends in credit performance on the Company’s loan portfolio to determine where they believe it is in

an economic credit cycle.

Depending upon estimations of what point in the credit cycle the current economy may exist, management adjusts, on a quantitative basis, historical loss rates either upwards or downwards from the mean.

If Management

believes we are nearing the end on a credit cycle, the Company may adjust historical losses in increments higher from the mean (e.g.

one standard deviation from the mean).

If the Company believes that we are in the recovery stage of a credit cycle,

it may adjust historical losses downwards from the mean.

Management understands that historical credit losses may not exactly follow a normal bell-shaped curve, but that the approach provides consistency across all loan segments as well as a

measured probability of credit loss coverage.

Management evaluated current economic metrics as its basis to determine that it believes that the U.S.

economy is at the beginning of an economic recession.

Based on this

determination, management has used a one-standard deviation from the mean to capture 68.2 % of all credit losses over the 15-year

economic cycle.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

Management used the duration of each loan segment to estimate the remaining life of loans to ensure that the model covers credit losses over the expected life of such loans.

Management will continue to employ the use of qualitative factors as defined by the Interagency Policy Statement on the Allowance for Loan and Lease Losses (“SR 2006-17”).

Management will consider qualitative or environmental factors that are likely to cause estimated credit losses associated with our existing portfolio to differ from historical loss experience, as defined in the Interagency Guidance, including but

not limited to:

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

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

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

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

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

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

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

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

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

These qualitative factors are applied primarily to our agriculture and agricultural real estate loan exposure.

Premises and equipment — Land is carried at cost.

Premises and equipment are carried at cost, net of accumulated depreciation and amortization.

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

Building and building improvements

30 to 40 years

Leasehold improvements

term of lease

Furniture and equipment

Computers, software and equipment

Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

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

These policies provide protection against the adverse financial effects that could result from the death of a key employee and

provide tax-exempt income to offset expenses associated with certain employee benefit plans.

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

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

certain policies.

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

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

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.

the carrying amount exceeds its reporting unit’s fair value, then an impairment loss would be recognized as a charge to earnings but is limited by the amount of goodwill allocated to that reporting unit.

Other intangible assets — Other intangible assets

consist primarily of core deposit intangibles (“CDI”), which are amounts recorded in business combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the client relationships associated

with the deposits.

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

These assets are reviewed at least annually for events or circumstances that could affect their recoverability.

These events could include

loss of the underlying core deposits, increased competition or adverse changes in the economy.

The amortization of our CDI is recorded in other non-interest expense.

To the extent other identifiable intangible assets are deemed unrecoverable;

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

Transfers of 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.

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

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

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

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

Accordingly, ROU assets are reduced by tenant improvement allowances from property owners

plus any prepaid rent.

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

As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized

borrowing over a similar term of the lease payments at commencement date.

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.

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

The ROU asset

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

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

Off-balance sheet credit related financial instruments — In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, and standby letters of credit.

Such financial instruments

are recorded when they are funded.

Allowance for credit losses - unfunded loan commitments — An allowance for credit losses - unfunded loan commitments is maintained at a level that, in the opinion of management, is adequate to absorb current expected credit losses associated with the 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.

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 statements of financial

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.

The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that

are not within the scope of Topic 606.

The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented

in the Consolidated Statements of Income 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.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

Income taxes — Deferred income tax assets and deferred income tax

liabilities represent the tax effect of temporary differences between financial reporting and tax reporting measured at enacted tax rates in effect for the year in which the differences are expected to reverse.

The Company recognizes only the

impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority.

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

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

Judgments and tax

strategies are subject to audit by various taxing authorities.

While the Company believes it has no significant uncertain income tax positions in the consolidated financial statements, adverse determinations by these taxing authorities could have a

material adverse effect on the consolidated financial positions, result of operations, or cash flows.

Basic 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.

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

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 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 business.

As a result, the Company is not organized around discernible lines of business and operates as an integrated unit to customize solutions for its

customers, with business line emphasis and product offerings changing over time as customer needs and demands change.

Loss contingencies — Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an

amount or range of loss can be reasonably estimated.

Management does not believe there are any such loss contingencies that will have a material and adverse effect on the consolidated financial statements.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

Advertising costs — Advertising costs are expensed

when incurred and totaled $ 1.3 million in 2022, $ 1.1 million in 2021, and $ 0.9 million in 2020.

Accounting Standards Pending Adoption — The

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

In 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.

ASU 2020-04 was effective upon issuance and, based upon the amendments provided in

ASU 2022-06 discussed below, can generally be applied through December 31, 2024.

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 the FASB and its impact on our financial condition and results of operations.

In January 2021, the FASB issued ASU No.

2021-01, Reference Rate Reform (Topic 848).

The main amendments in this ASU are intended to clarify certain optional expedients and scope

of derivative instruments.

The amendments are elective and effective immediately upon issuance of this ASU.

ASU 2021-01 was effective upon issuance and, based upon the amendments provided in ASU 2022-06 discussed below, can generally be applied

through December 31, 2024.

We have not elected to apply these amendments;

however, we will assess the applicability of this ASU to us as we continue to monitor guidance for reference rate reform from the FASB and its impact on our financial

condition and results of operations.

In March 2022, the FASB issued guidance within ASU 2022-02, Financial Instruments – Credit Losses (Topic 326):

Troubled Debt

Restructurings and Vintage Disclosures .

The amendments in this ASU eliminate the current troubled debt restructuring (TDR) recognition and measurement guidance and, instead, require that a creditor evaluate (consistent with the accounting

for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan.

The amendments also introduce new requirements related to certain modifications of receivables made to borrowers experiencing

financial difficulty.

These amendments require vintage disclosures including current-period gross write-offs by year of origination for financing receivables.

Gross write-off

information must be included in the vintage disclosures in accordance with ASC 326-20-50-6, which requires disclosure of the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of

The Company has elected to adopt this portion of the amendments in the current year.

The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

amendments should be applied prospectively, though for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect

adjustment to retained earnings in the period of adoption.

Early adoption is permitted, including adoption in an interim period.

If an entity elects to early adopt in an interim period, the guidance should be applied

as of the beginning of the fiscal year that includes the interim

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to the vintage

ASU 2022-02 will be effective for the Company on January 1, 2023.

The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2022, the FASB issued guidance within ASU 2022-03, Fair Value Measurement of Equity Securities Subject to

contractual Sale Restrictions.

The amendments in this ASU affect all entities that have investments in equity securities measured at fair value that are subject to a contractual sale restriction.

These amendments clarify that a contractual

restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.

The amendments in this ASU are effective for fiscal years, beginning after December 15, 2023, including interim periods within those fiscal years.

adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance.

The adoption of this ASU is not expected to have material impact on the Company’s consolidated financial

2022-06, “Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848.” ASU 2022-06 extends the period of time preparers can utilize the reference rate

reform relief guidance provided by ASU 2020-04 and ASU 2021-01, which are discussed above.

ASU 2022-06, which was effective upon issuance, defers the sunset date of this prior guidance from December 31, 2022 to December 31, 2024, after which

entities will no longer be permitted to apply the relief guidance in Topic 848.

We have not elected to apply amendments at this time, however, will assess the applicability of this ASU to us as we continue to monitor guidance for reference rate

reform from FASB and its impact on our financial condition and results of operations.

Adoption of New Accounting Standard — 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

Rules and interpretive releases of the SEC under the authority of the federal securities laws are also sources of authoritative GAAP for the Company as an SEC registrant.

All other accounting literature is non-authoritative.

On January 1, 2022, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic

The Company adopted ASC 326 using the modified retrospective method for all financials assets measured at amortized cost and off-balance sheet credit exposures.

Results for reporting periods beginning after January 1, 2022 are presented under

ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

In adopting ASU 2016-13 (Topic 326) Management determined that the Weighted Average Remaining Maturity (“WARM”) method was most appropriate given the Company’s current size and

The implementation of CECL did not result in any material change in the

amount of the Company’s December 31, 2021 Allowance for Credit Losses, therefore, no adjustment to Shareholders’ Equity was made as of January 1, 2022.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 1—Summary of Significant Accounting Policies—Continued

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 replaces the incurred loss impairment methodology in previous GAAP with CECL, a methodology that reflects current 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 is 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 entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually.

The use of forecasted information incorporates more timely

information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements.

The following table illustrates the pre-tax impact of the adoption of this ASU:

(Dollars in thousands)

Reported under ASC

Allowance for credit losses:

Residential and home equity

Total real estate

Commercial & industrial

Commercial leases

Consumer and other

Total allowance for credit losses on loans

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 2 — Investment Securities

The amortized cost, fair values, and

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

Gross Unrealized

(Dollars in thousands)

As of December 31, 2022

Treasury notes

Government-sponsored securities

Mortgage-backed securities (1)

Collateralized mortgage obligations (1)

Corporate securities

Total available-for-sale securities

(1) All mortgage-backed securities and collateralized

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

Gross Unrealized

(Dollars in thousands)

As of December 31, 2021

Treasury notes

Government-sponsored securities

Mortgage-backed securities (1)

Collateralized mortgage obligations (1)

Total available-for-sale securities

(1) All mortgage-backed securities and collateralized

mortgage obligations 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

Gross Unrealized

(Dollars in thousands)

As of December 31, 2022

Municipal securities

Mortgage-backed securities (1)

Collateralized mortgage obligations (1)

Total held-to-maturity securities

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

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 2—Investment Securities—Continued

Gross Unrealized

(Dollars in thousands)

As of December 31, 2021

Municipal securities

Mortgage-backed securities (1)

Collateralized mortgage obligations (1)

Total held-to-maturity securities

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

The allowance for

credit losses on held-to-maturity securities is a contra-asset valuation account that is deducted from the amortized cost basis of held-to-maturity securities to present the net amount expected to be collected.

Management measures expected

credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and

reasonable and supportable forecasts.

With regard to residential mortgage-backed securities issued by the U.S.

government, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost bases

of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S.

Accordingly, no

allowance for credit losses has been recorded for these securities.

With regard to securities issued by States and political subdivisions and other held-to-maturity securities, management considers (i) issuer bond ratings, (ii) historical loss

rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) internal forecasts and (v) whether or not such securities are guaranteed or

pre-refunded by the issuers.

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

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

The following tables show the gross unrealized losses for available-for-sale securities, for which an allowance for credit losses has not been recorded, that are less than 12

months and 12 months or more:

December 31, 2022

Less Than 12 Months

12 Months or More

(Dollars in thousands)

As of December 31, 2022

U.S.Treasury notes

Government-sponsored securities

Mortgage-backed securities (1)

Collateralized mortgage obligations (1)

Corporate securities

Total available-for-sale securities

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

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 2—Investment Securities—Continued

December 31, 2021

Less Than 12 Months

12 Months or More

(Dollars in thousands)

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.

As of December 31,

2022, the Company held 195 available-for-sale securities of which 94 were in an unrealized loss position for less than twelve months and 75

securities were in an unrealized loss position for twelve months or more without an allowance for credit losses.

Because the decline in fair value is attributable to changes in interest rates and not credit quality and because the Company does

not have the intent to sell these securities and it is more likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to impaired.

Management evaluates the

available-for-sale securities in an unrealized loss position, relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations.

The following table presents the activity in the allowance for credit

losses for held-to-maturity debt securities by major type:

December 31, 2022

(Dollars in thousands)

Mortgage-backed

Collateralized

Allowance for credit losses - securities

Beginning Balance

Provision for credit losses

Ending Balance

The amortized cost and estimated fair values of investment

securities at December 31, 2022 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

After five years through

After ten years

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.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 2—Investment Securities—Continued

The Company monitors the credit quality of those held-to-maturity debt securities not issued by the U.S.

government or one of its agencies or government

sponsored entities, through the use of credit ratings.

Credit ratings are reviewed and updated quarterly.

The following table summarizes the amortized cost of held-to-maturity municipal debt securities by credit rating at December 31, 2022:

Held-to-Maturity

Amortized Cost

(Dollars in thousands)

December 31, 2022

Municipal securities

As of December 21, 2022, there were no past due principal or interest payments associated with these securities.

Proceeds from sales and calls of these securities were as

(Dollars in thousands)

Gross Proceeds

Pledged Securities

As of December 31, 2022, securities carried at $ 479 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) borrowings, and other government agency deposits as required by

This amount was $ 426 million at December 31, 2021.

Note 3—Federal Home Loan Bank Stock and Other Non-Marketable Securities

The Bank is a member of the FHLB system.

Members are required to own a certain amount of stock based on the level of borrowings and

other factors, and may invest in additional amounts.

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

Both cash and

stock dividends are reported as income.

FHLB stock and other equity securities are reported in Non-Marketable Securities on the Company’s consolidated statements of financial condition and totaled $ 15.5 million at both December 31, 2022 and 2021.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 4—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

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

Total loans and leases held-for-investment, net

(1) Includes SBA PPP loans of $ 0 and $ 70,765 as of December 31, 2022

and December 31, 2021, respectively.

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

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

These government guaranteed loans were 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 them.

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.

As of December 2022 and 2021, PPP loans outstanding were $ 0 and $ 70.8 million, respectively.

At December 31, 2022, 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 $ 1.2

billion and $ 884 million, respectively.

The borrowing capacity on these loans was $ 758.0 million from FHLB and $ 651.0 million from the FRB.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 4—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, 2022 and 2021:

December 31, 2022

(Dollars in thousands)

90+ Days Past

Loans and leases held-for-investment, net

Residential and home equity

Total real estate

Commercial & industrial

Commercial leases

Consumer and other

Total loans and leases, net

December 31, 2021

(Dollars in thousands)

90+ Days Past

Loans and leases held-for-investment, net

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 4—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

Residential and home equity

Total real estate

Commercial & industrial

Commercial leases

Consumer and other

Non-accrual loans and leases, are TDRs

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 4—Loans and Leases —Continued

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

Residential and home equity

Total real estate

Commercial & industrial

Commercial leases

Consumer and other

Non-accruing TDR loans and leases

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 4—Loans and Leases —Continued

The following table summarizes TDRs outstanding by year of occurrence:

Year Ended December 31, 2022

(Dollars in thousands)

# of Accruing

$ of Accruing

Loan and lease TDRs

Year Ended December 31, 2021

(Dollars in thousands)

# of Accruing

$ of Accruing

Loan and lease TDRs

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 4—Loans and Leases —Continued

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

December 31, 2022

(Dollars in thousands)

Loans and leases held for investment, net

Residential and home equity

Total real estate

Commercial & industrial

Commercial leases

Consumer and other

Total loans and leases, net

December 31, 2021

(Dollars in thousands)

Loans and leases held for investment, net

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 4—Loans and Leases —Continued

The following table represents outstanding loan

balances by credit quality indicators and vintage year by class of financing receivable and current period gross charge-offs by year of origination as follows:

December 31, 2022

Term Loans Amortized Cost Basis by Origination Year

(Dollars in thousands)

Net loans and leases held for investment

Special mention

Total Commercial

Current-period gross charge-offs

Special mention

Total Agricultural

Current-period gross charge-offs

Residential and home equity

Special mention

Total Residential and home equity

Residential and home equity

Current-period gross charge-offs

Special mention

Total construction

Current-period gross charge-offs

Total Real estate

Commercial & industrial

Special mention

Total Commercial & industrial

Commercial & industrial

Current-period gross charge-offs

Special mention

Total Agricultural

Current-period gross charge-offs

Commercial leases

Special mention

Total Commercial leases

Commercial leases

Current-period gross charge-offs

Consumer and other

Special mention

Total Consumer and other

Consumer and other

Current-period gross charge-offs

Total net loans and leases

Certain directors and executive officers of the

Company are defined as related parties.

These related parties, including their immediate families and companies in which they are principal owners, were loan customers of the Bank during the twelve months ended December 31, 2022 and December

Such loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with borrowers not related to the Company.

These loans did not involve more than the

normal risk of collection or have other unfavorable features.

A summary of the changes in those loans is as follows:

(Dollars in thousands)

Balance at beginning of the period

New loans or advances during year

Balance at end of period

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 4—Loans and Leases —Continued

Changes in the allowance for credit losses are as follows:

Year Ended December 31, 2022

(Dollars in thousands)

Residential &

Allowance for credit losses:

Balance at beginning of year

Impact of Adopting ASC 326

Provision / (recapture) for credit losses

Net (charge-offs) / recoveries

Balance at end of year

Year Ended December 31, 2021

(Dollars in thousands)

Residential &

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)

Residential &

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 4—Loans and Leases —Continued

A loan is considered collateral dependent when the borrower is experiencing

financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.

When management determines that foreclosure is probable, expected credit losses for collateral dependent loans are

based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

The collateral on the loans is a significant portion of what secures the collateral dependent loans and significant changes to the fair

value of the collateral can impact the ACL.

During 2022, there were no significant changes to the collateral that secures the collateral dependent loans, whether due to general deterioration or with credit quality indicators like appraisal

following table presents the amortized cost basis of collateral dependent loans by collateral type as of December 31, 2022:

December 31, 2022

(Dollars in thousands)

Collateral dependent loans and leases

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—Premises and Equipment

Premises and equipment consisted of the following:

(Dollars in thousands)

Premises and equipment:

Buildings and land

Furniture, fixtures, and equipment

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 $ 2.4 , $ 2.6 , and $ 2.8 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Rental income was $ 640,000 , $ 491,000 , and $ 434,000 for the years ended December 31, 2022, 2021, and 2020, respectively and is recorded in other income.

Note 6—Other Real Estate Owned

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

31, 2022 and 2021, 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.

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 7—Deposits

Certificates of deposit greater than and less than or equal to the FDIC insurance limit of $250,000 are summarized as follows:

(Dollars in thousands)

Certificates of deposit:

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

Certificates of deposit greater than $250,000

Total certificates of deposit

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

(Dollars in thousands)

2027 and beyond

Total certificates of deposit

Note 8—Short-term borrowings

As of December 31, 2022 and 2021, committed lines of credit arrangements totaling $ 1.5 billion and $ 1.4 billion were available to the Company from unaffiliated

banks, respectively.

The average Federal Funds interest rate as of December 31, 2022 was 4.50 %.

The Company is a member of the FHLB of San Francisco and has a committed credit line of $ 757.9 million, which is secured by $ 1.2 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 4.63 %

as of December 31, 2022.

The Company has $ 883.8 million in pledged

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

As of December 31, 2022, the Company’s overnight borrowing capacity using the primary credit facilities from the Fed account was $ 651.0 million.

The borrowing rate is 425 basis points.

There were no outstanding advances on the above borrowing facilities as of December 31, 2022 and 2021.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 9—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

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

(i) accrued and unpaid distributions

required to be paid on the Trust Preferred Securities;

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

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

up, or liquidation of Statutory Trust I.

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

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

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

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

Additionally, if the

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

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 10—Shareholders’ Equity

The Company and the Bank are subject

to various regulatory capital adequacy guidelines as outlined under Part 324 of the FDIC Rules and Regulations.

Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if

undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that

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

The Company and the Bank’s capital amounts and classification are also subject

to qualitative judgments by the regulators about components, risk weightings, and other factors.

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

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

Management believes that the Bank meets the requirements to be categorized as “well capitalized”

under the FDIC regulatory framework for prompt corrective action.

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

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

December 31, 2022

Required for Capital Adequacy Purposes

Minimum to be Categorized as “Well

Capitalized” Under Prompt Corrective

Action Regulation

(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 10—Shareholders’ Equity—Continued

December 31, 2021

Required for Capital Adequacy Purposes

Minimum to be Categorized as “Well

Capitalized” Under Prompt Corrective

Action Regulation

(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

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 capital adequacy standards per the regulations.

Basic and diluted 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

Weighted average number of dilutive shares outstanding

Basic earnings per common share

Diluted earning per commons share

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 11—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.

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 $ 1.8 million, $ 1.6 million, and $ 1.5 million for the years

ended December 31, 2022, 2021, and 2020, respectively.

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

Mandatory contributions totaled $ 1.6 million, $ 1.7 million, and $ 1.7 million for the years ended December 31, 2022, 2021, and 2020, 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.

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 Internal Revenue Service regulations.

The ERP is comprised of:

(1) a Performance Component which makes contributions

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

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

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

and subject to Board of Directors approval.

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

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

deferred compensation plan.

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

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

in the consolidated financial statements.

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

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

Company, and other financial instruments, on the open market.

ERP contributions are invested in a mix of financial instruments;

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

The Company expensed $ 7.4 million to

the ERP during the year ended December 31, 2022, $ 9.0 million during the year ended December 31, 2021 and $ 6.8 million during the year ended December 31, 2020.

The Company’s carrying value of the liability under the ERP was $ 57.0 million as of December 31, 2022 and $ 63.9

million as of December 31, 2021.

The Company’s shares of common stock held as investments in the Rabbi Trust of the ERP as of December 31, 2022 and 2021 totaled 50,196 and 55,436 with an historical cost basis of $ 31.4 million and $ 33.2 million,

respectively.

All amounts have been fully funded into the Rabbi Trust as of December 31, 2022 and 2021.

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 $ 0.1 million in 2022 compared

to net gains of $ 2.5 million in 2021 and $ 1.8

million in 2020.

Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 11—Employee Benefit Plans —Continued

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

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 $ 2.2 million for

the year ended December 31, 2022, $ 2.2 million for the year ended December 31, 2021, and $ 2.1 million for the year ended December 31, 2020.

As of December 31, 2022 and 2021, the total cash surrender value of the insurance policies was $ 73.0 million and $ 71.4 million,

respectively.

Senior Management Retention Plan

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

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 Internal Revenue Service regulations.

All contributions are

discretionary and subject to the Board of Directors approval.

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

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

contribute assets for the limited purpose of funding a non-qualified deferred compensation plan.

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

however, the assets of the

Rabbi Trust remain subject to the claims of its creditors and are included in the consolidated financial statements.

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

The Rabbi Trust will

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

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

The Company expensed $ 3.0 million to the SMRP during the year ended

December 31, 2022, $ 2.7 million during the year ended December 31, 2021 and $ 2.3 million during the year ended December 31, 2020.

The Company’s carrying value of the liability under the SMRP was $ 13.6 million as of December 31, 2022 and $ 11.1 million as of December 31, 2021.

The Company’s shares of stock held as investments in the Rabbi Trust of the SMRP as of December 31, 2022 and December 31, 2021 totaled 15,998

and 14,192 shares with an historical cost basis of $ 10.8 million and $ 9.5 million, respectively.

All amounts have been fully funded

into the Rabbi Trust as of December 31, 2022 and 2021.

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

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

Net gains on SMRP plan investments were $ 0.4 million in 2022, $ 0.1 million in 2021 and $ 0.1 in 2020.

Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices .

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 12—Fair Value

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.

This standard applies whenever other standards require, or permit assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances.

In this standard, the FASB

clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability.

In support of this principle, this standard establishes a fair value hierarchy that prioritizes the

information used to develop those assumptions.

The fair value hierarchy is as follows:

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

Level 2 inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

These might include quoted prices

for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants

would use in pricing the assets or liabilities.

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy.

Changes in economic

conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another.

In such instances, the transfer is reported at the beginning of the reporting period.

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

liabilities or total earnings.

Securities classified as available-for-sale are reported at fair value on a recurring basis utilizing Level 1, 2 and 3 inputs.

For these securities, the Company obtains fair

value measurements from an independent pricing service.

The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S.

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

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

The Company does not record all loans and

leases at fair value on a recurring basis.

However, from time to time, a loan or lease is considered collateral dependent and an allowance for credit losses is established.

Once a loan or lease is identified as collaterally dependent, management

measures impairment in accordance with the “Receivable” topic of the FASB ASC.

The fair value of collateral dependent 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.

Collateral dependent 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.

Collateral dependent 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 loans is generally based on recent real estate appraisals.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 12—Fair Value—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.

The valuation technique

used for Level 3 non-recurring collateral dependent loans is primarily the sales comparison approach less estimated selling costs.

Other Real Estate Owned (“OREO”) is reported at fair value on a non-recurring basis.

Fair values are based on recent real estate appraisals.

These appraisals may use a single valuation approach or a

combination of approaches including sales comparison, cost and the income approach.

Adjustments are often made in the appraisal process by the appraisers to take 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 non-recurring OREO is primarily the sales comparison approach

less estimated selling costs.

The following tables summarize the carrying value and estimated fair values of the Company’s financial assets and liabilities 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, 2022

Fair Value Measurements

(Dollars in thousands)

Carrying Amount

Total Fair Value

Financial Assets:

Cash and cash equivalents

Available-for-sale debt securities

Held-to-maturity debt securities

Non-marketable securities

Loans and leases, net

Bank-owned life insurance

Financial Liabilities:

Total deposits

Subordinated debentures

December 31, 2021

Fair Value Measurements

(Dollars in thousands)

Carrying Amount

Total Fair Value

Financial Assets:

Cash and cash equivalents

Available-for-sale debt securities

Held-to-maturity debt securities

Non-marketable securities

Loans and leases, net

Bank-owned life insurance

Financial Liabilities:

Total deposits

Subordinated debentures

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 12—Fair Value—Continued

Non-recurring Measurements:

collateral dependent loans and OREO are classified with Level 3 of the fair value hierarchy.

The estimated

fair value of collateral dependent 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 collateral dependent loan.

The key inputs used to determine

the fair value of collateral dependent 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.

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

After review and acceptance of the appraisal or evaluation, adjustments to collateral dependent 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, 2022

Fair Value Measurements

(Dollars in thousands)

Carrying Amount

Fair valued on a recurring basis:

Debt securities available-for-sale

Treasury notes

Government-sponsored securities

Mortgage-backed securities

Collateralized mortgage obligations

Corporate securities

Fair valued on a non-recurring basis:

Collateral dependent loans

Other real estate owned

December 31, 2021

Fair Value Measurements

(Dollars in thousands)

Carrying Amount

Fair valued on a recurring basis:

Debt 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 owned

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 13—Commitments and Contingencies

In the normal course of business, the Company enters into financial instruments with off balance sheet risk in order to meet the financing needs of its customers and to reduce its

own exposure to fluctuations in interest rates.

These instruments include commitments to extend credit, letters of credit, and other types of financial guarantees.

The Company had the following off balance sheet commitments as of the dates indicated.

(Dollars in thousands)

Commitments to extend credit, including

unsecured commitments of $ 20,401 and $ 21,036 as of December 31, 2022 and 2021, respectively

Stand-by letters of credit, including unsecured commitments of $ 7,954 and $ 9,091 as of December 31, 2022 and 2021, respectively

Performance guarantees under interest rate swap contracts entered into with 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 may or may not require collateral or other security to support financial instruments with credit risk.

Evaluations of each

customer’s creditworthiness are performed on a case-by-case basis.

Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third-party.

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.

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.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 14 — Leases

Lessee – Operating Leases

Operating leases in which we are the

lessee are recorded as operating lease right-of-use (“ROU”) assets and operating lease liabilities, included in other assets and other liabilities , respectively, on our consolidated statements of financial condition.

We do not currently have any significant finance leases in

which we are the lessee.

Operating lease ROU assets represent

our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease.

ROU assets and operating lease liabilities are recognized at lease commencement based

on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date.

ROU assets are further adjusted for lease incentives.

Operating lease expense, which is

comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded net in occupancy expense in the consolidated statements of

Our leases relate primarily to office

space and bank branches with remaining lease terms of generally nine months to 8 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, 2022, operating

lease ROU assets and liabilities were $ 3.4 million and $ 3.5 million, respectively.

Operating lease expenses totaled $ 730 ,000 for the

year ended December 31, 2022.

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 and $ 833 ,000 for the years ended December 31, 2021 and 2020,

respectively.

The table below summarizes the information related to our operating leases:

Year Ended December 31,

(in thousands except for percent and period data)

Cash Paid for Amounts Included in the Measurement of Lease Liabilities

Operating Cash Flow from Operating Leases

Weighted-Average Remaining Lease Term - Operating Leases, in Years

Weighted-Average Discount Rate - Operating Leases

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 14—Leases — Continued

The table below summarizes the maturity of remaining lease liability:

(Dollars in thousands)

Total lease payments

Net present value of lease liabilities

As of December 31, 2022, we had no additional operating leases for office space that have not yet commenced or that are anticipated to commence during the first quarter of 2023.

Lessor – Direct Financing Leases

The Company is the lessor in direct

finance lease arrangements.

Leases are recorded at the principal balance outstanding, net of unearned income and charge-offs.

Interest income is recognized using the interest method.

Leases typically have a maturity of three to ten years , and fixed rates that

are most often tied to Treasury indices with an appropriate spread based on the amount of perceived risk.

Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan.

Residual value risk is

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

Lease payments due to the Company are

typically fixed and paid in equal installments over the lease term.

Variable lease payments that do not depend on an index or a rate (e.g., property taxes) that are paid directly by the Company are minimal.

The majority of property taxes are paid

directly by the client to third-parties and are not considered part of variable payments and therefore are not recorded by the Company.

As a lessor, the Company leases

certain types of agriculture equipment, solar equipment, construction equipment and other equipment to its customers.

The Company’s net investment in direct financing leases was $ 111.6 million at December 31, 2022 and $ 96.4 million at December

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 15—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

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

Compensation expense

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 15—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

Unrealized losses on debt securities

Accrued liabilities

State income taxes

Lease liabilities

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

Premises and equipment

Deferred loan and lease costs

Right of use leasing asset

Core deposit intangible asset

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, 2022 and 2021.

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, 2022 and 2021, 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 2018 through 2022 tax years remain subject to selection for examination as of December 31, 2022.

As of December 31, 2022 and 2021, the Company has net

operating loss of $ 1.9 million and $ 2.0

million carry-forwards and no tax credit carry-forwards.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

16—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

Total liabilities and shareholders’ equity

Year Ended December 31,

(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

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 16—Condensed Financial Statements of Parent Company —Continued

(Dollars in thousands)

Year Ended December 31,

Statements of Cash Flows

Cash flows from operating activities:

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

Equity in undistributed net income of the Bank

Change in other assets and liabilities

Net cash provided by operating activities

Cash flows from investing activities:

Payments for investments in non-qualified retirement plans

Securities sold or matured

Net cash used in investing activities

Cash flows from financing activities:

Common stock repurchases

Issuance of common stock

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

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 7A. Quantitative and Qualitative Disclosures About Market Risk