FARMERS & MERCHANTS BANCORP 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Our market risk arises primarily from interest rate risk inherent in our lending and deposit taking activities. Management actively monitors and manages our interest rate risk exposure. We do not have any market-risk sensitive instruments entered into for trading purposes. 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 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 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. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in net interest income in the event of hypothetical changes in interest rates. If potential changes to net interest income resulting from hypothetical interest rate changes are not within risk tolerances determined by ALCO, and approved by the full Board of Directors, management may make adjustments to the Company’s asset and liability mix to bring interest rate risk levels within the Board-approved limits. Net Interest Income Simulation. 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. This analysis calculates the difference between net interest income forecasted using a rising and a falling interest rate scenario and a net interest income forecast using a base market interest rate derived from the current Treasury yield curve. The income simulation model includes various assumptions regarding the re-pricing relationships for each of our products. Many of our assets are floating rate loans, which are assumed to re-price immediately, and to the same extent as the change in market rates according to their contracted index. Some loans and investment vehicles include the opportunity of prepayment (embedded options), and accordingly the simulation model uses various proprietary models to estimate these prepayments and assumes the reinvestment of the proceeds at current yields. Our non-term deposit products generally 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 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. Interest rate changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in this analysis. Changes that vary significantly from the assumptions may have significant effects on our net interest income. 70 Table of Contents For the rising and falling interest rate scenarios, the base market interest rate forecast is 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 ALCO. 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 deposits to CDs (and their time periods), are the primary factors affecting the sensitivity of our net interest income to changes in market interest rates. Our short-term loans are typically priced at prime plus a margin, and our long-term loans are typically priced based on a 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, 2025, our loan and lease portfolio was comprised of 58.46% fixed rate and 41.54% variable rate loans. An additional component of managing our interest rate risk is the use of loan floors when structuring our variable loan products. At loan origination, a loan floor rate, typically equal to or slightly below the initial rate on the loan, is established. This is particularly beneficial in a declining interest rate environment. 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, 2025, that would occur upon an immediate change in interest rates based on the models discussed above, but without giving effect to any steps that management might take to counteract such changes: Estimated Change in Net Interest Income (NII) (as a % of NII) Estimated Change in Economic Value of Equity (EVE) (as a % of EVE) December 31, 2025 +300 bps (4.0 %) (12.0 %) +200 bps (3.1 %) (8.0 %) +100 bps (1.8 %) (3.2 %) 0 bps - - -100 bps 0.8 % 0.4 % -200 bps 1.1 % (1.9 %) -300 bps 2.3 % (6.2 %) 71 Table of Contents Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm ( Crowe LLP , Sacramento, California , PCAOB ID: 173 ) 74 Report of Independent Registered Public Accounting Firm (Eide Bailly LLP, San Ramon, California, PCAOB ID: 286) 77 Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 2025, and 2024 78 Consolidated Statements of Income for the three years ended December 31, 2025, 2024 and 2023 79 Consolidated Statements of Comprehensive Income for the three years ended December 31, 2025, 2024 and 2023 80 Consolidated Statements of Changes in Shareholders' Equity for the three years ended December 31, 2025, 2024 and 2023 81 Consolidated Statements of Cash Flows for the three years ended December 31, 2025, 2024 and 2023 82 Notes to the Consolidated Financial Statements 83 72 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and the Board of Directors of Farmers & Merchants Bancorp Lodi, California Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Farmers & Merchants Bancorp (the "Company") as of December 31, 2025 and 2024, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2025, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2025, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2025 and 2024, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2025 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, 2025, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these 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 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 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. (Continued) 73 Table of Contents Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the 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 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 Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the 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 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 financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the 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 on Loans and Leases –Reasonable and Supportable Forecasts - Refer to Notes 1 and 4 to the Financial Statements The allowance for credit losses on loans and leases is an accounting estimate of expected credit losses over the estimated life of the Company’s loan and lease portfolio, measured at amortized cost, to be presented at the net amount expected to be collected. The allowance for credit losses on loans and leases was $76,375,000 as of December 31, 2025. (Continued) 74 Table of Contents The allowance for credit losses on loans and leases under the current expected credit loss methodology required by ASC 326 is based on relevant available information from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The economic forecast used in the current expected credit loss methodology includes consideration of national, regional, and local economic expectations, and is applied as a qualitative adjustment through the use of management’s qualitative factors framework, utilizing a linear range of patterns based on historical losses. We identified the auditing of the reasonable and supportable forecasts used in the allowance for credit losses on loans and leases as a critical audit matter because of the significant auditor judgment and audit effort needed, including the need to involve more experienced audit personnel to evaluate the significant judgments made by management in determination of the forecasts. The primary procedures we performed to address this critical audit matter included: • Testing the effectiveness of controls over the determination of reasonable and supportable forecasts, including controls addressing: o The conceptual design of the reasonable and supportable forecast methodology, o The significant judgments and assumptions in the reasonable and supportable forecasts methodology, o The application of the reasonable and supportable forecasts, o The relevance and reliability of the underlying data used in the reasonable and supportable forecasts. • Substantively testing management’s process for the determination of reasonable and supportable forecasts, including: o Evaluating the conceptual design of the reasonable and supportable forecast methodology, o Evaluating significant judgments and assumptions in the reasonable and supportable forecasts methodology, o Testing the application of the reasonable and supportable forecasts, o The relevance and reliability of the underlying external data used in the reasonable and supportable forecasts. /s/ Crowe LLP We have served as the Company's auditor since 2024. Sacramento, California March 13, 2026 75 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Farmers & Merchants Bancorp Lodi, California Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year ended December 31, 2023 of Farmers & Merchants Bancorp and subsidiaries (the “Company”), 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 results of its operations and its cash flows for the year ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These 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. 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 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 audit 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 respond 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. We believe that our audit provides a reasonable basis for our opinion. /s/ Eide Bailly LLP We served as the Company’s auditor from 2022 to 2023. San Ramon, California March 14, 2024 76 Table of Contents FARMERS & MERCHANTS BANCORP CONSOLIDATED BALANCE SHEETS December 31, (Dollars in thousands, except share and per share amounts) 2025 2024 ASSETS Cash and due from banks $ 60,622 $ 71,058 Interest-bearing deposits with banks 84,242 141,505 Total cash and cash equivalents 144,864 212,563 Securities available-for-sale, amortized cost $ 955,203 and $ 490,992 , respectively 951,154 464,414 Securities held-to-maturity, fair value $ 592,736 and $ 610,953 , respectively 718,641 769,443 Allowance for credit losses - securities held-to-maturity ( 450 ) ( 450 ) Total investment securities 1,669,345 1,233,407 Non-marketable securities 15,549 15,549 Loans and leases held for investment, net of unearned income 3,648,945 3,678,388 Allowance for credit losses - loans and leases ( 76,375 ) ( 75,283 ) Loans held for investment, net 3,572,570 3,603,105 Bank-owned life insurance 76,614 74,085 Premises and equipment, net 55,847 51,367 Deferred income tax assets and income taxes receivevable 38,775 36,729 Accrued interest receivable 29,996 30,152 Goodwill 11,183 11,183 Other intangibles 1,165 1,687 Other real estate owned - 873 Other assets 74,202 99,496 Total Assets $ 5,690,110 $ 5,370,196 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing $ 1,642,119 $ 1,518,267 Interest-bearing: Demand 802,352 882,123 Savings and money market 1,790,274 1,583,202 Certificates of deposit 743,081 715,547 Total interest-bearing 3,335,707 3,180,872 Total deposits 4,977,826 4,699,139 Subordinated debentures 10,310 10,310 Interest payable and other liabilities 56,460 87,675 Total Liabilities 5,044,596 4,797,124 COMMITMENTS AND CONTINGENCIES (Note 15) SHAREHOLDERS' EQUITY Preferred shares, no par value, 1,000,000 shares authorized and, none issued or outstanding - - Common shares, $ 0.01 par value, 7,500,000 authorized, 728,560 and 699,798 issued and 697,904 and 699,798 outstanding at December 31, 2025 and 2024, respectively 7 7 Additional paid-in capital 11,550 - Retained earnings 669,262 592,431 Accumulated other comprehensive loss, net of taxes ( 3,512 ) ( 19,366 ) Treasury stock, at cost; 30,656 shares at December 31, 2025 and 0 shares at December 31, 2024 ( 31,793 ) - TOTAL SHAREHOLDERS' EQUITY 645,514 573,072 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,690,110 $ 5,370,196 See accompanying notes to the consolidated financial statements. 77 Table of Contents FARMERS & MERCHANTS BANCORP CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, (Dollars in thousands, except share and per share amounts) 2025 2024 2023 Interest income Interest and fees on loans and leases $ 218,668 $ 223,266 $ 204,482 Interest and dividends on investment securities 49,005 31,851 22,400 Interest on deposits with others 11,819 16,860 26,872 Total interest income 279,492 271,977 253,754 Interest expense Deposits 59,565 63,444 37,523 Borrowed funds - 986 - Subordinated debentures 767 871 846 Total interest expense 60,332 65,301 38,369 Net interest income 219,160 206,676 215,385 Provision for credit losses 3,500 - 9,407 Net interest income after provision for credit losses 215,660 206,676 205,978 Non-interest income Card processing 7,023 6,950 6,686 Service charges on deposit accounts 3,072 3,054 2,755 Increase in cash surrender value of BOLI 2,530 2,430 2,027 Gain on BOLI death benefit - 4 4,346 Net gain/(loss) on sale of securities 44 743 ( 8,199 ) Net gain on deferred compensation benefits 4,629 3,270 2,974 Other 6,335 4,249 4,325 Total non-interest income 23,633 20,700 14,914 Non-interest expense Salaries and employee benefits 74,129 72,472 70,883 Data processing 6,914 6,055 5,293 Occupancy 5,121 5,090 4,837 Deposit insurance 2,997 2,852 2,769 Professional services 3,651 3,587 2,334 Marketing 1,895 1,967 1,885 Net gain on deferred compensation benefits 4,629 3,270 2,974 Other 11,181 9,839 13,364 Total non-interest expense 110,517 105,132 104,339 INCOME BEFORE INCOME TAXES 128,776 122,244 116,553 Income tax expense 35,171 33,787 28,239 NET INCOME $ 93,605 $ 88,457 $ 88,314 Earnings per common share: Basic $ 134.96 $ 121.02 $ 116.61 Diluted $ 133.96 $ 121.02 $ 116.61 Weighted average number of common shares Basic 693,589 730,914 757,336 Diluted 698,768 730,914 757,336 See accompanying notes to the consolidated financial statements. 78 Table of Contents FARMERS & MERCHANTS BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, (Dollars in thousands) 2025 2024 2023 Net income $ 93,605 $ 88,457 $ 88,314 Other comprehensive income Unrealized gains/(losses) on available-for-sale securities 22,719 ( 8,973 ) 5,246 Reclassification adjustment for (gains)/losses on available-for-sale securities ( 189 ) ( 743 ) 8,199 Amortization of unrecognized loss on securities transferred to held-to-maturity ( 22 ) ( 82 ) ( 136 ) Net unrealized gains/(losses) on securities 22,508 ( 9,798 ) 13,309 Income tax (expense)/benefit ( 6,654 ) 2,896 ( 3,935 ) Other comprehensive income/(loss), net of tax 15,854 ( 6,902 ) 9,374 Total comprehensive income $ 109,459 $ 81,555 $ 97,688 See accompanying notes to the consolidated financial statements. 79 Table of Contents FARMERS & MERCHANTS BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Dollars in thousands, except share and per share amounts) Common Shares Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss)/Income Shares Treasury Stock Total Balance as of January 1, 2023 768,337 $ 8 $ 57,206 $ 449,932 $ ( 21,838 ) - $ - $ 485,308 Net income - - - 88,314 - - - 88,314 Other comprehensive income, net of tax - - - - 9,374 - - 9,374 Cash dividends declared ($ 17.10 per share) - - - ( 12,886 ) - - - ( 12,886 ) Repurchase of common stock ( 20,366 ) ( 1 ) ( 20,354 ) - - - - ( 20,355 ) Balance as of December 31, 2023 747,971 $ 7 $ 36,852 $ 525,360 $ ( 12,464 ) - $ - $ 549,755 Cumulative change from adoption of ASU 2023-02 - - - 40 - - - 40 Net income - - - 88,457 - - - 88,457 Other comprehensive loss, net of tax - - - - ( 6,902 ) - - ( 6,902 ) Cash dividends declared ($ 18.10 per share) - - - ( 13,017 ) - - - ( 13,017 ) Repurchase of common stock ( 48,173 ) - ( 36,852 ) ( 8,409 ) - - - ( 45,261 ) Balance as of December 31, 2024 699,798 $ 7 $ - $ 592,431 $ ( 19,366 ) - $ - $ 573,072 Net income - - - 93,605 - - - 93,605 Other comprehensive income, net of tax - - - - 15,854 - - 15,854 Issuance of restricted stock awards 33,660 - - - - - - - Forfeiture of restricted stock awards ( 1,992 ) - - - - - - - Stock based compensation expense - - 11,550 - - - - 11,550 Cash dividends declared ($ 19.35 per share) - - - ( 13,841 ) - - - ( 13,841 ) Repurchase of common stock ( 2,906 ) - - ( 2,933 ) - - - ( 2,933 ) Purchase of treasury stock - - - - - ( 30,656 ) ( 31,793 ) ( 31,793 ) Balance as of December 31, 2025 728,560 $ 7 $ 11,550 $ 669,262 $ ( 3,512 ) ( 30,656 ) $ ( 31,793 ) $ 645,514 See accompanying notes to the consolidated financial statements. 80 Table of Contents FARMERS & MERCHANTS BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, (Dollars in thousands) 2025 2024 2023 Cash flows from operating activities: Net income $ 93,605 $ 88,457 $ 88,314 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 3,500 - 9,407 Depreciation and amortization 3,063 2,937 2,491 Net accretion of securities premiums and discounts ( 1,903 ) ( 1,381 ) ( 109 ) Stock based compensation expenses 11,550 - - Increase in cash surrender value of BOLI ( 2,529 ) ( 2,430 ) ( 2,027 ) Gain on BOLI death benefit - ( 4 ) ( 4,346 ) (Increase)/Decrease in deferred income taxes, net ( 10,028 ) 8,128 ( 5,603 ) Net realized (gain)/loss on sale of securities available-for-sale ( 44 ) ( 743 ) 8,199 Net changes in: Other assets 29,151 ( 6,729 ) ( 16,792 ) Other liabilities ( 22,171 ) 15,500 13,814 Net cash provided by operating activities 104,194 103,735 93,348 Cash flows from investing activities: Net decrease/(increase) in loans and leases held for investment 27,676 ( 24,344 ) ( 156,433 ) Purchase of available-for-sale securities ( 564,846 ) ( 389,349 ) ( 84,114 ) Purchase of held-to-maturity securities ( 9,581 ) ( 4,218 ) ( 6,850 ) Proceeds from sales, maturities, calls and pay downs of available-for-sale securities 102,472 99,908 59,557 Proceeds from maturities, calls and pay downs of held-to-maturity securities 60,371 52,675 49,063 Purchase of bank-owned life insurance - - ( 7,271 ) Purchase of premises and equipment ( 7,578 ) ( 2,399 ) ( 4,972 ) Purchase of other investments ( 10,660 ) ( 16,050 ) ( 7,306 ) Redemption of other investments - 5,917 - Proceeds from bank-owned life insurance - 3,280 11,751 Proceeds from sale of assets 133 - 27 Net cash used in investing activities ( 402,013 ) ( 274,580 ) ( 146,548 ) Cash flows from financing activities: Net increase/(decrease) in deposits 278,687 31,044 ( 91,174 ) Cash dividends paid ( 13,841 ) ( 13,017 ) ( 12,886 ) Net cash used in share repurchase program ( 2,933 ) ( 45,261 ) ( 20,355 ) Purchase of treasury stock ( 31,793 ) - - Net cash provided by/(used in) financing activities 230,120 ( 27,234 ) ( 124,415 ) Net change in cash and cash equivalents ( 67,699 ) ( 198,079 ) ( 177,615 ) Cash and cash equivalents, beginning of year 212,563 410,642 588,257 Cash and cash equivalents, end of year $ 144,864 $ 212,563 $ 410,642 Supplemental disclosures of cash flow information: Cash paid for interest $ 62,757 $ 65,085 $ 29,280 Income taxes paid $ 14,939 $ 12,949 $ 12,662 Supplemental disclosures of non-cash transactions: Net change in unrealized (losses)/gains on securities available-for-sale $ ( 22,530 ) $ 9,716 $ ( 13,445 ) See accompanying notes to the consolidated financial statements. 81 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1—Summary of Significant Accounting Policies Nature of Operations and basis of consolidation — Farmers & Merchants Bancorp (the “Company” or “FMCB”) is a Delaware corporation headquartered in Lodi, California and is the bank holding company for Farmers & Merchants Bank of Central California (the “Bank” or “F&M Bank”). The Company operates all business activities through the Bank, which was organized in August 1916. F&M Bank is a California state-chartered bank. F&M Bank operates under the supervision of the California Department of Financial Protection and Innovation (“DFPI”), and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). F&M Bank is not a member of the Federal Reserve System; however, FMCB operates as a bank holding company under the Federal Bank Holding Company Act of 1956, subject to and under the supervision of and examination by the 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. and FMCB Statutory Trust I. F&M Bancorp, Inc. was created in March 2002 to protect the name F&M Bank. During 2002, the Company completed a fictitious business name filing in California to begin using the streamlined name “F&M Bank” as part of a larger effort to enhance the Company’s image and build brand name recognition. In December 2003, the Company formed a wholly owned subsidiary, FMCB Statutory Trust I, for the sole purpose of issuing Trust Preferred Securities and related subordinated debentures. In accordance with generally accepted accounting principles in the United States (“GAAP”), FMCB Statutory Trust I is a non-consolidated subsidiary. Through its network of 30 banking offices and 3 free-standing ATMs, F&M Bank emphasizes personalized service along with a broad range of banking services to businesses and individuals located in the service areas of its offices. Although the Company focuses on marketing its services to small and medium-sized businesses, a broad range of retail banking services are also made available to the local consumer market. F&M Bank branches are located through the mid Central Valley of California, including Sacramento, San Joaquin, Solano, Stanislaus and Merced counties and the east region of the San Francisco Bay Area including Napa, Alameda and Contra Costa counties. F&M Bank provides a broad complement of lending products, including commercial, commercial real estate, real estate construction, agribusiness, consumer, credit card, residential real estate loans, and equipment leases. Commercial products include term loans, leases, lines of credit and other working capital financing and letters of credit. Financing products for individuals include automobile financing, lines of credit, residential real estate, home improvement and home equity lines of credit. F&M Bank also offers a wide range of deposit products. These include checking, savings, money market, time certificates of deposit, individual retirement accounts and online banking services for both business and personal accounts. F&M Bank offers a wide range of specialized services designed for the needs of its commercial accounts. These services include a credit card program for merchants, lockbox and other collection services, account reconciliation, investment sweep, on-line account access, and electronic funds transfers by way of domestic and international wire and automated clearinghouse. F&M Bank makes investment products available to customers, including mutual funds and annuities. These investment products are offered through a third-party, which employs investment advisors to meet with and provide investment advice to the Company’s customers. 82 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1—Summary of Significant Accounting Policies—Continued The consolidated financial statements of the Company include the accounts of Farmers & Merchants Bancorp and its wholly owned subsidiary, Farmers & Merchants Bank of Central California. All intercompany transactions and balances have been eliminated. Use of estimates — The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Reclassifications — Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation. There was no impact on net income or retained earnings as a result of any reclassification. Cash and cash equivalents — Cash and cash equivalents consist of cash on hand, amounts due from banks, interest-bearing deposits, and federal funds sold, all of which have original maturities of three months or less. The Company places its cash with high credit quality institutions. The amounts on deposit fluctuate and, at times, exceed the insured limit by the FDIC, which potentially subjects the Company to credit risk. For these instruments, the carrying amount is a reasonable estimate of fair value. 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 as HTM are carried at amortized cost. Investment securities classified as 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 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. The Company’s HTM portfolio contains securities issued by U.S. government entities and agencies and municipalities. The Company uses industry historical credit loss information adjusted for current conditions to establish the allowance for credit losses on its HTM municipal bond portfolio. Further information regarding our policies and methodology used to estimate the allowance for credit losses on HTM securities is presented in Note 2 – Investment Securities. 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 83 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1—Summary of Significant Accounting Policies—Continued cost basis. If the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. Projected cash flows are discounted by the current effective interest rate. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to AOCI. Changes in the allowance for credit losses-securities are recorded as provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the non-collectability of a security is confirmed or when either criteria regarding intent of requirement to sell is met. The Company has elected the practical expedient 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 the FHLB at its par value. Due to the restrictive terms, and the lack of a readily determinable market value, FHLB stock is carried at cost. The investments in FHLB stock are required investments related to the Bank’s borrowings from FHLB. FHLB obtains its funding primarily through issuance of consolidated obligations of the FHLB system. The U.S. government does not guarantee these obligations, and each of the regional FHLBs are jointly and severally liable for repayment of each other’s debt. Loans and leases held for investment — Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for credit losses on loan and leases, any deferred fees or costs on originated loans and unamortized premiums or discounts on acquired loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the effective interest method. Interest on loans is accrued based upon the principal amount outstanding. 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-Accrual Loans and Leases — Accrual of interest on loans and leases is generally discontinued when a loan or lease becomes contractually past due by 90 days or more with respect to interest or principal. When loans and leases are 90 days past due, but in management's judgment are well secured and in the process of collection, they may not be classified as non-accrual. When a loan or lease is placed on non-accrual status, all interest previously accrued but not collected is reversed. Income on such loans and 84 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1—Summary of Significant Accounting Policies—Continued leases is then recognized only to the extent that cash is received and where the future collection of principal is probable. Modifications for Borrowers Experiencing Financial Difficulty — The Company may renegotiate the terms of existing loans for a variety of reasons. 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.” Credit Quality Indicators — The Company assigns a risk rating to all loans and leases and periodically performs detailed reviews of all such loans and leases over a certain threshold to identify credit risks and assess overall collectability. For smaller balance loans and leases, such as consumer and residential real estate, a credit grade is established at inception, and then updated only when the loan or lease becomes contractually delinquent or when the borrower requests a modification. For larger balance loans and leases, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans and leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into five major categories, defined as follows: Pass — A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management's close attention. This category also includes “Watch” loans, which is a loan with an emerging weakness in either the individual credit or industry that requires additional attention. A credit may also be classified Watch if cash flows have not yet stabilized, such as in the case of a development project. Special mention — A special mention loan or lease has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in the Company's credit position at some future date. Special mention loans and leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Substandard — A substandard loan or lease is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans or leases classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well-defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful — Loans or leases classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable or improbable. 85 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1—Summary of Significant Accounting Policies—Continued Loss — Loans or leases classified as loss are considered uncollectible. Once a loan or lease becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Company will estimate its probable loss and immediately charge-off some or all of the balance. Allowance for credit losses — Loans and Leases — 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 delayed recognition until it was probable a loss had been incurred with the current expected credit losses 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 size and complexity. Under the WARM methodology, lifetime losses are calculated by determining the remaining life of the loan pool, and then applying a loss rate over the remaining life of the loan pool. The methodology considers historical loss experience to estimate credit losses for the remaining balance of the loan pool. The calculated loss rate is applied to the contractual term, (adjusted for prepayments), to determine the loan pools current expected credit losses. 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. The methodology for determining the allowance for credit losses (“ACL”) on loans and leases is considered a critical accounting policy by management because of the high degree of judgment involved. The subjectivity of the assumptions used and the potential for changes in the economic environment could result in changes to the amount of the recorded ACL. Among the significant estimates required to establish the ACL are: (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) application of a reasonable and supportable forecast based on macro- and micro-economic factors expected to influence losses; (iv) value of collateral and strength of borrowers; and (v) the determination of the qualitative loss factors. All of these estimates are susceptible to significant change. The Company extends loans and leases to commercial and consumer customers primarily in Central California. These lending activities expose the Company to the risk borrowers will default, causing credit losses. The Company’s lending activities are exposed to various qualitative risks. All loan segments are exposed to risks inherent in the economy and market conditions. Significant risk characteristics related to the commercial and industrial loan segment include the borrowers’ business performance and financial condition, and the value of collateral for secured loans. Significant risk characteristics related to the commercial real estate segment include the borrowers’ business performance and the value of properties collateralizing the loans. Significant risk characteristics related to the agricultural and agricultural real estate segments include the borrowers’ business performance, the value of properties collateralizing the loans, stemming from commodity market prices and yield risks associated with water availability, disease, and inclement weather. Significant risk characteristics related to the construction real estate loan segment include the borrowers’ performance in successfully developing the real estate into the intended purpose and the value of the property collateralizing the loans. Significant risk characteristics related to the commercial leasing segment include issues that may arise from bank ownership and conversion of collateral with shifting market values. Significant risk characteristics related to the residential real estate segment include the borrowers’ financial wherewithal to service the mortgages and the value of the property 86 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1—Summary of Significant Accounting Policies—Continued collateralizing the loans. Significant risk characteristics related to the consumer loan segment include the financial condition of the borrowers and the value of collateral securing the loans. The ACL is a valuation account that is deducted from the amortized cost basis of loans and leases 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 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 economic forecasts. Management evaluates the reasonable and supportable forecasts over the expected duration of the loan portfolio segments which ranges from approximately 6 months to 3.5 years. Historical credit loss experience, which is based on 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 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, 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 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 groups. Additionally, management’s third party ALM application also utilizes a similar loan segmentation in calculating weighted average remaining life and duration which includes estimated prepayments. Management uses 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. The foundation of CECL modeling is the ability to estimate expected credit losses over the lifetime of a loan. Management must use relevant available information about past events (e.g. historical losses) current conditions, and 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. The representative period used for the full economic cycle is the first quarter of 2008 to the fourth quarter of 2017 for all segments except farmland and agriculture for which the first quarter of 1985 to the fourth quarter of 1994 was used. Additionally, due to the nature of the 1985 economic downturn and the specific impact that had on the farmland and agricultural lenders, management believes this is more comparable for the farmland and agricultural loan segments. 87 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1—Summary of Significant Accounting Policies—Continued Management has collected historical loss information on its own loan and lease portfolio as well as peer group information by the seventeen loan segments over this time horizon using information available from the Federal regulators using FFIEC call report data for all segments except for farmland and agricultural loan segments, which utilize Federal Reserve Economic Data (FRED). Federal regulators have placed the Company into a peer group of banks with assets between $ 3 billion to $ 10 billion. This peer group segmentation includes approximately 200 banks nationally. This peer group is similar in asset size and concentration with the exception of the agricultural portfolio as the Company is the 19 th largest agricultural lender in the country. As a result, none of the banks in the above national peer group have an agricultural concentration similar to the Company. Therefore, for purposes of historical losses, the Company uses the asset size peer group loss information for all loan segments except farmland and agricultural loans which uses a national peer group regardless of asset size. Using these peer groups, the model calculates the mean historical loss rate over the respective economic credit cycles described above for both the Company and its peer groups. In addition to the quantitative calculations described above, 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 international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments. ■ Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses. ■ Changes in the nature and volume of the portfolio and in the terms of loans. ■ Changes in the experience, ability, and depth of lending management and other relevant staff. ■ Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans. ■ Changes in the quality of the institution’s loan review system. ■ Changes in the value of underlying collateral for collateral-dependent loans. ■ The existence and effect of any concentrations of credit, and changes in the level of such concentrations. ■ The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio. The Company uses a risk setting scorecard approach which is applied to each loan portfolio segment to capture all risks across the various qualitative factors above utilizing a linear range of potential loss patterns to ensure potential losses are appropriately supported through historical losses. 88 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1—Summary of Significant Accounting Policies—Continued Other real estate owned — Other real estate owned, is expected to be sold and is comprised of properties no longer utilized for business operations and property acquired through foreclosure in satisfaction of indebtedness. These properties are recorded at fair value less estimated selling costs upon acquisition. Revised estimates to the fair value less cost to sell are reported as adjustments to the carrying amount of the asset, provided that such adjusted value is not in excess of the carrying amount at acquisition. Initial losses on properties acquired through full or partial satisfaction of debt are treated as credit losses and charged to the allowance for credit losses at the time of acquisition. Subsequent declines in value from the recorded amounts, routine holding costs, and gains or losses upon disposition, if any, are included in non-interest expense as incurred. Fair value estimates — The Company measures 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, management prioritizes valuation inputs in accordance with a three-level hierarchy. The Company prioritizes quoted prices in active markets and minimizes 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. The Company uses 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 10 “Fair Value” for further information regarding the use of fair value estimate s. Premises and equipment — Land is carried at cost. Premises and equipment are carried at cost, net of accumulated depreciation and amortization. Depreciation and amortization expense is computed using the straight-line method based on the estimated useful lives of the related assets below: Building and building improvements 30 to 40 years Leasehold improvements term of lease Furniture and equipment 3 to 7 years Computers, software and equipment 3 to 7 years Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. 89 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1—Summary of Significant Accounting Policies—Continued Bank-owned life insurance (“BOLI”) — The Bank has purchased life insurance policies. These policies provide protection against the adverse financial effects that could result from the death of a key employee and provide tax-exempt income to offset expenses associated with certain employee benefit plans. It is the Bank’s intent to hold these policies as a long-term investment; however, there may be an income tax impact if the Bank chooses to surrender certain policies. Although the lives of individual current or former management-level employees are insured, the Bank is the owner and sole or partial beneficiary. BOLI is carried at the cash surrender value (“CSV”) of the underlying insurance contract. Changes in the CSV and any death benefits received in excess of the CSV are recognized as non-interest income. Goodwill — Goodwill represents the excess of the purchase considerations paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination and is not amortized but is reviewed annually as of December 31, or more frequently as current circumstances and conditions warrant, for impairment. An assessment of qualitative factors is completed to determine if it is more likely than not that, the fair value of a reporting unit is less than its carrying amount. If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed. The quantitative goodwill impairment compares the reporting unit's estimated fair values, including goodwill, to its carrying amount. If the carrying amount exceeds its reporting unit’s fair value, then an impairment loss would be recognized as a charge to earnings but is limited by the amount of goodwill allocated to that reporting unit. Other intangible assets — Other intangible assets consist primarily of core deposit intangibles (“CDI”), which are amounts recorded in business combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the client relationships associated with the deposits. Core deposit intangibles are amortized over the estimated useful lives of such deposits. These assets are reviewed at least annually for events or circumstances that could affect their recoverability. These events could include loss of the underlying core deposits, increased competition or adverse changes in the economy. The amortization of our CDI is recorded in other non-interest expense. To the extent other identifiable intangible assets are deemed unrecoverable; impairment losses are recorded in other non-interest expense to reduce the carrying amount of the assets. 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. The Company records an operating lease right of use (“ROU”) asset and an operating lease liability (lease liability) for operating leases with a lease term greater than 12 months. The ROU asset and lease liability are recorded in other assets and other liabilities, respectively, in the consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Accordingly, ROU assets are reduced by tenant improvement allowances from property owners plus any prepaid rent. The Company does 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. 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. 90 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1—Summary of Significant Accounting Policies—Continued 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 determinable. A majority of the leases provide the Company with the option to extend the lease term one or more times following expiration of the initial term. The ROU asset and lease liability terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Off-balance sheet credit related financial instruments — In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded. Allowance for credit losses - unfunded loan commitments — An allowance for credit losses - unfunded loan commitments is maintained at a level that, in the opinion of management, is adequate to absorb current expected credit losses associated with the life of the Company’s commitments to lend funds under existing agreements such as letters or lines of credit. The Company 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. The Company also analyzes the estimated utilization rates based upon an average from the trailing 4 quarters and then applies the same historical loss rates used for the outstanding amounts to determine the appropriate reserve. However, given that a utilization rate represents a difference between the funded portion quarter to quarter, management analyzes the utilized balances of the commitments for a trailing 4 quarters in order to assess the maximum advance rate variance over the year. The utilization rates represent the max variance for each loan category within the last 4 quarters. In order to get an accurate depiction of the utilization rate. Draws on unfunded loan commitments that are considered uncollectible are charged to the allowance for credit losses on off-balance sheet exposures. 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 balance sheets. 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 are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income 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; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is limited judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers. 91 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1—Summary of Significant Accounting Policies—Continued Income taxes — Deferred income tax assets and deferred income tax liabilities represent the tax effect of temporary differences between financial reporting and tax reporting measured at enacted tax rates in effect for the year in which the differences are expected to reverse. The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority. Developing the provision for income taxes, including the effective tax rate and analysis of potential tax exposure items, if any, requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred income tax assets and liabilities and any estimated valuation allowances deemed necessary to value deferred income tax assets. Judgments and tax strategies are subject to audit by various taxing authorities. While the Company believes it has no material uncertain income tax positions in the consolidated financial statements as of December 31, 2025 and 2024, adverse determinations by these taxing authorities could have a material adverse effect on the consolidated balance sheets, statements of income, or cash flows. 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 period. Diluted earnings per common share is computed using the weighted average number of shares determined for the basic earnings per common share computation plus the dilutive effects of outstanding restricted stock awards using the treasury stock method. Shares are excluded from the computations of diluted earnings per share when their inclusion has an anti-dilutive effect. Comprehensive income — 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. Stock based compensation — The Company recognizes compensation cost based on the fair value of the equity instruments issued. The expense measures the cost of employee services received in exchange for stock based on the grant-date fair value of the award and recognizes the cost over the vesting period for all awards which is based on a service condition ranging from one to four years . The grant date fair value of restricted stock awards is calculated using a volume weighted average price over a 30 -day period as of the grant date. The impact of forfeitures on stock-based compensation expense is recognized as forfeitures occur. Derivatives — The Company offers interest rate swap products to certain loan customers to allow them to hedge the risk of rising interest rates on their variable-rate loans. When such products are issued, the Company also enters into an offsetting swap with institutional counterparties to eliminate the interest rate risk to the Company. These back-to-back swap agreements, which generate fee income for the Company, are intended to offset each other. The Company retains the credit risk of the original loan. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the client plus a fee. These swaps are not designated as accounting hedges and are recorded at fair value in "Other assets" and "Accrued interest payable and other liabilities" in the consolidated balance sheets. The changes in fair value are recorded in "Noninterest income - Other income" in the consolidated statements of income. Segment reporting — The Company is a holding company for the 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 92 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1—Summary of Significant Accounting Policies—Continued customer needs and demands change. Operations are managed, and financial performance is evaluated on a Company-wide basis by the Chief Executive Officer (“CEO”) who is the chief operating decision maker (“CODM”). The CODM evaluates the financial performance of the Company by evaluating revenues, significant expenses, and budget to actual results in setting the Company’s strategic plan and initiatives. The CODM uses revenues to evaluate product pricing and significant expenses to assess performance and evaluate return on assets and return on equity. The CODM uses consolidated net income to benchmark the Company against its competitors. The benchmarking analysis coupled with monitoring of budget to actual results are used in determining discretionary compensation. Loans, leases, and investments provide the revenues in the banking operation. Interest expense, provisions for credit losses, and salaries and employee benefits provide the significant expenses in the banking operation. Discrete financial information is not available other than on a Company-wide basis. Accordingly, all of the operations of the Company are considered by management to be aggregated in one reportable 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 amount or range of loss can be reasonably estimated. Management does not believe there are any such loss contingencies that will have a material and adverse effect on the consolidated financial statements. Adoption of New Accounting Standards — The Accounting Standards Codification (“ASC”) is the FASB officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities. Periodically, the FASB will issue Accounting Standard Updates (“ASU”) to its ASC. Rules and interpretive releases of the SEC under the authority of the federal securities laws are also sources of authoritative GAAP for the Company as an SEC registrant. All other accounting literature is non-authoritative. On January 1, 2025, the Company adopted ASU No. 2023-09 , “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” retrospectively. 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. The Company adopted this standard with no material impact on the Company’s consolidated financial statements. 93 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1—Summary of Significant Accounting Policies—Continued 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 November 2024, the FASB issued ASU No. 2024-03, “ Income Statement – Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40) : Disaggregation of Income Statement Expenses” ("ASU 2024-03"), and in January 2025, the FASB issued ASU No. 2025-01, “ Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date” ("ASU 2025-01"). ASU 2024-03 requires additional disclosure of the nature of expenses included in the income statement as well as disclosures about specific types of expenses included in the expense captions presented in the income statement. ASU 2024-03, as clarified by ASU 2025-01, is effective for public business entities for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Both early adoption and retrospective application are permitted. The Company is currently evaluating the impact that the adoption of these standards will have on its consolidated financial statements and disclosures, but does not expect the impact to be material . In July 2025, the FASB issued ASU No. 2025-05, “ Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets ” (“ASU 2025-05”). ASU 2025-05 provides amendments that provide all entities with a practical expedient when estimating expected credit losses for current accounts receivable and current contract assets arising from transactions accounted for under Topic 606. The amendments are effective in fiscal years beginning after December 15, 2025, and interim reporting periods within those fiscal years. The Company is evaluating adoption timing and the impact ASU 2025-05 will have on its financial statements but does not anticipate it will have a material impact on its consolidated financial statements. In December 2025, the FASB issued ASU No. 2025-11, “Interim Reporting (Topic 270): Narrow-Scope Improvements” (“ASU 2025-11”). ASU 2025-11 clarifies and improves the guidance for interim financial reporting by providing a list of required interim disclosures, clarifying the applicability of interim reporting requirements, and introducing a disclosure principle requiring entities to disclose events since the end of the last annual reporting period that have a material impact on the entity. The new guidance is effective for the Company starting January 1, 2029, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this new guidance will have on its financial presentation. In December 2025, the FASB issued ASU No. 2025-12, “Codification Improvements” (“ASU 2025-12”). ASU 2025-12 is part of the FASB's standing "evergreen" project and makes a broad set of technical corrections, clarifications, and other minor improvements across many Topics to make the Codification easier to understand and apply. The amendments will be effective for the Company beginning with the fiscal year ending December 31, 2027, and interim periods within that fiscal year. The Company is currently evaluating the impact of such amendments to the consolidated financial statements and related disclosures. 94 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 2—Investment Securities The amortized cost, fair values, and unrealized gains and losses of the securities available-for-sale are as follows: Gross Unrealized (Dollars in thousands) Amortized Cost Gains Losses Fair Value As of December 31, 2025 U.S. Government-sponsored securities $ 2,046 $ 2 $ 10 $ 2,038 Mortgage-backed securities (1) 834,820 9,140 17,720 826,240 Commercial mortgage-backed obligations (1) 1,231 22 - 1,253 Collateralized mortgage obligations (1) 21,087 5 362 20,730 Municipal securities 66,142 4,703 - 70,845 Corporate securities 29,567 171 - 29,738 Other 310 - - 310 Total available-for-sale securities $ 955,203 $ 14,043 $ 18,092 $ 951,154 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. Gross Unrealized (Dollars in thousands) Amortized Cost Gains Losses Fair Value As of December 31, 2024 U.S. Government-sponsored securities $ 2,657 $ 4 $ 17 $ 2,644 Mortgage-backed securities (1) 466,302 464 26,908 439,858 Commercial mortgage-backed obligations (1) 1,228 - 16 1,212 Collateralized mortgage obligations (1) 5,653 - 156 5,497 Corporate securities 14,800 56 - 14,856 Other 352 - 5 347 Total available-for-sale securities $ 490,992 $ 524 $ 27,102 $ 464,414 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. The book values, estimated fair values, and unrecognized gains and losses of investments classified as held-to-maturity are as follows: Gross Unrecognized Allowance Amortized for Credit (Dollars in thousands) Cost Gains Losses Fair Value Losses As of December 31, 2025 Mortgage-backed securities (1) $ 586,001 $ 88 $ 115,773 $ 470,316 $ - Collateralized mortgage obligations (1) 62,476 - 10,234 52,242 - Municipal securities 70,164 1,011 997 70,178 450 Total held-to-maturity securities $ 718,641 $ 1,099 $ 127,004 $ 592,736 $ 450 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. 95 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 2—Investment Securities—Continued Allowance Amortized Gross Unrecognized for Credit (Dollars in thousands) Cost Gains Losses Fair Value Losses As of December 31, 2024 Mortgage-backed securities (1) $ 626,427 $ - $ 143,544 $ 482,883 $ - Collateralized mortgage obligations (1) 68,377 - 13,876 54,501 - Municipal securities 74,639 46 1,116 73,569 450 Total held-to-maturity securities $ 769,443 $ 46 $ 158,536 $ 610,953 $ 450 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. The allowance for credit losses on held-to-maturity securities is a contra-asset valuation account that is deducted from the amortized cost basis of held-to-maturity securities to present the net amount expected to be collected. Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to residential mortgage-backed securities issued by the U.S. government, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost basis of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by States and political subdivisions and other held-to-maturity securities, management considers (i) issuer bond ratings, (ii) historical loss rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) internal forecasts and (v) whether or not such securities are guaranteed or pre-refunded by the issuers. Fair values are based on quoted market prices or dealer quotes. If a quoted market price or dealer quote is not available, fair value is estimated using quoted market prices for similar securities. The following tables show the gross unrealized losses for available-for-sale securities, for which an allowance for credit losses has not been recorded, that have been in an unrealized loss position for less than 12 months or 12 months or more: December 31, 2025 Less Than 12 Months 12 Months or More Total (Dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-Sale Securities U.S. Government-sponsored securities $ 461 $ 2 $ 676 $ 8 $ 1,137 $ 10 Mortgage-backed securities (1) 60,935 244 75,647 17,476 136,582 17,720 Collateralized mortgage obligations (1) 13,262 230 5,511 132 18,773 362 Total available-for-sale securities $ 74,658 $ 476 $ 81,834 $ 17,616 $ 156,492 $ 18,092 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. 96 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 2—Investment Securities—Continued December 31, 2024 Less Than 12 Months 12 Months or More Total (Dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-Sale Securities U.S. Government-sponsored securities $ 600 $ 1 $ 888 $ 16 $ 1,488 $ 17 Mortgage-backed securities (1) 324,202 5,772 67,319 21,136 391,521 26,908 Commerical mortgage-backed securities (1) 1,212 16 - - 1,212 16 Collateralized mortgage obligations (1) 5,043 147 454 9 5,497 156 Other 347 5 - - 347 5 Total available-for-sale securities $ 331,404 $ 5,941 $ 68,661 $ 21,161 $ 400,065 $ 27,102 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. As of December 31, 2025, the Company held 324 available-for-sale securities of which 14 securities were in an unrealized loss position for less than twelve months and 104 securities were in an unrealized loss position for twelve months or more without an allowance for credit losses. Because the decline in fair value is attributable to changes in interest rates and not credit quality and because the Company does not have the intent to sell and it is likely that the Company will not be required to sell the securities prior to their anticipated recovery at maturity, it has been determined that there is no expected credit loss on these securities. Management evaluates the available-for-sale securities in an unrealized loss position, relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations. The following tables present the activity in the allowance for credit losses for held-to-maturity securities by major type: December 31, 2025 (Dollars in thousands) Municipal securities Mortgage-backed securities Collateralized mortgage obligations Total Allowance for credit losses - securities Beginning balance $ 450 $ - $ - $ 450 Provision for credit losses - - - - Ending balance $ 450 $ - $ - $ 450 December 31, 2024 (Dollars in thousands) Municipal securities Mortgage-backed securities Collateralized mortgage obligations Total Allowance for credit losses - securities Beginning balance $ 450 $ - $ - $ 450 Provision for credit losses - - - - Ending balance $ 450 $ - $ - $ 450 97 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 2—Investment Securities—Continued The amortized cost and estimated fair values of investment securities at December 31, 2025 by contractual final maturity are shown in the following table: Available-for-Sale Held-to-Maturity (Dollars in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Securities maturing in: One year or less $ 5,670 $ 5,672 $ 1,918 $ 1,911 After one year through five years 25,577 25,733 18,411 18,389 After five years through ten years 24,394 25,778 18,653 17,843 After ten years 899,562 893,971 679,659 554,593 Total $ 955,203 $ 951,154 $ 718,641 $ 592,736 Maturities are based on the final contractual payment dates, and do not reflect the impact of contractual monthly principal payments, prepayments or early redemptions that may occur. Expected maturities of mortgage-backed and CMO securities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. The Company monitors the credit quality of those held-to-maturity securities not issued by the U.S. government or one of its agencies or government sponsored entities, through the use of credit ratings. Credit ratings are reviewed and updated quarterly. Nonrated municipal investments consist primarily of bonds issued by political subdivisions such as housing authorities and reclamation districts. Nonrated municipal investments are monitored through financial covenants and review of repayment history. As of December 31, 2025, there were no past due principal or interest payments associated with held-to-maturity municipal securities. There were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10 % of shareholders’ equity. The following tables summarize the amortized cost of held-to-maturity municipal securities by credit rating as of the dates indicated : Held-to-Maturity Amortized Cost (Dollars in thousands) AAA/AA/A BBB/BB/B Not Rated Total December 31, 2025 Municipal securities $ 18,562 $ 935 $ 50,667 $ 70,164 Total $ 18,562 $ 935 $ 50,667 $ 70,164 Held-to-Maturity Amortized Cost (Dollars in thousands) AAA/AA/A BBB/BB/B Not Rated Total December 31, 2024 Municipal securities $ 19,022 $ 403 $ 55,214 $ 74,639 Total $ 19,022 $ 403 $ 55,214 $ 74,639 98 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 2—Investment Securities—Continued During 2025, the Company sold securities with a book value of $ 24.8 million for a net gain of $ 44,287 . Included in the sales were $ 3.2 million of securities that were in the held-to-maturity portfolio and were sold for a loss of $ 145,367 for the year ended December 31, 2025. All held-to-maturity securities sold were mortgage-backed securities with a remaining book value of less than 15 % of the original principal balance at the time of purchase and, as allowed under ASC 320-10-25-14 , the sales were considered maturities for purposes of security classification. Proceeds from sales and calls of investment securities were as follows: For the Year Ended December 31, (Dollars in thousands) 2025 2024 2023 Gross proceeds $ 25,797 $ 70,721 $ 39,901 Gross gains 189 839 - Gross losses 145 96 8,199 Pledged Securities As of December 31, 2025, investment securities carried at $ 673.8 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) borrowings, and other government agency deposits as required by law. This amount was $ 712.5 million at December 31, 2024. Note 3—Federal Home Loan Bank Stock and Other Non-Marketable Securities The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock and other equity securities are carried at cost, classified as restricted securities, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. FHLB stock and other equity securities are reported in Non-Marketable Securities on the Company’s consolidated balance sheets and totaled $ 15.5 million at both December 31, 2025 and 2024. 99 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 4—Loans and Leases Loans and leases as of the dates indicated consisted of the following: December 31, (Dollars in thousands) 2025 2024 Loans and leases held for investment, net Real estate: Commercial $ 1,480,906 $ 1,360,841 Agricultural 705,668 751,026 Residential and home equity 405,080 404,399 Construction 128,179 194,903 Total real estate 2,719,833 2,711,169 Commercial & industrial 497,700 504,403 Agricultural 264,117 289,847 Commercial leases 181,004 179,718 Consumer and other 4,671 5,084 Total gross loans and leases 3,667,325 3,690,221 Unearned income ( 18,380 ) ( 11,833 ) Total net loans and leases 3,648,945 3,678,388 Allowance for credit losses ( 76,375 ) ( 75,283 ) Total loans and leases held for investment, net $ 3,572,570 $ 3,603,105 At December 31, 2025, the portion of loans that were approved for pledging as collateral on borrowing lines with the FHLB and the Federal Reserve Bank (“FRB”) were $ 1.4 billion and $ 1.4 billion, respectively. The borrowing capacity on these loans was $ 889.2 million from FHLB and $ 1.1 billion from the FRB at December 31, 2025. The following tables show an aging analysis of the loan and lease portfolio, net of unearned income, by the time past due for the periods indicated: December 31, 2025 (Dollars in thousands) 30-89 Days Past Due 90+ Days Past Due Non-accrual Total Past Due and Nonaccrual Current Total Non-accrual with no ACL Loans and leases held for investment, net Real estate: Commercial $ 7,248 $ - $ 750 $ 7,998 $ 1,464,585 $ 1,472,583 $ 750 Agricultural - - - - 705,668 705,668 - Residential and home equity - - - - 405,080 405,080 - Construction - - - - 128,179 128,179 - Total real estate 7,248 - 750 7,998 2,703,512 2,711,510 750 Commercial & industrial - - - - 497,700 497,700 - Agricultural - - - - 264,117 264,117 - Commercial leases 1,659 - - 1,659 169,288 170,947 - Consumer and other 5 - - 5 4,666 4,671 - Total loans and leases, net $ 8,912 $ - $ 750 $ 9,662 $ 3,639,283 $ 3,648,945 $ 750 100 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 4—Loans and Leases—Continued December 31, 2024 (Dollars in thousands) 30-89 Days Past Due 90+ Days Past Due Non-accrual Total Past Due and Nonaccrual Current Total Non-accrual with no ACL Loans and leases held for investment, net Real estate: Commercial $ - $ - $ 170 $ 170 $ 1,353,101 $ 1,353,271 $ 170 Agricultural - - - - 751,026 751,026 - Residential and home equity - - - - 404,399 404,399 - Construction - - - - 194,903 194,903 - Total real estate - - 170 170 2,703,429 2,703,599 170 Commercial & industrial 33 - 759 792 503,611 504,403 - Agricultural 36 - - 36 289,811 289,847 - Commercial leases - - - - 175,455 175,455 - Consumer and other 5 - - 5 5,079 5,084 - Total loans and leases, net $ 74 $ - $ 929 $ 1,003 $ 3,677,385 $ 3,678,388 $ 170 When borrowers are experiencing financial difficulty, the Company may agree to modify the contractual terms of a loan to a borrower in order to assist the borrower in repaying principal and interest owed to the Company. The Company's modifications of loans to borrowers experiencing financial difficulty are generally in the form of term extensions, repayment plans, payment deferrals, forbearance agreements, interest rate reductions, forgiveness of interest and/or fees, or any combination thereof. Commercial loans modified to borrowers experiencing financial difficulty are primarily loans that are substandard or non-accrual, where the maturity date was extended and/or the modified interest rate and payment terms are not commensurate with the current market. Modifications on personal real estate loans are primarily those placed on forbearance plans, repayment plans, or deferral plans where monthly payments are suspended for a period of time or past due amounts are paid off over a certain period of time in the future or set up as a balloon payment at maturity. Modifications to certain credit card and other small consumer loans are often modified under debt counseling programs that can reduce the contractual rate or, in certain instances, forgive certain fees and interest charges. Other consumer loans modified to borrowers experiencing financial difficulty consist of various other workout arrangements with customers. 101 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 4—Loans and Leases—Continued The following tables present the amortized cost of loans that were both experiencing financial difficulty and modified, by portfolio segment and type of modification, during the periods presented. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each portfolio segment of financing receivable is also presented below: December 31, 2025 Amortized cost associated with the following modification types: (Dollars in thousands) Maturity or term extension Payment deferral Multiple modification types 1 Total 2 Percentage of total loan segment Loans and leases held for investment, net Real estate: Commercial $ - $ - $ - $ - 0.00 % Agricultural - - 2,639 2,639 0.37 % Residential and home equity 88 - - 88 0.02 % Construction - - - - 0.00 % Total real estate 88 - 2,639 2,727 0.10 % Commercial & industrial 4,259 - - 4,259 0.86 % Agricultural - - 43 43 0.02 % Commercial leases - - - - 0.00 % Consumer and other - - - - 0.00 % Total $ 4,347 $ - $ 2,682 $ 7,029 0.19 % 1 Includes modifications that resulted from a combination of interest rate reduction, maturity or term extension, principal forgiveness, and payment deferral modifications. 2 Unfunded lending commitments related to loans modified to borrowers experiencing financial difficulty totaled $ 0 million at December 31, 2025. During the twelve months ended December 31, 2025, the Company had one agricultural real estate borrower with five loans that had principal and interest deferrals ranging from twelve to eighteen months . Three of the loans had the contractual term extended by eighteen months . In addition, during the twelve months ended December 31, 2025, the Company had two commercial & industrial loans where the contractual terms were extended by six and thirteen months , respectively, and two residential and home equity loans where the contractual terms were extended by ten years . 102 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 4—Loans and Leases—Continued December 31, 2024 Amortized cost associated with the following modification types: (Dollars in thousands) Maturity or term extension Payment deferral Multiple modification types 1 Total 2 Percentage of total loan segment Loans and leases held for investment, net Real estate: Commercial $ - $ - $ - $ - 0.00 % Agricultural - 8,567 2,197 10,764 1.43 % Residential and home equity - - - - 0.00 % Construction - - - - 0.00 % Total real estate - 8,567 2,197 10,764 0.40 % Commercial & industrial 2,500 - - 2,500 0.50 % Agricultural - - - - 0.00 % Commercial leases - - - - 0.00 % Consumer and other - - - - 0.00 % Total $ 2,500 $ 8,567 $ 2,197 $ 13,264 0.36 % 1 Includes modifications that resulted from a combination of interest rate reduction, maturity or term extension, principal forgiveness, and payment deferral modifications. 2 Unfunded lending commitments related to loans modified to borrowers experiencing financial difficulty totaled $0 million at December 31, 2024. During the twelve months ended December 31, 2024, the Company had one agricultural real estate borrower with five loans that had principal and interest deferrals ranging from two to four months . One of the agricultural real estate loans had the contractual term extended by four months . In addition, during the twelve months ended December 31 2024, the Company had one commercial & industrial loan where the contractual term was extended by two months . The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of the modification efforts. A payment default is defined as a loan having a payment past due 90 days or more after a modification took place. The modified loans presented in the tables above were current as of December 31, 2025 and 2024. The effect of modifications made to borrowers experiencing financial difficulty is already included in the ACL because of the measurement methodologies used to estimate the ACL; therefore, a change to the ACL is generally not recorded upon modification. If principal forgiveness is provided, that portion of the loan will be charged-off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the ACL. An assessment of whether the borrower is experiencing financial difficulty is made on the date of a modification. 103 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 4—Loans and Leases—Continued The following tables present outstanding loan and lease balances held for investment net of unearned income by segment, credit risk rating categories, vintage year by segment of financing receivable, and current period gross charge-offs by year of origination as follows: December 31, 2025 Term Loans Amortized Cost Basis by Origination Year (Dollars in thousands) 2025 2024 2023 2022 2021 Prior Revolving Loans Amortized Cost Revolving Loans Converted to Term Total Net loans and leases held for investment Real estate: Commercial Pass $ 201,486 $ 38,557 $ 103,052 $ 135,472 $ 192,814 $ 356,496 $ 290,112 $ 146,371 $ 1,464,360 Special mention 225 - - - 7,248 - - - 7,473 Substandard - - - 750 - - - - 750 Total Commercial $ 201,711 $ 38,557 $ 103,052 $ 136,222 $ 200,062 $ 356,496 $ 290,112 $ 146,371 $ 1,472,583 Commercial Current-period gross charge-offs $ - $ - $ - $ 380 $ - $ - $ - $ - $ 380 Agricultural Pass $ 46,027 $ 23,735 $ 35,874 $ 62,515 $ 41,110 $ 161,982 $ 274,736 $ 48,493 $ 694,472 Special mention 3,151 - - - - 3,085 4,960 - 11,196 Substandard - - - - - - - - - Total Agricultural $ 49,178 $ 23,735 $ 35,874 $ 62,515 $ 41,110 $ 165,067 $ 279,696 $ 48,493 $ 705,668 Agricultural Current-period gross charge-offs $ - $ - $ 180 $ 939 $ - $ - $ - $ - $ 1,119 Residential and home equity Pass $ 35,670 $ 29,212 $ 31,874 $ 50,922 $ 76,178 $ 128,370 $ 52,266 $ 352 $ 404,844 Special mention - - - - - 34 - - 34 Substandard - - - - - - 202 - 202 Total Residential and home equity $ 35,670 $ 29,212 $ 31,874 $ 50,922 $ 76,178 $ 128,404 $ 52,468 $ 352 $ 405,080 Residential and home equity Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Construction Pass $ - $ - $ - $ - $ - $ 1,375 $ 112,904 $ 13,900 $ 128,179 Special mention - - - - - - - - - Substandard - - - - - - - - - Total construction $ - $ - $ - $ - $ - $ 1,375 $ 112,904 $ 13,900 $ 128,179 Construction Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Total Real estate $ 286,559 $ 91,504 $ 170,800 $ 249,659 $ 317,350 $ 651,342 $ 735,180 $ 209,116 $ 2,711,510 Commercial & industrial Pass $ 39,666 $ 21,289 $ 29,692 $ 16,244 $ 13,167 $ 5,310 $ 337,525 $ 30,455 $ 493,348 Special mention - - - 40 - - 50 4,262 4,352 Substandard - - - - - - - - - Total Commercial & industrial $ 39,666 $ 21,289 $ 29,692 $ 16,284 $ 13,167 $ 5,310 $ 337,575 $ 34,717 $ 497,700 Commercial & industrial Current-period gross charge-offs $ - $ - $ 70 $ 98 $ 53 $ 12 $ - $ - $ 233 Agricultural Pass $ 3,104 $ 2,857 $ 2,312 $ 1,772 $ 1,020 $ 2,264 $ 245,438 $ 5,278 $ 264,045 Special mention - - - 29 - - - 43 72 Substandard - - - - - - - - - Total Agricultural $ 3,104 $ 2,857 $ 2,312 $ 1,801 $ 1,020 $ 2,264 $ 245,438 $ 5,321 $ 264,117 Agricultural Current-period gross charge-offs $ - $ - $ - $ 200 $ 34 $ - $ - $ - $ 234 104 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 4—Loans and Leases—Continued December 31, 2025 Term Loans Amortized Cost Basis by Origination Year (Dollars in thousands) 2025 2024 2023 2022 2021 Prior Revolving Loans Amortized Cost Revolving Loans Converted to Term Total Net loans and leases held for investment Commercial leases Pass $ 25,516 $ 29,201 $ 67,198 $ 21,749 $ 5,854 $ 21,429 $ - $ - $ 170,947 Special mention - - - - - - - - - Substandard - - - - - - - - - Total Commercial leases $ 25,516 $ 29,201 $ 67,198 $ 21,749 $ 5,854 $ 21,429 $ - $ - $ 170,947 Commercial leases Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Consumer and other Pass $ 1,244 $ 478 $ 609 $ 234 $ 23 $ 1,001 $ 879 $ - $ 4,468 Special mention - - - - - - - - - Substandard 192 - - - - 11 - - 203 Total Consumer and other $ 1,436 $ 478 $ 609 $ 234 $ 23 $ 1,012 $ 879 $ - $ 4,671 Consumer and other Current-period gross charge-offs $ 37 $ 3 $ - $ - $ - $ 10 $ - $ - $ 50 Total net loans and leases Pass $ 352,713 $ 145,329 $ 270,611 $ 288,908 $ 330,166 $ 678,227 $ 1,313,860 $ 244,849 $ 3,624,663 Special mention 3,376 - - 69 7,248 3,119 5,010 4,305 23,127 Substandard 192 - - 750 - 11 202 - 1,155 Total net loans and leases $ 356,281 $ 145,329 $ 270,611 $ 289,727 $ 337,414 $ 681,357 $ 1,319,072 $ 249,154 $ 3,648,945 Total current-period gross charge-offs $ 37 $ 3 $ 250 $ 1,617 $ 87 $ 22 $ - $ - $ 2,016 105 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 4—Loans and Leases—Continued December 31, 2024 Term Loans Amortized Cost Basis by Origination Year (Dollars in thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Amortized Cost Revolving Loans Converted to Term Total Net loans and leases held for investment Real estate: Commercial Pass $ 63,216 $ 117,550 $ 163,875 $ 209,222 $ 134,254 $ 292,326 $ 270,231 $ 99,819 $ 1,350,493 Special mention - - 1,138 - - 170 1,470 - 2,778 Substandard - - - - - - - - - Total Commercial $ 63,216 $ 117,550 $ 165,013 $ 209,222 $ 134,254 $ 292,496 $ 271,701 $ 99,819 $ 1,353,271 Commercial Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Agricultural Pass $ 24,877 $ 36,693 $ 69,209 $ 38,847 $ 46,452 $ 169,301 $ 309,661 $ 32,086 $ 727,126 Special mention - - - - 2,099 5,011 16,790 - 23,900 Substandard - - - - - - - - - Total Agricultural $ 24,877 $ 36,693 $ 69,209 $ 38,847 $ 48,551 $ 174,312 $ 326,451 $ 32,086 $ 751,026 Agricultural Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Residential and home equity Pass $ 33,036 $ 37,378 $ 57,760 $ 82,936 $ 72,304 $ 72,360 $ 47,669 $ 65 $ 403,508 Special mention - - - - - 85 - - 85 Substandard - - - - - 603 203 - 806 Total Residential and home equity $ 33,036 $ 37,378 $ 57,760 $ 82,936 $ 72,304 $ 73,048 $ 47,872 $ 65 $ 404,399 Residential and home equity Current-period gross charge-offs $ - $ 29 $ - $ - $ - $ - $ - $ - $ 29 Construction Pass $ 5,774 $ - $ 1,000 $ - $ - $ 1,375 $ 186,754 $ - $ 194,903 Special mention - - - - - - - - - Substandard - - - - - - - - - Total construction $ 5,774 $ - $ 1,000 $ - $ - $ 1,375 $ 186,754 $ - $ 194,903 Construction Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Total Real estate $ 126,903 $ 191,621 $ 292,982 $ 331,005 $ 255,109 $ 541,231 $ 832,778 $ 131,970 $ 2,703,599 Commercial & industrial Pass $ 23,235 $ 39,415 $ 20,065 $ 16,715 $ 3,525 $ 6,192 $ 363,947 $ 24,269 $ 497,363 Special mention - 2,280 67 3 - 381 1,017 2,500 6,248 Substandard - 107 - 33 - - 422 230 792 Total Commercial & industrial $ 23,235 $ 41,802 $ 20,132 $ 16,751 $ 3,525 $ 6,573 $ 365,386 $ 26,999 $ 504,403 Commercial & industrial Current-period gross charge-offs $ 231 $ 176 $ - $ 44 $ 100 $ 185 $ - $ - $ 736 Agricultural Pass $ 2,831 $ 2,820 $ 2,584 $ 1,708 $ 393 $ 2,471 $ 270,595 $ 6,325 $ 289,727 Special mention - - 41 - - - - 43 84 Substandard - - - - - - 36 - 36 Total Agricultural $ 2,831 $ 2,820 $ 2,625 $ 1,708 $ 393 $ 2,471 $ 270,631 $ 6,368 $ 289,847 Agricultural Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - 106 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 4—Loans and Leases—Continued December 31, 2024 Term Loans Amortized Cost Basis by Origination Year (Dollars in thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Amortized Cost Revolving Loans Converted to Term Total Net loans and leases held for investment Commercial leases Pass $ 31,977 $ 74,956 $ 21,859 $ 8,314 $ 8,065 $ 26,182 $ - $ - $ 171,353 Special mention - - 4,102 - - - - - 4,102 Substandard - - - - - - - - - Total Commercial leases $ 31,977 $ 74,956 $ 25,961 $ 8,314 $ 8,065 $ 26,182 $ - $ - $ 175,455 Commercial leases Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Consumer and other Pass $ 1,049 $ 1,195 $ 535 $ 71 $ 13 $ 1,349 $ 693 $ - $ 4,905 Special mention - - - - - - - - - Substandard 161 - - - - 18 - - 179 Total Consumer and other $ 1,210 $ 1,195 $ 535 $ 71 $ 13 $ 1,367 $ 693 $ - $ 5,084 Consumer and other Current-period gross charge-offs $ 63 $ 1 $ - $ - $ - $ 29 $ - $ - $ 93 Total net loans and leases Pass $ 185,995 $ 310,007 $ 336,887 $ 357,813 $ 265,006 $ 571,556 $ 1,449,550 $ 162,564 $ 3,639,378 Special mention - 2,280 5,348 3 2,099 5,647 19,277 2,543 37,197 Substandard 161 107 - 33 - 621 661 230 1,813 Total net loans and leases $ 186,156 $ 312,394 $ 342,235 $ 357,849 $ 267,105 $ 577,824 $ 1,469,488 $ 165,337 $ 3,678,388 Total current-period gross charge-offs $ 294 $ 206 $ - $ 44 $ 100 $ 214 $ - $ - $ 858 The Company, in the ordinary course of business, grants loans to the Company’s executive officers and directors, including their families and firms in which they are principal owners. Activity in such loans is summarized as follows: December 31, (Dollars in thousands) 2025 2024 Balance at beginning of the period $ 15,626 $ 17,035 New loans or advances during year 495 1,871 Effect of changes in composition of related parties ( 80 ) - Repayments ( 2,741 ) ( 3,280 ) Balance at end of period $ 13,300 $ 15,626 A loan or lease is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. When management determines that foreclosure is probable, expected credit losses for collateral dependent loans or leases are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. The collateral on the loans and leases is a significant portion of what secures the collateral dependent loans or leases and significant changes to the fair value of the collateral can impact the allowance for credit losses. 107 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 4—Loans and Leases—Continued The following table presents the amortized cost basis for collateral dependent loans and leases by type as of the dates indicated: December 31, 2025 (Dollars in thousands) Real Estate Vehicles and Equipment Total Collateral dependent loans and leases Real estate: Commercial $ 7,998 $ - $ 7,998 Agricultural - - - Residential and home equity - - - Construction - - - Total real estate 7,998 - 7,998 Commercial & industrial - - - Agricultural - - - Commercial leases - - - Consumer and other - - - Total gross loans and leases $ 7,998 $ - $ 7,998 December 31, 2024 (Dollars in thousands) Real Estate Vehicles and Equipment Total Collateral dependent loans and leases Real estate: Commercial $ 170 $ - $ 170 Agricultural - - - Residential and home equity - - - Construction - - - Total real estate 170 - 170 Commercial & industrial - 759 759 Agricultural - - - Commercial leases - - - Consumer and other - - - Total gross loans and leases $ 170 $ 759 $ 929 108 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 4—Loans and Leases—Continued Allowance for Credit Losses The allowance for credit losses (“ACL”) is the combination of the allowance for credit losses for loan and lease losses and the allowance for credit losses for unfunded loan commitments. The ACL for unfunded loan commitments is included within “Interest payable and other liabilities” on the consolidated balance sheets. The following table presents a summary of the activity in the ACL for loan and lease losses and ACL for unfunded loan commitments for the periods indicated: Year Ended December 31, 2025 2024 (Dollars in thousands) ACL for Loans and Leases ACL for Unfunded Commitments Allowance For Credit Losses ACL for Loans and Leases ACL for Unfunded Commitments Allowance For Credit Losses Balance at beginning of period $ 75,283 $ 2,690 $ 77,973 $ 74,965 $ 3,690 $ 78,655 Provision for/(reversal of) credit losses 2,890 610 3,500 1,000 ( 1,000 ) - Charge-offs ( 2,016 ) - ( 2,016 ) ( 858 ) - ( 858 ) Recoveries 218 - 218 176 - 176 Net (charge-offs)/recoveries ( 1,798 ) - ( 1,798 ) ( 682 ) - ( 682 ) Balance at end of period $ 76,375 $ 3,300 $ 79,675 $ 75,283 $ 2,690 $ 77,973 Changes in the allowance for credit losses on loans and leases are as follows: Year Ended December 31, 2025 (Dollars in thousands) Balance at beginning of year Provision for/(recapture of) credit losses Charge-Offs Recoveries Balance at end of year Allowance for credit losses: Real estate: Commercial $ 20,382 $ 2,572 $ ( 380 ) $ - $ 22,574 Agricultural 23,615 1,146 ( 1,119 ) 5 23,647 Residential and home equity 7,340 270 - 10 7,620 Construction 3,055 ( 744 ) - - 2,311 Total real estate 54,392 3,244 ( 1,499 ) 15 56,152 Commercial & industrial 7,791 ( 359 ) ( 233 ) 156 7,355 Agricultural 6,725 245 ( 234 ) 24 6,760 Commercial leases 6,153 ( 292 ) - - 5,861 Consumer and other 222 52 ( 50 ) 23 247 Total allowance for credit losses $ 75,283 $ 2,890 $ ( 2,016 ) $ 218 $ 76,375 109 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 4—Loans and Leases—Continued Year Ended December 31, 2024 (Dollars in thousands) Balance at beginning of year Provision for/(recapture of) credit losses Charge-Offs Recoveries Balance at end of year Allowance for credit losses: Real estate: Commercial $ 26,093 $ ( 5,711 ) $ - $ - $ 20,382 Agricultural 7,744 15,871 - - 23,615 Residential and home equity 7,770 ( 424 ) ( 29 ) 23 7,340 Construction 4,432 ( 1,377 ) - - 3,055 Total real estate 46,039 8,359 ( 29 ) 23 54,392 Commercial & industrial 13,380 ( 4,939 ) ( 736 ) 86 7,791 Agricultural 8,872 ( 2,163 ) - 16 6,725 Commercial leases 6,537 ( 384 ) - - 6,153 Consumer and other 137 127 ( 93 ) 51 222 Total allowance for credit losses $ 74,965 $ 1,000 $ ( 858 ) $ 176 $ 75,283 Note 5—Premises and Equipment Premises and equipment consisted of the following: December 31, (Dollars in thousands) 2025 2024 Premises and equipment: Buildings and land $ 70,259 $ 64,598 Furniture, fixtures, and equipment 21,880 20,762 Leasehold improvements 4,598 4,559 Subtotal 96,737 89,919 Accumulated depreciation and amortization ( 40,890 ) ( 38,552 ) Total premises and equipment $ 55,847 $ 51,367 Depreciation and amortization on premises and equipment included in occupancy expense amounted to $ 3.1 million, $ 2.9 million, and $ 2.5 million for the years ended December 31, 2025, 2024 and 2023, respectively. Rental income was $ 757,000 , $ 726,000 , and $ 749,000 for the years ended December 31, 2025, 2024, and 2023, respectively, and was recorded in other non-interest income. Note 6—Other Real Estate Owned The Company reported no foreclosed other real estate owned at December 31, 2025 compared to $ 873,000 at December 31, 2024 as the Company wrote off its only OREO property during 2025 after nine years . 110 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 7—Deposits Certificates of deposit greater than and less than or equal to the FDIC insurance limit of $250,000 are summarized as follows: December 31, (Dollars in thousands) 2025 2024 Certificates of deposit: Certificates of deposit less than or equal to $250,000 $ 344,818 $ 330,475 Certificates of deposit greater than $250,000 398,263 385,072 Total certificates of deposit $ 743,081 $ 715,547 Scheduled maturities for certificates of deposit are as follows for the years ending December 31: (Dollars in thousands) Amount 2026 $ 733,911 2027 6,717 2028 1,861 2029 235 2030 357 Total certificates of deposit $ 743,081 Overdrawn deposit balances of $ 187,000 and $ 156,000 were classified as consumer loans at December 31, 2025 and 2024, respectively. Note 8—Short-term borrowings As of December 31, 2025 and 2024, committed lines of credit arrangements totaling $ 2.1 billion and $ 2.1 billion, respectively, were available to the Company from the FHLB, FRB, and unaffiliated banks. The Company is a member of the FHLB of San Francisco and has a borrowing capacity and a committed credit line of $ 890.4 million, which is secured by $ 1.1 billion in various real estate loans and investment securities pledged as collateral. Borrowings generally provide for interest at the then current published rate based on the borrowing term. The overnight borrowing rate was 3.89 % as of December 31, 2025. The Company has $ 1.4 billion in pledged loans with the FRB. As of December 31, 2025, the Company’s overnight borrowing capacity using the primary credit facilities from the Fed account was $ 1.1 billion. The borrowing rate was 3.75 % as of December 31, 2025. The Company has an unsecured borrowing capacity from unaffiliated banks of $ 133.0 million as of December 31, 2025. There were no outstanding advances on the above borrowing facilities or from unaffiliated banks as of December 31, 2025 and 2024. Note 9—Long-term Subordinated Debentures In 2003, the Company formed a wholly-owned Connecticut statutory business trust, FMCB Statutory Trust I (“Statutory Trust I”), which issued $ 10.0 million of guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures (the “Trust Preferred Securities”). The Company is not considered the primary beneficiary of the trust (variable interest entity); therefore, the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. These debentures qualify as Tier 1 capital under current regulatory guidelines. All of 111 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 9—Long-term Subordinated Debentures—Continued the common securities of Statutory Trust I are owned by the Company. The proceeds from the issuance of the common securities and the Trust Preferred Securities were used by FMCB Statutory Trust to purchase $ 10.3 million of junior subordinated debentures of the Company, which carry a variable rate based on 3 -month SOFR plus 2.85 %. As of December 31, 2025, the interest rate on the junior subordinated debentures was 6.82 % and the next reset date is March 17, 2026 . The debentures represent the sole asset of Statutory Trust I. The Trust Preferred Securities accrue and pay distributions at a variable rate based on 3 -month SOFR plus 2.85 % per annum of the stated liquidation value of $ 1,000 per capital security. The Company has entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment to the extent that Statutory Trust I has funds available therefor of: (i) accrued and unpaid distributions required to be paid on the Trust Preferred Securities; (ii) the redemption price with respect to any Trust Preferred Securities called for redemption by Statutory Trust I; and (iii) payments due upon a voluntary or involuntary dissolution, winding up, or liquidation of Statutory Trust I. The Trust Preferred Securities are mandatorily redeemable upon maturity of the subordinated debentures on December 17, 2033 , or upon earlier redemption as provided in the indenture. The Company has the right to redeem the subordinated debentures purchased by Statutory Trust I, in whole or in part, on or after December 17, 2008. As specified in the indenture, if the subordinated debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited, by the terms of the debentures, from paying cash dividends on the Company’s common stock. Note 10—Fair Value The Company uses fair value measurements to record fair value adjustments to certain financial and non-financial assets and liabilities and to determine fair value disclosures. Various financial instruments such as available-for-sale securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets and liabilities on a non-recurring basis, such as collateral dependent loans and other real estate owned. These non-recurring fair value adjustments typically involve lower of cost or fair value accounting or write-down of individual assets. 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 at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. For accounting disclosure purposes, a three-level valuation hierarchy of fair value measurements has been established. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: • Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. • Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs that are observable for the assets or liabilities, either directly or indirectly (such as interest rates, yield curves, and prepayment speeds). • Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value. These may be internally developed, using the Company’s best information and assumptions that a market participant would consider. 112 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 10—Fair Value—Continued The carrying amounts and estimated fair values of financial instruments held by the Company are set forth below. Fair value estimates are made at a specific point in time based on relevant market information. They do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for many of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, risk characteristics and economic conditions. These estimates are subjective, involve uncertainties, and cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. Securities classified as available-for-sale are reported at fair value on a recurring basis utilizing Level 1, 2 and 3 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things. The Company does not record all loans and leases at fair value on a recurring basis. However, from time to time, a loan or lease is considered collateral dependent and an allowance for credit losses is established. Once a loan or lease is identified as collateral dependent, management measures specific reserves in accordance FASB ASC Topic 326. The fair value of collateral dependent loans or leases is estimated using one of several methods, including collateral value when the loan is collateral dependent, market value of similar debt, enterprise value, and discounted cash flows. Collateral dependent loans and leases not requiring an allowance represent loans and leases for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans and leases. Collateral dependent loans and leases where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. In determining the value of real estate collateral, the Company relies on external and internal appraisals of property values depending on the size and complexity of the real estate collateral. These appraisals may utilize a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take into account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 non-recurring collateral dependent loans is primarily the sales comparison approach less estimated selling costs. The Company maintains a list of qualified property appraisers who review appraisal reports for reasonableness. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists. Values of all loan collateral are regularly reviewed by credit administration. Unobservable inputs to these measurements, which include estimates and judgments often used in conjunction with appraisals, are not readily quantifiable. These measurements are classified as Level 3. 113 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 10—Fair Value—Continued Other Real Estate Owned (“OREO”) is reported at fair value on a non-recurring basis. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take into account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 non-recurring OREO is primarily the sales comparison approach less estimated selling costs. The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated. December 31, 2025 Fair Value Measurements (Dollars in thousands) Carrying Amount Level 1 Level 2 Level 3 Total Fair Value Fair valued on a recurring basis: Financial assets Available-for-sale securities U.S. Government-sponsored securities $ 2,038 $ - $ 2,038 $ - $ 2,038 Mortgage-backed securities 826,240 - 826,240 - 826,240 Commercial mortgage-backed securities 1,253 - 1,253 - 1,253 Collateralized mortgage obligations 20,730 - 20,730 - 20,730 Municipal securities 70,845 - 70,845 - 70,845 Corporate securities 29,738 - 29,738 - 29,738 Other 310 - 310 - 310 Other equity investments $ 3,256 $ 3,256 $ - $ - $ 3,256 Derivatives not designated as hedging instruments $ 172 $ - $ 172 $ - $ 172 Financial liabilities Derivatives not designated as hedging instruments $ 178 $ - $ 178 $ - $ 178 Fair valued on a non-recurring basis: Collateral dependent loans $ 7,998 $ - $ - $ 7,998 $ 7,998 December 31, 2024 Fair Value Measurements (Dollars in thousands) Carrying Amount Level 1 Level 2 Level 3 Total Fair Value Fair valued on a recurring basis: Available-for-sale securities U.S. Government-sponsored securities $ 2,644 $ - $ 2,644 $ - $ 2,644 Mortgage-backed securities 439,858 - 439,858 - 439,858 Commercial mortgage-backed securities 1,212 - 1,212 - 1,212 Collateralized mortgage obligations 5,497 - 5,497 - 5,497 Corporate securities 14,856 - 14,856 - 14,856 Other 347 - 347 - 347 Fair valued on a non-recurring basis: Collateral dependent loans $ 929 $ - $ - $ 929 $ 929 Other real estate owned 873 - - 873 873 114 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 10—Fair Value—Continued The following tables summarize the carrying amount and estimated fair values of the Company’s financial assets and liabilities not carried at fair value, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated. December 31, 2025 Fair Value Measurements (Dollars in thousands) Carrying Amount Level 1 Level 2 Level 3 Total Fair Value Financial assets: Cash and cash equivalents $ 144,864 $ 144,864 $ - $ - $ 144,864 Held-to-maturity securities, net 718,191 - 542,161 50,575 592,736 Non-marketable securities, at cost 15,549 - 15,549 - 15,549 Loans and leases, net 3,572,570 - - 3,591,336 3,591,336 Financial liabilities: Total deposits $ 4,977,826 $ - $ 4,975,673 $ - $ 4,975,673 Subordinated debentures 10,310 - 10,810 - 10,810 December 31, 2024 Fair Value Measurements (Dollars in thousands) Carrying Amount Level 1 Level 2 Level 3 Total Fair Value Financial assets: Cash and cash equivalents $ 212,563 $ 212,563 $ - $ - $ 212,563 Held-to-maturity securities, net 768,993 - 556,454 54,499 610,953 Non-marketable securities, at cost 15,549 - 15,549 - 15,549 Loans and leases, net 3,603,105 - - 3,523,057 3,523,057 Financial liabilities: Total deposits $ 4,699,139 $ - $ 4,695,388 $ - $ 4,695,388 Subordinated debentures 10,310 - 11,738 - 11,738 Non-marketable securities include FHLB stock, Pacific Coast Bankers’ Bank stock and TIB, National Association stock which are recorded at cost. Ownership of these stocks is restricted to member banks. Purchases and sales of these securities are at par value with the issuer. The fair value of these investments is equal to the carrying amount. 115 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 11—Earnings Per Share Basic earnings per common share is computed by dividing net earnings allocated to common shareholders by the weighted average number of common shares outstanding during the applicable period. Diluted earnings per common share is computed using the weighted average number of shares determined for the basic earnings per common share computation plus the dilutive effects of outstanding restricted stock awards using the treasury stock method. There were no outstanding restricted stock awards prior to 2025. Shares are excluded from the computations of diluted earnings per share when their inclusion has an anti-dilutive effect. For the year ended December 31, 2025, there were no potential common shares that were anti-dilutive. The following table presents the factors used in the earnings per share computation for the periods indicated: Year Ended December 31, (Dollars in thousands, except share and per share amounts) 2025 2024 2023 Net income $ 93,605 $ 88,457 $ 88,314 Weighted average common shares outstanding for basic earnings per common share 693,589 730,914 757,336 Dilutive potential common shares 5,179 - - Shares used in computing diluted earnings per common share 698,768 730,914 757,336 Basic earnings per common share $ 134.96 $ 121.02 $ 116.61 Diluted earnings per commons share $ 133.96 $ 121.02 $ 116.61 Note 12—Employee Benefit Plans Executive Retirement Plan The Company, through the Bank, sponsors an Executive Retirement Plan (“ERP”) for certain executive level employees. The ERP is a non-qualified deferred compensation plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by the Internal Revenue Service. The ERP is comprised of: (1) a Performance Component which makes contributions based upon long-term cumulative profitability and increase in market value of the Company; (2) a Salary Component which makes contributions based upon participant salary levels; and (3) an Equity Component for which contributions are discretionary and subject to Board of Directors approval. The Company maintains a Rabbi Trust to fund, in part, the ERP. The Rabbi Trust is an irrevocable grantor trust to which the Company may contribute assets for the limited purpose of funding a non-qualified deferred compensation plan. The Company may not use the assets of the Rabbi Trust for any purpose other than meeting its obligations under the ERP; however, the assets of the Rabbi Trust remain subject to the claims of its creditors and are included in the consolidated financial statements. The Company contributes cash to the Rabbi Trust from time to time for the sole purpose of funding the ERP. The Rabbi Trust will use any cash the Company contributes to purchase shares of common stock of the Company, and other financial instruments, on the open market. ERP contributions are invested in a mix of financial instruments; however, the Equity Component contributions are invested primarily in common stock of the Company. Effective November 29, 2024, each component of the ERP was terminated and frozen and no future contributions are permitted to be made. On December 10, 2025, the account balances were liquidated and paid out to eligible participants. 116 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 12—Employee Benefit Plans—Continued The Company incurred no expense to the ERP during the year ended December 31, 2025 due to the freezing of the plans, a net expense of $ 9.0 million during the year ended December 31, 2024, and a net expense of $ 9.1 million during the year ended December 31, 2023. The Company’s carrying value of the liability under the ERP was $ 72 ,000 as of December 31, 2025 and $ 61.4 million as of December 31, 2024, which is included in interest payable and other liabilities on the balance sheet. There were no shares of common stock held as investments in the Rabbi Trust of the ERP as of December 31, 2025 and 49,173 shares with an historical cost basis of $ 31.8 million at December 31, 2024. All amounts have been fully funded into the Rabbi Trust as of December 31, 2025 and 2024. The consolidated investments held in the Rabbi Trust are recorded at fair value with changes in unrealized gains or losses recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income. Net gains on ERP plan investments were $ 3.6 million in 2025 compared to net gains of $ 2.7 million in 2024 and $ 2.6 million in 2023. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Senior Management Retention Plan The Company, through the Bank, sponsors a Senior Management Retention Plan (“SMRP”) for certain senior level employees. The SMRP is a non-qualified deferred compensation plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by the Internal Revenue Service. All contributions are discretionary and subject to the Board of Directors approval. The Company maintains a Rabbi Trust to fund, in part, the SMRP. The Rabbi Trust is an irrevocable grantor trust to which the Company may contribute assets for the limited purpose of funding a non-qualified deferred compensation plan. The Company may not use the assets of the Rabbi Trust for any purpose other than meeting its obligations under the SMRP; however, the assets of the Rabbi Trust remain subject to the claims of its creditors and are included in the consolidated financial statements. The Company contributes cash to the Rabbi Trust from time to time for the sole purpose of funding the SMRP. The Rabbi Trust will use any cash the Company contributes to purchase shares of common stock of the Company, and other financial instruments, on the open market. Contributions to the SMRP are invested primarily in common stock of the Company. Effective November 29, 2024 the SMRP was terminated and frozen and no future contributions are permitted to be made. On December 10, 2025, the account balances were liquidated and paid out to eligible participants. The Company incurred no expense for the SMRP during the year ended December 31, 2025 due to the freezing of the plans, a net expense of $ 4.0 million during the year ended December 31, 2024 and a net expense of $ 4.1 million during the year ended December 31, 2023. The Company recognized the recapture of expense of $ 79 ,000 due to forfeitures within the plan during the year ended December 31, 2025. The Company’s carrying value of the liability under the SMRP was $ 2.1 million as of December 31, 2025 and $ 21.2 million as of December 31, 2024, which is included in interest payable and other liabilities on the balance sheet. The Company’s shares of stock held as investments in the Rabbi Trust of the SMRP as of December 31, 2025 and December 31, 2024 totaled 1,073 and 19,351 shares with an historical cost basis of $ 1.1 million and $ 14.6 million, respectively. All amounts have been fully funded into the Rabbi Trust as of December 31, 2025 and 2024. The consolidated investments held in the Rabbi Trust are recorded at fair value with changes in unrealized gains or losses recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income. Net gains on SMRP plan investments were $ 1.1 million in 2025, $ 0.5 million in 2024 and $ 0.4 million in 2023. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. 117 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 12—Employee Benefit Plans—Continued Profit Sharing Plan The Company, through the Bank, sponsors a Profit Sharing Plan for substantially all full-time employees of the Company with one or more years of service. Participants receive up to two annual employer contributions, one is mandatory and the other is discretionary. The mandatory contributions to the Profit Sharing Plan are made according to a predetermined set of criteria. Mandatory contributions totaled $ 2.1 million, $ 2.0 million, and $ 2.0 million for the years ended December 31, 2025, 2024, and 2023, respectively. The discretionary contributions to the Profit Sharing Plan are determined annually by the Board of Directors. The discretionary contributions totaled $ 1.8 million, $ 1.8 million, and $ 1.9 million for the years ended December 31, 2025, 2024, and 2023, respectively. Company employees are permitted, within limitations imposed by tax law, to make pretax contributions and after tax (Roth) contributions to the 401(k) feature of the Profit Sharing Plan. The Company does not match employee contributions within the 401(k) feature of the Profit Sharing Plan and the Company can terminate the Profit Sharing Plan at any time. Benefits pursuant to the Profit Sharing Plan vest 0 % during the first year of participation, 25 % per full year thereafter and after five years such benefits are fully vested. Bank-Owned Life Insurance The Company has purchased single premium life insurance policies on the lives of certain key employees of the Company. These policies provide: (1) financial protection to the Company in the event of the death of a key employee; and (2) significant income to the Company to offset the expense associated with the ERP and other employee benefit plans, since the interest earned on the cash surrender value of the policies is tax exempt as long as the policies are used to finance employee benefits. As compensation to each employee for agreeing to allow the Company to purchase an insurance policy on his or her life, split dollar agreements have been entered into with those employees. These agreements provide for a division of the life insurance death proceeds between the Company and each employee’s designated beneficiary or beneficiaries. The Company earned tax-exempt interest on the life insurance policies of $ 2.5 million, $ 2.4 million, and $ 2.0 million for the three years ended December 31, 2025, 2024, and 2023, respectively. As of December 31, 2025 and 2024, the total cash surrender value of the insurance policies was $ 76.6 million and $ 74.1 million, respectively. Note 13—Stock-Based Compensation Restricted Stock Award Plan At the special meeting of shareholders held on November 25, 2024, the Company’s shareholders approved the Farmers & Merchants Bancorp 2025 Restricted Stock Retirement Plan (the “2025 Plan”). The 2025 Plan provides for the issuance of up to 80,000 shares to directors and employees of the Company and its subsidiaries and affiliates. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date. Due to the illiquidity of the stock, the fair value of the stock is determined using a volume weighted average price over a 30 -day period as of the grant date. The awards contain a service condition, which requires the employees to provide services during the applicable vesting periods. The awards were comprised of a one-year award for directors and two-year , three-year and four-year awards for employees depending on their roles and responsibilities. The awards vest on a pro-rated basis over the life of the award. Total remaining shares issuable under the 2025 Plan were 48,332 at December 31, 2025, including 1,992 shares forfeited and again available for future awards under the 2025 Plan. The unvested restricted shares generally have voting rights and dividend rights; however, the dividends are paid to the holder only when the restricted shares vest. Dividends on forfeited restricted shares are also forfeited. 118 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 13—Stock-Based Compensation—Continued During the year ended December 31, 2025, the Company issued the following restricted stock awards under the 2025 Plan: Date of Grant Number of Shares Volume Weighted Average Price over a 30-day Period as of the Grant Date February 3, 2025 30,818 $ 1,033.03 October 14, 2025 2,442 1,042.19 December 9, 2025 400 1,054.48 The following table summarizes the change in the Company’s nonvested shares for the year ended December 31, 2025: Number of Shares Average of the Volume Weighted Average Price over a 30-day Period as of the Grant Date Restricted Stock Award Nonvested shares outstanding, January 1, 2025 - $ - Granted 33,660 1,033.95 Vested - - Forfeited 1,992 1,035.68 Nonvested shares outstanding, December 31, 2025 31,668 $ 1,033.84 For the year ended December 31, 2025, the Company recognized $ 11.6 million in compensation cost related to shares granted under the 2025 Plan. As of December 31, 2025, there was $ 22.3 million of total unrecognized compensation cost related to nonvested shares granted under the 2025 Plan. The remaining cost is expected to be recognized over a weighted-average period of 1.69 years. No shares of restricted stock vested during the year ended December 31, 2025. 119 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 14—Derivatives Derivatives Not Designated as Hedging Instruments As a customer accommodation, the Company may enter into interest rate swaps with its loan customers. The Company also enters into corresponding offsetting derivatives with third parties. While these derivatives represent economic hedges, they do not qualify as hedges for accounting purposes. The fair value of these swaps are recorded as components of other assets and other liabilities in the Company’s consolidated balance sheets. December 31, 2025 December 31, 2024 (Dollars in thousands) Notional Amount Fair Value Notional Amount Fair Value Derivatives not designated as hedging instruments: Interest rate swaps related to customer loans $ 8,715 $ 172 $ - $ - Total included in other assets $ 172 $ - Derivatives not designated as hedging instruments: Interest rate swaps related to customer loans $ 8,715 $ 178 $ - $ - Total included in other liabilities $ 178 $ - (Dollars in thousands) Location of Gain or (Loss) Recognized in Income on Derivatives December 31, 2025 2024 Derivatives not designated as hedging instruments: Interest rate swaps related to loan customers Other (expense) income $ ( 6 ) $ - Total $ ( 6 ) $ - Note 15—Commitments and Contingencies In the normal course of business, the Company enters into financial instruments with off balance sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These instruments include commitments to extend credit, letters of credit, and other types of financial guarantees. The Company had the following off balance sheet commitments as of the dates indicated: December 31, (Dollars in thousands) 2025 2024 Commitments to extend credit, including unsecured commitments of $ 20,995 and $ 20,535 as of December 31, 2025 and 2024, respectively $ 1,049,468 $ 1,006,649 Stand-by letters of credit, including unsecured commitments of $ 5,248 and $ 4,490 as of December 31, 2025 and 2024, respectively 19,250 15,411 The Company's exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer's creditworthiness are performed on a case-by-case basis. The estimated exposure to loss from these commitments is included in the allowance for credit losses for unfunded loan commitments, which amounted to $ 3.3 million and $ 2.7 million for the years ended December 31, 2025 and 2024, respectively. 120 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 15—Commitments and Contingencies—Continued Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third-party. Outstanding standby letters of credit have maturity dates ranging from 1 to 51 months with a final expiration in some cases up to April 2030. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company has commitments to fund investments in low-income housing tax credit investments (“LIHTC”) partnerships and limited liability companies. The Company invests in LIHTC partnerships and solar tax funds that are designed to generate a return primarily through the realization of federal tax credits. The Company accounts for these investments by amortizing the cost of tax credit investments over the life of the investment using a proportional amortization method and tax credit investment amortization expense is a component of the provision for income taxes. At December 31, 2025 and 2024, the balance of the investments in LIHTC was $ 45.5 million and $ 43.8 million, respectively. These balances are reflected in the other assets line on the consolidated balance sheets. Total unfunded commitments related to the investments in LIHTC totaled $ 16.8 million and $ 18.9 million at December 31, 2025 and 2024, respectively. These balances are reflected in the interest payable and other liabilities line on the consolidated balance sheets. The Company expects to fulfill these commitments through 2042. Additionally, during the years ended December 31, 2025 and 2024, the Company recognized tax credits from its investments in LIHTC of $ 5.1 million and $ 4.4 million, respectively. In the ordinary course of business, the Company becomes involved in litigation arising out of its normal business activities. Management, after consultation with legal counsel, believes that the ultimate liability, if any, resulting from the disposition of such claims would not be material in relation to the financial position of the Company. The Company may be required to maintain average reserves on deposit with the FRB primarily based on deposits outstanding. Reserve requirements are offset by the Company’s vault cash and deposit balances maintained with the FRB. 121 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 16—Leases Lessee – Operating Leases Operating leases in which we are the lessee are recorded as operating lease right-of-use (“ROU”) assets and operating lease liabilities, included in other assets and other liabilities , respectively, on our consolidated balance sheets. We do not currently have any significant finance leases in which we are the lessee. Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded net in occupancy expense in the consolidated statements of income. Our leases relate primarily to office space and bank branches with remaining lease terms of generally nine months to 7 years. Certain lease arrangements contain extension options that typically range from 5 to 10 years at the then fair market rental rates. ASC 842 requires lessees to evaluate whether option periods, if available, will be exercised in order to determine the full life of the lease. The Company used the first option period, unless it is a relatively new lease that has a long initial lease term or other extenuating circumstances. As of December 31, 2025, operating lease ROU assets and liabilities were $ 1.6 million and $ 1.7 million, respectively. As of December 31, 2024, operating lease ROU assets and liabilities were $ 2.2 million and $ 2.3 million, respectively. Operating lease expenses totaled $ 798 ,000, $ 758 ,000 and $ 737 ,000 for the years ended December 31, 2025, 2024 and 2023, respectively. The table below summarizes the information related to our operating leases: Year Ended December 31, (in thousands except for percent and period data) 2025 2024 Cash Paid for Amounts Included in the Measurement of Lease Liabilities Operating Cash Flow from Operating Leases $ 798 $ 758 Weighted-Average Remaining Lease Term - Operating Leases, in Years 3.11 3.56 Weighted-Average Discount Rate - Operating Leases 2.7 % 2.7 % 122 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 16—Leases—Continued The table below summarizes the maturity of remaining lease liability: (Dollars in thousands) Amount 2026 $ 740 2027 407 2028 283 2029 186 2030 101 Total lease payments 1,717 Discount ( 62 ) Net present value of lease liabilities $ 1,655 As of December 31, 2025, we had no additional operating leases for office space that had not yet commenced or that are anticipated to commence during the first quarter of 2026. Lessor – Direct Financing Leases The Company is the lessor in direct finance lease arrangements. Leases are recorded at the principal balance outstanding, net of unearned income and charge-offs. Interest income is recognized using the interest method. Leases typically have a maturity of three to ten years , and fixed rates that are most often tied to Treasury indices with an appropriate spread based on the amount of perceived risk. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed with qualified, independent appraisers that establish the residual values the Company uses in structuring a lease. At the conclusion of the lease, the lessee has the option to extend the lease, purchase the leased asset or return the leased asset to the Company. Lease payments due to the Company are typically fixed and paid in equal installments over the lease term. Variable lease payments that do not depend on an index or a rate (e.g., property taxes) that are paid directly by the Company are minimal. The majority of property taxes are paid directly by the client to third-parties and are not considered part of variable payments and therefore are not recorded by the Company. As a lessor, the Company leases certain types of agriculture equipment, solar equipment, construction equipment and other equipment to its customers. The Company's net investment in direct financing leases, included in the line item “Loans and leases held for investment, net of unearned income” on the balance sheet, was $ 181.0 million at December 31, 2025 and $ 179.7 million at December 31, 2024. The following table provides the components of leases receivable income for the period indicated: Year Ended December 31, (Dollars in thousands) 2025 2024 2023 Interest income on net investments in leases $ 11,653 $ 11,760 $ 7,766 123 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 16—Leases—Continued The following table presents the components of lease receivables as of the date indicated: December 31, (Dollars in thousands) 2025 2024 Direct financing leases Lease receivables $ 180,776 $ 176,760 Unguaranteed residual values 228 2,959 Total net investment in direct financing leases $ 181,004 $ 179,719 The following table presents maturities of direct financing lease receivables for the years ending December 31: (Dollars in thousands) Amount 2026 $ 3,114 2027 11,988 2028 21,020 2029 11,037 2030 74,356 Thereafter 100,833 Total lease payments 222,348 Less: unearned interest income and guaranteed residual value ( 41,572 ) Net lease receivables $ 180,776 Note 17—Income Taxes Pretax income from continuing operations is all from domestic activities. The Company has no foreign operations or foreign tax expense. The components of income tax expense (benefit) are as follows: Year Ended December 31, (Dollars in thousands) 2025 2024 2023 Income tax expense (benefit) Current: Federal $ 10,871 $ 14,196 $ 23,025 State 1,981 8,574 10,817 Total current income tax expense 12,852 22,770 33,842 Deferred: Federal 13,803 7,284 ( 6,546 ) State 8,516 3,733 943 Total deferred income tax expense (benefit) 22,319 11,017 ( 5,603 ) Total provision for income tax expense $ 35,171 $ 33,787 $ 28,239 124 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 17—Income Taxes—Continued The combined federal and state income tax expense differs from that computed at the federal statutory corporate tax rate as follows and is presented on a retrospective basis under ASU 2023-09: Year Ended December 31, 2025 2024 2023 (Dollars in thousands) Amount Rate Amount Rate Amount Rate Effective income tax rate Federal statutory rate $ 27,043 21.00 % $ 25,671 21.00 % $ 24,476 21.00 % State taxes, net of federal income tax benefit* 8,119 6.30 % 9,730 7.96 % 9,290 7.97 % Tax credits Low-income housing tax credits ( 5,560 ) ( 4.32 %) ( 4,253 ) ( 3.48 %) ( 3,528 ) ( 3.03 %) Nontaxable and nondeductible items Bank-owned life insurance ( 558 ) ( 0.43 %) ( 521 ) ( 0.43 %) ( 1,338 ) ( 1.15 %) Tax-exempt interest income, net of TEFRA ( 780 ) ( 0.61 %) ( 512 ) ( 0.45 %) ( 470 ) ( 0.40 %) Other 164 0.13 % 123 0.10 % 76 0.07 % Nondeductible items 5,250 4.08 % - - - - Other Compensation expense ( 3,685 ) ( 2.86 %) ( 137 ) ( 0.11 %) ( 267 ) ( 0.23 %) Tax effect of low-income housing tax credit losses ( 1,137 ) ( 0.88 %) ( 921 ) ( 0.75 %) - - Low-income housing tax credit amortization 6,031 4.68 % 4,566 3.73 % - - Other, net 284 0.22 % 41 0.07 % - - Total income tax expense and effective tax rate $ 35,171 27.31 % $ 33,787 27.64 % $ 28,239 24.23 % * State taxes in California made up the majority (greater than 50%) of the tax effect in the category. The increase in compensation expense deduction above is related to the distribution of deferred compensation (non-qualified retirement plans). The cash paid for income taxes (net of refunds) during the year was as follows: Year Ended December 31, (Dollars in thousands) 2025 2024 2023 Payments: Federal $ 4,255 $ 3,805 $ - State and local: California 10,431 9,116 12,647 Other 253 28 15 Total income taxes paid $ 14,939 $ 12,949 $ 12,662 125 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 17—Income Taxes—Continued The components of net deferred tax assets and liabilities at the periods shown are summarized as follows: December 31, (Dollars in thousands) 2025 2024 Deferred tax assets: Allowance for credit losses $ 23,688 $ 23,185 Deferred compensation 4,110 23,849 Unrealized losses on debt securities 1,594 8,250 Accrued liabilities 4,097 3,685 Loss carryforwards 1,863 476 State income taxes 522 1,793 Lease liabilities 489 692 Tax credit carry forward 21,351 2,402 Acquired loans fair valuation and other 437 188 Total deferred tax assets 58,151 64,520 Deferred tax liabilities: Commercial leasing $ ( 30,297 ) $ ( 25,704 ) Premises and equipment ( 2,144 ) ( 2,034 ) Deferred loan and lease costs ( 902 ) ( 936 ) Right of use leasing asset ( 459 ) ( 659 ) Core deposit intangible asset ( 345 ) ( 499 ) Accretion on investment securities ( 1,782 ) ( 1,200 ) FHLB dividends ( 348 ) ( 348 ) Investments (other K-1s) ( 75 ) ( 225 ) Prepaid assets ( 17 ) ( 17 ) Total deferred tax liabilities ( 36,369 ) ( 31,622 ) Net deferred tax assets $ 21,782 $ 32,898 The Company believes, based on available information, that more likely than not, the net deferred tax asset will be realized in the normal course of operations. Accordingly, no valuation allowance has been recorded at December 31, 2025 or 2024. The decrease in net deferred tax assets of $ 11.1 million was primarily due to a decrease in unrealized losses on debt securities and an increase in deferred tax liabilities from commercial leasing activities. As of December 31, 2025 and 2024, the Company had federal net operating loss carryovers of $ 8.0 million and $ 1.6 million, respectively. The $ 1.6 million in federal net operating loss carryover expires in 2036, but the rest can be carried forward indefinitely. As of December 31, 2025 and 2024, the Company also had a state net operating loss carryforward of $ 1.7 million which expires in 2036. The Company had $ 21.4 million and $ 2.4 million in federal tax credit carry-forwards as of December 31, 2025 and December 31, 2024, respectively. The tax credit carry-forwards have expiration dates ranging from 2026 to 2042 , for low-income housing tax credits. The significant increase in carry-forward tax credits results from the reduction in taxable income, resulting in limitations to fully utilize tax credits that were generated in 2025. The impact of a tax position is recognized in the financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The Company believes that it has no material uncertain tax positions in the consolidated financial statements as of December 31, 2025 or 2024. 126 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 17—Income Taxes—Continued The Company files U.S. and state income tax returns in jurisdictions with various statutes of limitations. The 2022 through 2025 federal tax years and the 2021 through 2025 state tax years remain subject to selection for examination as of December 31, 2025. The IRS is in the process of reviewing the Company’s 2023 tax return including inquiries related to certain leasing investment tax credits. The timing of when the IRS review will be complete and the potential outcome of the IRS review are both uncertain at this time. Note 18—Condensed Financial Statements of Parent Company Financial information pertaining only to Farmers and Merchants Bancorp, on a parent-only basis, is as follows: December 31, (Dollars in thousands) 2025 2024 Balance sheets Assets Cash and cash equivalents $ 1,188 $ 285 Investment in subsidiaries 653,302 584,851 Other assets 3,348 163 Total assets $ 657,838 $ 585,299 Liabilities and shareholders' equity Subordinated debentures $ 10,310 $ 10,310 Other liabilities 2,014 1,917 Shareholders' equity 645,514 573,072 Total liabilities and shareholders' equity $ 657,838 $ 585,299 Year Ended December 31, (Dollars in thousands) 2025 2024 2023 Statements of income Dividend and other income from subsidiaries $ 54,800 $ 60,900 $ 33,300 Interest and dividends 317 26 25 Total income 55,117 60,926 33,325 Reimbursement of expenses from subsidiaries 825 746 705 Other expenses 3,272 2,994 2,321 Total expense 4,097 3,740 3,026 Income before income taxes 51,020 57,186 30,299 Income tax benefit 1,117 1,078 887 52,137 58,264 31,186 Equity in undistributed net income of subsidiaries 41,468 30,193 57,128 Net income $ 93,605 $ 88,457 $ 88,314 127 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 18—Condensed Financial Statements of Parent Company—Continued Year Ended December 31, (Dollars in thousands) 2025 2024 2023 Statements of Cash Flows Cash flows from operating activities: Net income $ 93,605 $ 88,457 $ 88,314 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of the Bank ( 41,468 ) ( 30,193 ) ( 57,128 ) Change in other assets and liabilities 555 169 603 Net cash provided by operating activities 52,692 58,433 31,789 Cash flows from investing activities: Purchase of securities ( 3,222 ) - - Net cash used in investing activities ( 3,222 ) - - Cash flows from financing activities: Common stock repurchases ( 2,933 ) ( 45,261 ) ( 20,355 ) Purchase of treasury stock ( 31,793 ) - - Cash dividends paid ( 13,841 ) ( 13,017 ) ( 12,886 ) Net used in financing activities ( 48,567 ) ( 58,278 ) ( 33,241 ) Net change in cash and cash equivalents 903 155 ( 1,452 ) Cash and cash equivalents, beginning of year 285 130 1,582 Cash and cash equivalents, end of year $ 1,188 $ 285 $ 130 Note 19—Subsequent Events In accordance with ASC Topic 855, “ Subsequent Events ”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, the Company has evaluated all events or transactions that occurred after December 31, 2025 up through the date the Company issued the financial statements. During this period, there were no subsequent events that required recognition or disclosure. 128 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None