UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                           --------------------------
                                    FORM 10-K
                           --------------------------
              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

                                       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 executiveoffices)               (Zip Code)

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

        Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.01
PAR VALUE PER SHARE

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.  Yes [ ]  No [X]

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ]  No [X]

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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]

Indicate  by  check mark whether the registrant is a large accelerated filer, an
accelerated  filer,  or  a non-accelerated filer. See definition of "accelerated
filer  and  large  accelerated  filer"  in Rule 12b-2 of the Exchange Act (Check
one):
Large accelerated filer [ ]  Accelerated filer [X]  Non-accelerated filer [ ]

Indicate  by check mark whether the registrant is a shell company (as defined in
Rule  12b-2  of  the  Act)  Yes [ ]  No [X]

The  aggregate  market  value  of  the  Registrant's  common  stock  held  by
non-affiliates  on  June  30, 2006 (based on the last reported trade on June 29,
2006)  was  $437,367,315.

The number of shares of Common Stock outstanding as of February 28, 2007:
811,933

Documents Incorporated by Reference:
Portions of the definitive Proxy Statement for the 2007 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A are incorporated by reference in Part III, Items 10 through 14.


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<PAGE>
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANCORP
FORM 10-K

                                    TABLE OF CONTENTS
                                    -----------------

                                                                                        PAGE
                                                                                        ----
<S>                                                                                     <C>
                                         PART I
                                         ------
Introduction                                                                               3

Item  1.     Business                                                                      3

Item 1A.     Risk Factors                                                                 17

Item 1B.     Unresolved Staff Comments                                                    20

Item  2.     Properties                                                                   21

Item  3.     Legal Proceedings                                                            21

Item  4.     Submission of Matters to a Vote of Security Holders                          21

                                       PART II
                                       -------

Item  5.     Market for the Registrant's Common Equity, Related

             Stockholder Matters and Issuer Purchases of Equity Securities                21

Item  6.     Selected Financial Data                                                      24

Item  7.     Management's Discussion and Analysis of Financial

             Condition and Results of Operations                                          26

Item 7A.     Quantitative and Qualitative Disclosures About Market Risk                   45

Item  8.     Financial Statements and Supplementary Data                                  48

Item  9.     Changes in and Disagreements with Accountants on

             Accounting and Financial Disclosure                                          77

Item 9A.     Controls and Procedures                                                      77

Item 9B.     Other Information                                                            77

                                      PART III
                                      --------

Item 10.     Directors, Executive Officers and Corporate Governance                       77

Item 11.     Executive Compensation                                                       78

Item 12.     Security Ownership of Certain Beneficial Owners and Management

             and Related Stockholder Matters                                              78

Item 13.     Certain Relationships and Related Transactions, and Director Independence    78

Item 14.     Principal Accountant Fees and Services                                       78

                                      PART IV
                                      -------

Item 15.     Exhibits and Financial Statement Schedules                                   79

Signatures                                                                                79

Index to Exhibits                                                                         80
</TABLE>


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<PAGE>
INTRODUCTION - FORWARD LOOKING STATEMENTS

This  Form  10-K contains various forward-looking statements, usually containing
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 of
1995,  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, agricultural, 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;  and (viii) other factors
discussed  in  Item  1A.  Risk  Factors.

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.

PART I

ITEM 1. BUSINESS

GENERAL DEVELOPMENT OF THE BUSINESS

August  1, 1916 marked the first day of business for Farmers & Merchants Bank of
Lodi.  The  Bank  was incorporated under the laws of the State of California and
was  licensed  by  the  California  Department  of  Financial  Institutions as a
state-chartered  bank.  The  Bank prospered and grew even through the Depression
years.  Farmers  &  Merchants' first venture out of Lodi occurred in response to
the  closure  of  the  only  bank  serving the community of Galt, requiring area
residents to drive miles away for the simplest banking transaction. To meet this
need,  the  Galt  office  was  opened  in 1948. Shortly thereafter branches were
opened  in  Linden,  North  Modesto and South Sacramento. On April 12, 1957, the
Bank's  name  was  changed  to  Farmers  & Merchants Bank of Central California.

The  Bank  continued  expansion  in the Lodi market area and also acquired three
offices  in  Turlock  and  Hilmar in 1985. The service area was next expanded by
opening  a loan production office in the community of Elk Grove. This office was
later  converted  to  a  full  service branch. A third office was also opened in
Modesto.  The  year  2002  saw  the  opening  of  the Lincoln Center office, the
Company's  first  branch  in  the  city of Stockton. In September, 2003 the Bank
opened its fourth office in Modesto. Located across from the Vintage Faire Mall,
this  branch  incorporates state of the art technology throughout and represents
the  template  for  the  Bank's  future  branch  expansions  and  renovations.

During  2004  the  Company  initiated  a  major branch expansion, relocation and
renovation  program.  A  second  Galt  office  was opened in June 2005 and a new
full-service  branch  in  downtown Sacramento in February 2006. In October 2006,
the  Company  opened  its sixth Lodi office on the southwest side of town in the
Vintner's  Square  shopping  center and in November 2006, the Company's flagship
commercial  branch  was  opened  on March Lane in Stockton. The downtown Turlock
branch  will be relocated to a new facility during the second half of 2007. Many
branches  received  renovations  during the previous three years, both to update
these  facilities  and  to  comply with the Americans with Disabilities Act. The
Company  currently  estimates that the capital expenditures associated with this
multi-year program, which began in 2004, will be in excess of $10 million, which
will  result  in  increases  in  the Company's occupancy and equipment expenses.


                                        3
<PAGE>
On  March 10, 1999, Farmers & Merchants Bancorp (together with its subsidiaries,
the  "Company"),  pursuant to a reorganization, acquired all of the voting stock
of  Farmers  &  Merchants  Bank  of  Central  California (the "Bank"). Farmers &
Merchants  Bancorp  is  a  bank  holding  company  incorporated  in the State of
Delaware, and registered under the Bank Holding Company Act of 1956, as amended.
The  Company's  outstanding  securities  as  of  December  31, 2006 consisted of
811,933 shares of common stock, $0.01 par value and no shares of preferred stock
issued.  The  Bank  is  the  Company's  principal  asset.

The  Bank's  two  wholly  owned  subsidiaries are Farmers & Merchants Investment
Corporation  and  Farmers/Merchants  Corp.  Farmers  &  Merchants  Investment
Corporation  is currently dormant and Farmers/Merchants Corp. acts as trustee on
deeds  of  trust  originated  by  the  Bank.

F  & M Bancorp, Inc. was created in March 2002 to protect the name "F & M Bank".
During  2002,  the  Company  completed a fictitious name filing in California to
begin  using  the  streamlined  name, "F & M Bank" as part of a larger effort to
enhance  the  Company's  image and build brand name recognition. Since 2002, the
Company  has  converted most of its daily operating and image advertising to the
"F  & M Bank" name and the Company's logo, slogan and signage were redesigned to
incorporate  the  trade  name,  "F  &  M  Bank".

During  2003  the  Company  formed a wholly owned Connecticut statutory business
trust,  FMCB  Statutory Trust I, for the sole purpose of issuing trust preferred
securities.  See  Note  17  located  in  "Item  8.  Financial  Statements  and
Supplementary  Data."

The  Company's  principal business is to serve as a holding company for the Bank
and  for  other  banking  or  banking related subsidiaries which the Company may
establish  or  acquire.  As  a  legal  entity  separate  and  distinct  from its
subsidiary, the Company's principal source of funds is, and will continue to be,
dividends  paid by and other funds advanced from the Bank. Legal limitations are
imposed  on  the amount of dividends that may be paid and loans that may be made
by the Bank to the Company. See "Item 1. Business - Dividends and Other Transfer
of  Funds."

The  Bank's deposit accounts are insured under the Federal Deposit Insurance Act
up  to  applicable  limits.

As  a bank holding company, the Company is subject to regulation and examination
by  the  Board of Governors of the Federal Reserve System ("FRB"). The Bank is a
California  state-chartered  non-fed  member  bank subject to the regulation and
examination  of  the  California  Department  of  Financial Institutions and the
Federal  Deposit  Insurance  Corporation.

SERVICE AREA

The  Company  services the northern Central Valley of California with 21 banking
offices.  The  area  includes  Sacramento,  San  Joaquin,  Stanislaus and Merced
Counties  with  branches in Sacramento, Elk Grove, Galt, Lodi, Stockton, Linden,
Modesto,  Turlock  and  Hilmar.

Through  its  network  of  banking  offices, the Company emphasizes personalized
service  along  with  a  full  range  of  banking  services  to  businesses  and
individuals  located  in  the service areas of its offices. Although the Company
focuses  on  marketing its services to small and medium sized businesses, a full
range  of  retail  banking  services  are  made  available to the local consumer
market.

The  Company offers a wide range of deposit instruments. These include checking,
savings,  money  market,  time  certificates  of  deposit, individual retirement
accounts  and  online  banking services for both business and personal accounts.
The  Company also serves as a federal tax depository for its business customers.

The  Company  provides  a  full  complement  of  lending  products,  including
commercial, real estate construction, agribusiness, installment, credit card and
real estate loans. Commercial products include lines of credit and other working
capital  financing  and  letters  of  credit. Financing products for individuals
include  automobile  financing,  lines  of credit, residential real estate, home
improvement  and  home  equity  lines  of  credit.


                                        4
<PAGE>
The  Company  also  offers a wide range of specialized services designed for the
needs  of  its commercial accounts. These services include a credit card program
for  merchants,  collection services, lockbox, investment sweep, on-line account
access, and electronic funds transfers by way of domestic and international wire
and  automated  clearinghouse.

The  Company  makes investment products available to customers, including mutual
funds  and  annuities.  These  investment  products  are offered through a third
party,  which  employs  investment  advisors to meet with and provide investment
advice  to  the  Company's  customers.

EMPLOYEES

At  December  31, 2006, the Company employed a total of 302 full time equivalent
employees.  The  Company  believes that its employee relations are satisfactory.

COMPETITION

The  banking and financial services industry in California generally, and in the
Company's  market  areas  specifically,  is highly competitive. The increasingly
competitive  environment is a result primarily of changes in regulation, changes
in  technology  and  product  delivery  systems,  and  the  accelerating pace of
consolidation among financial service providers. The Company competes with other
major  commercial  banks,  diversified  financial  institutions,  credit unions,
savings  and  loan  associations,  money market and other mutual funds, mortgage
companies,  and  a  variety of other non-banking financial services and advisory
companies. Federal legislation encourages competition between different types of
financial  service  providers  and  has fostered new entrants into the financial
services  market, and it is anticipated that this trend will continue. Using the
financial  holding  company  structure, insurance companies and securities firms
may  compete  more  directly  with  banks  and  bank  holding  companies.

Many of our competitors are much larger in total assets and capitalization, have
greater  access  to  capital  markets  and  offer  a  broader range of financial
services  than  the  Company.  In  order to compete with other financial service
providers,  the Company relies upon personal contact by its officers, directors,
employees,  and  shareholders,  along  with  various  promotional activities and
specialized  services.  In  those  instances  where  the  Company  is  unable to
accommodate a customer's needs, the Company may arrange for those services to be
provided  through  its  correspondents.

GOVERNMENT POLICIES

The  Company's  profitability,  like  most  financial institutions, is primarily
dependent  on  interest  rate differentials. The difference between the interest
rates  paid by the Company on interest-bearing liabilities, such as deposits and
other  borrowings,  and  the  interest  rates  received  by  the  Company on its
interest-earning  assets, such as loans extended to its customers and securities
held  in  its  investment portfolio, comprise the major portion of the Company's
earnings.  These  rates are highly sensitive to many factors that are beyond the
control  of  the  Company  and  the  Bank,  such  as  inflation,  recession  and
unemployment,  and  the impact which future changes in economic conditions might
have  on  the  Company  and  the  Bank  cannot  be  predicted.

The  business  of  the  Company  is  also  influenced by the monetary and fiscal
policies  of  the  federal  government  and the policies of regulatory agencies,
particularly  the  Board of Governors of the Federal Reserve System (the "FRB").
The  FRB  implements national monetary policies (with objectives such as curbing
inflation  and  combating  recession) through its open-market operations in U.S.
Government securities by adjusting the required level of reserves for depository
institutions  subject  to  its  reserve  requirements, and by varying the target
federal  funds  and  discount  rates  applicable  to  borrowings  by  depository
institutions. The actions of the FRB in these areas influence the growth of bank
loans,  investments,  and  deposits  and  also  affect  interest rates earned on
interest-earning assets and paid on interest-bearing liabilities. The nature and
impact  on  the  Company  of  any future changes in monetary and fiscal policies
cannot  be  predicted.

From  time  to time, legislative acts, as well as regulations, are enacted which
have  the effect of increasing the cost of doing business, limiting or expanding
permissible  activities,  or affecting the competitive balance between banks and


                                        5
<PAGE>
other financial services providers. Proposals to change the laws and regulations
governing  the  operations  and  taxation  of banks, bank holding companies, and
other  financial  institutions  and  financial services providers are frequently
made  in  the  U.S.  Congress,  in  the  state  legislatures, and before various
regulatory  agencies.  This  legislation  may  change  banking  statutes and the
operating  environment  of  the  Company and its subsidiaries in substantial and
unpredictable  ways. If enacted, such legislation could increase or decrease the
cost  of  doing  business,  limit or expand permissible activities or affect the
competitive  balance among banks, savings associations, credit unions, and other
financial institutions. The Company cannot predict whether any of this potential
legislation  will  be  enacted,  and  if  enacted,  the  effect  that it, or any
implementing  regulations,  would  have on the financial condition or results of
operations  of  the  Company or any of its subsidiaries. See "Item 1. Business -
Supervision  and  Regulation."

SUPERVISION AND REGULATION

General
Bank  holding  companies  and banks are extensively regulated under both federal
and  state  law.  The  regulation  is  intended  primarily for the protection of
depositors  and  the  deposit  insurance  fund  and  not  for  the  benefit  of
shareholders  of  the  Company.  Set forth below is a summary description of the
material laws and regulations, which relate to the operations of the Company and
the  Bank.  This description does not purport to be complete and is qualified in
its  entirety  by  reference  to  the  applicable  laws  and  regulations.

In  recent  years  significant  legislative  proposals and reforms affecting the
financial  services  industry have been discussed and evaluated by Congress, the
state  legislature  and  before  the  various  bank  regulatory  agencies. These
proposals  may  increase  or  decrease  the  cost of doing business, limiting or
expanding  permissible  activities, or enhance the competitive position of other
financial  service providers. The likelihood and timing of any such proposals or
bills  and the impact they might have on the Company and its subsidiaries cannot
be  predicted.

The Company
The  Company  is  a registered bank holding company and is subject to regulation
under  the  Bank  Holding Company Act of 1956 ("BHCA"), as amended. Accordingly,
the  Company's operations are subject to extensive regulation and examination by
the  FRB.  The  Company  is  required  to file with the FRB quarterly and annual
reports  and  such additional information as the FRB may require pursuant to the
Bank Holding Company Act. The FRB conducts periodic examinations of the Company.

The  FRB may require that the Company terminate an activity or terminate control
of  or  liquidate  or  divest  certain  subsidiaries  of affiliates when the FRB
believes  the activity or the control of the subsidiary or affiliate constitutes
a significant risk to the financial safety, soundness or stability of any of its
banking  subsidiaries.  The FRB also has the authority to regulate provisions of
certain  bank  holding  company  debt,  including  authority  to impose interest
ceilings and reserve requirements on such debt. Under certain circumstances, the
Company  must  file  written  notice  and  obtain approval from the FRB prior to
purchasing  or  redeeming  its  equity  securities.

Under  the  BHCA  and regulations adopted by the FRB, a bank holding company and
its  non-banking  subsidiaries  are  prohibited  from  requiring  certain tie-in
arrangements  in  connection  with  an  extension  of  credit,  lease or sale of
property or furnishing of services. For example, with certain exceptions, a bank
may  not condition an extension of credit on a promise by its customer to obtain
other  services provided by it, its holding company or other subsidiaries, or on
a  promise  by  its  customer not to obtain other services from a competitor. In
addition,  federal  law  imposes  certain  restrictions  on transactions between
Farmers  &  Merchants  Bancorp  and  its  subsidiaries.  Further, the Company is
required by the FRB to maintain certain levels of capital. See "Item 1. Business
-  Supervision  and  Regulation  -  Capital  Standards."

Directors, officers and principal shareholders of the Company, and the companies
with  which  they  are  associated,  have  had and will continue to have banking
transactions  with  the  Bank  in  the  ordinary  course  of  business. All such
extensions  of  credit  are  made  on  substantially  the  same terms (including
interest  rates and collateral) as, and following credit-underwriting procedures
that  are  not  less stringent than, those prevailing at the time for comparable
transactions  by the Bank with other persons not covered by 12 USC 215.1 et seq.
and  who are not employed by the Bank, and does not involve more than the normal
risk  of  repayment  or  present  other  unfavorable  features.  Extensions


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of  credit  to  insiders  have  been  and  may  be made pursuant to a benefit or
compensation  program that is widely available to employees of the Bank and that
does  not  give  preference  to  any  insider  of the Bank over other employees.

The  Company is prohibited by the BHCA, except in certain statutorily prescribed
instances,  from  acquiring direct or indirect ownership or control of more than
5%  of  the  outstanding voting shares of any company that is not a bank or bank
holding  company  and  from  engaging directly or indirectly in activities other
than  those  of banking, managing or controlling banks or furnishing services to
its  subsidiaries.  However,  the  Company, subject to the prior approval of the
FRB,  may  engage  in any, or acquire shares of companies engaged in, activities
that  are  deemed  by the FRB to be so closely related to banking or managing or
controlling  banks  as  to  be  a  proper  incident  thereto.

Under  FRB  regulations, a bank holding company is required to serve as a source
of financial and managerial strength to its subsidiary banks and may not conduct
its  operations  in  an  unsafe  or unsound manner. In addition, it is the FRB's
policy  that  in serving as a source of strength to its subsidiary banks, a bank
holding  company  should  stand  ready  to  use  available  resources to provide
adequate  capital  funds  to  its  subsidiary  banks during periods of financial
stress  or  adversity  and  should  maintain  the  financial  flexibility  and
capital-raising  capacity  to  obtain  additional  resources  for  assisting its
subsidiary  banks.  This  support  may  be required at times when a bank holding
company  may  not  be  able  to  provide  such support. A bank holding company's
failure  to  meet  its  obligations  to  serve  as  a  source of strength to its
subsidiary  banks  will  generally  be considered by the FRB to be an unsafe and
unsound  banking  practice  or  a  violation  of  the FRB's regulations or both.

The  Gramm-Leach-Bliley Act of 1999 ("GLBA") eliminated many of the restrictions
placed on the activities of bank holding companies that become financial holding
companies.  Among  other  things,  GLBA  repealed  certain  Glass-Steagall  Act
restrictions on affiliations between banks and securities firms, and amended the
BHCA  to  permit  bank holding companies that are financial holding companies to
engage  in  activities,  and  acquire companies engaged in activities, that are:
financial  in  nature  (including  insurance  underwriting,  insurance  company
portfolio  investment,  financial advisory, securities underwriting, dealing and
market-making,  and  merchant  banking  activities);  incidental  to  financial
activities;  or complementary to financial activities if the FRB determines that
they  pose  no  substantial  risk  to  the  safety  or  soundness  of depository
institutions  or  the  financial system in general. The Company has not become a
financial  holding  company.  GLBA  also  permits  national  banks  to engage in
activities  considered  financial  in  nature  through  a  financial subsidiary,
subject  to  certain  conditions  and  limitations.

The  Company's  securities  are  registered  with  the  Securities  and Exchange
Commission  under the Securities Exchange Act of 1934, as amended (the "Exchange
Act").  As  such, the Company is subject to the information, proxy solicitation,
insider  trading  and  other  requirements and restrictions of the Exchange Act.

The Bank
The  Bank,  as  a  California  chartered  non-member bank, is subject to primary
supervision, periodic examination and regulation by the California Department of
Financial  Institutions  ("DFI")  and  the Federal Deposit Insurance Corporation
("FDIC").  If,  as  a  result  of  an  examination  of the Bank, the FDIC should
determine  that  the  financial  condition,  capital  resources,  asset quality,
earnings  prospects,  management,  liquidity,  or  other  aspects  of the Bank's
operations are unsatisfactory or that the Bank or its management is violating or
has  violated any law or regulation, various remedies are available to the FDIC.
Such  remedies  include  the  power  to enjoin "unsafe or unsound" practices, to
require  affirmative  action  to  correct  any  conditions  resulting  from  any
violation  or  practice, to issue an administrative order that can be judicially
enforced,  to direct an increase in capital, to restrict the growth of the Bank,
to  assess  civil  monetary  penalties,  to  remove  officers  and directors and
ultimately  to  terminate  the  Bank's deposit insurance, which for a California
chartered  bank  would result in a revocation of the Bank's charter. The DFI has
many  of  the  same  remedial  powers.

Various  requirements and restrictions under the laws of the State of California
and  the  United  States  affect  the  operations of the Bank. State and federal
statutes  and  regulations  relate  to  many  aspects  of the Bank's operations,
including  reserves  against  deposits,  ownership of deposit accounts, interest
rates  payable  on  deposits,  loans,  investments,  mergers  and  acquisitions,
borrowings,  dividends,  locations  of branch offices, and capital requirements.
Further,  the  Bank is required to maintain certain levels of capital. See "Item
1.  Business  -  Supervision  and  Regulation  -  Capital  Standards."


                                        7
<PAGE>
The USA Patriot Act
Title III of the United and Strengthening America by Providing Appropriate Tools
Required  to Intercept and Obstruct Terrorism Act of 2001 (the USA Patriot Act")
includes  numerous  provisions  for  fighting international money laundering and
blocking  terrorism  access  to  the  U.S. financial system. The USA Patriot Act
requires  certain  additional  due  diligence  and  record  keeping  practices,
including,  but not limited to, new customers, correspondent and private banking
accounts.

Part  of  the  USA  Patriot  Act requires covered financial institutions to: (i)
establish  an  anti-money  laundering  program;  (ii)  establish  appropriate
anti-money  laundering  policies,  procedures and controls; (iii) appoint a Bank
Secrecy  Act  officer  responsible  for  day-to-day compliance; and (iv) conduct
independent  audits. The Patriot Act also expands penalties for violation of the
anti-money  laundering  laws,  including expanding the circumstances under which
funds  in a bank account may be forfeited. The Patriot Act also requires covered
financial  institutions  to  respond under certain circumstances to requests for
information from federal banking agencies within 120 hours. Various measures are
currently  pending  before  Congress  to  extend  portions  of  the Patriot Act.

Privacy Restrictions
The  GLBA,  in  addition  to  the  previous  described  changes  in  permissible
non-banking  activities permitted to banks, bank holding companies and financial
holding  companies,  also requires financial institutions in the U.S. to provide
certain  privacy  disclosures to customers and consumers, to comply with certain
restrictions  on  the  sharing and usage of personally identifiable information,
and  to  implement  and  maintain  commercially  reasonable customer information
safeguarding  standards.

The  Company  believes  that it complies with all provisions of the GLBA and all
implementing  regulations  and  the  Bank has developed appropriate policies and
procedures  to  meet  its  responsibilities  in  connection  with  the  privacy
provisions  of  GLBA.

Dividends and Other Transfer of Funds
Dividends  from  the  Bank  constitute  the  principal  source  of income to the
Company.  The Company is a legal entity separate and distinct from the Bank. The
Bank  is subject to various statutory and regulatory restrictions on its ability
to  pay  dividends to the Company. Under such restrictions, the amount available
for  payment  of  dividends  to the Company by the Bank totaled $19.4 million at
December  31,  2006.

The  FDIC  and the DFI also have authority to prohibit the Bank from engaging in
activities  that,  in  their  opinion, constitute unsafe or unsound practices in
conducting  its business. It is possible, depending upon the financial condition
of  the  bank  in  question  and  other factors, that the FDIC and the DFI could
assert  that  the  payment  of  dividends  or  other  payments might, under some
circumstances,  be  an unsafe or unsound practice. Further, the FRB and the FDIC
have  established  guidelines  with  respect  to  the maintenance of appropriate
levels  of  capital by banks or bank holding companies under their jurisdiction.
Compliance  with the standards set forth in such guidelines and the restrictions
that  are  or  may  be  imposed under the prompt corrective action provisions of
federal  law  could  limit the amount of dividends which the Bank or the Company
may  pay. An insured depository institution is prohibited from paying management
fees  to  any  controlling  persons  or, with certain limited exceptions, making
capital  distributions  if  after  such  transaction  the  institution  would be
undercapitalized.  The  DFI  may  impose  similar  limitations  on the Bank. See
"Prompt  Corrective  Regulatory  Action  and  Other  Enforcement Mechanisms" and
"Capital Standards" for a discussion of these additional restrictions on capital
distributions.

Transactions with Affiliates
The  Bank  is  subject  to  certain  restrictions  imposed by federal law on any
extensions  of  credit to, or the issuance of a guarantee or letter of credit on
behalf  of, the Company or other affiliates, the purchase of, or investments in,
stock  or  other securities thereof, the taking of such securities as collateral
for  loans,  and the purchase of assets of the Company or other affiliates. Such
restrictions  prevent  the  Company and other affiliates from borrowing from the
Bank  unless  the  loans  are  secured  by  marketable obligations of designated
amounts.  Further,  such  secured loans and investments by the Bank to or in the
Company  or  to  or in any other affiliates are limited, individually, to 10% of
the  Bank's  capital  and  surplus (as defined by federal regulations), and such
secured  loans  and  investments  are  limited,  in the aggregate, to 20% of the
Bank's  capital  and  surplus  (as  defined  by  federal  regulations).


                                        8
<PAGE>
In  addition,  the  Company  and  its  operating  subsidiaries generally may not
purchase a low-quality asset from an affiliate, and other specified transactions
between  the  Company  or its operating subsidiaries and an affiliate must be on
terms  and conditions that are consistent with safe and sound banking practices.

Also, the Company and its operating subsidiaries may engage in transactions with
affiliates  only  on terms and under conditions that are substantially the same,
or at least as favorable to the Company or its subsidiaries, as those prevailing
at  the  time  for  comparable transactions with (or that in good faith would be
offered  to)  non-affiliated  companies.

California  law  also  imposes certain restrictions with respect to transactions
with  affiliates.  Additionally,  limitations  involving  the  transactions with
affiliates  may  be  imposed  on  the  Bank  under  the prompt corrective action
provisions  of federal law. See "Item 1. Business - Supervision and Regulation -
Prompt  Corrective  Action  and  Other  Enforcement  Mechanisms."

Capital Standards
The FRB and the FDIC have established risk-based capital guidelines with respect
to  the  maintenance  of  appropriate levels of capital by United States banking
organizations.  These  guidelines  are  intended to provide a measure of capital
that  reflects  the risk associated with a banking organization's operations for
both transactions reported on the balance sheet as assets and transactions, such
as  letters  of  credit  and  recourse  arrangements,  which are recorded as off
balance  sheet  items.  Under these guidelines, nominal dollar amounts of assets
and  credit  equivalent amounts of off balance sheet items are multiplied by one
of  several risk adjustment percentages, which range from 0% for assets with low
credit  risk,  such as certain U.S. Treasury securities, to 100% for assets with
relatively  high  credit  risk,  such  as  commercial  loans.

The federal banking agencies require a minimum ratio of qualifying total capital
to  risk-weighted  assets  of  8%  and  a  minimum  ratio  of  Tier 1 capital to
risk-weighted  assets  of  4%. In addition to the risk-based guidelines, federal
banking regulators require banking organizations to maintain a minimum amount of
Tier 1 capital to total assets, referred to as the leverage ratio. For a banking
organization  rated  in the highest of the five categories used by regulators to
rate  banking  organizations,  the  minimum  leverage ratio of Tier 1 capital to
total  assets  must  be  4%.  In  addition  to  these uniform risk-based capital
guidelines  and  leverage  ratios that apply across the industry, the regulators
have  the discretion to set individual minimum capital requirements for specific
institutions  at  rates  significantly  above minimum guidelines and ratios. For
further information on the Company and the Bank's risk-based capital ratios, see
Note  10  located  in  "Item  8.  Financial  Statements and Supplementary Data."

Prompt Corrective Action and Other Enforcement Mechanisms
The  Federal  Deposit  Insurance Corporation Improvement Act of 1991 ("FDICIA"),
among  other  things,  identifies five capital categories for insured depository
institutions  (well  capitalized,  adequately  capitalized,  undercapitalized,
significantly undercapitalized and critically undercapitalized) and requires the
respective  Federal  regulatory  agencies  to  implement  systems  for  "prompt
corrective  action" for insured depository institutions that do not meet minimum
capital  requirements  within such categories. FDICIA imposes progressively more
restrictive  constraints  on  operations,  management and capital distributions,
depending on the category in which an institution is classified. Failure to meet
the  capital  guidelines  could  also  subject  a banking institution to capital
raising  requirements.  An  "undercapitalized"  Company  must  develop a capital
restoration  plan.  At  December  31, 2006 the Bank exceeded all of the required
ratios  for  classification  as "well capitalized." It should be noted, however,
that  the  Bank's  capital  category  is  determined  solely  for the purpose of
applying  the federal banking agencies' prompt corrective action regulations and
the capital category may not constitute an accurate representation of the Bank's
overall  financial  condition  or  prospects.

An  institution  that,  based  upon  its  capital  levels, is classified as well
capitalized,  adequately  capitalized,  or  undercapitalized  may  be treated as
though  it  were  in  the next lower capital category if the appropriate federal
banking  agency,  after  notice  and opportunity for hearing, determines that an
unsafe  or  unsound  condition  or  practice  warrants  such  treatment. At each
successive  lower capital category, an insured depository institution is subject
to  more  restrictions.


                                        9
<PAGE>
Banking  agencies  have  also  adopted regulations which mandate that regulators
take  into  consideration  (i) concentrations of credit risk; (ii) interest rate
risk  (when  the  interest  rate sensitivity of an institution's assets does not
match the sensitivity of its liabilities or its off-balance-sheet position); and
(iii) risks from non-traditional activities, as well as an institution's ability
to  manage  those  risks,  when  determining  the  adequacy  of an institution's
capital.  That  evaluation  will  be made as a part of the institution's regular
safety and soundness examination. In addition, the banking agencies have amended
their regulatory capital guidelines to incorporate a measure for market risk. In
accordance  with  the  amended  guidelines,  the  Company  and  any company with
significant  trading  activity must incorporate a measure for market risk in its
regulatory  capital  calculations.

In  addition  to  measures  taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by  the  federal  banking agencies for unsafe or unsound practices in conducting
their businesses or for violations of any law, rule, regulation or any condition
imposed  in  writing  by  the  agency  or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance  of  a  cease-and-desist  order  that  can  be judicially enforced, the
termination  of insurance of deposits (in the case of a depository institution),
the  imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and  prohibition  orders  against  institution-affiliated  parties  and  the
enforcement of such actions through injunctions or restraining orders based upon
a  judicial  determination  that  the  agency  would be harmed if such equitable
relief  was not granted. Additionally, a holding company's inability to serve as
a  source  of strength to its subsidiary banking organizations could serve as an
additional  basis  for  a  regulatory  action  against  the  holding  company.

Safety and Soundness Standards
The  federal  banking  agencies  have  adopted  guidelines designed to assist in
identifying  and  addressing  potential  safety  and  soundness  concerns before
capital  becomes  impaired.  The guidelines set forth operational and managerial
standards  relating  to: (i) internal controls, information systems and internal
audit  systems;  (ii)  loan documentation; (iii) credit underwriting; (iv) asset
growth; (v) earnings; and (vi) compensation, fees and benefits. In addition, the
federal  banking agencies have also adopted safety and soundness guidelines with
respect  to  asset  quality and earnings standards. These guidelines provide six
standards  for  establishing and maintaining a system to identify problem assets
and  prevent those assets from deteriorating. Under these standards, any insured
depository  institution  should:  (i)  conduct periodic asset quality reviews to
identify problem assets; (ii) estimate the inherent losses in problem assets and
establish reserves that are sufficient to absorb estimated losses; (iii) compare
problem  asset  totals  to  capital;  (iv) take appropriate corrective action to
resolve  problem  assets;  (v) consider the size and potential risks of material
asset  concentrations;  and  (vi)  provide  periodic  asset quality reports with
adequate  information  for  management  and the Board of Directors to assess the
level  of  asset  risk. These guidelines also set forth standards for evaluating
and  monitoring  earnings  and for ensuring that earnings are sufficient for the
maintenance  of  adequate  capital  and  reserves.

Premiums for Deposit Insurance
The  Company's  deposit accounts are insured by the Bank Insurance Fund ("BIF"),
as  administered  by  the FDIC, up to the maximum permitted by law. Insurance of
deposits  may  be terminated by the FDIC upon a finding that the institution has
engaged  in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operation, or has violated any applicable law, regulation, rule, order,
or  condition  imposed  by  the  FDIC  or  the  Company's  primary  regulator.

For the year ending December 31, 2006, the FDIC charges an annual assessment for
the  insurance of deposits ranging from 0 to 27 basis points per $100 of insured
deposits,  based  on  the  results  of  examinations,  findings by the Company's
primary  federal  regulator and other information deemed relevant by the FDIC to
the  Company's  financial  condition  and  the  risk  posed to the BIF. The risk
classification  is  based  on  an  institution's  capital  group and supervisory
subgroup  assignment.  An  institution's risk category is based upon whether the
institution is well capitalized, adequately capitalized, or less than adequately
capitalized.  Each insured depository institution is also assigned to one of the
following  "supervisory  subgroups." Subgroup A, B or C. Subgroup A institutions
are  financially  sound  institutions  with  few  minor  weaknesses;  Subgroup B
institutions  are  institutions  that  demonstrate  weaknesses  which,  if  not
corrected,  could  result  in  significant  deterioration;  and  Subgroup  C
institutions  are institutions for which there is a substantial probability that
the  FDIC will suffer a loss in connection with the institution unless effective
action  is  taken to correct the areas of weakness. Insured institutions are not
allowed  to


                                       10
<PAGE>
disclose  their  risk assessment classification and no assurance can be given as
to  what  the  future  level  of  premiums  will  be.

Effective  January  1,  2007  the  FDIC has adopted a new rule for the insurance
assessment  on  deposits.  Under  the  new  rule the charge for annual insurance
deposit  assessments will range from a minimum of 5 basis points to a maximum of
43  basis  points  per  $100  of insured deposits. The new rule consolidates the
number  of  assessment  risk  categories  from  nine to four and names them Risk
Categories  I,  II,  III  and  IV.  The  four new categories will continue to be
defined  based  upon  supervisory  and  capital  evaluations,  which  are  both
established  measures  of  risk.  Risk  Category I contains all well-capitalized
institutions  generally  with  CAMELS  composite  ratings  of 1 or 2 and will be
assessed  annual  insurance  rates  of 5 to 7 basis points per $100 in deposits.
Risk  Category  II  contains  both  well  capitalized and adequately capitalized
institutions  with CAMELS composite ratings of 1, 2 or 3 and will be assessed an
annual insurance rate of 10 basis points per $100 in deposits. Risk Category III
contains  all  undercapitalized  institutions  generally  with  CAMELS composite
ratings  of  4  or  5  and will be assessed an annual insurance rate of 28 basis
points.  Risk  Category  IV contains all undercapitalized institutions for which
there  is substantial probability the FDIC will suffer a loss in connection with
the  institution  unless  effective  action  is  taken  to  correct the areas of
weakness.  Those  institutions  in  Risk  Category IV will be assessed an annual
insurance rate of 43 basis points per $100 in deposits. Insured institutions are
not  all  allowed  to  disclose  their  risk  assessment  classification  and no
assurance  can  be  given  as  to  what  the  future  level of premiums will be.

The  President  signed the budget reconciliation package (S. 1932) that contains
the  comprehensive  Federal  Deposit Insurance Reform Act of 2005 which provides
for  the  following:

-    Merging the Bank Insurance Fund (BIF) and the Savings Association Insurance
     Fund  (SAIF) into a new fund, the Deposit Insurance Fund (DIF). This change
     was  made  effective  March  31,  2006.

-    Increasing  the  coverage  limit  for  retirement  accounts to $250,000 and
     indexing  the  coverage  limit for retirement accounts to inflation as with
     the  general  deposit  insurance  coverage  limit.  This  change  was  made
     effective  April  1,  2006.

-    Establishing  a range of 1.15 percent to 1.50 percent within which the FDIC
     Board  of  Directors  may  set  the  Designated  Reserve  Ratio  (DRR).

-    Allowing  the  FDIC  to  manage  the pace at which the reserve ratio varies
     within  this  range.

     -    If the reserve ratio falls below 1.15 percent-or is expected to within
          6 months-the FDIC must adopt a restoration plan that provides that the
          DIF  will  return  to  1.15  percent  generally  within  5  years.

     -    If  the  reserve  ratio  exceeds 1.35 percent, the FDIC must generally
          dividend  to DIF members half of the amount above the amount necessary
          to  maintain  the  DIF  at  1.35  percent,  unless  the  FDIC  Board,
          considering  statutory  factors,  suspends  the  dividends.

     -    If  the  reserve  ratio  exceeds  1.5 percent, the FDIC must generally
          dividend  to  DIF  members  all  amounts above the amount necessary to
          maintain  the  DIF  at  1.5  percent.

-    Eliminating the restrictions on premium rates based on the DRR and granting
     the  FDIC Board the discretion to price deposit insurance according to risk
     for  all insured institutions regardless of the level of the reserve ratio.

-    Granting  a  one-time  initial  assessment  credit  (of  approximately $4.7
     billion)  to  recognize  institutions'  past  contributions  to  the  fund.

Based  upon  the  Company's  preliminary  assessment  of  the  effect  of  this
regulation,  management believes it will not currently have a material financial
impact.


                                       11
<PAGE>
Community Reinvestment Act ("CRA") and Fair Lending
The  Bank  is  subject  to  certain fair lending requirements involving lending,
investing  and  other  CRA  activities.  CRA  requires  each  insured depository
institution  to identify the communities served by the institution's offices and
to  identify  the types of credit and investments the institution is prepared to
extend  within such communities including low and moderate income neighborhoods.
It  also  requires  the  institution's  regulators  to  assess the institution's
performance  in  meeting  the  credit  needs  of  its community and to take such
assessment  into  consideration  in  reviewing  application  for  mergers,
acquisitions, relocation of existing branches, opening of new branches and other
transactions.  A  bank  may  be  subject to substantial penalties and corrective
measures  for  a  violation  of  certain  fair  lending  laws.

A  bank's  compliance  with  the  Community  Reinvestment  Act  is  based  on  a
performance  based evaluation system which bases CRA ratings on an institution's
lending  service and investment performance. An unsatisfactory rating may be the
basis  for  denying  a merger application. The Bank's latest CRA examination was
completed  by  the  Federal  Reserve  Bank of San Francisco and the lending test
portion included a review of small business, small farm, and home mortgage loans
originated between October 1, 2001 and September 30, 2003. Community development
lending  as  well  as investment and service activities were reviewed for all of
2002  and 2003. The Bank received a High Satisfactory rating in the lending area
and  an  Outstanding  rating  in  the  areas of investment and service. The Bank
received an overall rating of Outstanding in complying with its CRA obligations.
The  Bank  is expecting to have another CRA exam during the 1st quarter of 2007.

The Sarbanes-Oxley Act of 2002 ("the Act")
This  legislation  addresses  accounting  oversight  and  corporate  governance
matters,  including:

-    The  creation  of  a  five-member  oversight  board that sets standards for
     accountants  and  has  investigative  and  disciplinary  powers.

-    The  prohibition  of  accounting  firms  from  providing  various  types of
     consulting  services  to  public  clients  and requires accounting firms to
     rotate  partners  among  public  client  assignments  every  five  years.

-    Increased  penalties  for  financial  crimes.

-    Expanded  disclosure  of  corporate  operations  and  internal controls and
     certification  of  financial  statements.

-    Enhanced  controls  on,  and  reporting  of,  insider  trading.

-    Prohibition  on  lending  to  officers  and  directors of public companies,
     although  the  bank may continue to make these loans within the constraints
     of  existing  banking  regulations.

As  a  public  reporting  company, the Company is subject to the requirements of
this  legislation and related rules and regulations issued by the Securities and
Exchange  Commission  (the  "Commission").

AVAILABLE  INFORMATION

Company  reports filed with the Securities and Exchange Commission including the
annual  report  on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form  8-K,  proxy statements and ownership reports filed by Directors, executive
officers  and  principal  shareholders can be accessed through the Company's web
site  at  http://www.fmbonline.com.  The  link  to  the  Securities and Exchange
Commission  is  on  the  About  F  &  M  Bank  page.

STATISTICAL  DISCLOSURES

The  tables on the following pages set forth certain statistical information for
Farmers  & Merchants Bancorp on a consolidated basis. This information should be
read  in  conjunction  with  Item  7.  "Management's  Discussion  and

                                       12
<PAGE>
Analysis" and with the Company's Consolidated Financial Statements and the Notes
thereto  included  in  Item  8.  "Financial  Statements and Supplementary Data."

<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANCORP
INVESTMENT PORTFOLIO
The following table summarizes the balances
and distributions of the
investment securities held on the dates indicated.   Available    Held to   Available    Held to   Available    Held to
                                                      for Sale   Maturity    for Sale   Maturity    for Sale   Maturity
                                                     -------------------------------------------------------------------
DECEMBER 31:  (IN THOUSANDS)                                  2006                   2005                   2004
------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>         <C>        <C>         <C>        <C>         <C>
  U. S. Agency                                       $        -  $  30,539  $   29,926  $  30,644  $   75,065  $  19,943
  Municipal                                              11,274     69,910      15,576     66,260      18,009     56,240
  Mortgage-Backed Securities                            109,385      8,677     106,433     10,881      85,831     13,471
  Other                                                  11,968      2,114       6,094      2,126       6,583        298
------------------------------------------------------------------------------------------------------------------------
    TOTAL BOOK VALUE                                 $  132,627  $ 111,240  $  158,029  $ 109,911  $  185,488  $  89,952
========================================================================================================================
    FAIR VALUE                                       $  132,627  $ 110,132  $  158,029  $ 108,060  $  185,488  $  90,212
========================================================================================================================
</TABLE>


<TABLE>
<CAPTION>
ANALYSIS OF INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The following table is a summary of the relative maturities and yields of the
Company's investment securities Available-for-Sale as of December 31, 2006.
Non-taxable municipal securities have been calculated on a fully taxable
equivalent basis.

                                                       Fair    Average
DECEMBER 31, 2006 (IN THOUSANDS)                      Value     Yield
-----------------------------------------------------------------------
MUNICIPAL - NON-TAXABLE
<S>                                                  <C>       <C>
  One year or less                                   $  2,590     5.51%
  After one year through five years                     6,436     6.72%
  After ten years                                       2,248     9.12%
-----------------------------------------------------------------------
    TOTAL NON-TAXABLE MUNICIPAL SECURITIES             11,274     6.92%
-----------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES
  After ten years                                     109,385     5.11%
-----------------------------------------------------------------------
OTHER
  One year or less                                     11,968     4.57%
-----------------------------------------------------------------------
    TOTAL INVESTMENT SECURITIES AVAILABLE FOR SALE   $132,627     5.21%
=======================================================================
</TABLE>


Note:  The average yield for floating rate securities is calculated using the
current stated yield.

<TABLE>
<CAPTION>
ANALYSIS OF INVESTMENT SECURITIES HELD-TO-MATURITY
The following table is a summary of the relative maturities and yields of the
Company's investment securities Held-to-Maturity as of December 31, 2006.
Non-taxable municipal securities have been calculated on a fully taxable
equivalent basis.

                                                     Book    Average
DECEMBER 31, 2006 (IN THOUSANDS)                    Value     Yield
---------------------------------------------------------------------
U.S. AGENCY
<S>                                                <C>       <C>
  After one year through five years                $ 19,935     4.01%
  After five years through ten years                 10,604     4.35%
---------------------------------------------------------------------
    TOTAL U.S. AGENCY SECURITIES                     30,539     4.13%
---------------------------------------------------------------------
MUNICIPAL - NON-TAXABLE
  One year or less                                    3,769     4.89%
  After one year through five years                   8,533     4.80%
  After five years through ten years                 10,214     5.28%
  After ten years                                    47,394     6.20%
---------------------------------------------------------------------
    TOTAL NON-TAXABLE MUNICIPAL SECURITIES           69,910     5.82%
---------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES
  After five years through ten years                  8,677     3.88%
---------------------------------------------------------------------
OTHER
  After five years through ten years                    133     8.49%
  After ten years                                     1,981     2.55%
---------------------------------------------------------------------
    TOTAL OTHER SECURITIES                            2,114     2.92%
---------------------------------------------------------------------
    TOTAL INVESTMENT SECURITIES HELD-TO-MATURITY   $111,240     5.15%
=====================================================================
</TABLE>


                                       13
<PAGE>
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANCORP
LOAN DATA
(in thousands)
The following table shows the Bank's loan composition by type of loan.

                                                           December 31,
                                 2006           2005           2004           2003           2002
------------------------------------------------------------------------------------------------------
<S>                          <C>            <C>            <C>            <C>            <C>
  Real Estate                $     516,606  $     432,378  $     431,746  $     386,735  $     322,074
  Real Estate Construction          95,378        110,235         62,446         77,115         66,467
  Home Equity                       67,132         69,013         63,782         55,827         45,150
  Agricultural                     183,589        170,657        151,002        134,862        109,130
  Commercial                       165,412        174,530        142,133        136,955        135,877
  Consumer                          13,949         12,653         11,933         11,979         13,948
  Credit Card                        5,543          5,353          5,021          4,549          4,252
  Other                              1,730            952          1,019            976          1,795
------------------------------------------------------------------------------------------------------
TOTAL LOANS                      1,049,339        975,771        869,082        808,998        698,693
Less:
  Unearned Income                    2,427          2,514          2,174          2,092          2,018
  Allowance for Loan Losses         18,099         17,860         17,727         17,220         16,684
------------------------------------------------------------------------------------------------------
LOANS, NET                   $   1,028,813  $     955,397  $     849,181  $     789,686  $     679,991
======================================================================================================
</TABLE>

There were no concentrations of loans exceeding 10% of total loans which were
not otherwise disclosed as a category of loans in the above table.

<TABLE>
<CAPTION>
NON-PERFORMING LOANS
(in thousands)

                                                                     December 31,
                                                        2006    2005     2004      2003     2002
--------------------------------------------------------------------------------------------------
<S>                                                    <C>     <C>     <C>        <C>      <C>
NONACCRUAL LOANS
  Real Estate                                          $   3   $ 464   $    214   $1,670   $2,180
  Commercial                                              36     142          -      516      452
  Consumer                                                 -       -          -      181        2
  Other                                                    -       -          -        -      263
--------------------------------------------------------------------------------------------------
TOTAL NONACCRUAL LOANS                                    39     606        214    2,367    2,897
--------------------------------------------------------------------------------------------------

ACCRUING LOANS PAST DUE 90 DAYS OR MORE
  Real Estate                                              -      66          -      139        1
  Commercial                                               -       -          -       41        -
  Credit Card                                             15      22         11       37        9
  Other                                                    0       0          0        0        0
--------------------------------------------------------------------------------------------------
TOTAL ACCRUING LOANS PAST DUE 90 DAYS OR MORE             15      88         11      217       10
--------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS                             $  54   $ 694   $    225   $2,584   $2,907
==================================================================================================

Non-Performing Loans as a Percent of Total Loans        0.01%   0.07%      0.03%    0.32%    0.42%
==================================================================================================

Allowance for Loan Losses as a Percent of Total Loans   1.72%   1.83%      2.04%    2.13%    2.39%
==================================================================================================
</TABLE>

The  Bank's policy is to place loans (excluding Credit Card loans) on nonaccrual
status when the principal or interest is past due for ninety days or more unless
it  is both well secured and in the process of collection. Any interest accrued,
but  unpaid,  is  reversed  against  current  income.  Thereafter  interest  is
recognized  as income only as it is collected in cash. The gross interest income
that  would have been recorded if the loans had been current for the year ending
December 31, 2006 was $15,000. For a discussion of impaired loan policy see Note
3.  located  in  "Item  8.  Financial  Statements  and  Supplementary  Data."


                                       14
<PAGE>
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANCORP
PROVISION AND ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
A five-year review of activity in the allowance for loan losses and an allocation by loan
type of the allowance is shown in the tables below.


                                               2006      2005      2004      2003      2002
---------------------------------------------------------------------------------------------
<S>                                          <C>       <C>       <C>       <C>       <C>
Allowance for Loan Losses Beginning of Year  $17,860   $17,727   $17,220   $16,684   $12,709
Provision Charged to Expense                     275       425     1,275       625     4,926
CHARGE OFFS:
  Real Estate                                      -         -         -         1         -
  Agricultural                                   333       199         5         0       149
  Commercial                                     121       442       700       282       966
  Consumer                                        41        26         7       175        78
  Credit Card                                    284       200       243       239        93
  Other                                           60         -         -         -         -
---------------------------------------------------------------------------------------------
    TOTAL CHARGE OFFS                            839       867       955       697     1,286
---------------------------------------------------------------------------------------------

RECOVERIES:
  Real Estate                                      -         -         -       143         -
  Agricultural                                    75       376        26        17       141
  Commercial                                     624       134       209       394       149
  Consumer                                        37        19        32        25        34
  Credit Card                                     26        46        31        29        11
  Other                                           41         -         -         -         -
---------------------------------------------------------------------------------------------
    TOTAL RECOVERIES                             803       575       298       608       335
---------------------------------------------------------------------------------------------
NET (CHARGE-OFFS) RECOVERIES                     (36)     (292)     (657)      (89)     (951)
---------------------------------------------------------------------------------------------
LESS RECLASSIFICATION ADJUSTMENT*                  -         -      (111)        -         -
---------------------------------------------------------------------------------------------
TOTAL ALLOWANCE FOR LOAN LOSSES              $18,099   $17,860   $17,727   $17,220   $16,684
=============================================================================================
</TABLE>

*As of December 31, 2004, the Company reclassified $111,000 of the Allowance for
Loan Losses that pertained to commitments under commercial and standby letters
of credit to the "Other Liabilities" section of the Consolidated Balance Sheet.

RATIOS:
Allowance for Loan Losses to:
  Loans at Year End               1.72%  1.83%  2.04%  2.13%  2.39%
  Average Loans                   1.81%  1.98%  2.15%  2.33%  2.62%

Consolidated Net Charge-Offs to:
  Loans at Year End               0.00%  0.03%  0.08%  0.01%  0.14%
  Average Loans                   0.00%  0.03%  0.08%  0.01%  0.15%

For a description of the Company's policy regarding the Allowance for Loan
Losses, see Note 1 located in "Item 8. Financial Statements and Supplementary
Data."

<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)                 AMOUNT OF ALLOWANCE ALLOCATION AT DECEMBER 31,
                          -------------------------------------------------------------------------
                              2006           2005           2004           2003           2002
---------------------------------------------------------------------------------------------------
<S>                       <C>            <C>            <C>            <C>            <C>
Real Estate               $       5,548  $       5,344  $       5,136  $       6,216  $       4,718
Real Estate Construction            880          1,088            427          1,080            912
Home Equity                         436            416            170            471            450
Agricultural                      3,564          1,786          4,342          4,681          3,702
Commercial                        6,007          8,317          5,849          3,957          5,681
Consumer                             92             89            133            104            427
Other                             1,199            543          1,312            569            715
Unallocated                         373            277            358            142             79
---------------------------------------------------------------------------------------------------
Total                     $      18,099  $      17,860  $      17,727  $      17,220  $      16,684
===================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                               PERCENT OF LOANS IN EACH CATEGORY
                                                 TO TOTAL LOANS AT DECEMBER 31,
                          -------------------------------------------------------------------------
                              2006           2005           2004           2003           2002
                          -------------------------------------------------------------------------
<S>                       <C>            <C>            <C>            <C>            <C>
Real Estate                       49.2%          44.3%          49.7%          47.8%          46.1%
Real Estate Construction           9.1%          11.3%           7.2%           9.5%           9.5%
Home Equity                        6.4%           7.1%           7.3%           6.9%           6.5%
Agricultural                      17.5%          17.5%          17.4%          16.7%          15.6%
Commercial                        15.8%          17.9%          16.4%          16.9%          19.4%
Consumer                           1.3%           1.3%           1.4%           1.5%           2.0%
Credit Card                        0.5%           0.5%           0.6%           0.6%           0.6%
Other                              0.2%           0.1%           0.1%           0.1%           0.3%
---------------------------------------------------------------------------------------------------
Total                            100.0%         100.0%         100.0%         100.0%         100.0%
===================================================================================================
</TABLE>


                                       15
<PAGE>
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANCORP
MATURITIES AND RATE SENSITIVITY OF LOANS
(in thousands)
The following table shows the maturity distribution and interest
rate sensitivity of certain loans of the Company on December 31, 2006

                                       Over One
                                       Year to      Over
                           One Year      Five       Five
                           or Less      Years       Years       Total     Percent
<S>                       <C>         <C>         <C>        <C>          <C>
----------------------------------------------------------------------------------
Real Estate               $  13,413   $  86,439   $416,754   $  516,606     50.25%
Real Estate Construction     72,223       6,755     16,400       95,378      9.28%
Home Equity                       -         362     66,770       67,132      6.53%
Agricultural                101,551      71,227     10,811      183,589     17.85%
Commercial                   89,755      64,649     11,008      165,412     16.09%
----------------------------------------------------------------------------------
  Total                   $ 276,942   $ 229,432   $521,743   $1,028,117    100.00%
==================================================================================

Rate Sensitivity:
  Predetermined Rate      $  40,965   $  92,459   $180,579   $  314,003     30.54%
  Floating Rate             235,978     136,972    341,164      714,114     69.46%
----------------------------------------------------------------------------------
  Total                   $ 276,943   $ 229,431   $521,743   $1,028,117    100.00%
==================================================================================
Percent                       26.94%      22.32%     50.75%      100.00%
========================================================================
</TABLE>

COMMITMENTS AND LINES OF CREDIT

The  Company  issues  formal  commitments  or  lines  of  credit  to financially
responsible  commercial  and  agricultural  enterprises. Such commitments can be
either  secured or unsecured and are typically in the form of revolving lines of
credit for seasonal working capital needs. Occasionally, such commitments are in
the  form  of letters of credit to facilitate the customer's particular business
transactions.  For  further  discussion about commitments and contingencies, see
Note  14  located  in  "Item  8.  Financial  Statements and Supplementary Data."

<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANCORP
ANALYSIS OF CERTIFICATES OF DEPOSIT
(In thousands)
The following table sets forth, by time remaining to maturity, the Company's
time deposits in amounts of $100,000 or more for the periods indicated.

                                             December 31,
                                                 2006
----------------------------------------------------------
<S>                                          <C>
TIME DEPOSITS OF $100,000 OR MORE
  Three Months or Less                       $     213,708
  Over Three Months Through Six Months              72,991
  Over Six Months Through Twelve Months             43,948
  Over Twelve Months                                 9,640
----------------------------------------------------------
    TOTAL TIME DEPOSITS OF $100,000 OR MORE  $     340,287
==========================================================
</TABLE>

Refer  to  the Year-To-Date Average Balances and Rate Schedules located in "Item
7.  Management's  Discussion  and Analysis of Financial Condition and Results of
Operations"  for  information  on  separate  deposit  categories.


                                       16
<PAGE>
ITEM 1A. RISK FACTORS

An  investment in our common stock is subject to risks inherent in our business.
The  material  risks  and  uncertainties that management believes may affect our
business  are  described below. Before making an investment decision, you should
carefully consider the risks and uncertainties described below together with all
of  the  other information included or incorporated by reference in this report.
The  risks  and  uncertainties  described below are not the only ones facing our
business.  Additional risks and uncertainties that management is not aware of or
focused  on  or  that  management currently deems immaterial may also impair our
business  operations.  This  report  is  qualified in its entirety by these risk
factors.

If  any  of  the  following  risks  actually  occur, our financial condition and
results  of  operations could be materially and adversely affected. If this were
to  happen,  the  value of our common stock could decline significantly, and you
could  lose  all  or  part  of  your  investment.

RISKS  ASSOCIATED  WITH  OUR  BUSINESS

We  Are  Dependent On Real Estate And A Downturn In The Real Estate Market Could
Hurt  Our Business - A significant portion of our loan portfolio is dependent on
real estate. At December 31, 2006, real estate served as the principal source of
collateral with respect to approximately 66% of our loan outstandings. A decline
in  current  economic  conditions or rising interest rates could have an adverse
effect  on  the  demand  for  new  loans,  the  ability  of  borrowers  to repay
outstanding  loans, the value of real estate and other collateral securing loans
and the value of real estate owned by us, as well as our financial condition and
results  of  operations  in  general  and  the market value of our common stock.

Acts  of  nature,  including  earthquakes,  floods  and  fires,  which may cause
uninsured  damage  and  other  loss  of  value to real estate that secures these
loans,  may  also  negatively  impact  our  financial  condition.

Our Real Estate Lending Also Exposes Us To The Risk Of Environmental Liabilities
- In the course of our business, we may foreclose and take title to real estate,
and  could  be  subject  to  environmental  liabilities  with  respect  to these
properties.  We  may be held liable to a governmental entity or to third persons
for  property damage, personal injury, investigation and clean-up costs incurred
by  these  parties  in  connection  with  environmental contamination, or may be
required  to  investigate or clean up hazardous or toxic substances, or chemical
releases  at  a property. The costs associated with investigation or remediation
activities  could be substantial. In addition, as the owner or former owner of a
contaminated site, we may be subject to common law claims by third parties based
on  damages  and costs resulting from environmental contamination emanating from
the  property.  If  we  ever  become  subject  to  significant  environmental
liabilities,  our  business,  financial  condition,  liquidity  and  results  of
operations  could  be  materially  and  adversely  affected.

Our  Business Is Subject To Interest Rate Risk And Changes In Interest Rates May
Adversely  Affect  Our  Performance  And  Financial Condition - Our earnings are
impacted by changing interest rates. Changes in interest rates impact the demand
for  new loans, the credit profile of our borrowers, the rates received on loans
and securities and rates paid on deposits and borrowings. The difference between
the  rates  received  on loans and securities and the rates paid on deposits and
borrowings is known as interest rate spread. Given our current volume and mix of
interest-bearing  liabilities  and  interest-earning assets, we would expect our
interest  rate  spread  to  increase  if interest rates rise and, conversely, to
decline  if interest rates fall. Increasing levels of competition in the banking
and financial services business may decrease our interest rate spread by forcing
us  to offer lower lending interest rates and pay higher deposit interest rates.
Although  we  believe  our  current  level  of  interest  rate  sensitivity  is
reasonable,  significant  fluctuations  in  interest  rates  and  increasing
competition  may have an adverse effect on our business, financial condition and
results  of  operations.

A  sustained  decrease  in  market  interest  rates  could  adversely affect our
earnings.  When interest rates decline, borrowers tend to refinance higher-rate,
fixed-rate  loans  at  lower  rates, prepaying their existing loans. Under those
circumstances,  we  would  not  be  able to reinvest those prepayments in assets
earning  interest  rates as high as the rates on the prepaid loans. In addition,
our  commercial  real  estate  and  commercial loans, which carry interest rates
that,  in  general,  adjust  in  accordance with changes in the prime rate, will
adjust  to  lower rates. We are also significantly affected by the level of loan
demand  available in our market. The inability to make sufficient loans directly
affects


                                       17
<PAGE>
the  interest  income  we earn. Lower loan demand will generally result in lower
interest  income  realized  as  we  place  funds  in lower yielding investments.

Failure  To  Successfully  Execute  Our  Strategy  Could  Adversely  Affect  Our
Performance - Our financial performance and profitability depends on our ability
to execute our corporate growth strategy. Continued growth, however, may present
operating and other problems that could adversely affect our business, financial
condition and results of operations. Accordingly, there can be no assurance that
we  will  be  able  to  execute  our  growth  strategy  or maintain the level of
profitability  that  we  have  recently  experienced. Factors that may adversely
affect  our  ability to attain our long-term financial performance goals include
those  stated  elsewhere  in  this  section,  as  well  as:

-    Inability  to  control non-interest expense, including, but not limited to,
     rising  employee  and  healthcare  costs.

-    Inability  to  increase  non-interest  income.

-    Continuing  ability  to  expand  through  de  novo  branching or otherwise.

Economic  Conditions  In Our Service Areas Could Adversely Affect Our Operations
And/Or Cause Us To Sustain Losses - Our retail and commercial banking operations
are  concentrated  primarily  in  Sacramento, San Joaquin, Stanislaus and Merced
Counties.  As  a  result  of  this  geographic  concentration,  our  results  of
operations  depend  largely upon economic conditions in this area. A significant
source  of  risk  arises from the possibility that losses will be sustained if a
significant  number  of  our  borrowers,  guarantors and related parties fail to
perform  in  accordance  with the terms of their loans. This risk increases when
the  economy  is  weak.  We  have  adopted  underwriting  and  credit monitoring
procedures  and  credit  policies, including the establishment and review of the
allowance  for loan losses, that management believes are appropriate to minimize
this  risk  by  assessing  the  likelihood  of  nonperformance,  tracking  loan
performance  and  diversifying  our  credit  portfolio.  These  policies  and
procedures,  however,  may  not  prevent unexpected losses that could materially
adversely  affect  our  results of operations in general and the market value of
our  stock.

This  Company's  service areas can be significantly impacted by the seasonal and
cyclical  trends  of  the  agricultural  industry.  As  a  result, the Company's
financial  results  are  influenced  by  the  seasonal  banking  needs  of  its
agricultural  customers  (e.g., during the spring and summer customers draw down
their  deposit  balances  and  increase  loan  borrowing to fund the purchase of
equipment  and  the  planting  of  crops.  Correspondingly, deposit balances are
replenished  and loans repaid in late fall and winter as crops are harvested and
sold).  Additionally,  although  the  Company's loan portfolio is believed to be
well  diversified,  at  various  times  during the year approximately 35% of the
Company's  loan  balances  can  be  outstanding  to  agricultural  borrowers.
Commitments  are  well  diversified across various commodities, including dairy,
grapes,  walnuts,  almonds,  cherries,  apples,  pears, walnuts, and various row
crops. Additionally, many individual borrowers are themselves diversified across
commodity  types,  reducing  their  exposure,  and  therefore  the Company's, to
cyclical  downturns  in  any  one  commodity.

We  Face Strong Competition From Financial Service Companies And Other Companies
That  Offer  Banking  Services  That  Could  Hurt  Our  Business - The financial
services  business  in  our  market  areas is highly competitive. It is becoming
increasingly  competitive  due to changes in regulation, technological advances,
and  the  accelerating pace of consolidation among financial services providers.
We  face competition both in attracting deposits and in making loans. We compete
for loans principally through the interest rates and loan fees we charge and the
efficiency  and quality of services we provide. Increasing levels of competition
in  the  banking  and  financial  services business may reduce our market share,
decrease  loan  demand,  cause the prices we charge for our services to fall, or
decrease  our  net interest margin by forcing us to offer lower lending interest
rates  and  pay higher deposit interest rates. Therefore, our results may differ
in  future  periods  depending  upon  the  nature  or  level  of  competition.

Technology  and  other  changes  are  allowing  parties  to  complete  financial
transactions  that historically have involved banks through alternative methods.
For  example, consumers can now maintain funds that would have historically been
held  as bank deposits in brokerage accounts or mutual funds. Consumers can also
complete  transactions  such  as paying bills and/or transferring funds directly
without  the  assistance  of  banks.  The  process  of  eliminating  banks  as
intermediaries,  known  as  "disintermediation," could result in the loss of fee
income,  as  well  as  the  loss  of  customer  deposits  and the related income
generated  from  those deposits. The loss of these revenue streams and the lower
cost

                                       18
<PAGE>
deposits  as  a  source  of  funds  could  have a material adverse effect on our
financial  condition  and  results  of  operations.

We  May  Not Be Able To Attract And Retain Skilled People - Our success depends,
in  large part, on our ability to attract and retain key people. Competition for
the  best people in most of our activities can be intense and we may not be able
to hire people or to retain them. The unexpected loss of services of one or more
of  our  key  personnel  could  have  a  material adverse impact on our business
because  of  their skills, knowledge of our market, years of industry experience
and  the  difficulty  of  promptly  finding  qualified  replacement  personnel.

Our  Internal  Operations  Are  Subject To A Number Of Risks - We are subject to
certain  operations  risks,  including,  but  not limited to, information system
failures  and  errors,  customer  or  employee  fraud  and catastrophic failures
resulting  from  terrorist  acts  or  natural disasters. We maintain a system of
internal  controls  to  mitigate against such occurrences and maintain insurance
coverage  for such risks that are insurable, but should such an event occur that
is not prevented or detected by our internal controls, uninsured or in excess of
applicable  insurance  limits, it could have a significant adverse impact on our
business,  financial  condition  or  results  of  operations.

We  rely  heavily  on  communications  and  information  systems  to conduct our
business. Any failure, interruption or breach in security of these systems could
result  in  failures  or  disruptions  in  our customer relationship management,
general  ledger,  deposit,  loan  and  other systems. While we have policies and
procedures  designed to prevent or limit the effect of the failure, interruption
or  security  breach  of our information systems, there can be no assurance that
any such failures, interruptions or security breaches will not occur or, if they
do  occur,  that  they  will  be  adequately  addressed.  The  occurrence of any
failures,  interruptions  or  security breaches of our information systems could
damage  our  reputation,  result  in  a loss of customer business, subject us to
additional  regulatory  scrutiny,  or expose us to civil litigation and possible
financial  liability,  any  of which could have a material adverse effect on our
financial  condition  and  results  of  operations.

The  financial  services  industry is continually undergoing rapid technological
change  with  frequent  introductions  of  new  technology-driven  products  and
services.  The  effective  use  of  technology  increases efficiency and enables
financial institutions to better serve customers and to reduce costs. Our future
success depends, in part, upon our ability to address the needs of our customers
by  using technology to provide products and services that will satisfy customer
demands, as well as to create additional efficiencies in our operations. Many of
our  competitors have substantially greater resources to invest in technological
improvements.  We may not be able to effectively implement new technology-driven
products  and services or be successful in marketing these products and services
to  our  customers.  Failure to successfully keep pace with technological change
affecting  the  financial services industry could have a material adverse impact
on our business and, in turn, our financial condition and results of operations.

Severe  weather,  natural  disasters, acts of war or terrorism and other adverse
external  events  could  have  a  significant  impact  on our ability to conduct
business. Such events could affect the stability of our deposit base, impair the
ability  of borrowers to repay outstanding loans, impair the value of collateral
securing  loans,  cause  significant  property damage, result in loss of revenue
and/or  cause  us  to  incur  additional  expenses. Operations in several of our
markets  could  be  disrupted  by  both  the evacuation of large portions of the
population  as well as damage and or lack of access to our banking and operation
facilities.  While  we  have  not  experienced such an occurrence to date, other
severe  weather  or natural disasters, acts of war or terrorism or other adverse
external  events  may  occur  in the future. Although management has established
disaster  recovery  policies  and  procedures,  the occurrence of any such event
could have a material adverse effect on our business, which, in turn, could have
a  material adverse effect on our financial condition and results of operations.

We  Depend  On  Cash  Dividends  From  Our  Subsidiary  Bank  To  Meet  Our Cash
Obligations - As a holding company, dividends from our subsidiary bank provide a
substantial  portion  of  our cash flow used to service the interest payments on
our  Trust  Preferred  Securities  and  our  other  obligations,  including cash
dividends.  See  "Item  5.  Market  for  the Registrant's Common Equity, Related
Stockholder  Matters  and  Issuer  Purchases  of  Equity  Securities."  Various
statutory  provisions  restrict  the amount of dividends our subsidiary bank can
pay  to  us  without  regulatory  approval.


                                       19
<PAGE>
RISKS ASSOCIATED WITH OUR INDUSTRY

We  Are  Subject  To  Government  Regulation  That  Could  Limit Or Restrict Our
Activities,  Which In Turn Could Adversely Impact Our Operations - The financial
services  industry  is  regulated  extensively.  Federal and State regulation is
designed primarily to protect the deposit insurance funds and consumers, and not
to  benefit our shareholders. These regulations can sometimes impose significant
limitations  on  our  operations.

New  laws  and regulations or changes in existing laws and regulations or repeal
of  existing  laws  and  regulations  may  adversely  impact  our  business.

Further,  federal  monetary  policy,  particularly  as  implemented  through the
Federal  Reserve  System,  significantly  affects  economic  conditions  for us.

New  Legislative And Regulatory Proposals May Affect Our Operations And Growth -
Proposals  to  change  the  laws  and  regulations  governing the operations and
taxation  of,  and federal insurance premiums paid by, banks and other financial
institutions  and companies that control such institutions are frequently raised
in  the  U.S.  Congress,  the  California legislature and before bank regulatory
authorities.  The  likelihood  of any major changes in the future and the impact
such  changes  might have on us or our subsidiaries are impossible to determine.
Similarly,  proposals to change the accounting treatment applicable to banks and
other  depository  institutions  are  frequently  raised by the SEC, the federal
banking  agencies, the IRS and other appropriate authorities. The likelihood and
impact of any additional future changes in law or regulation and the impact such
changes might have on us or our subsidiaries are impossible to determine at this
time.

RISKS ASSOCIATED WITH OUR STOCK

Our Stock Trades Less Frequently Than Others - The Company's common stock is not
widely  held  or  listed on any exchange. 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. However, the limited
trading  market  for  the  Company's  common  stock  may  make  it difficult for
stockholders  to  dispose  of  their  shares.

Our Stock Price Is Affected By A Variety Of Factors - Stock price volatility may
make  it more difficult for you to resell your common stock when you want and at
prices  you  find  attractive.  Our  stock  price can fluctuate significantly in
response  to  a  variety  of factors discussed in this section, including, among
other  things:

-    Actual  or  anticipated  variations  in  quarterly  results  of operations.

-    Operating  and  stock  price  performance of other companies that investors
     deem  comparable  to  our  Company.

-    News reports relating to trends, concerns and other issues in the financial
     services  industry.

-    Perceptions  in  the  marketplace  regarding  our  Company  and/or  its
     competitors.

Our  Common  Stock  Is  Not  An Insured Deposit - Our common stock is not a bank
deposit  and,  therefore,  is  not  insured  against loss by the FDIC, any other
deposit  insurance  fund or by any other public or private entity. Investment in
our  common  stock  is  inherently risky for the reasons described in this "Risk
Factors"  section and elsewhere in this report and is subject to the same market
forces that affect the price of common stock in any company. As a result, if you
acquire  our  common  stock,  you  may  lose  some  or  all  of your investment.

ITEM 1B. UNRESOLVED STAFF COMMENTS

The  Company  has  no  unresolved  comments  received  from  staff  at  the SEC.


                                       20
<PAGE>
ITEM 2. PROPERTIES

Farmers  &  Merchants  Bancorp  along with its subsidiaries are headquartered in
Lodi,  California.  Executive offices are located at 111 W. Pine Street. Banking
services  are provided in twenty-one locations in the Company's service area. Of
the  twenty-one  locations,  thirteen  are  owned  and  eight  are  leased.  The
expiration  of  these leases occurs between the years 2007 and 2016. See Note 14
located  in  "Item  8.  Financial  Statements  and  Supplementary  Data."

ITEM 3. 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.

There  are no material proceedings adverse to the Company to which any Director,
officer  or  affiliate  of  the  Company  is  a  party.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No  matters  were  submitted  to a vote of the Company's stockholders during the
fourth  quarter  of  2006.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

The  common stock of Farmers & Merchants Bancorp is not widely held or listed on
any  exchange.  However,  trades may be reported on the OTC Bulletin Board under
the  symbol  "FMCB.OB". Additionally, management is aware that there are private
transactions  in  the  Company's  common  stock.

The  following  table  summarizes  the  actual  high and low sale prices for the
Company's  common stock since the first quarter of 2005. These figures are based
on activity posted on the OTC Bulletin Board and on private transactions between
individual  shareholders  that  are  reported  to  the  Company.

<TABLE>
<CAPTION>
                                                  Cash Dividends
                Calendar Quarter  High   Low   Declared (Per Share)
                ----------------  -----  ----  ---------------------
<S>             <C>               <C>    <C>   <C>
          2006  Fourth quarter    $ 557  $505  $                4.80
                Third quarter       565   505                      -
                Second quarter      550   475                   3.75
                First quarter       510   485                      -

          2005  Fourth quarter    $ 500  $465  $                4.50
                Third quarter       515   465                      -
                Second quarter      515   438                   3.18
                First quarter       525   415                      -
</TABLE>

As of January 31, 2007, there were approximately 1,483 shareholders of record of
the  Company's  common  stock.

Beginning  in  1975  and  continuing through 2005, the Company issued a 5% stock
dividend  annually.  However,  this dividend was discontinued in 2006 based upon
management's  and  the Board's assessment that: (1) the Company had a sufficient
number  of  shares  outstanding to provide for orderly and timely market trades;
(2)  the  costs  associated with the issuance of stock dividends could be better
spent  in  other  areas  of  the  Company's  operations;  and  (3)


                                       21
<PAGE>
whereas  the  required  accounting  for  a  stock  dividend has no impact on the
Company's  overall  capital  position  it does require that Retained Earnings be
reclassified to Additional Paid-In Capital, which over time limits the growth of
the  Retained  Earnings  account  from  which  cash  dividends  are  paid.

There  are  limitations  under  Delaware  corporate  law  as  to  the amounts of
dividends  that may be paid by the Company. Additionally, if we decided to defer
interest on our subordinated debentures, we would be prohibited from paying cash
dividends  on  the Company's common stock. The Company is dependent on dividends
paid  by  the  Bank to fund its dividend payments to its stockholders. There are
regulatory  limitations  on  cash  dividends  that may be paid by the Bank under
state  and  federal  laws.  See "Item 1. Business - Supervision and Regulation."

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 approved a
second  stock repurchase program because it concluded that the Company continued
to  have  more capital than it needed to meet present and anticipated regulatory
guidelines  for  the  Bank  to  be classified as "well capitalized." On April 4,
2006,  the  Board unanimously approved expanding the Repurchase Program to allow
the  repurchase  of up to $15 million of stock between May 1, 2006 and April 30,
2009.

Repurchases  under  the  program  will continue to be made on the open market or
through  private  transactions.  The  repurchase  program  also requires that no
purchases  may be made if the Bank would not remain "well-capitalized" after the
repurchase. All shares repurchased under the repurchase program will be retired.

The  following  table  indicates  the  number of shares repurchased by Farmers &
Merchants  Bancorp  during  the  fourth  quarter  of  2006.

<TABLE>
<CAPTION>
                                                               Approximate Dollar
                                         Number of Shares     Value of Shares that
                           Average    Purchased as Part of a  May Yet Be Purchased
               Number of  Price per     Publicly Announced      Under the Plan or
Period          Shares      Share        Plan or Program             Program
<S>            <C>        <C>         <C>                     <C>
-----------------------------------------------------------------------------------
October 2006         800  $      510                     800  $          10,817,820
November 2006          -           -                       -             10,817,820
December 2006          -           -                       -             10,817,820
-----------------------------------------------------------------------------------
Total                800  $      510                     800  $          10,817,820
</TABLE>

All  of  the  above  shares  were  repurchased  in  private  transactions.


                                       22
<PAGE>
PERFORMANCE GRAPHS

The  following  graphs  compare  the  yearly  percentage change in the Company's
cumulative  total  stockholder  return  on common stock with: (i) the cumulative
total  return  of the American Stock Exchange market index; and (ii) a published
index  compiled by Hemscott Group (formerly Core Data) of banks and bank holding
companies  throughout  the  United  States.  The following comparisons cover the
period  January  1,  2002  to  December  31,  2006. The graphs assume an initial
investment  of  $100 on January 1, 2002 and reinvestment of dividends. The stock
price  performance  set  forth  in  the  following  graphs  is  not  necessarily
indicative  of  future  price  performance.

These  graphs  shall  not  be deemed filed or incorporated by reference into any
filing  under the Securities Act of 1933 or under the Securities Exchange Act of
1934,  except  to  the  extent  that we specifically incorporate these graphs by
reference.

                                [GRAPHIC OMITTED]



                                [GRAPHIC OMITTED]


                                       23
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA

FARMERS & MERCHANTS BANCORP
FIVE YEAR FINANCIAL SUMMARY OF OPERATIONS
(in thousands except per share data)

SUMMARY OF INCOME:                                   2006         2005         2004         2003         2002
-----------------------------------------------------------------------------------------------------------------
<S>                                               <C>          <C>          <C>          <C>          <C>
Total Interest Income                             $   88,396   $   72,458   $   59,300   $   54,884   $   54,238
Total Interest Expense                                24,621       14,032        9,818       11,073       13,596
-----------------------------------------------------------------------------------------------------------------
Net Interest Income                                   63,775       58,426       49,482       43,811       40,642
Provision for Loan Losses                                275          425        1,275          625        4,926
-----------------------------------------------------------------------------------------------------------------
Net Interest Income After
  Provision for Loan Losses                           63,500       58,001       48,207       43,186       35,716
Total Non-Interest Income                             12,063       11,274       14,267       12,918       13,866
Total Non-Interest Expense                            43,121       40,617       36,175       33,286       29,109
-----------------------------------------------------------------------------------------------------------------
Income Before Income Taxes                            32,442       28,658       26,299       22,818       20,473
Provision for Income Taxes                            11,813       10,230        9,625        8,043        7,054
-----------------------------------------------------------------------------------------------------------------
Net Income Before Cumulative Effect
  of Change in Accounting Principle                   20,629       18,428       16,674       14,775       13,419
Cumulative Effect of a Change in
  Accounting Principle (net of tax)                        -            -         (224)           -            -
-----------------------------------------------------------------------------------------------------------------
Net Income                                        $   20,629   $   18,428   $   16,450   $   14,775   $   13,419
=================================================================================================================
BALANCE SHEET DATA:
-----------------------------------------------------------------------------------------------------------------
Total Assets                                      $1,411,233   $1,352,989   $1,226,295   $1,148,565   $1,021,907
Loans                                              1,046,912      973,257      866,908      806,906      696,675
Allowance for Loan Losses                             18,099       17,860       17,727       17,220       16,684
Investment Securities                                243,867      267,940      275,440      261,922      233,933
Deposits                                           1,198,528    1,103,340    1,002,110      904,349      850,225
Federal Home Loan Bank Advances                       47,532       98,847       80,889      111,928       40,965
Shareholders' Equity                                 132,340      123,648      116,547      109,605      103,565
-----------------------------------------------------------------------------------------------------------------

SELECTED RATIOS:
Return on Average Assets                                1.51%        1.46%        1.40%        1.36%        1.41%
Return on Average Equity                               16.16%       15.26%       14.50%       13.68%       13.16%
Dividend Payout Ratio(1)                               33.77%       34.55%       34.79%       32.05%       32.82%
Average Loans to Average Deposits                      90.24%       87.28%       86.41%       85.29%       79.71%
Average Equity to Average Assets                        9.38%        9.58%        9.68%        9.97%       10.71%
Period-end Shareholders' Equity to Total Assets         9.38%        9.14%        9.50%        9.54%       10.13%

PER SHARE DATA:
Net Income (2) (3)                                $    25.25   $    22.24   $    19.68   $    17.55   $    15.78
Cash Dividends Per Share (1)(3)                   $     8.55   $     7.68   $     6.85   $     5.63   $     5.18
</TABLE>

(1)  Not  including  cash  paid  in  lieu  of fractional shares related to stock
     dividend.
(2)  Based  on  the  weighted  average  number of shares outstanding of 817,044,
     828,537,  835,746,  841,857  and  850,490  for the years ended December 31,
     2006,  2005,  2004,  2003,  and  2002,  respectively.
(3)  Per  share  data  has  been adjusted, where applicable, for stock dividends
     issued  in  any  of  the  above  years.


                                       24
<PAGE>
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANCORP
QUARTERLY FINANCIAL DATA
(in thousands except per share data)


                               First     Second    Third    Fourth
2006                          Quarter   Quarter   Quarter   Quarter    Total
-----------------------------------------------------------------------------
<S>                           <C>       <C>       <C>       <C>       <C>
Total Interest Income         $ 20,703  $ 21,669  $ 22,950  $ 23,074  $88,396
Total Interest Expense           4,754     5,773     6,856     7,238   24,621
-----------------------------------------------------------------------------
Net Interest Income             15,949    15,896    16,094    15,836   63,775
Provision for Loan Losses          275         -         -         -      275
-----------------------------------------------------------------------------
Net Interest Income After
  Provision for Loan Losses     15,674    15,896    16,094    15,836   63,500
Total Non-Interest Income        2,604     3,499     3,114     2,846   12,063
Total Non-Interest Expense      10,534    11,376    10,777    10,434   43,121
-----------------------------------------------------------------------------
Income Before Income Taxes       7,744     8,019     8,431     8,248   32,442
Provision for Income Taxes       2,807     2,925     3,098     2,983   11,813
-----------------------------------------------------------------------------
Net Income                    $  4,937  $  5,094  $  5,333  $  5,265  $20,629
=============================================================================
Earnings Per Share (1)        $   6.00  $   6.22  $   6.54  $   6.49  $ 25.25
=============================================================================

                               First     Second    Third    Fourth
2005                          Quarter   Quarter   Quarter   Quarter    Total
-----------------------------------------------------------------------------
Total Interest Income         $ 16,093  $ 17,817  $ 18,705  $ 19,843  $72,458
Total Interest Expense           2,729     3,319     3,847     4,137   14,032
-----------------------------------------------------------------------------
Net Interest Income             13,364    14,498    14,858    15,706   58,426
Provision for Loan Losses            -         -         -       425      425
-----------------------------------------------------------------------------
Net Interest Income After
  Provision for Loan Losses     13,364    14,498    14,858    15,281   58,001
Total Non-Interest Income        2,902     3,023     2,984     2,365   11,274
Total Non-Interest Expense       9,299    10,357    10,452    10,509   40,617
-----------------------------------------------------------------------------
Income Before Income Taxes       6,967     7,164     7,390     7,137   28,658
Provision for Income Taxes       2,536     2,575     2,643     2,476   10,230
-----------------------------------------------------------------------------
Net Income                    $  4,431  $  4,589  $  4,747  $  4,661  $18,428
=============================================================================
Earnings Per Share (1)        $   5.33  $   5.52  $   5.74  $   5.65  $ 22.24
=============================================================================
</TABLE>

(1)  Per  share  data  has  been adjusted, where applicable, for stock dividends
     issued  in  any  of  the  above  years.

Farmers  & Merchants Bancorp stock is not traded on any exchange. The shares are
primarily  held  by  local  residents  and  are  not  actively  traded. Based on
information  from  shareholders  and  from  Company  stock transfer records, the
prices  paid  in  2006,  2005 and 2004 ranged from $565.00 to $300.00 per share.
Additional information about the Company's common stock is available in Part II,
Item  5.


                                       25
<PAGE>
ITEM  7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF  OPERATIONS

FORWARD-LOOKING STATEMENTS

This  annual  report  contains  various  forward-looking  statements,  usually
containing  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, agricultural, 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;  and (viii) other factors
discussed  in the Company's filings with the Securities and Exchange Commission.

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.

INTRODUCTION

Farmers  &  Merchants  Bancorp, or the Company, is a bank holding company formed
March  10, 1999. Its subsidiary, Farmers & Merchants Bank of Central California,
or  the  Bank,  is  a  California  state-chartered bank formed in 1916. The Bank
serves  the  northern  Central Valley of California with 21 banking offices. The
service  area  includes  Sacramento, San Joaquin, Stanislaus and Merced Counties
with  branches  in Sacramento, Elk Grove, Galt, Lodi, Stockton, Linden, Modesto,
Turlock  and  Hilmar.

Substantially  all of the Company's business activities are conducted within its
market  area.

As  a bank holding company, the Company is subject to regulation and examination
by  the  Board  of  Governors  of  the  Federal  Reserve  System  ("FRB").  As a
California,  state-chartered,  non-fed  member  bank,  the  Bank  is  subject to
regulation  and  examination  by  the  California  Department  of  Financial
Institutions  and  the  Federal  Deposit  Insurance  Corporation.

This  section  should  be  read  in  conjunction with the consolidated financial
statements  and  the  notes  thereto,  along  with  other  financial information
included  in  this  report.

OVERVIEW

The  Company's  primary  service area encompasses the northern Central Valley of
California, a region that can be significantly impacted by the seasonal needs of
the  agricultural  industry.  Accordingly, discussion of the Company's Financial
Condition  and Results of Operations is influenced by the seasonal banking needs
of its agricultural customers (e.g., during the spring and summer customers draw
down  their deposit balances and increase loan borrowing to fund the purchase of
equipment  and  planting  of  crops.  Correspondingly,  deposit  balances  are
replenished  and loans repaid in late fall and winter as crops are harvested and
sold).


                                       26
<PAGE>
<TABLE>
<CAPTION>
The Five Year Period: 2002 through 2006
The following table presents key performance data for the Company over the past five years.

(in thousands, except per share data)


Financial Performance Indicator           2006         2005         2004         2003         2002
------------------------------------------------------------------------------------------------------
<S>                                    <C>          <C>          <C>          <C>          <C>
Net Income                             $   20,629   $   18,428   $   16,450   $   14,775   $   13,419
------------------------------------------------------------------------------------------------------

Total Assets                           $1,411,233   $1,352,989   $1,226,295   $1,148,565   $1,021,907
------------------------------------------------------------------------------------------------------
Total Loans                            $1,046,912   $  973,257   $  866,908   $  806,906   $  696,675
------------------------------------------------------------------------------------------------------
Total Deposits                         $1,198,528   $1,103,340   $1,002,110   $  904,349   $  850,225
------------------------------------------------------------------------------------------------------
Total Shareholders' Equity             $  132,340   $  123,648   $  116,547   $  109,605   $  103,565
------------------------------------------------------------------------------------------------------
Total Risk-Based Capital Ratio              12.17%       12.32%       13.34%       13.24%       12.25%
------------------------------------------------------------------------------------------------------


Non-Performing Loans as a % of Total
Loans                                        0.01%        0.07%        0.03%        0.32%        0.42%
------------------------------------------------------------------------------------------------------
Net Charge-Offs to Average Loans             0.00%        0.03%        0.08%        0.01%        0.15%
------------------------------------------------------------------------------------------------------
Loan Loss Allowance as a % of Total
Loans                                        1.72%        1.83%        2.04%        2.13%        2.39%
------------------------------------------------------------------------------------------------------

Return on Average Assets                     1.51%        1.46%        1.40%        1.36%        1.41%
------------------------------------------------------------------------------------------------------
Return on Average Equity                    16.16%       15.26%       14.50%       13.68%       13.16%
------------------------------------------------------------------------------------------------------
Earnings Per Share (1)                 $    25.25   $    22.24   $    19.68   $    17.55   $    15.78
------------------------------------------------------------------------------------------------------
Cash Dividends Per Share (1) (2)       $     8.55   $     7.68   $     6.85   $     5.63   $     5.18
------------------------------------------------------------------------------------------------------
Cash Dividends Declared (2)            $    6,966   $    6,366   $    5,723   $    4,736   $    4,404
------------------------------------------------------------------------------------------------------
# Shares Repurchased During Year           11,718        8,066        7,981        5,732       20,749
------------------------------------------------------------------------------------------------------
Average Share Price of Repurchased
Shares                                 $      507   $      496   $      389   $      256   $      241
------------------------------------------------------------------------------------------------------
High Stock Price - Fourth Quarter      $      557   $      500   $      455   $      375   $      300
------------------------------------------------------------------------------------------------------
Low Stock Price - Fourth Quarter       $      505   $      465   $      400   $      300   $      250
------------------------------------------------------------------------------------------------------
</TABLE>

___________________________
(1)  Prior  years  have been restated for stock dividends issued in 2002 through
     2005.  No  stock  dividend  was  issued  in  2006.
(2)  Not  including  cash  paid  in  lieu  of fractional shares related to stock
     dividends.  These  payments  totaled  $779,000  between  2002  and  2005.

During  the  five  year  period  2002  through  2006,  the  Company's  operating
performance  improved  every  year.

-    Annual  net  income  increased  54%  to  $20.6  million from $13.4 million.

-    Earnings  Per  Share  increased  60%  to  $25.25  from  $15.78.

-    Return  on Average Equity increased 300 basis points to 16.16% from 13.16%.

-    Total  assets  increased  38%  to  $1.4  billion.

-    Total  loans  increased  50%  to  $1.0  billion.

Importantly,  during  this  period  of  asset  and  earnings  growth:

-    The  Bank's  risk based capital ratio has remained above the 10% level that
     federal  and  state  banking  regulators require for banks to be considered
     "well  capitalized."  See  "Financial  Condition  -  Capital."

                                       27
<PAGE>
-    The  Company's  asset  quality  has  remained  strong,  as reflected by net
     charge-offs  never  exceeding  0.15%  of  average  loans  in  any  year and
     non-performing  loans  totaling  0.01% of total loans at December 31, 2006.
     See  "Financial  Condition  -  Non-Performing  Assets."

-    The  Company's  allowance for loan losses has been maintained above 1.7% of
     total  loans,  reflecting  a  conservative  approach  to providing for loan
     losses.  See  "Results  of  Operations  -  Provision and Allowance for Loan
     Losses."

As  a  result  of  this  strong earnings performance, capital position and asset
quality,  shareholders  have  benefited  well  in excess of overall stock market
returns  over  the  past  five  years.

-    Return  on  Average  Equity has increased every year from 13.16% in 2002 to
     16.16%  in  2006.

-    Cash  Dividends  per  Share,  restated  for  stock  dividends  issued, have
     increased  89%  since 2001, and totaled $33.87 per share over the five year
     period.

-    The market price of the Company's stock has increased $265 per share from a
     close  of  $250  in  the  fourth  quarter of 2001 to a close of $515 in the
     fourth  quarter of 2006. Additionally, as a result of the 5% stock dividend
     declared  in 2002 through 2005; the average shareholder owned approximately
     121 shares at December 31, 2006 for every 100 shares they owned at December
     31,  2001.

-    The  total  return on the Company's stock over the past five years compares
     very  favorably  to overall stock market returns as represented by the AMEX
     Market  Index  and  the  Hemscott  Group  Index  of  Banks and Bank Holding
     Companies.  See  "Performance  Graphs."

-    The  total  market  capitalization  of  the  Company  has  increased $238.3
     million,  or  133%,  over  the  five  year  period.

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 approved a
second  stock repurchase program because it concluded that the Company continued
to  have  more capital than it needed to meet present and anticipated regulatory
guidelines  for  the  Bank  to  be classified as "well capitalized." On April 4,
2006,  the  Board unanimously approved expanding the Repurchase Program to allow
the  repurchase  of up to $15 million of stock between May 1, 2006 and April 30,
2009.Repurchases  under  the program will continue to be made on the open market
or  through  private  transactions. The repurchase program also requires that no
purchases  may be made if the Bank would not remain "well-capitalized" after the
repurchase. All shares repurchased under the repurchase program will be retired.

Since  the second stock repurchase program was expanded in 2006, the Company has
repurchased  over  8,200  shares  for  total  consideration  of  $4.2  million.

The  Current  Year:  2006
At  the  completion  of  our  90th year, management and the Board are pleased to
report  the  highest  net  income  in  the Company's history. For the year ended
December  31,  2006,  Farmers  &  Merchants Bancorp reported net income of $20.6
million,  earnings  per  share  of $25.25, return on average assets of 1.51% and
return  on  average  equity  of  16.16%.

The  Company's  continuing  strong  earnings  performance  in  2006 was due to a
carefully  implemented  strategy  to balance growth and margin protection, which
resulted  in:  (1) 7.6% growth in average earning assets; (2) improvement in the
mix  of  earning  assets as reflected by an increase in loans as a percentage of
average  earning  assets from 77% in 2005 to 79% in 2006; (3) improvement in the
net  interest  margin  from 5.12% in 2005 to 5.18% in 2006 due to the continuing
residual  impact of increases in market interest rates that occurred in mid-2004
through mid-2006; and (4) improvement in the efficiency ratio from 58.3% in 2005
to  56.9%  in  2006.


                                       28
<PAGE>
The following is a summary of the financial accomplishments achieved during 2006
as  compared  to  2005.

-    Net  income  increased  11.9%  to  $20.6  million  from  $18.4  million.

-    Earnings  per  share  increased  13.5%  to  $25.25  from  $22.24.

-    Net  interest  income  increased  9.2% to $63.8 million from $58.4 million.

-    Total  assets  increased  4.3%  to  $1.41  billion  from  $1.35  billion.

-    Gross  loans  increased  7.6%  to  $1.0  billion  from  $973.3  million.

-    Total  deposits  increased  8.6%  to  $1.2  billion  from  $1.1  billion.

-    Total  shareholders'  equity  increased  7.3% to $132.3 million from $123.6
     million,  after  dividends  of $7.0 million, stock buybacks of $5.9 million
     and  a  decrease  in  Accumulated  Other  Comprehensive  Loss  of $975,000.

-    Total  market  capitalization  increased  $14.6  million.

Looking  Forward:  2007  and  Beyond
In  management's  opinion, the following key issues will influence the financial
results  of  the  Company  in  2007  and  future  years:

-    The  Company is asset sensitive. See "Item 7A. Quantitative and Qualitative
     Disclosures  About  Market Risk - Interest Rate Risk." As a result, between
     2005  and  2006, the Company's net interest margin improved approximately 6
     basis  points as a result of the continuing residual impact of increases in
     market  interest rates that occurred in mid-2004 through mid-2006. However,
     since  increases  in the Company's deposit rates typically lag increases in
     loan  rates,  once  short-term  market  rates  stabilized  in June 2006 the
     Company's  net  interest  margin has dropped by approximately 33 bps from a
     high  of  5.37% in the first quarter of 2006 to 5.04% in the fourth quarter
     of  2006.  Some  economists are predicting that short-term market rates may
     drop  in  late  2007  which will place further pressure on the net interest
     margin  as  decreases  in  deposit  rates will lag decreases in loan rates.
     Additionally,  the  Company's  net interest margin is coming under pressure
     from (1) competitor pricing strategies for both loans and deposits that the
     Company  may  need  to  respond to in order to retain key customers and (2)
     changes  in  deposit  mix  as customers move funds from low or non-interest
     bearing  transaction and savings accounts to higher yielding time deposits.

-    The Company's results can be influenced by changes in the credit quality of
     its borrowers. Non-performing loans totaled $54,000 or 0.01% of total loans
     at  December  31, 2006 and $694,000 or 0.07% of total loans at December 31,
     2005.  Management  believes that these levels are adequately covered by the
     Company's  current  loan  loss  reserves  and  that  the  general  economic
     conditions  in  the  Company's  service area appear positive at the current
     time.  However,  future  financial  results  could  be  impacted  should
     deterioration  in  economic  conditions or other factors that affect credit
     quality  cause the level of the Company's non-performing loans to increase.

In  addition to the preceding issues, over the past several years management has
reviewed  the  Company's  existing  branch  delivery  system,  along  with  the
availability  and  desirability  of additional branch locations, and initiated a
major  branch  expansion,  relocation  and renovation program. New branches were
opened  during  2006  in  Sacramento, Lodi and Stockton and the downtown Turlock
branch  will  be  relocated  to a new facility in 2007. In management's opinion,
these  moves are integral to the long-term strategic positioning of the Company.

The  Company  currently estimates that the total capital expenditures associated
with  this  multi-year branch program, which began in 2004, will be in excess of
$10  million  which will result in an increase in the Company's future occupancy
expense  as  compared  to  2006.  In  addition, the increased staffing and other
operating  expense  associated


                                       29
<PAGE>
with  these  new branches will place pressure on the Company's earnings over the
next  24-36 months, the timeframe in which these branches are estimated to reach
break-even.

RESULTS OF OPERATIONS

The  following  discussion  and  analysis  is  intended  to  provide  a  better
understanding  of  Farmers & Merchants Bancorp and its subsidiaries' performance
during  each  of  the years in the three-year period ended December 31, 2006 and
the material changes in financial condition, operating income and expense of the
Company  and its subsidiaries as shown in the accompanying financial statements.

Net  Interest  Income/Net  Interest  Margin
The  tables  on the following pages reflect the Company's average balance sheets
and  volume  and rate analysis for the years ending 2006, 2005 and 2004. Average
balance  amounts  for  assets  and liabilities are the computed average of daily
balances.

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"  adjustment  and  is  noted  wherever  applicable.

The  Volume  and  Rate Analysis of Net Interest Income summarizes the changes in
interest  income  and  interest  expense  based  on changes in average asset and
liability  balances  (volume)  and  changes  in  average  rates (rate). For each
category  of  interest-earning  assets  and  interest-bearing  liabilities,
information  is provided with respect to changes attributable to: (1) changes in
volume  (change  in  volume  multiplied  by  initial  rate); (2) changes in rate
(change  in  rate  multiplied by initial volume); and (3) changes in rate/volume
(allocated  in  proportion  to  the  respective  volume  and  rate  components).

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. See "Item 7A. Quantitative
and  Qualitative  Disclosures  About  Market  Risk  -  Interest  Rate  Risk."

2006  Compared  to  2005
Net  interest  income  increased 9.2% to $63.8 million during 2006. During 2005,
net  interest  income  was $58.4 million, representing an increase of 18.1% from
2004.  On  a  fully taxable equivalent basis, net interest income increased 8.9%
and  totaled  $65.4 million during 2006, compared to $60.1 million for 2005. The
increase  in  net  interest  income  was  due  to a combination of (1) growth in
average  earning  assets in 2006 and (2) improvement in the net interest margin.

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
2006,  the Company's net interest margin was 5.18% compared to 5.12% in 2005. As
discussed  previously, this improvement is due to the continuing residual impact
of  increases  in  market  interest  rates  that  occurred  in  mid-2004 through
mid-2006.  See "Overview - Looking Forward: 2007 and Beyond" for a discussion of
factors  impacting  the  Company's  future  net  interest  margin.

Loans,  generally  the Company's highest earning assets, increased $73.7 million
as  of December 31, 2006 compared to December 31, 2005. See "Financial Condition
-  Loans"  for further discussion on this increase. On an average balance basis,
loans  increased  by  $94.8  million  for the year ended December 31, 2006. As a
result  of this loan growth, the mix of the Company's earning assets improved as
loans increased from 77.0% of average earning assets during 2005 to 79% in 2006.
Due  to  increases  in  market  rates  from  mid-  2004  through  mid-2006,  the
year-to-date  yield on the loan portfolio increased 86 basis points to 7.70% for
the  year  ended December 31, 2006 compared to 6.84% for the year ended December
31,  2005.  This  increase in yield plus the growth in loan balances resulted in
interest  revenue  from  loans  increasing  24.3%  to  $76.9  million  for 2006.


                                       30
<PAGE>
<TABLE>
<CAPTION>


FARMERS & MERCHANTS BANCORP
YEAR-TO-DATE AVERAGE BALANCES AND INTEREST RATES
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)

                                                                              Year Ended December 31,
                                                                                       2006
ASSETS                                                                    Balance     Interest     Rate
----------------------------------------------------------------------------------------------------------
<S>                                                                     <C>          <C>         <C>
Federal Funds Sold and Securities Purchased Under Agreements to Resell  $    1,030   $      49       4.76%
Investment Securities Available-for-Sale
  U.S. Agencies                                                             27,295       1,112       4.07%
  Municipals - Non-Taxable                                                  15,121         957       6.33%
  Mortgage Backed Securities                                               103,763       4,981       4.80%
  Other                                                                      6,870         385       5.60%
----------------------------------------------------------------------------------------------------------
    Total Investment Securities Available-for-Sale                         153,049       7,435       4.86%
----------------------------------------------------------------------------------------------------------

Investment Securities Held-to-Maturity
  U.S. Agencies                                                             30,593       1,270       4.15%
  Municipals - Non-Taxable                                                  67,490       3,947       5.85%
  Mortgage Backed Securities                                                 9,785         375       3.83%
  Other                                                                      2,120          62       2.92%
----------------------------------------------------------------------------------------------------------
    Total Investment Securities Held-to-Maturity                           109,988       5,654       5.14%
----------------------------------------------------------------------------------------------------------

Loans
  Real Estate                                                              567,479      40,915       7.21%
  Home Equity                                                               67,251       5,356       7.96%
  Agricultural                                                             164,897      13,843       8.39%
  Commercial                                                               178,528      14,976       8.39%
  Consumer                                                                  13,587       1,205       8.87%
  Credit Card                                                                5,445         536       9.84%
  Municipal                                                                  1,215          41       3.37%
----------------------------------------------------------------------------------------------------------
    Total Loans                                                            998,402      76,872       7.70%
----------------------------------------------------------------------------------------------------------
    Total Earning Assets                                                 1,262,469   $  90,010       7.13%
                                                                                     =====================

Unrealized Gain (Loss) on Securities Available-for-Sale                     (3,629)
Allowance for Loan Losses                                                  (18,280)
Cash and Due From Banks                                                     37,906
All Other Assets                                                            83,238
-----------------------------------------------------------------------------------
    TOTAL ASSETS                                                        $1,361,704
===================================================================================
LIABILITIES & SHAREHOLDERS' EQUITY
Interest Bearing Deposits
  Interest Bearing DDA                                                  $  128,199   $      89       0.07%
  Savings                                                                  277,185       2,310       0.83%
  Time Deposits                                                            424,745      16,231       3.82%
----------------------------------------------------------------------------------------------------------
    Total Interest Bearing Deposits                                        830,129      18,630       2.24%
Other Borrowed Funds                                                        99,484       5,164       5.19%
Subordinated Debt                                                           10,310         827       8.02%
----------------------------------------------------------------------------------------------------------
    Total Interest Bearing Liabilities                                     939,923   $  24,621       2.62%
                                                                                     =====================
Interest Rate Spread                                                                                 4.51%
Demand Deposits                                                            276,289
All Other Liabilities                                                       17,824
-----------------------------------------------------------------------------------
    TOTAL LIABILITIES                                                    1,234,036
Shareholders' Equity                                                       127,668
-----------------------------------------------------------------------------------
    TOTAL LIABILITIES & SHAREHOLDERS' EQUITY                            $1,361,704
===================================================================================
Impact of Non-Interest Bearing Deposits and Other Liabilities                                        0.67%
Net Interest Income and Margin on Total Earning Assets                                  65,389       5.18%
Tax Equivalent Adjustment                                                               (1,614)
----------------------------------------------------------------------------------------------------------
Net Interest Income                                                                  $  63,775       5.05%
==========================================================================================================
</TABLE>

Notes:  Yields  on  municipal securities have been calculated on a fully taxable
equivalent basis. Loan interest income includes fee income and unearned discount
of $2.7 million for the year ended December 31, 2006. Nonaccrual loans and lease
financing  receivables  have  been  included  in the average balances. Yields on
securities  available-for-sale  are  based  on  historical  cost.


                                       31
<PAGE>
<TABLE>
<CAPTION>

FARMERS & MERCHANTS BANCORP
YEAR-TO-DATE AVERAGE BALANCES AND INTEREST RATES
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
                                                                              Year Ended December 31,
                                                                                        2005
ASSETS                                                                    Balance     Interest     Rate
----------------------------------------------------------------------------------------------------------
<S>                                                                     <C>          <C>         <C>
Federal Funds Sold and Securities Purchased Under Agreements to Resell  $    5,593   $     188       3.36%
Investment Securities Available-for-Sale
  U.S. Agencies                                                             58,226       2,187       3.76%
  Municipals - Taxable                                                          81           5       6.17%
  Municipals - Non-Taxable                                                  15,987         976       6.10%
  Mortgage Backed Securities                                                79,290       3,112       3.92%
  Other                                                                      4,582         255       5.57%
----------------------------------------------------------------------------------------------------------
    Total Investment Securities Available-for-Sale                         158,166       6,535       4.13%
----------------------------------------------------------------------------------------------------------

Investment Securities Held-to-Maturity
  U.S. Agencies                                                             28,255       1,167       4.13%
  Municipals - Non-Taxable                                                  64,968       3,880       5.97%
  Mortgage Backed Securities                                                12,223         465       3.80%
  Other                                                                        432          26       6.02%
----------------------------------------------------------------------------------------------------------
    Total Investment Securities Held-to-Maturity                           105,878       5,538       5.23%
----------------------------------------------------------------------------------------------------------
Loans
  Real Estate                                                              507,315      34,133       6.73%
  Home Equity                                                               65,397       4,172       6.38%
  Agricultural                                                             142,008       9,880       6.96%
  Commercial                                                               170,081      12,012       7.06%
  Consumer                                                                  12,694       1,106       8.71%
  Credit Card                                                                5,046         491       9.73%
  Municipal                                                                  1,029          44       4.28%
----------------------------------------------------------------------------------------------------------
    Total Loans                                                            903,570      61,838       6.84%
----------------------------------------------------------------------------------------------------------
    Total Earning Assets                                                 1,173,207   $  74,099       6.32%
                                                                                     =====================
Unrealized Gain/(Loss) on Securities Available-for-Sale                     (1,856)
Allowance for Loan Losses                                                  (17,910)
Cash and Due From Banks                                                     35,453
All Other Assets                                                            72,235
-----------------------------------------------------------------------------------
    TOTAL ASSETS                                                        $1,261,129
===================================================================================
LIABILITIES & SHAREHOLDERS' EQUITY
Interest Bearing Deposits
  Interest Bearing DDA                                                  $  117,460   $      79       0.07%
  Savings                                                                  298,181       1,319       0.44%
  Time Deposits                                                            351,552       8,430       2.40%
----------------------------------------------------------------------------------------------------------
    Total Interest Bearing Deposits                                        767,193       9,828       1.28%
Other Borrowed Funds                                                        78,719       3,561       4.52%
Subordinated Debt                                                           10,310         643       6.24%
----------------------------------------------------------------------------------------------------------
    Total Interest Bearing Liabilities                                     856,222   $  14,032       1.64%
                                                                                     =====================
Interest Rate Spread                                                                                 4.68%
Demand Deposits                                                            268,038
All Other Liabilities                                                       16,092
-----------------------------------------------------------------------------------
    TOTAL LIABILITIES                                                    1,140,352
Shareholders' Equity                                                       120,777
-----------------------------------------------------------------------------------
    TOTAL LIABILITIES & SHAREHOLDERS' EQUITY                            $1,261,129
===================================================================================
Impact of Non-Interest Bearing Deposits and Other Liabilities                                        0.44%
Net Interest Income and Margin on Total Earning Assets                                  60,067       5.12%
Tax Equivalent Adjustment                                                               (1,641)
----------------------------------------------------------------------------------------------------------
Net Interest Income                                                                  $  58,426       4.98%
==========================================================================================================
</TABLE>

Notes:  Yields  on  municipal securities have been calculated on a fully taxable
equivalent basis. Loan interest income includes fee income and unearned discount
of $3.5 million for the year ended December 31, 2005. Nonaccrual loans and lease
financing  receivables  have  been  included  in the average balances. Yields on
securities  available-for-sale  are  based  on  historical  cost.


                                       32
<PAGE>
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANCORP
YEAR-TO-DATE AVERAGE BALANCES AND INTEREST RATES
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
                                                                              Year Ended December 31,
                                                                                       2004
ASSETS                                                                    Balance     Interest     Rate
----------------------------------------------------------------------------------------------------------
<S>                                                                     <C>          <C>         <C>
Federal Funds Sold and Securities Purchased Under Agreements to Resell  $   14,267   $     194       1.36%
Investment Securities Available-for-Sale
  U.S. Agencies                                                             67,419       2,449       3.63%
  Municipals - Taxable                                                       1,005          63       6.27%
  Municipals - Non-Taxable                                                  19,044       1,162       6.10%
  Mortgage Backed Securities                                                97,947       3,703       3.78%
  Other                                                                      7,098         381       5.37%
----------------------------------------------------------------------------------------------------------
    Total Investment Securities Available-for-Sale                         192,513       7,758       4.03%
----------------------------------------------------------------------------------------------------------

Investment Securities Held-to-Maturity
  U.S. Agencies                                                             13,409         564       4.21%
  Municipals - Non-Taxable                                                  37,303       2,383       6.39%
  Mortgage Backed Securities                                                 9,604         384       4.00%
  Other                                                                        333          15       4.50%
----------------------------------------------------------------------------------------------------------
    Total Investment Securities Held-to-Maturity                            60,649       3,346       5.52%
----------------------------------------------------------------------------------------------------------
Loans
  Real Estate                                                              477,220      29,771       6.24%
  Home Equity                                                               58,187       2,852       4.90%
  Agricultural                                                             131,971       7,091       5.37%
  Commercial                                                               140,145       8,062       5.75%
  Consumer                                                                  11,307       1,037       9.17%
  Credit Card                                                                4,599         442       9.61%
  Municipal                                                                  1,070          47       4.39%
----------------------------------------------------------------------------------------------------------
    Total Loans                                                            824,499      49,302       5.98%
----------------------------------------------------------------------------------------------------------
    Total Earning Assets                                                 1,091,928   $  60,600       5.55%
                                                                                     =====================

Unrealized Gain/(Loss) on Securities Available-for-Sale                        779
Allowance for Loan Losses                                                  (17,850)
Cash and Due From Banks                                                     33,389
All Other Assets                                                            63,005
-----------------------------------------------------------------------------------
    TOTAL ASSETS                                                        $1,171,251
===================================================================================
LIABILITIES & SHAREHOLDERS' EQUITY
Interest Bearing Deposits
  Interest Bearing DDA                                                  $   96,152   $      62       0.06%
  Savings                                                                  285,796       1,090       0.38%
  Time Deposits                                                            333,377       5,509       1.65%
----------------------------------------------------------------------------------------------------------
    Total Interest Bearing Deposits                                        715,325       6,661       0.93%
Other Borrowed Funds                                                        81,598       2,703       3.31%
Subordinated Debt                                                           10,310         454       4.40%
----------------------------------------------------------------------------------------------------------
    Total Interest Bearing Liabilities                                     807,233   $   9,818       1.22%
                                                                                     =====================
Interest Rate Spread                                                                                 4.33%
Demand Deposits                                                            238,817
All Other Liabilities                                                       11,780
-----------------------------------------------------------------------------------
    TOTAL LIABILITIES                                                    1,057,830
Shareholders' Equity                                                       113,421
-----------------------------------------------------------------------------------
    TOTAL LIABILITIES & SHAREHOLDERS' EQUITY                            $1,171,251
===================================================================================
Impact of Non-Interest Bearing Deposits and Other Liabilities                                        0.32%
Net Interest Income and Margin on Total Earning Assets                                  50,782       4.65%
Tax Equivalent Adjustment                                                               (1,300)
----------------------------------------------------------------------------------------------------------
Net Interest Income                                                                  $  49,482       4.53%
==========================================================================================================
</TABLE>

Notes:  Yields  on  municipal securities have been calculated on a fully taxable
equivalent basis. Loan interest income includes fee income and unearned discount
of $3.2 million for the year ended December 31, 2004. Nonaccrual loans and lease
financing  receivables  have  been  included  in the average balances. Yields on
securities  available-for-sale  are  based  on  historical  cost.


                                       33
<PAGE>
<TABLE>
<CAPTION>

FARMERS & MERCHANTS BANCORP
VOLUME AND RATE ANALYSIS OF NET INTEREST REVENUE
(Rates on a Taxable Equivalent Basis)                             2006 versus 2005
(in thousands)                                                   Amount of Increase
                                                          (Decrease) Due to Change in:
                                                    ----------------------------------------
INTEREST EARNING ASSETS                                Volume         Rate        Net Chg.
--------------------------------------------------------------------------------------------
<S>                                                 <C>           <C>           <C>
Federal Funds Sold                                  $      (195)  $        56   $      (139)
Investment Securities Available for Sale
  U.S. Agencies                                          (1,247)          172        (1,075)
  Municipals - Taxable                                       (2)           (3)           (5)
  Municipals - Non-Taxable                                  (54)           35           (19)
  Mortgage Backed Securities                              1,085           784         1,869
  Other                                                     128             2           130
--------------------------------------------------------------------------------------------
    Total Investment Securities Available for Sale          (90)          990           900
--------------------------------------------------------------------------------------------

Investment Securities Held to Maturity
  U.S. Agencies                                              97             6           103
  Municipals - Non-Taxable                                  149           (82)           67
  Mortgage Backed Securities                                (94)            4           (90)
  Other                                                      56           (20)           36
--------------------------------------------------------------------------------------------
    Total Investment Securities Held to Maturity            208           (92)          116
--------------------------------------------------------------------------------------------

Loans:
  Real Estate                                             4,229         2,553         6,782
  Home Equity                                               121         1,063         1,184
  Agricultural                                            1,736         2,227         3,963
  Commercial                                                620         2,344         2,964
  Installment                                                79            20            99
  Credit Card                                                39             6            45
  Other                                                       7           (10)           (3)
--------------------------------------------------------------------------------------------
    Total Loans                                           6,831         8,203        15,034
--------------------------------------------------------------------------------------------
    Total Earning Assets                                  6,754         9,157        15,911
--------------------------------------------------------------------------------------------

INTEREST BEARING LIABILITIES
Interest Bearing Deposits:
  Transaction                                                 7             3            10
  Savings                                                   (99)        1,090           991
  Time Deposits                                           2,026         5,775         7,801
--------------------------------------------------------------------------------------------
    Total Interest Bearing Deposits                       1,934         6,868         8,802
Other Borrowed Funds                                      1,028           575         1,603
Subordinated Debt                                             0           184           184
--------------------------------------------------------------------------------------------
    Total Interest Bearing Liabilities                    2,962         7,627        10,589
--------------------------------------------------------------------------------------------
TOTAL CHANGE                                        $     3,792   $     1,530   $     5,322
============================================================================================
</TABLE>

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.


                                       34
<PAGE>
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANCORP
VOLUME AND RATE ANALYSIS OF NET INTEREST REVENUE
(Rates on a Taxable Equivalent Basis)                            2005 versus 2004
(in thousands)                                                 Amount of Increase
                                                         (Decrease) Due to Change in:
                                                    ----------------------------------------
INTEREST EARNING ASSETS                                Volume         Rate        Net Chg.
--------------------------------------------------------------------------------------------
<S>                                                 <C>           <C>           <C>
Federal Funds Sold                                  $      (169)  $       163   $        (6)
Investment Securities Available for Sale
  U.S. Agencies                                            (343)           81          (262)
  Municipals - Taxable                                      (57)           (1)          (58)
  Municipals - Non-Taxable                                 (186)            0          (186)
  Mortgage Backed Securities                               (727)          136          (591)
  Other                                                    (140)           14          (126)
--------------------------------------------------------------------------------------------
    Total Investment Securities Available for Sale       (1,453)          230        (1,223)
--------------------------------------------------------------------------------------------

Investment Securities Held to Maturity
  U.S. Agencies                                             613           (10)          603
  Municipals - Non-Taxable                                1,661          (163)        1,498
  Mortgage Backed Securities                                101           (20)           81
  Other                                                       5             6            11
--------------------------------------------------------------------------------------------
    Total Investment Securities Held to Maturity          2,380          (187)        2,193
--------------------------------------------------------------------------------------------

Loans:
  Real Estate                                             1,943         2,419         4,362
  Home Equity                                               384           936         1,320
  Agricultural                                              572         2,217         2,789
  Commercial                                              1,912         2,038         3,950
  Installment                                               123           (54)           69
  Credit Card                                                43             6            49
  Other                                                      (2)           (1)           (3)
--------------------------------------------------------------------------------------------
    Total Loans                                           4,975         7,561        12,536
--------------------------------------------------------------------------------------------
    Total Earning Assets                                  5,733         7,767        13,500
--------------------------------------------------------------------------------------------

INTEREST BEARING LIABILITIES
Interest Bearing Deposits:
  Transaction                                                14             3            17
  Savings                                                    49           180           229
  Time Deposits                                             318         2,603         2,921
--------------------------------------------------------------------------------------------
    Total Interest Bearing Deposits                         381         2,786         3,167
Other Borrowed Funds                                        (98)          956           858
Subordinated Debt                                             1           189           190
--------------------------------------------------------------------------------------------
    Total Interest Bearing Liabilities                      284         3,931         4,215
--------------------------------------------------------------------------------------------
TOTAL CHANGE                                        $     5,449   $     3,836   $     9,285
============================================================================================
</TABLE>
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.


                                       35
<PAGE>
The  investment  portfolio  is the other main component of the Company's earning
assets.  The  Company  invests  primarily  in  mortgage-backed  securities, 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  $1.0 million in 2006 compared to the
average  balance  during  2005.  Interest  income  on  securities increased $1.0
million  to $13.1 million for the year ended December 31, 2006 compared to $12.1
million  for  the  year ended December 31, 2005. The average yield, on a taxable
equivalent  basis, in the investment portfolio was 5.0% in 2006 compared to 4.6%
in  2005.  See "Financial Condition - Investment Securities" for a discussion of
the  Company's  repositioning  of  its  securities  portfolio  during 2006 which
resulted  in  this  increase  in  yield.  Net interest income on the Schedule of
Year-to-Date  Average  Balances and Interest Rates shown on a taxable equivalent
basis, which is higher than net interest income as reflected on the Consolidated
Statement  of  Income because of adjustments that relate to income on securities
that  are  exempt  from  federal  income  taxes.

Average interest-bearing sources of funds increased $83.7 million or 9.8% during
2006.  Of  that  increase,  average  borrowed  funds  (primarily  FHLB Advances)
increased  $20.8 million, interest-bearing deposits increased $62.9 million, and
subordinated  debt  remained  unchanged.

During  2006,  the Company was able to grow average interest bearing deposits by
$62.9  million.  The  increase  was primarily in time deposits, which grew $73.2
million,  as  lower  cost  savings  and  interest bearing DDA decreased by $10.3
million.  See "Financial Condition - Deposits" for a discussion of trends in the
Company's  deposit base. Total interest expense on deposit accounts for 2006 was
$18.6  million  as  compared  to  $9.8  million  in 2005. As deposits increased,
interest  expense  on  deposits  increased  89.6%  or  $8.8 million in 2006. The
average  rate  paid  on  interest-bearing  deposits was 2.2% in 2006 and 1.3% in
2005.  This  increase in rates is a result of the lagging impact of increases in
market  interest  rates  that occurred in mid-2004 through mid-2006. The Company
anticipates  that  its  deposit  rates  will  continue to increase in 2007, even
though  market  rates  have been stable since June 2006. See "Overview - Looking
Forward:  2007  and  Beyond" for a discussion of factors impacting the Company's
future  deposit  rates  and  their  impact  on  net  interest  margin.

2005  Compared  to  2004
Net  interest  income increased 18.1% to $58.4 million during 2005. During 2004,
net  interest  income  was $49.5 million, representing an increase of 12.9% from
2003.  On  a fully taxable equivalent basis, net interest income increased 18.3%
and  totaled  $60.1  million  during  2005,  compared to $50.8 million for 2004.
Although  average earning assets grew 7.4% during 2005, a significant reason for
the  increase  in  net interest income during 2005 was increased market interest
rates  by  the  FRB.

For 2005, the Company's net interest margin was 5.12% compared to 4.65% in 2004.
This  improvement is primarily a result of the FRB's 200 basis point increase in
market  rates  since  December  31,  2004.

Loans,  generally the Company's highest earning assets, increased $106.3 million
as  of  December  31,  2005 compared to December 31, 2004. On an average balance
basis, loans increased by $79.1 million for the year ended December 31, 2005. As
a  result  of this loan growth, the mix of the Company's earning assets improved
as  loans increased from 75.5% of average earning assets during 2004 to 77.0% in
2005.  Due to increases in the prime rate during the latter half of 2004 through
2005,  the year-to-date yield on the loan portfolio increased 86 basis points to
6.84%  for the year ended December 31, 2005 compared to 5.98% for the year ended
December  31,  2004.  This  increase  in  yield plus the growth in loan balances
resulted  in  interest  revenue from loans increasing 25.4% to $61.8 million for
2005.

Average  investment  securities  increased slightly from the prior year. Average
balances  increased $10.9 million in 2005 compared to the average balance during
2004.  Interest income on securities increased $969,000 to $12.1 million for the
year  ended  December  31,  2005  compared  to  $11.1 million for the year ended
December  31,  2004.  The  average  yield, on a taxable equivalent basis, in the
investment  portfolio  was  4.6%  in 2005 compared to 4.4% in 2004. Net interest
income on the Schedule of Year-to-Date Average Balances and Interest Rates shown
on  a  taxable


                                       36
<PAGE>
equivalent  basis,  which is higher than net interest income as reflected on the
Consolidated Statement of Income because of adjustments that relate to income on
securities  that  are  exempt  from  federal  income  taxes.

Average interest-bearing sources of funds increased $49.0 million or 6.1% during
2005.  Of  that  increase,  average  borrowed  funds  (primarily  FHLB Advances)
decreased  $2.9  million, interest-bearing deposits increased $51.9 million, and
subordinated  debt  remained  unchanged.

During  2005,  the Company was able to grow average interest bearing deposits by
$51.9  million.  The  increase  was primarily in lower cost savings and interest
bearing  DDA  deposits,  which  grew $33.7 million, as higher cost time deposits
grew  by  $18.2 million. Total interest expense on deposit accounts for 2005 was
$9.8  million  as  compared  to  $6.7  million  in  2004. As deposits increased,
interest  expense  on  deposits  increased  47.6%  or  $3.2 million in 2005. The
average  rate  paid  on  interest-bearing  deposits was 1.3% in 2005 and 0.9% in
2004.  This  increase in rates is a result of the FRB's increase in market rates
during  2005.

Provision and Allowance 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 loan 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.

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, 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.
Additionally,  management  has  established  guidelines  to  ensure  the
diversification  of  the  Company's  credit  portfolio such that even within key
portfolio  sectors  such  as  real  estate  or  agriculture,  the  portfolio  is
diversified  across  factors  such  as  location, building type, crop type, etc.
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.

The  provision for loan losses totaled $275,000 in 2006, compared to $425,000 in
2005  and  $1.3 million in 2004. Changes in the provision between years were the
result  of  management's  evaluation  of  the adequacy of the allowance for loan
losses  relative  to  factors  such as the credit quality of the loan portfolio,
loan  growth,  current  loan  losses and the prevailing economic climate and its
effect  on borrowers' ability to repay loans in accordance with the terms of the
notes.  See  "Critical  Accounting  Policies  and Estimates - Allowance for Loan
Losses"  and  "Item  7A.  Quantitative  and Qualitative Disclosures About Market
Risk-Credit  Risk."

As  of December 31, 2006, the allowance for loan losses was $18.1 million, which
represented  1.7% of the total loan balance. At December 31, 2005, the allowance
for  loan  losses  was  $17.9  million  or 1.8% of the total loan balance. After
reviewing  all  factors  above, management concluded that the allowance for loan
losses  as  of  December  31,  2006  was  adequate.


                                       37
<PAGE>
<TABLE>
<CAPTION>
The  table  below  summarizes  the  activity in the allowance for losses for the
years  2006,  2005  and  2004.

Allowance for Losses
(IN THOUSAND)S                                                    2006      2005      2004
--------------------------------------------------------------------------------------------
<S>                                                             <C>       <C>       <C>
Allowance for Loan Losses, Beginning of Year                    $17,860   $17,727   $17,220
Allowance for Losses - Unfunded Commitments                         141       111         -
--------------------------------------------------------------------------------------------
  Total Allowance for Losses, Beginning of Year                  18,001    17,838    17,220
Provision for Loan Losses Charged to Expense                        275       425     1,275
Provision for Losses - Unfunded Commitments Charged to Expense        -        30         -
Loans Charged Off                                                  (839)     (867)     (955)
Recoveries of Loans Previously Charged Off                          803       575       298
--------------------------------------------------------------------------------------------
  Total Allowance for Losses, End of Year                       $18,240   $18,001   $17,838
============================================================================================

Allocation of Allowance for Losses
--------------------------------------------------------------------------------------------
Allowance for Loan Losses                                       $18,099   $17,860   $17,727
Allowance for Losses - Unfunded Commitments*                        141       141       111
--------------------------------------------------------------------------------------------
  Total Allowance for Losses, End of Year                       $18,240   $18,001   $17,838
============================================================================================
</TABLE>

*As of December 31, 2004, the Company reclassified $111,000 of the Allowance for
Loan  Losses  that pertained to commitments under commercial and standby letters
of  credit to the "Other Liabilities" section of the Consolidated Balance Sheet.

Non-Interest Income
Non-interest  income  includes:  (1)  service  charges  and  fees  from  deposit
accounts;  (2)  net gains and losses from the sale of investment securities; (3)
credit  card  merchant fees; (4) ATM fees; (5) gains and losses from the sale of
assets;  (6) increases in the cash surrender value of bank owned life insurance;
and  (7)  fees  from  other  miscellaneous  business  services.

2006 Compared to 2005
Non-interest  income totaled $12.1 million, an increase of $789,000 or 7.0% from
non-interest  income  of  $11.3  million  for  2005.

Most  of  the  increase in 2006 occurred in service charges on deposit accounts.
Service  charges totaled $6.0 million, an increase of $1.7 million or 38.5% from
service  charges  on deposit accounts of $4.4 million in 2005. This increase was
due  to  fees  related  to  the  Company's Overdraft Privilege Service which was
offered  to  eligible customers with deposit accounts in good standing beginning
May  1,  2006.

The  increase  in  service  charges was offset by an increase in loss on sale of
investment securities, which was a loss of $2.2 million in 2006 as compared to a
loss  of  $953,000  for  2005. During 2006 the Company made the decision to sell
some  of  its  investment  portfolio  at  a  loss  in  order to better align the
portfolio  with  its  evolving  asset/liability  management  objectives.  See
"Financial  Condition-Investment  Securities."

ATM  fees  totaled  $1.2  million, an increase of $211,000 or 21.3% over fees in
2005.  The increase in these fees is due to the convenience and increased number
of  ATM's at strategic locations which benefit both customers and non-customers.

2005  Compared  to  2004
Non-interest  income  totaled $11.3 million, a decrease of $3.0 million or 20.9%
from  non-interest  income  of  $14.3  million  for  2004.

Most  of  the  decrease  in  2005  occurred in gain (loss) on sale of investment
securities,  which  was a loss of $953,000 in 2005 as compared to a gain of $1.9
million  for 2004. During 2005 the Company made the decision to sell some of its
investment  portfolio  at a loss in order to better align the portfolio with its
evolving  asset/liability  management


                                       38
<PAGE>
objectives.  See "Financial Condition-Investment Securities." Additionally, $1.1
million  of  the gain in 2004 was a result of a non-recurring gain from the sale
of  common  stock  of  another  Company.

Service charges on deposit accounts totaled $4.4 million, a decrease of $427,000
or 8.9% from service charges on deposit accounts of $4.8 million in 2004 due to:
(1)  the  conversion  of  certain  deposit  customers  to  a  newly offered high
performance  checking  product  that does not have a monthly service charge; (2)
increasing  interest  rates  which  reduced service charges for those commercial
customers  on  business  account  analysis; and (3) a decrease in fees generated
from money service business relationships as a result of the Company's strategic
decision  to  exit  this  product  line.

Credit card merchant fees totaled $2.0 million, an increase of $286,000 or 16.3%
over  fee income of $1.8 million in 2004. The increase during 2005 was due to an
increase  in  merchant  volume  during  the  year.

ATM  fees  totaled $991,000, an increase of $257,000 or 35.0% over fees in 2004.
The  increase  in  these  fees is due to the convenience and increased number of
ATM's  at  strategic  locations  which benefit both customers and non-customers.

Non-Interest  Expense
Non-interest expense for the Company includes expenses for salaries and employee
benefits,  occupancy,  equipment,  supplies,  legal fees, professional services,
data processing, marketing, deposit insurance, merchant bankcard operations, and
other  miscellaneous  expenses.

2006  Compared  to  2005
Overall, non-interest expense totaled $43.1 million, an increase of $2.5 million
or  6.2%  for  the  year  ended  December  31,  2006.

Salaries and employee benefits increased $1.0 million due to: (1) officer salary
merit  increases which occurred in November 2005; (2) increased contributions to
the  Company's incentive compensation and supplemental retirement plans; and (3)
increased staff related to the three new branches opened during 2006. At the end
of  2006,  the Company had 302 full time equivalent employees compared to 294 at
the  end  of  2005.

Occupancy and equipment expenses represent the cost of operating and maintaining
branch  and administrative facilities, including the purchase and maintenance of
furniture,  fixtures,  and  office  equipment  and  data  processing  equipment.
Occupancy expense in 2006 totaled $2.5 million, an increase of $382,000 or 18.4%
over  2005. This increase was due to: (1) three new branches opened in 2006; (2)
increased  utilities  due to increased gas and electricity prices; (3) increased
rents  on  leased  properties;  and  (4)  increased  property  taxes.

Equipment expense in 2006 totaled $3.2 million, an increase of $709,000 or 28.3%
over  2005.  This  increase  was  due  to: (1) annual computer hardware/software
maintenance and upgrades; and (2) increased furniture and equipment depreciation
related  to  remodeling  and  adding  branch  locations.

Marketing expense was $1.2 million in 2006, a decrease of $355,000 or 23.3% from
$1.5  million  in  2005. In 2005 there were significant marketing expenses for a
new  high  performance  checking product started in November 2004, including the
associated  direct  mail  and  other ancillary expenses incurred to promote this
product.  These  same  expenses  were  not  required  in  2006.

Other  operating  expense  totaled  $6.9 million, a 9.7% increase from the prior
year.  This  increase  in  other  operating  expense during 2006 was due to: (1)
$228,000 early payoff penalties of FHLB borrowings; (2) operating losses related
to  non-sufficient  funds  and  electronic funds transactions; and (3) increased
stationary  and printing expense related to the Company's 90th anniversary logo.

2005  Compared  to  2004
Overall, non-interest expense totaled $40.6 million, an increase of $4.4 million
or  12.3%  for the year ended December 31, 2005, primarily as a result of a $2.7
million  increase  in  salaries and employee benefits. This increase was due to:
(1)  officer  salary  merit  increases  which  occurred  in  November  2005; (2)
increased  contributions  to  the


                                       39
<PAGE>
Company's  incentive  compensation  and  supplemental  retirement plans; and (3)
increased  expense  recognition associated with the termination of the Company's
defined  benefit  pension plan which took place in 2005. At the end of 2005, the
Company  had  294  full  time equivalent employees compared to 288 at the end of
2004.

Occupancy and equipment expenses represent the cost of operating and maintaining
branch  and administrative facilities, including the purchase and maintenance of
furniture,  fixtures,  and  office  equipment  and  data  processing  equipment.
Occupancy expense in 2005 totaled $2.1 million, an increase of $343,000 or 19.8%
over  2004.  This  increase  was  due  to:  (1) increased branch maintenance and
equipment  expense;  and  (2)  increased  furniture  and  equipment depreciation
related  to  remodeling  and  adding branch locations. Equipment expense in 2005
totaled  $2.5  million,  an  increase  of  $190,000  or  8.2%  over  2004.

Marketing  expense  was  $1.5  million in 2005, an increase of $520,000 or 51.9%
from  $1.0  million in 2004. This increase in 2005 was due to marketing expenses
for  a new high performance checking product started in November 2004, including
the associated direct mail and other ancillary expenses incurred to promote this
product.

Other  operating  expense  totaled  $6.3 million, a 7.9% increase from the prior
year.  This increase in other operating expense during 2005 was due primarily to
increases  in  insurance  premiums  and  charitable  contributions.

Income Taxes
The provision for income taxes increased $1.6 million during 2006. The effective
tax  rate  in  2006  was  36.4% compared to 35.7% in 2005 and 36.5% in 2004. The
increase  in  the  effective tax rate during 2006 was due primarily to decreased
municipal  security  income  that  is  tax  exempt for federal tax purposes. The
effective  rates  were  lower  than  the  statutory rate of 42% due primarily to
benefits  regarding  the  cash  surrender  value  of  life insurance, California
enterprise  zone  interest  income  exclusion, and tax exempt interest income on
municipal  securities  and  loans.

Current  tax  law  causes  the Company's current taxes payable to approximate or
exceed the current provision for taxes on the income statement. Three provisions
have had a significant effect on the Company's current income tax liability: the
restrictions  on  the deductibility of loan losses, deductibility of pension and
other  long-term  employee benefits only when paid and the statutory deferral of
deductibility  of  California  franchise  taxes on the Company's federal return.

FINANCIAL CONDITION

Investment  Securities
The  investment  portfolio  provides  the  Company with an income alternative to
loans. The Company's investment portfolio at the end of 2006 was $244.4 million,
a  decrease  of  $23.5  million  or  8.8%  from  2005.

During  2006  the  Company  sold  $63.3 million in available-for-sale investment
securities at a loss of $2.2 million. These securities generally had a remaining
life under three years and yields below current market rates. Funds not invested
in  loans  or  used  to pay down short-term borrowings were reinvested in higher
yielding,  somewhat longer term (5-7 years) securities which management believes
should  strengthen  the  Company's  net interest margin and reduce the Company's
asset  sensitivity,  thereby better protecting against future declines in market
interest  rates.

The  Company's  total  investment  portfolio  represented 17.3% of the Company's
total  assets  during  2006 and 19.8% of the Company's total assets during 2005.
Not  included  in  the investment portfolio are overnight investments in Federal
Funds Sold. In 2006, average Federal Funds Sold on a year to date basis was $1.0
million  compared  to  $5.6  million  in  2005.

The  Company  classifies  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 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. As of December 31, 2006 and 2005 there
were  no  securities  in  the  trading  portfolio.  Securities  classified  as
available-for-sale  include  securities  which may be sold to effectively manage
interest  rate  risk  exposure,  prepayment  risk, satisfy liquidity demands and
other  factors.  These


                                       40
<PAGE>
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.

Note 2 located in "Item 8. Financial Statements and Supplementary Data" displays
the  classifications  of the Company's investment portfolio, the market value of
the  Company's  investment  portfolio  and  the  maturity  distribution.

Loans
The  Company's  loan portfolio at December 31, 2006 increased $73.6 million from
December  31,  2005. The increase was due to strong loan demand in the Company's
market  area,  along  with a focused calling program on selected loan prospects.
Most of the current year's growth occurred in Agricultural Loans and Real Estate
Loans  (primarily  those  secured by production agricultural properties), market
segments  where  the  Company  believes  that  current  market  rates  are  more
reasonable than in the areas of Commercial, Consumer, Home Equity and Other Real
Estate  loans.  Additionally,  on an average balance basis, loans have increased
$94.8  million  or  10.5%.  In  2005,  average  balances increased 9.6% or $79.1
million  from the prior year. The table following sets forth the distribution of
the  loan  portfolio  by  type  as  of  the  dates  indicated.

<TABLE>
<CAPTION>
Loan Portfolio
(in thousands)                December 31, 2006   December 31, 2005
--------------------------------------------------------------------
<S>                           <C>                 <C>
  Real Estate                 $          516,606  $          432,378
  Real Estate Construction                95,378             110,235
  Home Equity                             67,132              69,013
  Agricultural                           183,589             170,657
  Commercial                             165,412             174,530
  Consumer                                21,222              18,958
--------------------------------------------------------------------
  Gross Loans                          1,049,339             975,771
Less:
  Unearned Income                          2,427               2,514
  Allowance for Loan Losses               18,099              17,860
--------------------------------------------------------------------
  Net Loans                   $        1,028,813  $          955,397
====================================================================
</TABLE>

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 December 31, 2006, the
Company  had  entered into loan commitments amounting to $442.5 million compared
to $447.7 million at December 31, 2005. In addition, letters of credit issued by
the  Company  to  guarantee  the  performance  of a customer to a third party at
December  31,  2006 and December 31, 2005, were $10.9 million and $11.5 million,
respectively.

Non-Performing Assets
Non-performing  assets  are  comprised  of  non-performing  loans  (defined  as
non-accrual  loans  plus accruing loans past due 90 days or more) and other real
estate  owned.  As  set  forth  in  the  table below, non-performing loans as of
December  31,  2006  were $54,000 compared to $694,000 at December 31, 2005. The
Company  reported  no  other  real  estate  owned at either December 31, 2006 or
December  31,  2005.

The  Company's  policy  is  to  place  loans on non-accrual status when, for any
reason,  principal  or interest is past due for ninety days or more unless it is
both  well  secured  and in the process of collection. Any interest accrued, but
unpaid,  is  reversed against current income. Thereafter, interest is recognized
as income only as it is collected in cash. Accrued interest reversed from income
on  loans  placed  on  a non-accrual status totaled $15,000 at December 31, 2006
compared  to  $50,000 at December 31, 2005. Non-performing loans as a percentage
of  total  loans  for the year ended 2006 was 0.01%. For the year ended 2005 the
percentage  was  0.07%.

                                       41
<PAGE>
<TABLE>
<CAPTION>
Non-Performing  Assets
(in thousands)                    December 31, 2006    December 31, 2005
--------------------------------------------------------------------------
<S>                               <C>                  <C>
  Non-Performing Loans            $               54   $              694
  Other Real Estate Owned                          -                    -
--------------------------------------------------------------------------
    Total                         $               54   $              694
==========================================================================
Non-Performing Assets
as a % of Total Loans                           0.01%                0.07%

Allowance for Loan Losses as a %
of Non-Performing Loans                     33,516.7%             2,573.5%
</TABLE>

Except  for  non-performing  loans  shown  in  the  table  above,  the Company's
management  is  not  aware  of any loans as of December 31, 2006 for which known
credit  problems of the borrower would cause serious doubts as to the ability of
such  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 the following or other factors may affect a borrower's ability to pay: (1)
deterioration in general economic conditions, real estate values or agricultural
commodity  prices; (2) increases in general rates of interest; or (3) changes in
the  financial  condition  or  business  of  a  borrower.

Although  management  believes  that  non-performing  loans  are  generally
well-secured  and  that  potential  losses  are  provided  for  in the Company's
allowance  for  loan losses, there can be no assurance that future deterioration
in  economic  conditions  or  collateral values will not result in future credit
losses.

Deposits
One  of  the key sources of funds to support earning assets 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.

Consistent  with  general  banking industry trends, the Company saw a slowing of
overall  deposit growth during 2006 along with a significant shift in the mix of
deposits  to higher yielding Time Deposits as customers sought to take advantage
of  increasing  market  interest  rates. Additionally, the Company's strategy of
balancing growth and margin protection called for not pursuing "high cost" local
deposits  by  offering  the  deposit  specials that many of its competitors were
using.  The  Company  is  continually  reviewing  this  strategy  with regard to
liquidity  trends  and  market  rates.

At  December  31, 2006, total deposits were $1.2 billion, an increase of 8.6% or
$95.2  million  from  December 31, 2005. Of the $95.2 million in overall deposit
growth, core deposits (exclusive of State of California Time Deposits) increased
$25.0  million  or  2.3%  during  2006. As previously discussed, the mix of core
deposits  changed significantly as Time Deposits increased $73.0 million and all
other  core  deposit  types  (Demand,  Interest Bearing Transaction and Savings)
decreased  $48.0  million.  Should  this  trend  continue in 2007, it will place
additional  pressure  on  the  Company's  net  interest  margin. See "Results of
Operations  -  Net  Interest  Income/Net  Interest  Margin."

Time  Deposits  with  the  State  of  California  increased  $70.0 million since
December  31,  2005.  These  CD's  are  used  to  manage the Company's liquidity
position,  as they represent a cost effective alternative to (1) high cost local
deposit  specials  and  (2)  short-term  borrowings. See "Federal Home Loan Bank
Advances."

Federal Home Loan Bank Advances
Advances  from the Federal Home Loan Bank (FHLB) are another key source of funds
to  support  earning  assets.  These advances are also used to manage the Bank'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 December 31, 2006 were $47.5 million compared to $98.8 million as of December
31,  2005.  This  decrease  of  $51.3  million  in


                                       42
<PAGE>
borrowings  occurred  as  a  result of the Company's management of its liquidity
needs using State of California Time Deposits which generally have rates from 20
to  30  basis points lower than FHLB advances. The average rate on FHLB advances
during  2006  was  5.2%  compared  to  4.5%  in  2005.

Subordinated Debentures
On December 17, 2003 the Company raised $10 million through an offering of trust
preferred  securities.  See Note 17 located in "Item 8. Financial Statements and
Supplementary  Data."  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%. Interest rates reset quarterly (the next reset is March 16, 2007) and the
rate  was  8.21%  as  of  December  31,  2006.  The  average rate paid for these
securities  in  2006  was  8.02% compared to 6.24% in 2005. Additionally, if the
Company  decided  to  defer interest on the subordinated debentures, the Company
would  be  prohibited  from paying cash dividends on the Company's common stock.

Capital
The  Company  relies  primarily  on  capital  generated through the retention of
earnings  to satisfy its capital requirements. The Company engages in an ongoing
assessment  of  its  capital  needs  in  order to support business growth and to
insure  depositor  protection.  Shareholders'  Equity  totaled $132.3 million at
December  31,  2006  and  $123.6  million  at  the  end  of  2005.

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's and the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company's and the
Bank's  capital  amounts  and  classification  are  also  subject to qualitative
judgments  by  the  regulators  about  components,  risk  weightings,  and other
factors.

Quantitative  measures  established  by  regulation  to  ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Total
and  Tier 1 capital to risk-weighted assets (as defined in the regulations), and
of  Tier 1 capital to average assets (as defined in the regulations). Management
believes,  as  of  December  31,  2006,  that  the Company and the Bank meet all
capital adequacy requirements to which they are subject. For further information
on  the Company and the Bank's risk-based capital ratios, see Note 10 located in
"Item  8.  Financial  Statements  and  Supplementary  Data."

As  previously discussed (see "Subordinated Debentures"), in order to supplement
its regulatory capital base, during December 2003 the Company issued $10 million
of  trust  preferred  securities.  See  Note  17  located  in "Item 8. Financial
Statements  and  Supplementary Data." On March 1, 2005 the Federal Reserve Board
issued  its  final  rule  effective  April  11,  2005, concerning the regulatory
capital  treatment  of  trust  preferred  securities  ("TPS")  by  bank  holding
companies  ("BHCs"). Under the final rule BHCs may include TPS in Tier 1 capital
in  an  amount  equal  to  25%  of  the sum of core capital net of goodwill. The
quantitative  limitation  concerning  goodwill will not be effective until March
31,  2009.  Any  portion  of trust preferred securities not qualifying as Tier 1
capital  would  qualify  as  Tier  2 capital subject to certain limitations. 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.

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 approved a
second  stock repurchase program because it concluded that the Company continued
to  have  more capital than it needed to meet present and anticipated regulatory
guidelines  for  the  Bank  to  be classified as "well capitalized." On April 4,
2006,  the  Board unanimously approved expanding the Repurchase Program to allow
the  repurchase  of up to $15 million of stock between May 1, 2006 and April 30,
2009.


                                       43
<PAGE>
Repurchases  under  the  program  will continue to be made on the open market or
through  private  transactions.  The  repurchase  program  also requires that no
purchases  may be made if the Bank would not remain "well-capitalized" after the
repurchase. All shares repurchased under the repurchase program will be retired.
See Part II, "Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters  and  Issuer  Purchases  of  Equity  Securities."

During  2006, the Company repurchased 11,718 shares at an average share price of
$507  per  share.  In  2005,  the Company repurchased 8,066 shares at an average
share  price  of $498. Since the second share repurchase program was expanded in
2006,  the  Company has repurchased over 8,200 shares for total consideration of
$4.2  million.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This "Management's Discussion and Analysis of Financial Condition and Results of
Operations,"  is  based  upon  the  Company's consolidated financial statements,
which  have  been  prepared  in  accordance with accounting principles generally
accepted  in  the United States. In preparing the Company's financial statements
management  makes  estimates  and  judgments that affect the reported amounts of
assets,  liabilities,  revenues  and expenses. Management believes that the most
significant  subjective  judgments  that  it  makes  include  the  following:

-    Allowance for Loan Losses. As a financial institution which assumes lending
     and  credit  risks  as  a  principle  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.

     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. For additional information, see Note 3 located in
     "Item  8.  Financial  Statements  and  Supplementary  Data."

-    Fair  Value.  The Company discloses the fair value of financial instruments
     and  the  methods  and  significant assumptions used to estimate those fair
     values.  The  estimated  fair  value  amounts  have  been determined by the
     Company  using  available  market  information  and  appropriate  valuation
     methodologies.  The use of assumptions and various valuation techniques, as
     well as the absence of secondary markets for certain financial instruments,
     will  likely  reduce  the  comparability  of fair value disclosures between
     financial  institutions. In some cases, book value is a reasonable estimate
     of  fair  value  due  to  the  relatively  short  period  of  time  between
     origination  of the instrument and its expected realization. For additional
     information,  see  Note  12  located  in  "Item 8. Financial Statements and
     Supplementary  Data."

-    Income  Taxes.  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.  For  additional information, see Note 7 located in "Item 8.
     Financial  Statements  and  Supplementary  Data."

OFF-BALANCE  SHEET  ARRANGEMENTS  AND  AGGREGATE  CONTRACTUAL  OBLIGATIONS  AND
COMMITMENTS

Off-balance  sheet  arrangements  are  any  contractual  arrangement to which an
unconsolidated  entity  is  a  party,  under  which  the  Company  has:  (1) any
obligation  under a guarantee contract; (2) a retained or contingent interest in
assets  transferred  to  an  unconsolidated  entity  or similar arrangement that
serves  as  credit,  liquidity  or  market  risk support to that entity for such
assets;  (3)  any  obligation  under  certain derivative instruments; or (4) any
obligation  under  a


                                       44
<PAGE>
material  variable interest held by us in an unconsolidated entity that provides
financing,  liquidity,  market  risk  or  credit risk support to the Company, or
engages  in  leasing,  hedging  or  research  and  development services with the
Company.

Our most significant off-balance sheet arrangements are limited to: (1) the full
and  unconditional  payment  guarantee  of accrued distributions relating to $10
million  of  Trust Preferred Securities issued by FMCB Statutory Trust (see Note
17  located  in  "Item  8.  Financial  Statements  and Supplementary Data"); (2)
derivative  instruments  indexed to the Prime Rate (see Note 13 located in "Item
8.  Financial  Statements  and  Supplementary  Data");  (3)  obligations  under
guarantee  contracts such as financial and performance standby letters of credit
for  our  credit customers (see Note 14 located in "Item 8. Financial Statements
and  Supplementary Data"); (4) unfunded commitments to lend (see Note 14 located
in  "Item  8.  Financial  Statements  and  Supplementary  Data");  and (5) lease
contracts  (see  Note  14  located  in  "Item  8.  Financial  Statements  and
Supplementary Data"). It is our belief that none of these arrangements expose us
to  any  greater risk of loss than is already reflected on our balance sheet. We
do  not have any off-balance sheet arrangements in which we have any retained or
contingent  interest  (as  we  do not transfer or sell our assets to entities in
which  we have a continuing involvement), any exposure to derivative instruments
that  are  indexed  to  stock  indices  nor  any  variable  interests  in  any
unconsolidated  entity  to  which  we  may  be  a  party.

The  following  table  presents,  as  of  December 31, 2006, our significant and
determinable  contractual  obligations  by  payment  date.  The  payment amounts
represent  those  amounts  contractually due to the recipient and do not include
any  unamortized  premiums or discount, hedge basis adjustments or other similar
carrying  value  adjustments.  For  further  information  on  the nature of each
obligation  type,  see  applicable note disclosure located in "Item 8. Financial
Statements  and  Supplementary  Data."

<TABLE>
<CAPTION>
Payments Due By Period
(in thousands)
                                             Less Than 1                           More Than 5
Contractual Obligations              Total      Year       1-3 Years   3-5 Years      Years
-----------------------------------------------------------------------------------------------
<S>                                 <C>      <C>           <C>         <C>         <C>
Operating Lease Obligations         $ 2,620  $        475  $      706  $      579  $        860
FHLB Advances                        47,532        46,730           -           -           802
Long-Term Subordinated Debentures    10,310             -           -           -        10,310
Deferred Compensation (1)            10,846           158         133         219        10,336
-----------------------------------------------------------------------------------------------
  Total                             $71,308  $     47,363  $      839  $      798  $     22,308
===============================================================================================
</TABLE>

(1)  These  amounts  represent  payments  to  participants  under  the Company's
non-qualified  deferred compensation and supplemental retirement plans. See Note
11  located  in  "Item  8.  Financial  Statements  and  Supplementary  Data."

ITEM 7A. 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.  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  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.


                                       45
<PAGE>
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.

The  Company's methodology for assessing the appropriateness of the allowance 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  uncollectible  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  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:

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


                                       46
<PAGE>
-    findings  of  the  Company's  internal  credit  examiners.

Management  reviews  these  conditions  in  discussion with the Company's senior
credit  officers.  To the extent that any of these conditions are 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.

Management  believes that the allowance for loan losses at December 31, 2006 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.

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 does not attempt to predict
interest  rates  and  positions  the  balance  sheet  in a manner which seeks to
minimize,  to  the  extent  possible,  the  effects  of changing 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:  (1)  analysis  of  asset  and  liability  mismatches  (GAP
analysis);  (2)  the  utilization  of  a  simulation  model;  and  (3) 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.

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 200 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
December  31,  2006,  the Company's estimated net interest income sensitivity to
changes  in  interest  rates,  as  a  percent


                                       47
<PAGE>
of  net interest income was an increase in net interest income of 0.92% if rates
increase  by  200 basis points and a decrease in net interest income of 2.43% if
rates  decline  200  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 cash flows; 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 12 located in "Item 8. Financial Statements and Supplementary
Data."

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 2006, Federal Funds Sold averaged
$1.0  million.  The  Company maintains Federal Funds credit lines of $75 million
with  major  banks  subject  to  the  customary  terms  and  conditions for such
arrangements  and  $150  million  in  repurchase  lines  with  major brokers. In
addition,  the  Company has additional borrowing capacity of $179.8 million from
the  Federal  Home  Loan  Bank.

At  December  31,  2006,  the  Company had available sources of liquidity, which
included  cash  and  cash  equivalents  and  unpledged  investment securities of
approximately  $75.7  million,  which  represents  5.4%  of  total  assets.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
                           INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                               AND FINANCIAL STATEMENT SCHEDULES


                                                                                           PAGE
                                                                                           ----
<S>                                                                                        <C>
Report of Management on Internal Control Over Financial Reporting                            49
Reports of Independent Registered Public Accounting Firms                                    50
Consolidated Financial Statements
     Consolidated Statement of Income - Years ended December 31, 2006, 2005 and 2004         53
     Consolidated Balance Sheet - December 31, 2006 and 2005                                 54
     Consolidated Statement of Changes in Shareholders' Equity - Years ended December 31,
     2006, 2005 and 2004                                                                     55
     Consolidated Statement of Comprehensive Income.                                         56
     Consolidated Statement of Cash Flows - Years Ended December 31, 2006, 2005 and 2004     57
Notes to Consolidated Financial Statements                                                   58
</TABLE>


                                       48
<PAGE>
                           FARMERS & MERCHANTS BANCORP

        REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING


Management  is  responsible  for  establishing and maintaining adequate internal
control over financial reporting at Farmers & Merchants Bancorp ("the Company").
Internal control over financial reporting includes controls over the preparation
of  financial statements in accordance with the instructions to the Consolidated
Financial  Statements  for  Bank Holding Companies (Form FR Y-9C) to comply with
the  reporting  requirements  of  Section  112  of the Federal Deposit Insurance
Corporation  Improvement  Act  ("FDICIA").

Management has assessed the effectiveness of the Company's internal control over
financial  reporting  as  of  December  31,  2006 based on criteria described in
"Internal  Control-Integrated  Framework"  issued by the Committee of Sponsoring
Organizations  of  the Treadway Commission. Based on that assessment, management
concluded  that the Company maintained effective internal control over financial
reporting  as  of  December  31,  2006.

Perry-Smith  LLP, the independent registered public accounting firm that audited
the financial statements included in this Annual Report has audited management's
assessment of the effectiveness of the Company's internal control over financial
reporting  as of December 31, 2006, as stated in their report which follows this
report.


/s/ Kent A. Steinwert                         /s/ Stephen W. Haley

Kent A. Steinwert                             Stephen W. Haley
President & Chief Executive Officer           Executive Vice President &
                                              Chief Financial  Officer


                                       49
<PAGE>
            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Shareholders and Board of Directors
Farmers & Merchants Bancorp
Lodi, California

     We  have  audited  the accompanying consolidated balance sheet of Farmers &
Merchants  Bancorp  and subsidiaries (the "Company") as of December 31, 2006 and
2005 and the related consolidated statements of income, changes in shareholders'
equity,  comprehensive  income and cash flows for the years then ended.  We also
have  audited  management's  assessment,  included in the accompanying Report of
Management  on  Internal  Control  Over  Financial  Reporting,  that  Farmers  &
Merchants  Bancorp  and  subsidiaries maintained effective internal control over
financial  reporting  as  of December 31, 2006, based on criteria established in
Internal  Control-Integrated  Framework  issued  by  the Committee of Sponsoring
Organizations  of  the Treadway Commission (the "COSO criteria").  The Company's
management  is  responsible  for  these  consolidated  financial statements, for
maintaining  effective  internal  control  over financial reporting, and for its
assessment  of  the  effectiveness of internal control over financial reporting.
Our  responsibility  is  to  express  an opinion on these consolidated financial
statements,  an  opinion  on  management's  assessment,  and  an  opinion on the
effectiveness  of  the Company's internal control over financial reporting based
on  our  audits.  The  consolidated financial statements for the Company for the
year  ended December 31, 2004 were audited by other auditors whose report, dated
March  14, 2005, expressed an unqualified opinion on those financial statements.

     We  conducted  our  audits  in  accordance with the standards of the Public
Company  Accounting  Oversight  Board  (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the  consolidated  financial  statements  are  free of material misstatement and
whether  effective  internal  control over financial reporting was maintained in
all material respects.  Our audit of financial statements included examining, on
a  test  basis, evidence supporting the amounts and disclosures in the financial
statements,  assessing  the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our  audit  of  internal  control over financial reporting included obtaining an
understanding  of  internal  control  over  financial  reporting,  evaluating
management's  assessment,  testing  and  evaluating  the  design  and  operating
effectiveness  of  internal  control, and performing such other procedures as we
considered necessary in the circumstances.  We believe that our audits provide a
reasonable  basis  for  our  opinions.


                                       50
<PAGE>
             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                                   (Continued)


     A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and  the preparation of financial statements for external purposes in accordance
with  generally  accepted accounting principles. Management's assessment and our
audit  of  internal  control over financial reporting included controls over the
Company's  preparation  of  financial  statements  in  accordance  with  the
instructions to the Consolidated Financial Statements for Bank Holding Companies
(Form  FR  Y9C)  to  comply  with the requirements of Section 112 of the Federal
Deposit  Insurance  Corporation  Improvement  Act (FDICIA). A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly  reflect  the transactions and dispositions of the assets of the company;
(2)  provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and  that  receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection  of  unauthorized  acquisition,  use,  or disposition of the company's
assets  that  could  have  a  material  effect  on  the  financial  statements.

     Because  of  its  inherent  limitations,  internal  control  over financial
reporting  may  not  prevent  or  detect misstatements. Also, projections of any
evaluation  of  effectiveness  to  future  periods  are subject to the risk that
controls  may  become  inadequate  because of changes in conditions, or that the
degree  of  compliance  with  the  policies  or  procedures  may  deteriorate.

     In  our  opinion,  the  consolidated financial statements referred to above
present  fairly,  in  all material respects, the financial position of Farmers &
Merchants  Bancorp  and  subsidiaries  as  of December 31, 2006 and 2005 and the
related  consolidated  statements  of  income,  changes in shareholders' equity,
comprehensive  income and cash flows for the years then ended in conformity with
accounting  principles  generally accepted in the United States of America. Also
in  our  opinion,  management's  assessment that Farmers & Merchants Bancorp and
subsidiaries  maintained  effective internal control over financial reporting as
of  December  31, 2006, is fairly stated, in all material respects, based on the
COSO  criteria.  Furthermore,  in  our  opinion, Farmers & Merchants Bancorp and
subsidiaries  maintained,  in  all material respects, effective internal control
over  financial  reporting  as of December 31, 2006, based on the COSO criteria.


                                        /s/ Perry-Smith LLP


Sacramento, California
March 6, 2007


                                       51
<PAGE>
            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors
and Stockholders of Farmers & Merchants Bancorp:

In  our  opinion, the accompanying consolidated statements of income, of changes
in  shareholders'  equity,  of  comprehensive  income  and of cash flows present
fairly,  in  all  material  respects,  the result of the operations and the cash
flows  of  Farmers  &  Merchants Bancorp and its subsidiaries for the year ended
December  31,  2004, in conformity with accounting principles generally accepted
in  the  United  States  of  America.  These  financial  statements  are  the
responsibility  of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of  these  statements  in  accordance  with  the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material misstatement. An audit includes examining, on a
test  basis,  evidence  supporting  the amounts and disclosures in the financial
statements,  assessing  the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We  believe  that  our  audit  provides  a  reasonable  basis  for  our opinion.


/s/ PricewaterhouseCoopers
San Francisco, California
March 14, 2005

                                       52
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
---------------------------------------------------------------------------------------------------
(in thousands except per share data)

                                                                          Year Ended December 31,
                                                                         2006      2005      2004
---------------------------------------------------------------------------------------------------
<S>                                                                    <C>       <C>       <C>
INTEREST INCOME
Interest and Fees on Loans                                             $76,872   $61,838   $49,302
Interest on Federal Funds Sold and Securities Purchased
  Under Agreements to Resell                                                49       188       194
Interest on Investment Securities:
  Taxable                                                                8,184     7,217     7,558
  Tax-Exempt                                                             3,291     3,215     2,246
---------------------------------------------------------------------------------------------------
    Total Interest Income                                               88,396    72,458    59,300
---------------------------------------------------------------------------------------------------

INTEREST EXPENSE
Deposits                                                                18,630     9,828     6,661
Borrowed Funds                                                           5,164     3,561     2,703
Subordinated Debentures                                                    827       643       454
---------------------------------------------------------------------------------------------------
    Total Interest Expense                                              24,621    14,032     9,818
---------------------------------------------------------------------------------------------------

NET INTEREST INCOME                                                     63,775    58,426    49,482
Provision for Loan Losses                                                  275       425     1,275
---------------------------------------------------------------------------------------------------
    NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                 63,500    58,001    48,207
---------------------------------------------------------------------------------------------------

NON-INTEREST INCOME
Service Charges on Deposit Accounts                                      6,046     4,364     4,791
Net (Loss) Gain on Sale of Investment Securities                        (2,168)     (953)    1,886
Credit Card Merchant Fees                                                2,124     2,039     1,753
Gain on Sale of Property and Equipment                                       6         1       171
Increase in Cash Surrender Value of Life Insurance                       1,645     1,563     1,582
ATM Fees                                                                 1,202       991       734
Other                                                                    3,208     3,269     3,350
---------------------------------------------------------------------------------------------------
    Total Non-Interest Income                                           12,063    11,274    14,267
---------------------------------------------------------------------------------------------------

NON-INTEREST EXPENSE
Salaries and Employee Benefits                                          27,820    26,773    24,103
Occupancy                                                                2,455     2,073     1,730
Equipment                                                                3,218     2,509     2,319
Credit Card Merchant Expense                                             1,569     1,458     1,200
Marketing                                                                1,167     1,522     1,002
Other                                                                    6,892     6,282     5,821
---------------------------------------------------------------------------------------------------
    Total Non-Interest Expense                                          43,121    40,617    36,175
---------------------------------------------------------------------------------------------------

    INCOME BEFORE INCOME TAXES                                          32,442    28,658    26,299
    Provision for Income Taxes                                          11,813    10,230     9,625
---------------------------------------------------------------------------------------------------
Net Income Before Cumulative Effect of Change in Accounting Principle   20,629    18,428    16,674
Cumulative Effect of Change in Accounting Principle, Net of Tax*             -         -      (224)
---------------------------------------------------------------------------------------------------
    NET INCOME                                                         $20,629   $18,428   $16,450
===================================================================================================
Earnings Per Share Before Cumulative Effect of Change in
Accounting Principle                                                   $ 25.25   $ 22.24   $ 19.95
Cumulative Effect of Change in Accounting Principle, Net of Tax        $     -   $     -   $ (0.27)
---------------------------------------------------------------------------------------------------
EARNINGS PER SHARE                                                     $ 25.25   $ 22.24   $ 19.68
===================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
* See Note 11 for full disclosure.


                                       53
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
------------------------------------------------------------------------------------------------------------
(in thousands except share data)
                                                                                          December 31,
ASSETS                                                                                 2006         2005
------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>          <C>
Cash and Cash Equivalents:
  Cash and Due from Banks                                                           $   47,006   $   50,669

Investment Securities:
  Available-for-Sale                                                                   132,627      158,029
  Held-to-Maturity                                                                     111,240      109,911
------------------------------------------------------------------------------------------------------------
    Total Investment Securities                                                        243,867      267,940
------------------------------------------------------------------------------------------------------------

Loans:                                                                               1,046,912      973,257
  Less: Allowance for Loan Losses                                                       18,099       17,860
------------------------------------------------------------------------------------------------------------
    Loans, Net                                                                       1,028,813      955,397
------------------------------------------------------------------------------------------------------------

Premises and Equipment, Net                                                             20,496       17,522
Bank Owned Life Insurance                                                               38,444       36,799
Interest Receivable and Other Assets                                                    32,607       24,662
------------------------------------------------------------------------------------------------------------
      TOTAL ASSETS                                                                  $1,411,233   $1,352,989
============================================================================================================

LIABILITIES
Deposits:
  Demand                                                                            $  295,142   $  325,745
  Interest-Bearing Transaction                                                         132,875      138,321
  Savings                                                                              271,019      283,226
  Time                                                                                 499,492      356,048
------------------------------------------------------------------------------------------------------------
      Total Deposits                                                                 1,198,528    1,103,340
============================================================================================================

Federal Funds Purchased                                                                      -          650
Federal Home Loan Bank Advances                                                         47,532       98,847
Subordinated Debentures                                                                 10,310       10,310
Interest Payable and Other Liabilities                                                  22,523       16,194
------------------------------------------------------------------------------------------------------------
        TOTAL LIABILITIES                                                            1,278,893    1,229,341
------------------------------------------------------------------------------------------------------------

COMMITMENTS & CONTINGENCIES (SEE NOTE 14)
SHAREHOLDERS' EQUITY
Preferred Stock:  No Par Value.  1,000,000 Authorized, None Issued or Outstanding            -            -
Common Stock:  Par Value $0.01, 2,000,000 Shares Authorized, 811,933 and
  823,651 Issued and Outstanding at December 31, 2006 and 2005, respectively                 8            8
Additional Paid-In Capital                                                              89,926       95,862
Retained Earnings                                                                       43,126       29,463
Accumulated Other Comprehensive Loss                                                      (720)      (1,685)
------------------------------------------------------------------------------------------------------------
        TOTAL SHAREHOLDERS' EQUITY                                                     132,340      123,648
------------------------------------------------------------------------------------------------------------
        TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                  $1,411,233   $1,352,989
============================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements


                                       54
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------------------
(in thousands except share and per share data)

                                                                                               ACCUMULATED
                                               COMMON               ADDITIONAL                    OTHER            TOTAL
                                               SHARES     COMMON     PAID-IN      RETAINED    COMPREHENSIVE    SHAREHOLDERS'
                                            OUTSTANDING    STOCK     CAPITAL      EARNINGS        LOSS            EQUITY
-----------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>           <C>      <C>           <C>         <C>              <C>
BALANCE, DECEMBER 31, 2003                      763,274   $     8  $    72,506   $  37,650            ($559)  $      109,605
-----------------------------------------------------------------------------------------------------------------------------
Net Income                                                                          16,450                            16,450
Cash Dividends Declared on
  Common Stock ($6.85 per share)                                                    (5,723)                           (5,723)
5% Stock Dividend                                37,429                 12,838     (12,838)                                -
Cash Paid in Lieu of Fractional
  Shares Related to Stock Dividend                                                    (207)                             (207)
Repurchase of Stock                              (7,981)                (3,107)                                       (3,107)
Change in Net Unrealized Gains on
   Derivative Instruments                                                                               (68)             (68)
Minimum Pension Plan Liability Adjustment                                                               971              971
Change in Net Unrealized Loss on
  Securities Available-for-Sale                                                                      (1,374)          (1,374)
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004                      792,722         8       82,237      35,332           (1,030)         116,547
-----------------------------------------------------------------------------------------------------------------------------
Net Income                                                                          18,428                            18,428
Cash Dividends Declared on
  Common Stock ($7.68 per share)                                                    (6,366)                           (6,366)
5% Stock Dividend                                38,995                 17,641     (17,641)                                -
Cash Paid in Lieu of Fractional
  Shares Related to Stock Dividend                                                    (290)                             (290)
Repurchase of Stock                              (8,066)                (4,016)                                       (4,016)
Change in Net Unrealized Gains on
  Derivative Instruments                                                                                (14)             (14)
Minimum Pension Plan Liability Adjustment                                                             1,018            1,018
Change in Net Unrealized Loss on
  Securities Available-for-Sale                                                                      (1,659)          (1,659)
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2005                      823,651         8       95,862      29,463           (1,685)         123,648
-----------------------------------------------------------------------------------------------------------------------------
Net Income                                                                          20,629                            20,629
Cash Dividends Declared on
  Common Stock ($8.55 per share)                                                    (6,966)                           (6,966)
Repurchase of Stock                             (11,718)                (5,936)                                       (5,936)
Change in Net Unrealized Gains on
  Derivative Instruments                                                                                 (7)              (7)
Change in Net Unrealized Loss on
  Securities Available-for-Sale                                                                         972              972
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2006                      811,933   $     8  $    89,926   $  43,126   $         (720)  $      132,340
=============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements


                                       55
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
-------------------------------------------------------------------------------------------------
(in thousands)
                                                                       Year Ended December 31,
                                                                       2006      2005      2004
-------------------------------------------------------------------------------------------------
<S>                                                                  <C>       <C>       <C>
NET INCOME                                                           $20,629   $18,428   $16,450

OTHER COMPREHENSIVE INCOME (LOSS)
  Unrealized Gains on Derivative Instruments:
    Unrealized holding gains arising during the period, net of
    income tax effects of $0, $0 and $81 for the years ended
    December 31, 2006, 2005 and 2004, respectively.                        -         -       111

    Less: Reclassification adjustment for realized gains
    included in net income, net of related income tax effects
    of $(6), $(10) and $(130) for the years ended December 31,
    2006, 2005 and 2004, respectively.                                    (7)      (14)     (179)

Unrealized Gains on Minimum Pension Liability Adjustment:
    Unrealized gains arising during the period, net of income
    tax effects of $0, $738, and $703 for the years
    ended December 31, 2006, 2005 and 2004, respectively.                  -     1,018       971

Unrealized Losses on Securities:
    Unrealized holding losses arising during the period, net
    of income tax effects of $(206), $(1,605), and  $(204) for the
    years ended December 31, 2006, 2005 and 2004, respectively.         (284)   (2,211)     (281)

    Less: Reclassification adjustment for realized losses (gains)
    included in net income, net of related income tax effects
    of $912, $401, and $(793) for the years ended December 31,
    2006, 2005 and 2004, respectively.                                 1,256       552    (1,093)
-------------------------------------------------------------------------------------------------
      TOTAL OTHER COMPREHENSIVE INCOME (LOSS)                            965      (655)     (471)
-------------------------------------------------------------------------------------------------
    COMPREHENSIVE INCOME                                             $21,594   $17,773   $15,979
=================================================================================================
</TABLE>

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


                                       56
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------------------------------
(in thousands)
                                                                            Year Ended December 31,
                                                                         2006        2005        2004
--------------------------------------------------------------------------------------------------------
<S>                                                                    <C>        <C>         <C>
OPERATING ACTIVITIES
Net Income                                                             $ 20,629   $  18,428   $  16,450
Adjustments to Reconcile Net Income to Net Cash Provided
  by Operating Activities:
    Provision for Loan Losses                                               275         425       1,275
    Cumulative Effect of Accounting Change                                    -           -         224
    Depreciation and Amortization                                         1,892       1,611       1,574
    Provision for Deferred Income Taxes                                  (1,169)     (1,874)     (1,837)
    Net Amortization of Investment Security Premium & Discounts            (166)        602         857
    Net Loss (Gain) on Sale of Investment Securities                      2,168         953      (1,886)
    Net Gain on Sale of Property & Equipment                                 (6)         (1)       (171)
Net Change in Operating Assets & Liabilities:
    Net Increase in Interest Receivable and Other Assets                 (9,133)     (2,846)       (849)
    Net Increase (Decrease) in Interest Payable and Other Liabilities     6,329        (245)      4,842
--------------------------------------------------------------------------------------------------------
      Net Cash Provided by Operating Activities                          20,819      17,053      20,479
--------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Securities Available-for-Sale:
    Purchased                                                           (72,910)    (70,058)   (133,854)
    Sold, Matured or Called                                              98,041      93,179     170,934
Securities Held-to-Maturity:
    Purchased                                                            (7,347)    (30,622)    (61,256)
    Matured or Called                                                     5,964      10,583       9,317
Net Loans Originated or Acquired                                        (74,494)   (107,216)    (61,068)
Principal Collected on Loans Previously Charged Off                         803         575         298
Net Additions to Premises and Equipment                                  (4,866)     (4,162)     (5,384)
Proceeds from Sale of Property & Equipment                                    6           1         219
--------------------------------------------------------------------------------------------------------
      Net Cash Used by Investing Activities                             (54,803)   (107,720)    (80,794)
--------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (Decrease) Increase in Demand, Interest-Bearing Transaction
  and Savings Deposits                                                  (48,256)     64,055      87,352
Net Increase in Time Deposits                                           143,444      37,175      10,409
Net (Decrease) Increase in Federal Funds Purchased                         (650)        650      (1,000)
Net (Decrease) Increase in Federal Home Loan Bank Advances              (51,315)     17,958     (31,039)
Stock Repurchases                                                        (5,936)     (4,016)     (3,107)
Cash Dividends                                                           (6,966)     (6,656)     (5,930)
--------------------------------------------------------------------------------------------------------
      Net Cash Provided by Financing Activities                          30,321     109,166      56,685
--------------------------------------------------------------------------------------------------------
      (Decrease) Increase in Cash and Cash Equivalents                   (3,663)     18,499      (3,630)
      Cash and Cash Equivalents at Beginning of Year                     50,669      32,170      35,800
--------------------------------------------------------------------------------------------------------
      CASH AND CASH EQUIVALENTS AT END OF YEAR                         $ 47,006   $  50,669   $  32,170
========================================================================================================
SUPPLEMENTARY DATA
Cash Payments Made for Income Taxes                                    $ 12,138   $  12,900   $  11,650
Interest Paid                                                          $ 22,857   $  13,345   $   9,863
========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements


                                       57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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  Bank's  wholly  owned  subsidiaries  include Farmers & Merchants
Investment  Corporation  and  Farmers/Merchants  Corp.  Farmers  &  Merchants
Investment Corporation has been dormant since 1991. Farmers/Merchants Corp. acts
as  trustee  on  deeds  of  trust  originated  by  the  Bank.

The  Company's other subsidiaries include F & M Bancorp, Inc. and FMCB Statutory
Trust I. F & M Bancorp, Inc. was created in March 2002 to protect the name F & M
Bank.  During 2002, the Company completed a fictitious name filing in California
to  begin using the streamlined name, "F & M Bank" as part of a larger effort to
enhance  the Company's image and build brand name recognition. In December 2003,
the  Company  formed  a  wholly  owned  subsidiary, FMCB Statutory Trust I. FMCB
Statutory  Trust  I  is  a  non-consolidated  subsidiary  per generally accepted
accounting  principles  (GAAP),  and  was formed for the sole purpose of issuing
Trust Preferred Securities. The accounting and reporting policies of the Company
conform  to  accounting  principles  generally  accepted in the United States of
America  and prevailing practice within the banking industry. 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  of the Company have been
prepared  in  accordance  with  accounting  principles generally accepted in the
United  States of America for financial information and with the instructions to
Form  10-K  and  Article  9  of  Regulation  S-X.

The  accompanying  consolidated financial statements include the accounts of the
Company and the Company's wholly owned subsidiaries, F & M Bancorp, Inc. and the
Bank,  along  with  the  Bank's  wholly  owned subsidiaries, Farmers & Merchants
Investment  Corporation  and  Farmers/Merchants  Corp. Significant inter-company
transactions  have  been  eliminated  in  consolidation.

The  preparation  of  consolidated  financial  statements  in  conformity  with
accounting  principles  generally  accepted  in  the  United  States  of America
requires  management  to  make  estimates  and  assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date of
the  financial  statements  and  the  reported  amounts of revenues and expenses
during  the  reporting period. Actual results could differ from these estimates.

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

Cash and Cash Equivalents
For  purposes  of  the  Consolidated  Statement  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, 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 level yield of
interest  over the estimated remaining period until maturity. Losses, reflecting
a  decline  in  value  judged  by  the  Company  to be other than temporary, are
recognized  in  the  period  in  which  they  occur.

Securities are classified as available-for-sale 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


                                       58
<PAGE>
management  strategy. These securities are reported at fair value with aggregate
unrealized  gains  or  losses  excluded  from  income and included as a separate
component  of shareholders' equity, net of related income taxes. Fair values are
based  on  quoted  market prices or broker/dealer price quotations on a specific
identification  basis.  Gains  or  losses  on  the  sale of these securities are
computed  using  the  specific  identification  method.

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

Investment securities are evaluated for impairment on at least a quarterly basis
and  more  frequently  when  economic  or  market  conditions  warrant  such  an
evaluation  to  determine  whether  a  decline  in  their  value  is  other than
temporary.  Management  utilizes  criteria such as the magnitude and duration of
the  decline  and the intent and ability of the Company to retain its investment
in  the  securities  for a period of time sufficient to allow for an anticipated
recovery  in  fair  value, in addition to the reasons underlying the decline, to
determine  whether  the  loss  in value is other than temporary. The term "other
than  temporary"  is not intended to indicate that the decline is permanent, but
indicates  that  the  prospects  for  a  near-term  recovery  of  value  is  not
necessarily  favorable,  or  that  there  is  a  lack  of  evidence to support a
realizable  value equal to or greater than the carrying value of the investment.
Once  a  decline in value is determined to be other than temporary, the value of
the  security  is  reduced and a corresponding charge to earnings is recognized.

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 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 Sheet is based on the present
value  of expected future cash flows discounted at the loan's effective interest
rate,  or  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 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 reduced
by  charge-offs  and increased by provisions charged to operating expense and by
recoveries  on  loans  previously  charged  off. 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 many
factors  in determining the adequacy of the allowance at the balance sheet date.

The  factors  evaluated  in  connection  with the allowance may include existing
general  economic and business conditions affecting the key lending areas of the
Company,  current  levels  of  problem  loans  and delinquencies, 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.


                                       59
<PAGE>
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, which are discussed more fully in Note 4
to  these  Consolidated  Financial  Statements.

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. In addition, the Federal Deposit Insurance Corporation
and  the California Department of Financial Institutions, as an integral part of
their  examination process, review the allowance for loan losses. These agencies
may  require  additions to the allowance for loan losses based on their judgment
about  information  available  at  the  time  of  their  examinations.

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, which is included in other assets, is comprised of properties
no  longer  utilized  for  business  operations  and  property  acquired through
foreclosure  in  satisfaction  of indebtedness. These properties are recorded at
fair  value  less estimated selling costs upon acquisition. Revised estimates to
the  fair  value  less  cost to sell are reported as adjustments to the carrying
amount  of  the asset, provided that such adjusted value is not in excess of the
carrying  amount  at  acquisition. Initial losses on properties acquired through
full or partial satisfaction of debt are treated as credit losses and charged to
the Allowance for 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
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.

Dividends and 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.

No stock dividend was declared during 2006. The Board of Directors declared a 5%
stock  dividend  in  each  of the years 2005 and 2004. Common stock shareholders
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 $22.62 and $17.15 per share was paid in
lieu  of  the  stock dividend for each of the years 2005 and 2004, respectively.

Total  cash  dividends  during 2006 were $6,966,000 or $8.55 per share of common
stock, an increase of 11.3% from $6,366,000 or $7.68 per share in 2005. In 2004,
cash  dividends  totaled  $5,723,000 or $6.85 per share. Prior periods have been
restated  where  applicable  for  stock  dividends  paid.


                                       60
<PAGE>
Earnings  per  share  for the years ending December 31, 2006, 2005 and 2004 were
$25.25,  $22.24  and  $19.68,  respectively,  and  were computed by dividing net
income  by  the  weighted  average  number  of common shares outstanding for the
period.  The  weighted  average number of shares outstanding for the three years
ending  December  31,  2006,  2005  and  2004 were 817,044, 828,537 and 835,746,
respectively.  Prior  periods  have  been  restated  where  applicable for stock
dividends  paid.

Segment Reporting
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 holding company for a community bank which offers a wide array of products
and  services  to  its  customers. Pursuant to its banking strategy, emphasis is
placed  on  building  relationships  with  its customers, as opposed to building
specific  lines  of  business.  As a result, the Company is not organized around
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. Therefore, the Company
only  reports  one  segment.

Derivative Instruments and Hedging Activities
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, 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 (loss), 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
(loss).  The Company was not utilizing any derivative instruments as of December
31,  2006.

Comprehensive Income
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 generally accepted
accounting  principles  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.

Evaluating the Effects of Potential Misstatements
In  September 2006, the SEC ("SEC") issued Staff Accounting Bulletin ("SAB") No.
108  Considering  the  Effects  of  Prior  Year  Misstatements  When Quantifying
Misstatements  in Current Year Financial Statements, which provides interpretive
guidance  on  how registrants should quantify financial statement misstatements.
Under  SAB  108  registrants  are  required to consider both a "rollover" method
which  focuses primarily on the income statement impact of misstatements and the
"iron  curtain"  method  which  focuses primarily on the balance sheet impact of
misstatements.  The  transition  provisions  of  SAB  108 permit a registrant to
adjust retained earnings for the cumulative effect of immaterial errors relating
to  prior years. The Company was required to adopt SAB 108 in the fourth quarter
of  2006.


                                       61
<PAGE>
Historically,  the  Company  evaluated  uncorrected  differences  utilizing  the
rollover  approach.  Under SAB 108 management must assess materiality using both
the rollover method and the iron-curtain method. The adoption of this accounting
standard  did  not have a material effect on the Company's financial position or
results  of  operations.

2. INVESTMENT SECURITIES

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

<TABLE>
<CAPTION>
                                                   Amortized       Gross Unrealized       Fair/Book
                                                               ------------------------
December 31, 2006                                    Cost         Gains       Losses        Value
----------------------------------------------------------------------------------------------------
<S>                                               <C>          <C>          <C>          <C>
Obligations of States and Political Subdivisions  $    11,224  $        59  $         9  $    11,274
Mortgage-Backed Securities                            110,568          109        1,292      109,385
Other                                                  12,075            -          107       11,968
----------------------------------------------------------------------------------------------------
  Total                                           $   133,867  $       168  $     1,408  $   132,627
====================================================================================================

                                                   Amortized       Gross Unrealized       Fair/Book
                                                               ------------------------
December 31, 2005                                    Cost         Gains       Losses        Value
----------------------------------------------------------------------------------------------------
Securities of U.S. Government Agencies            $    30,867  $         -  $       941  $    29,926
Obligations of States and Political Subdivisions       15,433          170           27       15,576
Mortgage-Backed Securities                            108,553            -        2,120      106,433
Other                                                   6,094            -            -        6,094
----------------------------------------------------------------------------------------------------
  Total                                           $   160,947  $       170  $     3,088  $   158,029
====================================================================================================
</TABLE>

Included  with  the  2006  available-for-sale "Other Securities Fair/Book Value"
total  of  $11.9  million was $7.7 million of FHLB stock. Included with the 2005
available-for-sale  "Other Securities Fair/Book Value" total of $6.1 million was
$5.8  million  of  FHLB  stock.

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

<TABLE>
<CAPTION>

                                                     Book          Gross Unrealized         Fair
                                                               ------------------------
December 31, 2006                                    Value        Gains       Losses        Value
----------------------------------------------------------------------------------------------------
<S>                                               <C>          <C>          <C>          <C>
Securities of U.S. Government Agencies            $    30,539  $         -  $       735  $    29,804
Obligations of States and Political Subdivisions       69,910          319          334       69,895
Mortgage-Backed Securities                              8,677            -          365        8,312
Other                                                   2,114            7            -        2,121
----------------------------------------------------------------------------------------------------
  Total                                           $   111,240  $       326  $     1,434  $   110,132
====================================================================================================

                                                     Book          Gross Unrealized         Fair
                                                               ------------------------
December 31, 2005                                    Value        Gains       Losses        Value
----------------------------------------------------------------------------------------------------
Securities of U.S. Government Agencies            $    30,644  $         -  $       721  $    29,923
Obligations of States and Political Subdivisions       66,260          151          840       65,571
Mortgage-Backed Securities                             10,881            -          449       10,432
Other                                                   2,126            8            -        2,134
----------------------------------------------------------------------------------------------------
  Total                                           $   109,911  $       159  $     2,010  $   108,060
====================================================================================================
</TABLE>

Fair  values  are  based  on  quoted market prices or dealer quotes. If a quoted
market  price  or  dealer  quote is not available, fair value is estimated using
quoted  market  prices  for  similar  securities.

The  remaining  principal  maturities of debt securities as of December 31, 2006
and  2005  are  shown  in  the  following tables. Mortgage-Backed Securities are
presented  based  on  expected  maturities.  Expected maturities may differ from
contractual  maturities  as  borrowers  may  have  the  right  to call or prepay
obligations  with  or  without  call  or  prepayment  penalties.


                                       62
<PAGE>
<TABLE>
<CAPTION>
                                                             After 1    After 5                Total
Securities Available-for-Sale                      Within     but        but         Over       Fair
December 31, 2006 (in thousands)                   1 Year   Within 5   Within 10   10 years    Value
------------------------------------------------------------------------------------------------------
<S>                                                <C>      <C>        <C>         <C>        <C>
Obligations of States and Political Subdivisions   $ 2,590  $   6,436  $        -  $   2,248  $ 11,274
Mortgage-Backed Securities                               -          -           -    109,385   109,385
Other                                               11,968          -           -          -    11,968
------------------------------------------------------------------------------------------------------
  Total                                            $14,558  $   6,436  $        -  $ 111,633  $132,627
======================================================================================================
2005 Totals                                        $11,141  $  32,171  $   43,483  $  71,234  $158,029
======================================================================================================

                                                             After 1    After 5                Total
Securities Available-for-Sale                      Within     but        but         Over       Fair
December 31, 2005 (in thousands)                   1 Year   Within 5   Within 10   10 years    Value
------------------------------------------------------------------------------------------------------
Securities of U.S. Government Agencies             $     -  $  19,935  $   10,604  $       -  $ 30,539
Obligations of States and Political Subdivisions     3,769      8,533      10,214     47,394    69,910
Mortgage-Backed Securities                               -          -       8,677          -     8,677
Other                                                    -          -         133      1,981     2,114
------------------------------------------------------------------------------------------------------
  Total                                            $ 3,769  $  28,468  $   29,628  $  49,375  $111,240
======================================================================================================
2005 Totals                                        $ 1,249  $  26,774  $   35,752  $  46,136  $109,911
======================================================================================================
</TABLE>

The  following  tables  show  those investments with gross unrealized losses and
their  market  value  aggregated  by investment category and length of time that
individual  securities have been in a continuous unrealized loss position at the
dates  indicated.

<TABLE>
<CAPTION>
                                          Less Than 12 Months     12 Months or More           Total
                                         ------------------------------------------------------------------
December 31, 2006                          Fair    Unrealized    Fair    Unrealized     Fair    Unrealized
 (in thousands)                           Value       Loss       Value      Loss       Value       Loss
-----------------------------------------------------------------------------------------------------------
<S>                                      <C>       <C>          <C>      <C>          <C>       <C>
Securities of U.S. Government Agencies   $      -  $         -  $29,804  $       735  $ 29,804  $       735
Obligations of States and Political
Subdivisions                               10,520           40   19,435          304    29,955          344
Mortgage-Backed Securities                 66,583          589   32,785        1,067    99,368        1,656
Other                                       3,893          107        -            -     3,893          107
-----------------------------------------------------------------------------------------------------------
  Total                                  $ 80,996  $       736  $82,024  $     2,106  $163,020  $     2,842
===========================================================================================================

                                          Less Than 12 Months    12 Months or More            Total
                                         ------------------------------------------------------------------
December 31, 2005                         Fair     Unrealized    Fair    Unrealized    Fair     Unrealized
 (in thousands)                           Value       Loss       Value      Loss       Value       Loss
-----------------------------------------------------------------------------------------------------------
Securities of U.S. Government Agencies   $ 25,220  $       796  $34,629  $       866  $ 59,849  $     1,662
Obligations of States and Political
Subdivisions                               41,036          465   13,118          402    54,154          867
Mortgage-Backed Securities                 91,808        1,676   25,057          893   116,865        2,569
-----------------------------------------------------------------------------------------------------------
  Total                                  $158,064  $     2,937  $72,804  $     2,161  $230,868  $     5,098
===========================================================================================================
</TABLE>

As  of December 31, 2006, the Company held 200 investment securities of which 37
were  in  a  loss  position  for  less  than twelve months and 48 were in a loss
position  and  had been in a loss position for twelve months or more. Management
periodically  evaluates  each  investment  security  for  other  than  temporary
impairment  relying  primarily


                                       63
<PAGE>
on  industry  analyst reports and observations of market conditions and interest
rate  fluctuations.  Management  believes it will be able to collect all amounts
due  according to the contractual terms of the underlying investment securities.

Securities  of  U.S. Government Agencies and Obligations of States and Political
Subdivisions
The  unrealized  losses on the Company's investments in U.S. government agencies
and  obligations  of  states  and political subdivisions were caused by interest
rate  increases.  The  contractual  terms of these investments do not permit the
issuer  to  settle the securities at a price less than the amortized cost of the
investment.  Because  the  Company  has  the  ability  and  intent to hold these
investments  until  a recovery of fair value, which may be maturity, the Company
does  not  consider  these  investments to be other-than-temporarily impaired at
December  31,  2006.

Mortgage-Backed  Securities
The  unrealized losses on the Company's investment in mortgage-backed securities
were  caused  by  interest  rate  increases. The contractual cash flows of these
investments  are guaranteed by an agency of the U.S. government. Accordingly, it
is  expected  that  the securities would not be settled at a price less than the
amortized  cost of the Company's investment. Because the decline in market value
is attributable to changes in interest rates and not credit quality, and because
the  Company  has  the  ability  and  intent  to  hold these investments until a
recovery  of  fair  value,  which may be maturity, the Company does not consider
these  investments  to  be other-than-temporarily impaired at December 31, 2006.

Marketable Equity Securities (shown in the 2006 table in the "Other" category)
The  Company's  investment in marketable equity securities consists primarily of
investments  in common stock. The current fair value is 2.7% less than cost as a
result  of normal fluctuations in general market conditions. The duration of the
unrealized  loss  is less than 12 months. The Company has the ability and intent
to  hold  these investments until a recovery of fair value and does not consider
these  investments  to  be other-than-temporarily impaired at December 31, 2006.

Proceeds  from  sales  of  securities  available-for-sale  were  as  follows:

<TABLE>
<CAPTION>
(in thousands)         Gross    Gross    Gross
                     Proceeds   Gains   Losses
-----------------------------------------------
<S>                  <C>        <C>     <C>
2006                 $  63,760  $    1  $ 2,169
2005                    64,635     163    1,116
2004                    74,775   1,977       91
</TABLE>

As  of  December  31,  2006,  securities carried at $196,459,000 were pledged to
secure  public deposits, FHLB borrowings and other government agency deposits as
required  by  law.  This  amount  at  December  31,  2005  was  $150,741,000.

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans  as  of  December  31,  consisted  of  the  following:

<TABLE>
<CAPTION>
(in thousands)                                   2006       2005
<S>                                          <C>          <C>
-------------------------------------------------------------------
Real Estate                                  $  516,606   $432,378
Real Estate Construction                         95,378    110,235
Home Equity                                      67,132     69,013
Agricultural                                    183,589    170,657
Commercial                                      165,412    174,530
Consumer and Other                               21,222     18,958
-------------------------------------------------------------------
Subtotal                                      1,049,339    975,771
     Less:  Deferred Loan Origination Fees       (2,427)    (2,514)
-------------------------------------------------------------------
     Total Loans                             $1,046,912   $973,257
===================================================================
     Non-Performing Loans                    $       54   $    694
===================================================================
</TABLE>


                                       64
<PAGE>
<TABLE>
<CAPTION>
Changes in the allowance for loan losses consisted of the following:
(in thousands)
                                              2006      2005      2004
------------------------------------------------------------------------
<S>                                         <C>       <C>       <C>
Balance, January 1                          $17,860   $17,727   $17,220
Provision Charged to Operating Expense          275       425     1,275
Recoveries of Loans Previously Charged Off      803       575       298
Loans Charged Off                              (839)     (867)     (955)
Reclassification Adjustment*                      -         -      (111)
------------------------------------------------------------------------
  Balance, December 31                      $18,099   $17,860   $17,727
========================================================================
</TABLE>

*As of December 31, 2004, the Company reclassified $111,000 of the Allowance for
Loan  Losses  that pertained to commitments under commercial and standby letters
of  credit to the "Other Liabilities" section of the Consolidated Balance Sheet.

All  impaired loans have been assigned a related allowance for credit losses. As
of  December  31, 2006 and 2005, the total recorded investment in impaired loans
was $39,000 and $606,000, respectively. The related allowance for impaired loans
was  $10,000  and  $135,000 for the years ended 2006 and 2005, respectively. The
average  balance  of  impaired loans was $250,000, $412,000 and $1.6 million for
the  years ended 2006, 2005 and 2004, respectively. There was no interest income
reported  on  impaired  loans in 2006, 2005 and 2004. Interest income forgone on
loans placed on nonaccrual status was $15,000, $50,000 and $30,000 for the years
ended December 31, 2006, 2005 and 2004, respectively. A portion of pledged loans
totaling  $225,569,000  were  used  to secure Federal Home Loan Bank advances of
$46,730,000  and  the  unused  commitments.

4. PREMISES AND EQUIPMENT

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

<TABLE>
<CAPTION>
(in thousands)                                      2006     2005
-------------------------------------------------------------------
<S>                                                <C>      <C>
Land and Buildings                                 $24,248  $22,049
-------------------------------------------------------------------
Furniture, Fixtures and Equipment                   16,984   16,557
Leasehold Improvements                               2,257    1,167
-------------------------------------------------------------------
Subtotal                                            43,489   39,773
Less:  Accumulated Depreciation and Amortization    22,993   22,251
-------------------------------------------------------------------
  Total                                            $20,496  $17,522
===================================================================
</TABLE>

Depreciation  and  amortization  on premises and equipment included in occupancy
and  equipment expense amounted to $1,892,000, $1,611,000 and $1,574,000 for the
years ended December 31, 2006, 2005 and 2004, respectively. Total rental expense
for  premises  was  $375,000, $268,000 and $265,000 for the years ended December
31,  2006, 2005 and 2004, respectively. Rental income was $116,000, $109,000 and
$115,000  for  the  years  ended December 31, 2006, 2005 and 2004, respectively.

5. OTHER REAL ESTATE

The Bank reported no other real estate at December 31, 2006 and 2005. Other real
estate includes property no longer utilized for business operations and property
acquired  through  foreclosure  proceedings. These properties are carried at the
lower  of cost or fair value less selling costs determined at the date acquired.
Losses  arising from properties acquired through foreclosure are charged against
the  allowance  for  loan  losses. Subsequent declines in value, routine holding
costs  and  net  gains  or losses on disposition are included in other operating
expense  as  incurred.


                                       65
<PAGE>
6. TIME DEPOSITS

Time  Deposits  of  $100,000  or  more  as  of  December  31,  were  as follows:
(in  thousands)

<TABLE>
<CAPTION>
                                         2006      2005
---------------------------------------------------------
<S>                                    <C>       <C>
Balance                                $340,287  $207,976
=========================================================
</TABLE>

At December 31, 2006, the scheduled maturities of time deposits were as follows:

<TABLE>
<CAPTION>
                                               Scheduled
(in thousands)                                Maturities
---------------------------------------------------------
<S>                                           <C>
2007                                          $   475,938
2008                                               16,199
2009                                                5,775
2010                                                  619
2011                                                  961
---------------------------------------------------------
  Total                                       $   499,492
=========================================================
</TABLE>

7. INCOME TAXES

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

<TABLE>
<CAPTION>
(in thousands)                       2006      2005      2004
---------------------------------------------------------------
<S>                                <C>       <C>       <C>
Current
  Federal                          $ 9,443   $ 8,826   $ 8,071
  State                              3,539     3,278     3,228
---------------------------------------------------------------
    Total Current                   12,982    12,104    11,299
---------------------------------------------------------------
Deferred
  Federal                             (950)   (1,508)   (1,379)
  State                               (219)     (366)     (458)
---------------------------------------------------------------
    Total Deferred                  (1,169)   (1,874)   (1,837)
---------------------------------------------------------------
      Total Provision for Taxes*   $11,813   $10,230   $ 9,462
===============================================================
</TABLE>

*The  Provision  for  Taxes for 2004 includes the $163,000 tax impact associated
with the cumulative effect of change in accounting principle shown net of tax on
the  Consolidated  Statement  of  Income.

The  total provision for income taxes differs from the federal statutory rate as
follows:
(in  thousands)

<TABLE>
<CAPTION>
                                                2006              2005               2004
                                          Amount    Rate    Amount    Rate     Amount    Rate
-----------------------------------------------------------------------------------------------
<S>                                      <C>       <C>     <C>       <C>      <C>       <C>
Tax Provision at Federal Statutory Rate  $11,355    35.0%  $10,030   35.0  %  $ 9,069   35.0  %
Interest on Obligations of States
  and Political Subdivisions
  Exempt from Federal Taxation            (1,062)  (3.3)%   (1,081)  (3.7) %     (769)   (3.0)%
State and Local Income Taxes,
  Net of Federal Income Tax Benefit        2,158    6.7 %    1,893    6.6  %    1,801     6.9 %
Bank Owned Life Insurance                   (675)  (2.1)%     (636)  (2.2) %     (645)   (2.5)%
Other, Net                                    37     0.1%       24    0.0  %        6     0.0 %
-----------------------------------------------------------------------------------------------
    Total Provision for Taxes            $11,813    36.4%  $10,230   35.7  %  $ 9,462    36.4 %
===============================================================================================
</TABLE>


                                       66
<PAGE>
<TABLE>
<CAPTION>
The components of the net deferred tax assets as of December 31 are as follows:
(in thousands)                                           2006      2005
-------------------------------------------------------------------------
<S>                                                    <C>       <C>
Deferred Tax Assets
  Allowance for Loan Losses                            $ 7,670   $ 7,569
  Accrued Liabilities                                    2,214     1,650
  Deferred Compensation                                  3,372     2,335
  State Franchise Tax                                    1,249     1,147
  Unrealized Losses on Securities Available-for-Sale       522       708
  Interest on Non-Accrual Loans                              6       255
-------------------------------------------------------------------------
    Total Deferred Tax Assets                          $15,033   $13,664
-------------------------------------------------------------------------
Deferred Tax Liabilities
  Premises and Equipment                               $  (444)  $  (427)
  Securities Accretion (zero coupon securities)           (877)     (572)
  Other                                                   (510)     (446)
-------------------------------------------------------------------------
    Total Deferred Tax Liabilities                      (1,831)   (1,445)
-------------------------------------------------------------------------
      Net Deferred Tax Assets                          $13,202   $12,219
=========================================================================
</TABLE>

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

8. SHORT TERM BORROWINGS

As  of  December  31,  2006  and  2005,  the  Company had unused lines of credit
available  for  short  term liquidity purposes of $405 million and $346 million,
respectively. Federal Funds purchased and advances from the Federal Reserve Bank
are  generally  issued  on  an  overnight  basis.  There  were  no Federal Funds
purchased  at  December  31,  2006  and  $650,000  at  December  31,  2005.

9. FEDERAL HOME LOAN BANK ADVANCES

The  Company's advances from the Federal Home Loan Bank of San Francisco consist
of  the  following  as  of  December  31,

<TABLE>
<CAPTION>
 (in thousands)                                                                               2006     2005
-------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>      <C>
5.35% note payable due February 4, 2008 with interest due quarterly, callable February 2,    $     -  $25,000
2003 and quarterly thereafter.
5.38% note payable due August 12, 2008 with interest due quarterly, callable August 12,            -   15,000
2003 and quarterly thereafter.
5.60% amortizing note, interest and principal payable monthly with final maturity of             802      847
September 25, 2018.
4.28% fixed rate credit advance, interest payable weekly with a maturity of January 4,             -   58,000
2008*
5.38% fixed rate credit advance, interest payable at month end and maturity of January 11,    25,000        -
2007
5.34% fixed rate credit advance, interest payable daily with a maturity of January 2, 2007    21,730        -
-------------------------------------------------------------------------------------------------------------
  Total                                                                                      $47,532  $98,847
=============================================================================================================
</TABLE>
*While  this  borrowing  had a maturity in 2008, the Company prepaid it in 2006.

In  accordance  with  the Collateral Pledge and Security Agreement, advances are
secured  by  all  Federal Home Loan Bank stock held by the Company and by agency
and  mortgage-backed  securities,  with  carrying  values  of  $1,840,000.


                                       67
<PAGE>
A  portion  of  pledged  loans totaling $225,569,000 were used to secure Federal
Home  Loan  Bank  advances  of  $46,730,000  and  the  unused  commitments.

10. SHAREHOLDERS' EQUITY

From  1975 through 2005, the Company issued an annual 5% stock dividend. In 2006
the  stock  dividend  was  discontinued.  Earnings  and cash dividends per share
amounts  have  been  restated  where  applicable  for  stock  dividends.

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. Repurchases will be made
on the open market or through private transactions. 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. 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. On April 4,
2006,  the  Board unanimously approved expanding the repurchase program to allow
the  repurchase  of up to $15 million of stock between May 1, 2006 and April 30,
2009.Repurchases  under  the program will continue to be made on the open market
or  through  private  transactions. The repurchase program also requires that no
purchases  may be made if the Bank would not remain "well-capitalized" after the
repurchase. All shares repurchased under the repurchase program will be retired.

Dividends  from the Bank constitute the principal source of cash to the Company.
The  Company  is  a  legal  entity  separate  and  distinct from the Bank. Under
regulations  controlling  California state chartered banks, the Bank is, to some
extent,  limited  in  the  amount  of dividends that can be paid to shareholders
without  prior  approval of the California Department of Financial Institutions.
These  regulations  require  approval  if  total  dividends  declared by a state
chartered  bank in any calendar year exceed the bank's net profits for that year
combined  with its retained net profits for the preceding two calendar years. As
of  December  31,  2006, the Bank could declare dividends of $19,376,000 without
approval  of  the  California  Department  of  Financial  Institutions.

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.

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 following table of Total and Tier 1 capital to risk-weighted assets
(as  defined  in  the  regulations), and of Tier 1 capital to average assets (as
defined  in the regulations). Management believes, as of December 31, 2006, that
the  Company  and  the Bank meet all capital adequacy requirements to which they
are  subject.

In  addition, the most recent notification from the FDIC categorized the Bank as
well capitalized under the regulatory framework for prompt corrective action. To
be  categorized  as  well  capitalized,  the  Bank  must  maintain minimum total
risk-based,  Tier  1  risk-based  and Tier 1 leverage ratios as set forth in the
following tables. There are no conditions or events since that notification that
management  believes  have  changed  the  Bank's  category.


                                       68
<PAGE>
<TABLE>
<CAPTION>
                                                                                                             Well Capitalized
                                                                                  Regulatory Capital           Under Prompt
(in thousands)                                                Actual                Requirements             Corrective Action
December 31, 2006                                      Amount        Ratio       Amount        Ratio       Amount        Ratio
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>          <C>          <C>          <C>          <C>          <C>

Total Bank Capital to Risk Weighted Assets           $   152,118       11.69%  $   104,101         8.0%  $   130,126     10.0%
Total Consolidated Capital to Risk Weighted Assets   $   159,336       12.17%  $   104,698         8.0%          N/A      N/A
Tier 1 Bank Capital to Risk Weighted Assets          $   135,827       10.44%  $    52,051         4.0%  $    78,076      6.0%
Tier 1 Consolidated Capital to Risk Weighted Assets  $   142,954       10.92%  $    52,349         4.0%          N/A      N/A
Tier 1 Bank Capital to Average Assets                $   135,827        9.93%  $    54,736         4.0%  $    68,420      5.0%
Tier 1 Consolidated Capital to Average Assets        $   142,954       10.40%  $    54,979         4.0%          N/A      N/A

December 31, 2005                                      Amount        Ratio       Amount        Ratio       Amount        Ratio
---------------------------------------------------------------------------------------------------------------------------------
Total Bank Capital to Risk Weighted Assets           $   148,139       12.14%  $    97,606         8.0%  $   122,008     10.0%
Total Consolidated Capital to Risk Weighted Assets   $   150,648       12.32%  $    97,805         8.0%          N/A      N/A
Tier 1 Bank Capital to Risk Weighted Assets          $   132,854       10.89%  $    48,803         4.0%  $    73,205      6.0%
Tier 1 Consolidated Capital to Risk Weighted Assets  $   135,333       11.07%  $    48,903         4.0%          N/A      N/A
Tier 1 Bank Capital to Average Assets                $   132,854       10.25%  $    51,852         4.0%  $    64,815      5.0%
Tier 1 Consolidated Capital to Average Assets        $   135,333       10.42%  $    51,936         4.0%          N/A      N/A
</TABLE>

11. EMPLOYEE BENEFIT PLANS

Pension Plan
The  Company,  through  the  Bank, sponsored a defined benefit Pension Plan (the
Plan)  that  covered  substantially  all  full-time  employees  of  the Company.
Effective  June  9,  2001 the Plan was amended to freeze the benefit accruals in
the  Plan.  With  the  exception of employees who had reached age 55 and who had
accumulated  10 years of Plan service, the effect of the amendment was to freeze
the  participants'  monthly  pension  benefit.

In  February 2005 the Board of Directors terminated the Plan. Benefits for those
employees  who  were still accruing benefits under the Plan were frozen on April
30,  2005  when  the Plan was amended to halt all future benefit accruals. Those
employees now participate in the mandatory contributions to the Company's Profit
Sharing  Plan.

The  Company  filed  Form  500,  Standard Termination Notice for Single Employer
Plan,  with the Pension Benefit Guaranty Corporation (the "PBGC") on October 21,
2005. The Company did not receive a Notice of Noncompliance from the PBGC within
sixty days, so it distributed all benefits to all participants prior to December
31,  2005.

The  Company filed Form 5310, Application for Determination of Terminating Plan,
with  the Internal Revenue Service on September 22, 2005. The Company received a
favorable  determination  letter  from  the Internal Revenue Service on June 19,
2006.

Because  of  the Company's decision to terminate the Plan in 2005, it elected to
accelerate  the  recognition  of  gain/loss  over a two year amortization period
effective  January 1, 2004, to match the remaining life of the Plan. This change
in  amortization  period  resulted  in  a cumulative adjustment in the amount of
$387,000  ($224,000,  net  of  tax).

The  following  schedule  states  the change in benefit obligations for the year
ended  December  31,  2005.

<TABLE>
<CAPTION>
<S>                                                      <C>
(in thousands)                                              2005
-----------------------------------------------------------------
Benefit Obligation at Beginning of Year                  $ 5,508
Service Cost                                                  53
Interest Cost                                                258
Benefits Paid                                               (767)
Increase Due to Actuarial Loss and Assumption Change         320
Settlement Payments                                       (5,372)
-----------------------------------------------------------------
    Total Benefit Obligation at End of Year              $     -
=================================================================


                                       69
<PAGE>
The Change in Plan Assets are as follows:(in thousands)     2005
-----------------------------------------------------------------
Fair Value of Plan Assets at Beginning of Year           $ 4,080
Employer Contribution                                      1,945
Benefits Paid                                             (6,139)
Actual Return on Plan Assets                                 114
-----------------------------------------------------------------
    Total Fair Value of Plan Assets at End of Year       $     -
=================================================================
</TABLE>

The  components  of  the  net  periodic  benefit  costs  are  as  follows:

<TABLE>
<CAPTION>
(in thousands)                                                  2005      2004
--------------------------------------------------------------------------------
<S>                                                           <C>       <C>
Service Cost                                                  $    53   $    47
Interest Cost                                                     258       255
Expected Return on Plan Assets                                   (114)     (114)
Amortization of :
  Unrecognized Prior Service Cost                                   -         -
  Unrecognized Net Loss                                           947     1,569
--------------------------------------------------------------------------------
Total Net Periodic Benefit Cost                               $ 1,144   $ 1,757
One-Time Charge Due to Plan Termination                         1,229         -
--------------------------------------------------------------------------------
  Total Net Periodic Benefit Cost                             $ 2,373   $ 1,757
================================================================================
(Decrease) /Increase in Minimum Liability Included in Other
Comprehensive Income                                          $(1,756)  $(1,674)
================================================================================
</TABLE>

Weighted-average  assumptions  used to determine benefit obligations at December
31,  2005.

<TABLE>
<CAPTION>
<S>                                        <C>
                                           2005
------------------------------------------------
Assumptions Used in the Accounting were:
Discount Rate (Settlement Rate)            4.89%
Rate of Compensation Increase              4.00%
================================================
</TABLE>

Weighted-average  assumptions used to determine net benefit cost for years ended
December  31,

<TABLE>
<CAPTION>
                                           2005   2004
-------------------------------------------------------
<S>                                        <C>    <C>
Assumptions Used in the Accounting were:
Discount Rate (Settlement Rate)            4.89%  5.12%
Expected Return on Plan Assets             3.00%  3.00%
Rate of Compensation Increase              4.00%  4.00%
=======================================================
</TABLE>

The  Company's  Pension  Plan  had no weighted-average assets for the year ended
December  31,  2006 and the weighted-average asset allocation for the year ended
December 31, 2005, by asset category was 91% in savings deposits and 9% in other
deposits.

Profit Sharing Plan
The  Company, through the Bank, sponsors a Profit Sharing Plan for substantially
all  full-time  employees  of  the  Company  with  one or more years of service.
Participants  receive  up  to  two  annual  employer  contributions,  one  is
discretionary and the other is mandatory. The discretionary contributions to the
Profit  Sharing  Plan  are  determined  annually  by the Board of Directors. The
discretionary  contributions  totaled  $775,000,  $725,000  and $660,000 for the
years  ended  December  31,  2006,  2005  and  2004, respectively. The mandatory
contributions  to  the Profit Sharing Plan are made according to a predetermined
set of criteria. Mandatory contributions totaled $727,000, $693,000 and $645,000
for  the  years  ended  December  31, 2006, 2005 and 2004, respectively. Company
employees  are  permitted, within limitations imposed by tax law, to make pretax
contributions to the 401(k) feature of the Profit Sharing Plan. The Company does
not match employee contributions within the 401(k) feature of the Profit Sharing
Plan  and  the


                                       70
<PAGE>
Company  can terminate the Profit Sharing Plan at any time. Benefits pursuant to
the  Profit Sharing Plan vest 0% during the first year of participation, 25% per
full  year  thereafter  and  after  five  years  such benefits are fully vested.

Indexed  Retirement  Plan  and  Life  Insurance  Arrangements
The  Company,  through the Bank, sponsors an Indexed Retirement Plan for certain
employees.  The  Indexed  Retirement Plan is a defined contribution supplemental
executive  retirement  plan and was developed to supplement the Company's Profit
Sharing Plan which, as a qualified plan, has a ceiling on benefits as set by the
Internal  Revenue  Service.

The  Company  made  contributions  to  the  Indexed Retirement Plan of $856,000,
$802,000  and  $751,000  for  the  years ended December 31, 2006, 2005 and 2004,
respectively. The Company's total accrued liability under the Indexed Retirement
Plan  was  $2.83  million  and  $1.94  million as of December 31, 2006 and 2005,
respectively.  The balance in each participant's account is 0% vested during the
first  five  years  of  employment  and becomes fully vested after five years of
employment.

The Company has purchased single premium life insurance policies on the lives of
the  Indexed  Retirement Plan participants as well as certain other employees of
the  Company. These policies provide: (1) financial protection to the Company in
the  event  of the death of a key employee and; (2) since the interest earned on
the  cash  surrender value of the policies is tax exempt as long as the policies
are  used  to  finance  employee  benefits, significant income to the Company to
offset  the  expense  associated  with  the  Indexed  Retirement  Plan and other
employee  benefit  plans. As compensation to each employee for agreeing to allow
the  Company  to  purchase  an insurance policy on his or her life, split dollar
agreements have been entered into with those employees. These agreements provide
for a division of the life insurance death proceeds between the Company and each
employee's  designated  beneficiary  or  beneficiaries.

The  Company  earned  tax exempt interest on the life insurance policies of $1.6
million  for  each  of  the  years ended December 31, 2006, 2005 and 2004. As of
December  31,  2006  and  2005,  the total cash surrender value of the insurance
policies  was  $38.4  million  and  $36.8  million,  respectively.

Deferred  Bonus  and  Executive  Retention  Plans
The  Company,  through the Bank, sponsors Deferred Bonus and Executive Retention
Plans  for  certain  employees.  Both plans grant bonuses based on the long-term
cumulative  profitability  and  increase  in  market  value  of the Company. The
Company  made contributions to both plans of $1.4 million, $966,000 and $248,000
for  the  years  ended  December 31, 2006, 2005 and 2004, respectively. Benefits
pursuant  to  the  Deferred  Bonus  Plan  vest  0%  during  the  first  year  of
participation,  25%  per full year thereafter and after five years such benefits
are fully vested. Benefits pursuant to the Executive Retention Plan vest 10% per
year beginning in 2005 and after ten years are fully vested. The Company's total
accrued  liability  under  the  Deferred Bonus and Executive Retention Plans was
$3.6  million  and  $2.1 million as of December 31, 2006 and 2005, respectively.

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosure about Fair
Value  of  Financial  Instruments."  The  estimated fair value amounts have been
determined  by  the  Company  using available market information and appropriate
valuation  methodologies.  The  use  of  assumptions  and  various  valuation
techniques,  as  well  as the absence of secondary markets for certain financial
instruments,  will  likely  reduce  the  comparability of fair value disclosures
between  financial  institutions.  In  some  cases,  book  value is a reasonable
estimate  of  fair  value  due  to  the  relatively short period of time between
origination  of  the  instrument  and  its  expected  realization.


                                       71
<PAGE>
The  following  table  summarized  the  book  value  and estimated fair value of
financial  instruments  as  of  December  31:

<TABLE>
<CAPTION>
                                                            2006                    2005
                                                     Carrying    Estimated   Carrying    Estimated
ASSETS:(in thousands)                                 Amount    Fair Value    Amount    Fair Value
---------------------------------------------------------------------------------------------------
<S>                                                 <C>         <C>          <C>        <C>
  Cash and Cash Equivalents                         $   47,006  $    47,006  $  50,669  $    50,669
  Investment Securities Held-to-Maturity               111,240      110,132    109,911      108,060
  Investment Securities Available-for-Sale             132,627      132,627    158,029      158,029
  Loans, Net of Deferred Loan Origination Fees       1,046,912    1,025,363    973,257      971,763
  Cash Surrender Value of Life Insurance Policies       38,444       38,444     36,799       36,799
  Accrued Interest Receivable                            8,537        8,537      7,880        7,880
LIABILITIES:
  Deposits:
    Non-Interest Bearing                               295,142      295,142    325,745      325,745
    Interest-Bearing                                   903,386      902,019    777,595      707,892
  Federal Funds Purchased                                    -            -        650          650
  Federal Home Loan Bank Advances                       47,532       47,555     98,847       99,522
  Subordinated Debentures                               10,310       10,281     10,310       10,365
  Accrued Interest Payable                               3,897        3,897      2,133        2,133
</TABLE>

The  methods  and  assumptions  used to estimate the fair value of each class of
financial  instrument  listed  in  the  table  above  are  explained  below.

Cash  and  Cash  Equivalents: The carrying amounts reported in the balance sheet
for  cash and due from banks and federal funds sold are a reasonable estimate of
fair  value.

Investment Securities: Fair values for investment securities are based on quoted
market  prices, where available. If quoted market prices are not available, fair
values  are  based  on  quoted  market  prices  of  comparable  instruments.

Loans:  For  variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for  fixed-rate  loans  are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of  similar  credit  quality. The carrying amount of accrued interest receivable
approximates  its  fair  value.

Cash  Surrender  Value  of  Life  Insurance  Policies:  The  fair  value of life
insurance  policies are based on cash surrender values at each reporting date as
provided  by  the  insurers.

Deposit  Liabilities:  The  fair  value  of  demand  deposits,  interest bearing
transaction  accounts  and savings accounts is the amount payable on demand. The
fair value of fixed-maturity certificates of deposit is estimated by discounting
expected  future cash flows utilizing interest rates currently being offered for
deposits  of  similar  remaining  maturities.  The  carrying  amount  of accrued
interest  payable  approximates  its  fair  value.

Borrowings:  The  fair  value  of  federal  funds purchased and other short-term
borrowings  is  approximated  by the book value. The fair value for Federal Home
Loan  Bank  borrowings  is  determined  using  discounted  future  cash  flows.

Subordinated  Debentures: Fair values of subordinated debentures were determined
based on the current market value of like-kind instruments of a similar maturity
and  structure.

Limitations:  Fair  value  estimates  presented  herein  are  based on pertinent
information  available  to management as of December 31, 2006 and 2005. Although
management  is  not  aware  of  any  factors that would significantly affect the
estimated  fair  value  amounts,  such  amounts  have  not  been comprehensively
revalued  for  purposes  of  these  financial  statements  since  that date, and
therefore,  current  estimates  of  fair value may differ significantly from the
amounts  presented  above.


                                       72
<PAGE>
13. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The  Company  uses  derivative  instruments  to limit its exposure to changes in
interest rates. The Company has developed a Hedging Policy to provide guidelines
that  address  instruments  to  be  used,  authority  limits,  implementation
guidelines,  guidelines  for  evaluating  hedge  alternatives,  reporting
requirements,  and  the  credit  worthiness  of  the  instrument's counterparty.

The  Company  reviews  compliance  with  these guidelines annually with the ALCO
Committee and the Board of Directors. The guidelines may change as the Company's
business  needs  dictate.

In  January of 2004, the Company terminated an interest rate swap agreement with
a  notional  amount of $12 million and maturity of December 8, 2006. As a result
of  this  termination,  the  Company  recorded a deferred gain of $112,500 to be
amortized over the original remaining life of the interest rate swap as follows:
$37,500  in  2004,  $37,500  in  2005  and  $37,500  in  2006.

As required, the Company records in the balance sheet the interest rate swaps at
fair  value.  Because  the transactions meet the criteria for a cash-flow hedge,
changes  in fair value are reported in other comprehensive income (loss). In the
event  that  a portion of the hedge becomes ineffective, the ineffective portion
of  the  derivative's  change  in  fair  value will be immediately recognized in
earnings.

14. 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  and  to  reduce  its  own exposure to fluctuations in interest rates.
These  instruments  include  commitments to extend credit, letters of credit and
financial  guarantees  that are not reflected in the Consolidated Balance Sheet.

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 $10,929,000 at December 31, 2006,
and  $11,541,000 at December 31, 2005. Outstanding standby letters of credit had
original  terms  ranging  from  1  to  34  months with final expiration in 2009.
Commitments  generally  have fixed expiration dates or other termination clauses
and  may  require  payment  of  a  fee.  Undisbursed  loan  commitments  totaled
$442,544,000  and  $447,685,000  as of December 31, 2006 and 2005, 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.

The  Company  is obligated under a number of noncancellable operating leases for
premises  and  equipment  used  for  banking  purposes.  Minimum  future  rental
commitments  under  noncancellable operating leases as of December 31, 2006 were
$475,000,  $353,000, $353,000, $310,000, and $269,000 for the years 2007 to 2011
and  $860,000  thereafter.

In  the  ordinary course of business, the Company becomes involved in litigation
arising  out  of  its normal business activities. Management, after consultation
with legal counsel, believes that the ultimate liability, if any, resulting from
the  disposition  of  such  claims  would  not  be  material  in relation to the
financial  position  of  the  Company.

The  Company  may  be  required to maintain average reserves on deposit with the
Federal  Reserve  Bank  primarily  based  on deposits outstanding. There were no
reserve  requirements  during  2006  or  2005.


                                       73
<PAGE>
15. RECENT ACCOUNTING DEVELOPMENTS

In  June  2006, FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income  Taxes  -  an  Interpretation  of  FASB  Statement  109  (FIN 48). FIN 48
clarifies  the  accounting  for  uncertainty  in  income  taxes  recognized in a
company's  financial  statements  in  accordance  with  FASB  Statement No. 109,
Accounting  for Income Taxes. FIN 48 also prescribes a recognition threshold and
measurement  standard for the financial statement recognition and measurement of
an  income  tax  position  taken  or  expected  to  be taken in a tax return. In
addition,  FIN  48  provides guidance on derecognition, classification, interest
and  penalties,  accounting  in  interim  periods,  disclosure  and  transition.

The  Company  presently  recognizes  income  tax positions based on management's
estimate of whether it is reasonably possible that a liability has been incurred
for  unrecognized  income  tax  benefits  by  applying  FASB  Statement  No.  5,
Accounting for Contingencies. The provisions of FIN 48 will be effective for the
Company  on  January  1,  2007  and  are to be applied to all tax positions upon
initial  application  of  this  standard.  Only  tax  positions  that  meet  the
more-likely-than-not  recognition  threshold  at  the  effective  date  may  be
recognized  or continue to be recognized upon adoption. The cumulative effect of
applying  the  provisions  of  FIN  48  will be reported as an adjustment to the
opening balance of retained earnings for the fiscal year of adoption. Management
does  not  expect  the  adoption  of  FIN  48  to  have a material impact on the
Company's  financial  position  or  results  of  operations.

In  September  2006,  the  FASB issued Statement No. 157 (SFAS 157), "Fair Value
Measurements."  SFAS  157  defines  fair  value,  establishes  a  framework  for
measuring fair value and expands disclosures about fair value measurements. SFAS
157  applies  whenever other standards require (or permit) assets or liabilities
to  be  measured  at fair value but does not expand the use of fair value in any
new  circumstances. In this standard, the FASB clarifies the principle that fair
value  should  be  based  on  the assumptions market participants would use when
pricing  the  asset  or  liability.  In  support  of  this  principle,  SFAS 157
establishes  a  fair  value  hierarchy  that prioritizes the information used to
develop  those  assumptions.  The  provisions  of  SFAS  157  are  effective for
financial  statements  issued for fiscal years beginning after November 15, 2007
and  interim  periods within those fiscal years. Management is in the process of
evaluating  the  impact  the  adoption  of  SFAS 157 will have on the results of
operations.

In  September  2006,  the  FASB ratified the consensuses reached by the Emerging
Issues Task Force (the Task Force) on Issue No. 06-5 (EITF 06-5) "Accounting for
the  Purchases of Life Insurance - Determining the Amount that Could be Realized
in  Accordance  with  FASB  Technical  Bulletin  No.85-4"  (FTB  85-4). FTB 85-4
indicates  that  the  amount of the asset included in the balance sheet for life
insurance  contracts  within  its  scope  should  be  "the  amount that could be
realized  under  the  insurance  contract  as  of  the  date of the statement of
financial  position."  Questions  arose  in applying the guidance in FTB 85-4 to
whether  "the  amount  that could be realized" should consider 1) any additional
amounts included in the contractual terms of the insurance policy other than the
cash  surrender  value  and  2)  the contractual ability to surrender all of the
individual-life  policies  (or certificates in a group policy) at the same time.
EITF 06-5 determined that "the amount that could be realized" should 1) consider
any  additional  amounts  included in the contractual terms of the policy and 2)
assume  the  surrender  of  an  individual-life  by  individual-life  policy (or
certificate  by  certificate  in  a  group policy. Any amount that is ultimately
realized by the policy holder upon the assumed surrender of the final policy (or
final certificate in a group policy) shall be included in the "amount that could
be  realized." An entity should apply the provisions of EITF 06-5 through either
a  change  in  accounting  principle  through  a cumulative-effect adjustment to
retained  earnings  as  of  the beginning of the year of adoption or a change in
accounting principle through retrospective application to all prior periods. The
provisions  of EITF 06-5 are effective for fiscal years beginning after December
15,  2006. Management is in the process of evaluating the impact the adoption of
EITF  06-5  will  have  on  the  results  of  operations.

In  September  2006, the FASB ratified the consensuses reached by the Task Force
on  Issue  No.  06-4  (EITF  06-4)  "Accounting  for  Deferred  Compensation and
Postretirement  Benefit  Aspects  of  Endorsement  Split-Dollar  Life  Insurance
Arrangements."  A  question  arose  when  an employer enters into an endorsement
split-dollar  life  insurance arrangement related to whether the employer should
recognize  a liability for the future benefits or premiums to be provided to the
employee.  EITF 06-4 indicates that an employer should recognize a liability for
future  benefits  and  that  a liability for the benefit obligation has not been
settled  through  the  purchase  of an endorsement type policy. An entity should
apply  the  provisions  of  EITF  06-4  either  through  a  change in accounting
principle  through a cumulative-effect adjustment to retained earnings as of the
beginning  of  the  year of adoption or a change in accounting principle through
retrospective  application to all prior periods. The provisions of EITF 06-4 are
effective


                                       74
<PAGE>
for fiscal years beginning after December 15, 2007. Management is in the process
of  evaluating  the impact the adoption of EITF 06-4 will have on the results of
operations.

16. PARENT COMPANY FINANCIAL INFORMATION

The  financial  information  below  is  presented  as  of  December 31, 2006 and
December  31,  2005.

<TABLE>
<CAPTION>
                           Farmers & Merchants Bancorp
                             Condensed Balance Sheets

(in thousands)                                                   2006      2005
---------------------------------------------------------------------------------
<S>                                                            <C>       <C>
Cash                                                           $    386  $    556
Investment in Farmers & Merchants Bank of Central California    135,169   131,170
Investment Securities                                             4,203       310
Capital Leases                                                      826       519
Other Assets                                                      2,336     1,630
---------------------------------------------------------------------------------
    TOTAL ASSETS                                               $142,920  $134,185
=================================================================================

Subordinated Debentures                                        $ 10,310  $ 10,310
Liabilities                                                         270       227
Shareholders' Equity                                            132,340   123,648
---------------------------------------------------------------------------------
    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                 $142,920  $134,185
=================================================================================
</TABLE>


<TABLE>
<CAPTION>
                                         Farmers & Merchants Bancorp
                                         Condensed Income Statements

                                                                               Year Ended December 31,
(in thousands)                                                               2006        2005        2004
------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>         <C>         <C>
Equity in Undistributed Earnings in Farmers & Merchants Bank of Central
California                                                                $   2,973   $   9,160   $   9,243
Dividends from Subsidiary                                                    18,600      10,000       7,350
Interest Income                                                                  67          59          27
Other Expenses, Net                                                          (1,695)     (1,327)       (285)
Tax Benefit                                                                     684         536         115
------------------------------------------------------------------------------------------------------------
    NET INCOME                                                            $  20,629   $  18,428   $  16,450
============================================================================================================
</TABLE>


                                       75
<PAGE>
<TABLE>
<CAPTION>
                                              Farmers & Merchants Bancorp
                                          Condensed Statements of Cash Flows

                                                                                        Year Ended December 31,
(in thousands)                                                                         2006        2005        2004
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>         <C>         <C>
Cash Flows from Operating Activities:
Net Income                                                                          $  20,629   $  18,428   $  16,450
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
  Equity in Undistributed Net Earnings from Subsidiary                                 (2,973)     (9,160)     (9,243)
  Gain on Sale of Securities                                                                -        (143)     (1,095)
  Net Increase in Other Assets                                                           (767)       (522)       (109)
  Net Increase (Decrease) in Other Liabilities                                             43        (136)        189
----------------------------------------------------------------------------------------------------------------------
      Net Cash Provided by Operating Activities                                        16,932       8,467       6,192
----------------------------------------------------------------------------------------------------------------------
Investing Activities:
  Investment in Bank Subsidiary                                                             -           -      (3,180)
  Securities Purchased                                                                 (3,893)          -           -
  Securities Sold or Matured                                                                -         251       1,815
  Change in Capital Leases                                                               (307)        266        (451)
----------------------------------------------------------------------------------------------------------------------
      Net Cash Used by Investing Activities                                            (4,200)        517      (1,816)
----------------------------------------------------------------------------------------------------------------------
Financing Activities:
  Stock Repurchased                                                                    (5,936)     (4,016)     (3,107)
  Cash Dividends                                                                       (6,966)     (6,656)     (5,930)
----------------------------------------------------------------------------------------------------------------------
      Net Cash Used by Financing Activities                                           (12,902)    (10,672)     (9,037)
----------------------------------------------------------------------------------------------------------------------
    Increase in Cash and Cash Equivalents                                                (170)     (1,688)     (4,661)
    Cash and Cash Equivalents at Beginning of Year                                        556       2,244       6,905
----------------------------------------------------------------------------------------------------------------------
      Cash and Cash Equivalents at End of Year                                      $     386   $     556   $   2,244
======================================================================================================================
</TABLE>

17. LONG-TERM SUBORDINATED DEBENTURES

In  December  2003,  the  Company  formed  a  wholly owned Connecticut statutory
business  trust,  FMCB  Statutory  Trust  I  ("Statutory Trust I"), which issued
$10,000,000 of guaranteed preferred beneficial interests in the Company's junior
subordinated  deferrable interest debentures (the "Trust Preferred Securities").
These  debentures  qualify  as  Tier  1  capital  under  Federal  Reserve  Board
guidelines.  All  of the common securities of Statutory Trust I are owned by the
Company.  The  proceeds from the issuance of the common securities and the Trust
Preferred  Securities  were used by FMCB Statutory Trust to purchase $10,310,000
of  junior  subordinated  debentures of the Company, which carry a floating rate
based  on  three-month LIBOR plus 2.85%. The debentures represent the sole asset
of  Statutory  Trust  I.  The  Trust  Preferred  Securities  accrue  and  pay
distributions  at  a  floating rate of three-month LIBOR plus 2.85% per annum of
the  stated  liquidation  value  of $1,000 per capital security. The Company has
entered  into  contractual  arrangements  which,  taken  collectively, fully and
unconditionally  guarantee  payment  of:  (i)  accrued  and unpaid distributions
required to be paid on the Trust Preferred Securities; (ii) the redemption price
with  respect  to  any  Trust  Preferred  Securities  called  for  redemption by
Statutory  Trust  I;  and  (iii)  payments  due  upon a voluntary or involuntary
dissolution, winding up or liquidation of Statutory Trust I. The Trust Preferred
Securities  are  mandatorily  redeemable  upon  maturity  of  the  subordinated
debentures  on  December 17, 2033, or upon earlier redemption as provided in the
indenture.  The  Company  has  the  right  to redeem the subordinated debentures
purchased  by  Statutory  Trust I, in whole or in part, on or after December 17,
2008. As specified in the indenture, if the subordinated debentures are redeemed
prior  to  maturity,  the  redemption price will be the principal amount and any
accrued  but  unpaid  interest.  Additionally,  if  the Company decided to defer
interest  on  the  subordinated debentures, the Company would be prohibited from
paying  cash  dividends  on  the  Company's  common  stock.


                                       76
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

The  Company  maintains  controls  and  procedures  designed  to ensure that all
relevant  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.

Under  the  supervision  and with the participation of management, including the
Company's  Chief  Executive  Officer  and  Chief  Financial Officer, the Company
conducted  an  evaluation  of  the  effectiveness  of  our internal control over
financial  reporting as of December 31, 2006 based on the framework in "Internal
Control  -  Integrated  Framework"  issued  by  the  Committee  of  Sponsoring
Organizations of the Treadway Commission. Based upon that evaluation, management
concluded that our internal control over financial reporting was effective as of
December  31,  2006.

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.

Management's report on internal control over financial reporting is set forth on
page  49  in  "Item  8.  Financial  Statements  and  Supplementary Data," and is
incorporated  herein  by reference. Management's assessment of the effectiveness
of  the  Company's internal control over financial reporting has been audited by
Perry-Smith  LLP, the independent registered public accounting firm that audited
the  Company's  2006 Consolidated Financial Statements, as stated in its report,
which is set forth on page 50 in "Item 8. Financial Statements and Supplementary
Data,"  and  is  incorporated  herein  by  reference.

ITEM 9B. OTHER INFORMATION

None

PART  III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Set  forth  below is certain information regarding the Executive Officers of the
Company  and/or  Bank:

<TABLE>
<CAPTION>
NAME AND POSITION(S)                   AGE         PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
--------------------                   ---         -----------------------------------------------
<S>                                    <C>  <C>
Kent A. Steinwert                       54  President & Chief Executive Officer of the Company and
President                                   Bank.
& Chief Executive Officer
of the Company and Bank

Richard S. Erichson                     59  Executive Vice President & Senior Credit Officer of the
Executive Vice President                    Company and Bank.
& Senior Credit Officer
of the Company and Bank


                                       77
<PAGE>
Deborah E. Hodkin                       44  Executive Vice President & Chief Administrative Officer of
Executive Vice President & Chief            the Company and Bank.
Administrative Officer and Secretary
of the Company and Bank

Chris C. Nelson                         52  Executive Vice President & Head of Retail Banking of the
Executive Vice President & Head of          Bank.
Retail Banking of the Bank

Stephen W. Haley                        53  Executive Vice President & Chief Financial Officer of the
Executive Vice President                    Company and Bank since April 2003, prior thereto, President
& Chief Financial Officer of the            and Chief Operating Officer of Community West Bancshares.
Company and the Bank

Kenneth W. Smith                        47  Executive Vice President & Head of Business Banking of the
Executive Vice President & Head of          Bank since January 2004, prior thereto, Senior Vice President
Business Banking of the Bank                and Credit Administrator of the Bank.
</TABLE>

Also,  see  "Election  of  Directors"  and "Compliance with Section 16(a) of the
Exchange  Act"  in  the Company's definitive proxy statement for the 2007 Annual
Meeting  of  Shareholders as filed with the Commission and which is incorporated
herein  by  reference.

The Company has adopted a Code of Conduct which complies with the Code of Ethics
requirements  of  the  Securities and Exchange Commission. A copy of the Code of
Conduct  is  posted  on  the  Company's website. The Company intends to disclose
promptly  any amendment to, or waiver from any provision of, the Code of Conduct
applicable  to  senior  financial officers, and any waiver from any provision of
the  Code  of  Conduct  applicable  to  Directors, on its website. The Company's
website  address  is  www.fmbonline.com.
                      -----------------

During  2006,  there  were  no  changes  in  procedures  for  the  nomination of
Directors.

ITEM 11. EXECUTIVE COMPENSATION

The  information  required  by Item 11 of Form 10-K is incorporated by reference
from  the  information contained in the Company's definitive proxy statement for
the  2007  Annual  Meeting  of  Shareholders  which  will  be  filed pursuant to
Regulation  14A.

ITEM  12.  SECURITY  OWNERSHIP  OF  CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED  STOCKHOLDER  MATTERS

The  information  required  by Item 12 of Form 10-K is incorporated by reference
from  the  information contained in the Company's definitive proxy statement for
the  2007  Annual  Meeting  of  Shareholders  which  will  be  filed pursuant to
Regulation  14A.  The  Company does not have any equity compensation plans which
require  disclosure  under  Item  201(d)  of  Regulation  S-K.

ITEM  13.  CERTAIN  RELATIONSHIPS  AND  RELATED  TRANSACTIONS,  AND  DIRECTOR
INDEPENDENCE

The  information  required  by Item 13 of Form 10-K is incorporated by reference
from  the  information contained in the Company's definitive proxy statement for
the  2007  Annual  Meeting  of  Shareholders  which  will  be  filed pursuant to
Regulation  14A.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The  information  required  by Item 14 of Form 10-K is incorporated by reference
from  the  information contained in the Company's definitive proxy statement for
the  2007  Annual  Meeting  of  Shareholders  which  will  be  filed pursuant to
Regulation  14A.


                                       78
<PAGE>
PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     (a)  (1) Financial Statements. Incorporated herein by reference, are listed
          in  Item  8  hereof.
          (2) Financial Statement Schedules. None

     (b)  See  Index  to  Exhibits  on  Page  79

SIGNATURES

Pursuant  to  the requirements of Section 13 or 15(d) 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
                                        (Registrant)

                                   By   /s/ Stephen W. Haley
                                        -------------------------------
Dated:  March 9, 2007                   Stephen W. Haley
                                        Executive Vice President &
                                        Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has  been  signed below by the following persons on behalf of the registrant and
in  the  capacities  indicated  on  March  9,  2007.

/s/ Kent A. Steinwert
-------------------------------------      President and Chief Executive Officer
Kent A. Steinwert                          (Principal Executive Officer)

/s/ Stephen W. Haley
-------------------------------------      Executive Vice President & Chief
Stephen W. Haley                           Financial Officer
                                          (Principal Financial and Accounting
                                           Officer)

/s/ Ole R. Mettler                         /s/ James E. Podesta
-------------------------------------      -------------------------------------
Ole R. Mettler, Chairman                   James E. Podesta, Director

/s/ Stewart Adams, Jr.                     /s/ Kevin Sanguinetti
-------------------------------------      -------------------------------------
Stewart Adams, Jr., Director               Kevin Sanguinetti, Director

/s/ Ralph Burlington                       /s/ Carl Wishek, Jr.
-------------------------------------      -------------------------------------
Ralph Burlington, Director                 Carl Wishek, Jr., Director

/s/ Edward Corum, Jr.                       /s/ Calvin Suess
-------------------------------------      -------------------------------------
Edward Corum, Jr., Director                Calvin Suess, Director

/s/ Robert F. Hunnell
-------------------------------------
Robert F. Hunnell, Director


                                       79
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
-----------------

   Exhibit No.                                           Description
   ----------                                            -----------
<S>                 <C>

       3(i)         Amended and Restated Certificate of Incorporation of Farmers & Merchants Bancorp, filed on
                    Registrant's Form 8-K dated April 30, 1999, is incorporated herein by reference.
       3(ii)        By-Laws of Farmers & Merchants Bancorp, filed on Registrant's Form 8-K dated April 30, 1999,
                    Is incorporated herein by reference.
       10.1         Employment Agreement dated January 1, 2005, between Farmers & Merchants Bank of Central
                    California and Kent A. Steinwert, filed on Registrant's Form 10-K for the year ended December
                    31, 2004, is incorporated herein by reference.
       10.2         Employment Agreement dated January 1, 2005, between Farmers & Merchants Bank of Central
                    California and Chris C. Nelson, filed on Registrant's Form 10-K for the year ended December 31,
                    2004, is incorporated herein by reference.
       10.3         Employment Agreement dated January 1, 2005, between Farmers & Merchants Bank of Central
                    California and Deborah E. Hodkin, filed on Registrant's Form 10-K for the year ended December
                    31, 2004, is incorporated herein by reference.
       10.4         Employment Agreement dated January 1, 2005, between Farmers & Merchants Bank of Central
                    California and Kenneth W. Smith, filed on Registrant's Form 10-K for the year ended December
                    31, 2004, is incorporated herein by reference.
       10.5         Employment Agreement dated January 1, 2005, between Farmers & Merchants Bank of Central
                    California and Richard S. Erichson, filed on Registrant's Form 10-K for the year ended December
                    31, 2004, is incorporated herein by reference.
       10.6         Employment Agreement dated January 1, 2005, between Farmers & Merchants Bank of Central
                    California and Stephen W. Haley, filed on Registrant's Form 10-K for the year ended December
                    31, 2004, is incorporated herein by reference.
       10.15        2005 Deferred Bonus Plan of Farmers & Merchants Bank of Central California executed May 3,
                    2005, filed on Registrant's Form 10-Q for the quarter ended March 31, 2005, is incorporated
                    herein by reference.
       10.16        Executive Retention Plan of Farmers & Merchants Bank of Central California executed May 3,
                    2005, filed on Registrant's Form 10-Q for the quarter ended March 31, 2005, is incorporated
                    herein by reference.
       10.17        Amended and Restated Indexed Retirement Plan of Farmers & Merchants Bank of Central
                    California adopted as of March 7, 2006, filed on Registrant's Form 10-K for the year ended
                    December 31, 2005, is incorporated herein by reference.
       10.18        Deferred Compensation Plan of Farmers & Merchants Bank of Central California, executed
                    October 17, 2006, filed on the Registrants Form 10-Q for the quarter ended September 30, 2006,
                    is incorporated herein by reference.
        14          Code of Conduct of Farmers & Merchants Bancorp, filed on Registrant's Form 10-K for the year
                    ended December 31, 2003, is incorporated herein by reference.
        18          Letter regarding change in accounting principle, filed on Registrant's Form 10-K for the year
                    ended December 31, 2004, is incorporated herein by reference.
        21          Subsidiaries of the Registrant, filed on Registrant's Form 10-K for the year ended December 31,
                    2003, is incorporated herein by reference.
       31(a)        Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                    Act of 2002.
       31(b)        Certification of the 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.
</TABLE>


                                       80