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

FORM 10-Q

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

For the quarterly period ended March 31, 2021

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________

Commission File Number:  000-26099

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

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

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

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

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

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐
Accelerated filer ☒
  Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
 

 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
FMCB
OTCQX

Number of shares of common stock of the registrant 789,646 outstanding as of May 7, 2021.


FARMERS & MERCHANTS BANCORP

FORM 10-Q
TABLE OF CONTENTS

PART I. - FINANCIAL INFORMATION
Page
 
 
 
 
 
Item 1 - Financial Statements
 
 
 
 
 
 
 
3
 
 
 
 
 
 
4
 
 
 
 
 
 
5
 
 
 
 
 
 
6
 
 
 
 
 
 
7
 
 
 
 
 
 
8
 
 
 
 
 
35
 
 
 
 
 
54
 
 
 
 
 
57
 
 
 
 
PART II. - OTHER INFORMATION
 
 
 
 
 
 
58
 
 
 
 
 
58
 
 
 
 
 
58
 
 
 
 
 
58
 
 
 
 
 
58
 
 
 
 
 
58
 
 
 
 
 
59
 
 
 
 
 
 
59


PART I. FINANCIAL INFORMATION

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
 

 

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
 

 

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


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


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


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.

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.

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.

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 1st 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.

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.

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.

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.

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.

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

The COVID-19 pandemic has affected all of us.  Designated as an “essential business”, the Company’s subsidiary, Farmers & Merchants Bank of Central California, has kept all branches open and maintained regular business hours during these difficult times. Our staffing levels have remained stable during the COVID-19 crisis. We have taken what we believe are prudent measures to protect our employees and customers, while still providing core banking services.
 
On March 27, 2020 the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law and was amended and extended by the Consolidated Appropriations Act of 2021 (“H.R. 133”) on December 21, 2020. Through this legislation, as well as related federal and state regulatory actions, the federal government has taken extraordinary efforts to provide financial assistance to individuals and companies to help them move through these difficult times. However, there are no 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 time.


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
 

 
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.

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.


 
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.

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.

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
 


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.

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.

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.

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
 

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.

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%.

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
   
$
-
 

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
 


       
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.

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
%



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
 

       
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.

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.
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.

ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis of the major factors that influenced our financial performance for the three months ended March 31, 2021. This analysis should be read in conjunction with our 2020 Annual Report to Shareholders on Form 10-K, and with the unaudited consolidated financial statements and notes as set forth in this report.

Forward–Looking Statements

This Form 10-Q contains various forward-looking statements, usually containing the words “estimate,” “project,” “expect,” “objective,” “goal,” or similar expressions and includes assumptions concerning Farmers & Merchants Bancorp’s (together with its subsidiaries, the “Company” or “we”) operations, future results, and prospects. These forward-looking statements are based upon current expectations and are subject to risks and uncertainties. In connection with the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important factors which could cause the actual results of events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.

Such factors include, but are not limited to, the following: (1) economic conditions in the Central Valley of California; (2) significant changes in interest rates and loan prepayment speeds; (3) credit risks of lending and investment activities; (4) changes in federal and state banking laws or regulations; (5) competitive pressure in the banking industry; (6) changes in governmental fiscal or monetary policies; (7) uncertainty regarding the economic outlook resulting from the continuing war on terrorism, as well as actions taken or to be taken by the U.S. or other governments as a result of further acts or threats of terrorism; (8) water management issues in California and the resulting impact on the Company’s agricultural customers; (9) expansion into new geographic markets and new lines of business; (10) the impact of COVID-19 on the Company and its customers (see COVID-19 Disclosure below); and (11) other factors discussed in Item 1A. Risk Factors located in the Company’s 2020 Annual Report on Form 10-K.

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

COVID-19 (Coronavirus) Disclosure

In an attempt to slow the accelerating spread of COVID-19, on March 16, 2020 the first cities and counties in Northern California were place under “shelter-in-place” orders. By March 19th, the Governor had placed the entire state under these orders. Since that time, most California counties, including those in which the Company operates, have been in various levels of lockdown. The Governor has developed guidelines as to when a given county can re-open certain business and other activities but all counties in which the Company operates remain under some level of restrictions. Businesses have been designated as “essential” or “non-essential.” Non-essential businesses have either been closed or had the scope of their activities significantly reduced. The economic impact of this situation has already been severe, and continuing restrictions will only exacerbate the situation. The duration of these restrictions is not known at this time nor is the pace of recovery once they are lifted.

Designated as an “essential business”, Farmers & Merchants Bank of Central California has kept all branches open and maintained regular business hours during this difficult time. Our staffing levels have remained stable during the COVID-19 crisis.

Impact on the Banking Industry
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law by Congress, and on December 21, 2020 this original legislation was amended and extended by the passage of   Consolidated Appropriations Act 2021 (“H.R. 133”). The primary impact of this legislation, as well as related federal and state regulatory actions, is as follows:

•
Paycheck Protection Program (“PPP”) … 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 over the next several months (H.R. 133 reduced the number of employees to 300 for “second draw” PPP loans). 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 to 5 years, and under certain conditions the SBA can forgive them after eight or twenty-four weeks. Farmers & Merchants Bank of Central California has actively participated in the PPP, and since April, 2020 we have funded over $470.4 million of loans for 2,373 of our small business customers.  As of March 31, 2021, $221.9 million of these loans remain outstanding.  Although these loans carry a nominal interest rate of 1%, the SBA will pay the banks an origination fee of 1-5% depending on the size of the loan. All fees have been capitalized and are being amortized over the life of the loans. The Company has collected $16.4 million in fees from the SBA, and as of March 31, 2021, $10.2 million of these fees have been accreted into income, since inception. Since these loans are currently in the process of being forgiven by the SBA, the income statement impact to the Company in early 2021 could be significant. The Company is currently accepting applications for the second round of the PPP, but does not currently expect anywhere near the volume levels experienced in the first round.
•
Main Street Lending Program (“MSLP”) … The Federal Reserve Bank is administering a program to provide up to $600 billion of credit to small and medium-sized eligible businesses that were in sound financial condition before COVID-19 and that were either unable to access the PPP or that require additional financial support after receiving a PPP loan. These loans are not forgivable. The MSLP offers loans up to $300 million for businesses with up to 15,000 employees or $5 billion in annual revenues. Terms are five years, interest rate of LIBOR plus 3%, and deferral of principal for two years and interest for one year. If sold, lenders are required to retain 5% of each loan with the remaining 95% sold to the Federal Reserve Bank. The Company has registered as an eligible lender under the MSLP, but has not yet used the program.
•
Temporary Relief from Troubled Debt Restructurings … 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 troubled debt restructurings (“TDR”) for a limited period of time to account for the effects of COVID-19. Farmers & Merchants Bank of Central California has, and continues to, actively work with existing borrowers to restructure loans, primarily for up to six months, moving to either interest only payments or full deferral of principal and interest payments. After the deferral period ends, any deferred amounts would then be added to the final principal balance. 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.

Since April 2020 we have restructured $278.1 million of loans under the CARES Act and H.R. 133 guidelines. The payment status of these loans as of March 31, 2021 is as follows:

ꟷ
$12.9 million have paid-off or paid-down;
ꟷ
$159.3 million have resumed full principal and interest payments;
ꟷ
$104.7 million are making interest only payments; and
ꟷ
$1.2 million remain in full payment deferral.

As of March 31, 2021, accrued interest receivable on these loans totals $2.7 million, with only $15,377 of that amount related to borrowers that remain in full payment deferral. At the current time, the Company believes its accrued interest is collectible, but continues to monitor each borrower, and has established a reserve for uncollectible interest in the amount of $775,000 as of March 31, 2021.

•
Foreclosure Actions … The CARES Act and H.R. 133 restrict the ability of financial institutions to exercise their foreclosure rights on residential and multi-family properties backed by federally guaranteed mortgage loans. The State of California has gone further and temporarily suspended all residential and commercial foreclosures through June 30, 2021 (and it is assumed at the current time that this will be extended before it expires). The Company is working with its borrowers when they make requests to defer payments on their mortgage loans.
•
CECL Implementation Deferral … 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.  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 implementation.
•
Paycheck Protection Program Liquidity Facility (“PPPLF”) … The Federal Reserve Bank has developed a loan program to neutralize the liquidity impact to financial institutions of funding loans made under the PPP. Banks may pledge their PPP loans on a non-recourse basis and borrow against these loans for a period of up to five years at a fixed rate of .35%. Furthermore, since these FRB borrowings are on a non-recourse basis, the loans will not be counted under the calculation of leverage capital ratios. Since Farmers & Merchants Bank of Central California has significant liquidity at the current time, no borrowings have been made under the PPPLF. The Company has until June 30, 2021 to borrow under this facility.

Impact on Farmers & Merchants Bancorp and Farmers & Merchants Bank of Central California
The Company is exposed to the following COVID-19 risks and uncertainties:
 
•
We may not be able to maintain staff levels in order to operate key activities of our business.
•
Our earnings may be affected by borrowers that cannot make payments on their loans. We have credit exposure to industries that have been impacted by either: (1) the public’s changing habits in response to the risks of COVID-19 (e.g., hotels, movie theaters, health clubs and restaurants); or (2) continuing levels of  “shelter-in-place” orders imposed by local, state and federal officials (e.g., small businesses determined to be “non-essential”).
•
Our liquidity position may be affected as a result of significant and unusual deposit outflows or loan drawdowns.
 

However, from a financial perspective, as reflected by the following March 31, 2021 measures, the Company entered this period with strong fundamentals which should assist us in responding to the risks of COVID-19:

•
Liquidity consisting of $435 million of Fed Funds Sold and $946 million of Investment Securities;
•
Strong Asset Quality as reflected by only $493,000 of non-performing loans, and a negligible delinquency ratio of .026% of total loans;
•
Risk Based Capital Ratio of 12.89%;
•
Allowance for Credit Losses of $60.2 million or 1.93% of total loans and leases (2.08% exclusive of government fully guaranteed loans issued under the SBA’s PPP); and
•
ROAA of 1.45% and ROAE of 15.56% in first quarter 2021

Our credit exposure to the “Hospitality” (primarily hotels) and “Entertainment” (primarily restaurants, health clubs and movie theaters) industries totals $146.7 million in loans and leases outstanding at March 31, 2021. This represents 4.7% of total loans and leases outstanding and 34.4% of total shareholders’ equity, both measures that are thought to be reasonable when compared to peers. Most of these loans: (1) were underwritten with an original LTV of 50-70% on the underlying real estate, providing us what should be adequate collateral coverage; and (2) have financially strong guarantors with liquidity that provides additional protection. Over and above the impact on the Hospitality and Entertainment industries there has been a general economic slowdown as a result of the continuing levels of “shelter-in-place” orders. The Central Valley of California may be in a better position than other areas to weather this impact because agricultural activity has substantially continued. We are monitoring the impact on our borrowers, and working closely with them using all of the tools at our disposal, including the SBA PPP program, the FRB Main Street Lending Program and other loan restructuring strategies, to help them move through this period of reduced business activity. Since April 2020, we have restructured $278.1 million of loans under the CARES Act and H.R. 133 guidelines. 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.

Although we continue to believe that our 2021 financial performance may be negatively impacted by sustained low interest rates and the potential for increased borrower stress, the full extent of this impact cannot be determined at this time. Additionally, these negative impacts may be somewhat mitigated by the fees paid by the SBA under the PPP. We believe that we are well positioned to move through this difficult period with sustained profitability.

Introduction

Farmers & Merchants Bancorp, or the Company, is a bank holding company formed March 10, 1999. Its subsidiary, Farmers & Merchants Bank of Central California, or the Bank, is a California state-chartered bank formed in 1916. Banking services are provided in twenty-nine full-service branches and three stand-alone ATM’s in the Company’s service area. The service area includes Sacramento, San Joaquin, Stanislaus, Merced, Contra Costa, Napa and Solano Counties with branches in Sacramento, Elk Grove, Galt, Lodi, Stockton, Linden, Modesto, Turlock, Hilmar, Merced, Manteca, Riverbank, Napa, Walnut Creek, Concord, Rio Vista, Walnut Grove and Lockeford.

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

Overview

Although the Company has initiated efforts to expand its geographic footprint into the East Bay area of San Francisco and Napa, California (see Item 1: Business – Service Area located in the Company’s 2020 Annual Report on Form 10-K), the Company’s primary service area remains the mid Central Valley of California. Accordingly, discussion of the Company’s Financial Condition and Results of Operations is influenced by the seasonal banking needs of its agricultural customers (e.g., during the spring and summer customers draw down their deposit balances and increase loan borrowing to fund the purchase of equipment and planting of crops. Correspondingly, deposit balances are replenished and loans repaid in late fall and winter as crops are harvested and sold).

The State of California experienced drought conditions from 2013 through most of 2016. After 2016, reasonable levels of rain and snow alleviated drought conditions in our primary service area, but the winter of 2020-2021 was once again dry. Despite this winter’s dry weather, current reservoir levels, when combined with ground water levels, should mean that the availability of water in our primary service area will not be an issue in the near future. However, the weather patterns over the past 8 years further reinforce the fact that the long-term risks associated with the availability of water are significant.

For the three months ended March 31, 2021, Farmers & Merchants Bancorp reported net income of $16,713,000, earnings per share of $21.17 and return on average assets of 1.45%. Return on average shareholders’ equity was 15.56% for the three months ended March 31, 2021.

For the three months ended March 31, 2020, Farmers & Merchants Bancorp reported net income of $14,122,000, earnings per share of $17.80 and return on average assets of 1.53%. Return on average shareholders’ equity was 14.90% for the three months ended March 31, 2020.

The following is a summary of the financial results for the three-month period ended March 31, 2021 compared to March 31, 2020.

•
Net income increased 18.3% to $16.7 million from $14.1 million.
•
Earnings per share increased 18.9% to $21.17 from $17.80.
•
Total assets increased 27.3% to $4.7 billion from $3.7 billion.
•
Total loans & leases increased 16.5% to $3.1 billion from $2.7 billion.
•
Total deposits increased 30.3% to $4.2 billion from $3.3 billion.

The primary reasons for the Company’s $2.6 million or 18.3% increase in net income in the first quarter of 2021 as compared to the same period of 2020 were:

•
A $4.7 million increase in net interest income related to the growth in earning assets.
•
A $1.8 million increase in gain on investment securities sold.
•
A $732,000 increase in other non-interest income.

These positive impacts were partially offset by:

•
A $1.9 million increase in salaries and employee benefits.
•
A $1.3 million increase in the provision for credit losses.
•
An increase in the tax provision from 23.9% to 24.8%

Results of Operations

Net Interest Income / Net Interest Margin
The tables on the following pages reflect the Company’s average balance sheets and volume and rate analysis for the three month periods ended March 31, 2021 and 2020.

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

Net interest income is the amount by which the interest and fees on loans & leases and other interest-earning assets exceed the interest paid on interest-bearing sources of funds. For the purpose of analysis, the interest earned on tax-exempt investments and municipal loans is adjusted to an amount comparable to interest subject to normal income taxes. This adjustment is referred to as “tax equivalent” adjustment and is noted wherever applicable. The presentation of net interest income and net interest margin on a tax equivalent basis is a common practice within the banking industry.

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

The Company’s earning assets and rate sensitive liabilities are subject to repricing at different times, which exposes the Company to income fluctuations when interest rates change. In order to minimize income fluctuations, the Company attempts to match asset and liability maturities. However, some maturity mismatch is inherent in the asset and liability mix. See “Item 3. Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Risk.”

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

 
Three Months Ended March 31,
2021
 
 
Three Months Ended March 31,
2020
 
Assets
 
Balance
 
 
Interest
 
 
Annualized
Yield/Rate
 
 
Balance
 
 
Interest
 
 
Annualized
Yield/Rate
 
Interest Bearing Deposits With Banks
 
$
410,276
 
 
$
103
 
 
 
0.10
%
 
$
289,028
 
 
$
947
 
 
 
1.33
%
Investment Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Notes
 
 
14,869
 
 
 
85
 
 
 
2.32
%
 
 
16,298
 
 
 
92
 
 
 
2.30
%
U.S. Government Agency SBA
 
 
8,102
 
 
 
14
 
 
 
0.69
%
 
 
10,504
 
 
 
51
 
 
 
1.94
%
Municipals - Taxable
 
 
16,091
 
 
 
153
 
 
 
3.80
%
 
 
10,078
 
 
 
86
 
 
 
3.41
%
Obligations of States and Political Subdivisions - Non-Taxable (1)
 
 
55,078
 
 
 
534
 
 
 
3.88
%
 
 
49,335
 
 
 
542
 
 
 
4.39
%
Mortgage Backed Securities
 
 
749,374
 
 
 
3,307
 
 
 
1.77
%
 
 
436,743
 
 
 
2,918
 
 
 
2.67
%
Other
 
 
46,395
 
 
 
245
 
 
 
2.11
%
 
 
1,801
 
 
 
5
 
 
 
1.11
%
Total Investment Securities
 
 
889,909
 
 
 
4,338
 
 
 
1.95
%
 
 
524,759
 
 
 
3,694
 
 
 
2.82
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans & Leases: (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate
 
 
2,099,665
 
 
 
24,419
 
 
 
4.72
%
 
 
1,821,961
 
 
 
23,649
 
 
 
5.28
%
Home Equity Line & Loans
 
 
32,815
 
 
 
362
 
 
 
4.47
%
 
 
39,834
 
 
 
560
 
 
 
5.72
%
Agricultural
 
 
226,200
 
 
 
2,564
 
 
 
4.60
%
 
 
265,432
 
 
 
3,431
 
 
 
5.26
%
Commercial
 
 
365,881
 
 
 
4,111
 
 
 
4.56
%
 
 
391,929
 
 
 
4,873
 
 
 
5.06
%
Consumer (3)
 
 
10,349
 
 
 
3,742
 
 
 
146.64
%
 
 
14,256
 
 
 
221
 
 
 
6.30
%
Other
 
 
222,496
 
 
 
545
 
 
 
0.99
%
 
 
770
 
 
 
4
 
 
 
2.11
%
Leases
 
 
102,566
 
 
 
1,344
 
 
 
5.31
%
 
 
105,178
 
 
 
1,422
 
 
 
5.50
%
Total Loans & Leases
 
 
3,059,972
 
 
 
37,087
 
 
 
4.92
%
 
 
2,639,360
 
 
 
34,160
 
 
 
5.26
%
Total Earning Assets
 
 
4,360,157
 
 
$
41,528
 
 
 
3.86
%
 
 
3,453,147
 
 
$
38,801
 
 
 
4.57
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized (Loss) Gain on Securities Available-for-Sale
 
 
12,918
 
 
 
 
 
 
 
 
 
 
 
6,796
 
 
 
 
 
 
 
 
 
Allowance for Credit Losses
 
 
(59,431
)
 
 
 
 
 
 
 
 
 
 
(55,022
)
 
 
 
 
 
 
 
 
Cash and Due From Banks
 
 
64,221
 
 
 
 
 
 
 
 
 
 
 
59,917
 
 
 
 
 
 
 
 
 
All Other Assets
 
 
241,815
 
 
 
 
 
 
 
 
 
 
 
237,469
 
 
 
 
 
 
 
 
 
Total Assets
 
$
4,619,680
 
 
 
 
 
 
 
 
 
 
$
3,702,307
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities & Shareholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Bearing Deposits with Banks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Bearing DDA
 
$
943,635
 
 
$
294
 
 
 
0.13
%
 
$
704,065
 
 
$
548
 
 
 
0.32
%
Savings and Money Market
 
 
1,291,214
 
 
 
418
 
 
 
0.13
%
 
 
1,015,398
 
 
 
961
 
 
 
0.38
%
Time Deposits
 
 
418,917
 
 
 
525
 
 
 
0.51
%
 
 
522,548
 
 
 
1,635
 
 
 
1.27
%
Total Interest Bearing Deposits
 
 
2,653,766
 
 
 
1,237
 
 
 
0.19
%
 
 
2,242,011
 
 
 
3,144
 
 
 
0.57
%
Federal Home Loan Bank Advances
 
 
4
 
 
 
-
 
 
 
0.00
%
 
 
4
 
 
 
-
 
 
 
0.00
%
Subordinated Debentures
 
 
10,310
 
 
 
79
 
 
 
3.11
%
 
 
10,310
 
 
 
119
 
 
 
4.69
%
Total Interest Bearing Liabilities
 
 
2,664,080
 
 
$
1,316
 
 
 
0.20
%
 
 
2,252,325
 
 
$
3,263
 
 
 
0.59
%
Interest Rate Spread (4)
 
 
 
 
 
 
 
 
 
 
3.66
%
 
 
 
 
 
 
 
 
 
 
3.98
%
Demand Deposits (Non-Interest Bearing)
 
 
1,469,741
 
 
 
 
 
 
 
 
 
 
 
1,011,298
 
 
 
 
 
 
 
 
 
All Other Liabilities
 
 
56,268
 
 
 
 
 
 
 
 
 
 
 
59,497
 
 
 
 
 
 
 
 
 
Total Liabilities
 
 
4,190,089
 
 
 
 
 
 
 
 
 
 
 
3,323,120
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’ Equity
 
 
429,591
 
 
 
 
 
 
 
 
 
 
 
379,187
 
 
 
 
 
 
 
 
 
Total Liabilities & Shareholders’ Equity
 
$
4,619,680
 
 
 
 
 
 
 
 
 
 
$
3,702,307
 
 
 
 
 
 
 
 
 
Net Interest Income and Margin on Total Earning Assets (5)
 
 
 
 
 
 
40,212
 
 
 
3.74
%
 
 
 
 
 
 
35,538
 
 
 
4.19
%
Tax Equivalent Adjustment
 
 
 
 
 
 
(111
)
 
 
 
 
 
 
 
 
 
 
(112
)
 
 
 
 
Net Interest Income
 
 
 
 
 
$
40,101
 
 
 
3.73
%
 
 
 
 
 
$
35,426
 
 
 
4.17
%

(1) Yields and interest income are calculated on an fully taxable equivalent basis using the current statutory federal tax rate.
(2) Average balances on loans & leases outstanding include non-performing loans, if any. The amortized portion of net loan origination fees is included in interest income on loans & leases, representing an adjustment to the yield.
(3) Includes CARES Act Small Business Administration Paycheck Protection Program loans.
(4) Interest rate spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
(5) Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets.

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

(in thousands)
 
Three Months Ended
 
   
Mar. 31, 2021 compared to Mar. 31, 2020
 
Interest Earning Assets
 
Volume
   
Rate
   
Net Chg.
 
Interest Bearing Deposits With Banks
 
$
292
   
$
(1,136
)
 
$
(844
)
Investment Securities
                   
-
 
U.S. Treasury Notes
   
(8
)
   
1
     
(7
)
US Government Agency SBA
   
(10
)
   
(27
)
   
(37
)
Municipals - Taxable
   
56
     
11
     
67
 
Obligations of States and Political Subdivisions - Non-Taxable
   
59
     
(67
)
   
(8
)
Mortgage Backed Securities
   
1,608
     
(1,219
)
   
389
 
Other
   
232
     
8
     
240
 
Total Investment Securities
   
1,937
     
(1,293
)
   
644
 
                         
Loans & Leases
                       
Real Estate
   
3,468
     
(2,698
)
   
770
 
Home Equity Line & Loans
   
(88
)
   
(110
)
   
(198
)
Agricultural
   
(469
)
   
(398
)
   
(867
)
Commercial
   
(306
)
   
(456
)
   
(762
)
Consumer (1)
   
(79
)
   
3,600
     
3,521
 
Other
   
544
     
(3
)
   
541
 
Leases
   
(33
)
   
(45
)
   
(78
)
Total Loans & Leases
   
3,037
     
(110
)
   
2,927
 
Total Earning Assets
   
5,266
     
(2,539
)
   
2,727
 
                         
Interest Bearing Liabilities
                       
Interest Bearing Deposits with Banks
                       
Transaction
   
288
     
(542
)
   
(254
)
Savings and Money Market
   
218
     
(761
)
   
(543
)
Time Deposits
   
(276
)
   
(834
)
   
(1,110
)
Total Interest Bearing Deposits
   
230
     
(2,137
)
   
(1,907
)
Subordinated Debentures
   
-
     
(40
)
   
(40
)
Total Interest Bearing Liabilities
   
230
     
(2,177
)
   
(1,947
)
Total Change
 
$
5,036
   
$
(362
)
 
$
4,674
 

(1) Includes CARES Act Small Business Administration Paycheck Protection Program Loans.
Notes:  Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total “net change.”  The above figures have been rounded to the nearest whole number.

Net interest income increased $4.7 million or 13.20% to $40.1 million during the first quarter of 2021 compared to $35.4 million for the first quarter of 2020. On a fully tax equivalent basis, net interest income increased 13.15% and totaled $40.2 million at March 31, 2021, compared to $35.5 million at March 31, 2020. As more fully discussed below, the increase in net interest income was primarily due to a $907.0 million increase in average earning assets offset by a 45 basis point decrease in the net interest margin.

Net interest income on a taxable equivalent basis, expressed as a percentage of average total earning assets, is referred to as the net interest margin. For the quarter ended March 31, 2021, the Company’s net interest margin was 3.74% compared to 4.19% for the quarter ended March 31, 2020. This decrease in net interest margin was primarily due to a 71 basis point decrease in the yield on earning assets.

Average loans & leases totaled $3.1 billion for the quarter ended March 31, 2021; an increase of $420.6 million compared to the average balance for the quarter ended March 31, 2020. Loans & leases decreased from 76.4% of average earning assets at March 31, 2020 to 70.2% at March 31, 2021. The annualized yield on the Company’s loan & lease portfolio decreased to 4.92% for the quarter ended March 31, 2021, compared to 5.26% for the quarter ended March 31, 2020. This lower yield offset somewhat the positive impact of increased average loan & lease balances resulting in interest revenue from loans & leases increasing 8.6% to $37.1 million for quarter ended March 31, 2021. The Company continues to experience aggressive competitor pricing for loans & leases to which it may need to continue to respond in order to retain key customers. This could place negative pressure on future loan & lease yields and net interest margin.

The investment portfolio is the other main component of the Company’s earning assets. Historically, the Company invested primarily in: (1) mortgage-backed securities issued by U.S. government-sponsored entities; (2) debt securities issued by the U.S. Treasury, government agencies and U.S. government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, at certain times the Company selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 5 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity. Since the risk factor for these types of investments is generally lower than that of loans & leases, the yield earned on investments is generally less than that of loans & leases.

Average investment securities totaled $889.9 million for the quarter ended March 31, 2021; an increase of $365.2 million compared to the average balance for the quarter ended March 31, 2020. The average investment portfolio yield, on a tax equivalent (TE) basis, was 1.95% for the quarter ended March 31, 2021, compared to 2.82% for the quarter ended March 31, 2020. This overall decrease in yield was caused primarily by a drop in market interest rates. As a result of the combined impact of these, balance and yield changes, tax equivalent interest income on securities increased $644,000 to $4.3 million for the quarter ended March 31, 2021, compared to $3.7 million for the quarter ended March 31, 2020. See “Financial Condition – Investment Securities” for a discussion of the Company’s investment strategy in 2021. Net interest income on the Schedule of Year-to-Date Average Balances and Interest Rates is shown on a tax equivalent basis, which is higher than net interest income as reflected on the Consolidated Statements of Income because of adjustments that relate to income on securities that are exempt from federal income taxes.

Interest bearing deposits with banks and overnight investments in Federal Funds Sold are additional earning assets available to the Company. Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earn interest at the Fed Funds rate, which was 0.10% during the first quarter of 2021 compared to 1.33% during the first quarter of 2020. Average interest bearing deposits with banks for the quarter ended March 31, 2021, was $410.3 million, an increase of $121.2 million compared to the average balance for the quarter ended March 31, 2020. Interest income on interest bearing deposits with banks for the quarter ended March 31, 2021, decreased $844,000 to $103,000 compared to the quarter ended March 31, 2020, primarily due to the significant decline in the Fed Funds rate.

Average interest-bearing liabilities increased $411.8 million or 18.28% during the first quarter of 2021. Of that increase: (1) interest-bearing transaction deposits increased $239.6 million; (2) savings and money market deposits increased $275.8 million; (3) time deposits decreased $103.6 million (see “Financial Condition – Deposits”); (4) FHLB advances remained unchanged (see “Financial Condition – Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings”); and (5) subordinated debt remained unchanged (see “Financial Condition – Subordinated Debentures”).

Total interest expense on interest bearing deposits was $1.2 million for the first quarter of 2021 as compared to $3.1 million for the first quarter of 2020. The average rate paid on interest-bearing deposits was 0.19% for the first quarter of 2021 compared to 0.57% for the first quarter of 2020, due to the significant drop in market interest rates. The Company continues to experience aggressive competitor rates on interest bearing deposits which it may need to meet in order to retain key customers. This could place negative pressure on future deposit rates and net interest margin.

Provision and Allowance for Credit Losses
As a financial institution that assumes lending and credit risks as a principal element of its business, credit losses will be experienced in the normal course of business. The Company has established credit management policies and procedures that govern both the approval of new loans & leases and the monitoring of the existing portfolio. The Company manages and controls credit risk through comprehensive underwriting and approval standards, dollar limits on loans & leases to one borrower (the term “borrower” is used herein to describe a customer who has entered into either a loan or lease transaction), and by restricting loans & leases made primarily to its principal market area where management believes it is best able to assess the applicable risk. Additionally, management has established guidelines to ensure the diversification of the Company’s credit portfolio such that even within key portfolio sectors such as real estate or agriculture, the portfolio is diversified across factors such as location, building type, crop type, etc. Management reports regularly to the Board of Directors regarding trends and conditions in the loan & lease portfolio and regularly conducts credit reviews of individual loans & leases. Loans & leases that are performing but have shown some signs of weakness are subject to more stringent reporting and oversight.

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.

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. Loans & 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’s or lease’s effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s 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”) under ASC 310-40, if the Company for economic or legal reasons related to the borrower’s financial difficulties grants a more than insignificant concession to the borrower that it would not otherwise consider. Restructured loans or 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.

The determination of the general reserve for loans or leases that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors that include economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan & lease portfolio, and probable losses inherent in the portfolio taken as a whole.

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 1st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer & other; and (9) equipment leases. See “Financial Condition – Loans & Leases” for examples of loans & leases made by the Company. The allowance for credit losses attributable to each portfolio segment, which includes both impaired loans & leases and loans & leases that are not impaired, 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 or leases, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans & 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 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. See “Note 1 Significant Accounting Policies - Allowance for Credit Losses.”

In addition, the Company’s and Bank’s regulators, including the FRB, DFPI and 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.

Provision for Credit Losses
Changes in the provision for credit losses between years are the result of management’s evaluation, based upon information currently available, of the adequacy of the allowance for credit losses relative to factors such as the credit quality of the loan & lease portfolio, loan & lease growth, current credit losses, and the prevailing economic climate and its effect on borrowers’ ability to repay loans & leases in accordance with the terms of the notes.

The State of California experienced drought conditions from 2013 through most of 2016. After 2016, reasonable levels of rain and snow alleviated drought conditions in our primary service area, but the winter of 2020-2021 was once again dry. Despite this winter’s dry weather, current reservoir levels, when combined with ground water levels, should mean that the availability of water in our primary service area will not be an issue in the near future. However, the weather patterns over the past 8 years further reinforce the fact that the long-term risks associated with the availability of water are significant.

The Company made a $1.3 million provision for credit losses during the first quarter of 2021 compare to no provision during the first quarter of 2020. Net recoveries during the first quarter of 2021 were $63,000 compared to net charge-offs of $188,000 in the first quarter of 2020. See “Overview – Looking Forward: 2021 and Beyond”, “Critical Accounting Policies and Estimates – Allowance for Credit Losses” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk-Credit Risk” located in the Company’s 2020 Annual Report on Form 10-K.

After reviewing all factors above, management concluded that the allowance for credit losses, as of March 31, 2021, and March 31, 2020 were adequate.

 
Three Months Ended March 31,
 
(in thousands)
 
2021
   
2020
 
             
Balance at Beginning of Period
 
$
58,862
   
$
55,012
 
Charge-Offs
   
(8
)
   
(265
)
Recoveries
   
71
     
77
 
Provision
   
1,250
     
-
 
Balance at End of Period
 
$
60,175
   
$
54,824
 

The table below breaks out current quarter activity by portfolio segment (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
     
412
     
4
     
(21
)
   
(114
)
   
(567
)
   
(14
)
   
(36
)
   
(57
)
   
256
     
1,250
 
Ending Balance- March 31, 2021
 
$
29,066
   
$
9,045
   
$
1,647
   
$
967
   
$
1,914
   
$
4,250
   
$
9,976
   
$
296
   
$
1,674
   
$
1,340
   
$
60,175
 

The Allowance for Credit Losses at March 31, 2021 increased $1.3 million from December 31, 2020. The Company believes that an allowance of 1.93% of gross loans (2.07% when government guaranteed SBA PPP loans are excluded) provides sufficiently for our exposure at the current time.

Changes to the reserve during the first quarter of 2021 are due to changes in the underlying credit quality of the loan portfolio. Overall: (1) reserves for “Agricultural” and “Agricultural Real Estate” loans (which are currently thought to have more limited COVID-19 loss exposure since agricultural activity has substantially continued) have remained relatively stable; (2) reserves for Commercial Real Estate (where our COVID-19 exposure is thought to be greater since many of these companies and consumers will be impacted by “non-essential” designations and “shelter-in-place” orders) have been increased; and (3) the “Unallocated” reserve has been increased. See “Management’s Discussion and Analysis - COVID-19 (Coronavirus) Disclosure” for additional information of the Company’s COVID-19 exposure.

See “Management’s Discussion and Analysis - Financial Condition – Classified Loans & Leases and Non-Performing Assets” for further discussion regarding these loan categories.

See “Note 6. Allowance for Credit Losses” for additional details regarding the provision and allowance for credit losses.

Non-Interest Income
Non-interest income includes: (1) service charges and fees from deposit accounts; (2) net gains and losses from investment securities; (3) increases in the cash surrender value of bank owned life insurance; (4) debit card and ATM fees; (5) net gains and losses on non-qualified deferred compensation plans; and (6) fees from other miscellaneous business services.

Overall, non-interest income increased $6.8 million for the three months ended March 31, 2021, compared to the same period of 2020. This increase was primarily comprised of: (1) a $4.2 million increase in the net gain on deferred compensation investments (balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although Generally Accepted Accounting Principles require these investment gains/losses be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no effect on the Company’s net income); (2) a $1.8 million increase in gain on the sale investment securities; (3) a $302,000 increase in debit card/ATM fees; and (4) a $716,000 increase in gain on sale of leases. These increases were partially offset by a $282,000 decrease in deposit service charges as a result of the slowing economy due to COVID-19.

Non-Interest Expense
Non-interest expense for the Company includes expenses for: (1) salaries and employee benefits; (2) net gains and losses on non-qualified deferred compensation plan investments; (3) occupancy; (4) equipment; (5) supplies; (6) legal fees; (7) professional services; (8) data processing; (9) marketing; (10) deposit insurance; (11) ORE carrying costs and gains/losses on sale; and (12) other miscellaneous expenses.

Overall, non-interest expense increased $6.6 million or 33.2% for the three months ended March 31, 2021, compared to the same period in 2020. This increase was primarily comprised of: (1) a $4.2 million increase in the net gain on deferred compensation investments (balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although Generally Accepted Accounting Principles require these investment gains/losses be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no effect on the Company’s net income); (2) increased salaries and employee benefits of $1.9 million; (3) a $287,000 increase in FDIC insurance: and (4) a $125,000 increase in occupancy expense.

Income Taxes
The Bank’s provision for income taxes increased 23.8% to $5.5 million for the first quarter of 2021 compared to the first quarter of 2020. The effective tax rate for the first quarter of 2021 was 24.8% compared to 23.9% for the first quarter of 2020. The Company’s effective tax rate fluctuates from quarter to quarter due primarily to changes in the mix of taxable and tax-exempt earning sources. The effective rates were lower than the combined Federal and State statutory rate of 30% due primarily to benefits regarding the cash surrender value of life insurance; credits associated with low income housing tax credit investments (LIHTC); and tax-exempt interest income on municipal securities and loans.

Financial Condition

This section discusses material changes in the Company’s consolidated balance sheet at March 31, 2021, as compared to December 31, 2020 and to March 31, 2020. As previously discussed (see “Overview”) the Company’s financial condition can be influenced by the seasonal banking needs of its agricultural customers.

Investment Securities and Federal Funds Sold
The investment portfolio provides the Company with an income alternative to loans & leases. The debt securities in the Company’s investment portfolio have historically been comprised primarily of: (1) mortgage-backed securities issued by U.S. federal government-sponsored entities; (2) debt securities issued by U.S. Treasury, government agencies and U.S. government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, at certain times, the Company has selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 7 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity without subjecting the Company to the interest rate risk associated with mortgage-backed securities.

The Company’s investment portfolio at March 31, 2021 was $946.0 million compared to $876.7 million at the end of 2020, an increase of $69.4 million or 7.9%. At March 31, 2020, the investment portfolio totaled $590.09 million. The Company uses its investment portfolio to help balance its overall interest rate risk. Accordingly, when market rates are increasing it invests most of its funds in shorter term Treasury and Agency securities or shorter term (10, 15 and 20 year) mortgage backed securities. Conversely, when rates are falling, 30 year mortgage backed securities or longer term Treasury and Agency securities may be increased.

The Company’s total investment portfolio currently represents 20.0% of the Company’s total assets as compared to 19.3% at December 31, 2020, and 15.9% at March 31, 2020.

As of March 31, 2021, the Company held $70.5 million of municipal investments, all classified as HTM. Of this balance, $23.9 million were bank-qualified municipal bonds, and $46.6 million were private placement municipal bonds, warrants, and CRA qualified investments in our service area. In order to comply with Section 939A of the Dodd-Frank Act, the Company performs its own credit analysis on new purchases of municipal bonds. As of March 31, 2021, all 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 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.

Not included in the investment portfolio are interest bearing deposits with banks and overnight investments in Federal Funds Sold. Interest bearing deposits with banks consisted of FRB deposits. The FRB currently pays interest on the deposits that banks maintain in their FRB accounts, whereas historically banks had to sell these Federal Funds to other banks in order to earn interest. Since balances at the FRB are effectively risk free, the Company elected to maintain its excess cash at the FRB. Interest bearing deposits with banks totaled $434.5 million at March 31, 2021, $317.5 million at December 31, 2020 and $225.7 million at March 31, 2020.

The Company classifies its investments as held-to-maturity (“HTM”), trading, or available-for-sale (“AFS”). Securities are classified as HTM and are carried at amortized cost when the Company has the intent and ability to hold the securities to maturity. During the first quarter of 2021, $316.9 million in mortgage-backed securities were transferred from available-for-sale securities to held-to-maturity at fair value. See “Note 3 – Investment Securities” for additional details regarding the transfer of investment securities. Trading securities are securities acquired for short-term appreciation and are carried at fair value, with unrealized gains and losses recorded in non-interest income. As of March 31, 2021, December 31, 2020 and March 31, 2020, there were no securities in the trading portfolio. Securities classified as AFS include securities, which may be sold to effectively manage interest rate risk exposure, prepayment risk, satisfy liquidity demands and other factors. These securities are reported at fair value with aggregate, unrealized gains or losses excluded from income and included as a separate component of shareholders’ equity, net of related income taxes.

Loans & Leases

Loans & leases can be categorized by borrowing purpose and use of funds. Common examples of loans & leases made by the Company include:

Commercial and Agricultural Real Estate - These are loans secured by farmland, commercial real estate, multifamily residential properties, and other non-farm, non-residential properties generally within our market area. Commercial mortgage term loans can be made if the property is either income producing or scheduled to become income producing based upon acceptable pre-leasing, and the income will be the Bank’s primary source of repayment for the loan. Loans are made both on owner occupied and investor properties; generally do not exceed 15 years (and may have pricing adjustments on a shorter timeframe); have debt service coverage ratios of 1.00 or better with a target of greater than 1.25; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.

Real Estate Construction - These are loans for development and construction (the Company generally requires the borrower to fund the land acquisition) and are secured by commercial or residential real estate. These loans are generally made only to experienced local developers with whom the Bank has a successful track record; for projects in our service area; with Loan To Value (LTV) below 75%; and where the property can be developed and sold within 2 years. Commercial construction loans are made only when there is a written take-out commitment from the Bank or an acceptable financial institution or government agency. Most acquisition, development and construction loans are tied to the prime rate or LIBOR with an appropriate spread based on the amount of perceived risk in the loan.

Residential 1st Mortgages - These are loans primarily made on owner occupied residences; generally underwritten to income and LTV guidelines similar to those used by FNMA and FHLMC; however, we will make loans on rural residential properties up to 40 acres. Most residential loans have terms from ten to twenty years and carry fixed rates priced off of treasury rates. The Company has always underwritten mortgage loans based upon traditional underwriting criteria and does not make loans that are known in the industry as “subprime,” “no or low doc,” or “stated income.”

Home Equity Lines and Loans - These are loans made to individuals for home improvements and other personal needs. Generally, amounts do not exceed $250,000; Combined Loan To Value (CLTV) does not exceed 80%; FICO scores are at or above 670; Total Debt Ratios do not exceed 43%; and in some situations the Company is in a 1st lien position.

Agricultural - These are loans and lines of credit made to farmers to finance agricultural production. Lines of credit are extended to finance the seasonal needs of farmers during peak growing periods; are usually established for periods no longer than 12 to 24 months; are often secured by general filing liens on livestock, crops, crop proceeds and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a processing plant, or orchard/vineyard development; have maturities from five to seven years; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.

Commercial - These are loans and lines of credit to businesses that are sole proprietorships, partnerships, LLC’s and corporations. Lines of credit are extended to finance the seasonal working capital needs of customers during peak business periods; are usually established for periods no longer than 12 to 24 months; are often secured by general filing liens on accounts receivable, inventory and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a plant or purchase of a business; have maturities from five to seven years; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.

Consumer - These are loans to individuals for personal use, and primarily include loans to purchase automobiles or recreational vehicles, and unsecured lines of credit. The Company has a very minimal consumer loan portfolio, and loans are primarily made as an accommodation to deposit customers.

Leases –These are leases to businesses or individuals, for the purpose of financing the acquisition of equipment. They can be either “finance leases” where the lessee retains the tax benefits of ownership but obtains 100% financing on their equipment purchases; or “true tax leases” where the Company, as lessor, places reliance on equipment residual value and in doing so obtains the tax benefits of ownership. 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 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.

See “Item 3. Quantitative and Qualitative Disclosures About Market Risk-Credit Risk” for a discussion about the credit risks the Company assumes and its overall credit risk management practices.

Each loan or lease type involves risks specific to the: (1) borrower; (2) collateral; and (3) loan & lease structure. See “Results of Operations - Provision and Allowance for Credit Losses” for a more detailed discussion of risks by loan & lease type. The Company’s current underwriting policies and standards are designed to mitigate the risks involved in each loan & lease type. The Company’s policies require that loans & leases are approved only to those borrowers exhibiting a clear source of repayment and the ability to service existing and proposed debt. The Company’s underwriting procedures for all loan & lease types require careful consideration of the borrower, the borrower’s financial condition, the borrower’s management capability, the borrower’s industry, and the economic environment affecting the loan or lease.

Most loans & leases made by the Company are secured, but collateral is the secondary or tertiary source of repayment; cash flow is our primary source of repayment. The quality and liquidity of collateral are important and must be confirmed before the loan is made.

In order to be responsive to borrower needs, the Company prices loans & leases: (1) on both a fixed rate and adjustable rate basis; (2) over different terms; and (3) based upon different rate indices; as long as these structures are consistent with the Company’s interest rate risk management policies and procedures. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk-Interest Rate Risk” for further details.

Overall, the Company’s loan & lease portfolio at March 31, 2021 totaled $3.1 billion, an increase of $440.9 million or 16.5% over March 31, 2020. This increase occurred as a result of: (1) the Company’s business development efforts directed toward credit-qualified borrowers; and (2) expansion of our service area into the East Bay of San Francisco and Napa; and (3) the origination of $470.4 million of PPP loans, of which $221.9 million remain outstanding at March 31, 2021 (See “Management’s Discussion and Analysis - COVID-19 (Coronavirus) Disclosure” for additional information of the Company’s COVID-19 exposure). No assurances can be made that this growth in the loan & lease portfolio will continue, and it is anticipated that the majority of the remaining PPP loans will be forgiven by the SBA during 2021. Loans & leases at March 31, 2021 increased $11.4 million from $3.1 billion at December 31, 2020.

The following table sets forth the distribution of the loan & lease portfolio by type and percent as of the periods indicated.

March 31, 2021
December 31, 2020
March 31, 2020
(in thousands)
$
%
$
%
$
%
Commercial Real Estate
 $           1,021,565
32.7%
 $           971,326
31.2%
 $             868,736
32.5%
Agricultural Real Estate
 634,244
20.3%
643,014
20.7%
        594,154
22.2%
Real Estate Construction
  208,573
6.7%
185,741
6.0%
        126,956
4.7%
Residential 1st Mortgages
 305,085
9.8%
299,379
9.6%
        256,732
9.6%
Home Equity Lines and Loans
 32,407
1.0%
34,239
1.1%
          40,747
1.5%
Agricultural
 221,152
7.1%
264,372
8.5%
        264,771
9.9%
Commercial
367,875
11.8%
374,816
12.0%
        404,329
15.1%
Consumer & Other (1)
232,209
7.4%
235,529
7.6%
          14,839
0.6%
Leases
101,058
3.2%
103,117
3.3%
        105,362
3.9%
Total Gross Loans & Leases
 3,124,168
100.0%
3,111,533
100.0%
     2,676,626
100.0%
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.

Classified Loans & Leases and Non-Performing Assets
All loans & leases are assigned a credit risk grade using grading standards developed by bank regulatory agencies. See “Results of Operations - Provision and Allowance for Credit Losses” for more detail on risk grades. The Company utilizes the services of a third-party independent loan & lease review firm to perform evaluations of individual loans & leases and review the credit risk grades the Company places on loans & leases. Loans & leases that are judged to exhibit a higher risk profile are referred to as “classified” and these loans & leases receive increased management attention. As of March 31, 2021, classified loans totaled $19.5 million compared to $18.6 million at December 31, 2020 and $16.4 million at March 31, 2020.

Classified loans & leases with higher levels of credit risk can be further designated as “impaired” loans & leases. 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. See “Results of Operations - Provision and Allowance for Credit Losses” for further details. Impaired loans & leases consist of: (1) non-accrual loans & leases; and/or (2) restructured loans & leases that are still performing (i.e., accruing interest).

Non-Accrual Loans & leases - Accrual of interest on loans & leases is generally discontinued when a loan or lease becomes contractually past due by 90 days or more with respect to interest or principal. When loans & leases are 90 days past due, but in management’s judgment are well secured and in the process of collection, they may not be classified as non-accrual. When a loan or lease is placed on non-accrual status, all interest previously accrued but not collected is reversed. Income on such loans & leases is then recognized only to the extent that cash is received and where the future collection of principal is probable. At March 31, 2021 non-accrual loans & leases totaled $493,000. At December 31, 2020 and March 31, 2020, non-accrual loans & leases totaled $495,000 and $549,000, respectively.

Restructured Loans & Leases - A restructuring of a loan or lease constitutes a TDR under ASC 310-40, if the Company for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider, except when subject to the CARES Act and H.R. 133. Restructured loans or 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 loans or leases, 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 of March 31, 2021, restructured loans & leases on accrual totaled $7.8 million as compared to $7.9 million at December 31, 2020 and $12.0 million at March 31, 2020.

Other Real Estate - Loans where the collateral has been repossessed are classified as other real estate (“ORE”) or, if the collateral is personal property, the loan is classified as other assets on the Company’s consolidated financial statements.

Not included in the table below, but relevant to a discussion of asset quality are loans that were granted some form of relief because of COVID-19 and are not considered TDRs because of the CARES Act and H.R. 133. Since April 2020 we have restructured $278.1 million of loans under the CARES Act and H.R. 133 guidelines (see “Management’s Discussion and Analysis - COVID-19 (Coronavirus) Disclosure”).

The following table sets forth the amount of the Company’s non-performing loans & leases (defined as non-accrual loans & leases plus accruing loans & leases past due 90 days or more) and ORE as of the dates indicated.

Non-Performing Assets
                 
(in thousands)
 
March 31, 2021
   
December 31, 2020
   
March 31, 2020
 
Non-Performing Loans & Leases
 
$
493
   
$
495
   
$
549
 
Other Real Estate
   
873
     
873
     
873
 
Total Non-Performing Assets
 
$
1,366
   
$
1,368
   
$
1,422
 
                         
Non-Performing Loans & Leases
                       
as a % of Total Loans & Leases
   
0.02
%
   
0.02
%
   
0.00
%
Restructured Loans & Leases (Performing)
 
$
7,843
   
$
7,868
   
$
12,028
 

Although management believes that non-performing loans & leases are generally well-secured and that potential losses are provided for in the Company’s allowance for credit losses, there can be no assurance that future deterioration in economic conditions and/or collateral values will not result in future credit losses. Specific reserves of $0, $92,000, and $214,000 have been established for non-performing loans & leases at March 31, 2021, December 31, 2020 and March 31, 2020, respectively.

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.

The Company reported $873,000 of ORE at March 31, 2021, December 31, 2020, and March 31, 2020.

Except for: (i) those classified and non-performing loans & leases discussed above, and (ii) those loans modified under the COVID-19 guidelines of the CARES Act and H.R. 133, the Company’s management is not aware of any loans & leases as of March 31, 2021, for which known financial problems of the borrower would cause serious doubts as to the ability of these borrowers to materially comply with their present loan or lease repayment terms, or any known events that would result in the loan or lease being designated as non-performing at some future date. However:

•
The State of California experienced drought conditions from 2013 through most of 2016. After 2016, reasonable levels of rain and snow alleviated drought conditions in our primary service area, but the winter of 2020-2021 was once again dry. Despite this winter’s dry weather, current reservoir levels, when combined with ground water levels, should mean that the availability of water in our primary service area will not be an issue in the near future. However, the weather patterns over the past 8 years further reinforce the fact that the long-term risks associated with the availability of water are significant.

•
In an attempt to slow the accelerating spread of COVID-19, on March 16, 2020 the first cities and counties in Northern California were placed under “shelter-in-place” orders. By March 19th, the Governor had placed the entire state under these orders. Since that time most California counties have been in various levels of lockdown, including those in which the Company operates. The Governor has developed guidance as to when a given county can re-open certain business and other activities, but all counties in which the Company operates still remain under some level of restriction. Businesses have been designated as “essential” or “non-essential.” Non-essential businesses have either been closed or had the scope of their activities significantly reduced. Unemployment has increased. The economic impact of this situation has already been severe, and continuing restrictions will only exacerbate the situation. Although the availability of vaccines should significantly help the situation, the future duration of restrictions is not known at this time nor is the pace of recovery once they are lifted, therefore, the Company cannot determine the ultimate impact on classified and non-performing loans and leases (see “Part I, Item 2. COVID-19 (Coronavirus) Disclosure”).

See “Part I, Item 1A. Risk Factors” in the Company’s 2020 Annual Report on Form 10-K, and “Management’s Discussion and Analysis - COVID-19 (Coronavirus) Disclosure” for additional information of the Company’s COVID-19 exposure.

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

The Company’s deposit balances at March 31, 2021 have increased $985.9 million or 30.3% compared to March 31, 2020. In addition to the Company’s ongoing business development activities for deposits, the following factors positively impacted year-over-year deposit growth: (1) the Company’s strong financial results and position and F&M Bank’s reputation as one of the most safe and sound banks in its market area; (2) the Company’s expansion of its service area into Walnut Creek, Concord and Napa; and (3) borrowers under the PPP depositing loan proceeds into their deposit accounts until those funds are used for operating expenses. The company continues to experience significant competitive pressures on deposit rates. The Company remains selective in how they respond to competitor rates, which may impact future deposit growth.

Although total deposits have increased 30.3% since March 31, 2020, importantly, low cost transaction accounts continue to grow at a strong pace as well:

•
Demand and interest-bearing transaction accounts increased $804.1 million or 47.2% since March 31, 2020.
•
Savings and money market accounts have increased $287.0 million or 27.9% since March 31, 2020.
•
Time deposit accounts have decreased $105.2 million or 20.2% since March 31, 2020.

The Company’s deposit balances at March 31, 2021 have increased $180.9 million or 4.5% compared to December 31, 2020. Demand and interest-bearing transaction accounts increased by $131.0 million or 5.5%, savings and money market deposits increased 4.4% or $55.2 million while time deposit accounts decreased by $5.3 million or 1.3%. Deposit trends in the first half of the year can be impacted by the seasonal needs of our agricultural customers.

Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings
Lines of credit with the Federal Reserve Bank and the Federal Home Loan Bank are other key sources of funds to support earning assets. These sources of funds are also used to manage the Company’s interest rate risk exposure, and as opportunities arise, to borrow and invest the proceeds at a positive spread through the investment portfolio. There were no FHLB Advances at March 31, 2021, December 31, 2020, or March 31, 2020. There were no Federal Funds purchased or advances from the FRB at March 31, 2021, December 31, 2020 or March 31, 2020.

As of March 31, 2021 the Company has additional borrowing capacity of $673.5 million with the Federal Home Loan Bank and $446.6 million with the Federal Reserve Bank. Any borrowings under these lines would be collateralized with loans that have been accepted for pledging at the FHLB and FRB.

Long-Term Subordinated Debentures
On December 17, 2003, the Company raised $10 million through an offering of trust-preferred securities (“TPS”). See Note 13 located in “Item 8. Financial Statements and Supplementary Data” of the Company’s 2020 Annual Report on Form 10-K. Although this amount is reflected as subordinated debt on the Company’s balance sheet, under current regulatory guidelines, our TPS will continue to qualify as regulatory capital (See “Capital”). These securities accrue interest at a variable rate based upon 3-month LIBOR plus 2.85%. Interest rates reset quarterly and were 3.03% as of March 31, 2021, 3.08% at December 31, 2020 and 3.69% at March 31, 2020. The average rate paid for these securities for the first quarter of 2021 was 3.11% and 4.69% for the first quarter of 2020. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on the Company’s common stock.

Capital
The Company relies primarily on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to insure depositor protection. Shareholders’ Equity totaled $426.0 million at March 31, 2021, $423.7 million at December 31, 2020, and $394.2million at March 31, 2020.

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

The minimum capital level requirements applicable to the Company and the Bank are: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets (“RWA”); (ii) a Tier 1 capital ratio of 6% of RWA; (iii) a total capital ratio of 8% of RWA; and (iv) a Tier 1 leverage ratio of 4% of total assets. A “capital conservation buffer” of 2.5% above each of the new regulatory minimum capital ratios, which would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0% of RWA; (ii) a Tier 1 capital ratio of 8.5% of RWA; and (iii) a total capital ratio of 10.5% of RWA. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. The Company’s subordinated debentures issued in 2003 to continue to be counted as Tier 1 capital.

The Company believes that it is currently in compliance with all of these capital requirements and that they did not result in any restrictions on the Company’s business activity.

In addition, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.

(in thousands)
 
Actual
   
Current Regulatory
Capital
Requirements
   
Well Capitalized
Under Prompt
Corrective Action
 
The Company:
 
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
As of March 31, 2021
                                   
Total Capital Ratio
 
$
468,419
     
12.89
%
 
$
290,826
     
8.0
%
   
N/A
     
N/A
 
Common Equity Tier 1 Capital Ratio
 
$
412,792
     
11.36
%
 
$
163,590
     
4.5
%
   
N/A
     
N/A
 
Tier 1 Capital Ratio
 
$
422,792
     
11.63
%
 
$
218,120
     
6.0
%
   
N/A
     
N/A
 
Tier 1 Leverage Ratio
 
$
422,792
     
9.19
%
 
$
184,045
     
4.0
%
   
N/A
     
N/A
 


(in thousands)
 
Actual
   
Current Regulatory
Capital Requirements
   
Well Capitalized
Under Prompt
Corrective Action
 
The Bank:
 
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
As of March 31, 2021
                                   
Total Capital Ratio
 
$
464,238
     
12.77
%
 
$
290,733
     
8.0
%
 
$
363,416
     
10.0
%
Common Equity Tier 1 Capital Ratio
 
$
418,625
     
11.52
%
 
$
163,537
     
4.5
%
 
$
236,221
     
6.5
%
Tier 1 Capital Ratio
 
$
418,625
     
11.52
%
 
$
218,050
     
6.0
%
 
$
290,733
     
8.0
%
Tier 1 Leverage Ratio
 
$
418,625
     
9.11
%
 
$
183,816
     
4.0
%
 
$
229,770
     
5.0
%

Loans originated under the SBA’s PPP are assigned a risk-weighting of 0% so they have no impact on the Company’s RBC ratios.  However, they are fully includable in the tier 1 leverage capital ratio calculation, which has resulted in a short-term reduction in that ratio (until the PPP loans are forgiven).  Had the Company not participated in the PPP program, the net result would have been a 46 basis point improvement to the March 31, 2021 tier 1 leverage capital ratio, increasing the ratio to 9.65%.

As previously discussed (see “Long-Term Subordinated Debentures”), in order to supplement its regulatory capital base, during December 2003 the Company issued $10 million of trust preferred securities. On March 1, 2005, the Federal Reserve Board issued its final rule effective April 11, 2005, concerning the regulatory capital treatment of trust preferred securities (“TPS”) by bank holding companies (“BHCs”). Under the final rule BHCs may include TPS in Tier 1 capital in an amount equal to 25% of the sum of core capital net of goodwill. Any portion of trust-preferred securities not qualifying as Tier 1 capital would qualify as Tier 2 capital subject to certain limitations. The Company has received notification from the Federal Reserve Bank of San Francisco that all of the Company’s trust preferred securities currently qualify as Tier 1 capital.

The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.

In 1998, the Board approved the Company’s first common stock repurchase program. This program has been extended and expanded several times since then, and most recently, on November 6, 2018, the Board of Directors approved an extension of the $20 million stock repurchase program over the three-year period ending December 31, 2021. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of the Company’s 2020 Annual Report on Form 10-K for additional information.

There were no stock repurchases during the first quarter of 2021 or 2020. The remaining dollar value of shares that may yet be purchased under the Company’s Common Stock Repurchase Plan is approximately $20 million.

On November 23, 2020, the Board of Directors of Farmers & Merchants Bancorp approved, and all applicable regulators provided statements of non-objection regarding, the Company’s repurchase and retirement of up to $8.5 million of its outstanding common stock during the fourth quarter of 2020 and the first half of 2021. These repurchases will be done outside of the Company’s current repurchase plan.  All repurchases will be made at the then prevailing market prices. The Company did not repurchase shares during the first quarter of 2021. During the fourth quarter of 2020 the Company repurchased $2.8 million of shares from shareholders.

On August 5, 2008, the Board of Directors approved a Share Purchase Rights Plan (the “Rights Plan”), pursuant to which the Company entered into a Rights Agreement dated August 5, 2008, with Computershare as Rights Agent. The Rights Plan was set to expire on August 5, 2018. On November 19, 2015, the Board of Directors approved a seven-year extension of the term of the Rights Plan. Pursuant to an Amendment to the Rights Agreement dated February 18, 2016, the term of the Rights Plan was extended from August 5, 2018 to August 5, 2025. The extension of the term of the Rights Plan was intended as a means to continue to guard against abusive takeover tactics and was not in response to any particular proposal. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of the Company’s 2020 Annual Report on Form 10-K for further explanation.

The Company did not issue any new shares during the first quarter of 2021. During the first quarter of 2020, the Company issued 523 shares of common stock to the Bank’s non-qualified deferred compensation retirement plans. These shares were issued at a price of $770.00 per share based upon valuations completed during the quarter off issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital.

Critical Accounting Policies and Estimates
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In preparing the Company’s financial statements management makes estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These judgments govern areas such as the allowance for credit losses, the fair value of financial instruments and accounting for income taxes.

For a full discussion of the Company’s critical accounting policies and estimates see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2020 Annual Report on Form 10-K.

Off Balance Sheet Commitments
In the normal course of business the Company enters into financial instruments with off balance sheet risks in order to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit, letters of credit and other types of financial guarantees. The Company had the following off balance sheet commitments as of the dates indicated.

(in thousands)
 
March 31, 2021
   
December 31, 2020
   
March 31, 2020
 
Commitments to Extend Credit
 
$
1,103,851
   
$
1,040,844
   
$
939,064
 
Letters of Credit
   
19,613
     
18,846
     
20,047
 
Performance Guarantees Under Interest Rate Swap Contracts Entered
                       
Into Between Our Borrowing Customers and Third Parties
   
2,029
     
2,786
     
3,640
 

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

Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third party. Most standby letters of credit are issued for 12 months or less. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Additionally, the Company maintains a reserve for off balance sheet commitments, which totaled $315,000 at March 31, 2021, December 31, 2020 and March 31, 2020. We do not anticipate any material losses as a result of these transactions.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Management
The Company has adopted risk management policies and procedures, which aim to ensure the proper control and management of all risk factors inherent in the operation of the Company, most importantly credit risk, interest rate risk and liquidity risk. These risk factors are not mutually exclusive. It is recognized that any product or service offered by the Company may expose the Company to one or more of these risk factors.

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

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

In order to control credit risk in the loan & lease portfolio the Company has established credit management policies and procedures that govern both the approval of new loans & leases and the monitoring of the existing portfolio. The Company manages and controls credit risk through comprehensive underwriting and approval standards, dollar limits on loans & leases to one borrower, and by restricting loans & leases made primarily to its principal market area where management believes it is best able to assess the applicable risk. Additionally, management has established guidelines to ensure the diversification of the Company’s credit portfolio such that even within key portfolio sectors such as real estate or agriculture, the portfolio is diversified across factors such as location, building type, crop type, etc. However, as a financial institution that assumes credit risks as a principal element of its business, credit losses will be experienced in the normal course of business. The allowance for credit losses is maintained at a level considered by management to be adequate to provide for risks inherent in the loan & lease portfolio. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs.

The Company’s methodology for assessing the appropriateness of the allowance is applied on a regular basis and considers all loans & leases. The systematic methodology consists of three parts.

Part 1 - includes a detailed analysis of the loan & lease portfolio in two phases. The first phase is conducted in accordance with the “Receivables” topic of the FASB ASC 310. Individual loans & leases are reviewed to identify them for impairment. A loan or lease is impaired when principal and interest are deemed uncollectible in accordance with the original contractual terms of the loan or lease. Impairment is measured as either the expected future cash flows discounted at each loan’s or lease’s effective interest rate, the fair value of the loan’s or lease’s collateral if the loan or lease is collateral dependent, or an observable market price of the loan or lease, if one exists. Upon measuring the impairment, the Company will ensure an appropriate level of allowance is present or established.

Central to the first phase of the analysis of the loan & lease portfolio is the risk rating system. The originating credit officer assigns each borrower an initial risk rating, which is based primarily on a thorough analysis of that borrower’s financial position in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior credit administration personnel. Credits are monitored by credit administration personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary. Risk ratings are reviewed by both the Company’s independent third-party credit examiners and bank examiners from the DFPI and FDIC.

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

The second phase is conducted by segmenting the loan & lease portfolio by risk rating and into groups of loans & leases with similar characteristics in accordance with the “Contingency” topic of the FASB ASC450. In this second phase, groups of loans & leases with similar characteristics are reviewed and the appropriate allowance factor is applied based on the historical average charge-off rate for each particular group of loans or leases.

Part 2 - considers qualitative internal and external factors that may affect a loan or lease’s collectability, is based upon management’s evaluation of various conditions, the effects of which are not directly measured in the determination of the historical and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the second element of the analysis of the allowance include, but are not limited to the following conditions that existed as of the balance sheet date:

•
general economic and business conditions affecting the key service areas of the Company;
•
credit quality trends (including trends in collateral values, delinquencies and non-performing loans & leases);
•
loan & lease volumes, growth rates and concentrations;
•
loan & lease portfolio seasoning;
•
specific industry and crop conditions;
•
recent loss experience; and
•
duration of the current business cycle.

Part 3 - An unallocated allowance generally occurs due to the imprecision in estimating and allocating allowance balances associated with macro factors such as: (1) economic conditions in the Central Valley; and (2) the long-term risks associated with the availability of water in the Central Valley.

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

Management believes, that based upon the preceding methodology, and using information currently available, the allowance for credit losses at March 31, 2021 was adequate. No assurances can be given that future events may not result in increases in delinquencies, non-performing loans & leases, or net loan & lease charge-offs that would require increases in the provision for credit losses and thereby adversely affect the results of operations.

See “PART 1. – Item 2. - Management’s Discussion and Analysis - COVID-19 (Coronavirus) Disclosure” for a discussion of how COVID-19 may impact credit risk.

Interest Rate Risk
The mismatch between maturities of interest sensitive assets and liabilities results in uncertainty in the Company’s earnings and economic value and is referred to as interest rate risk. The Company does not attempt to predict interest rates and positions the balance sheet in a manner, which seeks to minimize, to the extent possible, the effects of changing interest rates.

The Company measures interest rate risk in terms of potential impact on both its economic value and earnings. The methods for governing the amount of interest rate risk include: (1) analysis of asset and liability mismatches (Gap analysis); (2) the utilization of a simulation model; and (3) limits on maturities of investment, loan & lease, and deposit products, which reduces the market volatility of those instruments.

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

The interest rates paid on deposit accounts do not always move in unison with the rates charged on loans & leases. In addition, the magnitude of changes in the rates charged on loans & leases is not always proportionate to the magnitude of changes in the rate paid for deposits. Consequently, changes in interest rates do not necessarily result in an increase or decrease in the net interest margin solely as a result of the differences between repricing opportunities of earning assets or interest bearing liabilities.

The Company also utilizes the results of a dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. The sensitivity of the Company’s net interest income is measured over a rolling one-year horizon.

The simulation model estimates the impact of changing interest rates on interest income from all interest-earning assets and the interest expense paid on all interest-bearing liabilities reflected on the Company’s balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given a 200 basis point upward and a 100 basis point downward shift in interest rates. A shift in rates over a 12-month period is assumed. Results that exceed policy limits, if any, are analyzed for risk tolerance and reported to the Board with appropriate recommendations. At March 31, 2021, the Company’s estimated net interest income sensitivity to changes in interest rates, as a percent of net interest income was a slight increase in net interest income of 0.15% if rates increase by 200 basis points and a decrease in net interest income of 0.15% if rates decline 100 basis points. Comparatively, at December 31, 2020, the Company’s estimated net interest income sensitivity to changes in interest rates, as a percent of net interest income was a decrease in net interest income of .03% if rates increase by 200 basis points and a decrease in net interest income of .02% if rates decline 100 basis points.

The estimated sensitivity does not necessarily represent a Company forecast and the results may not be indicative of actual changes to the Company’s net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape; prepayments on loans & leases and securities; pricing strategies on loans & leases and deposits; replacement of asset and liability cash flows; and other assumptions. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change.

Liquidity Risk
Liquidity risk is the risk to earnings or capital resulting from the Company’s inability to meet its obligations when they come due without incurring unacceptable losses. It includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect the Company’s ability to liquidate assets or acquire funds quickly and with minimum loss of value. The Company endeavors to maintain a cash flow adequate to fund operations, handle fluctuations in deposit levels, respond to the credit needs of borrowers, and to take advantage of investment opportunities as they arise.

The Company’s principal operating sources of liquidity include (see “Item 8. Financial Statements and Supplementary Data – Consolidated Statements of Cash Flows” of the Company’s 2020 Annual Report on Form 10-K) cash and cash equivalents, cash provided by operating activities, principal payments on loans & leases, proceeds from the maturity or sale of investments, and growth in deposits. To supplement these operating sources of funds the Company maintains Federal Funds credit lines of $118 million and repurchase lines of $112 million with major banks. As of March 31, 2021, the Company has additional borrowing capacity of $673.5 million with the FHLB and $446.6 million with the FRB. Borrowings under these lines are collateralized with loans or securities that have been accepted for pledging at the FHLB and FRB.

At March 31, 2021, the Company had available sources of liquidity, which included cash and cash equivalents and unpledged investment securities AFS of approximately $732 million, which represents 15.31% of total assets, an increase of $149 million from December 31, 2020.

See “PART 1. – Item 2. - Management’s Discussion and Analysis - COVID-19 (Coronavirus) Disclosure” for a discussion of how COVID-19 may impact liquidity risk.

ITEM 4.
CONTROLS AND PROCEDURES

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

As of the end of the period covered by this report, the Company carried out an evaluation of the effectiveness of Company’s disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer, the Chief Financial Officer and other senior management of the Company. The evaluation was based, in part, upon reports and affidavits provided by a number of executives. Based on the foregoing, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

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

PART II.  OTHER INFORMATION

ITEM 1.
Legal Proceedings

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

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

ITEM 1A.
Risk Factors

See “Item 1A. Risk Factors” in the Company’s 2020 Annual Report to Shareholders on Form 10-K. In management’s opinion, with the exception of the disclosure regarding COVID-19 (see “PART 1. – Item 2. - Management’s Discussion and Analysis - COVID-19 Disclosure”), there have been no material changes in risk factors since the filing of the 2020 Form 10-K.

ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds

There were no shares repurchased by Farmers & Merchants Bancorp during the first quarter of 2021. The remaining dollar value of shares that may yet be purchased under the Company’s Stock Repurchase Plan is approximately $20.0 million.

The common stock of Farmers & Merchants Bancorp is not widely held or listed on any exchange. However, trades are reported on the OTCQX under the symbol “FMCB”.

ITEM 3.
Defaults Upon Senior Securities

Not applicable

ITEM 4.
Mine Safety Disclosures

Not applicable

ITEM 5.
Other Information

None

ITEM 6.
Exhibits

Exhibit No.
Description
   
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

SIGNATURES

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

FARMERS & MERCHANTS BANCORP
     
     
Date:  May 7, 2021
/s/ Kent A. Steinwert
 
     
 
Kent A. Steinwert
 
 
Chairman, President
 
 
& Chief Executive Officer
 
 
(Principal Executive Officer)
 
     
Date:  May 7, 2021
/s/ Stephen W. Haley
 
     
 
Stephen W. Haley
 
 
Executive Vice President and
 
 
Chief Financial Officer
 
 
(Principal Financial & Accounting Officer)



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