FARMERS & MERCHANTS BANCORP 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 71 Consolidated Financial Statements Consolidated Balance Sheets – December 31, 2020, and 2019 73 Consolidated Statements of Income – Years ended December 31, 2020, 2019 and 2018 74 Consolidated Statements of Comprehensive Income – Years Ended December 31, 2020, 2019 and 2018 75 Consolidated Statements of Changes in Shareholders' Equity – Years ended December 31, 2020, 2019 and 2018 76 Consolidated Statements of Cash Flows - Years Ended December 31, 2020, 2019 and 2018 77 Notes to the Consolidated Financial Statements 78 70 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Farmers & Merchants Bancorp Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Farmers & Merchants Bancorp and subsidiaries (the “Company”) as of December 31, 2020 and 2019 , the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020 , and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2020 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019 , and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 , in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020 , based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 71 Table of Contents Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses As described in Notes 1 and 6 to the consolidated financial statements, the Company’s consolidated allowance for credit losses balance was $58.8 million at December 31, 2020. The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company’s loan & lease portfolio as of the balance sheet date. The overall allowance consists of three primary components: specific reserves related to impaired loans & leases; general reserves for inherent losses related to loans & leases that are not impaired; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors. The determination of the general reserve for loans & leases that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors that include economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, the character of the loan & lease portfolio, and probable losses inherent in the portfolio taken as a whole. We identified management’s risk ratings of loans and the estimation of qualitative factors, both of which are used in the allowance for credit losses calculation, as a critical audit matter. The Company assigns a risk rating to all loans & leases and periodically performs detailed reviews of all such loans & leases over a certain threshold to identify credit risks and assess overall collectability. For smaller balance loans & leases, such as consumer and residential real estate, a credit grade is established at inception, and then updated only when the loan or lease becomes contractually delinquent or when the borrower requests a modification. For larger balance loans, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans & leases. The qualitative factors are used to estimate losses related to factors that are not captured in the historical loss rates such as economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, and the character of the loan & lease portfolio, and are based on management’s evaluation of available internal and external data and involves significant management judgement. Auditing management’s judgments regarding the determination of risk ratings and qualitative factors applied to the allowance for credit losses involved a high degree of subjectivity. The primary procedures we performed to address this critical audit matter included: • Testing the design, implementation, and operating effectiveness of controls relating to management’s calculation of the allowance for credit losses, including controls over the accuracy of risk ratings of loans and the determination of the qualitative factors used. • Testing a risk-based targeted selection of loans to gain substantive evidence that the Company is appropriately rating these loans in accordance with its policies, and that the risk ratings for the loans are reasonable. • Performing a loan grade analysis by loan type to determine whether any large fluctuations occurred that could not be reasonably explained. • Obtaining management’s analysis and supporting documentation related to the qualitative factors, and testing whether the qualitative factors used in the calculation of the allowance for credit losses are supported by the analysis provided by management and are used in a manner consistent with management’s established policies and procedures. • Performing an independent sensitivity analysis to evaluate the reasonableness of the qualitative factors used by management to account for inherent losses that are not captured in the calculation of the allowance for credit losses based on historical loss rates alone. /s/ Moss Adams LLP San Francisco, California March 15, 2021 We have served as the Company’s auditor since 2013. 72 Table of Contents Farmers & Merchants Bancorp Consolidated Balance Sheets (in thousands except share and per share data) December 31, Assets 2020 2019 Cash and Cash Equivalents: Cash and Due from Banks $ 66,327 $ 71,564 Interest Bearing Deposits with Banks 317,510 223,194 Total Cash and Cash Equivalents 383,837 294,758 Investment Securities: Available-for-Sale, amortized cost $ 789,175 , and $ 502,693 , respectively 807,732 507,386 Held-to-Maturity, fair value $ 70,049 and $ 61,097 , respectively 68,933 60,229 Total Investment Securities 876,665 567,615 Loans & Leases: 3,099,592 2,673,027 Less: Allowance for Credit Losses 58,862 55,012 Loans& Leases, Net 3,040,730 2,618,015 Premises and Equipment, Net 50,147 45,271 Bank Owned Life Insurance, Net 69,235 67,148 Interest Receivable and Other Assets 129,839 129,023 Total Assets $ 4,550,453 $ 3,721,830 Liabilities Deposits: Demand $ 1,475,425 $ 1,067,187 Interest-Bearing Transaction 902,487 697,952 Savings and Money Market 1,260,487 994,958 Time 421,868 517,922 Total Deposits 4,060,267 3,278,019 Subordinated Debentures 10,310 10,310 Interest Payable and Other Liabilities 56,211 64,205 Total Liabilities 4,126,788 3,352,534 Commitments & Contingencies (See Note 19) Shareholders’ Equity Preferred Stock: No Par Value, 1,000,000 Shares Authorized, None Issued or Outstanding - - Common Stock: Par Value $ 0.01 , 7,500,000 Shares Authorized, 789,646 and 793,033 Shares Issued and Outstanding at December 31, 2020 and 2019, respectively. 8 8 Additional Paid-In Capital 77,516 79,947 Retained Earnings 333,070 286,036 Accumulated Other Comprehensive Income, Net of Taxes 13,071 3,305 Total Shareholders’ Equity 423,665 369,296 Total Liabilities and Shareholders’ Equity $ 4,550,453 $ 3,721,830 The accompanying notes are an integral part of these consolidated financial statements 73 Table of Contents Farmers & Merchants Bancorp Consolidated Statements of Income (in thousands except per share data) Year Ended December 31, 2020 2019 2018 Interest Income Interest and Fees on Loans & Leases $ 143,383 $ 137,237 $ 119,837 Interest on Deposits with Banks 1,207 4,909 2,755 Interest on Investment Securities: Taxable 12,391 9,911 9,257 Exempt from Federal Tax 1,671 1,651 1,604 Total Interest Income 158,652 153,708 133,453 Interest Expense Deposits 9,113 12,640 7,425 Borrowed Funds - - 1 Subordinated Debentures 378 554 524 Total Interest Expense 9,491 13,194 7,950 Net Interest Income 149,161 140,514 125,503 Provision for Credit Losses 4,500 200 5,533 Net Interest Income After Provision for Credit Losses 144,661 140,314 119,970 Non-Interest Income Service Charges on Deposit Accounts 2,637 3,673 3,479 Net Gain (Loss) on Sales Investment Securities 40 1 ( 1,260 ) Increase in Cash Surrender Value of Bank Owned Life Insurance 2,088 2,031 1,900 Debit Card and ATM Fees 5,536 5,120 4,365 Net Gain on Deferred Compensation Investments 1,777 2,625 1,088 Other 3,618 3,791 5,647 Total Non-Interest Income 15,696 17,241 15,219 Non-Interest Expense Salaries and Employee Benefits 56,950 55,250 50,054 Net Gain on Deferred Compensation Plan Investments 1,777 2,625 1,088 Occupancy 4,640 4,295 3,905 Equipment 4,994 4,921 4,303 Marketing 922 1,254 1,232 Legal 128 2,347 968 FDIC Insurance 517 624 912 Acquisition Expenses - - 2,933 Other 12,478 10,926 10,064 Total Non-Interest Expense 82,406 82,242 75,459 Income Before Provision for Income Taxes 77,951 75,313 59,730 Provision for Income Taxes 19,217 19,277 14,203 Net Income $ 58,734 $ 56,036 $ 45,527 Basic and Diluted Earnings Per Common Share $ 74.03 $ 71.18 $ 56.82 The accompanying notes are an integral part of these consolidated financial statements 74 Table of Contents FARMERS & MERCHANTS BANCORP Consolidated Statements of Comprehensive Income (in thousands) Year Ended December 31, 2020 2019 2018 Net Income $ 58,734 $ 56,036 $ 45,527 Other Comprehensive Loss Net Unrealized Gain (Loss) on Available-for-Sale Securities 13,905 8,936 ( 4,343 ) Deferred Tax (Benefit) Expense Related to Unrealized (Gain) Losses ( 4,099 ) ( 2,642 ) 1,284 Reclassification Adjustment for Realized (Gain) Loss on Sales of Available-for-Sale Securities Included in Net Income ( 40 ) ( 1 ) 1,260 Deferred Tax Related to Reclassification Adjustment - - ( 372 ) Total Other Comprehensive Income (Loss) 9,766 6,293 ( 2,171 ) Comprehensive Income $ 68,500 $ 62,329 $ 43,356 The accompanying notes are an integral part of these consolidated financial statements 75 Table of Contents Farmers & Merchants Bancorp Consolidated Statements of Changes in Shareholders’ Equity (in thousands except share and per share data) Common Shares Outstanding Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Total Shareholders’ Equity Balance, January 1, 2018 812,304 $ 8 $ 93,624 $ 206,845 $ ( 817 ) $ 299,660 Net Income 45,527 45,527 Cash Dividends Declared on Common Stock ($ 13.90 per share) ( 11,151 ) ( 11,151 ) Repurchase of Common Stock ( 44,503 ) ( 31,152 ) ( 31,152 ) Issuance of Common Stock 15,920 10,502 10,502 Change in Net Unrealized Loss on Securities Available-for-Sale ( 2,171 ) ( 2,171 ) Balance, December 31, 2018 783,721 $ 8 $ 72,974 $ 241,221 $ ( 2,988 ) $ 311,215 Net Income 56,036 56,036 Cash Dividends Declared on Common Stock ($ 14.20 per share) ( 11,221 ) ( 11,221 ) Issuance of Common Stock 9,312 6,973 6,973 Change in Net Unrealized Gain on Securities Available-for-Sale 6,293 6,293 Balance, December 31, 2019 793,033 $ 8 $ 79,947 $ 286,036 $ 3,305 $ 369,296 Net Income 58,734 58,734 Cash Dividends Declared on Common Stock ($ 14.75 per share) ( 11,700 ) ( 11,700 ) Repurchase of Common Stock ( 3,910 ) ( 2,834 ) ( 2,834 ) Issuance of Common Stock 523 403 403 Change in Net Unrealized Gain on Securities Available-for-Sale 9,766 9,766 Balance, December 31, 2020 789,646 $ 8 $ 77,516 $ 333,070 $ 13,071 $ 423,665 The accompanying notes are an integral part of these consolidated financial statements 76 Table of Contents Farmers & Merchants Bancorp Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2020 2019 2018 Operating Activities Net Income $ 58,734 $ 56,036 $ 45,527 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Credit Losses 4,500 200 5,533 Depreciation and Amortization 2,769 2,756 2,421 (Benefit) Provision for Deferred Income Taxes ( 1,962 ) ( 3,254 ) 5,462 Net Amortization of Investment Security Premiums & Discounts 1,159 510 861 Amortization of Core Deposit Intangible 626 639 228 Accretion of Discount on Acquired Loans ( 166 ) ( 47 ) ( 153 ) Net (Gain) Loss on Sale of Investment Securities ( 40 ) ( 1 ) 1,260 Net Loss (Gain) on Sale of Property & Equipment ( 32 ) 87 ( 273 ) Earnings from Equity Investment - - ( 66 ) Dividends from Equity Investment - - 63 Gain on Remeasurement of Previously Held Equity Investment - - ( 997 ) Net Change in Operating Assets & Liabilities: Net (Increase) Decrease in Interest Receivable and Other Assets ( 3,333 ) 18,949 ( 2,098 ) Net (Decrease) Increase in Interest Payable and Other Liabilities ( 4,136 ) 4,983 6 Net Cash Provided by Operating Activities 58,119 80,858 57,774 Investing Activities: Purchase of Investment Securities Available-for-Sale ( 670,550 ) ( 652,280 ) ( 465,414 ) Proceeds from Sold, Matured, or Called Securities Available-for-Sale 383,257 644,244 550,727 Purchase of Investment Securities Held-to-Maturity ( 22,020 ) ( 16,376 ) ( 9,813 ) Proceeds from Matured, or Called Securities Held-to-Maturity 13,299 10,871 10,647 Net Loans & Leases Paid, Originated or Acquired ( 427,573 ) ( 102,413 ) ( 276,066 ) Principal Collected on Loans & Leases Previously Charged Off 524 220 158 Cash Paid for Acquisition, Net - - ( 5,987 ) Additions to Premises and Equipment, Net ( 7,709 ) ( 15,537 ) ( 4,577 ) Purchase of Other Investments ( 6,063 ) ( 4,400 ) ( 5,750 ) Proceeds from Sale of Property & Equipment 81 41 986 Net Cash Used in Investing Activities ( 736,754 ) ( 135,630 ) ( 205,089 ) Financing Activities: Net Increase in Deposits 782,248 215,187 148,033 Stock Repurchases ( 2,834 ) - ( 31,152 ) Cash Dividends ( 11,700 ) ( 11,221 ) ( 11,151 ) Net Cash Provided by Financing Activities 767,714 203,966 105,730 Net Change in Cash and Cash Equivalents 89,079 149,194 ( 41,585 ) Cash and Cash Equivalents at Beginning of Year 294,758 145,564 187,149 Cash and Cash Equivalents at End of Year $ 383,837 $ 294,758 $ 145,564 Supplementary Data Cash Payments Made for Income Taxes $ 9,581 $ 7,342 $ 7,971 Issuance of Common Stock to the Bank’s Non-Qualified Retirement Plans $ 403 $ 6,973 $ 10,502 Interest Paid $ 10,903 $ 11,755 $ 7,731 Supplementary Noncash Disclosure Lease Liabilities Arising from Obtaining Right-of-Use Assets $ - $ 5,645 $ - Acquisitions: Fair Value of Assets Acquired $ - $ - $ 234,456 Fair Value of Liabilities Acquired $ - $ - $ 192,809 The accompanying notes are an integral part of these consolidated financial statements 77 Table of Contents 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 wholly owned subsidiaries include F & M Bancorp, Inc. and FMCB Statutory Trust I. F & M Bancorp, Inc. was created in March 2002 to protect the name F & M Bank. During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name “F & M Bank” as part of a larger effort to enhance the Company’s image and build brand name recognition. In December 2003, the Company formed a wholly owned subsidiary, FMCB Statutory Trust I, for the sole purpose of issuing Trust Preferred Securities and related subordinated debentures, in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). FMCB Statutory Trust I is a non-consolidated subsidiary. On October 10, 2018, Farmers & Merchants Bancorp completed the acquisition of the Bank of Rio Vista, headquartered in Rio Vista, California, a locally owned and operated community bank established in 1904. As of the acquisition date, Bank of Rio Vista had approximately $ 217.5 million in assets and three branch locations in the communities of Rio Vista, Walnut Grove, and Lodi. Since the Company had a 39.65 % interest in Bank of Rio Vista prior to the acquisition of the remaining interest, the transaction was accounted for as a business combination achieved in stages or a step acquisition. The Company, through an independent valuation, remeasured its previously held equity interest in Bank of Rio Vista at fair value, which resulted in a gain for the excess of the acquisition-date fair value over its carrying value of $ 997,000 which is included in other non-interest income in the consolidated statements of income. At the effective time of the acquisition, Bank of Rio Vista was merged into Farmers & Merchants Bank of Central California. Basis of Presentation The accounting and reporting policies of the Company conform to U.S. GAAP and prevailing practice within the banking industry. The accompanying consolidated financial statements and notes thereto have been prepared in accordance with accounting principles generally accepted in the United States of America for financial information. 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 U.S. GAAP and under the rules and regulations of U.S. Securities and Exchange Commission, 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 had no effect on previously reported net income or total shareholders’ equity. Accounting Guidance Pending Adoption at December 31, 2020 The following paragraphs provide descriptions of newly issued but not yet effective accounting standards that could have a material effect on the Company’s financial position or results of operations. 78 Table of Contents In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU will require the earlier recognition of credit losses on loans and other financial instruments based on an expected loss model, replacing the incurred loss model that is currently in use. Under the new guidance, an entity will measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The expected loss model will apply to loans and leases, unfunded lending commitments, held-to-maturity debt securities and other debt instruments measured at amortized cost. The impairment model for available-for-sale debt securities will require the recognition of credit losses through a valuation allowance when fair value is less than amortized cost, regardless of whether the impairment is considered to be other-than-temporary. During 2019, the Company completed an assessment of its CECL data and system needs, and engaged a third-party vendor to assist in developing a CECL model. The Company, in conjunction with this vendor, researched and analyzed modeling standards, loan segmentation, as well as potential external inputs to supplement our historical loss history. Model validation began in the third quarter, enabling the Company to complete parallel runs using data beginning with the second quarter of 2019 . The new guidance had been effective on January 1, 2020. However, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) and H.R. 133, resulted in federal banking regulators issuing an interim final rule allowing banks the option of delaying the implementation of CECL until January 1, 2022. In addition, the national banking regulators have issued a joint statement allowing financial institutions to mitigate the effects of CECL in their regulatory capital calculations for up to two years. The Company has elected to delay CECL adoption, but continues to run its CECL model quarterly to accumulate data for the ultimate implementation. Management is currently evaluating the impact that the standard will have on its consolidated financial statements . Out of Period Adjustment During the quarter ended September 30, 2018, while preparing 2017 tax returns, the Company identified certain items related to IRS Code Section 162(m) that were not appropriately reflected in the 2014 through 2017 Provision for Income Taxes. To reflect this change, the cumulative impact of $ 990,000 was recognized by reducing the Company’s Provision for Income Taxes in the third quarter of 2018. After evaluating the quantitative and qualitative aspects of the adjustment, the Company concluded that its 2017 financial statements were not materially misstated and, therefore, no restatement was required. Cash and Cash Equivalents For purposes of the Consolidated Statements of Cash Flows, the Company has defined cash and cash equivalents as those amounts included in the balance sheet captions Cash and Due from Banks, Interest Bearing Deposits with Banks and Federal Funds Sold, which have original maturity dates of 3 months or less. 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 (“HTM”) 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 over the term through the earliest call date 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 (“AFS”) if it is management’s intent, at the time of purchase, to hold the securities for an unstated period of time and may be used as part of the Company’s asset/liability 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 earnings. 79 Table of Contents Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement; and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. Equity securities, are carried at fair value, with unrealized and realized gains recognized through earnings . Loans & Leases Loans & leases are reported at the principal amount outstanding net of unearned discounts and deferred loan & lease fees and costs. Interest income on loans & leases is accrued daily on the outstanding balances using the simple interest method. Loan & lease origination fees are deferred and recognized over the contractual life of the loan or lease as an adjustment to the yield. Loans & leases 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 or lease is considered well-secured if it is collateralized by property having a net realizable value in excess of the amount of the loan or lease or is guaranteed by a financially capable party. When a loan or lease 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. Additionally, cash would be applied to principal if all principal was not expected to be collected. Loans & leases placed on non-accrual status are returned to accrual status when the loans or leases 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 or lease. A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Impaired loans & leases are either: (1) non-accrual loans & leases; or (2) restructured loans & leases that are still accruing interest. Loans or leases determined to be impaired are individually evaluated for impairment. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan or lease's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan or lease's observable market price, or the fair value of the collateral if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral . A restructuring of a loan or lease constitutes a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the borrower’s (the term “borrower” is used herein to describe a customer who has entered into either a loan or lease transaction) financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured loans & leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans & leases that are on nonaccrual status at the time they become TDR, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms. However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment as described above. Generally, the Company will not restructure loans or leases for borrowers unless: (1) the existing loan or lease is brought current as to principal and interest payments; and (2) the restructured loan or lease can be underwritten to reasonable underwriting standards. If these standards are not met other actions will be pursued (e.g., foreclosure) to collect outstanding loan or lease amounts. After restructure, a determination is made whether the loan or lease will be kept on accrual status based upon the underwriting and historical performance of the restructured credit. 80 Table of Contents On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law, and was amended and extended by the Consolidated Appropriations Act of 2021 (“H.R. 133”) on December 21, 2020. The CARES Act and H.R. 133 provide financial institutions, under specific circumstances, the opportunity to temporarily suspend certain requirements under generally accepted accounting principles related to modifications for a limited period of time to account for the effects of COVID-19. In March 2020, a joint statement was issued by federal and state regulatory agencies, after consultation with the FASB, to clarify that short-term loan modifications are not TDRs if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to any relief. Under this guidance, six months is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification program is implemented. The guidance also provides that these modified loans generally will not be classified as nonaccrual during the term of the modification. See “Note 2 – Risks and Uncertainties” for additional information on the CARES Act, H.R. 133 and the impact of COVID-19 on the Company . Allowance for Credit Losses The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company's loan & lease portfolio as of the balance sheet date . The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan & lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of three primary components: specific reserves related to impaired loans & leases; general reserves for inherent losses related to loans & leases that are not impaired; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors. The determination of the general reserve for loans & leases that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, qualitative factors that include economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, the character of the loan & lease portfolio, and probable losses inherent in the portfolio taken as a whole . The Company maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1 st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer and other; and (9) equipment leases. The allowance for credit losses attributable to each portfolio segment, which includes both individually evaluated impaired loans & leases and loans & leases that are collectively evaluated for impairment, is combined to determine the Company's overall allowance, which is included on the consolidated balance sheet. The Company assigns a risk rating to all loans & leases and periodically performs detailed reviews of all such loans & leases over a certain threshold to identify credit risks and assess overall collectability. For smaller balance loans & leases, such as consumer and residential real estate, a credit grade is established at inception, and then updated only when the loan or lease becomes contractually delinquent or when the borrower requests a modification. For larger balance loans, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans & leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into five major categories, defined as follows: Pass and Watch – A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management's close attention. This category also includes “Watch” loans, which is a loan with an emerging weakness in either the individual credit or industry that requires additional attention. A credit may also be classified Watch if cash flows have not yet stabilized, such as in the case of a development project. Included in this category are all loans in which the Bank entered into a CARES Act modification . 81 Table of Contents Special Mention – A special mention loan or lease has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in the Company's credit position at some future date. Special mention loans & leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification . Substandard – A substandard loan or lease is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans or leases classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well-defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected . Doubtful – Loans or leases classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable or improbable. Loss – Loans or leases classified as loss are considered uncollectible. Once a loan or lease becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Company will estimate its probable loss and immediately charge-off some or all of the balance. The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management's assessment of the following for each portfolio segment: (1) inherent credit risk; (2) historical losses; and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below: Commercial Real Estate – Commercial real estate mortgage loans are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations. Real Estate Construction – Real estate construction loans, including land loans, are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects. Commercial – These loans are generally considered to possess a moderate inherent risk of loss because they are shorter-term; typically made to relationship customers; generally underwritten to existing cash flows of operating businesses; and may be collateralized by fixed assets, inventory and/or accounts receivable. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Agricultural Real Estate and Agricultural – These loans are generally considered to possess a moderate inherent risk of loss since they are typically made to relationship customers and are secured by crop production, livestock and related real estate. These loans are vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions. Leases – Equipment leases are generally considered to possess a moderate inherent risk of loss. As lessor, the Company is subject to both the credit risk of the borrower and the residual value risk of the equipment. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease. 82 Table of Contents Residential 1st Mortgages and Home Equity Lines and Loans – These loans are generally considered to possess a lower inherent risk of loss. The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating . Consumer & Other – A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating . At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company's and Bank's regulators, including the Federal Reserve Board (“FRB”), the Department of Financial Protection and Innovation (“DFPI”) and the Federal Deposit Insurance Corporation (“FDIC”), as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations . Acquired Loans Loans acquired through purchase or through a business combination are recorded at their fair value at the acquisition date. Credit discounts, which reflect estimates of credit losses, expected to be incurred over the life of the loan, are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date. Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off-balance-sheet commitments is included in Interest Payable and Other Liabilities on the Company’s Consolidated Balance Sheet. Right of Use Lease Asset & Lease Liability The Company leases retail space and office space under operating leases. Most leases require the Company to pay real estate taxes, maintenance, insurance and other similar costs in addition to the base rent. Certain leases also contain lease incentives, such as tenant improvement allowances and rent abatement. Variable lease payments are recognized as lease expense as they are incurred. We record an operating lease right of use (ROU) asset and an operating lease liability (lease liability) for operating leases with a lease term greater than 12 months. The ROU asset and lease liability are recorded in other assets and other liabilities, respectively, in the consolidated statement of financial condition. 12 ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Accordingly, ROU assets are reduced by tenant improvement allowances from landlords plus any prepaid rent. We do not separate lease and non-lease components of contracts. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. Many of our leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule, which are factored into our determination of lease payments when appropriate. A majority of the leases provide the Company with the option to extend the lease term one or more times following expiration of the initial term. The ROU asset and lease liability terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. 83 Table of Contents Revenue from Contracts with Customers The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods. The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is limited judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers. 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 7 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 expected to be sold and is comprised of properties no longer utilized for business operations and property acquired through foreclosure in satisfaction of indebtedness. These properties are recorded at fair value less estimated selling costs upon acquisition. Revised estimates to the fair value less cost to sell are reported as adjustments to the carrying amount of the asset, provided that such adjusted value is not in excess of the carrying amount at acquisition. Initial losses on properties acquired through full or partial satisfaction of debt are treated as credit losses and charged to the allowance for credit losses at the time of acquisition. Subsequent declines in value from the recorded amounts, routine holding costs, and gains or losses upon disposition, if any, are included in non-interest expense as incurred. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law, and was amended and extended by H.R. 133 on December 21, 2020. The CARES Act and H.R. 133 restrict the ability of financial institutions to exercise their foreclosure rights on residential and multi-family properties backed by federally guaranteed mortgage loans. The State of California has gone further and temporarily suspended all residential and commercial foreclosures through June 30, 2021. The Company is working with its borrowers when they make requests to defer payments on their mortgage loans. See “Note 2 – Risks and Uncertainties” for additional information on the CARES Act and the impact of COVID-19 on the Company. 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. The Company follows the standards set forth in the “Income Taxes” topic of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This standard 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. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. 84 Table of Contents The Company accounts for leases with Investment Tax Credits (ITC) under the deferred method as established in ASC 740-10. ITC are viewed and accounted for as a reduction of the cost of the related assets and presented as deferred income on the Company’s financial statement. The Company accounts for its interest in LIHTC using the cost method as established in ASC 323-740. As an investor, the Company obtains income tax credits and deductions from the operating losses of these tax credit entities. The income tax credits and deductions are allocated to the investors based on their ownership percentages and are recorded as a reduction of income tax expense (or an increase to income tax benefit) and a reduction of federal income taxes payable. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. At December 31, 2020 and 2019, the Company has no material uncertain tax positions and recognized no interest or penalties. The Company's policy is to recognize interest and penalties related to income taxes in the provision for income taxes in the Consolidated Statement of Income . Basic and Diluted Earnings Per Common Share The Company’s common stock is not traded on any exchange. However, trades are reported on the OTCQX under the symbol "FMCB". The shares are primarily held by local residents and are not actively traded. Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. There are no common stock equivalent shares. Therefore, there is no difference between presentation of diluted and basic earnings per common share. See Note 15 – “Dividends and Basic and Diluted Earnings Per Common Share” for additional information . Segment Reporting The “Segment Reporting” topic of the FASB ASC requires that public companies report certain information about operating segments. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is a holding company for a community bank, which offers a wide array of products and services to its customers. Pursuant to its banking strategy, emphasis is placed on building relationships with its customers, as opposed to building specific lines of business. As a result, the Company is not organized around discernible lines of business and 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. Comprehensive Income The “Comprehensive Income” topic of the FASB ASC establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Other comprehensive income refers to revenues, expenses, gains, and losses that U.S. GAAP recognize as changes in value to an enterprise but are excluded from net income. For the Company, comprehensive income includes net income and changes in fair value of its available-for-sale investment securities. 85 Table of Contents Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the consolidated financial statements. Business Combinations And Related Matters Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method, the acquiring entity in a business combination recognizes 100 percent of the acquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fair values as of the date of acquisition. Any excess of the fair value over the purchase price of net assets and other identifiable intangible assets acquired is recorded as bargain purchase gain. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value, if the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the statement of operations from the date of acquisition. Acquisition-related costs, including conversion charges, are expensed as incurred. Goodwill and Other Intangible Assets : Goodwill is determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill that arises from a business combination is periodically evaluated for impairment at the reporting unit level, at least annually. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Core deposit intangible ("CDI") represents the estimated future benefit of deposits related to an acquisition and is booked separately from the related deposits and evaluated periodically for impairment. The CDI asset is amortized on a straight-line method over its estimated useful life of ten years . At December 31, 2020, the future estimated amortization expense for the CDI arising from our past acquisitions is as follows: (in thousands) 2021 2022 2023 2024 2025 Thereafter Total Core Deposit Intangible Amortization $ 611 $ 593 $ 573 $ 549 $ 522 $ 1,165 $ 4,013 We make a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit where goodwill is assigned is less than its carrying amount. If we conclude that it is more likely than not that the fair value is more than its carrying amount, no impairment is recorded. Goodwill is tested for impairment on an interim basis if circumstances change or an event occurs between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The qualitative assessment includes adverse events or circumstances identified that could negatively affect the reporting units’ fair value as well as positive and mitigating events. Such indicators may include, among others, a significant change in legal factors or in the general business climate, significant change in our stock price and market capitalization, unanticipated competition, and an action or assessment by a regulator. If the fair value of a reporting unit is less than its carrying amount, an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value is recognized. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. 2. Risks and Uncertainties The COVID-19 pandemic has affected all of us. Designated as an “essential business”, the Company’s subsidiary, Farmers & Merchants Bank of Central California, has kept all branches open and maintained regular business hours during these difficult times. Our staffing levels have remained stable during the COVID-19 crisis. We have taken what we believe are prudent measures to protect our employees and customers, while still providing core banking services. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law, and was amended and extended by the Consolidated Appropriations Act of 2021 (“H.R. 133”) on December 21, 2020. Through this legislation, as well as related federal and state regulatory actions, the federal government has taken extraordinary efforts to provide financial assistance to individuals and companies to help them move through these difficult times. However, there are no guarantees how long the COVID-19 virus may continue to impact our economy, and therefore, the Company. While we expect the effects of COVID-19 could have an adverse future impact on our business, financial condition and results of operations, we are unable to predict the full extent or nature of these impacts at the current time. 86 Table of Contents 3. Investment Securities The amortized cost, fair values, and unrealized gains and losses of the securities available-for-sale are as follows: (in thousands) Amortized Gross Unrealized Fair/Book December 31, 2020 Cost Gains Losses Value US Treasury Notes $ 14,859 $ 429 $ - $ 15,288 US Government Agency SBA 8,252 1 93 8,160 Mortgage Backed Securities (1) 720,562 17,359 48 737,873 Corporate Securities 45,010 927 18 45,919 Other 492 - - 492 Total $ 789,175 $ 18,716 $ 159 $ 807,732 Amortized Gross Unrealized Fair/Book December 31, 2019 Cost Gains Losses Value US Treasury Notes $ 54,745 $ 250 $ - $ 54,995 US Government Agency SBA 10,902 9 113 10,798 Mortgage Backed Securities (1) 436,531 4,646 99 441,078 Other 515 - - 515 Total $ 502,693 $ 4,905 $ 212 $ 507,386 (1) All Mortgage Backed Securities were issued by an agency or government sponsored entity of the U.S. government. The book values, estimated fair values and unrealized gains and losses of investments classified as held-to-maturity are as follows: (in thousands) Amortized Gross Unrealized Fair December 31, 2020 Cost Gains Losses Value Obligations of States and Political Subdivisions $ 68,933 $ 1,116 $ - $ 70,049 Total $ 68,933 $ 1,116 $ - $ 70,049 Amortized Gross Unrealized Fair December 31, 2019 Cost Gains Losses Value Obligations of States and Political Subdivisions $ 60,229 $ 880 $ 12 $ 61,097 Total $ 60,229 $ 880 $ 12 $ 61,097 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 amortized cost and estimated fair values of investment securities at December 31, 2020 by contractual maturity are shown in the following tables. (in thousands) Available-for-Sale Held-to-Maturity December 31, 2020 Amortized Cost Fair/Book Value Amortized Cost Fair Value Within One Year $ 5,479 $ 5,512 $ 8,309 $ 8,309 After One Year Through Five Years 25,427 26,096 5,137 5,179 After Five Years Through Ten Years 30,281 30,912 23,493 24,451 After Ten Years 7,426 7,339 31,994 32,110 68,613 69,859 68,933 70,049 Investment Securities Not Due at a Single Maturity Date: Mortgage Backed Securities 720,562 737,873 - - Total $ 789,175 $ 807,732 $ 68,933 $ 70,049 87 Table of Contents Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. 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. (in thousands) Less Than 12 Months 12 Months or More Total December 31, 2020 Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Securities Available-for-Sale US Government Agency SBA $ 1,741 $ 3 $ 6,126 $ 90 $ 7,867 $ 93 Mortgage Backed Securities 20,142 45 177 3 20,319 48 Corporate Securities 4,041 18 - - 4,041 18 Total $ 25,924 $ 66 $ 6,303 $ 93 $ 32,227 $ 159 There were no HTM investments with gross unrealized losses at December 31, 2020. Less Than 12 Months 12 Months or More Total December 31, 2019 Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Securities Available-for-Sale US Government Agency SBA $ 2,693 $ 6 $ 5,198 $ 107 $ 7,891 $ 113 Mortgage Backed Securities 131,005 88 713 11 131,718 99 Total $ 133,698 $ 94 $ 5,911 $ 118 $ 139,609 $ 212 Securities Held-to-Maturity Obligations of States and Political Subdivisions $ 355 $ 12 $ - $ - $ 355 $ 12 Total $ 355 $ 12 $ - $ - $ 355 $ 12 As of December 31, 2020, the Company held 649 investment securities of which 13 were in an unrealized loss position for less than twelve months and 83 securities were in an unrealized loss position for twelve months or more. Management periodically evaluates each investment security for other-than-temporary impairment relying primarily 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 Government Agency and Government Sponsored Entities – At December 31, 2020 and December 31, 2019, no securities of government agency and government sponsored entities were in a loss position. U.S. Treasury Notes – At December 31, 2020 and December 31, 2019 , no U.S. Treasury Note security investments were in a loss position. U.S. Government SBA – At December 31, 2020, 8 U.S. Government SBA security investments were in a loss position for less than 12 months and 65 were in a loss position for 12 months or more. The unrealized losses on the Company's investment in U.S. Government SBA were $ 93,000 at December 31, 2020 and $ 113,000 at December 31, 2019. The unrealized losses were caused by interest rate fluctuations. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2020 and December 31, 2019. 88 Table of Contents Mortgage Backed Securities - At December 31, 2020, 3 mortgage backed security investments were in a loss position for less than 12 months and 18 were in a loss position for 12 months or more. The unrealized losses on the Company's investment in mortgage-backed securities were $ 48,000 at December 31, 2020 and $ 99,000 at December 31, 2019. The unrealized losses were caused by interest rate fluctuations. The contractual cash flows of these investments are guaranteed by an agency or government sponsored entity 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 does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2020 or 2019. Corporate Securities - At December 30, 2020, 2 corporate securities were in an unrealized loss position for less than 12 months and no ne were in a loss position for 12 months or more. The unrealized losses on the Company’s investment in corporate securities were $ 18,000 . Changes in the prices of corporate securities are primarily influenced by: (1) changes in market interest rates; (2) changes in perceived credit risk in the general economy or in particular industries; (3) changes in the perceived credit risk of a particular company; and (4) day to day trading supply, demand and liquidity. The Company monitors the status of each of our corporate securities and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security. Because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at December 30, 2020. Obligations of States and Political Subdivisions - At December 31, 2020, no obligations of states and political subdivisions were in a loss position for less than 12 months. None were in a loss position for 12 months or more. As of December 31, 2020, one-hundred percent of the Company’s bank-qualified municipal bond portfolio is rated at either the issue or the issuer level, and all of these ratings are “investment grade.” The Company monitors the status of all municipal investments in the portfolio, and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security. The unrealized losses on the Company’s investment in obligation of states and political subdivisions were $ 0 at December 31, 2020 and $ 12,000 at December 31, 2019. Management believes that any unrealized losses on the Company's investments in obligations of states and political subdivisions were caused by interest rate fluctuations. 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 does not intend to sell the securities and it is more likely than not that the Company would not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2020 and December 31, 2019. Proceeds from sales and calls of these securities were as follows: (in thousands) Gross Proceeds Gross Gains Gross Losses 2020 $ 5,080 $ 40 $ - 2019 $ 5,300 $ 1 $ - 2018 $ 99,323 $ 78 $ 1,338 Pledged Securities As of December 31, 2020, securities carried at $ 439.7 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) borrowings, and other government agency deposits as required by law. This amount was $ 352.5 million at December 31, 2019. 89 Table of Contents 4. Federal Home Loan Bank Stock and Other Equity Securities, at Cost The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock and other equity securities are carried at cost, classified as restricted securities, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. FHLB stock and other equity securities are reported in Interest Receivable and Other Assets on the Company’s Consolidated Balance Sheets and totaled $ 12.7 million at December 31, 2020 and 2019. 5. Loans & Leases Loans & leases as of December 31 consisted of the following: (in thousands) 2020 2019 Commercial Real Estate $ 971,326 $ 846,486 Agricultural Real Estate 643,014 625,767 Real Estate Construction 185,741 115,644 Residential 1st Mortgages 299,379 255,253 Home Equity Lines and Loans 34,239 39,270 Agricultural 264,372 292,904 Commercial 374,816 384,795 Consumer & Other (1) 235,529 15,422 Leases 103,117 104,470 Total Gross Loans & Leases 3,111,533 2,680,011 Less: Unearned Income 11,941 6,984 Subtotal 3,099,592 2,673,027 Less: Allowance for Credit Losses 58,862 55,012 Loans & Leases, Net $ 3,040,730 $ 2,618,015 (1) Includes CARES Act Small Business Administration Paycheck Protection Program loans of $ 224,309 as of December 31, 2020. Paycheck Protection Program (“PPP”) … Under the CARES Act and H.R. 133 (see “Note 2 – Risks and Uncertainties”) the Small Business Administration (“SBA”) was directed by Congress to provide loans to small businesses with less than 500 employees to assist these businesses in meeting their payroll and other financial obligations during the COVID-19 pandemic. These government guaranteed loans are made with an interest rate of 1%, a risk weight of 0% under risk-based capital rules, have a term of 2 years, and under certain conditions the SBA will forgive them. The Bank actively participated in the PPP, and since April 2020, the Bank has funded $ 347.4 million of loans for 1,540 small business customers. At December 31, 2020, the portion of loans that were approved for pledging as collateral on borrowing lines with the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“FRB”) were $ 808.9 million and $ 706.2 million, respectively. The borrowing capacity on these loans was $ 630.5 million from FHLB and $ 438.1 million from the FRB. 6. Allowance for Credit Losses The Company was originally scheduled to implement ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (“CECL”) as of January 1, 2020. The CARES Act and H.R. 133 provide the election to defer CECL implementation until January 1, 2022. The Company has elected to delay CECL implementation. 90 Table of Contents The following tables show the allocation of the allowance for credit losses at December 31, 2020 and December 31, 2019 by portfolio segment and by impairment methodology (in thousands) : December 31, 2020 Commercial Real Estate Agricultural Real Estate Real Estate Construction Residential 1st Mortgages Home Equity Lines & Loans Agricultural Commercial Consumer & Other Leases Unallocated Total Year-To-Date Allowance for Credit Losses: Beginning Balance- January 1, 2020 $ 11,053 $ 15,128 $ 1,949 $ 855 $ 2,675 $ 8,076 $ 11,466 $ 456 $ 3,162 $ 192 $ 55,012 Charge-Offs - - - - ( 7 ) - ( 1,101 ) ( 66 ) - - ( 1,174 ) Recoveries - 81 - 52 78 - 280 33 - - 524 Provision 16,626 ( 6,576 ) ( 306 ) 53 ( 722 ) ( 3,262 ) ( 684 ) ( 90 ) ( 1,431 ) 892 4,500 Ending Balance- December 31, 2020 $ 27,679 $ 8,633 $ 1,643 $ 960 $ 2,024 $ 4,814 $ 9,961 $ 333 $ 1,731 $ 1,084 $ 58,862 Ending Balance Individually Evaluated for Impairment - - - 117 8 92 20 52 - - 289 Ending Balance Collectively Evaluated for Impairment 27,679 8,633 1,643 843 2,016 4,722 9,941 281 1,731 1,084 58,573 Loans & Leases: Ending Balance $ 958,980 $ 643,014 $ 185,741 $ 299,379 $ 34,239 $ 264,372 $ 374,816 $ 235,529 $ 103,522 $ - $ 3,099,592 Ending Balance Individually Evaluated for Impairment 104 5,629 - 2,365 158 495 233 254 - - 9,238 Ending Balance Collectively Evaluated for Impairment 958,876 637,385 185,741 297,014 34,081 263,877 374,583 235,275 103,522 - 3,090,354 December 31, 2019 Commercial Real Estate Agricultural Real Estate Real Estate Construction Residential 1st Mortgages Home Equity Lines & Loans Agricultural Commercial Consumer & Other Leases Unallocated Total Year-To-Date Allowance for Credit Losses: Beginning Balance- January 1, 2019 $ 11,609 $ 14,092 $ 1,249 $ 880 $ 2,761 $ 8,242 $ 11,656 $ 494 $ 4,022 $ 261 $ 55,266 Charge-Offs - - - - - - ( 592 ) ( 83 ) - - ( 675 ) Recoveries - 38 - 13 28 - 90 52 - - 221 Provision ( 556 ) 998 700 ( 38 ) ( 114 ) ( 166 ) 312 ( 7 ) ( 860 ) ( 69 ) 200 Ending Balance- December 31, 2019 $ 11,053 $ 15,128 $ 1,949 $ 855 $ 2,675 $ 8,076 $ 11,466 $ 456 $ 3,162 $ 192 $ 55,012 Ending Balance Individually Evaluated for Impairment 234 - - 118 12 99 137 61 - - 661 Ending Balance Collectively Evaluated for Impairment 10,819 15,128 1,949 737 2,663 7,977 11,329 395 3,162 192 54,351 Loans & Leases: Ending Balance $ 838,570 $ 625,767 $ 115,644 $ 255,253 $ 39,270 $ 292,904 $ 384,795 $ 15,422 $ 105,402 $ - $ 2,673,027 Ending Balance Individually Evaluated for Impairment 4,524 5,654 - 2,368 229 188 1,528 200 - - 14,691 Ending Balance Collectively Evaluated for Impairment 834,046 620,113 115,644 252,885 39,041 292,716 383,267 15,222 105,402 - 2,658,336 91 Table of Contents The ending balance of loans individually evaluated for impairment includes restructured loans in the amount of $ 876,000 and $ 2.6 million at December 31, 2020 and 2019, respectively, which are no longer disclosed or classified as TDR’s, since they were restructured at market terms. The following tables show the loan & lease portfolio, including unearned income allocated by management’s internal risk ratings at December 31, 2020 and December 31, 2019 (in thousands) : December 31, 2020 Pass (1) Special Mention Substandard Total Loans Loans & Leases: Commercial Real Estate $ 946,621 $ 7,849 $ 4,510 $ 958,980 Agricultural Real Estate 631,043 400 11,571 643,014 Real Estate Construction 185,741 - - 185,741 Residential 1st Mortgages 298,689 - 690 299,379 Home Equity Lines and Loans 34,058 - 181 34,239 Agricultural 263,781 96 495 264,372 Commercial 373,038 1,060 718 374,816 Consumer & Other 235,063 - 466 235,529 Leases 103,522 - - 103,522 Total $ 3,071,556 $ 9,405 $ 18,631 $ 3,099,592 (1) Includes “Watch” loans of $ 958.2 million. December 31, 2019 Pass (1) Special Mention Substandard Total Loans Loans & Leases: Commercial Real Estate $ 831,941 $ 6,629 $ - $ 838,570 Agricultural Real Estate 611,792 1,136 12,839 625,767 Real Estate Construction 115,644 - - 115,644 Residential 1st Mortgages 254,459 - 794 255,253 Home Equity Lines and Loans 39,092 - 178 39,270 Agricultural 289,276 2,617 1,011 292,904 Commercial 380,650 3,239 906 384,795 Consumer & Other 14,934 - 488 15,422 Leases 105,402 - - 105,402 Total $ 2,643,190 $ 13,621 $ 16,216 $ 2,673,027 (1) Includes “Watch” loans of $ 744.7 million. See Note 1. “Significant Accounting Policies – Allowance for Credit Losses” for a description of the internal risk ratings used by the Company. There were no loans & leases outstanding at December 31, 2020 and 2019 rated doubtful or loss. The following tables show an aging analysis of the loan & lease portfolio, including unearned income, by the time past due at December 31, 2020 and December 31, 2019 (in thousands) : December 31, 2020 30-59 Days Past Due 60-89 Days Past Due 90 Days and Still Accruing Nonaccrual Total Past Due Current Total Loans & Leases Loans & Leases: Commercial Real Estate $ - $ - $ - $ - $ - $ 958,980 $ 958,980 Agricultural Real Estate - - - 495 495 642,519 643,014 Real Estate Construction - - - - - 185,741 185,741 Residential 1st Mortgages - - - - - 299,379 299,379 Home Equity Lines and Loans - - - - - 34,239 34,239 Agricultural - - - - - 264,372 264,372 Commercial - - - - - 374,816 374,816 Consumer & Other 11 - - - 11 235,518 235,529 Leases - - - - - 103,522 103,522 Total $ 11 $ - $ - $ 495 $ 506 $ 3,099,086 $ 3,099,592 92 Table of Contents December 31, 2019 30-59 Days Past Due 60-89 Days Past Due 90 Days and Still Accruing Nonaccrual Total Past Due Current Total Loans & Leases Loans & Leases: Commercial Real Estate $ - $ - $ - $ - $ - $ 838,570 $ 838,570 Agricultural Real Estate - - - - - 625,767 625,767 Real Estate Construction 240 - - - 240 115,404 115,644 Residential 1st Mortgages - - - - - 255,253 255,253 Home Equity Lines and Loans - - - - - 39,270 39,270 Agricultural - - - - - 292,904 292,904 Commercial 77 - - - 77 384,718 384,795 Consumer & Other 35 - - - 35 15,387 15,422 Leases - - - - - 105,402 105,402 Total $ 352 $ - $ - $ - $ 352 $ 2,672,675 $ 2,673,027 Non-accrual loans & leases at December 31, 2020 were $ 495,000 . There were no non-accrual loans & leases at December 31, 2019. Foregone interest income on non-accrual loans & leases, which would have been recognized during the period, if all such loans & leases had been current in accordance with their original terms, totaled $ 22,000 , $ 0 , and $ 0 at December 31, 2020, 2019, and 2018 respectively. The following tables show information related to impaired loans & leases at and for the year ended December 31, 2020 and December 31, 2019 (in thousands) : December 31, 2020 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial Real Estate $ 84 $ 84 $ - $ 764 $ 35 Agricultural Real Estate 5,629 5,629 - 5,629 352 Agricultural 3 3 - 2 - Commercial - - - 377 16 $ 5,716 $ 5,716 $ - $ 6,772 $ 403 With an allowance recorded: Commercial Real Estate $ - $ - $ - $ 21 $ 1 Agricultural Real Estate - - - 137 - Residential 1st Mortgages 1,671 1,895 84 1,652 76 Home Equity Lines and Loans 64 75 3 66 4 Agricultural 492 534 92 410 59 Commercial 234 234 13 123 18 Consumer & Other 190 191 56 194 13 $ 2,651 $ 2,929 $ 248 $ 2,603 $ 171 Total $ 8,367 $ 8,645 $ 248 $ 9,375 $ 574 93 Table of Contents December 31, 2019 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial Real Estate $ 86 $ 86 $ - $ 90 $ 8 Agricultural Real Estate 5,654 5,654 - 6,069 379 Commercial - - - 8 1 $ 5,740 $ 5,740 $ - $ 6,167 $ 388 With an allowance recorded: Commercial Real Estate $ 2,822 $ 2,822 $ 234 $ 2,853 $ 94 Residential 1st Mortgages 1,562 1,770 74 1,601 73 Home Equity Lines and Loans 68 79 7 71 4 Agricultural 188 188 99 195 6 Commercial 1,528 1,528 137 1,554 53 Consumer & Other 200 200 61 54 - $ 6,368 $ 6,587 $ 612 $ 6,328 $ 230 Total $ 12,108 $ 12,327 $ 612 $ 12,495 $ 618 Total recorded investment shown in the prior table will not equal the total ending balance of loans & leases individually evaluated for impairment on the allocation of allowance table. This is because this table does not include impaired loans that were previously modified in a troubled debt restructuring, are currently performing and are no longer disclosed or classified as TDR’s, since they were restructured at market terms. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law, and was amended and extended by the Consolidated Appropriations Act 2021 (“H.R. 133”) on December 21, 2020. The CARES Act and H.R. 133 provide financial institutions, under specific circumstances, the opportunity to temporarily suspend certain requirements under generally accepted accounting principles related to TDR’s for a limited period of time to account for the effects of COVID-19. In March 2020, a joint statement was issued by federal and state regulatory agencies, after consultation with the FASB, to clarify that short-term loan modifications are not TDRs if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to any relief. Under this guidance, six months is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification program is implemented. The guidance also provides that these modified loans generally will not be classified as nonaccrual during the term of the modification. Since April 2020, we have restructured $ 277.6 million of loans under the CARES Act and H.R. 133 guidelines. As of December 31, 2020, $ 3.7 million of these loans remain in a deferral status, the other loans having returned to making principal and/or interest payments. We believe that these actions will assist these borrowers in getting through these difficult times, but no guaranties can be made that at some time in the future these loans will not be required to be accounted for as a TDR. For borrowers who are 30 days or more past due when enrolling in a loan modification program related to the COVID-19 pandemic, we evaluate the loan modifications under our existing TDR framework, and where such a loan modification would result in a more than insignificant concession to a borrower experiencing financial difficulty, the loan will be accounted for as a TDR and will generally not accrue interest. See “Note 2 – Risks and Uncertainties” for additional information on the CARES Act, H.R. 133 and the impact of COVID-19 on the Company. At December 31, 2020, there were no formal foreclosure proceedings in process for consumer mortgage loans secured by residential real estate properties. At December 31, 2020, the Company allocated $ 158,000 of specific reserves to $ 7.9 million of troubled debt restructured loans, all of which were performing. At December 31, 2019, the Company allocated $ 612,000 of specific reserves to $ 12.1 million of troubled debt restructured loans, all of which were performing. The Company had no commitments at December 31, 2020 and December 31, 2019 to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. 94 Table of Contents Modifications involving a reduction of the stated interest rate of the loan were for 5 years. Modifications involving an extension of the maturity date range from 3 months to 10 years. The following table presents loans by class modified as troubled debt restructured loans for the year ended December 31, 2020 (in thousands) : December 31, 2020 Troubled Debt Restructurings Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Residential 1st Mortgages 2 $ 156 $ 156 Agricultural 3 495 495 Commercial 1 224 224 Total 6 $ 875 $ 875 The troubled debt restructurings described above increased the allowance for credit losses by $ 120,000 . There were no charge-offs for the twelve months ended December 31, 2020. During the year ended December 31, 2020, there were no payment defaults on loans modified as troubled debt restructurings within twelve months following the modification. The following table presents loans by class modified as troubled debt restructured loans for the year ended December 31, 2019 (in thousands) : December 31, 2019 Troubled Debt Restructurings Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Agricultural 1 $ 201 $ 201 Consumer & Other 1 195 195 Total 2 $ 396 $ 396 The troubled debt restructurings described above increased the allowance for credit losses by $ 101,000 . There were no charge-offs for the twelve months ended December 31, 2019. During the year ended December 31, 2019, there were no payment defaults on loans modified as troubled debt restructurings within twelve months following the modification. 7. Premises and Equipment Premises and equipment as of December 31 consisted of the following: (in thousands) 2020 2019 Land and Buildings $ 60,246 $ 53,997 Furniture, Fixtures and Equipment 21,750 21,058 Leasehold Improvement 3,753 3,745 Subtotal 85,749 78,800 Less: Accumulated Depreciation and Amortization 35,602 33,529 Total $ 50,147 $ 45,271 Depreciation and amortization on premises and equipment included in occupancy and equipment expense amounted to $ 2,769,000 , $ 2,756,000 , and $ 2,421,000 for the years ended December 31, 2020, 2019 and 2018, respectively. Rental income was $ 434,000 , $ 183,000 , and $ 173,000 for the years ended December 31, 2020, 2019, and 2018, respectively. 95 Table of Contents 8. Other Real Estate The Bank reported $ 873,000 in other real estate at December 31, 2020, and December 31, 2019. Other real estate includes property no longer utilized for business operations and property acquired through foreclosure proceedings. These properties are carried at fair value less selling costs determined at the date acquired. Losses, if any, arising from properties acquired through foreclosure are charged against the allowance for loan losses at the time of foreclosure. Subsequent declines in value, periodic holding costs, and net gains or losses on disposition are included in other operating expense as incurred. Other real estate is reported in Interest Receivable and Other Assets on the Company’s Consolidated Balance Sheets. 9. Time Deposits Time Deposits of $250,000 or more as of December 31 were as follows: (in thousands) 2020 2019 Balance $ 185,944 $ 257,392 At December 31, 2020, the scheduled maturities of time deposits were as follows: (in thousands) Scheduled Maturities 2021 $ 373,332 2022 38,620 2023 7,571 2024 715 2025 1,630 Total $ 421,868 10. Income Taxes Current and deferred income tax expense (benefit) provided for the years ended December 31 consisted of the following: (in thousands) 2020 2019 2018 Current Federal $ 12,174 $ 14,798 $ 2,517 State 9,005 7,733 6,224 Total Current 21,179 22,531 8,741 Deferred Federal ( 1,115 ) ( 3,500 ) 5,622 State ( 847 ) 246 ( 160 ) Total Deferred ( 1,962 ) ( 3,254 ) 5,462 Total Provision for Taxes $ 19,217 $ 19,277 $ 14,203 96 Table of Contents The total provision for income taxes differs from the federal statutory rate as follows: 2020 2019 2018 (in thousands) Amount Rate Amount Rate Amount Rate Tax Provision at Federal Statutory Rate $ 16,370 21.0 % $ 15,816 21.0 % $ 12,543 21.0 % Interest on Obligations of States and Political Subdivisions exempt from Federal Taxation ( 350 ) ( 0.4 %) ( 358 ) ( 0.5 %) ( 338 ) ( 0.5 %) State and Local Income Taxes, Net of Federal Income Tax Benefit 6,445 8.3 % 6,304 8.4 % 4,791 7.9 % Bank Owned Life Insurance ( 444 ) ( 0.6 %) ( 460 ) ( 0.6 %) ( 434 ) ( 0.7 %) Low-Income Housing Tax Credit ( 2,655 ) ( 3.4 %) ( 2,078 ) ( 2.8 %) ( 1,624 ) ( 2.7 %) Out of Period Adjustment - 0 .0 % - 0 .0 % ( 802 ) ( 1.3 %) Other, Net ( 149 ) ( 0.2 %) 53 0.1 % 67 0.1 % Total Provision for Taxes $ 19,217 24.7 % $ 19,277 25.6 % $ 14,203 23.8 % The components of net deferred tax assets as of December 31 are as follows: The net deferred tax assets are reported in Interest Receivable and Other Assets on the Company’s Consolidated Balance Sheet. (in thousands) 2020 2019 Deferred Tax Assets Allowance for Credit Losses $ 17,248 $ 15,925 Accrued Liabilities 8,526 8,452 Deferred Compensation 13,707 14,200 State Franchise Tax 1,891 1,624 Tax Credit Carry Forward - 1,266 Lease Liability 1,454 1,487 Acquired Net Operating Loss 643 673 Fair Value Adjustment on Loans Acquired 237 286 Fair Value Adjustment on ORE Acquired 108 108 PPP Loan Service Fee Income 1,367 - Low-Income Housing Investment 384 286 Other 7 2 Total Deferred Tax Assets $ 45,572 $ 44,309 Deferred Tax Liabilities Premises and Equipment ( 1,684 ) ( 1,974 ) Securities Accretion ( 588 ) ( 370 ) Unrealized Gain on Securities Available-for-Sale ( 5,156 ) ( 935 ) Leasing Activities ( 17,183 ) ( 19,226 ) Core Deposit Intangible Asset ( 1,186 ) ( 1,372 ) ROU Lease Asset ( 1,428 ) ( 1,471 ) Prepaid ( 45 ) ( 66 ) Other ( 1,209 ) ( 898 ) Total Deferred Tax Liabilities ( 28,479 ) ( 26,312 ) Net Deferred Tax Assets $ 17,093 $ 17,997 97 Table of Contents On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted in response to the COVID- 19 pandemic. The CARES Act provides options for accelerating refunds associated with previously paid alternative minimum taxes. The Company benefited from the alternative minimum tax refund provisions of the CARES Act and submitted accelerated refund claims during the year ended December 31, 2020. Based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred tax assets are expected to be deductible, Management believes it is more likely than not we will realize the benefit of the remaining deferred tax assets. The Company and its subsidiaries file income tax returns in the U.S. federal and California jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by the tax authorities for the years before 2016. 11. Short Term Borrowings The Company had unused lines of credit available for short-term liquidity purposes of $ 1.3 billion at December 31, 2020 and 2019 . Federal Funds purchased and advances are generally issued on an overnight basis. There were no advances from the FHLB at December 31, 2020 or 2019. There were no Federal Funds purchased or advances from the FRB at December 31, 2020 or 2019. 12. Federal Home Loan Bank Advances The Company had no short-term or long-term advances from the Federal Home Loan Bank of San Francisco at December 31, 2020 or 2019. In accordance with the Collateral Pledge and Security Agreement, advances are secured by all FHLB stock held by the Company. At December 31, 2020, $ 808.9 million in loans were approved for pledging as collateral on borrowing lines with the FHLB. The borrowing capacity on these loans was $ 630.5 million. 13. Long-term Subordinated Debentures In December 2003, the Company formed a wholly owned Connecticut statutory business trust, FMCB Statutory Trust I (“Statutory Trust I”), which issued $ 10.0 million of guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures (the “Trust Preferred Securities”). The Company is not considered the primary beneficiary of the trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. These debentures qualify as Tier 1 capital under current regulatory guidelines. All of the common securities of Statutory Trust I are owned by the Company. The proceeds from the issuance of the common securities and the Trust Preferred Securities were used by FMCB Statutory Trust to purchase $ 10.3 million of junior subordinated debentures of the Company, which carry a floating rate based on three-month LIBOR plus 2.85 %. The debentures represent the sole asset of Statutory Trust I. The Trust Preferred Securities accrue and pay distributions at a floating rate of three-month LIBOR plus 2.85 % per annum of the stated liquidation value of $ 1,000 per capital security. The Company has entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment to the extent that Statutory Trust I has funds available therefore 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. 98 Table of Contents 14. Shareholders’ Equity In 1998, the Board approved the Company’s first common stock repurchase program. This program has been extended and expanded several times since then, and most recently, on November 6, 2018, the Board of Directors approved an extension of the $ 20 million stock repurchase program to December 31, 2021. Repurchases under the program may be made from time to time on the open market or through private transactions. The repurchase program also requires that no repurchases may be made if the Bank would not remain “well-capitalized” after the repurchase. There were no stock repurchases made in 2020 or 2019 under the Common Stock Repurchase Plan. On November 23, 2020, the Board of Directors of Farmers & Merchants Bancorp approved, and all applicable regulators provided statements of non-objection regarding, the Company’s repurchase and retirement of up to $ 8.5 million of its outstanding common stock during the fourth quarter of 2020 and the first half of 2021. These repurchases will be done outside of the Company’s current repurchase plan. All repurchases will be made at the then prevailing market prices. In the fourth quarter of 2020 the Company repurchased $ 2.8 million of shares from shareholders. On August 5, 2008 , the Board of Directors approved a Share Purchase Rights Plan (the “Rights Plan”), pursuant to which the Company entered into a Rights Agreement dated August 5, 2008, with Computershare as Rights Agent, and the Company declared a dividend of a right to acquire one preferred share purchase right (a “Right”) for each outstanding share of the Company’s common stock, $ 0.01 par value per share, to stockholders of record at the close of business on August 15, 2008 . Generally, the Rights are only triggered and become exercisable if a person or group (the “Acquiring Person”) acquires beneficial ownership of 10 percent or more of the Company’s common stock or announces a tender offer for 10 percent or more of the Company’s common stock. The Rights Plan is similar to plans adopted by many other publicly traded companies. The effect of the Rights Plan is to discourage any potential acquirer from triggering the Rights without first convincing the Company’s Board of Directors that the proposed acquisition is fair to, and in the best interest of, all of the stockholders of the Company. The provisions of the Plan, if triggered by the Acquiring Person, will substantially dilute the equity and voting interest of any potential acquirer unless the Board of Directors approves of the proposed acquisition (under Article XV of the Company’s Certificate of Incorporation, the Board of Directors has the authority to consider any and all factors in determining whether an acquisition is in the best interests of the Company and its stockholders). Each Right, if and when exercisable, will entitle the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, no par value, at a purchase price of $ 1,600 for each one one-hundredth of a share, subject to adjustment. Each holder of a Right (except for the Acquiring Person, whose Rights will be null and void upon such event) shall thereafter have the right to receive, upon exercise, that number of Common Shares of the Company having a market value of two times the exercise price of the Right. At any time before a person becomes an Acquiring Person, the Rights can be redeemed, in whole, but not in part, by Farmers and Merchants Bancorp’s Board of Directors at a price of $ 0.001 per Right. The Rights Plan was set to expire on August 5, 2018. On November 19, 2015, the Board of Directors approved a seven-year extension of the term of the Rights Plan. Pursuant to an Amendment to the Rights Agreement dated February 18, 2016, the term of the Rights Plan was extended from August 5, 2018 to August 5, 2025. The extension of the term of the Rights Plan was intended as a means to continue to guard against abusive takeover tactics and was not in response to any particular proposal. The Board also increased the purchase price under the Rights Plan to $ 1,600 per one one-hundredth of a preferred share from $ 1,200 , to reflect the increase in the market price of the Company’s common stock over the past several years. 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 the Company without prior approval of the California DFPI. 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. 99 Table of Contents During 2020, the Company issued a combined total 523 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans. All of the shares were issued at a price of $ 770.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4 (a) (2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital. During 2019, the Company issued a combined total 9,312 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans. All of the shares were issued at prices ranging from $ 715.00 to $ 770.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital. During 2018, the Company issued a combined total 13,520 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans. There were also 2,400 shares issued to individuals during 2018. All of the shares were issued at prices ranging from $ 635.00 to $ 690.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital. The Company and the Bank are subject to various federal regulatory capital requirements under the Basel III Capital Rules. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the 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. The implementation of Basel III requirements increased the required capital levels that the Company and the Bank must maintain. The final rules included new minimum risk-based capital and leverage ratios, which have been fully phased in. The new minimum capital level requirements applicable to the Company and the Bank under the final rules are: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets (“RWA”); (ii) a Tier 1 capital ratio of 6% of RWA; (iii) a total capital ratio of 8% of RWA; and (iv) a Tier 1 leverage ratio of 4% of total assets. The final rules also established a “capital conservation buffer” of 2.5% above each of the new regulatory minimum capital ratios, which resulted in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0% of RWA; (ii) a Tier 1 capital ratio of 8.5% of RWA; and (iii) a total capital ratio of 10.5% of RWA. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. The final rules also permit the Company’s subordinated debentures issued in 2003 to continue to be counted as Tier 1 capital. The Company believes that it is currently in compliance with all of these capital requirements and that they will not result in any restrictions on the Company’s business activity. 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. 100 Table of Contents (in thousands) Actual Minimum Regulatory Capital Requirements Well Capitalized Under Prompt Corrective Action December 31, 2020 Amount Ratio Amount Ratio Amount Ratio Total Bank Capital to Risk Weighted Assets $ 446,251 12.46 % $ 286,462 8.00 % $ 358,077 10.00 % Total Consolidated Capital to Risk Weighted Assets $ 450,890 12.59 % $ 286,539 8.00 % N/A N/A Total Bank Common Equity Tier 1 Capital Ratio $ 401,313 11.21 % $ 161,135 4.50 % $ 232,750 6.50 % Total Consolidated Common Equity Tier 1 Capital Ratio $ 395,941 11.05 % $ 161,178 4.50 % N/A N/A Tier 1 Bank Capital to Risk Weighted Assets $ 401,313 11.21 % $ 214,846 6.00 % $ 286,462 8.00 % Tier 1 Consolidated Capital to Risk Weighted Assets $ 405,941 11.33 % $ 214,904 6.00 % N/A N/A Tier 1 Bank Capital to Average Assets $ 401,313 9.04 % $ 177,605 4.00 % $ 222,006 5.00 % Tier 1 Consolidated Capital to Average Assets $ 405,941 9.13 % $ 177,820 4.00 % N/A N/A (in thousands) Actual Minimum Regulatory Capital Requirements Well Capitalized Under Prompt Corrective Action December 31, 2019 Amount Ratio Amount Ratio Amount Ratio Total Bank Capital to Risk Weighted Assets $ 399,230 12.33 % $ 259,012 8.00 % $ 323,765 10.00 % Total Consolidated Capital to Risk Weighted Assets $ 400,258 12.36 % $ 259,028 8.00 % N/A N/A Total Bank Common Equity Tier 1 Capital Ratio $ 358,576 11.08 % $ 145,694 4.50 % $ 210,447 6.50 % Total Consolidated Common Equity Tier 1 Capital Ratio $ 349,601 10.80 % $ 145,703 4.50 % N/A N/A Tier 1 Bank Capital to Risk Weighted Assets $ 358,576 11.08 % $ 194,259 6.00 % $ 259,012 8.00 % Tier 1 Consolidated Capital to Risk Weighted Assets $ 359,601 11.11 % $ 194,271 6.00 % N/A N/A Tier 1 Bank Capital to Average Assets $ 358,576 9.89 % $ 145,079 3.00 % $ 181,349 5.00 % Tier 1 Consolidated Capital to Average Assets $ 359,601 9.90 % $ 145,255 3.00 % N/A N/A 15. Dividends and Basic and Diluted Earnings Per Common Share Total cash dividends during 2020 were $ 11,700,000 or $ 14.75 per share of common stock, an increase of 3.9 % per share from $ 11,221,000 or $ 14.20 per share in 2019. In 2018, cash dividends totaled $ 11,151,000 or $ 13.90 per share. Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. The Company has no securities or other contracts, such as stock options, that could require the issuance of additional common stock. Accordingly, diluted earnings per share are equal to basic earnings per share. The following table calculates the basic and diluted earnings per common share for the periods indicated. ( net income in thousands ) 2020 2019 2018 Net Income $ 58,734 $ 56,036 $ 45,527 Weighted Average Number of Common Shares Outstanding 793,337 787,227 801,229 Basic and Diluted Earnings Per Common Share $ 74.03 $ 71.18 $ 56.82 16. Employee Benefit Plans Profit Sharing Plan The Company, through the Bank, sponsors a Profit Sharing Plan for substantially all full-time employees of the Company with one or more years of service. Participants receive up to two annual employer contributions, one is discretionary and the other is mandatory. The discretionary contributions to the Profit Sharing Plan are determined annually by the Board of Directors. The discretionary contributions totaled $ 1.5 million, $ 1.4 million, and $ 1.2 million for the years ended December 31, 2020, 2019, and 2018, respectively. The mandatory contributions to the Profit Sharing Plan are made according to a predetermined set of criteria. Mandatory contributions totaled $ 1.7 million, $ 1.6 million, and $ 1.4 million for the years ended December 31, 2020, 2019, and 2018, respectively. Company employees are permitted, within limitations imposed by tax law, to make pretax contributions and after tax (Roth) contributions to the 401(k) feature of the Profit Sharing Plan. The Company does not match employee contributions within the 401(k) feature of the Profit Sharing Plan and the Company can terminate the Profit Sharing Plan at any time. Benefits pursuant to the Profit Sharing Plan vest 0 % during the first year of participation, 25 % per full year thereafter and after five years such benefits are fully vested. 101 Table of Contents Executive Retirement Plan and Life Insurance Arrangements The Company, through the Bank, sponsors an Executive Retirement Plan (“ERP”) for certain executive level employees. The ERP is a non-qualified deferred compensation plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by the Internal Revenue Service. The ERP is comprised of: (1) a Performance Component which makes contributions based upon long-term cumulative profitability and increase in market value of the Company; (2) a Salary Component which makes contributions based upon participant salary levels; and (3) an Equity Component for which contributions are discretionary and subject to Board of Directors approval. The Company maintains a Rabbi Trust to fund, in part, the ERP. The Rabbi Trust is an irrevocable grantor trust to which the Company may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. The Company may not use the assets of the Rabbi Trust for any purpose other than meeting its obligations under the ERP, however, the assets of the Rabbi Trust remain subject to the claims of its creditors and are included in the consolidated financial statements. The Company contributes cash to the Rabbi Trust from time to time for the sole purpose of funding the ERP. The Rabbi Trust will use any cash the Company contributes to purchase shares of common stock of the Company, and other financial instruments, on the open market. ERP contributions are invested in a mix of financial instruments; however, the Equity Component contributions are invested primarily in common stock of the Company. The Company expensed $ 6.8 million to the ERP during the year ended December 31, 2020, $ 6.6 million during the year ended December 31, 2019 and $ 6.2 million during the year ended December 31, 2018. The Company’s carrying value of the liability under the ERP was $ 56.7 million as of December 31, 2020 and $ 50.5 million as of December 31, 2019. The Company’s shares of common stock held as investments in the Rabbi Trust of the ERP as of December 31, 2020 and 2019 totaled 52,980 and 48,133 with an historical cost basis of $ 31.2 million and $ 29.1 million, respectively. All amounts have been fully funded into the Rabbi Trust as of December 31, 2020 and 2019. The consolidated investments held in the Rabbi Trust are recorded at fair value with changes in unrealized gains or losses recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income. Net gains on ERP plan investments were $ 1.8 million in 2020 compared to net gains of $ 2.6 million in 2019. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. The Company has purchased single premium life insurance policies on the lives of certain key employees of the Company. These policies provide: (1) financial protection to the Company in the event of the death of a key employee; and (2) significant income to the Company to offset the expense associated with the Executive Retirement Plan and other employee benefit plans, since the interest earned on the cash surrender value of the policies is tax exempt as long as the policies are used to finance employee benefits. As compensation to each employee for agreeing to allow the Company to purchase an insurance policy on his or her life, split dollar agreements have been entered into with those employees. These agreements provide for a division of the life insurance death proceeds between the Company and each employee’s designated beneficiary or beneficiaries. The Company earned tax-exempt interest on the life insurance policies of $ 2.1 million for the year ended December 31, 2020, $ 2.0 million for the year ended December 31, 2019, and $ 1.9 million for the year ended December 31, 2018. As of December 31, 2020 and 2019, the total cash surrender value of the insurance policies was $ 69.2 million and $ 67.1 million, respectively. 102 Table of Contents Senior Management Retention Plan The Company, through the Bank, sponsors a Senior Management Retention Plan (“SMRP”) for certain senior level employees. The SMRP is a non-qualified deferred compensation plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by the Internal Revenue Service. All contributions are discretionary and subject to the Board of Directors approval. The Company maintains a Rabbi Trust to fund, in part, the SMRP. The Rabbi Trust is an irrevocable grantor trust to which the Company may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. The Company may not use the assets of the Rabbi Trust for any purpose other than meeting its obligations under the SMRP, however, the assets of the Rabbi Trust remain subject to the claims of its creditors and are included in the consolidated financial statements. The Company contributes cash to the Rabbi Trust from time to time for the sole purpose of funding the SMRP. The Rabbi Trust will use any cash the Company contributes to purchase shares of common stock of the Company, and other financial instruments, on the open market. Contributions to the SMRP are invested primarily in common stock of the Company. The Company expensed $ 2.3 million to the SMRP during the year ended December 31, 2020, $ 1.3 million during the year ended December 31, 2019 and $ 1.5 million during the year ended December 31, 2018. The Company’s carrying value of the liability under the SMRP was $ 8.6 million as of December 31, 2020 and $ 6.3 million as of December 31, 2019. The Company’s shares of stock held as investments in the Rabbi Trust of the SMRP as of December 31, 2020 and December 31, 2019 totaled 12,548 and 9,822 shares with an historical cost basis of $ 7.9 million and $ 5.8 million, respectively. All amounts have been fully funded into the Rabbi Trust as of December 31, 2020 and 2019. The consolidated investments held in the Rabbi Trust are recorded at fair value with changes in unrealized gains or losses recorded within non-interest income and the equal and offsetting charges in the related liability are recorded in non-interest expense in the consolidated statements of income. Net gains on SMRP plan investments were $ 0.1 million in 2020 compared to zero in 2019. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices . 17. Fair Value Measurements The Company follows the “Fair Value Measurement and Disclosures” topic of the FASB ASC, which establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. This standard applies whenever other standards require, or permit, assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, this standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows: Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date. Level 2 inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. 103 Table of Contents Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. Securities classified as available-for-sale are reported at fair value on a recurring basis utilizing Level 1, 2 and 3 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The Company does not record all loans & leases at fair value on a recurring basis. However, from time to time, a loan or lease is considered impaired and an allowance for credit losses is established. Once a loan or lease is identified as individually impaired, management measures impairment in accordance with the “Receivable” topic of the FASB ASC. The fair value of impaired loans or leases is estimated using one of several methods, including collateral value when the loan is collateral dependent, market value of similar debt, enterprise value, and discounted cash flows. Impaired loans & leases not requiring an allowance represent loans & leases for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans & leases. Impaired loans & leases where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The fair value of collateral dependent impaired loans is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take in to account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring impaired loans is primarily the sales comparison approach less selling costs of 10 %. Other Real Estate (“ORE”) is reported at fair value on a non-recurring basis. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take in to account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring ORE is primarily the sales comparison approach less selling costs of 10 %. The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated. Fair Value Measurements At December 31, 2020, Using (in thousands) Fair Value Total Quoted Prices in Active Markets for Identical Assets (Level 1) Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Available-for-Sale Securities: US Treasury Notes $ 15,288 $ 15,288 $ - $ - US Government Agency SBA 8,160 - 8,160 - Mortgage Backed Securities 737,873 - 737,873 - Corporate Securities 45,919 - 45,919 - Other 492 182 310 - Total Assets Measured at Fair Value On a Recurring Basis $ 807,732 $ 15,470 $ 792,262 $ - 104 Table of Contents Fair Value Measurements At December 31, 2019, Using (in thousands) Fair Value Total Quoted Prices in Active Markets for Identical Assets (Level 1) Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Available-for-Sale Securities: US Treasury Notes $ 54,995 $ 54,995 $ - $ - US Government Agency SBA 10,798 - 10,798 - Mortgage Backed Securities 441,078 - 441,078 - Other 515 205 310 - Total Assets Measured at Fair Value On a Recurring Basis $ 507,386 $ 55,200 $ 452,186 $ - Fair values for Level 2 available-for-sale investment securities are based on quoted market prices for similar securities. During the year ended December 31, 2020, there were no transfers in or out of level 1, 2, or 3. The following tables present information about the Company’s impaired loans & leases and other real estate, classes of assets or liabilities that the Company carries at fair value on a non-recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated. Not all impaired loans & leases are carried at fair value. Impaired loans & leases are only included in the following tables when their fair value is based upon an appraisal of the collateral, and if that appraisal results in a partial charge-off or the establishment of a specific reserve. Fair Value Measurements At December 31, 2020, Using (in thousands) Fair Value Total Quoted Prices in Active Markets for Identical Assets (Level 1) Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Impaired Loans: Residential 1st Mortgage $ 1,584 $ - $ - $ 1,584 Home Equity Lines and Loans 61 - - 61 Agricultural 400 - - 400 Commercial 213 - - 213 Consumer 138 - - 138 Total Impaired Loans 2,396 - - 2,396 Other Real Estate: Real Estate Construction 873 - - 873 Total Other Real Estate 873 - - 873 Total Assets Measured at Fair Value On a Non-Recurring Basis $ 3,269 $ - $ - $ 3,269 105 Table of Contents Fair Value Measurements At December 31, 2019, Using (in thousands) Fair Value Total Quoted Prices in Active Markets for Identical Assets (Level 1) Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Impaired Loans: Commercial Real Estate $ 2,588 $ - $ - $ 2,588 Residential 1st Mortgage 1,403 - - 1,403 Home Equity Lines and Loans 142 - - 142 Agricultural 88 - - 88 Commercial 1,391 - - 1,391 Consumer 139 - - 139 Total Impaired Loans 5,751 - - 5,751 Other Real Estate: Real Estate Construction 873 - - 873 Total Other Real Estate 873 - - 873 Total Assets Measured at Fair Value On a Non-Recurring Basis $ 6,624 $ - $ - $ 6,624 The Company’s property appraisals are primarily based on the sales comparison approach and the income approach methodologies, which consider recent sales of comparable properties, including their income generating characteristics, and then make adjustments to reflect the general assumptions that a market participant would make when analyzing the property for purchase. These adjustments may increase or decrease an appraised value and can vary significantly depending on the location, physical characteristics and income producing potential of each property. Additionally, the quality and volume of market information available at the time of the appraisal can vary from period to period and cause significant changes to the nature and magnitude of comparable sale adjustments. Given these variations, comparable sale adjustments are generally not a reliable indicator for how fair value will increase or decrease from period to period. Under certain circumstances, management discounts are applied based on specific characteristics of an individual property. The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2020 and 2019: December 31, 2020 (in thousands) Fair Value Valuation Technique Unobservable Inputs Range, Weighted Avg. Impaired Loans: Residential 1st Mortgage $ 1,584 Sales Comparison Approach Adjustment for Difference Between Comparable Sales 0.72 % - 4.13 %, 2.57 % Home Equity Lines and Loans $ 61 Sales Comparison Approach Adjustment for Difference Between Comparable Sales 1.1 % - 1.4 %, 1.25 % Agricultural $ 400 Income Approach Capitalization Rate 10 %, 10 % Commercial $ 213 Income Approach Capitalization Rate 10 %, 10 % Consumer $ 138 Income Approach Adjustment for Difference Between Comparable Sales 10 %, 10 % Other Real Estate: Real Estate Construction $ 873 Sales Comparison Approach Adjustment for Difference Between Comparable Sales 10 %, 10 % 106 Table of Contents December 31, 2019 (in thousands) Fair Value Valuation Technique Unobservable Inputs Range, Weighted Avg. Impaired Loans: Commercial Real Estate $ 2,588 Income Approach Capitalization Rate 3.3 % Residential 1st Mortgages $ 1,403 Sales Comparison Approach Adjustment for Difference Between Comparable Sales 0.8 % - 6.4 %, 3 % Home Equity Lines and Loans $ 142 Sales Comparison Approach Adjustment for Difference Between Comparable Sales 1 % - 2 %, 1.3 % Agricultural $ 88 Income Approach Capitalization Rate 4.3 % Commercial $ 1,391 Income Approach Capitalization Rate 3.3 % Consumer $ 139 Sales Comparison Approach Adjustment for Difference Between Comparable Sales 40.6 % Other Real Estate: Real Estate Construction $ 873 Sales Comparison Approach Adjustment for Difference Between Comparable Sales 10 % 18. Fair Value of Financial Instruments U.S. GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. 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. The fair value of loans held for investment, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses consistent with ASC 820. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, risk premium, credit, and nonperformance risk of the loans. Loans are considered a Level 3 classification. The following tables summarize the carrying value and estimated fair value of financial instruments for the periods indicated: Fair Value of Financial Instruments Using December 31, 2020 (in thousands) Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level 1) Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Estimated Fair Value Assets: Cash and Cash Equivalents $ 383,837 $ 383,837 $ - $ - $ 383,837 Investment Securities Available-for-Sale 807,732 15,470 792,262 - 807,732 Investment Securities Held-to-Maturity 68,933 - 26,262 43,787 70,049 Loans & Leases, Net 3,040,730 - - 3,045,911 3,045,911 Accrued Interest Receivable 20,333 - 20,333 - 20,333 Liabilities: Deposits 4,060,267 3,638,400 - 422,840 4,061,240 Subordinated Debentures 10,310 - 6,888 - 6,888 Accrued Interest Payable 1,383 - 1,383 - 1,383 107 Table of Contents Fair Value of Financial Instruments Using December 31, 2019 (in thousands) Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level 1) Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Estimated Fair Value Assets: Cash and Cash Equivalents $ 294,758 $ 294,758 $ - $ - $ 294,758 Investment Securities Available-for-Sale 507,386 55,200 452,186 - 507,386 Investment Securities Held-to-Maturity 60,229 - 31,253 29,844 61,097 Loans & Leases, Net 2,618,015 - - 2,584,805 2,584,805 Accrued Interest Receivable 16,733 - 16,733 - 16,733 Liabilities: Deposits 3,278,019 2,760,097 - 517,172 3,277,269 Subordinated Debentures 10,310 - 7,325 - 7,325 Accrued Interest Payable 2,795 - 2,795 - 2,795 19. Commitments and Contingencies In the normal course of business, the Company enters into financial instruments with off balance sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These instruments include commitments to extend credit, letters of credit, and other types of financial guarantees. The Company had the following off balance sheet commitments as of the dates indicated. (in thousands) December 31, 2020 December 31, 2019 Commitments to Extend Credit $ 1,040,844 $ 919,982 Letters of Credit 18,846 20,346 Performance Guarantees Under Interest Rate Swap Contracts Entered Into Between Our Borrowing Customers and Third Parties 2,786 1,513 The Company’s exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer’s creditworthiness are performed on a case-by-case basis. Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third party. Outstanding standby letters of credit have maturity dates ranging from 1 to 25 months with final expiration in January 2022. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. In the ordinary course of business, the Company becomes involved in litigation arising out of its normal business activities. Management, after consultation with legal counsel, believes that the ultimate liability, if any, resulting from the disposition of such claims would not be material in relation to the financial position of the Company. The Company may be required to maintain average reserves on deposit with the Federal Reserve Bank primarily based on deposits outstanding. Reserve requirements are offset by the Company’s vault cash and deposit balances maintained with the Federal Reserve Bank. 108 Table of Contents 20. Leases Lessee – Operating Leases Effective January 1, 2019, the Company adopted the provisions of Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842),” for all open leases with a term greater than one year as of the adoption date, using the modified retrospective approach. Prior comparable periods are presented in accordance with previous guidance under Accounting Standards Codification ASC 840. Operating leases in which we are the lessee are recorded as operating lease right-of-use (“ROU”) assets and operating lease liabilities, included in other assets and other liabilities , respectively, on our consolidated balance sheets. We do not currently have any significant finance leases in which we are the lessee. Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded net in occupancy expense in the consolidated statements of income. Our leases relate primarily to office space and bank branches with remaining lease terms of generally 1 to 10 years. Certain lease arrangements contain extension options which typically range from 5 to 10 years at the then fair market rental rates. ASC 842 requires lessees to evaluate whether option periods, if available, will be exercised in order to determine the full life of the lease. The Company used the first option period, unless it is a relatively new lease that has a long initial lease term or other extenuating circumstances. As of December 31, 2020, operating lease ROU assets and liabilities were $ 4.80 million and $ 4.92 million, respectively. Operating lease expenses totaled $ 833,000 for the year ended December 31, 2020. As of December 31, 2019, operating lease ROU assets and liabilities were $ 4.98 million and $ 5.03 million, respectively. Operating leases totaled $ 836,000 for the year ended December 31, 2019. In the 4th quarter of 2020, the lease term and payment of one lease was modified resulting in additional ROU assets and liabilities of $ 542,000 . The table below summarizes the information related to our operating leases: (in thousands except for percent and period data) Year Ended December 31, 2020 Year Ended December 31, 2019 Cash Paid for Amounts Included in the Measurement of Lease Liabilities Operating Cash Flow from Operating Leases $ 795 $ 783 Right-of-Use Assets Obtained in Exchange for New Operating Lease Liabilities $ - $ 5,645 Weighted-Average Remaining Lease Term - Operating Leases, in Years 7.33 7.88 Weighted-Average Discount Rate - Operating Leases 2.9 % 3.2 % 109 Table of Contents The table below summarizes the maturity of remaining lease liability: (in thousands) December 31, 2020 2021 727 2022 695 2023 705 2024 721 2025 731 2026 and thereafter 1,907 Total Lease Payments 5,486 Less: Interest ( 568 ) Present Value of Lease Liabilities $ 4,918 As of December 31, 2020, we have no additional operating leases for office space that have not yet commenced or that are anticipated to commence during the first quarter of 2021. Lessor - Direct Financing Leases The Company is the lessor in direct finance lease arrangements. Leases are recorded at the principal balance outstanding, net of unearned income and charge-offs. Interest income is recognized using the interest method. Leases typically have a maturity of three to ten years , and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease. The impact of adopting Topic 842 for lessor accounting was not significant. Lease payments due to the Company are typically fixed and paid in equal installments over the lease term. Variable lease payments that do not depend on an index or a rate (e.g., property taxes) that are paid directly by the Company are minimal. The majority of property taxes are paid directly by the client to a third party and are not considered part of variable payments and therefore are not recorded by the Company. As a lessor, the Company leases certain types of agriculture equipment, solar equipment, construction equipment and other equipment to its customers. The Company’s net investment in direct financing leases was $ 103.5 million at December 31, 2020 and $ 105.4 million at December 31, 2019. 21. Recent Accounting Pronouncements Accounting Guidance Pending Adoption at December 31, 2020 The following paragraphs provide descriptions of newly issued but not yet effective accounting standards that could have a material effect on the Company’s financial position or results of operations. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). The updated guidance simplifies the accounting for income taxes by removing certain exceptions and improves the consistent application of GAAP by clarifying and amending other existing guidance. ASU 2019-012 will be effective for us on January 1, 2021 and is not expected to have any material impact on our consolidated financial statements. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) . The amendments in this ASU are elective and provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this ASU may be elected as of March 12, 2020 through December 31, 2022. An entity may choose to elect the amendments in this update at an interim period subsequent to March 12, 2020 with adoption methods varying based on transaction type. We have not elected to apply these amendments. However, we will assess the applicability of the ASU to us and continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations. 110 Table of Contents 22. Parent Company Financial Information The following financial information is presented as of December 31 for the periods indicated. Farmers & Merchants Bancorp Condensed Balance Sheets (in thousands) 2020 2019 Cash $ 4,551 $ 1,341 Investment in Farmers & Merchants Bank of Central California 429,037 378,271 Investment Securities 434 411 Other Assets 832 102 Total Assets $ 434,854 $ 380,125 Subordinated Debentures $ 10,310 $ 10,310 Liabilities 879 519 Shareholders’ Equity 423,665 369,296 Total Liabilities and Shareholders’ Equity $ 434,854 $ 380,125 Farmers & Merchants Bancorp Condensed Statements of Income Year Ended December 31, (in thousands) 2020 2019 2018 Equity (Loss) in Undistributed Earnings in Farmers & Merchants Bank of Central California $ 40,597 $ 44,571 $ ( 26,488 ) Dividends from Subsidiary 19,874 13,166 73,010 Interest Income 11 17 16 Other Expenses, Net ( 2,477 ) ( 2,416 ) ( 1,527 ) Tax Benefit 729 698 516 Net Income $ 58,734 $ 56,036 $ 45,527 111 Table of Contents Farmers & Merchants Bancorp Condensed Statements of Cash Flows Year Ended December 31, (in thousands) 2020 2019 2018 Cash Flows from Operating Activities: Net Income $ 58,734 $ 56,036 $ 45,527 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: (Equity) Loss in Undistributed Net Earnings from Subsidiary ( 40,597 ) ( 44,571 ) 26,488 Net (Increase) in Other Assets ( 753 ) ( 160 ) ( 125 ) Net Increase (Decrease) in Liabilities 360 222 ( 942 ) Net Cash Provided by Operating Activities 17,744 11,527 70,948 Investing Activities: Payments for Business Acquisition - - ( 28,642 ) Payments for Investments in Non-Qualified Retirement Plan ( 403 ) ( 6,273 ) ( 10,503 ) Net Cash Used by Investing Activities ( 403 ) ( 6,273 ) ( 39,145 ) Financing Activities: Stock Repurchased ( 2,834 ) - ( 31,152 ) Issuance of Common Stock 403 6,973 10,503 Cash Dividends ( 11,700 ) ( 11,221 ) ( 11,151 ) Net Cash Used by Financing Activities ( 14,131 ) ( 4,248 ) ( 31,800 ) Increase in Cash and Cash Equivalents 3,210 1,006 3 Cash and Cash Equivalents at Beginning of Year 1,341 335 332 Cash and Cash Equivalents at End of Year $ 4,551 $ 1,341 $ 335 23. Quarterly Unaudited Financial Data The following tables set forth certain unaudited historical quarterly financial data for each of the eight consecutive quarters in 2020 and 2019. This information is derived from unaudited consolidated financial statements that include, in management’s opinion, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation when read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-K. 2020 (in thousands except per share data) First Quarter Second Quarter Third Quarter Fourth Quarter Total Total Interest Income $ 38,689 $ 37,967 $ 39,793 $ 42,203 $ 158,652 Total Interest Expense 3,263 2,552 2,094 1,582 9,491 Net Interest Income 35,426 35,415 37,699 40,621 149,161 Provision for Credit Losses - 300 1,700 2,500 4,500 Net Interest Income After Provision for Credit Losses 35,426 35,115 35,999 38,121 144,661 Total Non-Interest Income 2,927 3,514 4,539 4,716 15,696 Total Non-Interest Expense 19,790 19,787 20,783 22,046 82,406 Income Before Income Taxes 18,563 18,842 19,755 20,791 77,951 Provision for Income Taxes 4,441 4,533 4,945 5,298 19,217 Net Income $ 14,122 $ 14,309 $ 14,810 $ 15,493 $ 58,734 Basic and Diluted Earnings Per Common Share $ 17.80 $ 18.03 $ 18.66 $ 19.54 $ 74.03 112 Table of Contents 2019 (in thousands except per share data) First Quarter Second Quarter Third Quarter Fourth Quarter Total Total Interest Income $ 37,173 $ 38,626 $ 38,810 $ 39,099 $ 153,708 Total Interest Expense 2,966 3,253 3,530 3,445 13,194 Net Interest Income 34,207 35,373 35,280 35,654 140,514 Provision for Credit Losses - 200 - - 200 Net Interest Income After Provision for Credit Losses 34,207 35,173 35,280 35,654 140,314 Total Non-Interest Income 4,464 4,400 3,974 4,403 17,241 Total Non-Interest Expense 20,445 20,565 20,856 20,376 82,242 Income Before Income Taxes 18,226 19,008 18,398 19,681 75,313 Provision for Income Taxes 4,677 4,903 4,660 5,037 19,277 Net Income $ 13,549 $ 14,105 $ 13,738 $ 14,644 $ 56,036 Basic and Diluted Earnings Per Common Share $ 17.27 $ 17.92 $ 17.45 $ 18.54 $ 71.18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None