FARMERS & MERCHANTS BANCORP 10-Q

ITEM 1. Financial Statements FARMERS & MERCHANTS BANCORP Condensed Consolidated Balance Sheets (in thousands except share data) Assets March 31, 2021 (Unaudited) December 31, 2020 March 31, 2020 (Unaudited) Cash and Cash Equivalents: Cash and Due from Banks $ 58,883 $ 66,327 $ 57,304 Interest Bearing Deposits with Banks 434,524 317,510 225,656 Total Cash and Cash Equivalents 493,407 383,837 282,960 Investment Securities: Available-for-Sale, at Fair Value 560,973 807,732 532,246 Held-to-Maturity, fair value $ 374,828 , $ 70,049 and $ 59,503 , respectively 385,054 68,933 58,701 Total Investment Securities 946,027 876,665 590,947 Loans & Leases: 3,111,011 3,099,592 2,670,109 Less: Allowance for Credit Losses 60,175 58,862 54,824 Loans & Leases, Net 3,050,836 3,040,730 2,615,285 Premises and Equipment, Net 49,585 50,147 45,910 Bank Owned Life Insurance, Net 69,762 69,235 67,657 Interest Receivable and Other Assets 124,842 129,839 117,682 Total Assets $ 4,734,459 $ 4,550,453 $ 3,720,441 Liabilities Deposits: Demand $ 1,529,753 $ 1,475,425 $ 1,009,561 Interest Bearing Transaction 979,185 902,487 695,283 Savings and Money Market 1,315,700 1,260,487 1,028,681 Time 416,576 421,868 521,748 Total Deposits 4,241,214 4,060,267 3,255,273 Subordinated Debentures 10,310 10,310 10,310 Interest Payable and Other Liabilities 56,965 56,211 60,628 Total Liabilities 4,308,489 4,126,788 3,326,211 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 , 789,646 and 793,556 , Shares Issued and Outstanding at March 31 , 2021 , December 31, 2020 and March 31 , 2020 , Respectively 8 8 8 Additional Paid-In Capital 77,516 77,516 80,350 Retained Earnings 349,790 333,070 300,158 Accumulated Other Comprehensive (Loss) Income, Net of Taxes ( 1,344 ) 13,071 13,714 Total Shareholders’ Equity 425,970 423,665 394,230 Total Liabilities and Shareholders’ Equity $ 4,734,459 $ 4,550,453 $ 3,720,441 The accompanying notes are an integral part of these unaudited consolidated financial statements 3 Table of Contents FARMERS & MERCHANTS BANCORP Condensed Consolidated Statements of Income (Unaudited) (in thousands except per share data) Three Months Ended March 31, 2021 2020 Interest Income Interest and Fees on Loans & Leases $ 37,087 $ 34,160 Interest on Deposits with Banks 103 947 Interest on Investment Securities: Taxable 3,804 3,152 Exempt from Federal Tax 423 430 Total Interest Income 41,417 38,689 Interest Expense Deposits 1,237 3,144 Subordinated Debentures 79 119 Total Interest Expense 1,316 3,263 Net Interest Income 40,101 35,426 Provision for Credit Losses 1,250 - Net Interest Income After Provision for Credit Losses 38,851 35,426 Non-Interest Income Service Charges on Deposit Accounts 638 920 Net Gain on Sale of Investment Securities 1,840 13 Increase in Cash Surrender Value of Bank Owned Life Insurance 526 509 Debit Card and ATM Fees 1,579 1,277 Net Gain (Loss) on Deferred Compensation Investments 3,540 ( 662 ) Other 1,602 870 Total Non-Interest Income 9,725 2,927 Non-Interest Expense Salaries and Employee Benefits 16,740 14,880 Net Gain (Loss) on Deferred Compensation Investments 3,540 ( 662 ) Occupancy 1,231 1,106 Equipment 1,224 1,168 Marketing 188 245 Legal 111 30 FDIC Insurance 287 - Other 3,042 3,023 Total Non-Interest Expense 26,363 19,790 Income Before Provision for Income Taxes 22,213 18,563 Provision for Income Taxes 5,500 4,441 Net Income $ 16,713 $ 14,122 Basic and Diluted Earnings Per Common Share $ 21.17 $ 17.80 The accompanying notes are an integral part of these unaudited consolidated financial statements 4 Table of Contents FARMERS & MERCHANTS BANCORP Condensed Consolidated Statements of Comprehensive Income (Unaudited) (in thousands) Three Months Ended March 31, 2021 2020 Net Income $ 16,713 $ 14,122 Other Comprehensive Income Increase in Net Unrealized (Loss) Gain on Available-for-Sale Securities ( 18,566 ) 14,790 Deferred Tax Benefit Related to Unrealized (Loss) Gains 5,489 ( 4,372 ) Reclassification Adjustment for Realized Gains on Available-for-Sale Securities ( 1,840 ) ( 13 ) Deferred Tax Benefit Related to Reclassification Adjustment 544 4 Amortization of Unrealized (Loss) on Securities Transferred from Available-for-Sale to Held-to-Maturity ( 58 ) - Deferred Tax Benefit Related to (Loss) on Securities Transferred 16 - Total Other Comprehensive Income ( 14,415 ) 10,409 Comprehensive Income $ 2,298 $ 24,531 The accompanying notes are an integral part of these unaudited consolidated financial statements 5 Table of Contents Farmers & Merchants Bancorp Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) (in thousands except share data) Common Shares Outstanding Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Gain / (Loss) net Total Shareholders’ Equity Balance, December 31, 2019 793,033 $ 8 $ 79,947 $ 286,036 $ 3,305 $ 369,296 Net Income - - 14,122 - 14,122 Issuance of Common Stock 523 - 403 - - 403 Other Comprehensive Income - - - 10,409 10,409 Balance, March 31, 2020 793,556 $ 8 $ 80,350 $ 300,158 $ 13,714 $ 394,230 Balance, December 31, 2020 789,646 $ 8 $ 77,516 $ 333,070 $ 13,071 $ 423,665 Net Income - - 16,713 - 16,713 Cash Dividends Returned - - 7 - 7 Other Comprehensive Income - - - ( 14,415 ) ( 14,415 ) Balance, March 31, 2021 789,646 $ 8 $ 77,516 $ 349,790 $ ( 1,344 ) $ 425,970 The accompanying notes are an integral part of these unaudited consolidated financial statements 6 Table of Contents FARMERS & MERCHANTS BANCORP Condensed Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, (in thousands) 2021 2020 Operating Activities: Net Income $ 16,713 $ 14,122 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Credit Losses 1,250 - Depreciation and Amortization 660 709 Net Amortization/Accretion of Investment Security Premiums & Discounts 407 125 Amortization of Core Deposit Intangible 153 157 Accretion of Discount on Acquired Loans ( 16 ) ( 90 ) Net Gain on Sale of Investment Securities ( 1,840 ) ( 13 ) Net Change in Operating Assets & Liabilities: Net Decrease in Interest Receivable and Other Assets 10,308 8,718 Net Increase (Decrease) in Interest Payable and Other Liabilities 1,386 ( 3,417 ) Net Cash Provided by Operating Activities 29,021 20,311 Investing Activities: Purchase of Investment Securities Available-for-Sale ( 199,440 ) ( 67,661 ) Proceeds from Sold, Matured or Called Securities Available-for-Sale 110,388 57,595 Purchase of Investment Securities Held-to-Maturity ( 3,211 ) ( 2,380 ) Proceeds from Matured or Called Securities Held-to-Maturity 3,930 3,904 Net Loans & Leases Paid, Originated or Acquired ( 11,340 ) 2,820 Additions to Premises and Equipment, Net ( 100 ) ( 1,352 ) Purchase of Other Investments ( 632 ) ( 2,289 ) Net Cash Used in Investing Activities ( 100,405 ) ( 9,363 ) Financing Activities: Net Increase (Decrease) in Deposits 180,947 ( 22,746 ) Cash Dividends Returned 7 - Net Cash Provided by (Used in) Financing Activities 180,954 ( 22,746 ) Net Change in Cash and Cash Equivalents 109,570 ( 11,798 ) Cash and Cash Equivalents at Beginning of Period 383,837 294,758 Cash and Cash Equivalents at End of Period $ 493,407 $ 282,960 Supplementary Data Cash Payments Made for Income Taxes $ - $ 3 Issuance of Common Stock to the Bank’s Non-Qualified Retirement Plans $ - $ 403 Interest Paid $ 1,943 $ 3,628 Supplementary Noncash Disclosure Investment Securities Available-for-Sale Transferred to Held-to-Maturity $ 316,925 $ - The accompanying notes are an integral part of these unaudited consolidated financial statements 7 Table of Contents FARMERS & MERCHANTS BANCORP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. The accounting and reporting policies of the Company conform to U.S. GAAP and prevailing practice within the banking industry. The following is a summary of the significant accounting and reporting policies used in preparing the consolidated financial statements. Basis of Presentation The accompanying consolidated financial statements 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 unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for quarterly reports on Form 10 -Q. These unaudited consolidated financial statements do not include all disclosures associated with the Company’s consolidated annual financial statements included in its Annual Report on Form 10 -K, as amended (“2020 Annual Report on Form 10-K”), for the year ended December 31, 2020 and, accordingly, should be read in conjunction with such audited consolidated financial statements. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The preparation of consolidated financial statements in conformity with U.S. GAAP 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. Accounting Guidance Pending Adoption at March 31, 2021 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. 8 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 current expected credit losses (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 of 2019, 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. 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 three 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 to 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 indefinite period of time and/or to use the securities 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. Transfers of debt securities from the available-for-sale category to the held-to-maturity category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer remains in accumulated other comprehensive income and in the carrying value of the held-to-maturity investment security. Premiums or discounts on investment securities are amortized or accreted using the effective interest method over the life of the security as an adjustment of yield. Unrealized holding gains or losses that remain in accumulated other comprehensive income are amortized or accreted over the remaining life of the security as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount. Trading securities, if any, are acquired for short-term appreciation and are recorded in a trading portfolio and are carried at fair value, with unrealized gains and losses recorded in non-interest income. 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 changes in market value recognized through earnings . 9 Table of Contents 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 more than insignificant 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. 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. 10 Table of Contents 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. 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. 11 Table of Contents 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. 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. 12 Table of Contents 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 California 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. 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. 13 Table of Contents 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. 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. 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 Low Income Housing Tax Credits (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. 14 Table of Contents 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 March 31, 2021 and 2020, 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 9 – “Dividends and Basic and Diluted Earnings Per Common Share” for additional information. Segment Reporting The “Segment Reporting” topic of the FASB ASC 280 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 220 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, and amortization of net unrealized gains or losses on securities transferred from available-for-sale to held-to-maturity, net of related taxes. 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 . 15 Table of Contents At March 31, 2021, 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 $ 459 $ 593 $ 573 $ 549 $ 522 $ 1,165 $ 3,861 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 T he 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 guaranties how long the COVID-19 virus may continue to impact our economy, and therefore, the Company. While we expect the effects of COVID-19 to have an adverse future impact on our business, financial condition and results of operations, we are unable to predict the extent or nature of these impacts at the current tim e. 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 March 31, 2021 Cost Gains Losses Value US Treasury Notes $ 14,885 $ 348 $ - $ 15,233 US Government Agency SBA 7,894 1 86 7,809 Mortgage Backed Securities (1)(2) 494,399 8,192 10,080 492,511 Corporate Securities 44,998 488 711 44,775 Other 645 - - 645 Total $ 562,821 $ 9,029 $ 10,877 $ 560,973 16 Table of Contents Amortized Gross Unrealized Fair 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 March 31, 2020 Cost Gains Losses Value US Treasury Notes $ 14,777 $ 622 $ - $ 15,399 US Government Agency SBA 10,043 9 98 9,954 Mortgage Backed Securities (1) 482,439 18,945 8 501,376 Other 5,517 - - 5,517 Total $ 512,776 $ 19,576 $ 106 $ 532,246 (1) All Mortgage Backed Securities were issued by an agency or government sponsored entity of the U.S. Government. (2) During Q1 2021, the Company transferred $ 316.9 million of AFS securities to HTM. The amortized cost, estimated fair values and unrealized gains and losses of investments classified as held-to-maturity are as follows (in thousands): Amortized Gross Unrealized Fair March 31, 2021 Cost Gains Losses Value Obligations of States and Political Subdivisions $ 70,454 $ 905 $ - $ 71,359 Mortgage Backed Securities (1)(2) 314,600 - 11,131 303,469 Total $ 385,054 $ 905 $ 11,131 $ 374,828 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 March 31, 2020 Cost Gains Losses Value Obligations of States and Political Subdivisions $ 58,701 $ 812 $ 10 $ 59,503 Total $ 58,701 $ 812 $ 10 $ 59,503 (1) All Mortgage Backed Securities were issued by an agency or government sponsored entity of the U.S. Government. (2) During Q1 2021, the Company transferred $ 316.9 million of AFS securities to HTM. As part of our ongoing review of our investment securities portfolio, we reassessed the classification of certain MBS securities. During the first quarter of 2021, we transferred $ 316.9 million of these securities, which we intend and have the ability to hold to maturity, from available-for-sale securities to held-to-maturity at fair value. The unrealized pre-tax loss of $ 2,000 at the date of transfer remained in accumulated other comprehensive income and is amortized over the remaining lives of the securities . 17 Table of Contents 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 March 31, 2021 by contractual maturity are shown in the following table (in thousands): Available-for-Sale Held-to-Maturity March 31, 2021 Amortized Cost Fair Value Amortized Cost Fair Value Within one year $ 5,642 $ 5,650 $ 8,152 $ 8,152 After one year through five years 32,404 32,682 5,542 5,582 After five years through ten years 23,307 23,143 22,277 23,052 After ten years 7,069 6,987 34,483 34,573 68,422 68,462 70,454 71,359 Investment securities not due at a single maturity date: Mortgage-backed securities 494,399 492,511 314,600 303,469 Total $ 562,821 $ 560,973 $ 385,054 $ 374,828 Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may 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 March 31, 2021 Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Securities Available-for-Sale US Government Agency SBA $ 505 $ 1 $ 7,028 $ 85 $ 7,533 $ 86 Mortgage Backed Securities 277,832 10,077 173 3 278,005 10,080 Corporate Securities 31,958 711 - - 31,958 711 Total $ 310,295 $ 10,789 $ 7,201 $ 88 $ 317,496 $ 10,877 Securities Held-to-Maturity Mortgage Backed Securities 303,275 11,131 - - 303,275 11,131 Total $ 303,275 $ 11,131 $ - $ - $ 303,275 $ 11,131 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. 18 Table of Contents Less Than 12 Months 12 Months or More Total March 31, 2020 Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Securities Available-for-Sale US Government Agency SBA $ 2,458 $ 5 $ 4,674 $ 93 $ 7,132 $ 98 Mortgage Backed Securities 1,503 2 255 6 1,758 8 Total $ 3,961 $ 7 $ 4,929 $ 99 $ 8,890 $ 106 Securities Held-to-Maturity Obligations of States and Political Subdivisions $ 728 $ 10 $ - $ - $ 728 $ 10 Total $ 728 $ 10 $ - $ - $ 728 $ 10 As of March 31, 2021, the Company held 599 investment securities of which 83 were in an unrealized loss position for less than twelve months. 88 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. U.S. Treasury Notes – At March 31, 2021, December 31, 2020 and March 31, 2020, no U.S. Treasury Notes security investments were in a loss position. U.S. Government SBA – At March 31, 2021, three U.S. Government SBA security investments were in an unrealized loss position for less than 12 months and 70 were in an unrealized loss position for 12 months or more. The unrealized losses on the Company’s investment in U.S. Government SBA securities were $ 86,000 at March 31, 2021 and $ 93,000 at December 31, 2020, and $ 98,000 at March 31, 2020. 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 March 31, 2021, December 31, 2020, and March 31, 2020. Mortgage Backed Securities – At March 31, 2021, 62 mortgage backed security investments were in an unrealized loss position for less than 12 months and 18 were in an unrealized loss position for 12 months or more. The unrealized losses on the Company’s investment in mortgage backed securities were $ 21.2 million, $ 48,000 , and $ 8,000 at March 31, 2021, December 31, 2020, and March 31, 2020, respectively. 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 March 31, 2021, December 31, 2020, and March 31, 2020. Corporate Securities – At March 31, 2021, 18 corporate securities were in an unrealized loss position for less than 12 months and none were in a loss position for 12 months or more. The unrealized losses on the Company’s investment in corporate securities were $ 711,000 , $ 18,000 and $ 0 at March 31, 2021, December 31, 2020, and March 31, 2020, respectively. 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 March 31, 2021, December 31, 2020, and March 31, 2020. 19 Table of Contents Obligations of States and Political Subdivisions - At March 31, 2021, no obligation of states and political subdivisions were in an unrealized loss position. As of March 31, 2021, one-hundred percent of the Company’s bank-qualified municipal bond portfolio was rated at either the issue or issuer level, and all of these ratings were “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 obligations of states and political subdivisions were $ 0 , $ 0 and $ 10,000 at March 31, 2021, December 31, 2020 and March 31, 2020, respectively. 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 March 31, 2021, December 31, 2020, and March 31, 2020. Proceeds from sales and calls of securities for the periods shown were as follows: (in thousands) Proceeds Gains Losses Three Months Ended March 31, 2021 $ 63,788 $ 1,840 $ - Three Months Ended March 31, 2020 $ 2,255 $ 13 $ - Pledged Securities As of March 31, 2021, securities carried at $ 390.9 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 $ 439.7 million at December 31, 2020, and $ 381.3 million at March 31, 2020. 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 March 31, 2021 , December 31, 2020 and March 31, 2020. 5. Loans & Leases Loans & Leases consisted of the following: (in thousands) March 31, 2021 December 31, 2020 March 31, 2020 Commercial Real Estate $ 1,021,565 $ 971,326 $ 868,736 Agricultural Real Estate 634,244 643,014 594,154 Real Estate Construction 208,573 185,741 126,956 Residential 1st Mortgages 305,085 299,379 256,732 Home Equity Lines and Loans 32,407 34,239 40,747 Agricultural 221,152 264,372 264,771 Commercial 367,875 374,816 404,329 Consumer & Other (1) 232,209 235,529 14,839 Leases 101,058 103,117 105,362 Total Gross Loans & Leases 3,124,168 3,111,533 2,676,626 Less: Unearned Income 13,157 11,941 6,517 Subtotal 3,111,011 3,099,592 2,670,109 Less: Allowance for Credit Losses 60,175 58,862 54,824 Net Loans & Leases $ 3,050,836 $ 3,040,730 $ 2,615,285 (1) Includes CARES Act Small Business Administration Paycheck Protection Program loans of $ 221,857 as of March 31, 2021. 20 Table of Contents 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 $ 470.4 million of loans for 2,373 small business customers. At March 31, 2021, 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 $ 938.8 million and $ 708.7 million, respectively. The borrowing capacity on these loans was $ 669.5 million from FHLB and $ 446.6 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. The following tables show the allocation of the allowance for credit losses by portfolio segment and by impairment methodology at the dates indicated (in thousands) : March 31, 2021 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- December 31, 2020 $ 27,679 $ 8,633 $ 1,643 $ 960 $ 2,024 $ 4,814 $ 9,961 $ 333 $ 1,731 $ 1,084 $ 58,862 Charge-Offs - - - - - - - ( 8 ) - - ( 8 ) Recoveries - - - 28 4 3 29 7 - - 71 Provision 1,387 415 4 ( 21 ) ( 114 ) ( 570 ) ( 14 ) ( 36 ) ( 57 ) 256 1,250 Ending Balance- March 31, 2021 $ 29,066 $ 9,048 $ 1,647 $ 967 $ 1,914 $ 4,247 $ 9,976 $ 296 $ 1,674 $ 1,340 $ 60,175 Ending Balance Individually Evaluated for Impairment - - - 107 8 - 15 48 - - 178 Ending Balance Collectively Evaluated for Impairment 29,066 9,048 1,647 860 1,906 4,247 9,961 248 1,674 1,340 59,997 Loans & Leases: Ending Balance $ 1,008,032 $ 634,244 $ 208,573 $ 305,085 $ 32,407 $ 221,152 $ 367,875 $ 232,209 $ 101,434 $ - $ 3,111,011 Ending Balance Individually Evaluated for Impairment 99 - 2,149 2 153 6,122 228 186 - - 8,939 Ending Balance Collectively Evaluated for Impairment $ 1,007,933 $ 634,244 $ 206,424 $ 305,083 $ 32,254 $ 215,030 $ 367,647 $ 232,023 $ 101,434 $ - $ 3,102,072 21 Table of Contents 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- December 31, 2019 $ 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 - - - 52 78 81 280 33 - - 524 Provision 16,626 ( 6,495 ) ( 306 ) 53 ( 722 ) ( 3,343 ) ( 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 March 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- December 31, 2019 $ 11,053 $ 15,128 $ 1,949 $ 855 $ 2,675 $ 8,076 $ 11,466 $ 456 $ 3,162 $ 192 $ 55,012 Charge-Offs - - - - - - ( 244 ) ( 21 ) - - ( 265 ) Recoveries - - - 19 20 28 2 8 - - 77 Provision 69 ( 659 ) ( 22 ) 163 88 ( 1,145 ) 990 ( 61 ) 26 551 - Ending Balance- March 31, 2020 $ 11,122 $ 14,469 $ 1,927 $ 1,037 $ 2,783 $ 6,959 $ 12,214 $ 382 $ 3,188 $ 743 $ 54,824 Ending Balance Individually Evaluated for Impairment - - - 116 10 398 11 60 - - 595 Ending Balance Collectively Evaluated for Impairment 11,122 14,469 1,927 921 2,773 6,561 12,203 322 3,188 743 54,229 Loans & Leases: Ending Balance $ 861,311 $ 594,154 $ 126,956 $ 256,732 $ 40,747 $ 264,771 $ 404,329 $ 14,839 $ 106,270 $ - $ 2,670,109 Ending Balance Individually Evaluated for Impairment 4,486 5,629 - 2,310 200 733 1,517 196 - - 15,071 Ending Balance Collectively Evaluated for Impairment $ 856,825 $ 588,525 $ 126,956 $ 254,422 $ 40,547 $ 264,038 $ 402,812 $ 14,643 $ 106,270 $ - $ 2,655,038 The ending balance of loans individually evaluated for impairment includes restructured loans in the amount of $ 601,000 at March 31, 2021 , $ 876,000 at December 31, 2020 and $ 2.5 million at March 31, 2020 , which are no longer disclosed or classified as TDRs, since they were restricted at market terms. 22 Table of Contents The following tables show the loan & lease portfolio allocated by management’s internal risk ratings at the dates indicated (in thousands) : March 31, 2021 Pass (1) Special Mention Substandard Total Loans & Leases Loans & Leases: Commercial Real Estate $ 995,679 $ 7,843 $ 4,510 $ 1,008,032 Agricultural Real Estate 621,696 977 11,571 634,244 Real Estate Construction 208,573 - - 208,573 Residential 1st Mortgages 304,237 - 848 305,085 Home Equity Lines & Loans 32,228 - 179 32,407 Agricultural 220,294 365 493 221,152 Commercial 366,022 1,196 657 367,875 Consumer & Other 230,919 - 1,290 232,209 Leases 101,434 - - 101,434 Total $ 3,081,082 $ 10,381 $ 19,548 $ 3,111,011 ( 1 ) Includes “Watch” loans of $ 1.0 billion. 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. March 31, 2020 Pass (1) Special Mention Substandard Total Loans & Leases Loans & Leases: Commercial Real Estate $ 854,346 $ 6,965 $ - $ 861,311 Agricultural Real Estate 580,205 1,136 12,813 594,154 Real Estate Construction 126,956 - - 126,956 Residential 1st Mortgages 256,027 - 705 256,732 Home Equity Lines & Loans 40,577 - 170 40,747 Agricultural 263,794 - 977 264,771 Commercial 400,735 2,321 1,273 404,329 Consumer & Other 14,392 - 447 14,839 Leases 106,270 - - 106,270 Total $ 2,643,302 $ 10,422 $ 16,385 $ 2,670,109 ( 1 ) Includes “Watch” loans of $ 802.7 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 or leases outstanding at March 31, 2021, December 31, 2020 , and March 31, 2020 , rated doubtful or loss . 23 Table of Contents The following tables show an aging analysis of the loan & lease portfolio, including unearned income, by the time past due at the dates indicated (in thousands) : March 31, 2021 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 $ - $ - $ - $ - $ - $ 1,008,032 $ 1,008,032 Agricultural Real Estate - - - 493 493 633,751 634,244 Real Estate Construction - - - - - 208,573 208,573 Residential 1st Mortgages - - - - - 305,085 305,085 Home Equity Lines & Loans - - - - - 32,407 32,407 Agricultural - 73 - - 73 221,079 221,152 Commercial - - - - - 367,875 367,875 Consumer & Other 253 - - - 253 231,956 232,209 Leases - - - - - 101,434 101,434 Total $ 253 $ 73 $ - $ 493 $ 819 $ 3,110,192 $ 3,111,011 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 March 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 $ - $ - $ - $ - $ - $ 861,311 $ 861,311 Agricultural Real Estate - - - - - 594,154 594,154 Real Estate Construction - - - - - 126,956 126,956 Residential 1st Mortgages - - - - - 256,732 256,732 Home Equity Lines & Loans 226 - - - 226 40,521 40,747 Agricultural - - - 549 549 264,222 264,771 Commercial 250 - - - 250 404,079 404,329 Consumer & Other 7 - - - 7 14,832 14,839 Leases - - - - - 106,270 106,270 Total $ 483 $ - $ - $ 549 $ 1,032 $ 2,669,077 $ 2,670,109 Non-accrual loans & leases were $ 493,000 at March 31, 2021 , $ 495,000 at December 31, 2020 and $ 549,000 at March 31, 2020 . 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 $ 12,000 , $ 22,000 , and $ 2,000 at March 31, 2021, December 31, 2020 and March 31, 2020 respectively. 24 Table of Contents The following tables show information related to impaired loans & leases for the periods indicated (in thousands) : March 31, 2021 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial Real Estate $ - $ - $ - $ 42 $ - Agricultural Real Estate 5,629 5,629 - 5,629 149 Agricultural 493 536 - 248 - $ 6,122 $ 6,165 $ - $ 5,919 $ 149 With an allowance recorded: Commercial Real Estate $ 83 $ 83 $ 1 $ 42 $ 3 Residential 1st Mortgages 1,661 1,884 83 1,666 20 Home Equity Lines & Loans 63 74 3 64 1 Agricultural - - - 246 - Commercial 228 228 15 231 4 Consumer & Other 186 187 48 188 4 $ 2,221 $ 2,456 $ 150 $ 2,437 $ 32 Total $ 8,343 $ 8,621 $ 150 $ 8,356 $ 181 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 March 31, 2020 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial Real Estate $ 2,888 $ 2,888 $ - $ 1,487 $ 29 Agricultural Real Estate 5,629 5,629 - 5,642 89 Commercial 1,507 1,507 - 754 15 $ 10,024 $ 10,024 $ - $ 7,883 $ 133 With an allowance recorded: Commercial Real Estate $ - $ - $ - $ 1,411 $ - Agricultural Real Estate 549 549 214 275 - Residential 1st Mortgages 1,550 1,761 77 1,556 19 Home Equity Lines & Loans 67 78 3 68 1 Agricultural 184 184 184 186 2 Commercial 11 11 11 770 - Consumer & Other 196 196 61 198 4 $ 2,557 $ 2,779 $ 550 $ 4,464 $ 26 Total $ 12,581 $ 12,803 $ 550 $ 12,347 $ 159 25 Table of Contents 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. Since April 2020 , we have restructured $ 278.1 million of loans under the CARES Act and H.R. 133 guidelines. As of March 31, 2021 , $ 1.2 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 March 31, 2021, there were no formal foreclosure proceedings in process for consumer mortgage loans secured by residential real estate properties. At March 31, 2021, the Company allocated $ 150,000 of specific reserves to $ 7.8 million of troubled debt restructured loans & leases, all of which were performing. The Company had no commitments at March 31, 2021 to lend additional amounts to customers with outstanding loans or leases that are classified as TDRs. During the three-month period ended March 31, 2021, no loans or leases were modified as a troubled debt restructuring. 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. The Company had no commitments at December 31, 2020 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. 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 tables present loans by class modified as troubled debt restructured loans for the periods ended indicated (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. 26 Table of Contents 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. At March 31, 2020, there were no formal foreclosure proceedings in process for consumer mortgage loans secured by residential real estate properties. At March 31, 2020, the Company allocated $ 336,000 of specific reserves to $ 12.6 million of troubled debt restructured loans & leases, all of which were performing. The Company had no commitments at March 31, 2020 to lend additional amounts to customers with outstanding loans or leases that are classified as TDRs. During the three-month period ended March 31, 2020, no loans or leases were modified as a troubled debt restructuring. 7. Fair Value Measurements The Company follows the “Fair Value Measurement and Disclosures” topic of the FASB ASC 820, 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. 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 310. 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 into account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring impaired loans is primarily the sales comparison approach less selling costs of 10 %. 27 Table of Contents 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 into account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring ORE is primarily the sales comparison approach less selling costs of 10 %. The following tables present information about the Company’s assets 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 March 31, 2021, Using Fair Value Quoted Prices in Active Markets for Identical Assets Other Observable Inputs Significant Unobservable Inputs (in thousands) Total (Level 1) (Level 2) (Level 3) Available-for-Sale Securities: US Treasury Notes $ 15,233 $ 15,233 $ - $ - US Government Agency SBA 7,809 - 7,809 - Mortgage Backed Securities 492,511 - 492,511 - Corporate Securities 44,775 - 44,775 - Other 645 335 310 - Total Assets Measured at Fair Value On a Recurring Basis $ 560,973 $ 15,568 $ 545,405 $ - Fair Value Measurements At December 31, 2020, Using Fair Value Quoted Prices in Active Markets for Identical Assets Other Observable Inputs Significant Unobservable Inputs (in thousands) Total (Level 1) (Level 2) (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 $ - Fair Value Measurements At March 31, 2020, Using Fair Value Quoted Prices in Active Markets for Identical Assets Other Observable Inputs Significant Unobservable Inputs (in thousands) Total (Level 1) (Level 2) (Level 3) Available-for-Sale Securities: US Treasury Notes $ 15,399 $ 15,399 $ - $ - US Government Agency SBA 9,954 - 9,954 - Mortgage Backed Securities 501,376 - 501,376 - Other 5,517 5,207 310 - Total Assets Measured at Fair Value On a Recurring Basis $ 532,246 $ 20,606 $ 511,640 $ - 28 Table of Contents Fair values for Level 2 available-for-sale investment securities are based on quoted market prices for similar securities. During the period ended March 31, 2021, there were no transfers in or out of level 1, 2, or 3 . The following tables present information about the Company’s impaired loans or 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 or leases are carried at fair value. Impaired loans or leases are only included in the following tables when their fair value is based upon a current 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 March 31, 2021, 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 $ 82 $ - $ - $ 82 Residential 1st Mortgage 1,572 - - 1,572 Home Equity Lines and Loans 60 - - 60 Commercial 212 - - 212 Consumer 138 - - 138 Total Impaired Loans 2,064 - - 2,064 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 $ 2,937 $ - $ - $ 2,937 29 Table of Contents 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 Fair Value Measurements At March 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 $ 1,470 $ - $ - $ 1,470 Home Equity Lines and Loans 64 - - 64 Consumer 135 - - 135 Total Impaired Loans 1,669 - - 1,669 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 $ 2,542 $ - $ - $ 2,542 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. 30 Table of Contents The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at the dates indicated. March 31, 2021 (in thousands) Fair Value Valuation Technique Unobservable Inputs Range, Weighted Avg. Impaired Loans: Commercial Real Estate $ 82 Income Approach Capitalization Rate 7 %, 7 % Residential 1st Mortgage $ 1,572 Sales Comparison Approach Adjustment for Difference Between Comparable Sales 0.71 % - 4.10 %, 2.55 % Home Equity Lines and Loans $ 60 Sales Comparison Approach Adjustment for Difference Between Comparable Sales 1.1 % - 1.3 %, 1.23 % Commercial $ 212 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 % 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 % March 31, 2020 (in thousands) Fair Value Valuation Technique Unobservable Inputs Range, Weighted Avg. Impaired Loans: Residential 1st Mortgage $ 1,470 Sales Comparison Approach Adjustment for Difference Between Comparable Sales 1 % - 4 %, 2.84 % Home Equity Lines and Loans $ 64 Sales Comparison Approach Adjustment for Difference Between Comparable Sales 1 % - 2 %, 1.07 % Consumer $ 135 Sales Comparison Approach Adjustment for Difference Between Comparable Sales 4 %, 4 % Other Real Estate: Real Estate Construction $ 873 Sales Comparison Approach Adjustment for Difference Between Comparable Sales 10 %, 10 % 31 Table of Contents 8. 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 book value and estimated fair value of financial instruments for the periods indicated: Fair Value of Financial Instruments Using March 31 , 2021 (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 $ 493,407 $ 493,407 $ - $ - $ 493,407 Investment Securities Available-for-Sale 560,973 15,568 545,405 - 560,973 Investment Securities Held-to-Maturity 385,054 - 329,007 45,820 374,827 Loans & Leases, Net 3,050,836 - - 3,061,994 3,061,994 Accrued Interest Receivable 15,220 - 15,220 - 15,220 Liabilities: Deposits 4,241,214 3,824,638 - 417,280 4,241,918 Subordinated Debentures 10,310 - 6,870 - 6,870 Accrued Interest Payable 757 - 757 - 757 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 32 Table of Contents Fair Value of Financial Instruments Using March 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 $ 282,960 $ 282,960 $ - $ - $ 282,960 Investment Securities Available-for-Sale 532,246 20,606 511,640 - 532,246 Investment Securities Held-to-Maturity 58,701 - 29,296 30,207 59,503 Loans & Leases, Net 2,615,285 - - 2,605,120 2,605,120 Accrued Interest Receivable 12,541 - 12,541 - 12,541 Liabilities: Deposits 3,255,273 2,733,525 - 524,013 3,257,538 Subordinated Debentures 10,310 - 7,415 - 7,415 Accrued Interest Payable 2,430 - 2,430 - 2,430 9. Dividends and Basic and Diluted Earnings Per Common Share Farmers & Merchants Bancorp common stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. However, trades are reported on the OTCQX under the symbol “FMCB”. No cash dividends were declared during the first quarter of 2021 or 2020. 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 three months ended March 31, 2021 and 2020. ( net income in thousands ) 2021 2020 Net Income $ 16,713 $ 14,122 Weighted Average Number of Common Shares Outstanding 789,646 793,504 Basic and Diluted Earnings Per Common Share $ 21.17 $ 17.80 10. Leases Lessee – Operating Leases Operating leases in which we are the lessee are recorded as operating lease right-of-use (“ROU”) assets and operating lease liabilities, included in other assets and other liabilities , respectively, on our consolidated balance sheets. We do not currently have any significant finance leases in which we are the lessee. Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded net in occupancy expense in the consolidated statements of income. 33 Table of Contents 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 March 31, 2021, operating lease ROU assets and liabilities were $ 4.19 million and $ 4.27 million , respectively. Operating lease expenses totaled $ 201,000 for the three month period ended March 31, 2021. 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. At March 31, 2020, operating lease ROU assets and liabilities were $ 4.81 million and $ 4.87 million , respectively. Operating leases expenses totaled $ 208,000 at March 31, 2020. The table below summarizes the information related to our operating leases: (in thousands except for percent and period data) Three Months Ended March 31, 2021 Year Ended December 31, 2020 Three Months Ended March 31, 2020 Cash Paid for Amounts Included in the Measurement of Lease Liabilities Operating Cash Flow from Operating Leases $ 192 $ 795 $ 197 Weighted-Average Remaining Lease Term - Operating Leases, in Years 6.79 7.33 7.68 Weighted-Average Discount Rate - Operating Leases 2.8 % 2.9 % 3.2 % The table below summarizes the maturity of remaining lease liability: (in thousands) March 31, 2021 2021 $ 493 2022 644 2023 653 2024 667 2025 677 2026 and thereafter 1,564 Total Lease Payments 4,698 Less: Interest ( 427 ) Present Value of Lease Liabilities $ 4,271 As of March 31, 2021, we have no additional operating leases for office space that have not yet commenced or that are anticipated to commence during the second 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. 34 Table of Contents 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 $ 101.4 million at March 31, 2021, $ 103.5 million at December 31, 2020 and $ 106.3 million at March 31, 2020. 11. Recent Accounting Pronouncements Accounting Guidance Pending Adoption at March 31, 2021 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.