What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2024-03-14 compared with 2023-03-15 · 897 added, 837 removed, 961 unchanged (64% of the section changed)

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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.

In monitoring interest rate risk we continually analyze and manage our earning assets and funding liabilities based on their payment streams and interest rates, the timing of their maturities and/or prepayments, and their sensitivity to

actual or potential changes in market interest rates.

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

guidelines of acceptable levels of risk-taking.

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

portfolio assets and their funding sources.

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

opportunities of portfolio assets and their funding sources.

Since our earnings are primarily dependent on our ability to generate net interest income, we focus on actively monitoring and managing the effects of adverse changes in interest rates on our net interest income.

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

ALCO monitors interest rate risk by analyzing the potential

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

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

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

ALCO monitors interest rate risk by analyzing the potential impact on net interest income from

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

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

income within acceptable ranges despite changes in interest rates.

ALCO and management utilize a third party to assist with asset liability management including the use of simulation models.

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

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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

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

changes in interest rates.

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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.

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

reinvestment of the proceeds at current yields.

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

This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions.

It assumes the balance sheet grows modestly, but that its structure will remain similar to the

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.

It assumes the balance sheet size remains static throughout the simulation horizon by

replacing existing cash flows/amortization into similar products at current rates to try and capture the ongoing activity of the balance sheet without forecasting any level of growth.

It does not account for all factors that affect this analysis,

including changes by management to mitigate the effect of interest rate changes or secondary impacts such as changes to our credit risk profile as interest rates change.

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

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Changes that vary significantly from the assumptions may have significant effects on our net interest income.

For the rising and falling interest rate scenarios, the base market interest rate forecast 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.

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 100, 200 and 300 basis points.

We then evaluate the

simulation results using two approaches:

Net Interest Income at Risk (“NII at Risk”) and Economic Value of Equity (“EVE”).

Under NII at Risk, the impact on net interest income from the changes in interest rates on interest-earning assets and

interest-bearing liabilities is modeled using various assumptions of assets and liabilities.

EVE measures the period-end present value of assets minus the present value of liabilities.

Management uses this value to measure the changes in the

economic value of the Company under various interest rate scenarios.

Based on our quarterly simulations, our net interest margin exposure related to these hypothetical changes in market interest rates was within the current guidelines established by 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 as rates earned on our interest-bearing assets reprice higher and at a faster pace than rates paid

on our interest-bearing liabilities.

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

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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.

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.

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.

are typically priced based on a specific term of the Treasury Curve for comparable maturities, plus a margin.

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

would cause market rate changes to have a greater impact on our net interest margin.

As of December 31, 2023, our loan and lease portfolio was comprised of 58.1% fixed rate and 41.9% variable rate loans.

The vast majority of our variable loans

also contain interest rate floors which are designed to mitigate the impact of decreases in interest rates as index rates drop.

The following table presents the projected change in the Company’s net interest income over the next twelve months and the economic value of equity at December 31, 2023, that would occur upon an immediate change in

interest rates, but without giving effect to any steps that management might take to counteract that change:

Estimated Change in

Net Interest Income (NII)

(as a % of NII)

Estimated Change in

Economic Value of Equity

(as a % of EVE)

December 31, 2023

Financial Statements and Supplementary

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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.

Opinions on the Consolidated Financial Statements and Internal Control

Over Financial Reporting

We have audited the accompanying consolidated statements of financial

condition of Farmers & Merchants Bancorp and subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows

for the years 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, 2023, 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, 2023 and 2022, and the consolidated results of its operations and its cash flows for the years 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, 2023, based on criteria

established in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Basis for Opinions

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

reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying 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.

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.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective

internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included

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

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk

that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

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

the circumstances.

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

Definition and Limitations of Internal Control Over Financial

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.

The critical audit matter communicated below is a matter arising from

the current-period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated

financial statements and (2) involved especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a

whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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.

The Company has a loan portfolio of $3.7 billion and related allowance

for credit losses - loans and leases (ACL) of $75.0 million as of December 31, 2023.

As discussed in Notes 1 and 4 of the Company’s consolidated financial statements, the ACL represents management’s estimate of expected credit losses

over the life of the loan and lease portfolios.

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.

includes the process utilized by management to challenge the model results and determine the best estimate of the ACL as of the statement of financial condition 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.

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 evaluating the trends in such adjustments.

We 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.

Testing the mathematical accuracy and computation of the ACL.

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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.

audited the accompanying consolidated statement of financial condition of Farmers &

Merchants Bancorp and subsidiaries (the Company) as of December 31, 2021 , the related consolidated statement of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year 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 the year 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.

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.

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

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

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.

Our audit also included evaluating the accounting principles used and

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

We believe that our audit provides a reasonable

basis for our opinion.

/s/ Moss Adams LLP

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Total cash and cash equivalents

Securities available-for-sale, at fair value

Securities available-for-sale, amortized cost $ 199,374 and $ 183,171 , respectively

Securities held-to-maturity, fair value $ 671,585 and $ 688,393 , respectively

Allowance for credit losses - securities

Allowance for credit losses - securities held-to-maturity

Total investment securities

Non-marketable securities

Loans and leases held for investment

Loans and leases held-for-investment, net of unearned income

Allowance for credit losses - loans and leases

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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

Common shares, $ 0.01 par value, 7,500,000 authorized, 747,971 and 768,337

issued and outstanding at December 31, 2023 and 2022, respectively

Additional paid-in capital

Retained earnings

Accumulated other comprehensive (loss), net of taxes

Accumulated other comprehensive income/(loss), net of taxes

TOTAL SHAREHOLDERS’ EQUITY

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Interest and fees on loans and leases

Interest and dividends on securities

Interest and dividends on investment securities

Interest on deposits with others

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Card processing

Gain on BOLI death benefit

Net gain on deferred compensation benefits

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

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

Total non-interest income

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Salaries and employee benefits

Net gain on deferred compensation benefits

Data Processing

FDIC insurance

Net gain on deferred compensation benefits

Deposit insurance

Professional services

Total non-interest expense

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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

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

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

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

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

Income tax (expense)/benefit

Other comprehensive income/(loss), net of tax

Total comprehensive income

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Balance as of January 1, 2021

Other comprehensive income, net of tax

Other comprehensive loss, net of tax

Cash dividends declared ($ 15.30

Issuance of common stock

Repurchase of common stock

Balance as of December 31, 2021

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Cash dividends declared ($ 16.15

Repurchase of common stock

Balance as of December 31, 2022

Other comprehensive loss, net of tax

Other comprehensive income, net of tax

Cash dividends declared ($ 17.10

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Increase in cash surrender value of BOLI

Decrease/(increase) in deferred income taxes, net

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

Gain on BOLI death benefit

(Increase)/decrease in deferred income taxes, net

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

Net changes in:

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Cash flows from investing activities:

Net change in loans held for investment

Net change in loans and leases held-for-investment

Purchase of available-for-sale securities

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

Purchase of bank-owned life insurance

Purchase of premises and equipment

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Cash flows from financing activities:

Net increase in deposits

Net (decrease)/increase in deposits

Cash dividends paid

Net cash used in share repurchase of common stock

Net provided by financing activities

Net cash used in/provided by financing activities

Net change in cash and cash equivalents

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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

Net change in unrealized gains/(losses) on securities available-for-sale

Lease liabilities arising from obtaining right-of-use assets

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NOTES TO CONSOLIDATED STATEMENTS

Note 1—Summary of Significant Accounting

Note 1—Summary of

Significant Accounting Policies

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

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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.

as a bank holding company under the Federal Bank Holding Company Act of 1956, subject to and under the supervision of and examination by the Federal Reserve and is the sole shareholder of F&M Bank.

Both FMCB and F&M Bank are subject to

periodic examination by these applicable federal and state regulatory agencies and file periodic reports and other information with the agencies.

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

The Company’s other wholly-owned subsidiaries include F & M Bancorp, Inc.

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In accordance with generally accepted accounting principles in the United

States (“U.S.

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

States (“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

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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.

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

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS

Note 1—Summary of Significant Accounting Policies—Continued

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

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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.

Statement of cash flows — For purposes of presentation on the

consolidated statements of cash flows, "cash and cash equivalents" are defined as those amounts included in "Cash and cash equivalents" on the consolidated balance sheets .

Investment securities — Investment securities are classified as

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

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

indefinite period of time, but not necessarily to maturity.

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

Investment securities classified at HTM are carried at

amortized cost.

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.

Debt securities classified as HTM are carried at

cost, net of the allowance for credit losses – securities, adjusted for amortization of premiums and discounts to the earliest callable date.

Debt securities classified as AFS are measured at fair value.

Unrealized holding gains and losses on

debt securities classified as AFS are excluded from earnings and are reported net of tax as accumulated other comprehensive income (or loss) (“AOCI”), a component of shareholders’ equity, until realized.

When AFS securities, specifically

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

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

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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.

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

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

NOTES TO CONSOLIDATED STATEMENTS

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.

For AFS investment securities in an unrealized loss position, the Company first assesses whether it intends to sell, or is more likely than not that it will be required to sell

the security before recovery of its amortized cost basis.

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

would be recognized in earnings.

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

from credit losses or other factors.

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

related to the security, among other factors.

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

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

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

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

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

value, is recognized as a charge to AOCI.

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.

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

Interest on loans is accrued based upon the principal amount

The Company has elected the practical expedient to exclude all accrued interest receivable from all required disclosures of amortized cost.

Additionally, an election was made not to measure an allowance for credit losses for accrued

interest receivables.

The Company has also made the election that all interest accrued but ultimately not received is reversed against interest income.

Non-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.

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

Due to the restrictive terms, and the lack of a readily determinable market

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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)

NOTES TO CONSOLIDATED STATEMENTS

Note 1—Summary of Significant Accounting Policies—Continued

On January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments – Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage

Disclosures using the prospective transition method.

This ASU eliminates the troubled debt restructuring recognition and measurement guidance and requires an entity to present gross write-offs by year of origination.

The amendments also

enhance disclosure requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.

With the exception of enhanced disclosures, there was no material impact to the consolidated financial statements

from adoption of this ASU.

The Company’s updated accounting policy, as a result of this new ASU, is outlined below.

Modifications for Borrowers Experiencing Financial Difficulty.

The Company may renegotiate the terms of existing loans for a variety of

When refinancing or restructuring a loan, the Company evaluates where the borrower is experiencing financial difficulty.

In making this determination, the Company considers whether the borrower is currently in default on any of its debt.

In addition, the Company evaluates whether it is probable that the borrower would be in payment default on any of its debt in the foreseeable future without the modification and if the borrower (without the current modification) could obtain

equivalent financing from another creditor at a market rate for similar debt.

Modifications of loans to borrowers in these situations may indicate that the borrower is facing financial difficulty.

Modifications of loans to borrowers experiencing

financial difficulty that are in the form of principal forgiveness, interest rate reductions, other-than-insignificant payment delays, or a term extension (or a combination thereof) require disclosure.

The Company’s disclosures are included in Note

4 - Loans and Leases.

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.

Losses — Loans — On January 1, 2022, the Company adopted

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments , as amended, which replaced the incurred loss methodology that delays recognition

until it is probable a loss has been incurred with an expected loss methodology that is referred to as CECL.

Both the FASB Staff Q&A Topic 326, No.

1 and the federal financial institution regulatory agencies (“Financial Institution Letter

FIL-17-2019”), along with the Securities and Exchange Commission, have confirmed that smaller, less complex organizations are not required to implement complex models, developed by outside vendors to calculate current expected credit losses.

Accordingly, in adopting ASU 2016-13 (Topic 326) Management determined that the Weighted Average Remaining Maturity (“WARM”) methodology was most appropriate given the Company’s current size and complexity.

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

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.

(i) a weighted

average loss estimate categorized by loan segmentation;

(ii) average duration calculations in order to assess the loss factors over the life of the loan segment;

(iii) an economic report to assess macro and micro-economic factors influencing loss

(iv) value of collateral and strength of guarantors;

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

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

All of these estimates are susceptible to

significant change.

The Company’s methodology is set forth in a formal policy and takes into consideration the need for a valuation allowance for loans evaluated on a collective (pool) basis, which

have similar risk characteristics as well as allowances to individual loans that do not share similar risk characteristics.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS

Note 1—Summary of Significant Accounting Policies—Continued

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

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

its consolidated statement of income.

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

Recoveries on previously charged off loans

are credited to the ACL.

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

Recoveries on previously

charged off loans are credited to the ACL.

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

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

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

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

The ACL is maintained at a level sufficient to provide for expected credit losses over the life

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

These factors include, among others,

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

Management incorporates reasonable and supportable information in order to calculate the ACL.

This includes the ability to reliably forecast and document exogenous events that

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

Management is confident in its ability to effectively identify historical loss information by the appropriate portfolio segmentation.

In addition, management believes that it can

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

Due to a growth cycle that has expanded the Company’s geographical service area and product mix as it has expanded into the San

Francisco Bay Area, the Company’s peer group has been determined to better align with the Company’s loss profile for loans tied to the commercial real estate, commercial, industrial, real estate, and consumer segments.

However, given the low

concentration in agricultural industry related loans in the peer group, the Company’s own loss history in agricultural loans is more suitable.

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 utilizes the seventeen loan segments used in

preparing regulatory Call Reports to segment its portfolio and to extract the relevant information needed to calculate its ACL.

This allows management the ability to obtain historical loss information for itself as well as its peer group.

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

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

NOTES TO CONSOLIDATED STATEMENTS

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”).

Management must use relevant available information about past events (e.g.

historical losses)

current conditions, and economic forecasts about future conditions.

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

Management uses a

“through-the-cycle” historical credit loss experience as its baseline for historical credit losses and has determined a representative period for a full credit cycle would be from 2009 to 2023 ( 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.

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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.

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.

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 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.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

NOTES TO CONSOLIDATED STATEMENTS

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:

Management employs the use of qualitative factors as defined by the Interagency Policy Statement on Allowance for Credit Losses (“SR 20-12”).

Management considers qualitative or

environmental factors that are likely to cause estimated credit losses associated with our existing portfolio to differ from historical loss experience, as defined in the Interagency guidance, including but not limited to:

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

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

Fair value estimates — We measure some of our assets and liabilities on a fair value basis.

Fair value is the price that would be

received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

To increase consistency and comparability in fair value measurements, we prioritize valuation inputs in accordance with a

three-level hierarchy.

We prioritize quoted prices in active markets and minimize reliance on unobservable inputs when possible.

When observable market prices are not available, fair value is estimated using modeling techniques requiring

professional judgment to estimate the appropriate fair value.

We believe we use assumptions that market participants would consider in pricing the asset or the liability.

Changes in market conditions may reduce the availability of quoted prices

or observable data.

See Note 11 for further information regarding the use of fair value estimates.

Premises and equipment — Land is carried at cost.

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

NOTES TO CONSOLIDATED STATEMENTS

Note 1—Summary of Significant Accounting Policies—Continued

31 unchanged sentences

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

Right of use lease asset & lease liability — Accounting Standards Codification (“ASC”) 842, Leases (“ASC 842”), establishes a right of use model that requires a lessee to record a right of

use asset and a lease liability for all leases with terms longer than 12 months.

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

The ROU 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 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.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

NOTES TO CONSOLIDATED STATEMENTS

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.

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.

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.

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.

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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.

The Bank uses a methodology for determining the allowance for credit losses - unfunded loan commitments that applies the same loan segmentation and loss rate to each pool

as the funded exposure adjusted for probability of funding.

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.

Provisions for credit losses - unfunded loan commitments are recognized in the provision for credit losses, and added to the allowance for credit losses - unfunded loan commitments, which is included in other liabilities in the consolidated

statements of financial condition.

In 2022, the provision for credit-losses – unfunded loan commitments was recognized in non-interest expense.

Revenue from contracts with customers — The Company records revenue from contracts with customers in accordance with ASC Topic 606, “Revenue

from Contracts with Customers” (“Topic 606”) .

Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price

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

Significant revenue has not been recognized in the current reporting period that results from performance

obligations satisfied in previous periods.

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

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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.

in the Consolidated Statements of Income is not necessary.

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

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FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

NOTES TO CONSOLIDATED STATEMENTS

Note 1—Summary of Significant Accounting Policies—Continued

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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.

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

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.

Therefore, there is no difference between presentation of diluted and basic

earnings per common share.

Comprehensive income — 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.

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 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.

The Company is not organized around discernible lines of business, but rather operates as an integrated unit to customize solutions for its customers

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

As a result, the Company has only one

operating segment.

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

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

Subsequent events

— We evaluated events that occurred between December 31, 2023 and the date the accompanying financial statements were issued, and determined that there were no material events that would require adjustments to our consolidated financial statements

or significant disclosure in the accompanying Notes.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

NOTES TO CONSOLIDATED STATEMENTS

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.

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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.

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

In June 2022, the Financial Accounting Standards Board (“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.

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

The company adopted

this standard on January 1, 2024, with no material impact on the Company’s Consolidated Financial Statements.

In March 2023, the FASB issued ASU 2023-02, Investments – Equity Method and Joint Ventures (Topic 323):

Accounting for Investments in Tax Credit

Structures Using the Proportional Amortization Method .

ASU 2023-02 allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the

related income tax credits.

The Amendments in ASU 2023-02 apply to all reporting entities that hold (1) tax equity investments that meet the conditions for and elect to account for them using the proportional amortization method or (2) an

investment in a low income housing tax credit investments (“LIHTC”) structure through a limited liability entity that is not accounted for using the proportional amortization method and to which certain LIHTC-specific guidance removed from FASB ASC

323-740, Investments – Equity Method and Joint Ventures:

Income Taxes, has been applied.

ASU 2023-02 is effective for fiscal years beginning after December 15, 2023, including interim periods within those

fiscal years.

Early adoption is permitted for any interim period within those fiscal years.

The amendments in ASU 2023-02 must be applied on either a modified retrospective or a retrospective basis (except as discussed in the ASU for LIHTC

investments not accounted for using the proportional amortization method).

The Company adopted this standard to use the proportional amortization method on January 1, 2024, with no material impact on the Company’s Consolidated Financial Statements.

In July 2023, the FASB issued ASU 2023-03, Presentation of Financial Statements (Topic 205), Income Statement—Reporting

Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718) .

This ASU amends the FASB Accounting Standards Codification for SEC paragraphs

pursuant to SEC Staff Accounting Bulletin No.

120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X:

Income or Loss Applicable to

Common Stock.

ASU 2023-03 is effective upon addition to the FASB Codification.

The Company is currently evaluating the impact this ASU will have on its disclosures.

In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements:

Codification Amendments in Response to the SEC’s

Disclosure Updated and Simplification Initiative.

ASU 2023-06 amends the disclosure or presentation requirements related to various subtopics in the FASB Accounting Standards Codification (the “Codification”).

The ASU was issued in

response to the SEC’s August 2018 final rule that updated and simplified disclosure requirements that the SEC believed were “redundant, duplicative, overlapping, outdated, or superseded.” The new guidance is intended to align U.S.

requirements with those of the SEC and to facilitate the application of U.S.

GAAP for all entities.

For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to

the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure

from its rules.

For all other entities, the amendments will be effective two years later.

However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and

not become effective for any entity.

The Company is currently evaluating the impact this ASU will have on its disclosures.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

NOTES TO CONSOLIDATED STATEMENTS

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

In December 2023, the FASB issued ASU 2023-07, “Segment

Reporting (Topic 280), Improvements to Reportable Segment Disclosures” .

ASU 2023-07 Requires public entities to disclose significant segment expenses, an amount and description for other segment items, the title and position of the

entity’s chief operating decision maker (“CODM”) and an explanation of how the CODM uses the reported measures of profit or loss to assess segment performance, and, on an interim basis, certain segment related disclosures that previously were

required only on an annual basis.

ASU 2023-07 also clarifies that entities with a single reportable segment are subject to both new and existing segment reporting requirements and that an entity is permitted to disclose multiple measures of

segment profit or loss, provided that certain criteria are met.

ASU 2023-07 requires annual disclosures for fiscal years beginning January 1, 2024 and interim disclosures for fiscal years beginning January 1, 2025.

Early adoption is permitted.

The Company is required to apply the amendments in this update retrospectively to all prior periods presented in the financial statements.

The Company will update its segment related disclosures upon adoption.

In December 2023, the FASB issued ASU No.

2023-09, “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.” ASU 2023-09 requires public business entities to disclose in their rate reconciliation table additional categories of information about

federal, state and foreign income taxes and to provide more details about the reconciling items in some categories if items meet a quantitative threshold.

ASU 2023-09 also requires all entities to disclose income taxes paid, net of refunds,

disaggregated by federal, state and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold, among other things.

ASU 2023-09 is effective for us on January 1, 2025, though early

adoption is permitted.

The Company will update its income tax disclosures upon adoption.

FARMERS & MERCHANTS BANCORP

NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)

Note 2 — Investment Securities

NOTES TO CONSOLIDATED STATEMENTS

Note 2 — Investment

The amortized cost, fair values, and

2 unchanged sentences

(Dollars in thousands)

As of December 31, 2022

Treasury notes

December 31, 2023

Government-sponsored securities

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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.

(1) All mortgage-backed securities and collateralized mortgage

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

Gross Unrealized

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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.

(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

2 unchanged sentences

As of December 31, 2023

Municipal securities

Mortgage-backed securities (1)

Collateralized mortgage obligations (1)

Municipal securities

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.

( 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)

NOTES TO CONSOLIDATED STATEMENTS

Note 2—Investment Securities—Continued

2 unchanged sentences

As of December 31, 2022

Municipal securities

Mortgage-backed securities (1)

Collateralized mortgage obligations (1)

Municipal securities

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.

(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk