FARMERS & MERCHANTS BANCORP - Quarter Report: 2021 September (Form 10-Q)
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 September 30, 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 November 1, 2021.
FARMERS & MERCHANTS BANCORP
FORM 10-Q
PART I. - FINANCIAL INFORMATION
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57
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60
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PART II. - OTHER INFORMATION
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61 | |||
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61
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62
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PART I. FINANCIAL INFORMATION
FARMERS & MERCHANTS BANCORP
(in thousands except share data)
Assets
|
September 30,
2021
|
December 31,
2020
|
September 30,
2020
|
|||||||||
Cash and Cash Equivalents:
|
||||||||||||
Cash and Due from Banks
|
$
|
66,503
|
$
|
66,327
|
$
|
58,810
|
||||||
Interest Bearing Deposits with Banks
|
804,260
|
317,510
|
299,558
|
|||||||||
Total Cash and Cash Equivalents
|
870,763
|
383,837
|
358,368
|
|||||||||
Investment Securities:
|
||||||||||||
Available-for-Sale
|
333,151
|
807,732
|
568,536
|
|||||||||
Held-to-Maturity, fair value $540,308, $70,049 and $71,055, respectively
|
550,618
|
68,933
|
69,913
|
|||||||||
Total Investment Securities
|
883,769
|
876,665
|
638,449
|
|||||||||
Loans & Leases:
|
3,139,801
|
3,099,592
|
3,111,931
|
|||||||||
Less: Allowance for Credit Losses
|
60,303
|
58,862
|
56,798
|
|||||||||
Loans & Leases, Net
|
3,079,498
|
3,040,730
|
3,055,133
|
|||||||||
Premises and Equipment, Net
|
48,580
|
50,147
|
49,214
|
|||||||||
Bank Owned Life Insurance, Net
|
70,852
|
69,235
|
68,705
|
|||||||||
Interest Receivable and Other Assets
|
149,296
|
129,839
|
131,745
|
|||||||||
Total Assets
|
$
|
5,102,758
|
$
|
4,550,453
|
$
|
4,301,614
|
||||||
Liabilities
|
||||||||||||
Deposits:
|
||||||||||||
Demand
|
$
|
1,694,431
|
$
|
1,475,425
|
$
|
1,340,797
|
||||||
Interest Bearing Transaction
|
1,077,569
|
902,487
|
812,166
|
|||||||||
Savings and Money Market
|
1,402,560
|
1,260,487
|
1,201,566
|
|||||||||
Time
|
393,834
|
421,868
|
460,248
|
|||||||||
Total Deposits
|
4,568,394
|
4,060,267
|
3,814,777
|
|||||||||
Subordinated Debentures
|
10,310
|
10,310
|
10,310
|
|||||||||
Interest Payable and Other Liabilities
|
69,863
|
56,211
|
59,626
|
|||||||||
Total Liabilities
|
4,648,567
|
4,126,788
|
3,884,713
|
|||||||||
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 September 30, 2021, December 31, 2020 and September 30, 2020, Respectively
|
8
|
8
|
8
|
|||||||||
Additional Paid-In Capital
|
77,516
|
77,516
|
80,350
|
|||||||||
Retained Earnings
|
377,523
|
333,070
|
323,524
|
|||||||||
Accumulated Other Comprehensive (Loss) Income, Net of Taxes
|
(856
|
)
|
13,071
|
13,019
|
||||||||
Total Shareholders’ Equity
|
454,191
|
423,665
|
416,901
|
|||||||||
Total Liabilities and Shareholders’ Equity
|
$
|
5,102,758
|
$
|
4,550,453
|
$
|
4,301,614
|
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
FARMERS & MERCHANTS BANCORP
(in thousands except per share data)
|
Three Months
Ended September 30,
|
Nine Months
Ended September 30,
|
||||||||||||||
2021
|
2020
|
2021
|
2020
|
|||||||||||||
Interest Income
|
||||||||||||||||
Interest and Fees on Loans & Leases
|
$
|
36,088
|
$
|
36,409
|
$
|
109,839
|
$
|
104,880
|
||||||||
Interest on Deposits with Banks
|
328
|
81
|
595
|
1,093
|
||||||||||||
Interest on Investment Securities:
|
||||||||||||||||
Taxable
|
3,283
|
2,889
|
10,781
|
9,216
|
||||||||||||
Exempt from Federal Tax
|
399
|
414
|
1,238
|
1,260
|
||||||||||||
Total Interest Income
|
40,098
|
39,793
|
122,453
|
116,449
|
||||||||||||
Interest Expense
|
||||||||||||||||
Deposits
|
929
|
2,011
|
3,200
|
7,613
|
||||||||||||
Subordinated Debentures
|
78
|
83
|
236
|
296
|
||||||||||||
Total Interest Expense
|
1,007
|
2,094
|
3,436
|
7,909
|
||||||||||||
Net Interest Income
|
39,091
|
37,699
|
119,017
|
108,540
|
||||||||||||
Provision for Credit Losses
|
-
|
1,700
|
1,250
|
2,000
|
||||||||||||
Net Interest Income After Provision for Loan Losses
|
39,091
|
35,999
|
117,767
|
106,540
|
||||||||||||
Non-Interest Income
|
||||||||||||||||
Service Charges on Deposit Accounts
|
808
|
654
|
2,125
|
1,948
|
||||||||||||
Net Gain on Sale of Investment Securities
|
-
|
-
|
2,554
|
13
|
||||||||||||
Increase in Cash Surrender Value of Bank Owned Life Insurance
|
549
|
528
|
1,616
|
1,557
|
||||||||||||
Debit Card and ATM Fees
|
1,788
|
1,465
|
5,173
|
4,044
|
||||||||||||
Net Gain on Deferred Compensation Investments
|
615
|
1,022
|
1,828
|
883
|
||||||||||||
Other
|
1,100
|
870
|
3,641
|
2,535
|
||||||||||||
Total Non-Interest Income
|
4,860
|
4,539
|
16,937
|
10,980
|
||||||||||||
Non-Interest Expense
|
||||||||||||||||
Salaries and Employee Benefits
|
14,453
|
13,606
|
47,375
|
42,269
|
||||||||||||
Net Gain on Deferred Compensation Investments
|
615
|
1,022
|
1,828
|
883
|
||||||||||||
Occupancy
|
1,145
|
1,186
|
3,554
|
3,429
|
||||||||||||
Equipment
|
1,251
|
1,272
|
3,688
|
3,726
|
||||||||||||
Marketing
|
63
|
245
|
669
|
515
|
||||||||||||
Legal
|
85
|
23
|
485
|
100
|
||||||||||||
FDIC Insurance
|
317
|
249
|
902
|
256
|
||||||||||||
Other
|
2,656
|
3,180
|
9,231
|
9,182
|
||||||||||||
Total Non-Interest Expense
|
20,585
|
20,783
|
67,732
|
60,360
|
||||||||||||
Income Before Provision for Income Taxes
|
23,366
|
19,755
|
66,972
|
57,160
|
||||||||||||
Provision for Income Taxes
|
5,864
|
4,945
|
16,604
|
13,919
|
||||||||||||
Net Income
|
$
|
17,502
|
$
|
14,810
|
$
|
50,368
|
$
|
43,241
|
||||||||
Basic and Diluted Earnings Per Common Share
|
$
|
22.16
|
$
|
18.66
|
$
|
63.79
|
$
|
54.49
|
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
FARMERS & MERCHANTS BANCORP
(in thousands)
|
Three Months
Ended September 30,
|
Nine Months
Ended September 30,
|
||||||||||||||
2021
|
2020
|
2021
|
2020
|
|||||||||||||
Net Income
|
$
|
17,502
|
$
|
14,810
|
$
|
50,368
|
$
|
43,241
|
||||||||
Other Comprehensive Income
|
||||||||||||||||
Increase in Net Unrealized (Loss) Gain on Available-for-Sale Securities
|
(2,237
|
)
|
(2,325
|
)
|
(16,846
|
)
|
13,803
|
|||||||||
Deferred Tax Provision Benefit (Expense) Related to Unrealized (Loss) Gains
|
662
|
688
|
4,981
|
(4,080
|
)
|
|||||||||||
Reclassification Adjustment for Realized Gains on Available-for-Sale Securities Included in Net
Income
|
-
|
-
|
(2,554
|
)
|
(13
|
)
|
||||||||||
Deferred Tax Related to Reclassification Adjustment
|
-
|
-
|
755
|
4
|
||||||||||||
Amortization of Unrealized Loss on Securities Transferred to Held to Maturity
|
(135
|
)
|
-
|
(373
|
)
|
-
|
||||||||||
Deferred Tax Benefit Related to Loss on Securities Transferred
|
40
|
-
|
110
|
-
|
||||||||||||
Total Other Comprehensive (Loss) Income
|
(1,670
|
)
|
(1,637
|
)
|
(13,927
|
)
|
9,714
|
|||||||||
Comprehensive Income
|
$
|
15,832
|
$
|
13,173
|
$
|
36,441
|
$
|
52,955
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
FARMERS & MERCHANTS BANCORP
For the three and nine months ended September 30, 2021 and 2020
|
||||||||||||||||||||||||
(in thousands except share data)
|
Common
Shares
Outstanding
|
Common
Stock
|
Additional
Paid-In
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
(Loss) Income, net
|
Total
Shareholders’
Equity
|
||||||||||||||||||
Three Months Ended September 30, 2021
|
||||||||||||||||||||||||
Balance, June 30, 2021
|
789,646
|
$
|
8
|
$
|
77,516
|
$
|
360,021
|
$
|
814
|
$
|
438,359
|
|||||||||||||
Net Income
|
-
|
17,502
|
-
|
17,502
|
||||||||||||||||||||
Other Comprehensive Loss
|
-
|
-
|
-
|
(1,670
|
)
|
(1,670
|
)
|
|||||||||||||||||
Balance, September 30, 2021
|
789,646
|
$
|
8
|
$
|
77,516
|
$
|
377,523
|
$
|
(856
|
)
|
$
|
454,191
|
||||||||||||
Three Months Ended September 30, 2020
|
||||||||||||||||||||||||
Balance, June 30, 2020
|
793,556
|
$
|
8
|
$
|
80,350
|
$
|
308,714
|
$
|
14,656
|
$
|
403,728
|
|||||||||||||
Net Income
|
-
|
14,810
|
-
|
14,810
|
||||||||||||||||||||
Other Comprehensive Loss
|
-
|
-
|
-
|
(1,637
|
)
|
(1,637
|
)
|
|||||||||||||||||
Balance, September 30, 2020
|
793,556
|
$
|
8
|
$
|
80,350
|
$
|
323,524
|
$
|
13,019
|
$
|
416,901
|
Nine
Months Ended September 30, 2021
|
||||||||||||||||||||||||
Balance, December 31, 2020
|
789,646
|
$
|
8
|
$
|
77,516
|
$
|
333,070
|
$
|
13,071
|
$
|
423,665
|
|||||||||||||
Net Income
|
-
|
-
|
50,368
|
-
|
50,368
|
|||||||||||||||||||
Cash Dividends Declared on Common Stock ($7.50 per share)
|
-
|
-
|
(5,922
|
)
|
-
|
(5,922
|
)
|
|||||||||||||||||
Cash Dividends Returned
|
-
|
-
|
7
|
-
|
7
|
|||||||||||||||||||
Other Comprehensive Loss
|
-
|
-
|
-
|
(13,927
|
)
|
(13,927
|
)
|
|||||||||||||||||
Balance, September 30, 2021
|
789,646
|
$
|
8
|
$
|
77,516
|
$
|
377,523
|
$
|
(856
|
)
|
$
|
454,191
|
||||||||||||
Nine
Months Ended September 30, 2020
|
||||||||||||||||||||||||
Balance, December 31, 2019
|
793,033
|
$
|
8
|
$
|
79,947
|
$
|
286,036
|
$
|
3,305
|
$
|
369,296
|
|||||||||||||
Net Income
|
-
|
-
|
43,241
|
-
|
43,241
|
|||||||||||||||||||
Cash Dividends Declared on Common Stock ($7.25 per share)
|
-
|
-
|
(5,753
|
)
|
-
|
(5,753
|
)
|
|||||||||||||||||
Issuance of Common Stock
|
523
|
-
|
403
|
-
|
-
|
403
|
||||||||||||||||||
Other Comprehensive Income
|
-
|
-
|
-
|
9,714
|
9,714
|
|||||||||||||||||||
Balance, September 30, 2020
|
793,556
|
$
|
8
|
$
|
80,350
|
$
|
323,524
|
$
|
13,019
|
$
|
416,901
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
FARMERS & MERCHANTS BANCORP
Nine Months
|
||||||||
Ended September 30, | ||||||||
(in thousands) | 2021 |
2020 |
||||||
Operating Activities:
|
||||||||
Net Income
|
$
|
50,368
|
$
|
43,241
|
||||
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
|
||||||||
Provision for Credit Losses
|
1,250
|
2,000
|
||||||
Depreciation and Amortization
|
1,971
|
2,117
|
||||||
Net Amortization of Investment Security Premiums & Discounts
|
1,133
|
741
|
||||||
Amortization of Core Deposit Intangible
|
458
|
470
|
||||||
Accretion of Discount on Acquired Loans
|
(62
|
)
|
(134
|
)
|
||||
Net (Gain) on Sale of Investment Securities
|
(2,554
|
)
|
(13
|
)
|
||||
Net (Gain) on Sale of Property & Equipment
|
(31
|
)
|
(38
|
)
|
||||
Net Change in Operating Assets & Liabilities:
|
||||||||
Net (Increase) in Interest Receivable and Other Assets
|
(11,211
|
)
|
(6,269
|
)
|
||||
Net Increase (Decrease) in Interest Payable and Other Liabilities
|
10,738
|
(1,773
|
)
|
|||||
Net Cash Provided by Operating Activities
|
52,060
|
40,342
|
||||||
Investing Activities:
|
||||||||
Purchase of Investment Securities Available-for-Sale
|
(257,228
|
)
|
(273,408
|
)
|
||||
Proceeds from Sold, Matured or Called Securities Available-for-Sale
|
397,454
|
225,332
|
||||||
Purchase of Investment Securities Held-to-Maturity
|
(194,332
|
)
|
(19,056
|
)
|
||||
Proceeds from Matured or Called Securities Held-to-Maturity
|
29,042
|
9,341
|
||||||
Net Loans & Leases Paid, Originated or Acquired
|
(39,956
|
)
|
(438,984
|
)
|
||||
Additions to Premises and Equipment, Net
|
(1,001
|
)
|
(6,108
|
)
|
||||
Purchase of Other Investments
|
(4,516
|
)
|
(4,935
|
)
|
||||
Redemption of Other Investment | 2,556 | - | ||||||
Proceeds from Sale of Property & Equipment
|
635
|
81
|
||||||
Net Cash Used in Investing Activities
|
(67,346
|
)
|
(507,737
|
)
|
||||
Financing Activities:
|
||||||||
Net Increase in Deposits
|
508,127
|
536,758
|
||||||
Cash Dividends
|
(5,922
|
)
|
(5,753
|
)
|
||||
Cash Dividends Return
|
7
|
-
|
||||||
Net Cash Provided by Financing Activities
|
502,212
|
531,005
|
||||||
Net Change in Cash and Cash Equivalents
|
486,926
|
63,610
|
||||||
Cash and Cash Equivalents at Beginning of Period
|
383,837
|
294,758
|
||||||
Cash and Cash Equivalents at End of Period
|
$
|
870,763
|
$
|
358,368
|
||||
Supplementary Data
|
||||||||
Cash Payments Made for Income Taxes
|
$
|
22,530
|
$
|
7,443
|
||||
Issuance of Common Stock to the Bank’s Non-Qualified Retirement Plans
|
$
|
-
|
$
|
403
|
||||
Interest Paid
|
$
|
4,369
|
$
|
9,085
|
||||
Supplementary Noncash Disclosure
|
||||||||
Investment Securities Available-for-Sale Transferred to Held-to-Maturity
|
$
|
316,925
|
$ | - | ||||
Lease Liabilities Arising from Obtaining Right-of-Use Assets | $ | 302 | $ | - |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
FARMERS & MERCHANTS BANCORP
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 and nine months ended September 30, 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
September 30, 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 non-accrual status at the time they become TDR, remain
on non-accrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be
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 by
Congress 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
non-accrual during the term of the modification. See “Note 2 – Risks and Uncertainties” for additional information on the CARES Act and 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. 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
to seven years. Leasehold improvements are amortized over the lesser of the terms of the
respective leases, or their useful lives, which are generally to ten 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 by Congress 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 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 went further and temporarily suspended all residential and commercial foreclosures through September 30, 2021, but these guidelines have now expired. The Company continues to work 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 H.R. 133 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”) 740, 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 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.
For the three and nine-month periods ended September 30, 2021 and 2020, the Company had 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 Statements 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, diluted and basic earnings per common share are the same. 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, 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 September 30, 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
|
$
|
153
|
$
|
593
|
$
|
573
|
$
|
549
|
$
|
522
|
$
|
1,165
|
$
|
3,555
|
We make a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit where goodwill is assigned
is less than its carrying amount. If we conclude that it is more likely than not that the fair value is more than its carrying amount, no impairment is recorded. Goodwill is tested for impairment on an interim basis if circumstances change or an
event occurs between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The qualitative assessment includes adverse events or circumstances identified that could negatively affect the
reporting units’ fair value as well as positive and mitigating events. Such indicators may include, among others, a significant change in legal factors or in the general business climate, significant change in our stock price and market
capitalization, unanticipated competition, and an action or assessment by a regulator. If the fair value of a reporting unit is less than its carrying amount, an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value is recognized. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
2. Risks and Uncertainties
The COVID-19 pandemic has affected all of us. Designated as
an “essential business”, the Company’s subsidiary, Farmers & Merchants Bank of Central California, has kept all branches open and maintained regular business hours during these difficult times. Our staffing levels have remained stable during
the COVID-19 crisis. We have taken what we believe are prudent measures to protect our employees and customers, while still providing core banking services.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law and was amended and extended
by the Consolidated Appropriations Act of 2021 (“H.R. 133”) on December 21, 2020. Through this legislation, as well as related federal and state regulatory actions, the federal government has taken extraordinary efforts to provide financial
assistance to individuals and companies to help them move through these difficult times. However, there are no guarantees how long the COVID-19 virus may continue to impact our economy, and therefore, the Company.
While tremendous strides have been made in fighting the virus, particularly with the development of a vaccine, the lingering effects of
COVID-19 could have an adverse future impact on our business, financial condition and results of operations, however, 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 debt securities available-for-sale are as
follows
(in thousands):
Amortized
Cost
|
Gross Unrealized
|
Fair
Value
|
||||||||||||||
September 30, 2021
|
Gains
|
Losses
|
||||||||||||||
U.S. Treasury Notes
|
$
|
9,922
|
$
|
228
|
$
|
-
|
$
|
10,150
|
||||||||
U.S. Government Agency SBA
|
6,892
|
70
|
43
|
6,919
|
||||||||||||
Mortgage-Backed Securities (1)(2)
|
270,667
|
4,243
|
5,341
|
269,569
|
||||||||||||
Other
|
46,513
|
-
|
-
|
46,513
|
||||||||||||
Total
|
$
|
333,994
|
$
|
4,541
|
$
|
5,384
|
$
|
333,151
|
Amortized
Cost
|
Gross Unrealized
|
Fair
Value
|
||||||||||||||
December 31, 2020
|
Gains
|
Losses
|
||||||||||||||
U.S. Treasury Notes
|
$
|
14,859
|
$
|
429
|
$
|
-
|
$
|
15,288
|
||||||||
U.S. 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
Cost
|
Gross Unrealized
|
Fair
Value
|
||||||||||||||
September 30, 2020
|
Gains
|
Losses
|
||||||||||||||
U.S. Treasury Notes
|
$
|
94,830
|
$
|
512
|
$
|
-
|
$
|
95,342
|
||||||||
U.S. Government Agency SBA
|
8,530
|
1
|
102
|
8,429
|
||||||||||||
Mortgage-Backed Securities (1)
|
421,263
|
18,050
|
39
|
439,274
|
||||||||||||
Corporate Securities
|
25,002
|
159
|
98
|
25,063
|
||||||||||||
Other
|
428
|
-
|
-
|
428
|
||||||||||||
Total
|
$
|
550,053
|
$
|
18,722
|
$
|
239
|
$
|
568,536
|
(1) |
All Mortgage-Backed securities consist
of securities collateralized by residential real estate and 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
Cost
|
Gross Unrealized
|
Fair
Value
|
||||||||||||||
September 30, 2021
|
Gains
|
Losses
|
||||||||||||||
Obligations of States and Political Subdivisions
|
$
|
62,936
|
$
|
768
|
$
|
-
|
$
|
63,704
|
||||||||
Mortgage Backed Securities (1)(2)
|
487,682
|
48
|
11,126
|
476,604
|
||||||||||||
Total
|
$
|
550,618
|
$
|
816
|
$
|
11,126
|
$
|
540,308
|
Amortized
Cost
|
Gross Unrealized
|
Fair
Value
|
||||||||||||||
December 31, 2020
|
Gains
|
Losses
|
||||||||||||||
Obligations of States and Political Subdivisions
|
$
|
68,933
|
$
|
1,116
|
$
|
-
|
$
|
70,049
|
||||||||
Total
|
$
|
68,933
|
$
|
1,116
|
$
|
-
|
$
|
70,049
|
Amortized
Value
|
Gross Unrealized
|
Fair
Value
|
||||||||||||||
September 30, 2020
|
Gains
|
Losses
|
||||||||||||||
Obligations of States and Political Subdivisions
|
$
|
69,913
|
$
|
1,142
|
$
|
-
|
$
|
71,055
|
||||||||
Total
|
$
|
69,913
|
$
|
1,142
|
$
|
-
|
$
|
71,055
|
(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 to yield 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 September 30, 2021 by contractual maturity are shown in the following table (in thousands):
Available-for-Sale
|
Held-to-Maturity
|
|||||||||||||||
September 30, 2021
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
||||||||||||
Within one year
|
$
|
51,503
|
$
|
51,569
|
$
|
308
|
$
|
308
|
||||||||
After one year through five years
|
5,100
|
5,262
|
6,969
|
7,012
|
||||||||||||
After five years through ten years
|
563
|
566
|
19,543
|
20,254
|
||||||||||||
After ten years
|
6,161
|
6,185
|
36,116
|
36,130
|
||||||||||||
63,327
|
63,582
|
62,936
|
63,704
|
|||||||||||||
Investment securities not due at a single maturity date:
|
||||||||||||||||
Mortgage-Backed securities
|
270,667
|
269,569
|
487,682
|
476,604
|
||||||||||||
Total
|
$
|
333,994
|
$
|
333,151
|
$
|
550,618
|
$
|
540,308
|
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
|
||||||||||||||||||||||
September 30, 2021
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
||||||||||||||||||
Securities Available-for-Sale
|
||||||||||||||||||||||||
U.S. Government Agency SBA
|
$
|
188
|
$
|
1
|
$
|
2,141
|
$
|
42
|
$
|
2,329
|
$
|
43
|
||||||||||||
Mortgage-Backed Securities
|
171,869
|
5,339
|
116
|
2
|
171,985
|
5,341
|
||||||||||||||||||
Total
|
$
|
172,057
|
$
|
5,340
|
$
|
2,257
|
$
|
44
|
$
|
174,314
|
$
|
5,384
|
||||||||||||
Securities Held-to-Maturity
|
||||||||||||||||||||||||
Mortgage Backed Securities
|
468,360
|
11,126
|
-
|
-
|
$
|
468,360
|
$
|
11,126
|
||||||||||||||||
Total
|
$
|
468,360
|
$
|
11,126
|
$
|
-
|
$
|
-
|
$
|
468,360
|
$
|
11,126
|
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
|
||||||||||||||||||||||||
U.S. 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
|
||||||||||||||||||||||
September 30, 2020
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
||||||||||||||||||
Securities Available-for-Sale
|
||||||||||||||||||||||||
U.S. Government Agency SBA
|
$ |
2,312
|
$ |
4
|
$ |
5,810
|
$ |
98
|
$ |
8,122
|
$ |
102
|
||||||||||||
Mortgage-Backed Securities
|
20,741
|
35
|
194
|
4
|
20,935
|
39
|
||||||||||||||||||
Corporate Securities
|
10,363
|
98
|
-
|
-
|
10,363
|
98
|
||||||||||||||||||
Total
|
$
|
33,416
|
$
|
137
|
$
|
6,004
|
$
|
102
|
$
|
39,420
|
$
|
239
|
There were no HTM investments
with gross unrealized losses at September 30, 2020.
As of September 30, 2021, the Company held 590
investment securities of which 68 were in an unrealized loss position for less than twelve months and 60 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 September 30, 2021, December 31, 2020, and September 30, 2020, no U.S. Treasury Note
security investments were in an unrealized loss position.
U.S. Government Agency SBA – At September 30, 2021, 4 U.S. Government SBA security investments were in an
unrealized loss position for less than 12 months and 44 were in a loss position for 12 months or more. The unrealized losses on the Company's investment in U.S. Government Agency SBA securities were $43,000, $93,000, and $102,000 at September 30, 2021, December 31, 2020, and September 30, 2020, respectively. 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 September 30, 2021, December 31, 2020, and
September 30, 2020.
Mortgage-Backed Securities – At September 30, 2021, 64 mortgage-backed security investments were in an unrealized loss position for less than 12 months and 16 were in an unrealized loss position for 12 months or more. The unrealized losses on the Company's investment in mortgage-backed securities were $16.5 million, $48,000, and $39,000 at September 30, 2021, December 31, 2020, and September 30, 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 September 30, 2021, December 31, 2020, and September 30, 2020.
Corporate Securities - At September 30, 2021, we had no corporate securities in our portfolio, having sold all positions during the second quarter of 2021. The unrealized loss on the Company’s investment in the corporate securities were $0, $18,000 and $98,000 at September 30, 2021, December 31, 2020 and September 30, 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 did not intend to sell the securities and it was more likely than not that the Company would not have to sell the securities before recovery of their cost basis, the Company did not consider these
investments to be other-than-temporarily impaired at December 31, 2020 and September 30, 2020.
Other Securities – At September 30, 2021, none
of the other securities were in an unrealized loss position. Other securities consisted of Money Market accounts held at investment brokerages.
Obligations of States and Political
Subdivisions – At September 30, 2021, December 31, 2020 and
September 30,2020, no obligation of states and political subdivisions was in an unrealized loss position. As of September 30, 2021, the Company’s bank-qualified municipal bond portfolio was rated at either the issue or issuer
level, and all of these ratings are “investment grade.” The Company monitors the status of all municipal investments in the portfolio and at the current time does not believe any of them to be exhibiting financial problems that could result in a
loss in any individual security.
Proceeds from sales and calls of securities for the periods shown were as follows:
|
Three Months
Ended September 30,
|
Nine
Months
Ended September 30,
|
||||||||||||||
(in thousands)
|
2021
|
2020
|
2021
|
2020
|
||||||||||||
Proceeds
|
$
|
1,450
|
$
|
50,620
|
$
|
301,320
|
$
|
53,620
|
||||||||
Gains
|
-
|
-
|
5,570
|
13
|
||||||||||||
Losses
|
-
|
-
|
3,016
|
-
|
Pledged Securities
As of September 30, 2021, securities carried at $445.2 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 $333.2
million at September 30, 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 $15.5 million at
September 30, 2021, and $12.7 at
December 31, 2020 and September 2020.
5. Loans & Leases
Loans & Leases consisted of the following:
(in thousands)
|
September 30,
2021
|
December 31,
2020
|
September 30,
2020
|
|||||||
Commercial Real Estate
|
$
|
1,126,230
|
$
|
971,326
|
$
|
887,999
|
||||
Agricultural Real Estate
|
656,337
|
643,014
|
639,172
|
|||||||
Real Estate Construction
|
178,451
|
185,741
|
186,623
|
|||||||
Residential 1st Mortgages
|
309,728
|
299,379
|
293,489
|
|||||||
Home Equity Lines & Loans
|
31,664
|
34,239
|
35,875
|
|||||||
Agricultural
|
235,085
|
264,372
|
252,031
|
|||||||
Commercial
|
394,326
|
374,816
|
367,052
|
|||||||
Consumer & Other (1)
|
129,665
|
235,529
|
359,697
|
|||||||
Leases
|
90,022
|
103,117
|
105,511
|
|||||||
Total Gross Loans & Leases
|
3,151,508
|
3,111,533
|
3,127,449
|
|||||||
Less: Unearned Income
|
11,707
|
11,941
|
15,518
|
|||||||
Subtotal
|
3,139,801
|
3,099,592
|
3,111,931
|
|||||||
Less: Allowance for Credit Losses
|
60,303
|
58,862
|
56,798
|
|||||||
Net Loans & Leases
|
$
|
3,079,498
|
$
|
3,040,730
|
$
|
3,055,133
|
(1)
|
Includes CARES Act Small Business Administration Paycheck Protection Program loans of $121,182, $224,309 and $347,180 as of September 30, 2021, December 31, 2020 and September 30, 2020, respectively.
|
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 two to five 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 $494.9 million of loans for over 2,000 small business customers.
At September 30, 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 $1 billion and $742.4 million, respectively. The borrowing capacity on these loans were $749.5
million from FHLB and $467.8 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):
September 30, 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
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(33
|
)
|
-
|
-
|
(33
|
)
|
|||||||||||||||||||||||||||||||
Recoveries
|
-
|
-
|
-
|
74
|
17
|
29
|
83
|
21
|
-
|
-
|
224
|
|||||||||||||||||||||||||||||||||
Provision
|
1,200
|
794
|
(210
|
)
|
(70
|
)
|
(129
|
)
|
(238
|
)
|
738
|
(23
|
)
|
(872
|
)
|
60
|
1,250
|
|||||||||||||||||||||||||||
Ending Balance- September 30, 2021
|
$
|
28,879
|
$
|
9,427
|
$
|
1,433
|
$
|
964
|
$
|
1,912
|
$
|
4,605
|
$
|
10,782
|
$
|
298
|
$
|
859
|
$
|
1,144
|
$
|
60,303
|
||||||||||||||||||||||
Third Quarter Allowance for Credit Losses:
|
||||||||||||||||||||||||||||||||||||||||||||
Beginning Balance- June 30, 2021
|
$
|
28,890
|
$
|
9,107
|
$
|
1,405
|
$
|
957
|
$
|
1,899
|
$
|
4,552
|
$
|
9,920
|
$
|
281
|
$
|
1,639
|
$
|
1,579
|
$
|
60,229
|
||||||||||||||||||||||
Charge-Offs
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(17
|
)
|
-
|
-
|
(17
|
)
|
|||||||||||||||||||||||||||||||
Recoveries
|
-
|
-
|
-
|
15
|
6
|
24
|
38
|
8
|
-
|
-
|
91
|
|||||||||||||||||||||||||||||||||
Provision
|
(11
|
)
|
320
|
28
|
(8
|
)
|
7
|
29
|
824
|
26
|
(780
|
)
|
(435
|
)
|
-
|
|||||||||||||||||||||||||||||
Ending Balance- September 30, 2021
|
$
|
28,879
|
$
|
9,427
|
$
|
1,433
|
$
|
964
|
$
|
1,912
|
$
|
4,605
|
$
|
10,782
|
$
|
298
|
$
|
859
|
$
|
1,144
|
$
|
60,303
|
||||||||||||||||||||||
Ending Balance Individually Evaluated for Impairment
|
-
|
-
|
-
|
88
|
6
|
-
|
6
|
40
|
-
|
-
|
140
|
|||||||||||||||||||||||||||||||||
Ending Balance Collectively Evaluated for Impairment
|
28,879
|
9,427
|
1,433
|
876
|
1,906
|
4,605
|
10,776
|
258
|
859
|
1,144
|
60,163
|
|||||||||||||||||||||||||||||||||
Loans & Leases:
|
||||||||||||||||||||||||||||||||||||||||||||
Ending Balance
|
$
|
1,114,149
|
$
|
656,337
|
$
|
178,451
|
$
|
309,728
|
$
|
31,664
|
$
|
235,085
|
$
|
394,326
|
$
|
129,665
|
$
|
90,396
|
$
|
-
|
$
|
3,139,801
|
||||||||||||||||||||||
Ending Balance Individually Evaluated for Impairment
|
74
|
-
|
-
|
1,764
|
112
|
6,129
|
218
|
178
|
-
|
-
|
8,475
|
|||||||||||||||||||||||||||||||||
Ending Balance Collectively Evaluated for Impairment
|
$
|
1,114,075
|
$
|
656,337
|
$
|
178,451
|
$
|
307,964
|
$
|
31,552
|
$
|
228,956
|
$
|
394,108
|
$
|
129,487
|
$
|
90,396
|
$
|
-
|
$
|
3,131,326
|
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
|
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- 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
|
)
|
-
|
(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- June 30, 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
|
The ending balance of loans individually evaluated for impairment includes restructured loans in the amount of $327,200 at September 30, 2021, $876,000 at
December 31, 2020, and $828,500 at September 30, 2020, which are no longer disclosed or classified as TDRs since they were restructured at
market terms.
The following tables show the loan & lease portfolio, including unearned income, allocated by management’s internal risk ratings at the
dates indicated (in thousands):
September 30, 2021
|
Pass(1)
|
Special
Mention
|
Substandard
|
Total Loans
& Leases
|
||||||||||||
Loans & Leases:
|
||||||||||||||||
Commercial Real Estate
|
$
|
1,098,929
|
$
|
7,371
|
$
|
7,849
|
$
|
1,114,149
|
||||||||
Agricultural Real Estate
|
646,486
|
3,312
|
6,539
|
656,337
|
||||||||||||
Real Estate Construction
|
178,451
|
-
|
-
|
178,451
|
||||||||||||
Residential 1st Mortgages
|
308,960
|
-
|
768
|
309,728
|
||||||||||||
Home Equity Lines & Loans
|
31,490
|
-
|
174
|
31,664
|
||||||||||||
Agricultural
|
233,493
|
1,018
|
574
|
235,085
|
||||||||||||
Commercial
|
384,660
|
8,970
|
696
|
394,326
|
||||||||||||
Consumer & Other
|
129,450
|
-
|
215
|
129,665
|
||||||||||||
Leases
|
90,396
|
-
|
-
|
90,396
|
||||||||||||
Total
|
$
|
3,102,315
|
$
|
20,671
|
$
|
16,815
|
$
|
3,139,801
|
(1) |
Includes "Watch" loans of $954.4 million.
|
December 31, 2020
|
Pass(1)
|
Special
Mention
|
Substandard
|
Total Loans
& Leases
|
||||||||||||
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 & 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.
|
September 30, 2020
|
Pass(1)
|
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
|
(1) |
Includes "Watch" loans of $947.4 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 September 30, 2021, December 31, 2020, and September 30, 2020, rated doubtful or
loss.
The following tables show an aging analysis of the loan & lease portfolio, including unearned income, past due at the dates indicated (in thousands):
September 30, 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
|
$
|
453
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
453
|
$
|
1,113,696
|
$
|
1,114,149
|
||||||||||||||
Agricultural Real Estate
|
-
|
-
|
-
|
19
|
19
|
656,318
|
656,337
|
|||||||||||||||||||||
Real Estate Construction
|
-
|
-
|
-
|
-
|
-
|
178,451
|
178,451
|
|||||||||||||||||||||
Residential 1st Mortgages
|
102
|
-
|
-
|
-
|
102
|
309,626
|
309,728
|
|||||||||||||||||||||
Home Equity Lines & Loans
|
-
|
-
|
-
|
-
|
-
|
31,664
|
31,664
|
|||||||||||||||||||||
Agricultural
|
-
|
-
|
-
|
497
|
497
|
234,588
|
235,085
|
|||||||||||||||||||||
Commercial
|
50
|
-
|
-
|
-
|
50
|
394,276
|
394,326
|
|||||||||||||||||||||
Consumer & Other
|
5
|
-
|
-
|
-
|
5
|
129,660
|
129,665
|
|||||||||||||||||||||
Leases
|
-
|
-
|
-
|
-
|
-
|
90,396
|
90,396
|
|||||||||||||||||||||
Total
|
$
|
610
|
$
|
-
|
$
|
-
|
$
|
516
|
$
|
1,126
|
$
|
3,138,675
|
$
|
3,139,801
|
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 & 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
|
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
|
Non-accrual loans & leases were $516,000
at September 30, 2021, $495,000 at December 31, 2020 and $498,000 at September 30, 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 $35,700, $22,000,
and $15,530 at September 30, 2021, December 31, 2020 and September 30, 2020 respectively.
The following tables show information related to impaired loans & leases for the periods indicated (in thousands):
Three Months Ended
September 30, 2021
|
Nine
Months Ended
September 30,
2021
|
|||||||||||||||||||||||||||
September 30, 2021
|
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
|
$
|
65
|
$
|
65
|
$
|
-
|
$
|
73
|
$
|
1
|
$
|
52
|
$
|
2
|
||||||||||||||
Agricultural Real Estate
|
5,613
|
5,613
|
-
|
5,621
|
88
|
5,626
|
324
|
|||||||||||||||||||||
Agricultural
|
516
|
559
|
-
|
504
|
12
|
415
|
46
|
|||||||||||||||||||||
Commercial
|
8
|
8
|
-
|
9
|
-
|
5
|
-
|
|||||||||||||||||||||
$
|
6,202
|
$
|
6,245
|
$
|
-
|
$
|
6,207
|
$
|
101
|
$
|
6,098
|
$
|
372
|
|||||||||||||||
With an allowance recorded:
|
||||||||||||||||||||||||||||
Commercial Real Estate
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
28
|
$
|
3
|
||||||||||||||
Residential 1st Mortgages
|
1,503
|
1,719
|
75
|
1,585
|
16
|
1,638
|
52
|
|||||||||||||||||||||
Home Equity Lines & Loans
|
60
|
71
|
3
|
61
|
1
|
62
|
3
|
|||||||||||||||||||||
Agricultural
|
-
|
-
|
-
|
-
|
-
|
82
|
-
|
|||||||||||||||||||||
Commercial
|
210
|
210
|
6
|
213
|
4
|
222
|
12
|
|||||||||||||||||||||
Consumer & Other
|
178
|
179
|
40
|
181
|
3
|
185
|
10
|
|||||||||||||||||||||
$
|
1,951
|
$
|
2,179
|
$
|
124
|
$
|
2,040
|
$
|
24
|
$
|
2,217
|
$
|
80
|
|||||||||||||||
Total
|
$
|
8,153
|
$
|
8,424
|
$
|
124
|
$
|
8,247
|
$
|
125
|
$
|
8,315
|
$
|
452
|
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 & 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
|
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
|
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 September 30, 2021, all of these loans have returned to making principal and/or interest payments. We believe that these actions have assisted these borrowers in getting through these difficult times, but no guarantees 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 were 30 days or more past due when enrolling in a loan modification program related to the COVID-19 pandemic, we evaluated the loan
modifications under our existing TDR framework, and where such a loan modification would have resulted in a more than insignificant concession to a borrower experiencing financial difficulty, the loan was accounted for as a TDR and would
generally not accrue interest. See “Note 2 – Risks and Uncertainties” for additional information on the CARES Act and H.R. 133, and the impact of COVID-19 on the Company.
At September 30, 2021, there were no
formal foreclosure proceedings in process for consumer mortgage loans secured by residential real estate properties.
At September 30, 2021, the Company allocated $123,800
of specific reserves to $8.1 million of troubled debt restructured loans & leases, of which $7.6 million were performing. The Company had no commitments at
September 30, 2021, to lend additional amounts to customers with outstanding loans or leases that are classified as TDRs.
During the three and nine-month periods ended September 30, 2021, there were no loans or leases modified as a troubled debt restructuring.
During the three and nine-month periods ended September 30, 2021, the year ended December 31, 2020, and the three and nine-month periods
ended September 30, 2020 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, 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 table presents loans or leases by class modified as troubled debt restructured loans or leases for the year ended December
31, 2020 (in thousands):
December 31, 2020
|
||||||||||||
Troubled Debt Restructurings
|
Number of
Loans
|
Pre-Modification
Outstanding
Recorded
Investment
|
Post-Modification
Outstanding
Recorded
Investment
|
|||||||||
Residential 1st Mortgages
|
2
|
$
|
156
|
$
|
156
|
|||||||
Agricultural
|
3
|
495
|
495
|
|||||||||
Commercial
|
1
|
224
|
224
|
|||||||||
Total
|
6
|
$
|
875
|
$
|
875
|
The troubled debt restructurings described above increased the allowance for credit losses by $120,000 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 September 30, 2020, there were no
formal foreclosure proceedings in process for consumer mortgage loans secured by residential real estate properties.
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 were 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
|
||||||||||||||||||
Residential 1st Mortgages
|
-
|
$
|
-
|
$
|
-
|
2
|
$
|
156
|
$
|
156
|
||||||||||||||
Agricultural
|
-
|
-
|
-
|
3
|
495
|
495
|
||||||||||||||||||
Commercial |
1 |
224 |
224 |
1 |
224 |
224 |
||||||||||||||||||
Total
|
1
|
$
|
224
|
$
|
224
|
6
|
$
|
875
|
$
|
875
|
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-month periods ended September 30, 2020, 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.
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 September 30,
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:
|
||||||||||||||||
U.S. Treasury Notes
|
$
|
10,150
|
$
|
10,150
|
$
|
-
|
$
|
-
|
||||||||
U.S. Government Agency SBA
|
6,919
|
-
|
6,919
|
-
|
||||||||||||
Mortgage-Backed Securities
|
269,569
|
-
|
269,569
|
-
|
||||||||||||
Other
|
46,513
|
46,203
|
310
|
-
|
||||||||||||
Total Assets Measured at Fair Value On a Recurring Basis
|
$
|
333,151
|
$
|
56,353
|
$
|
276,798
|
$
|
-
|
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:
|
||||||||||||||||
U.S. Treasury Notes
|
$
|
15,288
|
$
|
15,288
|
$
|
-
|
$
|
-
|
||||||||
U.S. 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 September 30,
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:
|
||||||||||||||||
U.S. Treasury Notes
|
$
|
95,342
|
$
|
95,342
|
$
|
-
|
$
|
-
|
||||||||
U.S. Government Agency SBA
|
8,429
|
-
|
8,429
|
-
|
||||||||||||
Mortgage-Backed Securities
|
439,274
|
-
|
439,274
|
-
|
||||||||||||
Corporate Securities
|
25,063
|
-
|
25,063
|
-
|
||||||||||||
Other
|
428
|
118
|
310
|
-
|
||||||||||||
Total Assets Measured at Fair Value On a Recurring Basis
|
$
|
568,536
|
$
|
95,460
|
$
|
473,076
|
$
|
-
|
Fair values for Level 2 available-for-sale investment securities are based on quoted market prices for similar securities. During the three and nine-month periods ended September 30, 2021 and 2020, there were no transfers in or out of Level 1, 2, or 3.
The following tables present information about the Company’s other real estate and impaired loans or leases, 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 September 30,
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:
|
||||||||||||||||
Residential 1st Mortgage
|
$
|
1,423
|
$
|
-
|
$
|
-
|
$
|
1,423
|
||||||||
Home Equity Lines & Loans
|
57
|
-
|
-
|
57
|
||||||||||||
Commercial
|
204
|
-
|
-
|
204
|
||||||||||||
Consumer
|
138
|
-
|
-
|
138
|
||||||||||||
Total Impaired Loans
|
1,822
|
-
|
-
|
1,822
|
||||||||||||
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
|
$
|
2,695
|
$
|
-
|
$
|
-
|
$
|
2,695
|
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 & 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 September 30,
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
|
$
|
1,599
|
$
|
-
|
$
|
-
|
$
|
1,599
|
||||||||
Home Equity Lines & Loans
|
62
|
-
|
-
|
62
|
||||||||||||
Agricultural
|
400
|
-
|
-
|
400
|
||||||||||||
Commercial | 222 | - | - | 222 | ||||||||||||
Consumer
|
138
|
-
|
-
|
138
|
||||||||||||
Total Impaired Loans
|
$ |
2,421
|
$ |
-
|
$ |
-
|
$ |
2,421
|
||||||||
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
|
$
|
3,294
|
$
|
-
|
$
|
-
|
$
|
3,294
|
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.
September 30, 2021
|
||||||||||
(in thousands)
|
Fair Value
|
Valuation Technique
|
Unobservable Inputs
|
Range, Weighted Avg.
|
||||||
Impaired Loans:
|
||||||||||
Residential 1st Mortgage
|
$
|
1,423
|
Sales Comparison Approach
|
Adjustment for Difference
Between Comparable Sales
|
0.68% - 4.02%, 2.54
|
%
|
||||
Home Equity Lines & Loans
|
$
|
57
|
Sales Comparison Approach
|
Adjustment for Difference
Between Comparable Sales
|
1.1% - 1.3%, 1.20
|
%
|
||||
Commercial
|
$
|
204
|
Income Approach
|
Capitalization Rate
|
10%, 10
|
%
|
||||
Consumer
|
$
|
138
|
Income Approach
|
Capitalization Rate |
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 & 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
|
%
|
September 30,
2020
|
||||||||||
(in thousands)
|
Fair Value
|
Valuation Technique
|
Unobservable Inputs
|
Range, Weighted Avg.
|
||||||
Impaired Loans:
|
||||||||||
Residential 1st Mortgage
|
$
|
1,599
|
Sales Comparison Approach
|
Adjustment for Difference
Between Comparable Sales
|
0.73% - 4.16%, 2.58
|
%
|
||||
Home Equity Lines & Loans
|
$
|
62
|
Sales Comparison Approach
|
Adjustment for Difference
Between Comparable Sales
|
1.1% - 1.4%, 1.28
|
%
|
||||
Agricultural
|
$
|
400
|
Income Approach
|
Capitalization Rate
|
10%, 10
|
%
|
||||
Commercial | $ |
222 | 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
|
%
|
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 based on the assumptions market participants would use when
pricing the asset or liability. 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 non-performance 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
|
||||||||||||||||||||
September 30, 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
|
$
|
870,763
|
$
|
870,763
|
$
|
-
|
$
|
-
|
$
|
870,763
|
||||||||||
Investment Securities Available-for-Sale
|
333,151
|
56,353
|
276,798
|
-
|
333,151
|
|||||||||||||||
Investment Securities Held-to-Maturity
|
550,618
|
-
|
499,432
|
40,876
|
540,308
|
|||||||||||||||
Loans & Leases, Net
|
3,079,498
|
-
|
-
|
3,090,187
|
3,090,187
|
|||||||||||||||
Accrued Interest Receivable
|
18,762
|
-
|
18,762
|
-
|
18,762
|
|||||||||||||||
Liabilities:
|
||||||||||||||||||||
Deposits
|
4,568,394
|
4,174,561
|
-
|
394,158
|
4,568,719
|
|||||||||||||||
Subordinated Debentures
|
10,310
|
-
|
6,830
|
-
|
6,830
|
|||||||||||||||
Accrued Interest Payable
|
451
|
-
|
451
|
-
|
451
|
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
|
||||||||||||||||||||
September 30, 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
|
$
|
358,368
|
$
|
358,368
|
$
|
-
|
$
|
-
|
$
|
358,368
|
||||||||||
Investment Securities Available-for-Sale
|
568,536
|
95,460
|
473,076
|
-
|
568,536
|
|||||||||||||||
Investment Securities Held-to-Maturity
|
69,913
|
-
|
28,244
|
42,811
|
71,055
|
|||||||||||||||
Loans & Leases, Net
|
3,055,133
|
-
|
-
|
3,065,624
|
3,065,624
|
|||||||||||||||
Accrued Interest Receivable
|
22,596
|
-
|
22,596
|
-
|
22,596
|
|||||||||||||||
Liabilities:
|
||||||||||||||||||||
Deposits
|
3,814,777
|
3,354,528
|
-
|
461,754
|
3,816,282
|
|||||||||||||||
Subordinated Debentures
|
10,310
|
-
|
6,518
|
-
|
6,518
|
|||||||||||||||
Accrued Interest Payable
|
1,618
|
-
|
1,618
|
-
|
1,618
|
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”.
On May 13, 2021, the Board
of Directors declared a mid-year cash dividend of $7.50 per share, a 3.4% increase over the $7.25 per share paid on July 1, 2020. The cash dividend was paid on July 1, 2021,
to shareholders of record on June 11, 2021.
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 earnings per common share for the three and nine-month periods ended September 30, 2021 and 2020.
Three Months
Ended September 30,
|
Nine
Months
Ended September 30,
|
|||||||||||||||
(net income in thousands)
|
2021
|
2020
|
2021
|
2020
|
||||||||||||
Net Income
|
$
|
17,502
|
$
|
14,810
|
$
|
50,368
|
$
|
43,241
|
||||||||
Weighted Average Number of Common Shares Outstanding
|
789,646
|
793,556
|
789,646
|
793,539
|
||||||||||||
Basic and Diluted Earnings Per Common Share
|
$
|
22.16
|
$
|
18.66
|
$
|
63.79
|
$
|
54.49
|
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
and , 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
to ten years. Certain lease
arrangements contain extension options which typically range from to ten 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 September 30, 2021, operating lease ROU assets and liabilities were $4.19 million and $4.29 million, respectively. As of December 31, 2020,
operating lease ROU assets and liabilities were $4.80 million and $4.92 million, respectively. As of September 30, 2020, operating lease ROU assets and liabilities were $4.47 million and $4.55 million, respectively. In the first quarter of 2021, early termination of one lease resulted in a reduction to ROU assets and liabilities of $482,000 and $494,000, respectively. In the third quarter of 2021, a new modification to renew a lease for more years resulted in an addition to ROU assets and liabilities of $302,000.
The table below summarizes the information related to our operating leases:
(in thousands except for
percent and period data)
|
Nine
Months Ended
September 30, 2021
|
Year Ended
December 31, 2020
|
Nine Months Ended
September 30, 2020
|
|||||||||
Cash Paid for Amounts Included in the Measurement of Lease Liabilities
|
||||||||||||
Operating Cash Flow from Operating Leases
|
$
|
536
|
$
|
795
|
$
|
594
|
||||||
Right-of-Use Assets Obtained in Exchange for New Operating Lease Liabilities
|
$ | 302 | $ | - | $ | - | ||||||
Weighted-Average Remaining Lease Term - Operating Leases, in Years
|
6.76
|
7.33
|
7.29
|
|||||||||
Weighted-Average Discount Rate - Operating Leases
|
2.6
|
%
|
2.9
|
%
|
3.2
|
%
|
The table below summarizes the maturity of remaining lease liability:
(in thousands)
|
September 30, 2021
|
|||
2021
|
$
|
174
|
||
2022
|
702
|
|||
2023
|
714
|
|||
2024
|
730
|
|||
2025
|
741
|
|||
2026 and thereafter
|
1,602
|
|||
Total Lease Payments
|
4,663
|
|||
Less: Interest
|
(377
|
)
|
||
Present Value of Lease Liabilities
|
$
|
4,286
|
As of September 30, 2021, we have no
additional operating leases for office space that have not yet commenced or that are
anticipated to commence during the fourth 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
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.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 $90.4 million at September 30, 2021, $103.5 million at December 31, 2020, and $106.4 million at September 30, 2020.
11. Recent Accounting Pronouncements
Accounting Standards Adopted in 2021
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. We adopted this ASU prospectively on January 1, 2021, which did not have a material impact on our financial condition or results of
operations.
Accounting Guidance Pending Adoption at September 30, 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 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.
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). The main amendments in this ASU are intended to
clarify certain optional expedients and scope of derivative instruments. The amendments are elective and effective immediately upon issuance of this ASU. Amendments may be elected through December 31, 2022. We have not elected to apply amendments at
this time, however, will assess the applicability of this ASU to us as we continue to monitor guidance for reference rate reform from FASB and its impact on our 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 and nine-month periods ended September 30, 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
While tremendous strides have been made in fighting the COVID-19 virus, particularly with the development of a vaccine, the lingering effects of COVID-19 are still with us, and it is impossible to predict the future
impact that this will have on our communities and customers.
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 was amended and extended by the Consolidated Appropriations Act of 2021 (“H.R. 133”) on
December 21, 2020. 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 two to five 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 $494.9 million of loans for over 2,000 of our small business customers. As of September 30, 2021, $121.2 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 $17.9 million in fees from the SBA and as of
September 30, 2021, $13.5 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 the fourth quarter
of 2021 could be significant.
|
• |
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. As of September 30, 2021 all of these loans have returned to some form of payment
status, whether interest-only or full principal and interest.
• |
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 went further and temporarily suspended all residential and commercial foreclosures through September 30, 2021, but these guidelines have now expired. The Company continues to work 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.
|
Impact on Farmers & Merchants Bancorp and Farmers & Merchants Bank of Central California
Although as vaccination rates increase the impact of COVID-19 may diminish, the Company remains 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) possible reinstatements of “shelter-in-place” orders 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 September 30, 2021 measures, the Company enters the fourth quarter of 2021 with strong fundamentals which should assist us in continuing to respond
to the risks of COVID-19:
• |
Liquidity consisting of $804 million of Fed Funds Sold and $884 million of Investment Securities;
|
• |
Strong Asset Quality as reflected by only $516,000 of non-performing loans, and a negligible delinquency ratio of .036% of total loans and leases;
|
• |
Risk Based Capital Ratio of 13.28%;
|
• |
Allowance for Credit Losses of $60.3 million or 1.92% of total loans and leases (2.00% exclusive of government fully guaranteed loans issued under the SBA’s PPP); and
|
• |
ROAA of 1.39% and ROAE of 15.64% in third quarter 2021.
|
Our credit exposure to the “Hospitality” (primarily hotels) and “Entertainment” (primarily restaurants, health clubs and movie theaters) industries totals $153.5 million in loans and leases outstanding at September
30, 2021. This represents 4.9% of total loans and leases outstanding and 33.8% 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 in some areas as a result of COVID-19. The Central Valley of California has been and should continue to be in a better position than other areas to weather this impact because
agricultural activity has substantially continued. Although the financial position of these borrowers has improved over the past three months as the economy has opened up, we continue to monitor the impact on our borrowers, and continue to work
closely with them using all of the tools at our disposal to help them move through this period of reduced business activity.
Although our 2021 financial performance could still 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 continue moving 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).
For the three and nine months ended September 30, 2021, Farmers & Merchants Bancorp reported net income of $17,502,000 and $50,368,000, earnings per share of $22.16 and $63.79 and return on average assets of
1.39% and 1.39%, respectively. Return on average shareholders’ equity was 15.64% and 15.37% for the three and nine months ended September 30, 2021, respectively.
For the three and nine months ended September 30, 2020, Farmers & Merchants Bancorp reported net income of $14,810,000 and $43,241,000, earnings per share of $18.66 and $54.49 and return on average assets of
1.40% and 1.44%, respectively. Return on average shareholders’ equity was 14.40% and 14.54% for the three and nine months ended September 30, 2020, respectively.
The following is a summary of the financial results for the nine-month period ended September 30, 2021, compared to September 30, 2020:
• |
Net income increased 16.5% to $50.4 million from $43.2 million.
|
• |
Earnings per share increased 17.1% to $63.79 from $54.49.
|
• |
Total assets increased 18.6% to $5.1 billion from $4.3 billion.
|
• |
Loans & leases (exclusive of SBA PPP loans) increased 9.2% to $3.02 billion from $2.76 billion.
|
• |
Total deposits increased 19.8% to $4.6 billion from $3.8 billion.
|
The primary reasons for the Company’s $7.1 million or 16.5% increase in net income in the first nine months of 2021 as compared to the same period of 2020 were:
• |
A $10.5 million increase in net interest income related to the growth in earning assets.
|
• |
A $2.5 million increase in gain on investment securities sold.
|
• |
A $1.1 million increase in Debit Card and ATM fees.
|
• |
A $1.1 million increase in other non-interest income.
|
• |
A $750,000 decrease in the provision for credit losses.
|
These positive impacts were partially offset by:
• |
A $5.1 million increase in salaries and employee benefits.
|
• |
A $646,000 increase in FDIC insurance expense.
|
• |
A $499,000 increase in other non-interest expense.
|
• |
An increase in the tax provision from 24.4% 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 and nine-month periods ended September 30, 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
Quarterly Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
Three Months Ended
Sept 30, 2021
|
Three Months Ended
Sept 30, 2020
|
|||||||||||||||||||||||
Assets
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
||||||||||||||||||
Interest Bearing Deposits with Banks
|
$
|
856,159
|
$
|
328
|
0.15
|
%
|
$
|
314,049
|
$
|
81
|
0.10
|
%
|
||||||||||||
Investment Securities:
|
||||||||||||||||||||||||
U.S. Treasury Notes
|
9,911
|
59
|
2.36
|
%
|
27,423
|
89
|
1.29
|
%
|
||||||||||||||||
U.S. Government Agency SBA
|
7,151
|
14
|
0.78
|
%
|
9,167
|
24
|
1.05
|
%
|
||||||||||||||||
Municipals - Taxable
|
15,088
|
141
|
3.74
|
%
|
19,966
|
156
|
3.13
|
%
|
||||||||||||||||
Obligations of States and Political Subdivisions - Non-Taxable (1)
|
49,616
|
503
|
4.06
|
%
|
49,452
|
525
|
4.24
|
%
|
||||||||||||||||
Mortgage-Backed Securities
|
708,322
|
2,937
|
1.66
|
%
|
430,145
|
2,567
|
2.39
|
%
|
||||||||||||||||
Other
|
46,511
|
132
|
1.14
|
%
|
25,477
|
53
|
0.83
|
%
|
||||||||||||||||
Total Investment Securities
|
836,599
|
3,786
|
1.81
|
%
|
561,630
|
3,414
|
2.43
|
%
|
||||||||||||||||
Loans & Leases: (2)
|
||||||||||||||||||||||||
Real Estate
|
2,169,270
|
25,354
|
4.64
|
%
|
1,952,892
|
24,193
|
4.93
|
%
|
||||||||||||||||
Home Equity Lines & Loans
|
32,112
|
360
|
4.45
|
%
|
37,815
|
423
|
4.45
|
%
|
||||||||||||||||
Agricultural
|
236,071
|
2,637
|
4.43
|
%
|
263,706
|
3,365
|
5.08
|
%
|
||||||||||||||||
Commercial
|
374,162
|
4,111
|
4.36
|
%
|
362,880
|
4,377
|
4.80
|
%
|
||||||||||||||||
Consumer
|
8,521
|
125
|
5.82
|
%
|
12,261
|
190
|
6.16
|
%
|
||||||||||||||||
Other (3)
|
146,661
|
2,138
|
5.78
|
%
|
348,093
|
2,415
|
2.76
|
%
|
||||||||||||||||
Leases
|
96,690
|
1,363
|
5.59
|
%
|
106,272
|
1,446
|
5.41
|
%
|
||||||||||||||||
Total Loans & Leases
|
3,063,487
|
36,088
|
4.67
|
%
|
3,083,919
|
36,409
|
4.70
|
%
|
||||||||||||||||
Total Earning Assets
|
4,756,245
|
$
|
40,202
|
3.35
|
%
|
3,959,598
|
$
|
39,904
|
4.01
|
%
|
||||||||||||||
Unrealized Gain on Securities Available-for-Sale
|
1,995
|
20,960
|
||||||||||||||||||||||
Allowance for Credit Losses
|
(60,268
|
)
|
(55,782
|
)
|
||||||||||||||||||||
Cash and Due From Banks
|
72,887
|
61,633
|
||||||||||||||||||||||
All Other Assets
|
264,724
|
244,056
|
||||||||||||||||||||||
Total Assets
|
$
|
5,035,583
|
$
|
4,230,465
|
||||||||||||||||||||
Liabilities & Shareholders’ Equity
|
||||||||||||||||||||||||
Interest Bearing Deposits:
|
||||||||||||||||||||||||
Interest Bearing DDA
|
$
|
1,068,707
|
$
|
293
|
0.11
|
%
|
$
|
824,587
|
$
|
383
|
0.18
|
%
|
||||||||||||
Savings and Money Market
|
1,385,430
|
346
|
0.10
|
%
|
1,176,238
|
594
|
0.20
|
%
|
||||||||||||||||
Time Deposits
|
399,246
|
290
|
0.29
|
%
|
468,072
|
1,034
|
0.88
|
%
|
||||||||||||||||
Total Interest Bearing Deposits
|
2,853,383
|
929
|
0.13
|
%
|
2,468,897
|
2,011
|
0.32
|
%
|
||||||||||||||||
Subordinated Debentures
|
10,310
|
78
|
3.00
|
%
|
10,310
|
83
|
3.20
|
%
|
||||||||||||||||
Total Interest Bearing Liabilities
|
2,863,693
|
$
|
1,007
|
0.14
|
%
|
2,479,207
|
$
|
2,094
|
0.34
|
%
|
||||||||||||||
Interest Rate Spread (4)
|
3.21
|
%
|
3.67
|
%
|
||||||||||||||||||||
Demand Deposits (Non-Interest Bearing)
|
1,655,738
|
1,279,142
|
||||||||||||||||||||||
All Other Liabilities
|
68,564
|
60,812
|
||||||||||||||||||||||
Total Liabilities
|
4,587,995
|
3,819,161
|
||||||||||||||||||||||
Shareholders’ Equity
|
447,588
|
411,304
|
||||||||||||||||||||||
Total Liabilities & Shareholders’ Equity
|
$
|
5,035,583
|
$
|
4,230,465
|
||||||||||||||||||||
Net Interest Income and Margin on Total Earning Assets (5)
|
39,195
|
3.27
|
%
|
37,810
|
3.80
|
%
|
||||||||||||||||||
Tax Equivalent Adjustment
|
(104
|
)
|
(111
|
)
|
||||||||||||||||||||
Net Interest Income
|
$
|
39,091
|
3.26
|
%
|
$
|
37,699
|
3.79
|
%
|
(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 Progam 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
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
Nine Months Ended
Sept. 30, 2021
|
Nine Months Ended
Sept. 30, 2020
|
|||||||||||||||||||||||
Assets
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
||||||||||||||||||
Interest Bearing Deposits with Banks
|
$
|
620,757
|
$
|
595
|
0.13
|
%
|
$
|
286,049
|
$
|
1,093
|
0.51
|
%
|
||||||||||||
Investment Securities:
|
||||||||||||||||||||||||
U.S. Treasury Notes
|
12,071
|
212
|
2.35
|
%
|
19,897
|
267
|
1.79
|
%
|
||||||||||||||||
U.S. Government Agency SBA
|
7,590
|
41
|
0.72
|
%
|
9,799
|
94
|
1.28
|
%
|
||||||||||||||||
Municipals - Taxable
|
15,662
|
445
|
3.79
|
%
|
11,362
|
359
|
4.21
|
%
|
||||||||||||||||
Obligations of States and Political Subdivisions - Non-Taxable (1)
|
52,816
|
1,562
|
3.94
|
%
|
52,741
|
1,587
|
4.01
|
%
|
||||||||||||||||
Mortgage-Backed Securities
|
738,454
|
9,396
|
1.70
|
%
|
445,336
|
8,432
|
2.52
|
%
|
||||||||||||||||
Other
|
45,970
|
687
|
1.99
|
%
|
10,747
|
64
|
0.79
|
%
|
||||||||||||||||
Total Investment Securities
|
872,563
|
12,343
|
1.89
|
%
|
549,882
|
10,803
|
2.62
|
%
|
||||||||||||||||
Loans & Leases: (2)
|
||||||||||||||||||||||||
Real Estate
|
2,131,071
|
75,041
|
4.71
|
%
|
1,885,455
|
71,031
|
5.03
|
%
|
||||||||||||||||
Home Equity Lines & Loans
|
32,417
|
1,083
|
4.47
|
%
|
39,162
|
1,447
|
4.94
|
%
|
||||||||||||||||
Agricultural
|
229,862
|
7,758
|
4.51
|
%
|
264,528
|
10,180
|
5.14
|
%
|
||||||||||||||||
Commercial
|
365,744
|
12,567
|
4.59
|
%
|
378,272
|
13,810
|
4.88
|
%
|
||||||||||||||||
Consumer
|
9,388
|
1,010
|
14.38
|
%
|
13,294
|
619
|
6.22
|
%
|
||||||||||||||||
Other (3)
|
194,295
|
8,245
|
5.67
|
%
|
209,653
|
3,521
|
2.24
|
%
|
||||||||||||||||
Leases
|
100,347
|
4,135
|
5.51
|
%
|
105,880
|
4,272
|
5.39
|
%
|
||||||||||||||||
Total Loans & Leases
|
3,063,124
|
109,839
|
4.79
|
%
|
2,896,244
|
104,880
|
4.84
|
%
|
||||||||||||||||
Total Earning Assets
|
4,556,444
|
$
|
122,777
|
3.60
|
%
|
3,732,175
|
$
|
116,776
|
4.18
|
%
|
||||||||||||||
Unrealized Gain on Securities Available-for-Sale
|
5,431
|
16,096
|
||||||||||||||||||||||
Allowance for Credit Losses
|
(59,971
|
)
|
(55,190
|
)
|
||||||||||||||||||||
Cash and Due From Banks
|
68,755
|
61,588
|
||||||||||||||||||||||
All Other Assets
|
255,847
|
238,898
|
||||||||||||||||||||||
Total Assets
|
$
|
4,826,506
|
$
|
3,993,567
|
||||||||||||||||||||
Liabilities & Shareholders’ Equity
|
||||||||||||||||||||||||
Interest Bearing Deposits:
|
||||||||||||||||||||||||
Interest Bearing DDA
|
$
|
1,002,267
|
$
|
869
|
0.12
|
%
|
$
|
761,437
|
$
|
1,342
|
0.24
|
%
|
||||||||||||
Savings and Money Market
|
1,336,826
|
1,136
|
0.11
|
%
|
1,091,672
|
2,280
|
0.28
|
%
|
||||||||||||||||
Time Deposits
|
408,730
|
1,195
|
0.39
|
%
|
503,319
|
3,991
|
1.06
|
%
|
||||||||||||||||
Total Interest Bearing Deposits
|
2,747,823
|
3,200
|
0.16
|
%
|
2,356,428
|
7,613
|
0.43
|
%
|
||||||||||||||||
Federal Home Loan Bank Advances
|
-
|
-
|
0.00
|
%
|
1
|
-
|
0.00
|
%
|
||||||||||||||||
Subordinated Debentures
|
10,310
|
236
|
3.06
|
%
|
10,310
|
296
|
3.83
|
%
|
||||||||||||||||
Total Interest Bearing Liabilities
|
2,758,133
|
$
|
3,436
|
0.17
|
%
|
2,366,739
|
$
|
7,909
|
0.45
|
%
|
||||||||||||||
Interest Rate Spread(4)
|
3.44
|
%
|
3.73
|
%
|
||||||||||||||||||||
Demand Deposits (Non-Interest Bearing)
|
1,567,089
|
1,169,333
|
||||||||||||||||||||||
All Other Liabilities
|
64,439
|
61,024
|
||||||||||||||||||||||
Total Liabilities
|
4,389,661
|
3,597,096
|
||||||||||||||||||||||
Shareholders’ Equity
|
436,845
|
396,471
|
||||||||||||||||||||||
Total Liabilities & Shareholders’ Equity
|
$
|
4,826,506
|
$
|
3,993,567
|
||||||||||||||||||||
Net Interest Income and Margin on Total Earning Assets (5)
|
119,341
|
3.50
|
%
|
108,867
|
3.90
|
%
|
||||||||||||||||||
Tax Equivalent Adjustment
|
(324
|
)
|
(327
|
)
|
||||||||||||||||||||
Net Interest Income
|
$
|
119,017
|
3.49
|
%
|
$
|
108,540
|
3.88
|
%
|
(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 Progam 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
Sept. 30, 2021 compared to Sept. 30, 2020
|
Nine Months Ended
Sept. 30, 2021 compared to Sept. 30, 2020
|
|||||||||||||||||||||||
Interest Earning Assets
|
Volume
|
Rate
|
Net Chg.
|
Volume
|
Rate
|
Net Chg.
|
||||||||||||||||||
Interest Bearing Deposits with Banks
|
$
|
193
|
$
|
54
|
$
|
247
|
$
|
696
|
$
|
(1,194
|
)
|
$
|
(498
|
)
|
||||||||||
Investment Securities:
|
||||||||||||||||||||||||
U.S. Treasuries
|
(78
|
)
|
47
|
(30
|
)
|
(123
|
)
|
68
|
(55
|
)
|
||||||||||||||
U.S. Government Agency SBA
|
(14
|
)
|
4
|
(10
|
)
|
(31
|
)
|
(22
|
)
|
(53
|
)
|
|||||||||||||
Municipals - Taxable
|
(42
|
)
|
28
|
(15
|
)
|
117
|
(31
|
)
|
86
|
|||||||||||||||
Obligations of States and Political Subdivisions - Non-Taxable
|
2
|
(23
|
)
|
(21
|
)
|
2
|
(27
|
)
|
(25
|
)
|
||||||||||||||
Mortgage-Backed Securities
|
700
|
(330
|
)
|
370
|
1,922
|
(958
|
)
|
964
|
||||||||||||||||
Other
|
55
|
24
|
79
|
427
|
197
|
623
|
||||||||||||||||||
Total Investment Securities
|
623
|
(250
|
)
|
373
|
2,313
|
(773
|
)
|
1,540
|
||||||||||||||||
Loans & Leases:
|
||||||||||||||||||||||||
Real Estate
|
2,490
|
(1,329
|
)
|
1,161
|
7,936
|
(3,926
|
)
|
4,010
|
||||||||||||||||
Home Equity Lines & Loans
|
(62
|
)
|
(0
|
)
|
(63
|
)
|
(198
|
)
|
(167
|
)
|
(364
|
)
|
||||||||||||
Agricultural
|
(576
|
)
|
(152
|
)
|
(728
|
)
|
1,035
|
(3,457
|
)
|
(2,422
|
)
|
|||||||||||||
Commercial
|
136
|
(403
|
)
|
(266
|
)
|
(481
|
)
|
(762
|
)
|
(1,243
|
)
|
|||||||||||||
Consumer
|
(54
|
)
|
(12
|
)
|
(65
|
)
|
(226
|
)
|
617
|
391
|
||||||||||||||
Other(1)
|
(1,915
|
)
|
1,638
|
(277
|
)
|
(277
|
)
|
5,002
|
4,724
|
|||||||||||||||
Leases
|
(131
|
)
|
48
|
(83
|
)
|
(230
|
)
|
92
|
(137
|
)
|
||||||||||||||
Total Loans & Leases
|
(113
|
)
|
(209
|
)
|
(321
|
)
|
7,559
|
(2,601
|
)
|
4,958
|
||||||||||||||
Total Earning Assets
|
703
|
(405
|
)
|
299
|
10,569
|
(4,568
|
)
|
6,001
|
||||||||||||||||
Interest Bearing Liabilities
|
||||||||||||||||||||||||
Interest Bearing Deposits:
|
||||||||||||||||||||||||
Interest Bearing DDA
|
231
|
(321
|
)
|
(90
|
)
|
782
|
(1,255
|
)
|
(473
|
)
|
||||||||||||||
Savings and Money Market
|
134
|
(382
|
)
|
(248
|
)
|
698
|
(1,842
|
)
|
(1,144
|
)
|
||||||||||||||
Time
|
(179
|
)
|
(565
|
)
|
(744
|
)
|
(954
|
)
|
(1,842
|
)
|
(2,796
|
)
|
||||||||||||
Total Interest Bearing Deposits
|
186
|
(1,268
|
)
|
(1,082
|
)
|
526
|
(4,939
|
)
|
(4,413
|
)
|
||||||||||||||
Subordinated Debentures
|
-
|
(5
|
)
|
(5
|
)
|
-
|
(60
|
)
|
(60
|
)
|
||||||||||||||
Total Interest Bearing Liabilities
|
186
|
(1,273
|
)
|
(1,087
|
)
|
526
|
(4,999
|
)
|
(4,473
|
)
|
||||||||||||||
Total Change on a Tax Equivalent Basis
|
$
|
517
|
$
|
868
|
$
|
1,386
|
$
|
10,043
|
$
|
431
|
$
|
10,474
|
(1) Includes CARES Act Small Business Administration Paycheck Protection Progam 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.
Third Quarter 2021 vs. Third Quarter 2020
Net interest income for the third quarter of 2021 increased 3.7% or $1.4 million to $39.1 million. On a fully taxable equivalent basis, net interest income increased 3.7% and totaled $39.2 million for the third
quarter of 2021. As more fully discussed below, the increase in net interest income was due primarily to a $796.6 million increase in average earning assets offset by a 53 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 September 30, 2021, the Company’s net
interest margin was 3.27% compared to 3.80% for the quarter ended September 30, 2020. This decrease in net interest margin was due primarily to a 66 basis point decrease in yield on earning assets offset somewhat by a 20 basis point decrease in the
cost of interest bearing liabilities.
Average loans & leases totaled $3.1 billion for the quarter ended September 30, 2021; a decrease of $20.4 million compared to the average balance for the quarter ended September 30, 2020. Loans & leases
decreased from 77.9% of average earning assets at September 30, 2020 to 64.4% at September 30, 2021. The annualized yield on the Company’s loan & lease portfolio decreased slightly to 4.67% for the quarter ended September 30, 2021, compared to
4.70% for the quarter ended September 30, 2020. This decrease in the current quarter as compared to the same quarter last year was due to the decline in rates across loan types due to an overall drop in market interest rates offset by an increase
in PPP loans earning at a rate of 5.78% as compared to 2.76% in the third quarter of 2020. This increase in yield on PPP loans was due to the SBA’s forgiveness of a significant volume of these loans during the third quarter of 2021, which resulted
in a large amount of deferred loan fees being accreted into income during the quarter.
A lower yield, when combined with the impact of a decrease in average loan & lease balances, resulted in interest revenue from loans & leases decreasing slightly by 3 basis points to $36.1 million. 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 has 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 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 seven 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 $836.6 million for the quarter ended September 30, 2021; an increase of $275 million compared to the average balance for the quarter ended September 30, 2020. The average
investment portfolio yield, on a tax equivalent (TE) basis, was 1.81% for the quarter ended September 30, 2021, compared to 2.43% for the quarter ended September 30, 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 $373,000 to $3.79 million for the quarter ended September 30, 2021, compared to $3.41 million for the
quarter ended September 30, 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 .15% in September 2021 compared to .10% in September 2020. Average interest-bearing
deposits with banks for the quarter ended September 30, 2021, was $856.2 million, an increase of $542.1 million compared to the average balance for the quarter ended September 30, 2020. Interest income on interest-bearing deposits with banks for
the quarter ended September 30, 2021, increased $247,000 to $328,000 compared to the quarter ended September 30, 2020.
Average interest-bearing liabilities increased $384.5 million or 15.5% during the third quarter of 2021. Of that increase: (1) interest-bearing transaction deposits increased $244.1 million; (2) savings and money
market deposits increased $209.2 million; (3) time deposits decreased $68.8 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”). A significant portion of this deposit growth was a result of funds from the SBA PPP being deposited into borrower accounts until those
funds will be used for operating expenses.
Total interest expense on interest-bearing deposits was $929,000 for the third quarter of 2021 as compared to $2.0 million for the third quarter of 2020. The average rate paid on interest-bearing deposits was 0.13%
for the third quarter of 2021 compared to 0.32% for the third quarter of 2020 due to the significant drop in market interest rates.
Nine Months Ended September 30, 2021 vs. Nine Months Ended September 30, 2020
During the first nine months of 2021, net interest income increased 9.65% to $119.0 million, compared to $108.5 million at September 30, 2020. On a fully taxable equivalent basis, net interest income increased 9.62%
and totaled $119.3 million at September 30, 2021, compared to $108.9 million at September 30, 2020. As more fully discussed below the increase in net interest income was primarily due to a $824.3 million increase in average earning assets offset by
a 40 basis point decrease in the net interest margin.
For the nine months ended September 30, 2021, the Company’s net interest margin was 3.50% compared to 3.90% for the same period in 2020. This decrease in net interest margin was due primarily to a decrease of 0.58%
in the yield received on earning assets, offset somewhat by a 28 basis point decrease in the cost of interest-bearing liabilities.
The average balance of loans & leases increased by $166.9 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The yield on the loan & lease portfolio
decreased 5 basis points to 4.79% for the nine months ended September 30, 2021, compared to 4.84% for the nine months ended September 30, 2020. This lower yield offset somewhat the positive impact of increased average loan & lease balances
resulting in interest revenue from loans & leases increasing 4.73% or $4.9 million for the first nine months of 2021.
Average investment securities were $872.6 million for the nine months ended September 30, 2021 compared to $549.9 million for the same period in 2020. The average investment portfolio yield, on a tax equivalent
basis, for the nine months ended September 30, 2021, was 1.89% compared to 2.62% for the nine months ended September 30, 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 $1.5 million to $12.3 million for nine months ended September 30, 2021 compared to $10.8 million for the nine months ended September 30, 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. Interest-bearing deposits with
banks consisted primarily of FRB deposits. Balances with the FRB earn interest at the Fed Funds rate, which was .13% for the nine months ended September 2021, compared to .51% for the nine months ended September
2020. Average interest-bearing deposits with banks for the nine months ended September 30, 2021, was $620.7 million, an increase of $334.7 million compared to the average balance for the nine months ended September 30, 2020. Interest income on
interest-bearing deposits with banks for the nine months ended September 30, 2021, decreased $498,000 to $595,000 million compared to the nine months ended September 30, 2020.
Average interest-bearing liabilities increased $391.4 million or 16.5% during the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. Of that increase: (1) interest-bearing
transaction deposits increased $240.8 million; (2) savings and money market deposits increased $245.2 million; (3) time deposits decreased $94.6 million (see “Financial Condition – Deposits”); and (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 $3.2 million for the first nine months of 2021 as compared to $7.6 million for the first nine months of 2020. The average rate paid on interest-bearing deposits
was 0.16% in the first nine months of 2021 and 0.43% in the first nine months of 2020, due to the significant drop in market interest rates.
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 non-accrual status at the time they become TDR, remain on non-accrual 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, the availability of water in our primary service area was not an issue for the 2021 growing season. However, the weather patterns over the past eight years further reinforce the fact that the long-term
risks associated with the availability of water are significant.
The Company made a $1.25 million provision for credit losses during the first nine months of 2021 compared to $2.0 million for the same period in 2020. Net recoveries during the first nine months of 2021 were
$191,000 compared to net charge-offs of $214,000 in the first nine months 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 September 30, 2021 were adequate.
The following table contains the allowance for credit losses for the three and nine-month periods ended September 2021 and 2020:
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
(in thousands)
|
2021
|
2020
|
2021
|
2020
|
||||||||||||
Balance at Beginning of Period
|
$
|
60,229
|
$
|
55,058
|
$
|
58,862
|
$
|
55,012
|
||||||||
Charge-Offs
|
(17
|
)
|
(25
|
)
|
(33
|
)
|
(487
|
)
|
||||||||
Recoveries
|
91
|
65
|
224
|
273
|
||||||||||||
Provision
|
-
|
1,700
|
1,250
|
2,000
|
||||||||||||
Balance at End of Period
|
$
|
60,303
|
$
|
56,798
|
$
|
60,303
|
$
|
56,798
|
The table below breaks out current quarter activity by portfolio segment (in thousands):
September 30, 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
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(33
|
)
|
-
|
-
|
(33
|
)
|
|||||||||||||||||||||||||||||||
Recoveries
|
-
|
-
|
-
|
74
|
17
|
29
|
83
|
21
|
-
|
-
|
224
|
|||||||||||||||||||||||||||||||||
Provision
|
1,200
|
794
|
(210
|
)
|
(70
|
)
|
(129
|
)
|
(238
|
)
|
738
|
(23
|
)
|
(872
|
)
|
60
|
1,250
|
|||||||||||||||||||||||||||
Ending Balance- September 30, 2021
|
$
|
28,879
|
$
|
9,427
|
$
|
1,433
|
$
|
964
|
$
|
1,912
|
$
|
4,605
|
$
|
10,782
|
$
|
298
|
$
|
859
|
$
|
1,144
|
$
|
60,303
|
||||||||||||||||||||||
Third Quarter Allowance for Credit Losses:
|
||||||||||||||||||||||||||||||||||||||||||||
Beginning Balance- June 30, 2021
|
$
|
28,890
|
$
|
9,107
|
$
|
1,405
|
$
|
957
|
$
|
1,899
|
$
|
4,552
|
$
|
9,920
|
$
|
281
|
$
|
1,639
|
$
|
1,579
|
$
|
60,229
|
||||||||||||||||||||||
Charge-Offs
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(17
|
)
|
-
|
-
|
(17
|
)
|
|||||||||||||||||||||||||||||||
Recoveries
|
-
|
-
|
-
|
15
|
6
|
24
|
38
|
8
|
-
|
-
|
91
|
|||||||||||||||||||||||||||||||||
Provision
|
(11
|
)
|
320
|
28
|
(8
|
)
|
7
|
29
|
824
|
26
|
(780
|
)
|
(435
|
)
|
-
|
|||||||||||||||||||||||||||||
Ending Balance- September 30, 2021
|
$
|
28,879
|
$
|
9,427
|
$
|
1,433
|
$
|
964
|
$
|
1,912
|
$
|
4,605
|
$
|
10,782
|
$
|
298
|
$
|
859
|
$
|
1,144
|
$
|
60,303
|
The Allowance for Credit Losses at September 30, 2021 increased $3.5 million from September 30, 2020 and increased $1.41 million from December 31, 2020. The Company believes that an allowance of 1.92% of gross loans
(2.00% when government guaranteed SBA PPP loans are excluded) provides sufficiently for our exposure at the current time.
Changes to the reserve during the first nine months of 2021 are due to: (1) changes in volume by segment and (2) changes in the underlying credit quality of the loan and lease 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 or increased due to volume
changes; (2) reserves for Commercial Real Estate (where our COVID-19 exposure is thought to be greater since many of these companies and consumers were, and may continue to be, impacted by “non-essential” designations and “shelter-in-place” orders)
have been increased; (3) reserves for Commercial loans have increased with volume; and (4) reserves for “Leases” have decreased as that relatively new product segment matures within our portfolio and the risk is perceived to be lower. 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.
Third Quarter 2021 vs. Third Quarter 2020
Non-interest income increased $321,000 or 7.1% for the three months ended September 30, 2021, compared to the same period of 2020. This increase was primarily due to: (1) a $323,000
increase in debit card/ATM fees; (2) a $154,000 increase in service charges collected on deposit accounts; (3) a $136,000 increase in other miscellaneous non-interest income; (4) an increase of $76,000 in dividends received from the FHLB; (5) a
$21,000 increase in value of Bank owned life insurance; and (6) an $18,600 increase in gain on sales of leases. This increase is partially offset by: (1) a $407,000 decrease 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).
Nine Months Ended September 30, 2021 vs. Nine Months Ended September 30, 2020
Non‑interest income increased $5.9 million or 54.3% for the nine months ended September 30, 2021, compared to the same period of 2020. This increase was primarily due to: (1) a $2.5 million increase in gain on the
sale of investment securities; (2) a $1.1 million increase in debit card/ATM fees; (3) a $945,000 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 to 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); (4) a $687,000 increase in gain on sales of leases; (5) a $177,000 increase in service charges collected on deposit accounts; and (6) a $156,000
increase in dividend income received from FHLB.
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.
Third Quarter 2021 vs. Third Quarter 2020
Overall, non-interest expense decreased $198,000 or 1.0% for the three months ended September 30, 2021, compared to the same period in 2020. This decrease was primarily comprised of: (1) a $524,000 decrease in other
miscellaneous expenses; (2) a $407,000 decrease 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); and (3) a $182,000 decrease in marketing expenses. These decreases were partially offset by (1) an $847,000 increase in salaries and employee benefits; (2) a $68,000 increase in FDIC insurance.
Nine Months Ended September 30, 2021 vs. Nine Months Ended September 30, 2020
Non-interest expense increased $7.4 million or 12.2% for the nine months ended September 30, 2021, compared to the same period of 2020. This increase was primarily comprised of: (1) a $5.1 million increase in
salaries and employee benefits; (2) a $945,000 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); (3) a $646,000 increase in FDIC insurance; (4) a $385,000 increase in legal expense; (5) a $154,000 increase in marketing expense; and (6) a $125,000 increase in occupancy expense.
Income Taxes
The Bank’s provision for income taxes increased 18.6% to $5.9 million for the third quarter of 2021 compared to the third quarter of 2020. The Company’s effective tax rate for the third quarter of 2021 was 25.10%
compared to 25.03% for the third quarter of 2020. The Company’s effective tax rate can fluctuate 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 September 30, 2021, as compared to December 31, 2020, and to September 30, 2020. As previously discussed (see “Overview”), the
Company’s consolidated 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. 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 seven 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 September 30, 2021, was $883.8 million compared to $638.4 million at the end of 2020, an increase of $245.3 million or 38.4%. At December 31, 2020, the investment portfolio
totaled $876.7 million.
The Company’s total investment portfolio currently represents 17.3% of the Company’s total assets as compared to 19.3% at December 31, 2020, and 14.8% at September 30, 2020.
As of September 30, 2021, the Company held $62.9 million of municipal investments, all classified as HTM. Of this balance, $21.3 million were bank-qualified municipal bonds, and $41.6 million were private placement
municipal bonds, 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 September 30, 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 $804.3 million at September 30, 2021, $317.5 million at December 31, 2020, and $299.6 million at September 30, 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
September 30, 2021, December 31, 2020, and September 30, 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 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 September 30, 2021, totaled $3.1 billion, an increase of $27.9 million or 0.9% over September 30, 2020. Exclusive of SBA PPP loans, the loan portfolio grew $253.9
million, or 9.2%, over September 30, 2020. This increase in the non-PPP loan portfolio 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. No assurances can be made that this growth in the loan & lease portfolio will continue. Loans & leases at September 30, 2021 increased $40.2 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.
(in thousands)
|
September 30, 2021
|
December 31, 2020
|
September 30, 2020
|
|||||||||||||||||||||
Commercial Real Estate
|
$
|
1,126,230
|
35.7
|
%
|
$
|
971,326
|
31.2
|
%
|
$
|
887,999
|
28.4
|
%
|
||||||||||||
Agricultural Real Estate
|
656,337
|
20.8
|
%
|
643,014
|
20.7
|
%
|
639,172
|
20.4
|
%
|
|||||||||||||||
Real Estate Construction
|
178,451
|
5.7
|
%
|
185,741
|
6.0
|
%
|
186,623
|
6.0
|
%
|
|||||||||||||||
Residential 1st Mortgages
|
309,728
|
9.8
|
%
|
299,379
|
9.6
|
%
|
293,489
|
9.4
|
%
|
|||||||||||||||
Home Equity Lines & Loans
|
31,664
|
1.0
|
%
|
34,239
|
1.1
|
%
|
35,875
|
1.1
|
%
|
|||||||||||||||
Agricultural
|
235,085
|
7.5
|
%
|
264,372
|
8.5
|
%
|
252,031
|
8.1
|
%
|
|||||||||||||||
Commercial
|
394,326
|
12.5
|
%
|
374,816
|
12.0
|
%
|
367,052
|
11.7
|
%
|
|||||||||||||||
Consumer & Other (1)
|
129,665
|
4.1
|
%
|
235,529
|
7.6
|
%
|
359,697
|
11.5
|
%
|
|||||||||||||||
Leases
|
90,022
|
2.9
|
%
|
103,117
|
3.3
|
%
|
105,511
|
3.4
|
%
|
|||||||||||||||
Total Gross Loans & Leases
|
3,151,508
|
100.0
|
%
|
3,111,533
|
100.0
|
%
|
3,127,449
|
100.0
|
%
|
|||||||||||||||
Less: Unearned Income
|
11,707
|
11,941
|
15,518
|
|||||||||||||||||||||
Subtotal
|
3,139,801
|
3,099,592
|
3,111,931
|
|||||||||||||||||||||
Less: Allowance for Credit Losses
|
60,303
|
58,862
|
56,798
|
|||||||||||||||||||||
Net Loans & Leases
|
$
|
3,079,498
|
$
|
3,040,730
|
$
|
3,055,133
|
(1) Includes CARES Act Small Business Administration Paycheck Protection Program loans of $121,182, $224,309 and $347,180 as of September 30, 2021, December 31,2020 and September 30, 2020, respectively.
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 September 30, 2021, classified loans totaled $16.8 million compared to $18.6 million
at December 31, 2020, and $20.8 million at September 30, 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 September
30, 2021, non-accrual loans & leases totaled $516,000. At December 31, 2020 and September 30, 2020, non-accrual loans & leases totaled $495,000 and $498,000, 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. 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 non-accrual
status at the time they become TDR loans or leases, remain on non-accrual 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 September 30, 2021, restructured loans & leases on accrual totaled $7.6 million as compared to $7.9 million at December 31, 2020, and $7.9 million at September 30, 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 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)
|
September 30, 2021
|
December 31, 2020
|
September 30, 2020
|
|||||||||
Non-Performing Loans & Leases
|
$
|
516
|
$
|
495
|
$
|
498
|
||||||
Other Real Estate
|
873
|
873
|
873
|
|||||||||
Total Non-Performing Assets
|
$
|
1,389
|
$
|
1,368
|
$
|
1,371
|
||||||
Non-Performing Loans & Leases
|
||||||||||||
as a % of Total Loans & Leases
|
0.02
|
%
|
0.02
|
%
|
0.02
|
%
|
||||||
Restructured Loans & Leases (Performing)
|
$
|
7,631
|
$
|
7,868
|
$
|
7,890
|
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 $92,400 have been established for non-performing loans & leases at September 30, 2021, December
31, 2020 and September 30, 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 $35,700 $22,000 and $15,530 at September 30, 2021, December 31, 2020, and September 30, 2020, respectively.
The Company reported $873,000 of ORE at September 30, 2021, December 31, 2020, and September 30, 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 or leases as of June 30, 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, the availability of water in our primary service area was not an issue for the 2021 growing season. However, the weather patterns over the past eight years further reinforce the fact that the long-term risks associated
with the availability of water are significant.
|
• |
While tremendous strides have been made in fighting the COVID-19 virus, particularly with the development of a vaccine, the lingering effects of COVID-19 are still with us, and it is impossible to predict 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 September 30, 2021, have increased $753.6 million or 19.8% compared to September 30, 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.
Although total deposits have increased 19.8% since September 30, 2020, importantly, low cost transaction accounts have grown at a strong pace as well:
• |
Demand and interest-bearing transaction accounts increased $619 million or 28.8% since September 30, 2020.
|
• |
Savings and money market accounts have increased $201 million or 16.7% since September 30, 2020.
|
• |
Time deposit accounts have decreased $66.4 million or 14.4% since September 30, 2020.
|
The Company’s deposit balances at September 30, 2021, have increased $508.1 million or 12.5% compared to December 31, 2020. Interest-bearing transaction accounts increased by $394 million or 16.6%, savings and money
market deposits increased 11.3% or $142.1 million and time deposit accounts decreased by $28 million or 6.6%.
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 September 30, 2021, December 31, 2020, or September 30, 2020. There were no Federal Funds
purchased or advances from the FRB at September 30, 2021, December 31, 2020, or September 30, 2020.
As of September 30, 2021, the Company has additional borrowing capacity of $749.5 million with the Federal Home Loan Bank and $467.8 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 Financial Condition located in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” 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 2.97% as of September 30, 2021, 3.08% at
December 31, 2020, and 3.10% at September 30, 2020. The average rate paid for these securities for the first nine months of 2021 was 3.06% and 3.83% for the first nine months 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 $454.2 million at September 30, 2021, $423.7 million at December 31, 2020, and $416.9 million at September 30, 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 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 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 September 30, 2021
|
||||||||||||||||||||||||
Total Capital Ratio
|
$
|
497,797
|
13.28
|
%
|
$
|
299,941
|
8.0
|
%
|
N/A
|
N/A
|
||||||||||||||
Common Equity Tier 1 Capital Ratio
|
$
|
440,761
|
11.76
|
%
|
$
|
168,717
|
4.5
|
%
|
N/A
|
N/A
|
||||||||||||||
Tier 1 Capital Ratio
|
$
|
450,761
|
12.02
|
%
|
$
|
224,956
|
6.0
|
%
|
N/A
|
N/A
|
||||||||||||||
Tier 1 Leverage Ratio
|
$
|
450,761
|
8.97
|
%
|
$
|
200,908
|
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 September 30, 2021
|
||||||||||||||||||||||||
Total Capital Ratio
|
$
|
497,783
|
13.28
|
%
|
$
|
299,906
|
8.0
|
%
|
$
|
374,883
|
10.0
|
%
|
||||||||||||
Common Equity Tier 1 Capital Ratio
|
$
|
450,753
|
12.02
|
%
|
$
|
168,697
|
4.5
|
%
|
$
|
243,674
|
6.5
|
%
|
||||||||||||
Tier 1 Capital Ratio
|
$
|
450,753
|
12.02
|
%
|
$
|
224,930
|
6.0
|
%
|
$
|
299,906
|
8.0
|
%
|
||||||||||||
Tier 1 Leverage Ratio
|
$
|
450,753
|
8.98
|
%
|
$
|
200,850
|
4.0
|
%
|
$
|
251,063
|
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 26 basis point improvement to the September 30, 2021 tier 1 leverage
capital ratio, increasing the ratio to 9.23%.
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 nine months 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 were done outside of the Company’s current repurchase plan. All repurchases were made at the then prevailing market
prices. The Company did not repurchase shares during the first nine months 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 nine months ended September 30, 2021. During the nine months ended September 30, 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 a valuation completed 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)
|
September 30, 2021
|
December 31, 2020
|
September 30, 2020
|
|||||||||
Commitments to Extend Credit
|
$
|
1,058,760
|
$
|
1,040,844
|
$
|
969,258
|
||||||
Letters of Credit
|
19,391
|
18,846
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19,816
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Performance Guarantees Under Interest Rate Swap Contracts Entered Into Between Our Borrowing Customers and Third Parties
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1,808
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2,786
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3,797
|
The Company’s exposure to credit loss in the event of non-performance 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 September 30, 2021, December
31, 2020, and September 30, 2020. We do not anticipate any material losses as a result of these transactions.
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 is 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 ASC
450. 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, 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:
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general economic and business conditions affecting the key service areas of the Company;
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credit quality trends (including trends in collateral values, delinquencies and non-performing loans & leases);
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loan & lease volumes, growth rates and concentrations;
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loan & lease portfolio seasoning;
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specific industry and crop conditions;
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recent loss experience; and
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duration of the current business cycle.
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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 September 30, 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 September 30,
2021, the Company’s estimated net interest income sensitivity to changes in interest rates, as a percent of net interest income was an increase in net interest income of 3.4% if rates increase by 200 basis points and a decrease in net interest
income of 0.9% 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 .2% 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 20 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 September 30, 2021, the Company has additional borrowing capacity of $749.5 million with the FHLB and $467.8 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 September 30, 2021, the Company had available sources of liquidity, which included cash and cash equivalents and unpledged investment securities AFS of approximately $1.8 billion, which represents 34.7% of total
assets.
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.
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
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.
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 I. – 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.
There were no shares repurchased by Farmers & Merchants Bancorp during the first nine months 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”.
Not applicable
Not applicable
None
Exhibit No.
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Description
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Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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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.
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101.INS
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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).
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101.SCH
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Inline XBRL Taxonomy Extension Schema Document.
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101.CAL
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Inline XBRL Taxonomy Extension Calculation Linkbase Document.
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101.DEF
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Inline XBRL Taxonomy Extension Definition Linkbase Document.
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101.LAB
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Inline XBRL Taxonomy Extension Label Linkbase Document.
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101.PRE
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Inline XBRL Taxonomy Extension Presentation Linkbase Document.
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104
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Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
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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
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Date: November 8, 2021
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/s/ Kent A. Steinwert
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Kent A. Steinwert
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Chairman, President
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& Chief Executive Officer
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(Principal Executive Officer)
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Date: November 8, 2021
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/s/ Stephen W. Haley
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Stephen W. Haley
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Executive Vice President and
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Chief Financial Officer
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(Principal Financial & Accounting Officer)
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62