Loans & Leases and Allowance for Credit Losses

6 Months Ended

Jun. 30, 2020

Loans & Leases and Allowance for Credit Losses [Abstract]

Loans & Leases and Allowance for Credit Losses

5. Loans & Leases and Allowance for Credit Losses

Loans & Leases consisted of the following:

(in thousands)	June 30, 2020		December 31, 2019		June 30, 2019
Commercial Real Estate	$	873,922	$	846,486	$	821,472
Agricultural Real Estate		635,077		625,767		605,776
Real Estate Construction		166,548		115,644		93,539
Residential 1st Mortgages		272,209		255,253		257,408
Home Equity Lines and Loans		37,966		39,270		40,210
Agricultural		261,986		292,904		284,858
Commercial		369,817		384,795		382,192
Consumer & Other (1)		361,035		15,422		17,844
Leases		103,229		104,470		102,300
Total Gross Loans & Leases		3,081,789		2,680,011		2,605,599
Less: Unearned Income		17,277		6,984		6,701
Subtotal		3,064,512		2,673,027		2,598,898
Less: Allowance for Credit Losses		55,058		55,012		55,125
Net Loans & Leases	$	3,009,454	$	2,618,015	$	2,543,773

(1) Includes CARES Act Small Business Admistration Paycheck Protection Program loans.

Paycheck Protection Program (“PPP”) … Under the CARES Act (see “Note 2 – Risks and Uncertainties”) the Small Business Administration (“SBA”) was directed by Congress to provide up to $349 billion (subsequently expanded by an additional $310 billion) in 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. 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 can forgive them after eight weeks. Farmers & Merchants Bank of Central California actively participated in the PPP, and since April, 2020 the Bank has funded $347.4 million of loans for 1,536 small business customers.

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):

June 30, 2020	Commercial Real Estate		Agricultural Real Estate			Real Estate Construction			Residential 1st Mortgages		Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Leases			Unallocated		Total
Year-To-Date Allowance for Credit Losses:
Beginning Balance- January 1, 2020	$	11,053	$	15,128		$	1,949		$	855	$	2,675		$	8,076		$	11,466		$	456		$	3,162		$	192	$	55,012
Charge-Offs		-		-			-			-		(7	)		-			(426	)		(29	)		-			-		(462	)
Recoveries		-		-			-			46		34			30			80			18			-			-		208
Provision		10,370		(6,107	)		(497	)		870		(463	)		(3,316	)		(1,077	)		(86	)		(362	)		968		300
Ending Balance- June 30, 2020	$	21,423	$	9,021		$	1,452		$	1,771	$	2,239		$	4,790		$	10,043		$	359		$	2,800		$	1,160	$	55,058
Second Quarter Allowance for Credit Losses:
Beginning Balance- April 1, 2020	$	11,122	$	14,469		$	1,927		$	1,037	$	2,783		$	6,959		$	12,214		$	382		$	3,188		$	743	$	54,824
Charge-Offs		-		-			-			-		(7	)		-			(182	)		(8	)		-			-		(197	)
Recoveries		-		-			-			26		13			3			79			10			-			-		131
Provision		10,301		(5,448	)		(475	)		708		(550	)		(2,172	)		(2,068	)		(25	)		(388	)		417		300
Ending Balance- June 30, 2020	$	21,423	$	9,021		$	1,452		$	1,771	$	2,239		$	4,790		$	10,043		$	359		$	2,800		$	1,160	$	55,058
Ending Balance Individually Evaluated for Impairment		6		-			-			121		8			79			-			25			-			-		239
Ending Balance Collectively Evaluated for Impairment		21,417		9,021			1,452			1,650		2,231			4,711			10,043			334			2,800			1,160		54,819
Loans & Leases:
Ending Balance	$	855,762	$	635,077		$	166,548		$	272,209	$	37,966		$	261,986		$	369,817		$	361,035		$	104,112		$	-	$	3,064,512
Ending Balance Individually Evaluated for Impairment		1,663		5,629			-			2,411		168			473			10			195			-			-		10,549
Ending Balance Collectively Evaluated for Impairment	$	854,099	$	629,448		$	166,548		$	269,798	$	37,798		$	261,513		$	369,807		$	360,840		$	104,112		$	-	$	3,053,963

December 31, 2019	Commercial Real Estate			Agricultural Real Estate		Real Estate Construction		Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Leases			Unallocated			Total
Year-To-Date Allowance for Credit Losses:
Beginning Balance- January 1, 2019	$	11,609		$	14,092	$	1,249	$	880		$	2,761		$	8,242		$	11,656		$	494		$	4,022		$	261		$	55,266
Charge-Offs		-			-		-		-			-			-			(592	)		(83	)		-			-			(675	)
Recoveries		-			-		-		13			28			38			90			52			-			-			221
Provision		(556	)		1,036		700		(38	)		(114	)		(204	)		312			(7	)		(860	)		(69	)		200
Ending Balance- December 31, 2019	$	11,053		$	15,128	$	1,949	$	855		$	2,675		$	8,076		$	11,466		$	456		$	3,162		$	192		$	55,012
Ending Balance Individually Evaluated for Impairment		234			-		-		118			12			99			137			61			-			-			661
Ending Balance Collectively Evaluated for Impairment		10,819			15,128		1,949		737			2,663			7,977			11,329			395			3,162			192			54,351
Loans & Leases:
Ending Balance	$	838,570		$	625,767	$	115,644	$	255,253		$	39,270		$	292,904		$	384,795		$	15,422		$	105,402		$	-		$	2,673,027
Ending Balance Individually Evaluated for Impairment		4,524			5,654		-		2,368			229			188			1,528			200			-			-			14,691
Ending Balance Collectively Evaluated for Impairment	$	834,046		$	620,113	$	115,644	$	252,885		$	39,041		$	292,716		$	383,267		$	15,222		$	105,402		$	-		$	2,658,336

June 30 2019	Commercial Real Estate			Agricultural Real Estate		Real Estate Construction		Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Leases			Unallocated		Total
Year-To-Date Allowance for Credit Losses:
Beginning Balance- January 1, 2019	$	11,609		$	14,092	$	1,249	$	880		$	2,761		$	8,242		$	11,656		$	494		$	4,022		$	261	$	55,266
Charge-Offs		-			-		-		-			-			-			(379	)		(39	)		-			-		(418	)
Recoveries		-			-		-		6			11			11			23			26			-			-		77
Provision		(929	)		480		448		(22	)		(29	)		(772	)		967			(17	)		(922	)		996		200
Ending Balance- June 30, 2019	$	10,680		$	14,572	$	1,697	$	864		$	2,743		$	7,481		$	12,267		$	464		$	3,100		$	1,257	$	55,125
Second Quarter Allowance for Credit Losses:
Beginning Balance- April 1, 2019	$	11,400		$	14,493	$	1,207	$	863		$	2,738		$	7,448		$	11,933		$	467		$	4,008		$	350	$	54,907
Charge-Offs		-			-		-		-			-			-			-			(18	)		-			-		(18	)
Recoveries		-			-		-		3			5			4			12			12			-			-		36
Provision		(720	)		79		490		(2	)		-			29			322			3			(908	)		907		200
Ending Balance- June 30, 2019	$	10,680		$	14,572	$	1,697	$	864		$	2,743		$	7,481		$	12,267		$	464		$	3,100		$	1,257	$	55,125
Ending Balance Individually Evaluated for Impairment		201			-		-		122			12			99			158			6			-			-		598
Ending Balance Collectively Evaluated for Impairment		10,479			14,572		1,697		742			2,731			7,382			12,109			458			3,100			1,257		54,527
Loans & Leases:
Ending Balance	$	813,750		$	605,776	$	93,539	$	257,408		$	40,210		$	284,858		$	382,192		$	17,844		$	103,321		$	-	$	2,598,898
Ending Balance Individually Evaluated for Impairment		4,601			5,702		-		2,444			247			196			1,579			6			-			-		14,775
Ending Balance Collectively Evaluated for Impairment	$	809,149		$	600,074	$	93,539	$	254,964		$	39,963		$	284,662		$	380,613		$	17,838		$	103,321		$	-	$	2,584,123

The ending balance of loans individually evaluated for impairment includes restructured loans in the amount of $3.1 million at June 30, 2020, $2.6 million at December 31, 2019 and $2.6 million at June 30, 2019, which are no longer classified as TDRs.

The following tables show the loan & lease portfolio allocated by management’s internal risk ratings at the dates indicated (in thousands):

June 30, 2020	Pass		Special Mention		Substandard		Total Loans & Leases
Loans & Leases:
Commercial Real Estate	$	843,952	$	7,300	$	4,510	$	855,762
Agricultural Real Estate		620,754		1,530		12,793		635,077
Real Estate Construction		166,548		-		-		166,548
Residential 1st Mortgages		271,507		-		702		272,209
Home Equity Lines & Loans		37,780		-		186		37,966
Agricultural		261,085		-		901		261,986
Commercial		366,204		2,309		1,304		369,817
Consumer & Other		360,352		-		683		361,035
Leases		104,112		-		-		104,112
Total	$	3,032,294	$	11,139	$	21,079	$	3,064,512

December 31, 2019	Pass		Special Mention		Substandard		Total Loans
Loans & Leases:
Commercial Real Estate	$	831,941	$	6,629	$	-	$	838,570
Agricultural Real Estate		611,792		1,136		12,839		625,767
Real Estate Construction		115,644		-		-		115,644
Residential 1st Mortgages		254,459		-		794		255,253
Home Equity Lines and Loans		39,092		-		178		39,270
Agricultural		289,276		2,617		1,011		292,904
Commercial		380,650		3,239		906		384,795
Consumer & Other		14,934		-		488		15,422
Leases		105,402		-		-		105,402
Total	$	2,643,190	$	13,621	$	16,216	$	2,673,027

June 30, 2019	Pass		Special Mention		Substandard		Total Loans & Leases
Loans & Leases:
Commercial Real Estate	$	811,627	$	2,123	$	-	$	813,750
Agricultural Real Estate		591,191		2,523		12,062		605,776
Real Estate Construction		93,539		-		-		93,539
Residential 1st Mortgages		257,102		-		306		257,408
Home Equity Lines & Loans		40,178		-		32		40,210
Agricultural		278,794		5,254		810		284,858
Commercial		377,794		3,212		1,186		382,192
Consumer & Other		17,660		-		184		17,844
Leases		103,321		-		-		103,321
Total	$	2,571,206	$	13,112	$	14,580	$	2,598,898

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 June 30, 2020, December 31, 2019, and June 30, 2019, rated doubtful or loss.

The following tables show an aging analysis of the loan & lease portfolio by the time past due at the dates indicated

(in thousands):

June 30, 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	$	-	$	258	$	-	$	-	$	258	$	855,504	$	855,762
Agricultural Real Estate		-		-		-		-		-		635,077		635,077
Real Estate Construction		-		-		-		-		-		166,548		166,548
Residential 1st Mortgages		-		-		-		-		-		272,209		272,209
Home Equity Lines & Loans		-		-		-		-		-		37,966		37,966
Agricultural		-		-		-		473		473		261,513		261,986
Commercial		-		-		-		-		-		369,817		369,817
Consumer & Other		97		-		-		-		97		360,938		361,035
Leases		-		-		-		-		-		104,112		104,112
Total	$	97	$	258	$	-	$	473	$	828	$	3,063,684	$	3,064,512

December 31, 2019	30-59 Days Past Due		60-89 Days Past Due		90 Days and Still Accruing		Nonaccrual		Total Past Due		Current		Total Loans & Leases
Loans & Leases:
Commercial Real Estate	$	-	$	-	$	-	$	-	$	-	$	838,570	$	838,570
Agricultural Real Estate		-		-		-		-		-		625,767		625,767
Real Estate Construction		240		-		-		-		240		115,404		115,644
Residential 1st Mortgages		-		-		-		-		-		255,253		255,253
Home Equity Lines and Loans		-		-		-		-		-		39,270		39,270
Agricultural		-		-		-		-		-		292,904		292,904
Commercial		77		-		-		-		77		384,718		384,795
Consumer & Other		35		-		-		-		35		15,387		15,422
Leases		-		-		-		-		-		105,402		105,402
Total	$	352	$	-	$	-	$	-	$	352	$	2,672,675	$	2,673,027

June 30, 2019	30-59 Days Past Due		60-89 Days Past Due		90 Days and Still Accruing		Nonaccrual		Total Past Due		Current		Total Loans & Leases
Loans & Leases:
Commercial Real Estate	$	-	$	-	$	-	$	-	$	-	$	813,750	$	813,750
Agricultural Real Estate		-		-		-		-		-		605,776		605,776
Real Estate Construction		-		-		-		-		-		93,539		93,539
Residential 1st Mortgages		8		-		-		-		8		257,400		257,408
Home Equity Lines & Loans		-		-		-		-		-		40,210		40,210
Agricultural		-		-		-		-		-		284,858		284,858
Commercial		75		150		-		-		225		381,967		382,192
Consumer & Other		18		-		-		-		18		17,826		17,844
Leases		-		-		-		-		-		103,321		103,321
Total	$	101	$	150	$	-	$	-	$	251	$	2,598,647	$	2,598,898

The following tables show information related to impaired loans & leases for the periods indicated (in thousands):

							Three Months Ended June 30, 2020				Six Months Ended June 30, 2020
June 30, 2020	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial Real Estate	$	-	$	-	$	-	$	1,444	$	2	$	1,466	$	31
Agricultural Real Estate		5,629		5,629		-		5,629		87		5,636		176
Commercial		-		-		-		754		1		754		16
	$	5,629	$	5,629	$	-	$	7,827	$	90	$	7,856	$	223
With an allowance recorded:
Commercial Real Estate	$	84	$	84	$	6	$	42	$	1	$	727	$	1
Agricultural Real Estate		-		-		-		275		-		275		-
Residential 1st Mortgages		1,702		1,921		85		1,626		21		1,591		40
Home Equity Lines & Loans		67		77		3		67		1		68		2
Agricultural		473		487		79		329		43		257		45
Commercial		10		10		-		11		2		390		2
Consumer & Other		195		196		25		196		3		197		7
	$	2,531	$	2,775	$	198	$	2,546	$	71	$	3,505	$	97
Total	$	8,160	$	8,404	$	198	$	10,373	$	161	$	11,361	$	320

December 31, 2019	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial Real Estate	$	86	$	86	$	-	$	90	$	8
Agricultural Real Estate		5,654		5,654		-		6,069		379
Commercial		-		-		-		8		1
	$	5,740	$	5,740	$	-	$	6,167	$	388
With an allowance recorded:
Commercial Real Estate	$	2,822	$	2,822	$	234	$	2,853	$	94
Residential 1st Mortgages		1,562		1,770		74		1,601		73
Home Equity Lines and Loans		68		79		7		71		4
Agricultural		188		188		99		195		6
Commercial		1,528		1,528		137		1,554		53
Consumer & Other		200		200		61		54		-
	$	6,368	$	6,587	$	612	$	6,328	$	230
Total	$	12,108	$	12,327	$	612	$	12,495	$	618

							Three Months Ended June 30, 2019				Six Months Ended June 30, 2019
June 30, 2019	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial Real Estate	$	91	$	91	$	-	$	92	$	2	$	93	$	4
Agricultural Real Estate		5,702		5,702		-		6,471		128		6,855		201
Commercial		32		32		-		16		1		8		1
	$	5,825	$	5,825	$	-	$	6,579	$	131	$	6,956	$	206
With an allowance recorded:
Commercial Real Estate	$	2,857	$	2,857	$	201	$	2,874	$	24	$	2,884	$	47
Residential 1st Mortgages		1,614		1,820		81		1,620		17		1,627		38
Home Equity Lines & Loans		71		82		3		72		1		73		2
Agricultural		196		196		98		199		2		150		2
Commercial		1,548		1,548		158		1,574		13		1,597		27
Consumer & Other		6		6		6		6		-		6		-
	$	6,292	$	6,509	$	547	$	6,345	$	57	$	6,337	$	116
Total	$	12,117	$	12,334	$	547	$	12,924	$	188	$	13,293	$	322

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. 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.

On March 27, 2020 the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law. The CARES Act provides financial institutions, under specific circumstances, the opportunity to temporarily suspend certain requirements under generally accepted accounting principles related to TDR’s for a limited period of time to account for the effects of COVID-19. In March 2020, a joint statement was issued by federal and state regulatory agencies, after consultation with the FASB, to clarify that short-term loan modifications are not TDRs if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to any relief. Under this guidance, six months is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification program is implemented. The guidance also provides that these modified loans generally will not be classified as nonaccrual during the term of the modification. For the quarter ended June 30, 2020 we restructured $270.7 million of loans under the CARES Act guidelines (primarily payment or interest deferrals up to six months). 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 and the impact of COVID-19 on the Company.

At June 30, 2020, the Company allocated $373,000 of specific reserves to $8.1 million of troubled debt restructured loans & leases, all of which were performing. The Company had no commitments at June 30, 2020 to lend additional amounts to customers with outstanding loans or leases that are classified as TDRs.

During the six-month period ended June 30, 2020, there were five loans modified as a troubled debt restructuring. The modification involved a reduction of the stated interest rate of the loan for 5 years and extended the maturity date for 10 years.

The following table presents loans or leases by class modified as troubled debt restructured loans or leases during the three and six-month periods ended June 30, 2020 (in thousands):

	Three Months Ended June 30, 2020						Six Months Ended June 30, 2020
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Residential 1st Mortgages		-	$	-	$	-		5	$	634	$	634
Total		-	$	-	$	-		5	$	634	$	634

During the three and six months ended June 30, 2020, the twelve months ended December 31, 2019, and the three and six-month periods ended June 30, 2019 there were no payment defaults on loans or leases modified as troubled debt restructurings within twelve months following the modification. The Company considers a loan or lease to be in payment default once it is greater than 90 days contractually past due under the modified terms.

At December 31, 2019, the Company allocated $612,000 of specific reserves to $12.1 million of troubled debt restructured loans, all of which were performing. The Company had no commitments at December 31, 2019 to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the year ended December 31, 2019, the terms of certain loans were modified 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.

There were no modifications involving a reduction of the stated interest rate. Modifications involving an extension of the maturity date ranged from 3 months to 6 years.

The following table presents loans by class modified as troubled debt restructured loans for the period ended December 31, 2019 (in thousands):

	Year ended December 31, 2019
Troubled Debt Restructurings	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Agricultural		1	$	201	$	201
Consumer & Other		1		195		195
Total		2	$	396	$	396

The troubled debt restructurings described above increased the allowance for credit losses by $101,000. There were no charge-offs for the twelve months ended December 31, 2019.

At June 30, 2019, the Company allocated $547,000 of specific reserves to $12.1 million of troubled debt restructured loans & leases, all of which were performing. The Company had no commitments at June 30, 2019 to lend additional amounts to customers with outstanding loans or leases that are classified as TDRs.

During the six-month period ended June 30, 2019, there was one loan modified as a troubled debt restructuring. The modification involved a reduction of the stated interest rate of the loan for 5 years and extended the maturity date for 10 years.

The following table presents loans or leases by class modified as troubled debt restructured loans or leases during the three and six-month periods ended June 30, 2019 (in thousands):

	Three Months Ended June 30, 2019						Six Months Ended June 30, 2019
Troubled Debt Restructurings	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Agricultural		-	$	-	$	-		1	$	201	$	201
Total		-	$	-	$	-		1	$	201	$	201

During the three and six-months ended June 30, 2019 there were no payment defaults on loans or leases modified as troubled debt restructurings within twelve months following the modification. The Company considers a loan or lease to be in payment default once it is greater than 90 days contractually past due under the modified terms.