Loans & Leases and Allowance for Credit Losses

9 Months Ended

Sep. 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)	September 30, 2020		December 31, 2019		September 30, 2019
Commercial Real Estate	$	887,999	$	846,486	$	824,283
Agricultural Real Estate		639,172		625,767		617,310
Real Estate Construction		186,623		115,644		98,662
Residential 1st Mortgages		293,489		255,253		255,394
Home Equity Lines and Loans		35,875		39,270		39,490
Agricultural		252,031		292,904		289,182
Commercial		367,052		384,795		381,774
Consumer & Other (1)		359,697		15,422		16,871
Leases		105,511		104,470		100,784
Total Gross Loans & Leases		3,127,449		2,680,011		2,623,750
Less: Unearned Income		15,518		6,984		6,628
Subtotal		3,111,931		2,673,027		2,617,122
Less: Allowance for Credit Losses		56,798		55,012		54,954
Net Loans & Leases	$	3,055,133	$	2,618,015	$	2,562,168

(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 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. 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 1,540 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):

September 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	)		(54	)		-			-			(487	)
Recoveries		-		-			-			49			65			54			80			25			-			-			273
Provision		13,236		(6,336	)		(381	)		45			(617	)		(3,458	)		(1,127	)		(63	)		(248	)		949			2,000
Ending Balance- September 30, 2020	$	24,289	$	8,792			1,568		$	949		$	2,116		$	4,672		$	9,993		$	364		$	2,914		$	1,141		$	56,798
Third Quarter Allowance for Credit Losses:
Beginning Balance- July 1, 2020	$	21,423	$	9,021		$	1,452		$	1,771		$	2,239		$	4,790		$	10,043		$	359		$	2,800		$	1,160		$	55,058
Charge-Offs		-		-			-			-			-			-			-			(25	)		-			-			(25	)
Recoveries		-		-			-			3			31			24			-			7			-			-			65
Provision		2,866		(229	)		116			(825	)		(154	)		(142	)		(50	)		23			114			(19	)		1,700
Ending Balance- September 30, 2020	$	24,289	$	8,792		$	1,568		$	949		$	2,116		$	4,672		$	9,993		$	364		$	2,914		$	1,141		$	56,798
Ending Balance Individually Evaluated for Impairment		-		-			-			118			8			92			13			56			-			-			287
Ending Balance Collectively Evaluated for Impairment		24,289		8,792			1,568			831			2,108			4,580			9,980			308			2,914			1,141			56,511
Loans & Leases:
Ending Balance	$	871,623	$	639,172		$	186,623		$	293,489		$	35,875		$	252,031		$	367,052		$	359,697		$	106,369			-		$	3,111,931
Ending Balance Individually Evaluated for Impairment		108		5,629			-			2,390			164			498			235			194			-			-			9,218
Ending Balance Collectively Evaluated for Impairment	$	871,515	$	633,543		$	186,623		$	291,099		$	35,711		$	251,533		$	366,817		$	359,503		$	106,369		$	-		$	3,102,713

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

September 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		-			-		-		-			-			-			(592	)		(62	)		-			-			(654	)
Recoveries		-			-		-		8			20			34			40			40			-			-			142
Provision		(847	)		731		480		(33	)		(79	)		(431	)		601			3			(969	)		744			200
Ending Balance- September 30, 2019	$	10,762		$	14,823	$	1,729	$	855		$	2,702		$	7,845		$	11,705		$	475		$	3,053		$	1,005		$	54,954
Third Quarter Allowance for Credit Losses:
Beginning Balance- July 1, 2019	$	10,680		$	14,572	$	1,697	$	864		$	2,743		$	7,481		$	12,267		$	464		$	3,100		$	1,257		$	55,125
Charge-Offs		-			-		-		-			-			-			(213	)		(22	)		-			-			(235	)
Recoveries		-			-		-		2			9			23			17			13			-			-			64
Provision		82			251		32		(11	)		(50	)		341			(366	)		20			(47	)		(252	)		-
Ending Balance- September 30, 2019	$	10,762		$	14,823	$	1,729	$	855		$	2,702		$	7,845		$	11,705		$	475		$	3,053		$	1,005		$	54,954
Ending Balance Individually Evaluated for Impairment		253			-		-		121			12			95			147			5			-			-			633
Ending Balance Collectively Evaluated for Impairment		10,509			14,823		1,729		734			2,690			7,750			11,558			470			3,053			1,005			54,321
Loans & Leases:
Ending Balance	$	816,668		$	617,310	$	98,662	$	255,394		$	39,490		$	289,182		$	381,774		$	16,871		$	101,771		$	-		$	2,617,122
Ending Balance Individually Evaluated for Impairment		4,563			5,678		-		2,422			237			192			1,538			5			-			-			14,635
Ending Balance Collectively Evaluated for Impairment	$	812,105		$	611,632	$	98,662	$	252,972		$	39,253		$	288,990		$	380,236		$	16,866		$	101,771		$	-		$	2,602,487

The ending balance of loans individually evaluated for impairment includes restructured loans in the amount of $828,500 at September 30, 2020, $2.6 million at December 31, 2019, and $2.6 million at September 30, 2019, which are no longer classified as TDRs because they were restructured under market rates and terms.

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

September 30, 2020	Pass		Special Mention		Substandard		Total Loans & Leases
Loans & Leases:
Commercial Real Estate	$	861,874	$	5,239	$	4,510	$	871,623
Agricultural Real Estate		624,859		1,525		12,788		639,172
Real Estate Construction		186,623		-		-		186,623
Residential 1st Mortgages		292,792		-		697		293,489
Home Equity Lines & Loans		35,691		-		184		35,875
Agricultural		251,108		-		923		252,031
Commercial		364,465		1,316		1,271		367,052
Consumer & Other		359,194		-		503		359,697
Leases		106,369		-		-		106,369
Total	$	3,082,975	$	8,080	$	20,876	$	3,111,931

December 31, 2019	Pass		Special Mention		Substandard		Total Loans & Leases
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

September 30, 2019	Pass		Special Mention		Substandard		Total Loans & Leases
Loans & Leases:
Commercial Real Estate	$	814,560	$	2,108	$	-	$	816,668
Agricultural Real Estate		602,781		2,491		12,038		617,310
Real Estate Construction		98,662		-		-		98,662
Residential 1st Mortgages		254,594		-		800		255,394
Home Equity Lines & Loans		39,374		-		116		39,490
Agricultural		284,211		4,168		803		289,182
Commercial		377,779		2,839		1,156		381,774
Consumer & Other		16,436		-		435		16,871
Leases		101,771		-		-		101,771
Total	$	2,590,168	$	11,606	$	15,348	$	2,617,122

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 September 30, 2020, December 31, 2019, and September 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):

September 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	$	-	$	-	$	-	$	-	$	-	$	871,623	$	871,623
Agricultural Real Estate		-		-		-		498		498		638,674		639,172
Real Estate Construction		85		-		-		-		85		186,538		186,623
Residential 1st Mortgages		-		-		-		-		-		293,489		293,489
Home Equity Lines & Loans		-		-		-		-		-		35,875		35,875
Agricultural		-		-		-		-		-		252,031		252,031
Commercial		547		-		-		-		547		366,505		367,052
Consumer & Other		67		-		-		-		67		359,630		359,697
Leases		-		-		-		-		-		106,369		106,369
Total	$	699	$	-	$	-	$	498	$	1,197	$	3,110,734	$	3,111,931

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

September 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	$	-	$	-	$	-	$	-	$	-	$	816,668	$	816,668
Agricultural Real Estate		-		-		-		-		-		617,310		617,310
Real Estate Construction		-		-		-		-		-		98,662		98,662
Residential 1st Mortgages		-		-		-		-		-		255,394		255,394
Home Equity Lines & Loans		-		84		-		-		84		39,406		39,490
Agricultural		250		-		-		-		250		288,932		289,182
Commercial		258		-		-		-		258		381,516		381,774
Consumer & Other		9		60		-		-		69		16,802		16,871
Leases		-		-		-		-		-		101,771		101,771
Total	$	517	$	144	$	-	$	-	$	661	$	2,616,461	$	2,617,122

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

							Three Months Ended September 30, 2020				Nine Months Ended September 30, 2020
September 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	$	84	$	84	$	-	$	42	$	2	$	991	$	33
Agricultural Real Estate		5,629		5,629		-		5,629		88		5,633		264
Agricultural		5		6		-		3		-		1		-
Commercial		-		-		-		-		-		503		16
	$	5,718	$	5,719	$	-	$	5,674	$	90	$	7,128	$	313
With an allowance recorded:
Commercial Real Estate	$	-	$	-	$	-	$	42	$	-	$	498	$	1
Agricultural Real Estate		-		-		-		-		-		183		-
Residential 1st Mortgages		1,686		1,909		84		1,694		18		1,625		58
Home Equity Lines & Loans		65		76		3		66		1		67		3
Agricultural		492		534		92		483		7		333		52
Commercial		235		235		13		123		13		301		15
Consumer & Other		194		195		56		195		3		196		10
	$	2,672	$	2,949	$	248	$	2,603	$	42	$	3,203	$	139
Total	$	8,390	$	8,668	$	248	$	8,277	$	132	$	10,331	$	452

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 September 30, 2019				Nine Months Ended September 30, 2019
September 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	$	89	$	89	$	-	$	90	$	2	$	92	$	6
Agricultural Real Estate		5,678		5,678		-		5,691		89		6,467		290
Commercial		-		-		-		16		-		11		1
	$	5,767	$	5,767	$	-	$	5,797	$	91	$	6,570	$	297
With an allowance recorded:
Commercial Real Estate	$	2,840	$	2,840	$	253	$	2,853	$	24	$	2,873	$	71
Residential 1st Mortgages		1,601		1,810		80		1,608		18		1,620		56
Home Equity Lines & Loans		70		80		4		71		1		72		3
Agricultural		192		192		95		195		2		165		4
Commercial		1,538		1,538		147		1,545		13		1,580		40
Consumer & Other		5		6		5		6		-		6		-
	$	6,246	$	6,466	$	584	$	6,278	$	58	$	6,316	$	174
Total	$	12,013	$	12,233	$	584	$	12,075	$	149	$	12,886	$	471

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 because they were restructured under market rates and terms. 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. Since April 2020, we have restructured $276.9 million of loans under the CARES Act guidelines (primarily payment or interest deferrals up to six months). As of September 30, 2020, $103.8 million of these loans remain in a deferral status, the other loans having returned to making principal and/or interest payments. By October 31, 2020, the loans still in a deferral status had dropped to $24.1 million. 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 September 30, 2020, the Company allocated $156,000 of specific reserves to $7.9 million of troubled debt restructured loans & leases, all of which were performing. The Company had no commitments at September 30, 2020, to lend additional amounts to customers with outstanding loans or leases that are classified as TDRs.

During the nine month period ended September 30, 2020, there were six loans modified as a troubled debt restructuring. The modifications involved a reduction of the stated interest rate of the loans for 5 years and extended the maturity dates for 10 years.

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

	Three Months Ended September 30, 2020						Nine Months Ended September 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
Commercial Real Estate		1	$	225	$	225		1	$	225	$	225
Residential 1st Mortgages		-		-		-		2		168		161
Agricultural		-		-		-		3		473		473
Total		1	$	225	$	225		6	$	866	$	859

TDRs described above had minimal impact on the allowance for credit losses and resulted in charge-offs of $7,000 for the nine-month period ended September 30, 2020.

During the three and nine-months ended September 30, 2020, the year ended December 31, 2019, and the three and nine-month periods ended September 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 year 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

TDRs 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 September 30, 2019, the Company allocated $584,000 of specific reserves to $12.0 million of troubled debt restructured loans & leases, all of which were performing. The Company had no commitments at September 30, 2019, to lend additional amounts to customers with outstanding loans or leases that are classified as TDRs.

During the nine-month period ended September 30, 2019, there was one loan modified as a troubled debt restructuring. When a loan is restructured, the modification of the terms can include one or a combination of the following: a reduction of the stated interest rate; 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. This loan had no rate reduction but the maturity date was extended for 6 years.

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

	Three Months Ended September 30, 2019						Nine Months Ended September 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

The TDRs described above had minimal impact on the allowance for credit losses for the three and nine-month periods ended September 30, 2019.

During the three and nine-months ended September 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.