FARMERS & MERCHANTS BANCORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004
or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________ to ________

Commission File Number: 000-26099

FARMERS & MERCHANTS BANCORP
(Exact name of registrant as specified in its charter)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]

Number of shares of common stock of the registrant: Par value $0.01, authorized
2,000,000 shares; issued and outstanding 793,173 as of November 1, 2004.

1

FARMERS & MERCHANTS BANCORP

FORM 10-Q
TABLE OF CONTENTS

PART I. - FINANCIAL INFORMATION Page

Item 1 - Financial Statements

Consolidated Balance Sheets as of September 30, 2004,
December 31, 2003 and September 30, 2003.(Unaudited) 3

Consolidated Statements of Income for the Three Months
and Nine Months Ended September 30, 2004 and 2003.(Unaudited) 4

Consolidated Statements of Comprehensive Income for the Three
Months and Nine Months Ended September 30, 2004 and 2003.(Unaudited) 5

Consolidated Statements of Changes in Shareholders' Equity
for the Nine Months Ended September 30, 2004 and 2003.(Unaudited) 6

Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2004 and 2003.(Unaudited) 7

Notes to Consolidated Financial Statements 8

Item 2 - Management's Discussion and Analysis 14

Item 3 - Quantitative and Qualitative Disclosures About Market Risk 22

Item 4 - Controls and Procedures 26

PART II. - OTHER INFORMATION 30

Signatures 31

Index to Exhibits 32

2

PART I. - FINANCIAL INFORMATION

Item 1 - Financial Statements

FARMERS & MERCHANTS BANCORP
Consolidated Balance Sheets

- ----------------------------------------------------------------------------- -------------- -------------- ---------------
(in thousands) September 30, December 31, September 30,
2004 2003 2003
Assets (Unaudited) (Unaudited)
- ----------------------------------------------------------------------------- -------------- -------------- ---------------

Cash and Cash Equivalents:
Cash and Due From $34,321 $35,800 $36,521
Federal Funds Sold and Securities Purchased Under Agreements to Resell 6,500 - 20,800
- ----------------------------------------------------------------------------- -------------- -------------- ---------------
Total Cash and Cash Equivalents 40,821 35,800 57,321

Investment Securities:
Available-for Sale 176,720 223,965 194,056
Held-to-Maturity 70,089 37,957 41,182
- ----------------------------------------------------------------------------- -------------- -------------- ---------------
Total Investment Securities 246,809 261,922 235,238
- ----------------------------------------------------------------------------- -------------- -------------- ---------------

Loans 843,954 808,998 774,594
Less: Unearned Income (1,964) (2,092) (2,132)
Less: Allowance for Loan Losses (18,169) (17,220) (17,126)
- ----------------------------------------------------------------------------- -------------- -------------- ---------------
Loans, Net 823,821 789,686 755,336
- ----------------------------------------------------------------------------- -------------- -------------- ---------------
Land, Buildings & Equipment 12,171 11,209 11,394
Interest Receivable and Other Assets 52,072 49,948 48,111
- ----------------------------------------------------------------------------- -------------- -------------- ---------------
Total Assets $1,175,694 $1,148,565 $1,107,400
============================================================================= ============== ============== ===============

Liabilities & Shareholders' Equity
- ----------------------------------------------------------------------------- -------------- -------------- ---------------
Deposits:
Demand $252,619 $223,000 $200,304
Interest Bearing Transaction 93,146 96,869 86,754
Savings 291,900 276,016 262,549
Time 357,508 308,464 327,472
- ----------------------------------------------------------------------------- -------------- -------------- ---------------
Total Deposits 995,173 904,349 877,079
- ----------------------------------------------------------------------------- -------------- -------------- ---------------

Fed Funds Purchased - 1,000 -
FHLB Borrowings 40,898 111,928 111,938
Subordinated Debentures 10,310 10,310 -
Other Liabilities 13,069 11,373 7,965
- ----------------------------------------------------------------------------- -------------- -------------- ---------------
Total Liabilities 1,059,450 1,038,960 996,982
- ----------------------------------------------------------------------------- -------------- -------------- ---------------
Commitments & Contingencies (See Note 4)
Shareholders' Equity
Common Stock 8 8 8
Additional Paid In Capital 82,694 72,506 72,717
Retained Earnings 34,601 37,650 36,931
Accumulated Other Comprehensive (Loss) Income (1,059) (559) 762
- ----------------------------------------------------------------------------- -------------- -------------- ---------------
Total Shareholders' Equity 116,244 109,605 110,418
- ----------------------------------------------------------------------------- -------------- -------------- ---------------
Total Liabilities & Shareholders' Equity $1,175,694 $1,148,565 $1,107,400
============================================================================= ============== ============== ===============

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

3

FARMERS & MERCHANTS BANCORP
Consolidated Statements of Income (Unaudited)

- --------------------------------------------------------------------------------- ------------ ------------
(in thousands) Three Months Nine Months
Ended September 30, Ended September 30,
2004 2003 2004 2003
- ------------------------------------------------------- ------------ ------------ ------------ ------------

Interest Income
Interest & Fees on Loans $12,648 $11,543 $36,304 $33,219
Federal Funds Sold 64 31 124 128
Securities:
Taxable 1,858 1,485 5,612 5,440
Non-taxable 544 716 1,684 2,057
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Total Interest Income 15,114 13,775 43,724 40,844
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Interest Expense
Interest Bearing Transaction 15 19 44 98
Savings 272 301 779 998
Time Deposits 1,455 1,615 4,040 5,259
Interest on Borrowed Funds 627 775 2,125 2,180
Interest on Subordinated Debentures 119 - 327 -
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Total Interest Expense 2,488 2,710 7,315 8,535
- ------------------------------------------------------- ------------ ------------ ------------ ------------

Net Interest Income 12,626 11,065 36,409 32,309
Provision for Loan Losses 350 150 1,075 475
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Net Interest Income After
Provision for Loan Losses 12,276 10,915 35,334 31,834
- ------------------------------------------------------- ------------ ------------ ------------ ------------

Non-Interest Income
Service Charges on Deposit Accounts 1,211 1,254 3,669 3,658
Net Gain on Sale of Investment Securities 10 176 757 550
Credit Card Merchant Fees 469 401 1,306 1,144
Increase in Cash Surrender Value of Life Insurance 389 397 1,198 1,170
Other 871 940 2,999 2,784
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Total Non-Interest Income 2,950 3,168 9,929 9,306
- ------------------------------------------------------- ------------ ------------ ------------ ------------

Non-Interest Expense
Salaries & Employee Benefits 5,392 5,185 17,230 15,435
Occupancy 432 411 1,282 1,184
Equipment 548 505 1,526 1,603
Other Operating 2,136 1,929 5,898 5,877
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Total Non-Interest Expense 8,508 8,030 25,936 24,099
- ------------------------------------------------------- ------------ ------------ ------------ ------------

Net Income Before Taxes 6,718 6,053 19,327 17,041
Provision for Taxes 2,494 2,173 7,097 6,116
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Net Income $4,224 $3,880 $12,230 $10,925
======================================================= ============ ============ ============ ============

Earnings Per Share* $5.31 $4.84 $15.33 $13.60
======================================================= ============ ============ ============ ============

*2003 amounts have been restated to reflect the stock dividend declared during
second quarter of 2004. The accompanying notes are an integral part of these
consolidated financial statements

4

FARMERS & MERCHANTS BANCORP
Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) For Three Months For Nine Months
Ended September 30, Ended September 30,
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------

Net Income $4,224 $3,880 $12,230 $10,925

Other Comprehensive (Loss) Income -

Unrealized (Losses) Gains on Derivative Instruments:

Unrealized holding (losses) gains arising during the period, net of
related income tax effects of $59 and ($48) for the quarters ended
September 30, 2004 and 2003, respectively, and $123 and $37 for the nine
months ended September 30, 2004 and 2003, respectively. 82 (66) 170 51

Less: Reclassification adjustment for realized losses included in net
income, net of related income tax effects of ($44) and $0 for the quarters
ended September 30, 2004 and 2003, respectively, and ($109) and $0 for the
nine months ended June 30, 2004 and 2003, respectively. (61) - (150) -

Unrealized (Losses) Gains on Securities: Unrealized holding (losses) gains
arising during the period, net of related income tax effects of $1,883 and
($1,262) for the quarters ended September 30, 2004 and 2003, respectively,
and of ($60) and ($580)for the nine months ended September 30, 2004 and
2003, respectively. 2,595 (1,740) (82) (800)

Less: Reclassification adjustment for realized losses included in net
income, net of related income tax effects of ($4) and ($74) for the
quarters ended September 30, 2004 and 2003, respectively, and of
($318) and ($231) for the nine months ended September 30, 2004 and 2003,
respectively. (5) (102) (438) (319)

- -----------------------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive (Loss) Income 2,611 (1,908) (500) (1,068)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $6,835 $1,972 $11,730 $9,857
===================================================================================================================================

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

5

FARMERS & MERCHANTS BANCORP
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

- ---------------------------------------------------------------------- ------------ ------------ ---------------- ---------------
(in thousands except share data) Accumulated
Common Additional Other Total
Shares Common Paid-In Retained Comprehensive Shareholders'
Outstanding Stock Capital Earnings Income (Loss) Equity
- -------------------------------------------- ------------ ------------ ------------ ------------ ---------------- ---------------
Balance, December 31, 2002 733,021 $ 7 $ 64,979 $ 36,749 $ 1,830 $ 103,565
- -------------------------------------------- ------------ ------------ ------------ ------------ ---------------- ---------------

Net Income - - 10,925 - 10,925
Cash Dividends Declared on
Common Stock - - (1,605) - (1,605)
5% Stock Dividend 35,985 1 8,996 (8,996) - 1
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend - - (142) - (142)
Redemption of Stock (5,029) - (1,258) - - (1,258)
Unrealized Gains on Derivative Instruments 51 51
Changes in Net Unrealized Gain (Loss) on
Securities Available for Sale (1,119) (1,119)
- -------------------------------------------- ------------ ------------ ------------ ------------ ---------------- ---------------
Balance, September 30, 2003 763,977 $ 8 $ 72,717 $ 36,931 $ 762 $ 110,418
============================================ ============ ============ ============ ============ ================ ===============

- -------------------------------------------- ------------ ------------ ------------ ------------ ---------------- ---------------
Balance, December 31, 2003 763,274 $ 8 $ 72,506 $ 37,650 $ (559) $ 109,605
- -------------------------------------------- ------------ ------------ ------------ ------------ ---------------- ---------------
Net Income - - 12,230 - 12,230
Cash Dividends Declared on -
Common Stock - - (2,234) - (2,234)
5% Stock Dividend 37,429 - 12,838 (12,838) - -
Cash Paid in Lieu of Fractional
Shares Related to Stock Dividend - - (207) - (207)
Redemption of Stock (6,905) - (2,650) - - (2,650)
Unrealized Gains on
Derivitive Instruments 20 20
Changes in Net Unrealized Gain (Loss)
on Securities Available for Sale - - - (520) (520)
- -------------------------------------------- ------------ ------------ ------------ ------------ ---------------- ---------------
Balance, September 30, 2004 793,798 $ 8 $ 82,694 $ 34,601 $ (1,059) $ 116,244
============================================ ============ ============ ============ ============ ================ ===============

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

6

FARMERS & MERCHANTS BANCORP

Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands) Sept. 30, Sept. 30,
2004 2003
- ----- -----------------------------------------------------------------------------------------------------------------------

Operating Activities:
Net Income $12,230 $10,925
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Loan Losses 1,075 475
Depreciation and Amortization 1,128 1,168
Provision for Deferred Income Taxes (518) (75)
Net Amortization of Investment Security Premium & Discounts 709 1,351
Net Gain on Sale of Investment Securities (757) (730)
Net Gain on Sale of Property & Equipment (156) -
Net Change in Operating Assets & Liabilities:
Increase in Interest Receivable and Other Assets (1,208) (1,539)
Increase (Decrease) in Interest Payable and Other Liabilities 1,696 (2,129)
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 14,199 9,446

Investing Activities:
Securities Available-for-Sale:
Purchased (63,507) (164,878)
Sold or Matured 109,856 174,263
Securities Held-to-Maturity:
Purchased (37,980) (22,141)
Matured 5,894 8,899
Purchase of Life Insurance Contracts - (2,600)
Net Increase in Loans (35,371) (76,230)
Principal Collected on Loans Charged Off 161 410
Net Additions to Premises and Equipment (2,139) (1,220)
Proceeds from Sale of Property & Equipment 205 -
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (22,881) (83,497)

Financing Activities:
Net Increase in Demand, Interest-Bearing Transaction,
and Savings Deposits 41,780 18,000
Increase in Time Deposits 49,044 8,854
Federal Funds Purchased (1,000) (16,997)
Net (Decrease) Increase in Federal Home Loan Bank Borrowings (71,030) 70,946
Cash Dividends (2,441) (1,747)
Repurchase of Company Stock (2,650) (1,258)
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 13,703 77,798
Increase (Decrease) in Cash and Cash Equivalents 5,021 3,747
Cash and Cash Equivalents at Beginning of Year 35,800 53,574
- -----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents as of Sept. 30, 2004 and Sept. 30, 2003 $40,821 $57,321
=============================================================================================================================

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

7

FARMERS & MERCHANTS BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For the nine months ended September 30, 2004 and September 30, 2003

1. Significant Accounting Policies
Farmers & Merchants Bancorp (the Company) was organized March 10, 1999. Primary
operations are related to traditional banking activities through its subsidiary
Farmers & Merchants Bank of Central California (the Bank) which was established
in 1916. The consolidated financial statements of the Company and its
subsidiary, the Bank, are prepared in conformity with generally accepted
accounting principles (GAAP) and prevailing practices within the banking
industry. In preparing the financial statements, management is required to make
estimates and assumptions that affect reported amounts as of the date of the
balance sheet and revenues and expenses for the period. These estimates are
based on information available as of the date of the financial statements.
Therefore, actual results could differ from those estimates. The following is a
summary of the significant accounting and reporting policies used in preparing
the consolidated financial statements.

Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company and the Company's wholly owned subsidiaries, F & M Bancorp, Inc. and the
Bank, along with the Bank's wholly owned subsidiaries, Farmers & Merchants
Investment Corporation and Farmers/Merchants Corp. Significant intercompany
transactions have been eliminated in consolidation. F & M Bancorp, Inc. was
created in March 2002 to protect the name F & M Bank. Farmers & Merchants
Investment Corporation has been dormant since 1991. Farmers/Merchants Corp. acts
as trustee on deeds of trust originated by the Bank. In December 2003, the
Company formed FMCB Statutory Trust I. FMCB Statutory Trust I is a
non-consolidated subsidiary per GAAP, and was formed for the sole purpose of
issuing Trust Preferred Securities.

Certain amounts in the prior years' financial statements and related footnote
disclosures have been reclassified to conform to the current year presentation.
These reclassifications have no effect on previously reported income.

Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, the Company has
defined cash and cash equivalents as those amounts included in the balance sheet
captions Cash and Due from Banks and Federal Funds Sold and Securities Purchased
Under Agreements to Resell. Generally, these transactions are for one day
periods. For these instruments, the carrying amount is a reasonable estimate of
fair value.

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

8

Securities are classified as available-for-sale if it is management's intent, at
the time of purchase, to hold the securities for an indefinite period of time
and/or to use the securities as part of the Company's asset/liability management
strategy. Securities classified as available-for-sale include securities which
may be sold to effectively manage interest rate risk exposure, satisfy liquidity
demands and other factors. These securities are reported at fair value with
aggregate, unrealized gains or losses excluded from income and included as a
separate component of shareholders' equity, net of related income taxes. Fair
values are based on quoted market prices or broker/dealer price quotations on a
specific identification basis. Gains or losses on the sale of these securities
are computed using the specific identification method. Unrealized losses on
these securities, reflecting a decline in value judged by the Company to be
other than temporary, are recognized in the period in which they become known.

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

Loans
Loans are reported at the principal amount outstanding net of unearned discounts
and deferred loan fees. Interest income on loans is accrued daily on the
outstanding balances using the simple interest method. Loan origination fees are
deferred and recognized over the contractual life of the loan as an adjustment
to the yield. Loans are placed on a non-accrual status when the collection of
principal or interest is in doubt or when they become past due for 90 days or
more unless they are both well-secured and in the process of collection. For
this purpose a loan is considered well-secured if it is collateralized by
property having a net realizable value in excess of the amount of the loan or is
guaranteed by a financially capable party. When a loan is placed on non-accrual
status, the accrued and unpaid interest receivable is reversed and charged
against current income; thereafter, interest income is recognized only as it is
collected in cash. Loans placed on a non-accrual status are returned to accrual
status when the loans are paid current as to principal and interest and future
payments are expected to be made in accordance with the contractual terms of the
loan.

A loan is impaired when, based on current information and events, it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. When a loan is impaired, the recorded
amount of the loan in the Consolidated Balance Sheets is based on the present
value of expected future cash flows discounted at the loan's effective interest
rate, on the observable or estimated market price of the loan or on the fair
value of the collateral if the loan is collateral dependent. Impaired loans are
placed on a non-accrual status with income reported accordingly. Cash payments
are first applied as a reduction of the principal balance until collection of
the remaining principal and interest can be reasonably assured. Thereafter,
interest income is recognized as it is collected in cash.

Allowance for Loan Losses
As a financial institution which assumes lending and credit risks as a principal
element in its business, the Company anticipates that credit losses will be
experienced in the normal course of business. Accordingly, the allowance for
loan losses is maintained at a level considered adequate by management to
provide for losses that are inherent in the portfolio. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs. Management employs a systematic methodology for determining the
allowance for loan losses. On a quarterly basis, management reviews the credit
quality of the loan portfolio and considers problem loans, delinquencies,
internal credit reviews, current economic conditions, loan loss experience and
other factors in determining the adequacy of the allowance balance.

The conditions evaluated in connection with the allowance may include existing
general economic and business conditions affecting the key lending areas of the
Company, credit quality trends, collateral values, loan volumes and
concentration, seasoning of the loan portfolio, specific industry conditions,
recent loss experience, duration of the current business cycle, bank regulatory
examination results and findings of the Company's internal credit examiners.

9

The allowance also incorporates the results of measuring impaired loans as
provided in Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan-Income Recognition and Disclosures". These
accounting standards prescribe the measurement methods, income recognition and
disclosures related to impaired loans.

While the Company utilizes a systematic methodology in determining its
allowance, the allowance is based on estimates, and ultimate losses may vary
from current estimates. The estimates are reviewed periodically and, as
adjustments become necessary, are reported in earnings in the periods in which
they become known.

Premises and Equipment
Premises, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is computed principally
by the straight line method over the estimated useful lives of the assets.
Estimated useful lives of buildings range from 30 to 40 years, and for furniture
and equipment from 3 to 8 years. Leasehold improvements are amortized over the
lesser of the terms of the respective leases, or their useful lives, which are
generally 5 to 10 years. Remodeling and capital improvements are capitalized
while maintenance and repairs are charged directly to occupancy expense.

Other Real Estate
Other real estate owned, which is included in other assets, is comprised of
properties acquired through foreclosures 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 Loan Losses at the time of
acquisition. Subsequent declines in value from the recorded amounts, routine
holding costs, and gains or losses upon disposition, if any, are included in
non-interest income or expense as incurred.

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

Earnings Per Share
Farmers & Merchants Bancorp common stock is not traded on any exchange. The
shares are primarily held by local residents and are not actively traded.

The actual number of shares outstanding at September 30, 2004, was 793,798.
Basic earnings per share is calculated on the basis of the weighted average
number of shares outstanding during the period. Weighted average number of
shares for the nine months ending September 30, 2004 and 2003 were 797,981 and
803,391, respectively. Earnings per share for the nine months ending September
30, 2004 and 2003 were $15.33 and $13.60, respectively. Weighted average number
of shares for the three months ending September 30, 2004 and 2003 were 795,702
and 801,406, respectively. Earnings per share for the three months ending
September 30, 2004 and 2003 were $5.31 and $4.84, respectively. Prior periods
per share amounts have been restated for the 5% stock dividend declared during
2004 and 2003.

10

Dividends
On April 6, 2004, the Board of Directors declared a 5% stock dividend payable
May 12, 2004, to shareholders of record at the close of business on April 16,
2004. Common stock shareholders of record as of April 16, 2004 received one
share of common stock for every 20 shares of common stock owned. Fractional
shares were not issued. For common stock share lots of less than 20 shares, a
cash dividend in the amount of $17.15 per share was paid in lieu of the stock
dividend.

The Board of Directors of Farmers & Merchants Bancorp declared a cash dividend
on June 1, 2004, in the amount of $2.80 per share, an increase from the $2.10
per share paid last year. The cash dividend was paid on July 1, 2004, to
stockholders of record as of June 14, 2004.

No stock or cash dividends were declared during the third quarter of 2004.

Segment Reporting
The Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" requires that public
companies report certain information about operating segments. It also requires
that public companies report certain information about their products and
services, the geographic areas in which they operate, and their major customers.
The Company is a community bank which offers a wide array of products and
services to its customers. Pursuant to its banking strategy, emphasis is placed
on building relationships with its customers, as opposed to building specific
lines of business. As a result, the Company is not organized around discernable
lines of business and prefers to work as an integrated unit to customize
solutions for its customers, with business line emphasis and product offerings
changing over time as needs and demands change. Thus, all necessary requirements
of SFAS No. 131 have been met by the Company as of September 30, 2004.

Derivative Instruments and Hedging Activities
The Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Certain Hedging Activities" as amended by the
Statement of Financial Accounting Standards No. 138 and No. 149, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
All derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value. Changes in the fair
value of those derivatives are accounted for depending on the intended use of
the derivative and the resulting designation under specified criteria. If the
derivative is designated as a fair value hedge, the changes in the fair value of
the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge,
designed to minimize interest rate risk, the effective portions of the change in
the fair value of the derivative are recorded in other comprehensive income net
of related income taxes. Ineffective portions of changes in the fair value of
cash flow hedges are recognized in earnings.

The Company utilizes derivative financial instruments such as interest rate
caps, floors, swaps and collars. These instruments are purchased and/or sold to
reduce the Company's exposure to changing interest rates. The Company marks to
market the value of its derivative financial instruments and reflects gain or
loss in earnings in the period of change or in other comprehensive income.

11

Comprehensive Income
The Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. Other
comprehensive income refers to revenues, expenses, gains and losses that GAAP
recognize as changes in value to an enterprise but are excluded from net income.
For the Company, comprehensive income (loss) includes net income and changes in
fair value of its available-for-sale investment securities, minimum pension
liability adjustments and cash flow hedges.

2. Recent Accounting Developments
In June 2004, the Emerging Issues Task Force of the FASB issued final guidance
on its Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." A consensus was reached regarding
disclosures about unrealized losses on available-for-sale debt and equity
securities accounted for under FASB Statements No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."

This EITF describes a model involving three steps: (1) determine whether an
investment is impaired, (2) determine whether the impairment is other-than
- -temporary, and (3) recognize the impairment loss in earnings. The EITF also
requires several additional disclosures for cost-method investments. The EITF's
impairment accounting guidance was effective for reporting periods beginning
after June 15, 2004. For all other investments within the scope of this Issue,
the disclosures are effective in annual financial statements for fiscal years
ending after June 15, 2004. The additional disclosures for cost method
investments are effective for fiscal years ending after June 15, 2004.

The adoption of this EITF did not have a material impact on the Company's
consolidated financial statements. At September 30, 2004, management believes
the impairments described above are temporary and, accordingly, no impairment
loss has been recognized in the Company's consolidated statement of income.

FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN
46") may have an impact on the treatment of the trust preferred securities we
have issued and ability for those instruments to continue to provide the Company
with Tier 1 capital. FIN 46 prevents the Company from consolidating the trust
entity that issued these trust preferred securities. The Federal Reserve has
issued Supervisory Letter (SR 03-13) which allows for the inclusion of these
instruments in Tier 1 capital regardless of the impact of FIN 46 on the
consolidation of the trusts. There remains the potential that this determination
by the Federal Reserve may be changed at a later date (see Item 2. - Capital).
We do not expect FIN 46 to have any other material impact on the Company's
financial condition or operating results.

On March 9, 2004, the Staff of the Securities and Exchange Commission (the "SEC
Staff") issued Staff Accounting Bulletin No. 105, "Application of Accounting
Principles to Loan Commitments" ("SAB 105"). SAB 105 provides guidance on the
initial recognition and measurement of loan commitments that meet the definition
of a derivative, and summarizes the related disclosure requirements. SAB 105 is
effective for all loan commitments accounted for as derivatives that are entered
into, or substantially modified, on or after April 1, 2004. SAB 105 addresses
loan commitments that the Financial Accounting Standards Board (FASB) defines as
derivatives in paragraph 6 of FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by FASB Statement No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities
("FAS 133"). These loan commitments relate to the origination of mortgage loans
that will be held for sale. SAB 105 does not apply to (1) commitments to
purchase mortgage loans that do not meet the definition of a derivative under
paragraph 6 of FAS 133 or (2) commitments that are explicitly excluded from the
scope of FAS 133 (i.e., commitments to originate mortgage loans that will be
held for investment purposes and loan commitments to originate other types of
loans). The Company does not currently originate mortgage loans to be held for
sale. If that should change in the future, we would take SAB 105 into
consideration but do not expect it to have a material impact on the Company's
financial condition or operating results.

12

3. Interim-Period Disclosure of Employee Benefit Plans

Components of Net Periodic Pension Cost:

Three months ended September 30, Pension Benefits
-----------------------------------
(in thousands) 2004 2003
-------------- -------------
Service cost $ 12 $ 13
Interest cost 64 56
Expected return on assets (57) (32)
Amortization of loss 126 94
Amortization of prior service cost - -
Amortization of transition obligation - -
-------------- -------------
Net periodic pension cost $ 145 $ 131
============== =============

Employer Contributions
On July 13, 2004, the Company contributed $225,000 to the Plan. At the current
time, the Company does not intend to make additional 2004 contributions.

4. Commitments and Contingencies

In the normal course of business, the Company is a party to financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. These instruments include commitments to extend credit, letters of
credit and financial guarantees that are not reflected in the Consolidated
Balance Sheets.

The Company's exposure to credit loss in the event of nonperformance by the
other party with regard to standby letters of credit, undisbursed loan
commitments and financial guarantees is represented by the contractual notional
amount of those instruments. Commitments to extend credit are agreements to lend
to a customer as long as there is no violation of any condition established in
the contract. The Company uses the same credit policies in making commitments
and conditional obligations as it does for recorded balance sheet items. The
Company may or may not require collateral or other security to support financial
instruments with credit risk. Evaluations of each customer's creditworthiness
are performed on a case-by-case basis.

Standby letters of credit are conditional commitments issued by the Company to
guarantee performance of or payment for a customer to a third party. The Company
had standby letters of credit outstanding of $13.5 million at September 30,
2004, and $16.7 million at September 30, 2003. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition contained in the contract. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. Undisbursed
loan commitments totaled $333.5 million and $291.1 million as of September 30,
2004 and 2003, respectively. Since many of these commitments are expected to
expire without fully being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.

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, is of the opinion 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.

13

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

Forward-Looking Statements
Management's discussion and analysis is written to provide greater insight into
the results of operations and the financial condition of Farmers & Merchants
Bancorp and its subsidiaries. For a more complete understanding of the Company
and its operations, reference should be made to the financial statements
included in this report and in the Company's 2003 Annual Report on Form 10-K.
Certain statements in this Report on Form 10-Q constitute "forward-looking
statements" and usually contain the words "estimate," "project," "expect,"
"objective," "goal," or similar expressions and includes assumptions concerning
the Company's operations, future results and prospects. These forward-looking
statements are based upon current expectations and are subject to risk and
uncertainties. In connection with the "safe-harbor" provisions of the private
Securities Litigation Reform Act, the Company provides the following cautionary
statement identifying important factors which could cause the actual results of
events to differ materially from those set forth in or implied by the
forward-looking statements and related assumptions.

Such factors include the following: (i) the effect of changing regional and
national economic conditions; (ii) significant changes in interest rates and
prepayment speeds; (iii) credit risks of commercial, real estate, consumer and
other lending activities; (iv) changes in federal and state banking laws or
regulations; (v) competitive pressure in the banking industry; (vi) changes in
governmental fiscal or monetary policies; (vii) uncertainty regarding the
economic outlook resulting from the continuing war on terrorism, as well as
actions taken or to be taken by the U.S. or other governments as a result of
further acts or threats of terrorism; (viii) dividend restrictions; (ix)
asset/liability pricing risks and liquidity risks; (x) changes in the securities
markets; (xi) certain operational risks involving data processing systems or
fraud; (xii) the State of California's fiscal difficulties; and (xiii) other
external developments which could materially impact the Company's operational
and financial performance. Additional information on these and other factors
that could affect financial results are included in the Company's Securities and
Exchange Commission filings.

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

Overview
The Company's primary service area encompasses the northern Central Valley of
California, a region that is significantly impacted by the agricultural
industry. Accordingly, any discussion of the Company's Financial Condition and
Results of Operations is influenced by the seasonal banking needs of its
customers. Comparisons of the current quarter's results, both in terms of the
balance sheet and income statement, are most meaningful to the same quarter in
the prior year, not to the prior calendar quarter.

For the three and nine months ended September 30, 2004, Farmers & Merchants
Bancorp reported net income of $4,224,000 and $12,230,000, earnings per share of
$5.31 and $15.33 and return on average assets of 1.43% and 1.40%. Return on
average shareholders' equity was 14.97% and 14.55% for the three and nine months
ended September 30, 2004. For the three and nine months ended September 30,
2003, net income totaled $3,880,000 and $10,925,000, earnings per share was
$4.84 and $13.60 and return on average assets was 1.40% and 1.36%. Return on
average shareholders' equity for the three and nine months ended September 30,
2003 was 14.27% and 13.63%, respectively.

14

The Company's improved earnings performance in the first nine months of 2004
when compared to the same period last year was due to a combination of (1)
growth in earning assets, (2) improvement in the mix of earning assets as
reflected by an increase in loans as a percentage of average earning assets, (3)
improvement in non-interest income and (4) an improvement in the efficiency
ratio from 57.91% for the nine months ended September 30, 2003 to 55.97% for the
nine months ended September 30, 2004.

The following is a summary of the financial results for the nine-month period
ended September 30, 2004 compared to September 30, 2003.

o Net income increased 11.9% to $12.2 million from $10.9 million.

o Earnings per share increased 12.7% to $15.33 from $13.60

o Net interest income increased 12.7% to $36.4 million from $32.3 million.

o Total assets increased 6.2% to $1.2 billion.

o Gross loans increased 9.0% to $843.9 million.

o Total deposits increased 13.5% to $995.2 million.

o Total shareholders' equity increased 5.3% to $116.2 million after stock
repurchases of $2.7 million and cash dividends of $2.4 million.

Results of Operations

Net Interest Income
Net interest income is the amount by which the interest and fees on loans and
other interest earning assets exceed the interest paid on interest bearing
sources of funds. For the purpose of analysis, the interest earned on tax-exempt
investments and municipal loans is adjusted to an amount comparable to interest
subject to normal income taxes. This adjustment is referred to as "taxable
equivalent" and is noted wherever applicable. Interest income and expense are
affected by changes in the volume and mix of average interest earning assets and
average interest bearing liabilities, as well as fluctuations in interest rates.
Therefore, increases or decreases in net interest income are analyzed as changes
in volume, changes in rate and changes in the mix of assets and liabilities.

The Company's earning assets and rate sensitive liabilities are subject to
repricing at different times, which exposes the Company to income fluctuations
when interest rates change. In order to minimize income fluctuations, the
Company attempts to match asset and liability maturities. However, some maturity
mismatch is inherent in the asset and liability mix.

Net interest income increased 12.7% to $36.4 million for the first nine months
of 2004, compared to $32.3 million for the same period in 2003. On a fully
taxable equivalent basis, net interest income increased 11.6% to $37.4 million
through September 30, 2004, compared to $33.5 million for the first nine months
of 2003. Net interest income for the three months ended September 30, 2004
increased 14.1% to $12.6 million, compared to the three months ended September
30, 2003. The primary reason for the increase in net interest income during the
first nine months of 2004 when compared to the same period last year was an
improvement in the volume and mix (as reflected by an increase in loans as a
percentage of average earning assets) of earning assets. However, since the
Federal Reserve Bank began increasing market interest rates in June, 2004, the
Company's net interest income has started to benefit from an increase in the
yield on earning assets.

15

Net interest income on a taxable equivalent basis, expressed as a percentage of
average total earning assets, is referred to as the net interest margin. For the
nine months ended September 30, 2004, the net interest margin on a taxable
equivalent basis was 4.59% compared to 4.50% in 2003. For the three months ended
September 30, 2004, the net interest margin on a taxable equivalent basis was
4.64% compared to 4.42% in 2003. This is the second quarter in a row that the
Company's net interest margin has increased over the same period in the prior
year. Although this improvement is primarily a result of a decrease in the cost
of interest bearing liabilities, the Company's yield on earning assets has begun
to improve as a result of recent increases in short-term market interest rates.
Between June 30, 2004 and September 21, 2004, the Federal Reserve Bank increased
market interest rates by 75 basis points. As a result, the Company has increased
its prime rate by 75 basis points to 4.75%. Should market interest rates
continue to rise, the Company's net interest margin is expected to improve.

Loans, generally the Company's highest earning asset, increased $69.4 million as
of September 30, 2004 compared to September 30, 2003. On an average balance
basis, loans increased by $95.4 million for the nine months ended September 30,
2004. Due, in part, to the continuing negative impact of a decline in interest
rates during 2002 and 2003, the yield on the loan portfolio decreased 23 basis
points to 5.91% for the nine months ended September 30, 2004 compared to 6.14%
for the nine months ended September 30, 2003. This decrease in yield was offset
by the growth in loan balances, which resulted in interest revenue from loans
increasing 9.3% to $3.1 million for the first nine months of 2004.

The investment portfolio is the other main component of the Company's earning
assets. The Company's investment policy is conservative. The Company invests
primarily in mortgage-backed securities, U.S. Treasuries, U.S. Government
Agencies, and high-grade municipals. Since the risk factor for these types of
investments is significantly lower than that of loans, the yield earned on
investments is generally less than that of loans.

Average investment securities decreased $7.5 million compared to the average
balance for the nine months ended September 30, 2003. With the decrease in the
average balance of investment securities there was a decrease in interest income
of $407,000 for the nine months ended September 30, 2004 due also, in part, to
the continuing negative impact of a decline in interest rates during 2002 and
2003. The nine months average yield, on a taxable equivalent basis, in the
investment portfolio was 4.37% in 2004 compared to 4.51% in 2003. Net interest
income on the Schedule of Year-to-Date Average Balances and Interest Rates
located on page 28 is shown on a taxable equivalent basis, which is higher than
net interest income on the Consolidated Statements of Income because of
adjustments that relate to income on certain securities that are exempt from
federal income taxes.

Average interest-bearing sources of funds increased $51.5 million or 6.8% for
the nine months ended September 30, 2004. Of that increase, average borrowed
funds (primarily FHLB Advances) decreased $2.6 million, subordinated debentures
increased $10.3 million and interest-bearing deposits increased $43.8 million.
Even as interest-bearing sources of funds increased, interest expense decreased
14.3% as a result of declining interest rates paid for those sources of funds
and an improvement in the mix of lower cost interest bearing transaction and
savings deposits as a percentage of total interest bearing deposits (see
Deposits). Overall, the average interest cost on interest-bearing sources of
funds was 1.2% for the nine months ending September 30, 2004 and 1.5% for the
nine months ending September 30, 2003.

16

Allowance and Provision for Loan Losses
As a financial institution that assumes lending and credit risks as a principal
element of its business, credit losses will be experienced in the normal course
of business. The allowance for loan losses is established to absorb losses
inherent in the portfolio. The allowance for loan losses is maintained at a
level considered by management to be adequate to provide for risks inherent in
the loan portfolio. The allowance is increased by provisions charged to
operating expense and reduced by net charge-offs. In determining the adequacy of
the allowance for loan losses, management takes into consideration examinations
by the Company's supervisory authorities, results of internal credit reviews,
financial condition of borrowers, loan concentrations, prior loan loss
experience and general economic conditions. The allowance is based on estimates
and ultimate losses may vary from the current estimates. Management reviews
these estimates periodically and, when adjustments are necessary, they are
reported in the period in which they become known.

After reviewing all factors, management concluded that the allowance for loan
losses as of September 30, 2004 was adequate.

The Company has established credit management policies and procedures that
govern both the approval of new loans and the monitoring of the existing
portfolio. The Company manages and controls credit risk through comprehensive
underwriting and approval standards, portfolio diversification guidelines,
dollar limits on loans to one borrower and by restricting loans made primarily
to its principal market area where management believes it is better able to
assess the applicable risk. Management reports regularly to the Board of
Directors regarding trends and conditions in the loan portfolio and regularly
conducts credit reviews of individual loans. Loans that are performing but have
shown some signs of weakness are subjected to more stringent reporting and
oversight.

As of September 30, 2004, the allowance for loan losses was $18.2 million, which
represents 2.2% of the total loan balances. As of September 30, 2003, the
allowance was $17.1 million or 2.2% of total loans. The table below illustrates
the change in the allowance for the first nine months of 2004 and 2003.

Allowance for Loan Losses (in thousands)
Balance, December 31, 2003 $ 17,220
Provision Charged to Expense 1,075
Recoveries of Loans Previously Charged Off 162
Loans Charged Off (288)
======================================================================
Balance, September 30, 2004 $ 18,169
======================================================================

Balance, December 31, 2002 $ 16,684
Provision Charged to Expense 475
Recoveries of Loans Previously Charged Off 411
Loans Charged Off (444)
======================================================================
Balance, September 30, 2003 $ 17,126
======================================================================

17

Non-Interest Income
Overall, non-interest income increased $623,000 or 6.7% for the nine months
ended September 30, 2004 compared to the same period in 2003. A portion of the
growth occurred in gain on sale of investment securities, which increased
$207,000 through the first nine months of 2004. The increase was mainly the
result of the Company's decision to take advantage of the decline in interest
rates that began in early January 2004 and continued through early April 2004,
by selling approximately $37 million in investment securities for a gain. As a
result of increases in overall market interest rates, the Company does not
anticipate that these gains will recur during the remainder of 2004.

Other factors impacting the increase in non-interest income include gains of
$79,000 on derivative contracts, gains on sale of fixed assets of $155,000 and
increased Credit Card merchant fees in the amount of $162,000.

Non-Interest Expense
Overall, non-interest expense increased $1.8 million or 7.6% over the first nine
months of 2004, primarily as a result of a $1.8 million increase in Salaries and
Employee Benefits. This increase was due primarily to officer salary merit
increases which occurred in May 2004 and increased contributions to the
Company's retirement plans and incentive compensation plans.

Income Taxes
The provision for income taxes increased 16.0% to $7.1 million for the first
nine months of 2004. The Company's effective tax rate increased for the first
nine months of 2004 and was 36.7% compared to 35.9% for the same period in 2003.

Financial Condition

Investment Securities
The Financial Accounting Standards Board Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", requires the Company to
classify its investments as held-to-maturity, trading or available-for-sale.
Securities are classified as held-to-maturity and are carried at amortized cost
when the Company has the positive intent and ability to hold the securities to
maturity. Trading securities are securities acquired for short-term appreciation
and are carried at fair value, with unrealized gains and losses recorded in
non-interest income. Securities classified as available-for-sale include
securities, which may be sold to effectively manage interest rate risk exposure,
satisfy liquidity demand and other factors. These securities are reported at
fair value with aggregate, unrealized gains or losses excluded from income and
included as a separate component of shareholders' equity, net of related income
taxes.

The investment portfolio provides the Company with an income alternative to
loans. As of September 30, 2004 the investment portfolio represented 21.0% of
the Company's total assets. Total investment securities increased $11.6 million
from a year ago and totaled $246.8 million at September 30, 2004. Not included
in the investment portfolio are overnight investments in Federal Funds Sold. For
the nine months ended September 30, 2004, average Federal Funds Sold was $14.2
million compared to $12.4 million in 2003.

Loans
The Company's loan portfolio at September 30, 2004 increased $69.4 million from
September 30, 2003. The increase was due to strong loan demand in the Company's
market area, along with an aggressive calling program on high quality loan
prospects. Additionally, on a nine month average balance basis, loans have
increased $95.4 million or 13.2% over 2003. The table following sets forth the
distribution of the loan portfolio by type as of the dates indicated.

18

Loan Portfolio As Of:

(in thousands) September 30, 2004 December 31, 2003 September 30, 2003
- -------------------------------------- ------------------------ ------------------------ ------------------------

Real Estate $418,289 $386,735 $381,175
Real Estate Construction 64,744 77,115 73,828
Home Equity 61,661 55,827 50,054
Agricultural 138,180 134,862 125,516
Commercial 143,773 136,955 125,385
Consumer 17,307 17,504 18,636
- -------------------------------------- ------------------------ ------------------------ ------------------------
Gross Loans 843,954 808,998 774,594

Less:
Unearned Income 1,964 2,092 2,132
Allowance for Loan Losses 18,169 17,220 17,126
- -------------------------------------- ------------------------ ------------------------ ------------------------
Net Loans $823,821 $ 789,686 $ 755,336
====================================== ======================== ======================== ========================

In the ordinary course of business, the Company enters into commitments to
extend credit to its customers. These commitments are not reflected in the
accompanying consolidated financial statements. As of September 30, 2004, the
Company had entered into commitments with certain customers amounting to $333.5
million compared to $291.1 million at September 30, 2003. Letters of credit at
September 30, 2004 and September 30, 2003 were $13.5 million and $16.7 million,
respectively.

Non-Performing Assets
Non-performing assets are comprised of non-performing loans and other real
estate owned. As set forth in the table below, non-performing loans as of
September 30, 2004 were $517,000 compared to $2.7 million at September 30, 2003.
Accrued interest reversed from income on loans placed on a non-accrual status
totaled $32,000 at September 30, 2004 compared to $320,000 at September 30,
2003. The Company reported no other real estate owned for both September 30,
2004 and September 30, 2003.

Non-Performing Assets

(in thousands) September 30, 2004 December 31, 2003 September 30, 2003
- --------------------------------------- ------------------------ ----------------------- ------------------------

Non-performing Loans $517 $2,584 $2,745
Other Real Estate Owned - - -
======================================= ======================== ======================= ========================
Total $517 $2,584 $2,745
======================================= ======================== ======================= ========================

Non-Performing Assets
as a % of Total Loans 0.1% 0.3% 0.4%
- --------------------------------------- ------------------------ ----------------------- ------------------------
Allowance for Loan Losses as a % of
Non-Performing Loans 3,514.3% 666.4% 623.9%
- --------------------------------------- ------------------------ ----------------------- ------------------------

Except for non-performing loans shown in the table above, the Company's
management is not aware of any loans as of September 30, 2004 for which known
credit problems of the borrower would cause serious doubts as to the ability of
these borrowers to comply with their present loan repayment terms, or any known
events that would result in the loan being designated as non-performing at some
future date. The Company's management cannot, however, predict the extent to
which any deterioration in general economic conditions, real estate values,
increase in general rates of interest, change in the financial conditions or
business of a borrower may adversely affect a borrower's ability to pay.

19

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

At September 30, 2004, deposits totaled $995.2 million. This represents an
increase of 13.5% or $118.1 million from September 30, 2003. The increase was
focused in demand and savings deposits, which increased $52.3 million and $29.4
million, respectively. The Company's calling efforts for prospective customers
include acquiring both loan and deposit relationships which results in new
demand, interest bearing transaction and savings accounts. Although the
Company's time deposits have increased by $30.0 million since September 30,
2003, this growth has been entirely due to increased use of public deposits as
part of the Company's asset/liability management funding strategies (See Federal
Home Loan Bank Advances). Due to strong growth in demand, interest bearing
transaction and savings balances, the Company has reduced its focus on growing
higher cost time deposits; therefore, non-public time deposits have decreased
$10.2 million period over period. This reduced reliance on higher cost time
deposits has had, and should continue to have, a positive impact on the
Company's net interest margin (see Net Interest Income).

Federal Home Loan Bank Advances
Advances from the Federal Home Loan Bank are another key source of funds to
support earning assets. These advances are also used to manage the Company's
interest rate risk exposure, and as opportunities exist to borrow and invest the
proceeds at a positive spread through the investment portfolio. FHLB advances as
of September 30, 2004 were $40.9 million compared to $111.9 million as of
September 30, 2003. During June, 2004, the Company's asset/liability management
committee decided to replace $50.0 million of short-term FHLB advances with
three and six month public time deposits since the rates on these public funds
were lower than the equivalent FHLB advance rates.

Long-term Subordinated Debentures
On December 17, 2003 the Company raised $10 million through an offering of trust
preferred securities. Although this amount is reflected as subordinated debt on
the Company's balance sheet, under applicable regulatory guidelines, trust
preferred securities qualify as regulatory capital (see Capital). These
securities accrue interest at a variable rate based upon 3-month Libor plus
2.85%. The interest rate resets quarterly and was 4.74% as of September 30,
2004.

Capital
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Company and the Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
the Company and the Bank's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company and the
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.

20

Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios set
forth in the table below of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined in the regulations), and of
Tier I capital (as defined in the regulations) to average assets (as defined in
the regulations). Management believes, as of September 30, 2004, that the
Company and the Bank meet all capital adequacy requirements to which they are
subject.

As of September 30, 2003, the most recent notification from the Federal Reserve
Bank categorized the Company and the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company and the Bank must maintain minimum Total risk-based,
Tier I risk-based and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management believes
have changed the Company's categories.

To Be Well
Capitalized Under
Regulatory Capital Prompt Corrective
(in thousands) Actual Requirements Action Provisions
- ------------------------------------------------------------------------------------------------------------------
The Company: Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------

As of September 30, 2004
Total Capital to Risk Weighted Assets $ 140,270 13.59% $ 82,567 8.0% N/A N/A
Tier I Capital to Risk Weighted Assets $ 127,304 12.33% $ 41,283 4.0% N/A N/A
Tier I Capital to Average Assets $ 127,304 10.79% $ 47,176 4.0% N/A N/A

To Be Well
Capitalized Under
Regulatory Capital Prompt Corrective
(in thousands) Actual Requirements Action Provisions
- ------------------------------------------------------------------------------------------------------------------
The Bank: Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------
As of September 30, 2004
Total Capital to Risk Weighted Assets $ 137,266 13.67% $ 80,351 8.0% $ 100,439 10.0%
Tier I Capital to Risk Weighted Assets $ 124,642 12.41% $ 40,175 4.0% $ 60,263 6.0%
Tier I Capital to Average Assets $ 124,624 10.60% $ 47,036 4.0% $ 58,795 5.0%

As previously discussed (see Long-term Subordinated Debentures), in order to
supplement its regulatory capital base, during December 2003 the Company raised
$10 million of trust preferred securities. Under applicable regulatory
guidelines, trust preferred securities qualify as Tier 1 capital up to a maximum
of 25% of Tier 1 capital. Any additional portion of trust preferred securities
would qualify as Tier 2 capital. The Company has received notification from the
Federal Reserve Bank of San Francisco that all of the Company's trust preferred
securities currently qualify as Tier 1 capital.

In accordance with the provisions of Financial Accounting Standard Board
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"),
the Company does not consolidate the subsidiary trust which has issued the trust
preferred securities. Previously, financing subsidiaries were generally
consolidated with their parents under GAAP. As a result of this new accounting
interpretation, on July 2, 2003, the Federal Reserve Board issued Supervisory
Letter (SR 03-13) which preserves the historical capital treatment of trust
preferred securities as Tier I Capital despite the deconsolidation of these
securities. That Supervisory Letter remained in effect at December 31, 2003 and
September 30, 2004, and the Company continues to include these securities in its
Tier I capital.

21

On May 6, 2004, the FRB issued a proposed ruling on the continuing eligibility
of trust preferred securities as Tier I capital. As drafted, the proposed ruling
retains the current 25% limit but nets goodwill from the calculation of Tier I
capital. Since the Company currently has no goodwill, if implemented, this
change would have no impact. Public comments on the proposed ruling were
required by July 11, 2004 with a final ruling to follow. The Company cannot
predict the ultimate outcome of this issue, however, even in the unlikely event
that Tier I capital treatment for the Company's trust preferred securities was
fully disallowed the Company would remain "well-capitalized". Additionally, if
Tier I capital treatment were disallowed, the Company may be able to redeem the
trust preferred securities pursuant to their terms, and have the ability to
identify and obtain alternative sources of capital.

In 1998, the Board approved the Company's first stock repurchase program which
expired on May 1, 2001. During the second quarter of 2004, the Board of
Directors of Farmers & Merchants Bancorp approved a second stock repurchase
program because it concluded that the Company continues to have more capital
than it needs to meet present and anticipated regulatory guidelines to be
classified as "well capitalized".

Repurchases under the program will be made on the open market or through private
transactions. The aggregate price to be paid by the Company for all repurchased
stock will not exceed $10,000,000 and the program will expire on May 31, 2007.
The repurchase program also requires that no purchases may be made if the
Company would not remain "well-capitalized" after the repurchase. All shares
repurchased under the repurchase program will be retired. See Part II, Item
2(e).

Since 1999, the Company has repurchased nearly 44,000 shares for total
consideration of $11.3 million.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Management
The Company has adopted a Risk Management Plan which aims to ensure the proper
control and management of all risk factors inherent in the operation of the
Company and the Bank. Specifically, credit risk, interest rate risk, liquidity
risk, compliance risk, strategic risk, reputation risk and price risk can all
affect the market risk of the Company. These specific risk factors are not
mutually exclusive. It is recognized that any product or service offered by the
Company may expose the Company and the Bank to one or more of these risk
factors.

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

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

Credit risk in the loan portfolio is controlled by limits on industry
concentration, aggregate customer borrowings and geographic boundaries.
Standards on loan quality also are designed to reduce loan credit risk. Senior
Management, Directors' Committees and the Board of Directors are regularly
provided with information intended to identify, measure, control and monitor the
credit risk of the Company.

22

The Company's methodology for assessing the appropriateness of the allowance for
loan losses is applied on a regular basis and considers all loans. The
systematic methodology consists of two major elements. The first major element
includes a detailed analysis of the loan portfolio in two phases. The first
phase is conducted in accordance with SFAS No. 114, "Accounting by Creditors for
the Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures." Individual
loans are reviewed to identify loans for impairment. A loan is impaired when
principal and interest are deemed uncollectable in accordance with the original
contractual terms of the loan. Impairment is measured as either the expected
future cash flows discounted at each loan's effective interest rate, the fair
value of the loan's collateral if the loan is collateral dependent or an
observable market price of the loan (if one exists). Upon measuring the
impairment, the Company will ensure an appropriate level of allowance is present
or established.

Central to the first phase and the Company's credit risk management is its loan
risk rating system. The originating credit officer assigns borrowers an initial
risk rating, which is based primarily on a thorough analysis of each borrower's
financial position in conjunction with industry and economic trends. Approvals
are made based upon the amount of inherent credit risk specific to the
transaction and are reviewed for appropriateness by senior credit administration
personnel. Credits are monitored by credit administration personnel for
deterioration in a borrower's financial condition, which would impact the
ability of the borrower to perform under the contract. Risk ratings are adjusted
as necessary.

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

The second phase is conducted by segmenting the loan portfolio by risk rating
and into groups of loans with similar characteristics in accordance with SFAS
No. 5, "Accounting for Contingencies". In this second phase, groups of loans are
reviewed and applied the appropriate allowance percentage to determine a
portfolio formula allowance.

The second major element in the Company's methodology for assessing the
appropriateness of the allowance consists of management's considerations of all
known relevant internal and external factors that may affect a loan's
collectibility. This includes management's estimates of the amounts necessary
for concentrations, economic uncertainties, the volatility of the market value
of collateral and other relevant factors. The relationship of the two major
elements of the allowance to the total allowance may fluctuate from period to
period.

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

|X| then-existing general economic and business conditions affecting the key
lending areas of the Company;
|X| credit quality trends (including trends in non-performing loans expected to
result from existing conditions);
|X| collateral values;
|X| loan volumes and concentrations;
|X| seasoning of the loan portfolio;
|X| specific industry conditions within portfolio segments;
|X| recent loss experience in particular segments of the portfolio;
|X| duration of the current business cycle;
|X| bank regulatory examination results; and
|X| findings of the Company's internal credit examiners.

23

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

Implicit in lending activities is the risk that losses will and do occur and
that the amount of such losses will vary over time. Consequently, the Company
maintains an allowance for loan losses by charging a provision for loan losses
to earnings. Loans determined to be losses are charged against the allowance for
loan losses. The Company's allowance for loan losses is maintained at a level
considered by management to be adequate to provide for estimated losses inherent
in the existing portfolio along with unused commitments to provide financing
including commitments under commercial and standby letters of credit.

Management believes that the allowance for loan losses at September 30, 2004 was
adequate to provide for both recognized losses and estimated inherent losses in
the portfolio. No assurances can be given that future events may not result in
increases in delinquencies, non-performing loans or net loan charge-offs that
would increase the provision for loan losses and thereby adversely affect the
results of operations.

Market Risk - Interest Rate Risk
The mismatch between maturities of interest sensitive assets and liabilities
results in uncertainty in the Company's earnings and economic value and is
referred to as interest rate risk. The Company's primary objective in managing
interest rate risk is to minimize the potential for significant loss as a result
of changes in interest rates.

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

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

24

The interest rates paid on deposit accounts do not always move in unison with
the rates charged on loans. In addition, the magnitude of changes in the rates
charged on loans is not always proportionate to the magnitude of changes in the
rate paid for deposits. Consequently, changes in interest rates do not
necessarily result in an increase or decrease in the net interest margin solely
as a result of the differences between repricing opportunities of earning assets
or interest bearing liabilities. The Company also utilizes the results of a
dynamic simulation model to quantify the estimated exposure of net interest
income to sustained interest rate changes. The sensitivity of the Company's net
interest income is measured over a rolling one-year horizon.

The simulation model estimates the impact of changing interest rates on interest
income from all interest earning assets and the interest expense paid on all
interest bearing liabilities reflected on the Company's balance sheet. This
sensitivity analysis is compared to policy limits, which specify a maximum
tolerance level for net interest income exposure over a one-year horizon
assuming no balance sheet growth, given a 200 basis point upward and a 100 basis
point downward shift in interest rates. A shift in rates over a 12-month period
is assumed. Results that exceed policy limits, if any, are analyzed for risk
tolerance and reported to the Board with appropriate recommendations. At
September 30, 2004, the Company's estimated net interest income sensitivity to
changes in interest rates, as a percent of net interest income was an increase
in net interest income of 3.79% if rates increase by 200 basis points and a
decrease in net interest income of 2.71% if rates decline 100 basis points.

The estimated sensitivity does not necessarily represent a Company forecast and
the results may not be indicative of actual changes to the Company's net
interest income. These estimates are based upon a number of assumptions
including: the nature and timing of interest rate levels including yield curve
shape, prepayments on loans and securities, pricing strategies on loans and
deposits, replacement of asset and liability cashflows and other assumptions.
While the assumptions used are based on current economic and local market
conditions, there is no assurance as to the predictive nature of these
conditions including how customer preferences or competitor influences might
change. See Note 13 of the Notes to the Consolidated Financial Statements
located in the 2003 Annual Report to Shareholders.

Liquidity Risk
Liquidity risk is the risk to earnings or capital resulting from the Company's
inability to meet its obligations when they come due without incurring
unacceptable losses. It includes the ability to manage unplanned decreases or
changes in funding sources and to recognize or address changes in market
conditions that affect the Company's ability to liquidate assets or acquire
funds quickly and with minimum loss of value. The Company endeavors to maintain
a cash flow adequate to fund operations, handle fluctuations in deposit levels,
respond to the credit needs of borrowers and to take advantage of investment
opportunities as they arise. The principal sources of liquidity include credit
facilities from correspondent banks, brokerage firms and the Federal Home Loan
Bank, as well as interest and principal payments on loans and investments,
proceeds from the maturity or sale of investments and growth in deposits.

In general, liquidity risk is managed daily by controlling the level of Federal
Funds and the use of funds provided by the cash flow from the investment
portfolio. The Company maintains overnight investments in Federal Funds as a
cushion for temporary liquidity needs. During the first nine months of 2004,
Federal Funds averaged $14.2 million. The Company maintains Federal Fund credit
lines of $50 million with major banks subject to the customary terms and
conditions for such arrangements and $175 million in repurchase lines with major
brokers. In addition the Company has additional borrowing capacity of $198.3
million from the Federal Home Loan Bank.

25

At September 30, 2004, the Company had available sources of liquidity, which
included cash and cash equivalents and unpledged investment securities of
approximately $109.7 million, which represents 9.33% of total assets.

ITEM 4. CONTROLS AND PROCEDURES

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

As of the end of the period covered by this report, the Company carried out an
evaluation of the effectiveness of Company's controls and disclosure procedures
under the supervision and with the participation of the Chief Executive Officer,
the Chief Financial Officer and other Senior Management of the Company. Based on
the foregoing, the Company's Chief Executive Officer and the Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective.

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

Average Balance Sheets

The tables on the following pages reflect the Company's average balance sheets
and volume and rate analysis for the three and nine-month periods ending
September 30, 2004 and 2003.

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

The volume and rate analysis of net interest revenue summarizes the changes in
average asset and liability balances and interest earned and paid resulting from
changes in average asset and liability balances (volume) and changes in average
interest rates and the total net change in interest income and expenses. The
changes in interest due to both rate and volume have been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar amount
of the change in each.

26

Farmers & Merchants Bancorp
Quarterly Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)

Three Months Ended September 30, Three Months Ended September 30,
2004 2003
Assets Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------

Federal Funds Sold and Securities Purchased Under
Agreements to Resell $ 19,004 $ 64 1.34% $ 13,923 $ 31 0.88%
Investment Securities Available-for-Sale
U.S. Treasuries 0 0 0.00% 0 0 0.00%
U.S. Agencies 64,046 586 3.66% 52,514 444 3.43%
Municipals - Taxable 964 15 6.22% 1,212 19 6.36%
Municipals - Non-Taxable 17,495 277 6.33% 31,931 447 5.68%
Mortgage Backed Securities 84,542 827 3.91% 113,266 856 3.06%
Other 6,425 95 5.91% 11,408 160 5.69%
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 173,472 1,800 4.15% 210,331 1,926 3.71%
- ------------------------------------------------------------------------------------------------------------------------------

Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00% 0 0 0.00%
U.S. Agencies 19,952 195 3.91% 0 0 0.00%
Municipals - Taxable 0 0 0.00% 0 0 0.00%
Municipals - Non-Taxable 36,618 577 6.31% 41,710 677 6.58%
Mortgage Backed Securities 14,386 139 3.86% 0 0 0.00%
Other 307 2 2.61% 440 6 5.53%
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 71,263 913 5.13% 42,150 683 6.57%
- ------------------------------------------------------------------------------------------------------------------------------

Loans
Real Estate 482,262 7,619 6.27% 443,310 7,146 6.40%
Home Equity 59,272 720 4.82% 49,073 596 4.82%
Agricultural 141,507 1,927 5.40% 122,356 1,563 5.07%
Commercial 142,764 2,000 5.56% 130,209 1,778 5.42%
Consumer 11,271 258 9.08% 13,547 342 10.02%
Credit Card 4,619 112 9.62% 4,343 102 9.32%
Municipal 1,047 12 4.55% 1,311 16 4.84%
- ------------------------------------------------------------------------------------------------------------------------------
Total Loans 842,742 12,648 5.95% 764,149 11,543 5.99%
- ------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 1,106,481 $15,425 5.54% 1,030,553 $14,183 5.46%
========= ======= ========= =======

Unrealized (Loss)/Gain on Securities Available-for-Sale (911) 2,996
Allowance for Loan Losses (17,964) (17,166)
Cash and Due From Banks 33,674 30,345
All Other Assets 63,720 58,764
- ------------------------------------------------------------------ ------------
Total Assets $1,185,000 $1,105,492
================================================================== ============

Liabilities & Shareholders' Equity
Interest Bearing Deposits
Transaction $95,006 $ 15 0.06% $89,146 $ 19 0.08%
Savings 288,726 273 0.38% 254,582 301 0.47%
Time 360,592 1,454 1.60% 330,531 1,615 1.94%
- -----------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 744,324 1,742 0.93% 674,259 1,935 1.14%
Other Borrowed Funds 60,152 627 4.14% 116,683 775 2.64%
Subordinated Debentures 10,310 119 4.58% 0 0 0.00%
- -----------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 814,786 $2,488 1.21% 790,942 $2,710 1.36%
===================== =======================
Interest Rate Spread 4.33% 4.10%
Demand Deposits (Non-Interest Bearing) 245,105 196,893
All Other Liabilities 12,272 8,862
- ------------------------------------------------------------------ ------------
Total Liabilities 1,072,163 996,697

Shareholders' Equity 112,837 108,795
- ------------------------------------------------------------------ ------------
Total Liabilities & Shareholders' Equity $1,185,000 $1,105,492
================================================================== ============
Impact of Non-Interest Bearing Deposits and Other Liabilities 0.31% 0.32%
Net Interest Income and Margin on Total Earning Assets 12,937 4.64% 11,473 4.42%
Tax Equivalent Adjustment (311) (408)
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 12,626 4.53% $ 11,065 4.26%
=============================================================================================================================

Notes: Yields on municipal securities have been calculated on a fully taxable
equivalent basis using the combined Federal and State income tax rate of 42.06%.
Loan Fees are included in interest income for loans. Unearned discount is
included for rate calculation purposes. Nonaccrual loans and lease financing
receivables have been included in the average balances. Yields on securities
available-for-sale are based on historical cost.

27

Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)

Nine Months Ended September 30, Nine Months Ended September 30,
2004 2003
Assets Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------

Federal Funds Sold and Securities Purchased Under
Agreements to Resell $ 14,217 $ 124 1.16% $ 12,424 $ 128 1.38%
Investment Securities Available-for-Sale
U.S. Treasuries 0 0 0.00% 0 0 0.00%
U.S. Agencies 65,460 1,770 3.61% 42,819 1,082 3.42%
Municipals - Taxable 1,033 48 6.20% 1,282 60 6.33%
Municipals - Non-Taxable 19,737 900 6.08% 31,953 1,340 5.67%
Mortgage Backed Securities 101,958 2,855 3.73% 128,737 3,675 3.86%
Other 7,617 307 5.37% 16,429 608 5.00%
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Available-for-Sale 195,805 5,880 4.00% 221,220 6,765 4.13%
- ------------------------------------------------------------------------------------------------------------------------------

Investment Securities Held-to-Maturity
U.S. Treasuries 0 0 0.00% 0 0 0.00%
U.S. Agencies 11,215 370 4.40% 0 0 0.00%
Municipals - Taxable 0 0 0.00% 0 0 0.00%
Municipals - Non-Taxable 36,588 1,750 6.38% 37,984 1,884 6.70%
Mortgage Backed Securities 8,198 251 4.08% 0 0 0.00%
Other 344 11 4.26% 463 19 5.55%
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Held-to-Maturity 56,345 2,382 5.64% 38,447 1,903 6.69%
- ------------------------------------------------------------------------------------------------------------------------------

Loans
Real Estate 474,315 22,226 6.24% 413,504 20,248 6.55%
Home Equity 56,794 2,005 4.70% 47,848 1,810 5.06%
Agricultural 132,736 5,171 5.19% 109,943 4,241 5.16%
Commercial 137,614 5,762 5.58% 132,182 5,520 5.58%
Consumer 11,188 775 9.23% 13,804 1,047 10.14%
Credit Card 4,556 330 9.65% 4,355 305 9.36%
Municipal 1,065 35 4.38% 1,262 48 5.09%
- ------------------------------------------------------------------------------------------------------------------------------
Total Loans 818,268 36,304 5.91% 722,898 33,219 6.14%
- ------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 1,084,635 $44,689 5.49% 994,989 $42,015 5.65%
================= ========================

Unrealized Gain on Securities Available-for-Sale 601 3,980
Allowance for Loan Losses (17,691) (17,039)
Cash and Due From Banks 32,755 29,595
All Other Assets 61,938 56,288
- -------------------------------------------------------------------- ------------
Total Assets $1,162,238 $1,067,813
==================================================================== ============

Liabilities & Shareholders' Equity
Interest Bearing Deposits
Transaction $94,621 $ 44 0.06% $89,182 $ 98 0.15%
Savings 281,823 780 0.37% 247,517 997 0.54%
Time 328,753 4,039 1.64% 324,661 5,260 2.17%
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits 705,197 4,863 0.92% 661,360 6,355 1.28%
Other Borrowed Funds 94,235 2,125 3.00% 96,878 2,180 3.01%
Subordinated Debentures 10,310 327 0.00% 0 0 0.00%
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 809,742 $7,315 1.20% 758,238 $8,535 1.50%
================ ======== ==============
Interest Rate Spread 4.29% 4.14%
Demand Deposits (Non-Interest Bearing) 229,233 193,623
All Other Liabilities 11,170 9,067
- -------------------------------------------------------------------- ------------
Total Liabilities 1,050,145 960,928

Shareholders' Equity 112,093 106,885
- -------------------------------------------------------------------- ------------
Total Liabilities & Shareholders' Equity $1,162,238 $1,067,813
==================================================================== ============
Impact of Non-Interest Bearing Deposits and Other Liabilities 0.30% 0.36%
Net Interest Income and Margin on Total Earning Assets 37,374 4.59% 33,480 4.50%
Tax Equivalent Adjustment (965) (1,171)
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $36,409 4.47% $32,309 4.34%
- ------------------------------------------------------------------------------------------------------------------------------

Notes: Yields on municipal securities have been calculated on a fully taxable
equivalent basis using the combined Federal and State income tax rate of 42.06%.
Loan Fees are included in interest income for loans. Unearned discount is
included for rate calculation purposes. Nonaccrual loans and lease financing
receivables have been included in the average balances. Yields on securities
available-for-sale are based on historical cost.

28

Farmers & Merchants Bancorp
Volume and Rate Analysis of Net Interest Revenue
(Rates on a Taxable Equivalent Basis)

(in thousands) Three Months Ended Nine Months Ended
Sept. 30, 2004 compared to Sept. 30, 2003 Sept. 30, 2004 compared to Sept. 30, 2003
Interest Earning Assets Volume Rate Net Chg. Volume Rate Net Chg.
- -------------------------------------------------- ------------ -------- ------------ ------------ -------- ------------

Federal Funds Sold $ 14 $ 19 $ 33 $ 24 $ (28) $ (4)
Investment Securities Available for Sale
U.S. Treasuries 0 0 0 0 0 0
U.S. Agencies 108 34 142 627 61 688
Municipals - Taxable (3) (1) (4) (10) (2) (12)
Municipals - Non-Taxable (467) 297 (170) (581) 141 (440)
Mortgage Backed Securities (932) 903 (29) (694) (126) (820)
Other (107) 42 (65) (368) 67 (301)
- -------------------------------------------------- ------------ -------- ------------ ------------ -------- ------------
Total Investment Securities Available for Sale (1,401) 1,275 (126) (1,026) 141 (885)
- -------------------------------------------------- ------------ -------- ------------ ------------ -------- ------------

Investment Securities Held to Maturity
U.S. Treasuries 0 0 0 0 0 0
U.S. Agencies 98 97 195 185 185 370
Municipals - Taxable 0 0 0 0 0 0
Municipals - Non-Taxable (74) (25) (99) (55) (79) (134)
Mortgage Backed Securities 70 69 139 126 125 251
Other (1) (3) (4) (4) (4) (8)
- -------------------------------------------------- ------------ -------- ------------ ------------ -------- ------------
Total Investment Securities Held to Maturity 93 138 231 252 227 479
- -------------------------------------------------- ------------ -------- ------------ ------------ -------- ------------

Loans:
Real Estate 1,306 (833) 473 3,417 (1,439) 1,978
Home Equity 124 0 124 389 (194) 195
Agricultural 256 108 364 903 27 930
Commercial 175 47 222 250 (8) 242
Consumer (54) (30) (84) (184) (88) (272)
Credit Card 7 3 10 15 10 25
Other (4) (1) (5) (7) (6) (13)
- -------------------------------------------------- ------------ -------- ------------ ------------ -------- ------------
Total Loans 1,810 (706) 1,104 4,783 (1,698) 3,085
- -------------------------------------------------- ------------ -------- ------------ ------------ -------- ------------
Total Earning Assets 516 726 1,242 4,033 (1,358) 2,675
- -------------------------------------------------- ------------ -------- ------------ ------------ -------- ------------

Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction 7 (11) (4) 9 (63) (54)
Savings 180 (208) (28) 191 (408) (217)
Time Deposits 712 (873) (161) 109 (1,330) (1,221)
- -------------------------------------------------- ------------ -------- ------------ ------------ -------- ------------
Total Interest Bearing Deposits 899 (1,092) (193) 309 (1,801) (1,492)
Other Borrowed Funds (1,678) 1,530 (148) (53) (1) (54)
Subordinated Debentures 60 59 119 164 163 327
- -------------------------------------------------- ------------ -------- ------------ ------------ -------- ------------
Total Interest Bearing Liabilities (719) 497 (222) 420 (1,639) (1,219)
- -------------------------------------------------- ------------ -------- ------------ ------------ -------- ------------
Total Change $1,235 $229 $1,464 $3,613 $281 $3,894
================================================== ============ ======== ============ ============ ======== ============

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

29

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

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

ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities

2(e) The following table indicates the number of shares repurchased by Farmers &
Merchants Bancorp during the third quarter of 2004.

Number of Shares Approximate Dollar Value
Average Purchased as Part of a of Shares that May Yet Be
Number of Price per Publicly Announced Purchased Under the Plan
Third Quarter 2004 Shares Share Plan or Program or Program
- ------------------------------- ---------------- -------------- ------------------------ ---------------------------

07/01/2004 - 07/31/2004 571 $391 571 $9,659,000
08/01/2004 - 08/31/2004 2,239 400 2,239 8,764,000
09/01/2004 - 09/30/2004 954 425 954 8,358,000
- ------------------------------- ---------------- -------------- ------------------------ ---------------------------
Total 3,764 $405 3,764 $8,358,000

All of the above shares were repurchased in private transactions.

The Company's common stock is not listed on any exchange, nor is it included on
the NASDAQ National Market or the NASDAQ Small Cap Market. However, trades may
be reported on the OTC Bulletin Board under the symbol "FMCB.OB." Management is
aware that there are private transactions in the Company's common stock. When
the Company repurchases shares in private transactions the price is determined
based upon the most recent transactions that have occurred between third party
shareholders.

As discussed previously (see Part I, Item 2, "Capital"), during the second
quarter of 2004, the Board of Directors of Farmers & Merchants Bancorp approved
a resolution authorizing the repurchase, from time to time, of outstanding
shares of the common stock of the Company. The Board of Directors approved the
repurchase program because it concluded that the Company has more capital than
it needs to meet present and anticipated regulatory guidelines to be classified
as "well capitalized."

Repurchases will be made on the open market or through private transactions.
This repurchase program was announced in a press release dated June 21, 2004.
The aggregate price to be paid by the Company for all repurchased stock will not
exceed $10,000,000 and the program will expire on May 31, 2007. The repurchase
program also requires that no purchases may be made if the Company would not
remain "well-capitalized" after the repurchase. All shares repurchased under the
repurchase program will be retired.

30

ITEM 3. Defaults Upon Senior Securities

Not applicable

ITEM 4. Submission of Matters to a Vote of Security Holders

None

ITEM 5. Other Information

None

ITEM 6(a). Exhibits

See Exhibit Index on Page 32.

ITEM 6(b). Reports on Form 8-K

During the quarter ended September 30, 2004, the Company filed the
following Current Reports on Form 8-K:

Description Date of Report

Second Quarter 2004 results of operations July 23, 2004

SIGNATURES

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

FARMERS & MERCHANTS BANCORP

Date: November 8, 2004 /s/ Kent A. Steinwert
------------------------------
Kent A. Steinwert
President and
Chief Executive Officer
(Principal Executive Officer)

Date: November 8, 2004 /s/ Stephen W. Haley
------------------------------
Stephen W. Haley
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)

31

Index to Exhibits
Exhibit No. Description

31 Certification of the Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32 Certification of the Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

32